##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 20-F



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| ̈ |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------------------



OR



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 333-13904



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MTR CORPORATION LIMITED

LOGO

(Exact Name of Registrant as Specified in Its Charter)



---



|                                                |  |                                                
|----------------------------------------------- |  | -----------------------------------------------
|N/A                                             |  | Hong Kong                                      
|(Translation of Registrants Name Into English) |  | (Jurisdiction of Incorporation or Organization)



MTR Tower

Telford Plaza

Kowloon Bay

Hong Kong

852-2993-2111

(Address and Telephone Number of Principal Executive Offices)



---



Securities registered or to be registered pursuant to Section 12(b) of the Act:



None

(Title of class)



Securities registered or to be registered pursuant to
Section 12(g) of the Act:



None

(Title of Class)



Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:



7.25% Notes Due 2005

7.50% Notes Due February 4, 2009

7.50% Notes Due November 8, 2010

(Title of Class)



---



Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.



As of December 31, 2003, 5,288,695,393 ordinary shares, par value HK$1.00 each, were outstanding.



Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No ̈



Indicate by
check mark which financial statement item the registrant has elected to follow.     Item 17   x    Item 18 ̈



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##### Table of Contents

TABLE OF CONTENTS



MTR CORPORATION
LIMITED



|                                            |  |                                                                               |  |     
|------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ----
|                                            |  |                                                                               |  | Page
|                                            | 
|NOTE REGARDING FORWARD-LOOKING STATEMENTS   |  | i                                                                            
|                                            | 
|SUPPLEMENTAL INFORMATION AND EXCHANGE RATES |  | i                                                                            
|                                            | 
|INCORPORATION BY REFERENCE                  |  | i                                                                            
|                                            | 
|PART I                                      |  | 2                                                                            
|                                            |  |                                                                              
|Item 1.                                     |  | Identity of Directors, Senior Management and Advisers.                        |  | 2   
|                                            |  |                                                                              
|Item 2.                                     |  | Offer Statistics and Expected Timetable.                                      |  | 2   
|                                            |  |                                                                              
|Item 3.                                     |  | Key Information.                                                              |  | 2   
|                                            |  |                                                                              
|Item 4.                                     |  | Information on the Company.                                                   |  | 12  
|                                            |  |                                                                              
|Item 5.                                     |  | Operating and Financial Review and Prospects.                                 |  | 51  
|                                            |  |                                                                              
|Item 6.                                     |  | Directors, Senior Management and Employees.                                   |  | 68  
|                                            |  |                                                                              
|Item 7.                                     |  | Major Shareholders and Related Party Transactions.                            |  | 80  
|                                            |  |                                                                              
|Item 8.                                     |  | Financial Information.                                                        |  | 85  
|                                            |  |                                                                              
|Item 9.                                     |  | The Offer and Listing.                                                        |  | 86  
|                                            |  |                                                                              
|Item 10.                                    |  | Additional Information.                                                       |  | 87  
|                                            |  |                                                                              
|Item 11.                                    |  | Quantitative and Qualitative Disclosure about Market Risk                     |  | 93  
|                                            |  |                                                                              
|Item 12.                                    |  | Description of Securities Other than Equity Securities.                       |  | 100 
|                                            | 
|PART II                                     |  | 100                                                                          
|                                            |  |                                                                              
|Item 13.                                    |  | Defaults, Dividend Arrearages and Delinquencies.                              |  | 100 
|                                            |  |                                                                              
|Item 14.                                    |  | Material Modifications to the Rights of Security Holders and Use of Proceeds. |  | 100 
|                                            |  |                                                                              
|Item 15.                                    |  | Controls and Procedures                                                       |  | 100 
|                                            |  |                                                                              
|Item 16A.                                   |  | Audit Committee Financial Expert                                              |  | 100 
|                                            |  |                                                                              
|Item 16B.                                   |  | Code of Ethics                                                                |  | 101 
|                                            |  |                                                                              
|Item 16C.                                   |  | Principal Accountant Fees and Services                                        |  | 101 
|                                            |  |                                                                              
|Item 16D.                                   |  | Exemptions from the Listing Standards for Audit Committees                    |  | 101 
|                                            |  |                                                                              
|Item 16E.                                   |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers        |  | 101 



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##### Table of Contents

|         |  |                       |  |    
|-------- |  | --------------------- |  | ---
|         |  |                      
|PART III |  |                       |  | 102
|         |  |                      
|Item 17. |  | Financial Statements. |  | 102
|         |  |                      
|Item 18. |  | Financial Statements. |  | 102
|         |  |                      
|Item 19. |  | Exhibits.             |  | 102



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##### Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS



Certain statements contained in this Annual Report may be viewed as forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act). Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or
results of operations of MTR Corporation Limited (the Company) to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. With respect to the
Companys railway operations, such factors include, among others, the following: (i) general political, social and economic conditions in Hong Kong and elsewhere in Asia; (ii) accidents and natural disasters; (iii) the terms on which the
Company finances its working capital and capital expenditure requirements; (iv) the implementation of new projects and the timely and effective development of the railway and any disruptions to that implementation and development; (v) changes in the
fares for the Companys services; (vi) competition from alternative modes of transportation, in particular franchised buses and public light buses; (vii) the Companys relationship with the Government of the Hong Kong Special
Administrative Region (the Government); (viii) the Governments policies relating to transportation and land use planning in Hong Kong, which may change as a result of the Governments population and employment growth
projections (which themselves are subject to change); and (ix) other factors beyond the Companys control. With respect to the Companys property operations, such factors include, among others, the following: (i) general political, social
and economic conditions in Hong Kong and elsewhere in Asia; (ii) the level of interest rates prevailing in Hong Kong; (iii) the Companys ability to complete property developments on time and within budget; (iv) the terms on which the Company
finances its working capital and capital expenditure requirements; (v) competition from other property developments; (vi) the Government policies relating to property ownership and development, which may change as a result of the Governments
population and employment growth projections (which themselves are subject to change), and (vii) other factors beyond the Companys control.



SUPPLEMENTAL INFORMATION AND EXCHANGE RATES



The Company publishes its financial statements in Hong Kong Dollars. In this Annual Report, references to US Dollars, US$ or $ are to United States Dollars and references to
Hong Kong Dollars, HK Dollars or HK$ are to Hong Kong Dollars. Solely for the convenience of the reader, this Annual Report contains translations of certain Hong Kong Dollar amounts into US Dollar amounts at
specified rates. These translations should not be construed as representations that the Hong Kong Dollar amounts actually represent such US Dollar amounts or could be converted into US Dollar amounts at the rates indicated or at all. The
translations of Hong Kong Dollars into US Dollars have been made at the rate of HK$7.7640 to US$1.00, the noon buying rate in New York City for cable transfers in Hong Kong Dollars as certified for customs purposes by the Federal Reserve Bank of New
York (the Noon Buying Rate) on December 31, 2003.



INCORPORATION BY REFERENCE



This
Annual Report shall be deemed to be incorporated by reference into the prospectus included in the Registration Statement on Form F-3 (File No. 333-13904) of the Company and MTR Corporation (C.I.) Limited and to be a part thereof from the date on
which this Annual Report is furnished, to the extent not superseded by documents or reports subsequently filed or furnished.



-i-



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##### Table of Contents

PART I



Item 1. Identity of Directors, Senior Management and Advisers.



Not Applicable.



Item 2. Offer Statistics and Expected Timetable.



Not Applicable.



Item 3. Key Information.



The
following table presents selected financial information of the Company as of and for each of the years in the five-year period ended December 31, 2003. The following selected financial information should be read in conjunction with Item 5,
Operating and Financial Review and Prospects and the Companys audited consolidated financial statements and the related notes for the three-year period ended December 31, 2003 included elsewhere in this Annual Report (the
Financial Statements).



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##### Table of Contents

Selected Financial Data(1)(2)



|                                                                         |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|------------------------------------------------------------------------ |  | ----------------------------------------------------------------- | ------- | - | ---- | --- | ------------- | ---- |  | --- | ------------- | - |  | ------- | ------------- | - | ------- | --- | ------------- | - |  | --- | ------ | -
|                                                                         |  | Year Ended December 31,                                           |        
|                                                                         |  | 1999                                                              |         |   | 2000 |     |               | 2001 |  |     | 2002(3)(4)    |   |  | 2003(5) |               |   | 2003(5) |    
|                                                                         |  | (in millions, except number of shares, ratios and per share data) |        
|Profit and Loss Account Data:                                            |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Hong Kong GAAP:                                                          |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Revenue                                                                  |  | HK$                                                               | 7,252   |   |      | HK$ | 7,573         |      |  | HK$ | 7,592         |   |  | HK$     | 7,686         |   |         | HK$ | 7,594         |   |  | US$ | 978    |  
|Operating profit from railway and related operations before depreciation |  |                                                                   | 3,493   |   |      |     | 3,912         |      |  |     | 4,053         |   |  |         | 4,014         |   |         |     | 3,747         |   |  |     | 483    |  
|Profit on property developments                                          |  |                                                                   | 2,030   |   |      |     | 3,376         |      |  |     | 3,248         |   |  |         | 3,755         |   |         |     | 5,369         |   |  |     | 692    |  
|Operating profit before depreciation                                     |  |                                                                   | 5,523   |   |      |     | 7,288         |      |  |     | 7,301         |   |  |         | 7,769         |   |         |     | 9,116         |   |  |     | 1,174  |  
|Depreciation                                                             |  |                                                                   | (2,039  | ) |      |     | (2,091        | )    |  |     | (2,178        | ) |  |         | (2,470        | ) |         |     | (2,402        | ) |  |     | (309   | )
|Operating profit before interest and finance charges                     |  |                                                                   | 3,484   |   |      |     | 5,197         |      |  |     | 5,123         |   |  |         | 5,299         |   |         |     | 6,714         |   |  |     | 865    |  
|Interest and finance charges                                             |  |                                                                   | (1,104  | ) |      |     | (1,142        | )    |  |     | (874          | ) |  |         | (1,125        | ) |         |     | (1,539        | ) |  |     | (198   | )
|Profit before taxation                                                   |  |                                                                   | 2,380   |   |      |     | 4,055         |      |  |     | 4,278         |   |  |         | 4,213         |   |         |     | 5,198         |   |  |     | 670    |  
|Income Tax(6)                                                            |  |                                                                   |        |   |      |     |              |      |  |     |              |   |  |         | (634          | ) |         |     | (748          | ) |  |     | (96    | )
|Profit attributable to shareholders(7)                                   |  |                                                                   | 2,116   |   |      |     | 4,055         |      |  |     | 4,278         |   |  |         | 3,579         |   |         |     | 4,450         |   |  |     | 573    |  
|Dividends(8)                                                             |  |                                                                   |        |   |      |     |              |      |  |     | (1,203        | ) |  |         | (2,132        | ) |         |     | (2,178        | ) |  |     | (280   | )
|Earnings per share:                                                      |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Basic(9)                                                                 |  |                                                                   | 0.42    |   |      |     | 0.81          |      |  |     | 0.85          |   |  |         | 0.70          |   |         |     | 0.85          |   |  |     | 0.11   |  
|Diluted(10)                                                              |  |                                                                   | N/A     |   |      |     | 0.81          |      |  |     | 0.85          |   |  |         | 0.70          |   |         |     | 0.85          |   |  |     | 0.11   |  
|Dividend per share(8)                                                    |  |                                                                   |        |   |      |     |              |      |  |     | 0.24          |   |  |         | 0.42          |   |         |     | 0.42          |   |  |     | 0.05   |  
|                                                                         |  |                                                                   |         |   |      |    
|US GAAP:                                                                 |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Net income for the year                                                  |  | HK$                                                               | 2,449   |   |      | HK$ | 3,418         |      |  | HK$ | 4,468         |   |  | HK$     | 3,261         |   |         | HK$ | 1,369         |   |  | US$ | 176    |  
|                                                                         |  |                                                                   |         |   |      |    
|Earnings per share:                                                      |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Basic(9)                                                                 |  |                                                                   | 0.49    |   |      |     | 0.68          |      |  |     | 0.89          |   |  |         | 0.64          |   |         |     | 0.26          |   |  |     | 0.03   |  
|Diluted(10)                                                              |  |                                                                   | 0.49    |   |      |     | 0.68          |      |  |     | 0.89          |   |  |         | 0.64          |   |         |     | 0.26          |   |  |     | 0.03   |  
|                                                                         |  |                                                                   |         |   |      |    
|Balance Sheet Data (at year end):                                        |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Hong Kong GAAP:                                                          |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Total assets                                                             |  |                                                                   | 87,250  |   |      |     | 92,526        |      |  |     | 98,126        |   |  |         | 101,119       |   |         |     | 102,366       |   |  |     | 13,185 |  
|Net assets/shareholders funds                                           |  |                                                                   | 45,115  |   |      |     | 50,328        |      |  |     | 53,893        |   |  |         | 53,574        |   |         |     | 57,292        |   |  |     | 7,379  |  
|Loans, obligations under finance leases and bank overdrafts              |  |                                                                   | 23,177  |   |      |     | 27,203        |      |  |     | 31,385        |   |  |         | 33,508        |   |         |     | 32,025        |   |  |     | 4,125  |  
|Deferred income(11)                                                      |  |                                                                   | 13,776  |   |      |     | 10,403        |      |  |     | 8,411         |   |  |         | 6,226         |   |         |     | 5,061         |   |  |     | 652    |  
|Share capital, share premium and capital reserve                         |  |                                                                   | 32,188  |   |      |     | 32,188        |      |  |     | 32,807        |   |  |         | 33,910        |   |         |     | 35,086        |   |  |     | 4,519  |  
|Issued shares(12)                                                        |  |                                                                   | 321,881 |   |      |     | 5,000,000,000 |      |  |     | 5,055,229,742 |   |  |         | 5,158,748,655 |   |         |     | 5,288,695,393 |   |  |     |        |  
|                                                                         |  |                                                                   |         |   |      |    
|US GAAP:                                                                 |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Total assets                                                             |  |                                                                   | 81,346  |   |      |     | 86,370        |      |  |     | 92,691        |   |  |         | 96,286        |   |         |     | 93,233        |   |  |     | 12,008 |  
|Loans, obligations under finance leases and bank overdrafts              |  |                                                                   | 23,310  |   |      |     | 27,152        |      |  |     | 31,745        |   |  |         | 34,793        |   |         |     | 32,906        |   |  |     | 4,238  |  
|Shareholders equity                                                     |  |                                                                   | 37,879  |   |      |     | 41,322        |      |  |     | 44,870        |   |  |         | 46,942        |   |         |     | 47,534        |   |  |     | 6,122  |  
|Share capital, share premium and capital reserve                         |  |                                                                   | 32,188  |   |      |     | 32,213        |      |  |     | 32,273        |   |  |         | 32,278        |   |         |     | 32,297        |   |  |     | 4,160  |  
|                                                                         |  |                                                                   |         |   |      |    
|Other Financial Data (at year end):                                      |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Hong Kong GAAP:                                                          |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Ratio of debt to shareholders funds(13)                                 |  |                                                                   | 0.51:1  |   |      |     | 0.54:1        |      |  |     | 0.58:1        |   |  |         | 0.63:1        |   |         |     | 0.56:1        |   |  |     |        |  
|Ratio of earnings to fixed charges                                       |  |                                                                   | 2.00    |   |      |     | 2.63          |      |  |     | 2.69          |   |  |         | 3.02          |   |         |     | 4.06          |   |  |     |        |  
|                                                                         |  |                                                                   |         |   |      |    
|US GAAP:                                                                 |  |                                                                   |         |   |      |     |               |      |  |     |               |   |  |         |               |   |         |     |               |   |  |     |        |  
|Ratio of debt to shareholders equity(13)                                |  |                                                                   | 0.62:1  |   |      |     | 0.66:1        |      |  |     | 0.71:1        |   |  |         | 0.74:1        |   |         |     | 0.69:1        |   |  |     |        |  
|Ratio of earnings to fixed charges                                       |  |                                                                   | 2.27    |   |      |     | 2.60          |      |  |     | 3.24          |   |  |         | 2.90          |   |         |     | 1.84          |   |  |     |        |  

---

|(1) |  | The financial statements of the Company are prepared in accordance with generally accepted accounting principles in Hong Kong (Hong Kong GAAP), which differs in certain
material respects from generally accepted accounting principles in the United States (US GAAP). For a description of the nature and effect of these differences, see Note 47 of Notes to the Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The 2001, 2002 and 2003 annual accounts include the group accounts of the Company and its subsidiaries (the Group). The 1999 and 2000 annual accounts include only the
accounts of the Company in view of the Company having no effective control over the board of directors of one of its subsidiaries, Octopus Cards Limited, and the insignificant amounts involved in the other subsidiaries.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(3) |  | With the adoption of revised Statement of Standard Accounting Practice (SSAP) 12, Income Taxes, issued by the Hong Kong Society of Accountants, which became
effective on January 1, 2003, a restatement of the 2002 financial data was necessary. See Note 43A of Notes to the Financial Statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes results derived from the operation of the Tseung Kwan O Line since August 18, 2002.
|--- |  | --------------------------------------------------------------------------------------------

|(5) |  | Includes results derived from the first full year operation of the Tseung Kwan O Line, which commenced operations on August 18, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Income tax in 2002 and 2003 mainly comprised recognized deferred tax liabilities as a result of the adoption of the revised SSAP 12, Income Taxes.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Profit attributable to shareholders in 1999 reflects one-time staff payments totaling HK$264 million under the Companys voluntary separation scheme. Profit attributable to
shareholders in 2001 includes the Companys share of Octopus Cards Limiteds earnings of HK$29 million. Profit attributable to shareholders in 2002 includes write-off of project study costs and deferred expenditure totaling HK$218 million,
which was primarily related to the Shatin to Central Link and the North Island Link together with its related improvement works and the Companys share of Octopus Cards Limiteds earnings of HK$39 million. Profit attributable to
shareholders in 2003 includes a HK$69 million revaluation deficit relating to the Companys head office premises, write-off of project study costs and deferred expenditure totaling HK$49 million, which was primarily related to the West Island
Line (see Note 4C of Notes to Financial Statements), and the Companys share of Octopus Card Limiteds earnings of HK$23 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | An interim dividend of HK$0.14 (US$0.018) per share was paid on October 29, 2003. At the Companys annual general meeting held on June 3, 2004, the shareholders approved a
final dividend of HK$0.28 (US$0.036) per share. To comply with a change in Hong Kong GAAP that took effect on January 1, 2001, the Company recognizes a liability for dividends only in the accounting period in which they are declared or proposed and
approved by shareholders. The new accounting policy was adopted retrospectively resulting in the restatement of certain prior year balances. See Note 10 of Notes to the Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | The calculation of basic earnings per share in 1999 and 2000 is based on the profit attributable to shareholders in the relevant year and the assumption that 5,000,000,000 ordinary
shares were in issue during the relevant year. The calculation of basic earnings per share in 2001 is based on the profit attributable to shareholders in 2001 and the weighted average number of ordinary shares outstanding of 5,015,601,057. The
calculation of basic earnings per share in 2002 is based on the profit attributable to shareholders in 2002 and the weighted average number of ordinary shares outstanding of 5,098,511,864. The calculation of basic earnings per share in 2003 is based
on the profit for the year attributable to shareholders in 2003 and the weighted average number of ordinary shares outstanding of 5,214,028,094.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | The calculation of diluted earnings per share in 2000 is based on the profit attributable to shareholders in 2000 and the weighted average number of ordinary shares outstanding of
5,004,497,055 after adjusting for the effects of dilutive potential ordinary shares. The calculation of diluted earnings per share in 2001 is based on the profit attributable to shareholders in 2001 and the weighted average number of ordinary shares
outstanding of 5,030,188,894 after adjusting for the effects of dilutive potential ordinary shares. The calculation of diluted earnings per share in 2002 is based on the profit attributable to shareholders in 2002 and the weighted average number of
ordinary shares outstanding of 5,105,400,689 after adjusting for the effects of dilutive potential ordinary shares. The calculation of diluted earnings per share in 2003 is based on profit attributable to shareholders in 2003 and the weighted
average number of ordinary shares outstanding of 5,217,462,182 after adjusting for the effects of dilutive potential ordinary shares.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | For 1999 to 2002, the amounts represent the balance of up-front payments received from developers in excess of the related costs incurred by the Company for property development
projects not yet recognized as profit by the Company. For 2003, the amount also includes the balance of cash received from lease-out and lease-back transactions.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | See Note 34 of Notes to the Financial Statements.
|---- |  | -------------------------------------------------

|(13) |  | Debt includes loans, obligations under finance leases and bank overdrafts. See Note 26 of Notes to the Financial Statements.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Historical Exchange Rates Information



The Hong Kong Dollar is freely convertible into other currencies (including the US Dollar). Since October 17, 1983, the Hong
Kong Dollar has been linked to the US Dollar at the rate of HK$7.80 to US$1.00. The central element in the arrangements which give effect to the link is an agreement between the Government and the three Hong Kong banknote-issuing banks, The Hongkong
and Shanghai Banking Corporation Limited, Standard Chartered Bank and Bank of China (Hong Kong) Limited. Under this agreement, the Government of the Hong Kong SAR Exchange Fund issues certificates of its indebtedness to the banknote-issuing banks
against payment in US Dollars at the fixed exchange rate of HK$7.80 to US$1.00. The banknote-issuing banks hold the certificates of indebtedness to cover the issuances of banknotes. When the banknotes are withdrawn from circulation, the
banknote-issuing banks surrender the certificates of indebtedness to the Government of the Hong Kong SAR Exchange Fund and are paid the equivalent US Dollars at the fixed rate.



The market exchange rate of the Hong Kong Dollar against the US Dollar continues to be influenced by the forces of supply
and demand in the foreign exchange market. Exchange rates between the Hong Kong Dollar and other currencies are influenced by the rate between the US Dollar and the Hong Kong Dollar. The Noon Buying Rate has fluctuated between HK$7.70 to US$1.00 and
HK$7.90 to US$1.00 from January 1, 1999 through December 31, 2003.



The translations of Hong Kong Dollars into US Dollars in this Annual Report have been made at the Noon Buying Rate on December 31, 2003 of HK$7.7640 to US$1.00. The Noon Buying Rate on June 10, 2004 was HK$7.7978 to US$1.00.



The following table sets forth the high and low exchange rates between the
Hong Kong Dollar and the US Dollars (in Hong Kong Dollars per US Dollar) for each month during the previous six months.



|              |  |                  |  |       
|------------- |  | ---------------- |  | ------
|              |  | Noon Buying Rate
|              |  | High             |  | Low   
|December 2003 |  | 7.7670           |  | 7.7628
|January 2004  |  | 7.7775           |  | 7.7632
|February 2004 |  | 7.7845           |  | 7.7686
|March 2004    |  | 7.7980           |  | 7.7842
|April 2004    |  | 7.8000           |  | 7.7870
|May 2004      |  | 7.8010           |  | 7.7895



The following table
sets forth for the five most recent financial years the average exchange rates for each period between the Hong Kong Dollar and the US Dollar (in Hong Kong Dollars per US Dollar), calculating using the average of the exchange rates on the last day
of each month during the period.



|     |  |                               
|---- |  | ------------------------------
|     |  | Noon Buying RatePeriod Average
|1999 |  | 7.759892                      
|2000 |  | 7.793600                      
|2001 |  | 7.799558                      
|2002 |  | 7.799592                      
|2003 |  | 7.799367                      



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Risk Factors



The disclosure set forth in this section was prepared pursuant to the Plain English Rules adopted by the U.S. Securities and
Exchange Commission. References to we, us, our and our company in this section are to MTR Corporation Limited.



Risks relating to the Company and its business



Competition in Hong Kong from other transport providers may adversely affect us.



We compete with other transport providers, principally franchised bus and public light bus operators, as well as
non-franchised bus, tram and ferry operators and taxis. Our competitive strengths of speed, reliability and comfort have been eroded in recent years with:



| |  |  | the general improvement in bus services, including wider use of air-conditioning on buses;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the opening of the Western Harbour Tunnel and the West Kowloon Expressway;
| | - |  | --------------------------------------------------------------------------



| |  |  | the expanding bus network; and
| | - |  | ------------------------------



| |  |  | more direct road access to, and improved road traffic conditions in, urban areas.
| | - |  | ---------------------------------------------------------------------------------



We are also facing competitive pressure as a result of the opening of new highways and expressways. The lower capital costs
of our competitors and their greater inherent structural flexibility may enable them to respond to changing passenger demand more quickly than we can. In the Railway Development Strategy 2000 published in May 2000, the Government of the Hong Kong
SAR confirmed that railways are essential to Hong Kongs continued economic, social and land development and will be given priority in the Governments plans for infrastructure development. Within this framework, the Government also
recognized that franchised buses would continue to play an essential role in the public transport system in Hong Kong. As a result, we do not expect the Government to take any particular, direct measures which, in the short-term, would have the
effect of reducing or containing patronage on franchised buses or public light buses for the purpose of increasing our patronage.



The growth of our railway and property businesses and increase in patronage depends, in part, on the award to our company of new railway projects, the
implementation of those projects and on other factors that we may not be able to control.



The growth of our railway and property businesses depends, in part, on whether new railway projects are awarded to our company and whether we can implement them in a timely and effective manner in order to expand
capacity and, thereby, accommodate more passengers, and develop more properties. Our plans for new railway projects are subject to a number of uncertainties, including:



| |  |  | whether, and on what terms, including the grant of property development rights, certain new railway projects will be awarded to our company and, in particular, whether such terms
will enable us to earn a commercial rate of return on our investment in new railway projects;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | whether there will be a sufficient population in the catchment area for a new railway project and whether that catchment area is encouraged to use the mass transit railway system as
a result of government planning of highways and bus routes; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | whether we will be able to obtain adequate financing on acceptable terms to fund the required capital expenditures.
| | - |  | -------------------------------------------------------------------------------------------------------------------



Although the Government has agreed to ensure that there is a level playing
field and a clear framework for the award of new railway projects, we cannot assure you that new railway projects will be awarded to our company. In addition, although we have significant experience in the design and construction of railway projects
with a track record in financing and completing projects on time and within budget spanning over 20 years, we cannot assure you that new railway projects undertaken by us will be completed on time and within budget. There also can be no certainty
that any of the new railway projects proposed by the Government in the Railway Development Strategy 2000 will be implemented in the indicated time frame. For example, in January 2003, the Government decided to postpone the completion of the North
Island Link, which is one of the new railway projects proposed in the Railway Development Strategy 2000, until after 2016.



Increase in patronage will also be affected by macro-economic factors, such as population and employment growth and distribution and changes in
demographics and economic conditions. In addition, increase in patronage will be affected by the amount of road congestion and any expansion of the bus network. Furthermore, because of certain inherent capacity limitations and structural
inflexibilities of the mass transit railway, we may not be able to respond quickly to increases in demand. For example, we cannot quickly change our routes to cater for new passenger demand in areas which we do not operate.



Operation of the Shatin to Central Link railway by the Kowloon-Canton
Railway Corporation, or KCRC, is expected to result in a decrease in our revenues and may have a material adverse effect on our financial condition and results of operations.



One of the new railway projects announced by the Government in the Railway Development Strategy 2000 is the Shatin to
Central Link, which is intended to be a new strategic rail corridor in the rail network. On June 25, 2002, the Government awarded this project to the KCRC after inviting our company, KCRC and other parties to bid for the project. The earliest
possible completion date for the Shatin to Central Link is expected to be in 2011. Subject to a possible merger with KCRC, upon completion of the Shatin to Central Link, operation of the Shatin to Central Link by KCRC is expected to result in a
decrease in our revenues and may have a material adverse effect on our financial condition and results of operations. In addition, the Kowloon-Canton Railway system will further extend into the urban areas of Hong Kong, and KCRC will become our
direct competitor. This may have a material adverse effect on our long-term prospects.



Operation of the Kowloon Southern Link railway by KCRC is expected to result in a decrease in our revenues and may have a material adverse effect on our financial condition and results of operations.



Another of the new railway projects announced by the
Government in the Railway Development Strategy 2000 is the Kowloon Southern Link, which is intended to be an extension of the KCRC West Rail line from Nam Cheong station to East Tsim Sha Tsui station. West Rail trains will therefore be able to
operate a service continuing from Nam Cheong station all the way through to Hung Hom station, where an interchange with the KCRC East Rail and the Shatin to Central Link will be created.



No firm completion date for the Kowloon Southern Link has been given by KCRC as it is currently studying the scope and
timing of the project. The earliest possible completion date is expected to be in 2009. The operation of the Kowloon Southern Link by KCRC is expected to result in a decrease in our revenues and may have a material adverse effect on our financial
condition and results of operations as well as our long-term prospects.



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Our ability to raise fares to cover our operating costs could be limited by a number of factors and
could be significantly affected by new governmental policies on public transport fares.



We cannot assure you that patronage on the mass transit railway will increase sufficiently or that we could charge a higher level of fares to defray any increase in operating costs. Although we have the power to
determine our own fares, subject to our compliance with specified procedures, our ability to do so may be constrained by factors such as:



| |  |  | elasticity of demand;
| | - |  | ---------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | economic conditions prevailing in Hong Kong or elsewhere;
| | - |  | ---------------------------------------------------------



| |  |  | political sensitivities; and
| | - |  | ----------------------------



| |  |  | our traditional policy of increasing our fares roughly in line with inflation.
| | - |  | ------------------------------------------------------------------------------



On July 28, 2003, the Government issued to the Legislative Council of the Hong Kong Special Administrative Region a consultative paper on public
transport fares, which discusses proposals to introduce a fare adjustment formula, a trigger mechanism for fare adjustments and a cap on the maximum rate of fare adjustments. While we would maintain our fare autonomy under this proposal and the
proposed fare adjustment formula would only serve as a guideline for us in adjusting our fares, we cannot assure you that our ability to set our own fares will not be materially and adversely affected by any final decision taken by the Government on
public transport fares.



We have not increased our fares since
1997. Although we had planned to increase fares by 2.3% in April 2002, we decided not to increase our fares in 2002 due to general economic conditions and competitive pressures. Moreover, our average fares decreased in 2003 due to fare promotions.
We cannot assure you that we will be able to implement any fare increases in 2004.



The Government can exert significant influence on us, and could cause us to make decisions, modify the scope of our activities or impose new obligations on us that may not be in our best interest or that of our
other shareholders.



The Government is able to appoint our
entire Board of Directors without the concurrence of any of our other shareholders. Accordingly, the Government is in a position to influence significantly our major business decisions and strategies, including the scope of our activities and
investment decisions and our dividend policy. Please see Item 7, Major Shareholders and Related Party Transactions  Major Shareholder, for a description of the Governments beneficial ownership of our share capital. In
addition, we compete, to a limited extent, with KCRC, which is 100% beneficially owned by the Government and has a board of directors that consists entirely of government appointees. We also compete with Kowloon Motor Bus, New World First Bus and
Citybus, each of which has two board members who are appointed by the Government. Each of KCRC, Kowloon Motor Bus, New World First Bus, Citybus and other transport providers, such as taxi operators and minibus operators, are regulated by the
Government. The Government may use its ability to influence our business and/or the businesses of our competitors (whether through its shareholding interest, board representation or through regulation) in a manner that may not be in our best
interest or that of our other shareholders.



A number of
provisions in the Operating Agreement (as defined in Item 4, Information on the Company  History and Development of the Company  Overview) are related to prevailing



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government policies, including the provisions relating to the amount of land premium payable by us for the grant of land.
The Government may change its policies, intentions, preferences, views, expectations, projections, forecasts and opinions, including as a result of changes in the economic, political and social environment or its projections of population and
employment growth. In addition, the MTR Ordinance (as defined in Item 4, Information on the Company  History and Development of the Company  Overview) and its subsidiary legislation may be amended, modified or repealed in
accordance with the Hong Kong legislative process. Any amendment, modification or repeal could modify the existing regulatory regime and materially and adversely affect our financial condition and results of operations. The Government has agreed
with our company under the Operating Agreement that it will not make any new regulations under the MTR Ordinance without first having consulted us and having taken account of all reasonable representations made by us.



The Government may also adopt new policies and enact new laws, including in
relation to environmental matters, which may result in increased operating and construction costs for us or otherwise have a material adverse effect on our business, financial condition and results of operations.



We require significant capital for our business and are exposed to the
impact of interest rate and foreign currency movements in respect of our borrowings. If we are unable to obtain additional capital on acceptable terms when needed, our growth prospects and future profitability may be adversely affected.



We incur substantial capital expenditures each year to
maintain, renew and replace our operating assets and infrastructure. We also incur substantial capital expenditures when we undertake new railway projects.



Substantial portions of our operating cash flows are used to pay for these capital expenditures. If we are unable to fund capital expenditures from
operating cash flows and external sources, we will be required to reduce our capital expenditures. This would restrict our ability to grow and, over time, could reduce the quality and reliability of the service we provide.



In addition, we have borrowed, and expect to continue to borrow, significant
amounts at floating interest rates and in foreign currencies. In order to reduce our exposure to movements in interest rates and exchange rates, we have typically hedged a portion of such exposure. This helps to reduce, but does not eliminate, the
impact of interest rate and foreign currency movements. An increase in interest rates, or fluctuations in exchange rates between the Hong Kong Dollar and other currencies, may limit the availability or increase the cost of such swaps or hedging
instruments. This may increase our borrowing costs or reduce the availability of funding.



Our property business is subject to fluctuations in the Hong Kong property market as well as to general risks incidental to the ownership and management of rental properties.



Our property business has in recent years accounted for, and is expected to
continue to account for, a substantial portion of our net profit. All of our completed investment properties and investment properties under development are located in Hong Kong. Historically, the Hong Kong property market has been cyclical with
property values affected by the amount of new land made available by the Government, the rate of economic growth in Hong Kong and political and economic developments in Hong Kong and the Mainland of China.



We are exposed to the general risks inherent in relation to property
development, including that construction may not be completed on schedule or within budget, that development may be affected by governmental regulations, that developed properties may not be leased or sold on profitable terms and that



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purchasers may default. The terms on which property developers are prepared to bid for our development packages will also
be affected by the state of the property market at the time of tender.



In relation to properties held by us as investments, since leases of Hong Kong properties are often for a short duration (typically two to six years, depending on the type of property) or contain provisions requiring periodic adjustments of
rent within a short period of time (typically three years), our income from these properties may be subject to more frequent adjustments than would be the case in other real estate markets. We are also subject to the general risks incidental to the
ownership of properties including, among other things, competition for tenants, changes in market rental levels, inability to collect rent from tenants, and the need to renovate, repair and relet space periodically.



In certain circumstances, the Government has the power to suspend and
revoke our franchise under the MTR Ordinance.



Although
the power of the Chief Executive in Council (which refers to the Chief Executive of Hong Kong acting after consultation with the Executive Council of Hong Kong) under the MTR Ordinance to suspend or revoke our franchise is exercisable only in
certain circumstances, we cannot assure you that such power will not be exercised. If our franchise were to be suspended or revoked, we would not be able to operate our railway business and, accordingly, could not generate revenues from that
business.



Accidents and natural disasters could lead to
decreased revenues and increased expenditure and reduce our operating flexibility.



Our operations could be affected by accidents, including major equipment and power failures, collisions, derailments and natural disasters. Accidents and natural disasters could interrupt or prevent the operation of
the mass transit railway and lead to:



| |  |  | decreased revenues;
| | - |  | -------------------



| |  |  | increased expenditure;
| | - |  | ----------------------



| |  |  | prolonged interruptions in, or reductions of, railway operations;
| | - |  | -----------------------------------------------------------------



| |  |  | a reduction in our operating flexibility;
| | - |  | -----------------------------------------



| |  |  | increased liabilities for us; and
| | - |  | ---------------------------------



| |  |  | pressure for greater regulation.
| | - |  | --------------------------------



Although we believe that the insurance we have put in place is adequate and consistent with industry practice, we cannot assure you that such insurance
will be sufficient to cover losses or that such insurance will continue to be available on the same terms.



Any future outbreak of severe acute respiratory syndrome or other new or unusual diseases may materially and adversely affect our business and
operations, as well as our financial condition and results of operations.



Hong Kong, together with the Mainland of China, Singapore, Taiwan, Canada and certain other areas experienced in early 2003 an outbreak of severe acute respiratory syndrome, or SARS, a new and highly contagious form
of atypical pneumonia. According to the World Health Organization, over 8,400



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cases of SARS and more than 900 deaths had been reported in over 30 countries as of August 7, 2003. In addition, although
there have not been any new cases of SARS in Hong Kong in the second half of 2003, the World Health Organization reported several new cases of the disease in the Mainland of China in December 2003 and early 2004. At the height of the outbreak of
SARS, our average weekday patronage on the MTR Lines decreased, and the Airport Express Line recorded a significant reduction in its average daily patronage due to a steep decline in the number of airport passengers. Although this outbreak occurred
in early 2003, many aspects of SARS, including its cause, means of transmission and ability to survive in different environments, are still not well understood by the international medical community. Although our average MTR Lines weekday average
patronage recovered to over 2.1 million in June 2003 and to over 2.4 million in December 2003 from a low point of 1.8 million in April 2003, and daily patronage on the Airport Express Line increased to 12,700 in June 2003 and to 22,200 in December
2003 from a low point of 9,200 in May 2003, we cannot assure you that there will not be any future outbreak of SARS, or an outbreak of another contagious disease for which there is no known cure or vaccine. Any future outbreak of SARS or any other
contagious disease may cause patronage on our railway to again materially decrease. Furthermore, our ability to adequately staff and maintain our operations may be significantly disrupted in such circumstances. In addition, any future outbreak of
SARS or any other contagious disease may severely restrict the general level of economic activity in Hong Kong, which may also adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of SARS or any
other contagious disease would not have a material adverse effect on our financial condition and results of operations.



Risks relating to Hong Kong



Economic, political and legal developments in Hong Kong could affect our business.



Substantially all of our assets are located in Hong Kong and substantially all of our revenue is derived from Hong Kong.
Accordingly, our financial condition, results of operations and prospects are subject to a significant degree to the economic, political and legal developments in Hong Kong. Hong Kong became a Special Administrative Region of the Peoples
Republic of China, or PRC, on July 1, 1997 when the PRC resumed the exercise of sovereignty over Hong Kong. The basic policies of the PRC regarding Hong Kong are embodied in the Basic Law of Hong Kong, which was adopted by the National Peoples
Congress of the PRC on April 4, 1990 and came into effect on July 1, 1997. We cannot assure you that economic, political and legal developments in Hong Kong will not materially and adversely affect our business and operations.



Adverse economic developments in Hong Kong or elsewhere could have a
material adverse effect on our financial condition and results of operations.



Most of our revenues are derived from our business activities in Hong Kong, which are directly affected by the performance of Hong Kongs economy. Hong Kongs economy is in turn affected, directly and
indirectly, by the performance of the economies of neighboring Asian countries. As a result, adverse economic developments in Hong Kong or elsewhere in the Asian region could have a material adverse effect on our financial condition and results of
operations.



For example, the 1997 Asian financial crisis and
the subsequent economic downturn in the region adversely affected our financial results. Although the Hong Kong economy improved from the second half of 1999 through 2000, general economic conditions deteriorated significantly in 2001 and remained
weak during 2002 and 2003. Moreover, the outbreak of SARS in early 2003 severely decreased the level of economic activity and adversely affected economic growth in Hong Kong by, among other things, disrupting consumer spending and adversely
affecting tourist arrivals. Any decrease in economic activity in Hong Kong may, among other things, reduce patronage on our railway, lower our station advertising



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and kiosk rental income, and decrease our property rental and management income as well as profits from our property
development activities. For instance, the outbreak of SARS in early 2003 had an adverse impact on all of our businesses. In particular, it severely affected our average weekday patronage on the MTR Lines and our daily patronage on the Airport
Express Line. The SARS outbreak also severely curtailed our property development activities, reduced our other non-fare revenues and even constrained our ability to pursue our external consultancy services overseas. Although economic conditions
improved in the second half of 2003, we cannot assure you that economic conditions in Hong Kong will continue to improve in the future or that our operations would not be materially and adversely affected by a sustained downturn in the Hong Kong
economy.



The Hong Kong economy is also affected to a
significant extent by economies of the United States, the European Union and the Mainland of China. The economies of the United States and the European Union have been experiencing significantly slower growth in recent years. Moreover, any new
outbreak of SARS or any other contagious disease for which there is no known cure or vaccine might also adversely affect economic growth in the United States and the European Union, as well as the Mainland of China. We expect a recovery in the Hong
Kong economy to depend in part on the performance of the economies of the United States, the European Union and the Mainland of China. Any deterioration in economic conditions in the United States, the European Union or the Mainland of China may
materially and adversely affect our financial condition and results of operations.



A devaluation of the Hong Kong Dollar may increase costs associated with our capital expansion and will increase the Hong Kong Dollar cost of repaying our indebtedness.



The Hong Kong Dollar has been linked to the US Dollar at the rate of
approximately HK$7.80 to US$1.00 since October 17, 1983. The Government has repeatedly reaffirmed its commitment to this linked exchange rate system. However, in the event this policy were to be changed and there were to be a devaluation of the Hong
Kong Dollar, this would increase the Hong Kong Dollar cost of our foreign currency capital expenditures. In addition, the Hong Kong Dollar cost of our current and future liabilities denominated in foreign currencies would increase. As substantially
all of our revenues are denominated in Hong Kong Dollars, a devaluation of the Hong Kong Dollar may increase capital costs and the related depreciation costs to us and increase our Hong Kong Dollar interest expense on US Dollar denominated
indebtedness. This would in turn reduce our operating and net income, and make it more difficult for us to repay our US Dollar denominated debt obligations in a timely manner.



Item 4. Information on the Company.



History and Development of the Company



Overview



The Company is incorporated in Hong
Kong with limited liability under the Companies Ordinance of the laws of Hong Kong. The Financial Secretary Incorporated holds approximately 76% of the shares of the Company in trust on behalf of the Government. As at the end of May 2004,
approximately 1.46% of the shares of the Company were held on account of the Exchange Fund. The Exchange Fund is a fund established under the Exchange Fund Ordinance (Cap. 66 of the laws of Hong Kong) under the control of the Financial Secretary of
Hong Kong. It is used primarily for such purposes as the Financial Secretary thinks fit to affect, either directly or indirectly, the exchange value of the currency of Hong Kong and for other purposes incidental thereto. The Companys shares
are listed on the Hong Kong Stock Exchange. The Companys predecessor, Mass Transit Railway Corporation (MTRC), was a statutory corporation wholly-owned by the Government and was established in 1975 to construct and operate a mass
transit railway system in Hong Kong (the MTR). The MTR is comprised



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of the MTR Lines (consisting of the Kwun Tong Line, the Tsuen Wan Line, the Island Line, the Tung Chung Line and the
Tseung Kwan O Line) and the Airport Express Line.



The
Government announced in its budget speech on March 3, 1999 that it planned to partially privatize MTRC through the sale of a minority interest of its shares and a listing of its shares on the Hong Kong Stock Exchange. A key element in the
privatization process was the enactment on March 3, 2000 of the new Mass Transit Railway Ordinance (the MTR Ordinance), which came into effect on June 30, 2000. On the same day, the entire property, rights and liabilities of MTRC were
vested in the Company, which was incorporated on April 26, 2000. In addition, under the MTR Ordinance, the Company was granted the franchise for an initial period of 50 years (which may be extended) to operate and develop the MTR, subject to the
terms and conditions contained in the operating agreement, dated June 30, 2000, between the Government and the Company (the Operating Agreement).



On October 5, 2000, The Financial Secretary Incorporated, on behalf of the Government, completed its offer of 1,000,000,000 shares of the Company. As a
result of the offer, the Governments 100% shareholding in the Company was reduced to 80%. On November 1, 2000, The Financial Secretary Incorporated, on behalf of the Government, completed the sale of an additional 150,000,000 shares pursuant
to an over-allotment option granted to the underwriters of the share offer. As a result, the Governments shareholding was further reduced to approximately 77%. Following a series of issuances of scrip dividends, the exercise of share options,
loyalty bonus share transfers from the Government and share grants to the Companys employees by the Government since the listing of the Companys shares on the Hong Kong Stock Exchange, the Governments shareholding was further
reduced and was approximately 76% as of December 31, 2003.



Prior to July 1, 1997, Hong Kong was a Crown Colony of the United Kingdom. Since July 1, 1997, the Peoples Republic of China (the PRC) has exercised sovereignty over Hong Kong, which has become a Special Administrative
Region (SAR) of the PRC. The basic policies of the PRC regarding Hong Kong are set out in the Sino-British Joint Declaration between the Government of the United Kingdom and the Government of the PRC signed on December 19, 1984 (the
Joint Declaration). These basic policies were adopted by the National Peoples Congress of the PRC on April 4, 1990 and came into effect on July 1, 1997 (the Basic Law). The Basic Law provides, among other things, that
the Hong Kong SAR will exercise a high degree of autonomy except in foreign and defense affairs, that the previous capitalist system and way of life shall remain unchanged for 50 years and that the Government shall provide an appropriate economic
and legal environment for the maintenance of the status of Hong Kong as an international financial center. Under the Basic Law, the Hong Kong SAR is vested with executive, legislative and judicial power. Laws in existence as of June 30, 1997, as
they may be amended by the Hong Kong SAR legislature, remain in force except to the extent they contravene the Basic Law. In addition, the Basic Law provides that the Hong Kong Dollar will remain fully convertible, and that Hong Kongs current
social freedoms, including freedom of speech, press, assembly, travel and religion, are not to be affected.



The Companys registered office is located at MTR Tower, Telford Plaza, Kowloon Bay, Hong Kong; telephone: 852-2993-2111. The Companys website
address is www.mtr.com.hk. The information on the Companys website is not a part of this Annual Report. All references in this Annual Report to the Company are to MTRC where appropriate.



Recent Developments



On January 15, 2004, the Company and the Shenzhen Municipal Peoples
Government entered into an agreement in principle, which sets out the principles upon which the Company and the Shenzhen Municipal Peoples Government will negotiate an authorized operating agreement under which a project



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company to be established by the Company in the PRC will have the right to construct Phase 2 of Line 4 and operate Line
4, and to use the facilities of Phase 1 of Line 4 for a term of 30 years. The agreement in principle also provides that the project company will acquire property development rights along Line 4 with an aggregate gross floor area of 31.2 million
square feet. Line 4 will be a 13.1 mile double-track urban railway with 14 stations, and will connect Huanggang, at the boundary between Hong Kong and Shenzhen, with Longhua New Town in Shenzhen. Phase 1 of Line 4, which is an approximately 2.8 mile
section between Huanggang and Shouniangong, is currently under construction by the Shenzhen Metro Company Ltd and will be operated by them initially. The entire Line 4, which is expected to be operational by the end of 2008, will be operated by the
project company for a term of 30 years. The Company will initially hold a 100% equity interest in the project company, and is committed to holding directly or indirectly at least a 51% equity interest for the duration of the project. The total
investment for this project is expected to be approximately Renminbi 6 billion (equivalent to HK$5.6 billion at an assumed exchange rate of HK$0.938 to Renminbi 1.00 as of December 31, 2003). Approximately 40% of the total project investment will be
funded through an equity investment by the Company in the project company, which will have a registered capital of approximately Renminbi 2.4 billion (equivalent to HK$2.3 billion at an assumed exchange rate of HK$0.938 to Renminbi 1.00 as of
December 31, 2003), and the balance of the project costs is expected to be funded through non-recourse project financing denominated in Renminbi. The authorized operating agreement is subject to approval by the National Development and Reform
Commission of the PRC.



On January 20, 2004, the Group, through
the Companys wholly-owned subsidiary MTR Corporation (C.I.) Limited, raised US$600 million through the offering outside the United States of notes with a coupon rate of 4.75%, which are unconditionally and irrevocably guaranteed by the Company
and will mature in January 2014. These notes are listed on the London Stock Exchange.



On February 24, 2004, the Government announced its invitation to the Company and KCRC to commence discussions on the possible merger between the two companies, with a view to concluding the discussions by August 31,
2004. The Company intends to work closely with the Government and KCRC to structure and negotiate this transaction as expeditiously as possible. However, there is no assurance that the discussions between the Company, KCRC and the Government will
result in a merger. The Company believes that a merger implemented on acceptable terms would be beneficial to all the shareholders and stakeholders of the Company as it would provide an integrated regional and urban rail network for the people of
Hong Kong with greater efficiency, increased convenience and enhanced connectivity and provide room for fare adjustments.



On February 26, 2004, the Government agreed to extend the scrip dividend arrangement to each of the Companys three fiscal years ending December 31,
2006. Under the scrip dividend arrangement, the Government has undertaken to elect to receive its entitlement to dividends in scrip form in such an amount as to ensure that a maximum of 50% of the total dividend paid by the Company in respect of the
relevant fiscal year will be paid in the form of cash.



On
April 19, 2004, the Company and two entities wholly owned by the Beijing Municipal Peoples Government, Beijing Infrastructure Investment Co. Ltd. and Beijing Capital Group, entered into a memorandum of understanding, which sets out the
intention of the parties to form a joint venture in the form of a public-private partnership for the construction and operation of the proposed Beijing Metro Line 4. The Beijing Metro Line 4 will be a 17.8 mile underground metro line running from
South Fourth Ring Road (Majialou Station) to north of the Summer Xuan Sun Wu, Xi Cheng and Hai Diang districts of Beijing and will be the main north-south traffic line of Beijing City. The Beijing Metro Line 4 is also one of the major infrastructure
projects for the 2008 Olympic Games to be held in Beijing and is expected to open for services before the games commence. The total investment for the Beijing Metro Line 4 project is expected to be about Renminbi 16 billion (equivalent to HK$15
billion at an assumed exchange rate of



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HK$0.938 to Renminbi 1.00 as of December 31, 2003). Under the contemplated public-private partnership structure, subject
to further assessment of the project and negotiation of the terms of the final agreement, the Companys share of the investment in the project is expected not to exceed Renminbi 2.4 billion (equivalent to HK$2.3 billion at an assumed exchange
rate of HK$0.938 to Renminbi 1.00 as of December 31, 2003).



Capital Expenditures and Divestitures



Airport Railway



As part of the major infrastructure development strategy announced in 1994 known as the Ports and Airport Development Strategy, a new international airport at Chek Lap Kok (the Hong Kong International Airport) and related new
roads and infrastructure, including the Tung Chung Line and the Airport Express Line, were constructed. The Hong Kong International Airport, the Tung Chung Line and the Airport Express Line began operations in mid-1998.



The Airport Railway Agreement was entered into between the Company and the
Government in July 1995 (the Airport Railway Agreement). Summaries of certain provisions of the Airport Railway Agreement are set forth under the caption The Airport Railway  Airport Railway Agreement in the
Companys Annual Report on Form 20-F for the fiscal year ended December 31, 1997. Such summaries do not purport to be complete and are subject to, and qualified in their entirety by reference to, the provisions of the Airport Railway Agreement,
a copy of which has been filed as an exhibit to the Companys Annual Report on Form 20-F for the fiscal year ended December 31, 1995.



In 2003, the Company achieved a significant network enhancement of the Tung Chung Line and the Airport Express Line through the completion of the
four-tracking of these lines between the Lai King and Olympic stations and the opening of the new Nam Cheong station for the Tung Chung Line. The completion of the four-tracking project allows trains of the Airport Express Line and the Tung Chung
Line to operate on separate tracks for 2.8 miles, which is expected to increase efficiencies and enabled the successful opening of the new interchange stations at Nam Cheong and Mei Foo with the KCRC West Rail.



In 2003, the Company substantially completed negotiations and the preliminary
design for a new end station of the Airport Express Line to be constructed at the Hong Kong International Airport. This new station is designed to serve the proposed AsiaWorld-Expo development and, subject to the conclusion of a final agreement, is
expected to be completed by the end of 2005.



Quarry Bay
Congestion Relief Works



The Quarry Bay Congestion
Relief Works (the QBR) was completed in September 2001 within budget and at a cost to the Company of HK$2.8 billion. The QBR has reduced the time and increased the convenience for interchanging between previously the Kwun Tong Line and
now the Tseung Kwan O Line and the Island Line. The QBR involved extensive rock tunneling, laying new track and building two additional platforms in the existing North Point station.



Tseung Kwan O Extension Project



The Tseung Kwan O Extension Project (the TKE) was opened to the public on August 18, 2002 at a cost to the
Company of approximately HK$16 billion, compared to the original estimate of HK$30.5 billion in 1997, and over four months ahead of the original schedule.



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The Tseung Kwan O Line is 6.7 route miles in length and has seven stations and runs between North Point
and Po Lam. A new station, the Tseung Kwan O South station, is expected to be added in the future. The Tseung Kwan O Line provides two interchange stations at Yau Tong and Tiu Keng Leng to facilitate convenient cross-platform interchange with the
Kwun Tong Line. In addition, two interchange stations at Quarry Bay and North Point help facilitate convenient cross-platform interchange with the Island Line.



Disneyland Resort Line



On July 24, 2002, the Company entered into a project agreement with the Government relating to the financing, design, construction, operation and
maintenance of the Disneyland Resort Line (previously named Pennys Bay Rail Link). When completed, the Disneyland Resort Line will provide a rail-shuttle service between the Tung Chung Line at Sunny Bay (previously named Yam O) and the new
Hong Kong Disneyland theme park, which is expected to open in 2005 or early 2006. The project involves approximately 2.17 new route miles and two new stations.



The Government has previously acknowledged that the Company will require an appropriate commercial rate of return on its investment in any new railway
project, which the Government has previously recognized would ordinarily be between 1% and 3% above the estimated weighted average cost of capital of the Company, and that financial and other support from the Government may be required with respect
to any new railway project. In order to provide assistance in respect of the Disneyland Resort Line project, the Government agreed to ensure that any claim for or entitlement to (as against the Company) such amount of dividends representing the
Governments beneficial entitlement to cash dividends in respect of the financial year ended December 31, 2002 and thereafter as is equivalent to the funding gap will be waived as against the Company. For this purpose, the
funding gap means a net present value amount (as at the end of 2001) of HK$798 million, calculated using a discount rate of 11.25% (being the expected rate of return on the project), as more particularly defined in the project agreement
for the Pennys Bay Rail Link (now known as the Disneyland Resort Line). Together with the Governments assistance, the rate of return on the Disneyland Resort Line project is expected to be approximately 11.25% per annum. The Government
has waived HK$219 million and HK$675 million of its entitlement to cash dividends declared and payable by the Company to the Government in 2002 and 2003, respectively.



As of December 31, 2003, the Company had awarded all of the civil engineering and electrical and mechanical contracts for
the Disneyland Resort Line project. Rather than purchase new rolling stock for the line, the Company has decided to pursue the more cost-effective route of converting existing trains.



Work on the Disneyland Resort Line made substantial progress in 2003. Throughout 2003, all major civil and electrical and
mechanical contracts were either generally on or ahead of schedule for both the line itself and the two stations, one at the Disneyland theme park and one at Sunny Bay in North East Lantau, the interchange for the Tung Chung Line. The Company
expects to complete this project and have it ready for service by July 2005 and within the original budget estimate of HK$2 billion. The Company had cumulative expenditures of HK$285 million as of December 31, 2002 and HK$883 million as of December
31, 2003 on this project, and had authorized outstanding commitments on contracts related to this project totaling HK$446 million as of December 31, 2003. After taking into account the waiver by the Government of HK$219 million and HK$675 million of
its entitlement to cash dividends declared and payable by the Company to the Government in 2002 and 2003, respectively, the net balance of the railway construction in progress relating to this project was zero as of December 31, 2003.



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Tung Chung Cable Car



In July 2002, the Government awarded to the Company, on a provisional basis, a 30-year franchise to construct and operate a
cable car system to link Tung Chung with Ngong Ping, site of the Po Lin Monastery and the statue of Buddha. The approximately 17 minute cable car ride will rise 400 meters above sea level and offer views over Tung Chung Valley, the Hong Kong
International Airport and out to sea as far as the Macau Special Administrative Region. The Tung Chung Cable Car project is budgeted to cost HK$950 million and is expected to commence operations in early 2006. In addition, the total costs of works
ancillary to the Tung Chung Cable Car project to be performed by the Company on behalf of the Government under entrustment agreements are approximately HK$100 million and will be funded by the Government. Following the enactment of the Tung Chung
Cable Car Ordinance in June 2003, the Company entered an intensive period of consultation with the Government and other stakeholders. On November 19, 2003, the Company entered into a formal project agreement with the Government to develop, on a
build, operate and transfer basis, the Tung Chung Cable Car system under a franchise granted by the Government for a period of 30 years commencing on December 24, 2003. In November 2003, the Government also signed the entrustment agreements for
related works at Ngong Ping that include a landscaped piazza and a public transport interchange, together with a private treaty grant for a period of 30 years for a theme village adjacent to the Ngong Ping terminal. The environmental permits for the
cable car and the stream diversion were also granted in November 2003, and subsequently the contract for the building and civil engineering works was awarded. Construction commenced in December 2003.



The Company had cumulative expenditures of HK$17 million as of December 31,
2002 and HK$137 million as of December 31, 2003 on this project and had authorized outstanding commitments on contracts related to this project totaling HK$495 million as of December 31, 2003.



Island Line Extensions



The West Island Line was initially proposed to extend the network beyond
Sheung Wan in two phases: first to University Station and Sai Ying Pun by 2012 and then later to Kennedy Town, subject to the Governments decision on further development in this area. The Company submitted financial proposals to the Government
on the West Island Line in April 2002.



The South Island Line
is considered by the Company to be a further natural extension of the network and a pre-feasibility proposal was submitted to the Government in June 2002. The proposed South Island Line will run from South Horizons on Ap Lei Chau via Lei Tung to
Wong Chuk Hang then through Ocean Park with a potential station at Happy Valley to interchange stations with the Island Line at Wan Chai and Admiralty.



On January 21, 2003, the Government requested the Company to proceed with the planning on the first phase of the West Island Line and the South Island
Line. The Company commenced a feasibility study of this project in mid-2003 and submitted a project proposal to the Government at the end of March 2004. The project proposal seeks to achieve a better integration of the West Island Line and the South
Island Line with the existing network. Pursuant to the project proposal, the Island Line will be extended from Sheung Wan station to a new interchange station at Sai Ying Pun with the West Island Line which will run via 5 intermediate stations
(University, Kennedy Town, Cyberport, Wah Fu and Aberdeen) to another interchange station with the South Island Line at Wong Chuk Hang.



The maximum aggregate cost for both the West Island Line and South Island Line is estimated to be approximately HK$16.5 billion at December 2003 prices.
The commercial feasibility of this project will require direct funding support from the Government in an amount of approximately HK$7.2 billion. Subject to reaching an agreement with the Government in 2004, the Company intends to commence



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construction in 2005 and to commence operations of both the West Island Line and the South Island Line in 2009/2010.



Other Projects



On January 21, 2003, the Executive Council of the Hong Kong Special
Administrative Region (the Executive Council) decided that completion of the North Island Link will be postponed until after 2016. The North Island Link is formed by the extension of the Tung Chung Line at Hong Kong station to connect
with the Island Line at Fortress Hill. The Company agrees with the Governments decision to defer completion of the North Island Link, particularly in light of the reduced population growth forecast for Hong Kong and the already adequate
capacity of our railway network for serving the northern part of Hong Kong Island and our cross-harbor customers.



In February 2004, the Company submitted a proposal for an extension of the Kwun Tong Line from Yau Ma Tei station to Whampoa as requested by the
Government in November 2003.



In addition to the
projects described above, the Company has launched a number of significant projects intended to enhance the services it provides, including MTR station improvement and modification programs, installation of platform screen doors, an integrated
station management system and West Rail Interface Works among others. See  Business Overview  Capital Expenditures.



Financing of the projects is provided by funds generated from railway and related operations, property development profits and debt financing, except that
the commercial feasibility of the West Island Line and South Island Line will require direct funding support from the Government in an amount of approximately HK$7.2 billion. In addition, the Government has agreed to provide financial assistance in
respect of the Disneyland Resort Line as described under Capital Expenditures and Divestitures  Disneyland Resort Line above.



Divestitures



The Company did not undertake any significant divestitures during the three-year period ended December 31, 2003.



Business Overview



General



In 2003, the MTR Lines carried a total of 770 million passengers, or an
average of 2.24 million passengers per weekday, and the Airport Express Line carried 6.8 million passengers, or a daily average of 19,000 passengers. In conjunction with its construction and operation of the MTR, the Company is also involved in the
development and sale of residential and commercial properties with various third-party developers and manages, and in some cases owns certain developed properties. The Company also leases advertising and retail space and provides other services
within the MTR network. In addition, the Companys subsidiary, Octopus Cards Limited, operates the Octopus smart card system which the Company uses to collect the majority of its fare revenue. In recent years, the Company has also been
undertaking consultancy services in railway operations, project management and construction, property management and maintenance management. More recently, the Company established TraxComm Limited, a wholly-owned subsidiary through which the Company
provides fixed-line telecommunication network services.



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The Railway System



MTR Lines and the Airport Express Line



The MTR serves commuters and travelers to the Hong Kong International Airport through a 54.5 route miles network with 50
stations, and is comprised of six interconnecting lines: (1) the Kwun Tong Line, the Tsuen Wan Line, the Island Line, the Tung Chung Line, and the Tseung Kwan O Line, which collectively form the MTR Lines, and (2) the Airport Express Line.



The MTR Lines run along the north side of Hong Kong Island,
under Victoria Harbour, through Kowloon, into the New Territories, to Tsing Yi via the Rambler Channel Bridge, through the Tsing Ma Bridge and Kap Shui Mun Bridge and along the north side of Lantau Island to Tung Chung. The MTR Lines include a route
length of 50 miles, 49 stations and three cross-harbor tunnels (including the rail element in the Eastern Harbour Crossing). There are five depots for train stabling and maintenance (one of which is shared with the Airport Express Line).



The Kwun Tong Line, which commenced operations in 1979, extends
from Yau Ma Tei in mid-Kowloon, through east Kowloon to Tiu Keng Leng, while the East Harbour Crossing to North Point on Hong Kong Island is now a part of the Tseung Kwan O Line. There are interchange facilities with the Tsuen Wan Line at Yau Ma Tei
station, Mong Kok station and Prince Edward station, and with the Tseung Kwan O Line at Yau Tong station and Tiu Keng Leng station. There is also an interchange facility at Kowloon Tong station with the Kowloon-Canton Railway (the KCR),
a suburban railway wholly-owned by the Government through KCRC. The Kwun Tong Line is 9.8 route miles in length, of which 8.0 miles are underground. There are 11 underground and four above-ground stations, including the interchange stations, and a
depot at Kowloon Bay.



The Tsuen Wan Line, which
commenced operations in 1982, runs from the downtown business district in Central on Hong Kong Island, under the harbor to Tsim Sha Tsui in Kowloon, and then up the major commercial and residential Nathan Road corridor to Tsuen Wan in the New
Territories. There are interchange facilities with the Kwun Tong Line at Yau Ma Tei station, Mong Kok station and Prince Edward station, with the Island Line at Admiralty station and Central station, with the Tung Chung Line at Lai King station and
Central station and with the Airport Express Line at Central station and with the West Rail of KCRC at Mei Foo station. The Tsuen Wan Line is 10.5 route miles in length, of which 8.6 miles are underground, and has 12 underground and four
above-ground stations and a depot at Tsuen Wan.



The
Island Line, which commenced operations in 1985, runs from Sheung Wan in western Hong Kong Island through the central business district to the commercial and residential areas of eastern Hong Kong Island ending at Chai Wan. There are
interchange facilities with the Tsuen Wan Line at Admiralty station and Central station, with the Tseung Kwan O Line at North Point station and Quarry Bay station and with the Tung Chung and Airport Express Lines at Central station. The Island Line
is 8.3 route miles in length, of which 7.0 miles are underground, and has 12 underground and two above-ground stations, including the interchange stations, and a depot at Chai Wan.



The Tung Chung Line, which commenced operations in 1998, runs from Central on Hong Kong Island to Tung Chung on
Lantau Island. The Tung Chung Line consists of 19.4 route miles, of which 5.6 miles are underground and 13.8 miles are above ground. It has three underground, one partially underground and three above ground stations with a depot at Siu Ho Wan
(which is shared with the Airport Express Line). With its parallel route along the Nathan Road corridor, the Tung Chung Line provides relief to the heavily congested Tsuen Wan Line, and there are interchange facilities with the Tsuen Wan Line at Lai
King station and Hong Kong station, with the Island Line at Hong Kong station,



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with the Airport Express Line at Hong Kong station, Kowloon station and Tsing Yi station and with the West Rail of KCRC
at the new Nam Cheong station. The Tung Chung Line was constructed in conjunction with the infrastructure projects associated with the Hong Kong International Airport, and for most of its length it either shares its track with, or runs parallel to,
the Airport Express Line. In order to facilitate the growth of new communities on Northern Lantau Island and west Kowloon, the Tung Chung Line is designed to permit interchange with future railway lines to the northwest New Territories and other
parts of Kowloon.



The Airport Express Line, which
commenced operations in 1998, connects the Airport on Lantau Island with the Tsing Yi station, Kowloon station and Hong Kong station. The Airport Express Line consists of 21.9 route miles (which includes the track shared with the Tung Chung Line),
of which 4.7 miles are underground and 17.2 miles are above ground. It has two underground and two above ground stations and a depot at Siu Ho Wan (which is shared with the Tung Chung Line). There are interchange facilities with the Tung Chung Line
at Hong Kong station, Kowloon station and Tsing Yi station, and with the Island Line at Hong Kong station. The passenger cars are specially designed for comfortable travel with high quality business-class style seating and dedicated baggage space.
Train platforms are conveniently located with an integrated transportation system adjacent to the passenger terminal building at the Hong Kong International Airport. In addition, the Company provides at the Hong Kong station and Kowloon station an
in-town check-in service, enabling passengers to check-in for flights, receive boarding passes and check-in baggage at any time up to 90 minutes before their scheduled departure time on the same day of their flight departure. This service is
provided by nine airlines and baggage handling agents under agreements with the Company.



The Tseung Kwan O Line, which commenced operations in 2002, runs from Po Lam in Tseung Kwan O new town through the Eastern Harbour Crossing,
connecting with the existing Quarry Bay and North Point stations of the Island Line and includes a branch to a depot and future Tseung Kwan O South station. There are interchange facilities with the Kwun Tong Line at two new stations in Yau Tong and
Tiu Keng Leng, and with the Island Line at Quarry Bay and North Point. The Tseung Kwan O Line is 7.8 underground route miles in length and has three partially underground stations and two above ground stations, excluding the interchange stations
with the Island Line, and one depot at Tseung Kwan O (Area 86). It is expected that a sixth station, the Tseung Kwan O South station, which is to be located adjacent to the Tseung Kwan O (Area 86) depot, will be added in the future.



From time to time, the Company studies possible extensions of
its existing system in light of the reasonable future public transportation requirements of Hong Kong. The Company has the statutory authority to operate its own feeder bus services to the MTR stations but does not currently do so. Independent
franchises and operators currently provide franchised bus and minibus feeder service routes to MTR stations. The Company also provides free hotel shuttle bus services to Airport Express Line passengers. Such services are operating from designated
MTR stations to designated hotels and vice versa. In addition, at Hong Kong, Kowloon and Tsing Yi stations there are car parking facilities available for certain users of the MTR.



Construction



The construction of the MTR posed significant challenges as the system had to be built according to tight program schedules in one of the most densely
populated urban centers in the world and often under difficult environmental conditions. As a result, a variety of complex construction techniques were employed, including bored tunnels, diaphragm walling, top down construction, chemical ground
treatment, immersed tube, cut and cover tunnels and viaducts.



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The Modified Initial System (which consisted of the portion of the MTR from Kwun Tong to Central) was
constructed first and was fully completed in 1980. This was followed by the completion of the Tsuen Wan Extension (the portion of the MTR from Tsuen Wan to Prince Edward) in 1982, the Island Line (the portion of the MTR from Chai Wan to Sheung Wan)
in 1986, the Tung Chung and the Airport Express Lines in 1998 and the Tseung Kwan O Line in 2002. The Eastern Harbor Crossing, which was built by a third party and extended the Kwun Tong Line across Victoria Harbor to interchange with the Island
Line, commenced operations in 1989 and is now part of the Tseung Kwan O Line.



The Company employed contractors from Hong Kong as well as Japan, United Kingdom, France and other countries. Individual contracts for the design and construction of the MTR were awarded based on competitive
international bidding. The construction of the Kwun Tong, Tsuen Wan, Island and Tseung Kwan O Lines (the Urban Lines) collectively cost approximately HK$42.0 billion, while the construction of the Tung Chung and Airport Express Lines
collectively cost approximately HK$35.1 billion.



Operations



The MTR usually operates
seven days a week from approximately 6:00 a.m. to 1:00 a.m. (increased service may be available by prior press notice during special holidays). The Urban Lines trains run approximately two minutes apart during peak hours and approximately four
minutes apart during off-peak hours. During peak hours, Tung Chung Line trains run approximately 8 minutes apart between the Tsing Yi and Tung Chung stations and 4 minutes apart between the Hong Kong and Tsing Yi stations. During non-peak hours,
Tung Chung Line trains run approximately 10 minutes apart between the Hong Kong and Tung Chung stations. Starting from March 15, 2004 Airport Express Line trains run approximately 12 minutes apart during peak and non-peak hours. Trains run at an
average speed of approximately 21 miles per hour for the Urban Lines and approximately 50 miles per hour for the Tung Chung Line and the Airport Express Line. The duration of each stop at a station is approximately 30 seconds for trains on the MTR
Lines and approximately 90 seconds for trains on the Airport Express Line. Scheduled travel time for the Kwun Tong Line from Tiu Keng Leng to Yau Ma Tei is approximately 27 minutes, for the Tsuen Wan Line from Tsuen Wan to Central is approximately
30 minutes, for the Island Line from Sheung Wan to Chai Wan is 24 minutes, and for the Tseung Kwan O Line from Po Lam to North Point is approximately 15 minutes. Scheduled travel time for the Tung Chung Line from Tung Chung to Central, and for the
Airport Express Line from the Hong Kong International Airport, Lantau Island to Central, is approximately 23 minutes.



All trains and underground stations are air-conditioned to provide comfortable travel conditions during Hong Kongs hot and humid summers. Trains on
the MTR Lines consist of eight-car passenger trains and each car has a capacity for 48 seated and approximately 265 standing passengers. This gives the Urban Lines a maximum one-direction loading capacity of approximately 75,000 passengers per hour.
Airport Express Line trains currently consist of six-car passenger trains and one luggage car. Each Airport Express Line passenger car consists of 64 seats, each fitted with video screens providing news, information and tourist highlights.



Railway Operations



Automation, Computerized Facilities and Octopus Technology



The MTR makes extensive use of automated and
computerized facilities and equipment. Instead of lineside traffic signals to control train movement, MTR trains are controlled and regulated automatically by computerized signals transmitted through electronic track circuits, loops and beacons
which read train positions and regulate train speed and braking. The handling of single-journey tickets has



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also been automated by the use of ticket issuing and collecting machines. Moreover, the Company introduced a contactless
smart card, commonly referred to as the Octopus card, in September 1997, which completely replaced the magnetic Common Stored Value Tickets (CSVTs) previously used for multiple journeys as of January 2, 1999.



The contactless smart card system improves efficiency and convenience in the
payment of fares and enables travellers to use a common fare card for most public transportation services in Hong Kong, including buses, ferries and the KCR as well as the MTR. As was the case with the CSVTs, fares are automatically deducted from
the Octopus cards at computerized exit gates. A new company, Octopus Cards Limited, was formed to develop and operate the new Octopus payment system. The Company owns 57.4% of the issued share capital of Octopus Cards Limited, with the remaining
42.6% of the issued share capital collectively owned by KCRC, KMB Public Bus Services Holdings Limited, Citybus Limited, New World First Bus Services Limited and New World First Ferry Services Limited. Although the Company holds 57.4% of the issued
shares of Octopus Cards Limited, the Companys voting rights at board meetings of Octopus Cards Limited are limited to 49%. See Note 18 of Notes to the Financial Statements.



In September 1999, Octopus Cards Limited was reorganized into a separate operating entity with its own organizational and
manpower structure to allow it to focus on expanding the use and applications of the technologies offered by the Octopus cards. On April 20, 2000, Octopus Cards Limited received authorization from the Hong Kong Monetary Authority to act as a
deposit-taking company for the principal purpose of issuing multi-purpose Octopus cards. The authorization allows the Octopus cards to be used for a wider range of purposes, including some that are non-transport related, with a view to enhancing
convenience for cardholders. On January 17, 2001, the shareholders of Octopus Cards Limited agreed to operate under a new shareholders agreement, which maintained the existing voting arrangements, but changed the shareholding arrangements and
converted Octopus Cards Limited from a non-profit making entity into a profit making entity. The new agreement offers Octopus Cards Limited significant opportunities for expanding its business beyond transportation. Octopus Cards Limited will,
however, continue to have as its primary objective the fulfillment of the ticketing requirements of all present and future transport operators.



The Octopus cards have been widely accepted by customers, and as of December 31, 2003, approximately 10.4 million Octopus cards were in circulation.
Passengers using Octopus cards accounted for approximately 90% and 50% of average daily patronage on the MTR Lines and the Airport Express Line, respectively, during 2003. The Company currently offers its customers additional Octopus-related
services, including allowing customers to add value to the Octopus card through electronic funds transfer facilities located in all stations or autopay services provided by customers banks. The Octopus automatic add value services using bank
accounts or credit cards also expanded in 2003, with the number of these automatic add value accounts growing by approximately 8% to over 411,500 as of December 31, 2003.



In recent years, a large number of non-transportation applications have been added to the Octopus system, including
photocopiers at universities, various kinds of vending machines and self-service kiosks, public swimming pools and tennis courts, as well as retail chains like 7-Eleven convenience stores, Parkn Shop stores, Watsons chemist stores,
Pricerite stores, Circle K convenience stores, the Café de Coral restaurant chain, Daily Stop stores, Wellcome stores and Ocean Empire stores. In addition, the use of Octopus cards for gate entry at the Hong Kong Jockey Club racecourses at
Happy Valley and Shatin has also been successful. The Company has also extended the use of the Octopus cards to serve as an identification card for access control in the Companys depots, stations and residential projects, including Tierra
Verde, The Waterfront, Island Harbourview and Tung Chung Crescent. Octopus cards are also being used in school campuses for attendance taking, as library cards, in making payments at tuck shops and for school fees.



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In 2003, the Company and Octopus Cards Limited diversified their business into international automatic
fare collection consultancy services, when they were awarded a series of contracts with Thales e-Transactions CGA (Thales) to create an automatic fare collection system on a national scale in the Netherlands. The new automatic fare
collection system in the Netherlands will cover all modes of public transport, including train, bus, tram, metro and ferries. The Company and Octopus Cards Limited will work with the East-West e-Ticketing BV, consisting of Thales, Accenture and
Vialis Verkeer & Mobiliteit BV, to provide software and expertise in the operation of the new automatic fare collection system.



Octopus Cards Limited continued to win a number of awards in 2003. These include:



| |  |  | the Brand Leader Award in the Business Equipment and Services Category Award in Superbrands Hong Kong 2003, awarded by Superbrands,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Best Practice Award for Simplicity 2003 awarded by Best Practice Management,
| | - |  | --------------------------------------------------------------------------------



| |  |  | the Enterprise Award in the DHL/SCMP Hong Kong Business Awards 2003, and
| | - |  | ------------------------------------------------------------------------



| |  |  | the Hong Kong Top Ten Brandnames Award 2003 awarded by The Chinese Manufacturers Association of Hong Kong.
| | - |  | -----------------------------------------------------------------------------------------------------------



In 2003, there were an average of 7.5 million Octopus transactions per day
and the average daily transaction value grew from HK$50 million in 2002 to HK$51 million in 2003. Further expansion of the use of the Octopus technology for other modes of transportation and services in Hong Kong are constantly being explored.



Maintenance



The Company has a program of regular repairs and maintenance of its plant
and equipment, as well as its civil structural assets, including tunnels, viaducts, immersed tubes, bridges, stations and depot structures. The Company intends to ensure and maintain a high standard of safety and reliability through this program.



When not in use, passenger trains are stationed at maintenance
depots for cleaning and periodic inspections and maintenance. Every three years or after trains running on the Urban Lines have traveled approximately 200,000 miles, trains are overhauled at the Kowloon Bay depot. Trains running on the Tung Chung
and Airport Express Lines are overhauled only after they have traveled approximately 310,000 miles, due to fewer station stops being made by these trains and the more advanced technology installed on them. Preventive maintenance and condition
monitoring techniques are applied to achieve cost efficiency.



Civil structural assets are visually inspected annually to ensure safe train service. In-depth inspections are carried out at scheduled intervals, depending on the category of the asset. In 1998, the Company commenced the adoption of the
laser scanning inspection system. This system provides high quality records for engineering assessment and maintenance of tunnel structures. Repair works are prioritized according to the engineering assessment and hazards posed to safety. Routine
maintenance and quick recovery actions to eliminate potential hazards are carried out by special repair teams. Less critical problems are treated according to planned project schedules.



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Insurance



The Company maintains insurance coverage at a level it considers to be adequate and appropriate for the business it
operates. In particular, the Company insures against a variety of risks, including railway asset and property damage, business interruption, third party liability, construction damage and employees compensation.



Until November 1997, all of the Companys insurance risks were placed in
the Hong Kong and international insurance markets. Since that time, the Companys railway asset damage and business interruption (MD & BI) risks have been placed through Fasttrack Insurance Ltd. (Fasttrack
Insurance), a wholly-owned subsidiary incorporated in Bermuda as a captive insurance company.



Following several years in which Fasttrack Insurance retained the primary level of cover with respect to the MD&BI risks and obtained reinsurance in
excess of the retention for up to a certain limit for each and every loss, starting from May 31, 2003 the cover has been placed with Fasttrack Insurance without Fasttrack Insurance obtaining any reinsurance. The decision for this insurance
arrangement has been taken based on the very low loss ratios for this category of risks over many years and the existence of the Companys comprehensive and well developed risk management and safety procedures. A recent risk management survey
by Willis Limited has demonstrated that the cover limit under the insurance policy with Fasttrack Insurance of HK$500 million for each and every loss is sufficient for MD&BI risks. The Company will pay Fasttrack Insurance premiums with respect
to such insurance cover. In addition, the Company has renewed the separate cover for losses from terrorist attacks with Fasttrack Insurance for another one-year period from May 31, 2004 to May 30, 2005, with the same cover limit of an aggregate
amount of HK$100 million. Having carried out an analysis of the Companys claims history and the potential risks associated with increased risk retention, the Company decided also to place its third party liability insurance with Fasttrack with
effect from December 1, 2003 to November 30, 2004. Fasttrack retained the primary level of cover in an amount of HK$50 million with respect to the third party liability insurance and obtained reinsurance in excess of the retention for up to a
certain limit for each and every loss in the international insurance markets.



Using Fasttrack Insurance as a captive insurance company has several advantages over the approach adopted by the Company prior to November 1997. For example, Fasttrack Insurance is able to retain profitable premium
income that would otherwise be paid to other insurers. Furthermore, by demonstrating within the Company that, through Fasttrack Insurance, a significant level of risk is being retained, it is possible to emphasize the importance of sound and
effective safety management standards.



Since its commencement
of business in November 1997, Fasttrack Insurance has generated a cumulative surplus resulting from underwriting profits and investment income. As of December 31, 2003; this cumulative surplus together with paid up capital amounted to HK$150
million.



Passengers and Seasonality of Patronage



From the Companys first full year of operation
in 1980 up to and including 1996, there had been a continuous growth in the number of passengers using the MTR. As a result of the Asian economic crisis in the second half of 1997 and the resulting downturn in Hong Kongs economy, the MTR
experienced a 0.6% decrease in the number of passengers carried on the Urban Lines in 1997. This downward trend in patronage on the MTR Lines continued over the next four years, when the MTR experienced a 2.3% decrease to 794 million passengers
carried in 1998, a 1.8% decrease to 779 million passengers carried in 1999, a 1.5% decrease to 767 million passengers carried in 2000 and a 1.2% decrease to 758 million passengers carried in 2001. The downward trend was reversed in 2002, when total
patronage increased to 777 million passengers carried. The decrease in patronage through 2001 was mainly due to adverse



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economic conditions in Hong Kong, increased competition from bus operators, the impact of the opening of the Western
Harbor Crossing and road improvements in West Kowloon, and the dramatic fall in tourists visiting Hong Kong, but was partially offset by the commencement of operations of the Tung Chung Line in mid-1998. The increase in patronage on the MTR Lines in
2002 was primarily due to the opening of the Tseung Kwan O Line.



During the same period, patronage on the Airport Express Line increased from 4 million passengers in 1998 to approximately 10 million passengers in 1999 and 2000, but decreased to 9 million passengers in 2001 and 8.5 million passengers in
2002. Patronage figures for the Airport Express Line were significantly lower in 1998 because the Airport Express Line did not commence operations until July 6, 1998. The decreases in patronage on the Airport Express Line in 2001 and 2002 were
primarily due to the elimination of the 10% fare discount and the tragic events of September 11, 2001 in the United States, which continued to affect overall air passenger traffic in 2002, and a weak economic environment. The MTRs market share
of all franchised public transportation boardings in Hong Kong was 25.7% in 1998, 25.2% in 1999, 24.1% in 2000 and 23.5% in 2001 and 2002, and its market share of cross-harbor boardings (excluding taxis, public light buses and private cars) was
61.9% in 1998, 60.3% in 1999, 57.9% in 2000, 57.4% in 2001 and 58.2% in 2002. Average MTR Lines weekday patronage was 2.33 million in 1998, 2.28 million in 1999, 2.24 million in 2000, 2.23 million in 2001, and 2.26 million in 2002, and average
Airport Express Line daily patronage was 21,900 in 1998, 28,500 in 1999, 28,300 in 2000, 24,700 in 2001 and 23,200 in 2002.



In 2003, the MTR carried a total of 770 million passengers on the MTR Lines and 6.8 million passengers on the Airport Express Line. The combined result
represented a 24.3% market share of all franchised public transportation boardings in Hong Kong and a 58.7% market share of cross-harbor boardings (excluding in each case taxis, public light buses and private cars). These decreases in patronage were
primarily due to the effects of the outbreak of severe acute respiratory syndrome (SARS) that commenced in early 2003 and reached its peak in Hong Kong in March 2003. The SARS outbreak severely decreased economic activity and adversely
affected economic growth in Hong Kong by, among other things, disrupting consumer spending and adversely affecting tourist arrivals primarily in the first half of 2003. In particular, patronage on the MTR Lines during the SARS outbreak was lower
despite the additional patronage attributable to the Tseung Kwan O Line, and patronage on the Airport Express Line during the SARS outbreak was significantly lower compared to the corresponding period in 2002. In the second half of 2003, patronage
on both the MTR Lines and Airport Express Line recovered substantially to the levels prior to the SARS outbreak. In particular, after reaching a low of 1.8 million in April 2003, average weekday patronage on the MTR Lines recovered to over 2.1
million in June 2003 and over 2.4 million in December 2003. Moreover, average Airport Express Line daily patronage, after reaching a low of 9,200 in May 2003, increased to 12,700 in June 2003 and 22,200 in December 2003. Patronage on the Airport
Express Line, however, continued to be adversely affected by the reduced air passenger traffic resulting from the weak economic environment. Our market share of the important cross-harbor trips increased from 58.2% to 58.7%, primarily as a result of
the Tseung Kwan O Line commencing operations in August 2002 and despite continued growth in competition from bus services. Average MTR Lines weekday patronage in 2003 was 2.24 million, which was a decrease of 0.9% from 2002. Average Airport Express
Line daily patronage in 2003 was 18,700, which was a decrease of 19.4% from 2002.



The Company expects the following factors to positively influence patronage and market share:



| |  |  | the opening of the Tseung Kwan O Line in 2002 and related new service areas for the MTR system;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the increase in the number of tourists from the Mainland of China;
| | - |  | ------------------------------------------------------------------



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| |  |  | the ride 10 get 1 free promotion that has been extended to October 3, 2004;
| | - |  | -----------------------------------------------------------------------------



| |  |  | a number of marketing initiatives that were launched during the first half of 2003, including the ride 5 get cash coupons and HK$2 holiday ride promotions,
as part of the Companys SARS recovery program;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the promotion of the MTR network overseas, particularly in the Mainland of China, establishing distribution channels to sell MTR and Airport Express Line tickets in places which are
among the main sources of inbound tourism to Hong Kong;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the promotion of the Airport Express Line by Asia Miles upon the purchase of a 2 Trips Airport Express Line ticket, thereby encouraging more usage of the Airport Express
Line from frequent travelers and raising brand awareness among international travelers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the improved linkage with the KCRCs West Rail following the opening of the new interchange station at Nam Cheong and the pedestrian link at Mei Foo station in December 2003;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other improvements of linkages with other modes of transport, intermodal fare discount schemes and fare savers.
| | - |  | ---------------------------------------------------------------------------------------------------------------



Future passenger growth on the MTR Lines and the Airport Express Line will
depend on a variety of factors affecting consumer preferences among transportation modes and frequency of travel, including the Hong Kong economy, competition from alternative modes of public and private transportation as well as demographic
factors. Moreover, any future outbreak of SARS or any other contagious disease for which there is no known cure or vaccine may adversely affect our patronage. Patronage on the MTR has historically not been affected by seasonality in any material
respect. The Company continues to expect patronage of the Airport Express Line to be affected by competition from franchised airport buses, taxis, hotel shuttle buses, hotel guest cars and private cars.



Passengers traveling on the MTR Lines may interchange freely among the Kwun
Tong, Tsuen Wan, Island, Tung Chung and Tseung Kwan O Lines. As a result, ridership numbers for these five lines are by necessity reported as a single operating unit for the Companys internal reporting purposes.



The following table sets forth passenger growth and other operating data
since 1999:



|                                               |  |                         |  |         |  |         |  |         |  |        
|---------------------------------------------- |  | ----------------------- |  | ------- |  | ------- |  | ------- |  | -------
|                                               |  | Year Ended December 31,
|                                               |  | 1999                    |  | 2000    |  | 2001    |  | 2002(6) |  | 2003(7)
|Total number of passengers (in thousands)      |  |                         |  |         |  |         |  |         |  |        
| MTR Lines(1)                                 |  | 779,309                 |  | 767,416 |  | 758,421 |  | 777,210 |  | 770,419
| Airport Express Line                         |  | 10,396                  |  | 10,349  |  | 9,022   |  | 8,457   |  | 6,849  
|Average number of passengers (in thousands)    |  |                         |  |         |  |         |  |         |  |        
| MTR Lines(1)(2)                              |  | 2,284                   |  | 2,240   |  | 2,231   |  | 2,261   |  | 2,240  
| Airport Express Line(3)                      |  | 29                      |  | 28      |  | 25      |  | 23      |  | 19     
|Average passenger miles traveled (per journey) |  |                         |  |         |  |         |  |         |  |        
| MTR Lines(1)                                 |  | 4.6                     |  | 4.5     |  | 4.6     |  | 4.7     |  | 4.8    
| Airport Express Line                         |  | 18.5                    |  | 18.4    |  | 18.5    |  | 18.6    |  | 18.5   



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|                                               |  |                         |   |  |      |   |  |      |   |  |         |   |  |         |  
|---------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | - |  | ------- | - |  | ------- | -
|                                               |  | Year Ended December 31, |  
|                                               |  | 1999                    |   |  | 2000 |   |  | 2001 |   |  | 2002(6) |   |  | 2003(7) |  
|Average car occupancy                          |  |                         |   |  |      |   |  |      |   |  |         |   |  |         |  
| MTR Lines(1)                                 |  | 61                      |   |  | 61   |   |  | 58   |   |  | 57      |   |  | 53      |  
| Airport Express Line                         |  | 16                      |   |  | 16   |   |  | 14   |   |  | 13      |   |  | 13      |  
|Market share                                   |  |                         |   |  |      |   |  |      |   |  |         |   |  |         |  
|All movements(4)                               |  | 25.2                    | % |  | 24.1 | % |  | 23.5 | % |  | 23.5    | % |  | 24.3    | %
|Cross-harbor movements(4)                      |  | 60.3                    | % |  | 57.9 | % |  | 57.4 | % |  | 58.2    | % |  | 58.7    | %
|To/from the Hong Kong International Airport(5) |  | 32.0                    | % |  | 28.0 | % |  | 27.0 | % |  | 25.0    | % |  | 23.0    | %

---

|(1) |  | MTR Lines are comprised of the Tsuen Wan Line, the Kwun Tong Line, the Island Line and, since June 22, 1998, the Tung Chung Line and, since August 18, 2002, the Tseung Kwan O Line.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Weekday average.
|--- |  | ----------------

|(3) |  | Daily average.
|--- |  | --------------

|(4) |  | Market share represents the percentage of franchised public transportation boardings in Hong Kong, which is comprised of boardings on the MTR, franchised buses, trams, ferries,
green minibuses and the KCR throughout the territory (including areas that the MTR does not serve), but excludes boardings on taxis, public light buses and private cars for which no reliable data are available.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Market share represents the percentage of franchised public transportation boardings in Hong Kong to and from the Hong Kong International Airport.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes results from the operation of the Tseung Kwan O Line since August 18, 2002.
|--- |  | ------------------------------------------------------------------------------------

|(7) |  | Includes results from the full year operation of the Tseung Kwan O Line.
|--- |  | ------------------------------------------------------------------------



Fares



The Company establishes its own fares. While the Companys fares are currently not subject to governmental approval, the Company must comply under
the Operating Agreement with a specified procedure before changing the level of any fare, which requires the Company to: (1) consider the level of public acceptance of any proposed change (based on passenger surveys), (2) consult the Transport
Advisory Committee (a body established to advise the Chief Executive of the Hong Kong SAR (previously the Governor of Hong Kong) on transport policy in Hong Kong) and the Legislative Council Panel on Transport, (3) notify the Transport Advisory
Committee and the Legislative Council Panel on Transport within a reasonable period prior to the implementation of a new fare and (4) make a public announcement of the new fares.



Historically, the Company has reviewed its fares annually with the objective of making regular increases roughly in line
with inflation, so that revenues are sufficient to cover operating costs, debt servicing and depreciation of capital expenditure and to provide an appropriate shareholder return. Prior to increasing its fares, the Company first studies the
prevailing competitive position of the MTR and other public transportation alternatives and identifies the segments of the public transportation market in which it is relatively more or less competitive. The Company then evaluates various possible
fare increases for different market segments taking into account inflation, projected growth of the Hong Kong economy and assumptions as to consumer price sensitivity. The effects of alternative fare increases on patronage and fare revenue are then
assessed using data derived from previous fare changes. In addition, the Company surveys customers and considers their views on possible fare increases.



The MTRs average annual fare increase from 1980 until the end of 2003 has been 5.6%, which is approximately the average annual increase in the
Consumer Price Index (A) for the same period but lower than the average Hong Kong payroll index increase of 10.1% for the same period. In light of the unfavorable economic conditions prevailing in Hong Kong during 1998, the Company decided to forgo
a fare increase for the Kwun Tong, Tsuen Wan, and Island Lines. Due to the continued economic downturn and the general deflationary environment in Hong Kong, the Company maintained the same general fare throughout 1999, 2000, 2001, 2002, and 2003
for the MTR Lines. The introductory promotional discount



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for the Airport Express Line was, however, reduced from 30% to 10% on July 3, 2000 and then discontinued entirely on July
1, 2001. The Company also decided to withdraw the 30% staggered hours fare discount on July 2, 1999 and to collect HK$0.10 per journey from each passenger using an Octopus card on the MTR commencing July 3, 2000, to contribute towards the costs of
installing platform screen doors in 30 underground stations on the Urban Lines. Due to the continued poor economic environment in Hong Kong, the Company decided not to implement the 2.3% fare increase, initially planned for April 2002. The Company
did not increase fares in 2003.



The basic MTR fare structure
consists of thirteen different fare zones for the MTR Lines and three different fare zones for the Airport Express Line. The fare for any station-to-station movement depends on the distance between the zones containing such stations and whether the
journey involves crossing the Victoria Harbour. The Company offers concessionary fares to senior citizens, students and children. In addition, fare discounts are offered on certain feeder bus routes and at selected stations on a trial basis.



Passengers using the Airport Express Line enjoy half fares for
children, free MTR connection (Octopus card users), free hotel shuttle bus services, round trip discounts, free in-town check-in services and discounted car park rates. In addition, passengers making same day return journeys on the Airport Express
Line travel free of charge on the return journey.



The Company
is currently studying the details of the consultative paper on public transport fares (the Public Transport Fare Consultative Paper), which was issued by the Government on July 28, 2003. The Public Transport Fare Consultative Paper
discusses proposals to introduce a fare adjustment formula, a trigger mechanism for fare adjustments and a cap on the maximum rate of fare adjustments. Under these proposals, the Company would maintain its fare autonomy and the fare adjustment
formula would only serve as a guideline for the Company in adjusting its fares. The Public Transport Fare Consultative Paper stresses that any merger between the Company and KCRC would have a critical impact on the proposed fare adjustment
mechanism. The Company expects to continue discussions with the Government on the Governments plan to develop a more objective and transparent process for public transport fare adjustment, and the Company is itself considering various fare
adjustment mechanism alternatives in the best interest of all the shareholders and stakeholders of the Company as part of the merger study.



The following table sets forth the average fare paid per passenger trip on the MTR Lines, and compares the percentage increase in the average fare with
the Consumer Price Index (A) for the periods indicated:



|                                               |  |                         |      |    |      |     |      |      |  |     |      |    |  |      |      |    |  |     |      |   
|---------------------------------------------- |  | ----------------------- | ---- | -- | ---- | --- | ---- | ---- |  | --- | ---- | -- |  | ---- | ---- | -- |  | --- | ---- | --
|                                               |  | Year Ended December 31, |     
|                                               |  | 1999                    |      |    | 2000 |     |      | 2001 |  |     | 2002 |    |  | 2003 |     
|Average fare(1)                                |  | HK$                     | 6.67 |    |      | HK$ | 6.73 |      |  | HK$ | 6.81 |    |  | HK$  | 6.65 |    |  | HK$ | 6.57 |   
|Percentage increase (decrease) in average fare |  |                         | 1.2  | %  |      |     | 0.9  | %    |  |     | 1.2  | %  |  |      | (2.3 | )% |  |     | (1.2 | )%
|Consumer price index (A)                       |  |                         | (3.3 | )% |      |     | (3.0 | )%   |  |     | (1.7 | )% |  |      | (3.2 | )% |  |     | (2.1 | )%

---

|(1) |  | The average fare does not include the average fare for the Airport Express Line, which was HK$43, HK$53, HK$63, HK$65, HK$62 in 1999, 2000, 2001, 2002 and 2003, respectively. The
higher average fare for 1999 is mainly due to the longer average journey traveled on the Tung Chung Line and the elimination of the staggered hours discount. The higher average fare for 2000 is mainly due to the additional HK$0.10 per ride charged
since July 2000 for the platform screen doors project. The higher average fare for 2001 is mainly due to the full year effect of the additional HK$0.10 per ride charged for the platform screen doors project. The decrease of the average fare in 2002
and 2003 was mainly the result of the ride 10 get 1 free promotional campaign on the MTR Lines.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Advertising, Kiosk Rental and Other Income



The Company derives revenue from the leasing of advertising media, kiosks
and bank outlets in MTR stations, and from the use of mobile telephones, pagers and payphones within the MTR network. From time to time, the Company also derives income from other passenger services, such as the sale of souvenir MTR tickets. In
addition, the opening of the Tung Chung and Airport Express Lines introduced new businesses, such as car park operations.



To improve attractiveness to advertisers, the Company is actively introducing new forms of advertising, including sticker advertising on train bodies and
station walls, as well as tunnel advertising launched in April 2004. A program to convert 4-sheet advertising panels into larger 12-sheet advertising panels in station concourses increased the number of concourse 12-sheet advertising panels to 657
by May 2004.



During the second half of 2003, the Company
introduced trackside plasma panels to increase advertising revenue. A total of 68 plasma panels had been installed in 15 stations in early 2004 and the Company has also started extending the network of concourse plasma panels from 23 to 51 units.
The Company also enhanced customer service and raised advertising revenues by providing free internet access at several stations. In particular, MTR internet access centres, with advertising sponsorship, were erected in Central and Prince Edward
stations, with more MTR internet access centres planned for installation in 2004.



The Company has also entered into agreements with mobile telephone operators and paging operators that provide telephone and paging coverage within the MTR network. Currently, there are twelve mobile telephone
networks operated by six operators and 28 paging channels operated by five operators providing coverage within the MTR network. In 2003, approximately 740 million minutes mobile phone calls were made within the MTR system. Rental income from
external mobile base stations also provided a new source of income, with fifteen new sites completed in 2003. In addition, the Company began installing in 2003 a local area network to enable wireless broadband services which was launched on the
Airport Express Line in March 2004. The Company is also in the process of upgrading the existing integrated radio system for mobile services to offer third generation mobile telecommunications services within the MTR network by 2005. Revenue in 2003
from the provision of telecommunication services within the MTR network amounted to approximately HK$198 million.



In 2002, the Company formed TraxComm Limited, a wholly-owned subsidiary, to develop a wholesale fixed-line telecommunications business based on the
Companys existing fiber-optic infrastructure. On June 2, 2003, the Office of the Telecommunications Authority issued a fixed-line telecommunications license to TraxComm Limited. In 2003, TraxComm Limited built and began to operate an enhanced
network, which runs alongside the existing fiber-optic network. Due to the recent liberalization of the Hong Kong fixed-line telecommunications market, TraxComm Limited has been able to attract a number of customers, despite its relatively short
operating history. For example, a major telecommunications service provider that was recently granted a fixed-line network license by the Office of the Telecommunications Authority has entered into a long-term contract with TraxComm Limited, under
which that telecommunications provider will use TraxComm Limiteds enhanced fiber-optic network as its backbone. Moreover, one of the largest international direct dialing wholesale service providers in Hong Kong, has begun migrating over 400
circuits of bandwidth to TraxComm Limiteds recently launched data network.



As of May 31, 2004, the Company owned approximately 190,547 square feet of retail space within the MTR, comprising approximately 493 kiosks and mini-banks that provide a wide range of goods and services, as well as
the 62,205 square feet Dickson Cyber Express, a large retail center at



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Kowloon station. There are also self-service concessions and vending machines which provide a wide range of goods and
services. As of May 31, 2004, the occupancy rate for the Companys retail space was approximately 95%.



The Company, through its wholly-owned subsidiary MTR Travel Limited, operates a travel service center located at Admiralty station that sells local and
overseas traveling tours and tickets. The travel service center also acts as a customer service outlet, providing information on the MTR and selling MTR souvenirs.



The Company has provided consultancy services to a wide range of clients, such as routing planners, operators,
manufacturers, contractors and consultants as well as to clients involved in the promotion and management of major capital works projects. Assignments have been undertaken in Australia, the Mainland of China, Hong Kong, India, Taiwan, Thailand,
Philippines, Singapore, the United Kingdom and the Netherlands. In 2000, the Company decided to extend its consultancy services to include railway specific project management and technical services.



In 2003, the Companys consultancy services continued to experience a
significant increase in revenue, as the Company continued to capitalize on growing demand for its design, operations, maintenance, project management and training services. In addition to winning contracts in major cities in the Mainland of China,
such as Shanghai, Tianjin, Nanjing, Shenzhen, Hangzhou, Guangzhou, Chengdu and Beijing, the Company has also been awarded contracts in Australia, India, Korea, Macau, New York, Singapore, Taiwan, Thailand, the United Kingdom and the Netherlands. In
Hong Kong, the Company provided services to the Airport Authority under a three-year contract awarded in 2002 to maintain the automated people mover used in the Hong Kong International Airport. In the Netherlands, the Company and Octopus Cards
Limited were awarded a series of contracts with Thales to create an automatic fare collection system, which will cover all modes of public transport, including train, bus, tram, metro and ferries. The Company and Octopus Cards Limited are working
with the East-West e-Ticketing BV, consisting of Thales, Accenture and Vialis Verkeer & Mobiliteit BV, to provide software and expertise in the operation of the new automatic fare collection system. In India, the Company was awarded its first
rail consultancy contract to be funded by the International Bank for Reconstruction and Development.



In February 2003, after an international competitive tender, the Company was selected for the review of the feasibility study for Hangzhou Metro Line One,
an approximately 32.3 route miles urban metro serving the city center of Hangzhou, one of the most scenic tourist attractions in China. The feasibility study on Hangzhou Metro Line One was conducted by the Beijing Urban Engineering Design &
Research Institute and the review was completed by the Company in July 2003.



In May 2003, the Company signed a memorandum of cooperation with the Shenzhen Municipal Development Planning Bureau under which the Company will provide consultancy services with respect to the planning,
implementation, construction, operation, financing and maintenance of new metro lines in Shenzhen. On January 15, 2004, the Company and the Shenzhen Municipal Peoples Government entered into an agreement in principle in relation to the
construction of Phase 2 of Line 4 of the proposed Shenzhen metro system and the operation of Line 4 for a term of 30 years. See Item 4. Information on the Company  History and Development of the Company  Recent Developments
for further details relating to this project.



In March 2003,
the Company continued the expansion of its consultancy business in the Mainland of China through the establishment of a representative office in Shanghai. The Companys joint venture subsidiary, Shanghai Hong Kong Metro Construction Management
Co. Ltd., was appointed in June 2002 as the owners representative by Shanghai MRT Shen-Song Line Development Co. Ltd., an enterprise owned by the Shanghai Municipal Peoples Government, to undertake project management



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services for the design and construction of a 21.6 mile metro line, the Shensong Railway Line, in Shanghai between
Songjiang new city in the west and Xujiahui in the city center. The Company has entered into a joint venture agreement with the Shanghai Investment Consulting Corporation Limited to provide project management services in connection with this project
and other Shanghai project opportunities, but is currently negotiating the assignment of the joint venture agreement from Shanghai Investment Consulting Corporation Limited to the enterprise owned by the Shanghai Municipal Peoples Government,
Shanghai International Group Corporation Limited. The Shensong Railway Line will have a total of 12 underground stations and one depot and the expected commencement of operations has been re-scheduled for mid-2007. The Company will not bear any of
the design or construction costs in connection with this project. The design and construction works are proceeding on schedule.



The Company is also pursuing investment opportunities in the United Kingdoms light rail sector, together with Mitsubishi Corporation of Japan.
Specifically, projects in the Portsmouth area and in Liverpool, involving the South Hampshire Rapid Transit and Merseytram, respectively, are being considered. Further development of the South Hampshire Rapid Transit project is subject to a
resolution by the government of the United Kingdom with respect to the funding for this light rail project. A consortium of the Company, Mitsubishi Corporation and Serco Integrated Transport has been short-listed as one of two candidates invited to
submit best and final offers based on an information memorandum containing specifications and conditions for a design, build, operate and maintain franchise for the proposed Merseytram system.



The following table sets forth information relating to station commercial and
other income for the periods indicated:



|                                       |  |                            |     |      |     |      |  |      |     |      |     |     |  |     |      
|-------------------------------------- |  | -------------------------- | --- | ---- | --- | ---- |  | ---- | --- | ---- | --- | --- |  | --- | -----
|                                       |  | Year Ended December 31,(1)
|                                       |  | 1999                       |     | 2000 |     | 2001 |  | 2002 |     | 2003
|                                       |  | (in millions)             
|Station commercial and other income(2) |  | HK$                        | 823 |      | HK$ | 991  |  | HK$  | 973 |      | HK$ | 979 |  | HK$ | 1,117

---

|(1) |  | The information set forth in this table includes the results of operations for the Company only, except in 2001, 2002, and 2003, which include the results of the Company and its
subsidiaries, other than Octopus Cards Limited.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | For 2002, includes income derived in connection with the operation of the Tseung Kwan O Line since August 18, 2002. For 2003, includes income derived in connection with the first
full year of operations of the Tseung Kwan O Line.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating Cost Structure



The Company has a
program of monitoring and controlling railway operating costs. The following table sets forth the components of operating expenses for railway and related operations, and the percentages they represent of revenue from railway and related operations,
for the periods indicated.



|                                                             |  |                                   |       |  |      |   |  |      |       |  |         |   |  |         |       |  |    |   |  |     |       |  |    |   |  |     |       |  |    |  
|------------------------------------------------------------ |  | --------------------------------- | ----- |  | ---- | - |  | ---- | ----- |  | ------- | - |  | ------- | ----- |  | -- | - |  | --- | ----- |  | -- | - |  | --- | ----- |  | -- | -
|                                                             |  | Year Ended December 31,(1)        |      
|                                                             |  | 1999                              |       |  | 2000 |   |  | 2001 |       |  | 2002(2) |   |  | 2003(3) |      
|                                                             |  | (in millions, except percentages) |      
|Railway and related operations                               |  |                                   |       |  |      |   |  |      |       |  |         |   |  |         |       |  |    |   |  |     |       |  |    |   |  |     |       |  |    |  
|Staff costs and related expenses                             |  | HK$                               | 1,851 |  | 26   | % |  | HK$  | 1,688 |  | 22      | % |  | HK$     | 1,647 |  | 22 | % |  | HK$ | 1,579 |  | 21 | % |  | HK$ | 1,643 |  | 21 | %
|Energy and utilities                                         |  |                                   | 501   |  | 7    |   |  |      | 500   |  | 7       |   |  |         | 501   |  | 6  |   |  |     | 502   |  | 7  |   |  |     | 546   |  | 7  |  
|Stores and spares consumed                                   |  |                                   | 136   |  | 2    |   |  |      | 127   |  | 2       |   |  |         | 119   |  | 2  |   |  |     | 121   |  | 2  |   |  |     | 128   |  | 2  |  
|Operational rent and rates(4)                                |  |                                   | 63    |  | 1    |   |  |      | 65    |  | 1       |   |  |         | 78    |  | 1  |   |  |     | 87    |  | 1  |   |  |     | 21    |  |   |  
|Contracted repairs and maintenance(5)                        |  |                                   | 325   |  | 4    |   |  |      | 337   |  | 4       |   |  |         | 388   |  | 5  |   |  |     | 384   |  | 5  |   |  |     | 414   |  | 5  |  
|Expenses relating to station commercial and other businesses |  |                                   | 150   |  | 2    |   |  |      | 173   |  | 2       |   |  |         | 197   |  | 2  |   |  |     | 185   |  | 2  |   |  |     | 351   |  | 5  |  
|Property ownership and management expenses                   |  |                                   | 155   |  | 2    |   |  |      | 142   |  | 2       |   |  |         | 159   |  | 2  |   |  |     | 167   |  | 2  |   |  |     | 198   |  | 3  |  
|Other expenses(6)                                            |  |                                   | 578   |  | 8    |   |  |      | 629   |  | 8       |   |  |         | 450   |  | 6  |   |  |     | 647   |  | 8  |   |  |     | 546   |  | 7  |  
|                                                             |  |                                   |       |  |      |   |  |      |       |  |         |   |  |         |       |  |    |   |  |     |       |  |    |   |  |     |       |  |    |  
|                                                             |  | HK$                               | 3,759 |  | 52   | % |  | HK$  | 3,661 |  | 48      | % |  | HK$     | 3,539 |  | 46 | % |  | HK$ | 3,672 |  | 48 | % |  | HK$ | 3,847 |  | 50 | %



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|                                                           |  |                                   |       |  |      |   |  |      |       |  |         |   |  |         |       |  |    |   |  |     |       |  |    |   |  |     |       |  |    |  
|---------------------------------------------------------- |  | --------------------------------- | ----- |  | ---- | - |  | ---- | ----- |  | ------- | - |  | ------- | ----- |  | -- | - |  | --- | ----- |  | -- | - |  | --- | ----- |  | -- | -
|                                                           |  | Year Ended December 31,(1)        |      
|                                                           |  | 1999                              |       |  | 2000 |   |  | 2001 |       |  | 2002(2) |   |  | 2003(3) |      
|                                                           |  | (in millions, except percentages) |      
|Depreciation                                               |  |                                   | 2,039 |  | 28   |   |  |      | 2,091 |  | 28      |   |  |         | 2,178 |  | 29 |   |  |     | 2,470 |  | 32 |   |  |     | 2,402 |  | 32 |  
|                                                           |  |                                   |       |  |      |   |  |      |       |  |         |   |  |         |       |  |    |   |  |     |       |  |    |   |  |     |       |  |    |  
|Total operating expenses of railway and related operations |  | HK$                               | 5,798 |  | 80   | % |  | HK$  | 5,752 |  | 76      | % |  | HK$     | 5,717 |  | 75 | % |  | HK$ | 6,142 |  | 80 | % |  | HK$ | 6,249 |  | 82 | %
|                                                           |  |                                   |       |  |      |   |  |      |       |  |         |   |  |         |       |  |    |   |  |     |       |  |    |   |  |     |       |  |    |  

---

|(1) |  | The information set forth in this table includes the results of operations for the Company only, except in 2001, 2002, and 2003, which include the results of the Company and its
subsidiaries, other than Octopus Cards Limited
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes operating costs derived from the operation of the Tseung Kwan O Line since August 18, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------

|(3) |  | Includes operating costs derived from the first full year operation of the Tseung Kwan O Line.
|--- |  | ----------------------------------------------------------------------------------------------

|(4) |  | Similar to property taxes in respect of the Companys occupation of the land on which the MTR is situated. Reduction in charges for 2003 was primarily due to rate refunds in
respect of 2001 and 2002 following an agreed revision of rateable value.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Includes only repairs and maintenance costs paid to outside contractors.
|--- |  | ------------------------------------------------------------------------

|(6) |  | Includes railway support services, general and administrative expenses, project study costs and deferred expenditures written off and other expenses. For 2000, includes the
write-off of certain capital assets and the higher production and distribution costs of the 2000 annual report following the listing of the Companys shares on the Hong Kong Stock Exchange. For 2001, the substantial reduction was due to lower
production and distribution costs of the 2001 annual report and the capitalization of certain new project costs. For 2002, includes the write-off of project study costs and deferred expenditures in respect of the Shatin to Central Link and the North
Island Link together with its related improvement works totaling HK$218 million. For 2003, includes a HK$69 million revaluation deficit relating to the Companys head office premises and write-off of project study costs and deferred expenditure
totaling HK$49 million, which was primarily related to the West Island Line (see Note 4C of Notes to Financial Statements).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Staff Costs. Staff costs consist of staff salaries and benefits. Since 1998, the Company adopted various measures to reduce operating costs and
increase overall efficiency, including pay freezes, benefit reductions, hiring freezes, the implementation of voluntary separation schemes and limited redundancies. In particular, a voluntary separation scheme was implemented in early 2003 for
selected groups of employees as the Company identified approximately 100 surplus positions due to reduced headcount requirements resulting from a decline of project-related work. Employees of the selected groups who voluntarily chose to leave the
Company received enhanced severance packages. This scheme helped the Company to manage the decline of project-related work and alleviate the surplus situation. All these measures resulted in a continued reduction in staff costs from HK$1,851 million
in 1999 to HK$1,643 million in 2003. The reduction reflected significant gains in productivity and efficiency achieved through the continued efforts in human resources management, organizational restructuring and streamlining, staff redeployment and
outsourcing.



During the last several years, the Company has
established various programs to increase employee productivity. One such program is the use of predictive maintenance, which includes an increase in the number of inspections of railway plant and equipment to enable early detection of needed repairs
and maintenance, and an increase in the frequency of railway repairs and maintenance. At the same time, the Company has increased the size and reliability of its fleet and decreased the time during which equipment is taken out of service for needed
repairs and maintenance. In addition, the Company has automated operations where appropriate. Moreover, the Company is continuing with the gradual merger of operations and maintenance activities at stations and depots. This has enabled staff members
to be trained with a wider array of skills, resulting in higher productivity, greater flexibility and faster response time.



The following table sets forth the number of operations staff (i.e., employees directly related to the day-to-day operations and maintenance of the
railway) and the Companys record of productivity for the periods indicated.



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|                                                  |  |                         |     |  |       |     |  |       |     |  |         |        |  |         |       
|------------------------------------------------- |  | ----------------------- | --- |  | ----- | --- |  | ----- | --- |  | ------- | ------ |  | ------- | ------
|                                                  |  | Year Ended December 31, |    
|                                                  |  | 1999                    |     |  | 2000  |     |  | 2001  |     |  | 2002(1) |        |  | 2003(2) |       
|Total operations staff(3)                         |  | 5,026                   | (5) |  | 4,767 | (5) |  | 4,529 |     |  | 4,615   |        |  | 4,528   |       
|                                                  |  |                         |     |  |       |     |  |       |     |  |         |        |  |         |       
|Productivity per operations staff                 |  |                         |     |  |       |     |  |       |     |  |         |        |  |         |       
|Revenue car miles (in thousands)                  |  | 14                      |     |  | 15    |     |  | 16    |     |  | 17      |        |  | 18      |       
|Passengers carried (in thousands)                 |  | 157                     |     |  | 163   |     |  | 170   |     |  | 170     |        |  | 172     |       
|Railway operating profit (in thousands of HK$)(4) |  | 119                     |     |  | 153   |     |  | 182   | (8) |  | 125     | (6)(8) |  | 76      | (7)(8)

---

|(1) |  | Includes results derived from the operation of the Tseung Kwan O Line since August 18, 2002.
|--- |  | --------------------------------------------------------------------------------------------

|(2) |  | Includes results derived from the full-year operation of the Tseung Kwan O Line.
|--- |  | --------------------------------------------------------------------------------

|(3) |  | Excludes staff engaged in works relating to operations planning and development, operations consultancy services and staff hired for the short term.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excludes corporate overhead, project study costs and deferred expenditures written off and depreciation charges on unallocated assets at the corporate level.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Decrease in number of staff members was primarily due to the voluntary separation scheme introduced in 1999 to reduce operating costs.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes increased depreciation charges primarily on fixed assets of the Tseung Kwan O Line since August 18, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes full year increased depreciation charges primarily on fixed assets of the Tseung Kwan O Line.
|--- |  | ------------------------------------------------------------------------------------------------------

|(8) |  | For 1999 and 2000, includes results of the Company only. For 2001, 2002 and 2003, includes results of the Group.
|--- |  | ----------------------------------------------------------------------------------------------------------------



The increase in revenue car miles per operations staff in 2003 was primarily
a result of the full-year operation of the Tseung Kwan O Line.



The decrease in railway operating profit per operations staff in 2003 was primarily the combined result of the lower fare revenue recorded in the first half of 2003 due to the SARS outbreak and higher operating costs associated with the
full-year operation of the Tseung Kwan O Line since August 2002.



Depreciation. The Companys depreciable assets include the railway tunnel lining and other underground and overhead structures, rolling stock and leasehold land. The initial cost of rails is not
depreciated. The cost of replacements is charged to profit and loss account as and when incurred.



Energy and Utilities Costs. The Companys energy costs consist primarily of electricity costs which depend on consumption and electricity
tariffs. Electricity tariffs are affected principally by international fuel prices for gas, coal and, to a lesser extent, for oil. Electricity tariffs charged by power companies to consumers are regulated by the Government. The Company benefits from
its substantial use of energy during off-peak hours at lower rates. As the largest consumer of electricity in Hong Kong, the Company would normally have an opportunity to discuss in advance with the power companies any proposed increase in the
electricity tariff.



Over the past five years, electricity
tariffs have increased. During this period, the Company adopted various energy saving measures to mitigate the impact of the increase. In 2003, the Companys traction energy consumption measured in megawatt hours increased by approximately 1.2%
due to the opening of the Tseung Kwan O Line. The Companys traction energy consumption increased by an average of approximately 50% from 1998 to 2003 as a result of the opening of the Tung Chung and Airport Express Lines in mid-1998 and the
Tseung Kwan O Line in August 2002.



Material Costs.
Material costs consist mainly of certain spare parts and other items used primarily for repairs and maintenance. The Company uses inventory management and purchasing economies to control material costs as a percentage of railway operations revenue.



Contracted Repairs and Maintenance. Contracted repairs
and maintenance costs include only amounts paid to outside contractors. The Company uses outside contractors for, among other things, its



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ongoing program of repairs to tunnel linings, certain repairs and maintenance of escalators and elevators and certain
station cleaning. In recent years, the Company has increased the level of both in-house and contracted repairs and maintenance to improve passenger service and reliability. The Company undertakes most of its repairs and maintenance with its own
personnel.



Operational Rates. Operational rates are
payments by the Company to the Government, similar to property taxes, in respect of its occupation of the land on which the MTR is situated. Operational rates payments totaled approximately HK$67 million for the year ended December 2003. After a
refund on payments made to the Government totaling HK$46 million due to a successful reassessment review of the rateable value for the fiscal years of 2002 and 2003, the net balance paid to the Government was HK$21 million for the year ended
December 31, 2003.



Other Operating Costs. Other
operating costs include advertising costs, consultants fees, conference and training expenses and insurance and uninsured claims.



Equipment



The Company owned 1,050 passenger cars and 59 locomotives and other rolling stock as of December 31, 2003. The following table sets forth certain
information regarding the Companys rolling stock as of December 31, 2003:



|                    |  |                 |     |  |                |       |     |             |    |     |     |     
|------------------- |  | --------------- | --- |  | -------------- | ----- | --- | ----------- | -- | --- | --- | ----
|                    |  |                 |     |  |                |       |     | Average    
|                    |  | Number of Units |     |  | Net Book Value |       |     | Useful Life |    |     | Age
|                    |  |                 |     |  | (in millions)  |       |     | (in years) 
|Passenger cars(1)   |  | 762             |     |  | HK$            | 3,320 | (5) |             | 40 | (7) |     | 19.6
|Passenger cars(2)   |  | 184             | (4) |  |                | 2,528 |     |             | 40 | (8) |     | 5.5 
|Passenger cars(3)   |  | 104             |     |  |                | 1,296 |     |             | 40 |     |     | 1.5 
|Locomotives         |  | 59              |     |  |                | 238   | (6) |             | 16 |     |     | 13.5
|                    |  |                 |     |  |                |       |     |             |    |     |     |     
|Total rolling stock |  | 1,109           |     |  | HK$            | 7,382 |     |             |    |     |     |     
|                    |  |                 |     |  |                |       |     |             |    |     |     |     

---

|(1) |  | Figures for the Urban Lines, excluding the Tseung Kwan O Line, including 27 originally leased cars acquired during 1999.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

|(2) |  | Figures for the Tung Chung and Airport Express Lines.
|--- |  | -----------------------------------------------------

|(3) |  | Figures for the Tseung Kwan O Line.
|--- |  | -----------------------------------

|(4) |  | Including passenger cars for the Airport Express Line held in stock.
|--- |  | --------------------------------------------------------------------

|(5) |  | Including value of rolling stock modernized as of December 31, 2003.
|--- |  | --------------------------------------------------------------------

|(6) |  | Including value of other rolling stock used for maintenance purposes as of December 31, 2003.
|--- |  | ---------------------------------------------------------------------------------------------

|(7) |  | The useful life figure was revised from 25 years in 1997 to 40 years in 1998, after taking into account the asset condition, usage experience and rolling stock modernization
program.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The useful life figure was revised from 35 years in 2002 to 40 years in 2003, after taking into account the asset condition and usage experience.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



On March 23, 2003, the Company entered into a cross-border leasing
transaction with respect to a portion of its rolling stock that is described in more detail under Item 5, Operating and Financial Review and Prospects  Liquidity and Capital Resources  Capital Resources.



Property Development



General



Property is a significant part of the Companys business, providing an
important source of income to support the cost of construction of railway projects as well as contributing to future rail patronage from the immediate catchment areas created by property developments. In conjunction with its railway



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construction, the Company plays an important role in the development of residential and commercial properties above and
adjacent to stations and depots. The Government has granted the Company the development right over the land used for these property developments based on a land premium assessed at full market value without regard to the presence of the railway on
the sites being valued. The Companys practice in property development has been to arrange for various third-party developers to carry out the actual development works according to the Companys specifications. Typically, the developers
are responsible for all development costs (including Government land premium, construction and enabling work costs, marketing and sales expenses, professional fees, finance charges and other expenses), and have to bear all development risks. The
Company derives benefit from property developments through the sharing of cash profits with developers in agreed proportions from the sale or lease of the properties after deducting the development costs, the sharing of assets in kind, or through
up-front payments from the developers.



Eighteen property
developments associated with the construction of the Tsuen Wan, Kwun Tong and Island Lines have been completed. Developed properties comprise an aggregate of approximately 2.5 million square feet of commercial office space, 3.2 million square feet
of shops, 1.7 million square feet of community and Government facilities and 31,366 residential units. All residential units and offices have been sold. Almost all shops have either been sold or leased. In addition, several property developments
associated with the construction of the Tung Chung and Airport Express Lines have been completed. These properties comprise an aggregate of approximately 4,092,000 square feet of office space (of which approximately 1,493,000 square feet has been
sold), 20,554 residential units and approximately 2,533,000 square feet of retail and other space. The majority of the retail space has been leased. Cumulative property development profit realized by the Company up to the end of 2003 was
approximately HK$23.5 billion.



In November 2002, the
Government announced its new housing policy in support of the property prices that have dropped by almost two-thirds from their 1997 peak. Under the new housing policy, the Government, the largest owner of land in Hong Kong, suspended land sales in
2003. The Company supported this policy and agreed in consultation with the Government to postpone property development tenders until after 2003. The outbreak of SARS in early 2003 also resulted in slower sales of property developments and in a
decrease in property prices. However, with the containment of the outbreak, there was no further worsening effect on the property market. The property market improved towards the end of 2003, particularly due to foreign direct investment in the
sector. The Company plans to resume property development tenders at the end of 2004.



Tung Chung Line and Airport Express Line Property Developments



Under the terms of the Airport Railway Agreement, the Company was granted the right to undertake residential and commercial development on approximately
154 acres of land at five sites above or around the Tung Chung Line and Airport Express Line stations at Hong Kong, Kowloon, Olympic, Tsing Yi and Tung Chung. These developments comprise 15 development packages totaling approximately 29,000
residential flats and approximately 13.3 million square feet of office, hotel/service apartment and retail space. All of the packages have been awarded to developers under a competitive tendering process. There was continued construction activity
and staged development completions from earlier packages, notably in the Tung Chung and Kowloon stations, during 2003.



Despite weak property market conditions in Hong Kong, several major residential developments along the Airport Express Line were launched and reasonable
sales of flats were recorded from Airport Railway development sites, which totaled 18,790 units at the end of 2003. Construction of the various packages at Union Square in Kowloon station and at Tung Chung station progressed according to plan. A
total of 1,976 flats were completed during 2003, all of which are in Union Square. In particular, the



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Company obtained occupation permits in July and October 2003, respectively, for the Harbourside and Sorrento Phase 2
developments at Kowloon station. Sale of apartments at The Harbourside commenced in February 2004. The Company launched the sale of Phase Two of the Seaview Crescent property development and Phase Two of the Caribbean Coast property development,
with a total of 1,627 residential units at Tung Chung station in June 2003. In response to changing market conditions and demand forecasts, further adjustments were made to several development schemes to improve marketability and add value. The land
use at Olympic Station Site D, for example, was successfully changed from hotel to residential. The development is now planned to provide 1,484 residential units. Work on this project is in progress and on schedule, with completion expected in late
2005 or early 2006.



Two International Finance Centre
was completed on schedule, and the practical completion certificate was issued on July 15, 2003. Marketing of the 18 floors totaling 500,000 square feet gross owned by the Company, located on floors 33 to 52 and branded as Central 18 Zone at
Two IFC, began during 2002. With the issuance of the occupation permit in May 2003, the Company has successfully launched the leasing of Central 18 Zone at Two IFC. In particular, the Company has entered into lease agreements with leading
financial institutions, including a lease agreement with UBS AG for the lease of seven floors with a total floor area of approximately 170,226 square feet for a period of ten years. As of March 31, 2004, approximately 76% of Central 18 Zone at Two
IFC had been leased, and the Company is currently in discussions with additional potential office tenants. The IFC Mall and more than 1,200 parking spaces were also completed in mid-2003, while work continues on two adjacent hotel towers, which are
expected to be completed in early 2005. As a result of the issuance of the practical completion certificate with respect to Two International Finance Centre on July 15, 2003, the Company recognized a net profit of approximately HK$3 billion in
respect of this property development in 2003.



The 15 property
development packages awarded by the Company as described above have been, or are expected to be, completed between 1998 and 2008. The amount of actual profit realized by the Company will depend on the development costs, the ability to sell or lease
the completed properties, the timing of the completion of competing development projects, general economic conditions and other factors.



As of December 31, 2003, the Company had received HK$4.9 billion from participating developers in excess of related expenditures incurred as well as
profits recognized to date in connection with Tung Chung Line and Airport Express Line property developments. The Companys accounting policy under Hong Kong GAAP requires that such payments not be recognized as profit until the foundation and
site enabling works for a development are complete and acceptable for development, and after taking into account any outstanding risks and obligations retained by the Company in connection with such development.



Tseung Kwan O Line Property Developments



The TKE project agreement with the Government provides that the Company
shall have the right to undertake property developments at four locations within the project. These developments are located at the Tiu Keng Leng, Tseung Kwan O and Hang Hau stations and the depot and adjacent future station site in Area 86. The
development projects include up to 20 development packages, offering a total gross floor area of approximately 25 million square feet, which includes approximately 22.6 million square feet of residential flats, 1.5 million square feet of retail
space, 1.1 million square feet of offices and 6,800 carpark spaces.



In November 2003, the Companys joint venture developer, Sino Land, successfully launched the pre-sale of Residence Oasis, a 2,130 unit residential property development above the Hang Hau station. The Company also began preparation of
pre-lease marketing for the 38,000 square feet retail shopping



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##### Table of Contents

center at Hang Hau station, which will be known as The Link. Apartment layouts have also been finalized at
Site A of the Tiu Keng Leng station developments, enabling the Company to begin pre-sales in 2004.



The planned Area 86 development scheme on the Clearwater Bay peninsula, which comprises up to 14 of the said 20 planned TKE development packages and
approximately 17.8 million square feet of floor area, is one of the largest single development schemes in Hong Kong to date. The dream city complex represents a new model for high-density community living with segregated areas for
automotive and pedestrian movement and large open spaces for leisure activities. The development will include schools, clubhouses, shops and community centers.



The expected total investment cost is approximately HK$61 billion at 2003 prices. To date, four development packages have been awarded. However, in
view of the then-current market conditions and the Companys support of the housing policy of the Government at the time, the Company agreed in consultation with the Government to postpone property development tenders until after 2003.
Accordingly, the Company did not award any of the remaining property development packages in 2003. The Company expects to commence the launching of the remaining development packages, subject to prevailing market conditions, during 2004, with
completion of the final development package expected in 2013. In preparation for the forthcoming property development tenders, the Company has revised the master layout plan for the dream city complex to offer improved breezeways and more open
space. The Company currently anticipates launching the first property development package based on this improved plan in late 2004.



Other Development Projects



In 1999, the Company received town planning approval from the Government to develop the site above and near Choi Hung station on the Kwun Tong Line to
include park and ride facilities for commuters living in the Southeast New Territories as well as some commercial and residential areas. The Company awarded this development in July 2001 and the Government granted the land at the site to
the Company in November 2001 upon payment of the land premium. During 2002, the Government approved a further 12,185 gross square feet of residential space to be constructed at Choi Hung station, as part of the park and ride development.
This is in addition to 22,841 gross square feet of bonus floor area previously approved for the mixed-use development. The scheme currently comprises 206,500 square feet of residential space, 25,834 square feet of commercial/retail space, 504 car
parking spaces (450 of which is for park and ride), 10 motorcycle parking spaces and a two-storey public transport interchange. In 2003, flat layouts for the Choi Hung station development were finalized, enabling the Company to begin pre-sales in
2004.



Planning continues for the site adjacent to Tsing
Yi station, currently occupied by a transport interchange and lorry park. The Company had intended to proceed with a mixed-use scheme, but the development concept is now being reviewed, taking into account the communitys feedback.



Property Ownership and Management



The Company owns or manages certain developed properties adjacent to railway
structures and facilities in order to protect such railway structures and facilities and to provide a source of income. The Company currently wholly owns four shopping centers located above four of its stations  Telford Plaza I at Kowloon Bay
(427,019 square feet of leasable floor space), Luk Yeung Galleria at Tsuen Wan (129,878 square feet of leasable floor space), Paradise Mall (previously Heng Fa Chuen Shopping Centre) at Chai Wan (198,790 square feet of leasable floor space) and
Maritime Square at Tsing Yi (311,198 square feet of leasable floor space)  and certain other smaller properties. Upon completion of The



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##### Table of Contents

Link at Hang Hau station and the shopping center at Union Square, completion of which is expected by 2005 and
2006/2007, respectively, the Company will own six shopping centers. The completion of Two International Finance Centre increased the Companys property ownership by 500,000 square feet. In addition, the Company also owns properties jointly with
other parties, including Telford Plaza II and the carpark at One International Finance Centre at Hong Kong station. The Company holds these properties under long-term leases from the Government that will expire in 2047 and rents them to tenants for
commercial use. The Company has no present intention to sell any of these shopping centers. During the SARS outbreak in early 2003, these shopping centers recorded a steep decline in visitors. With the containment of the SARS outbreak, special
promotions in these shopping centers and the relaxation of travel restrictions for tourists from the Mainland of China, the number of visitors now surpasses previous levels.



The Company also manages certain residential properties. Growth in the property management portfolio from property
developments relating to the Airport Railway Project as well as at Tseung Kwan O is expected to continue over the next few years, adding some further 40,000 residential units to the Companys portfolio. The Company is one of the largest
property management companies in Hong Kong. During 2003, the Company has continued to expand and diversify its property management business. In particular, Coastal Skyline, Caribbean Coast and Seaview Crescent Phase Two at Tung Chung Station and
Sorrento Phase One at Union Square added a further 4,841 residential units to the Companys management portfolio. Moreover, the completion of Two International Finance Centre increased the total area of commercial and office space managed by
the Company to approximately 6 million square feet in 2003, from 3.9 million square feet in 2002. The Company managed 46,915 residential units (of which 18,186 units are Airport Railway developments). Income from property management increased by
10.6% to HK$94 million in 2003 from HK$85 million in 2002.



The
Company has also established the Premier Management Services brand as part of its property management services. This branded service is aimed at the high-end residential, serviced apartments and high quality office accommodations at Hong
Kong and Kowloon stations. Designed to provide a higher quality level of service to these property developments, the new service has been separately branded to distinguish it from the property management of mass residential properties. With leading
international financial institutions as tenants, Two International Finance Centre is managed by the Company under the Premier Management Services.



The Company also engages in property management related services in the Mainland of China where it sees significant growth opportunities. In 2003, the
Company acquired a pre-management contract for the Tulip Gardens residential development in Shenzhen, as well as a pre-management contract for Chongqing Palm Springs International Apartments, a large-scale residential development in Chongqing. In
Beijing, the Company formed a strategic partnership with Beijing Century Sun Real Estate Development Company Limited to provide multi-disciplinary property management services and to manage the Palm Springs International Apartments developments.



The Company was awarded its first property development
consultancy contract in Singapore in July 2002. The Company was selected by the Land Transport Authority of Singapore to provide consultancy services for the packaging and marketing of a 268,883 square feet site situated above a proposed Singapore
Mass Rail Transit station in a residential area located north of the city center.



MTR Property Agency Company Limited, a wholly-owned subsidiary formed by the Company in January 2001 to provide real estate agency services to the residents of some of its managed properties, contributed a total of
HK$6 million in revenue in 2003.



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##### Table of Contents

The following table sets forth the Companys property rental and property management revenue since
1999:



|                           |  |                            |     |      |     |      |  |      |     |      |     |     |  |     |    
|-------------------------- |  | -------------------------- | --- | ---- | --- | ---- |  | ---- | --- | ---- | --- | --- |  | --- | ---
|                           |  | Year Ended December 31,(1)
|                           |  | 1999                       |     | 2000 |     | 2001 |  | 2002 |     | 2003
|                           |  | (in millions)             
|Property rental(2)(3)      |  | HK$                        | 740 |      | HK$ | 807  |  | HK$  | 817 |      | HK$ | 897 |  | HK$ | 888
|Property management income |  |                            | 50  |      |     | 60   |  |      | 73  |      |     | 85  |  |     | 94 
|Property agency income(4)  |  |                            |    |      |     |     |  |      | 1   |      |     | 5   |  |     | 6  
|                           |  |                            |     |      |     |      |  |      |     |      |     |     |  |     |    
|Total                      |  | HK$                        | 790 |      | HK$ | 867  |  | HK$  | 891 |      | HK$ | 987 |  | HK$ | 988
|                           |  |                            |     |      |     |      |  |      |     |      |     |     |  |     |    

---

|(1) |  | The information set forth in this table includes the results of operations for the Company only, except in 2001, 2002 and 2003, which includes the results of the Company and its
subsidiaries, other than Octopus Cards Limited.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Property rental revenues include revenue from properties wholly owned by the Company and revenue from properties which the Company owns jointly with other parties.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Property rental revenues include service income relating to the provision of air conditioning services. .
|--- |  | ---------------------------------------------------------------------------------------------------------

|(4) |  | Property agency income was contributed by MTR Property Agency Company Limited, a wholly-owned subsidiary of the Company established in 2001
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



Capital Expenditures



The Company has incurred substantial capital expenditures in connection with
the construction of the Tung Chung Line, the Airport Express Line, the QBR and the Tseung Kwan O Line. See  History and Development of the Company  Capital Expenditures and Divestitures.



The following table sets forth the Companys capital additions for the
periods indicated.



|                                                                |  |               |       |         |     |       |         |  |     |       |  
|--------------------------------------------------------------- |  | ------------- | ----- | ------- | --- | ----- | ------- |  | --- | ----- | -
|                                                                |  | 2001(3)       |       | 2002(3) |     |       | 2003(3) | 
|                                                                |  | (in millions) |      
|Assets under construction(1)                                    |  | HK$           | 2,749 |         | HK$ | 1,928 |         |  | HK$ | 1,148 |  
|Operational equipment(2)                                        |  |               | 34    |         |     | 62    |         |  |     | 66    |  
|                                                                |  |               |       |         |     |       |         |  |     |       |  
|Total existing railway additions                                |  | HK$           | 2,783 |         | HK$ | 1,990 |         |  | HK$ | 1,214 |  
|New railway construction(4)                                     |  |               | 3,679 |         |     | 3,190 |         |  |     | 719   |  
|Leasehold land and buildings(5)                                 |  |               |      |         |     |      |         |  |     | 52    |  
|Investment property                                             |  |               | 195   |         |     | 16    |         |  |     | 3,626 |  
|                                                                |  |               |       |         |     |       |         |  |     |       |  
|Gross capital additions                                         |  | HK$           | 6,657 |         | HK$ | 5,196 |         |  | HK$ | 5,611 |  
|Governments assistance in respect of Disneyland Resort Line(6) |  |               |      |         |     | (219  | )       |  |     | (664  | )
|                                                                |  |               |       |         |     |       |         |  |     |       |  
|Net capital additions                                           |  | HK$           | 6,657 |         | HK$ | 4,977 |         |  | HK$ | 4,947 |  
|                                                                |  |               |       |         |     |       |         |  |     |       |  

---

|(1) |  | Assets under construction from 2001 to 2003 mainly reflect the addition of assets relating to various capital projects, the major items of which include the QBR, the automatic
transit control system, passenger train modernization, station management systems, improvement of Kowloon Bay depot accommodations, upgrade of the closed circuit television system and installation of platform screen doors.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes, among other things, environment control equipment, communication equipment, track signalling equipment, automatic ticket collection equipment and escalators and elevators.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Group assets are used starting from 2001.
|--- |  | -----------------------------------------

|(4) |  | For 2001 and 2002, construction costs relating to the Tseung Kwan O Line were capitalized and transferred to fixed assets since its opening in August 2002. For 2003, construction
costs mainly related to the Disneyland Resort Line and the Tung Chung Cable Car Project.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | On July 15, 2003, the Company took possession of a board room in Two International Finance Centre. The board room is valued at HK$52 million as of the date of receipt.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | See Notes 40E and 40J of Notes to the Financial Statements.
|--- |  | -----------------------------------------------------------



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Improvement Projects



The Company maintains a rolling capital expenditure plan to add, modify or replace assets when necessary to improve
performance and meet the needs of its customers. This includes improving station layouts, finishes and facilities, the provision of an integrated station management system and installation of platform screen doors. Under the plan, the Company
expects to incur approximately HK$4 billion of capital expenditures from 2004 through the end of 2006.



Platform Screen Doors



The Company has been retrofitting platform screen doors at underground stations on the Urban Lines since May 2001. The project, with an estimated cost of
approximately HK$2 billion, is a pioneer for railways worldwide as it was the first to fit screen doors in an operating system. In addition, the installation of these doors will substantially reduce energy consumption costs within the stations and
will improve passenger comfort and safety on platforms. The installation work takes place only during the non-passenger service hours, which is from 2:00 a.m. to 5:00 a.m. The first set of platform screen doors became operational in October 2001 at
one platform of the Choi Hung station. The first phase of the project (which includes Tsim Sha Tsui, Jordan, Yau Ma Tei, Mong Kok, Prince Edward and Admiralty stations) was substantially completed at the end of 2002. In 2003, installation of
platform screen doors was completed at 14 stations, including Sheung Wan, Central, Admiralty, Wan Chai, Tsim Sha Tsui, Jordan, Yau Ma Tei, Mong Kok, Prince Edward, Sham Shui Po platform 1, Shek Kip Mei, Cheung Sha Wan platform 1, Kowloon Tong and
Choi Hung platforms 2 and 3. All Urban Line underground stations are expected to be retrofitted with platform screen doors by 2006. The Airport Express, Tung Chung and Tseung Kwan O Lines were constructed with platform screen doors at all
stations.



Train Modernization Program



The train modernization program to refurbish MTR
trains with new and improved facilities, which commenced in August 1998, was completed ahead of schedule in October 2001. The refurbished trains provide improved, more energy efficient lighting and ventilation, more comfortable seats and additional
space for luggage or wheelchair users. The refurbished trains also contain informative and user-friendly flashing route maps showing the direction of travel, the next station and exit door, as well as new LED displays for unobtrusive infotainment.
The total cost of this program was HK$1.2 billion.



In March
2002, the Company completed installation of an advanced In-cab closed circuit television (CCTV) system in the Urban Lines trains with the aim of further enhancing the safety of passengers and efficiency of train operators. The In-cab
CCTV system features microwave transmission from station CCTV cameras located on platforms to the In-cab CCTV displays located in the drivers cabs. Through the use of the In-cab CCTV system, platform conditions become visible to the driver 10
meters before the train reaches the platform headwall and remain visible for 44 meters after the train departs from the platform. All drivers cabs and station platforms were equipped with In-cab CCTV by December 2001.



The Company has been replacing the motor alternator sets on the Urban Line
trains with static inverters. The static inverters provide improved reliability, are more energy efficient and reduce noise levels. The total cost of this program will be approximately HK$80 million and is expected to be completed in 2005.



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West Rail Interface Works



In 2003, the Company and KCRC completed the joint construction of the combined MTR/KCRC Nam Cheong station, which is
designed to accommodate the expected interchange flows between the KCRCs West Rail and the Tung Chung Line. In addition, the Company also completed the modification of the existing Mei Foo station to provide an exchange to the KCRCs West
Rail Mei Foo station to facilitate the interchange of passengers between KCRCs West Rail and the Tsuen Wan Line. These West Rail Interface Works were completed within the budgeted cost to the Company of approximately HK$2 billion.



Transit Links and Pedestrianization



For some time, the Company has been working on the planning of
above-ground light rail links. In June 2002, in response to the Governments request, the Company submitted a conceptual proposal to the Government for an above-ground environmentally friendly transport system covering the South East Kowloon
redevelopment of the former Kai Tak airport. The proposed system would run through this area, connecting to Ngau Tau Kok station on the Kwun Tong Line. In 2003, the Company undertook preliminary studies to determine the feasibility of introducing
light rail links in the Kowloon Bay Industrial Area and the West Kowloon Cultural District. The Company held preliminary discussions with the Government and private developers as to the technical and financial feasibility of a light rail link in the
Kowloon Bay Industrial Area. Prior to proceeding with its studies relating to light rail links in the West Kowloon Cultural District, the Company is awaiting the outcome of bids from private developers, which the Government is expected to announce
by mid-2004.



Pedestrianization of streets adjacent to MTR
entrances and underground or elevated links with their surrounding development are increasingly important features of the network. In this field, the Company works with private developers, the Urban Renewal Authority, the Housing Authority and other
bodies responsible for urban development. In 2003, new pedestrian entrances were completed at Kowloon Tong station to provide access from the new education resource center and passenger transport interchange that are currently under construction,
and also to the KCRC station southern concourse that is expected to be completed in early 2004. In addition, a new entrance was completed at Mong Kok station and a further integrated entrance is under construction as part of the Urban Renewal
Authority redevelopment and is due for completion by June 2005. Work began on alterations to the southern concourse of Tsim Sha Tsui station to form part of the subway network linking to the KCRC East Rail extension project. These alterations are
due for completion by the end of August 2004. Work also commenced on a pedestrian link project at Admiralty station in December 2003, while license agreements are under negotiation for further projects at Lai Chi Kok and Choi Hung stations.



Future Extensions



Historically, the financial returns achieved by the Company in relation to
its railway projects have been enhanced by the associated property developments carried out by the Company. In order to compensate the Company for the risks inherent in a particular railway project, the Company requires these returns to be at a
suitable commercial margin over its cost of capital. In this connection, the Government has recognized that this would ordinarily be between 1% and 3% above the estimated weighted average cost of capital of the Company.



Island Line Extensions



In May 2000, the Government identified, as part of its Railway Development
Strategy, the West Island Line and the North Island Link as natural extensions of the Island Line that are to be built and



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operated by the Company. The West Island Line was designed to extend the Island Line from Sheung Wan station to Kennedy
Town. The North Island Link was designed to extend the existing Tung Chung Line along the north shore of Hong Kong Island and connect it to the eastern half of the Island Line from Fortress Hill station to Chai Wan. Concurrently, the Tseung Kwan O
Line connects to the western half of the Island Line from Tin Hau station to Sheung Wan. The North Island Link was expected to relieve the congestion of the central part of the Island Line as well as the Tsuen Wan Line Nathan Road corridor.



In July 2001, at the Governments invitation, the Company
submitted formal proposals for the West Island Line and North Island Link projects. In April 2002, the Company submitted financial proposals to the Government on the West Island Line and North Island Link projects. In June 2002, the Company
submitted a pre-feasibility proposal to the Government on the South Island Line.



On January 21, 2003, the Government decided that the Company should proceed with the planning on the first phase of the West Island Line and the South Island Line and that the North Island Link will be postponed until
after 2016. The Company agrees with the Governments decision to defer completion of the North Island Link, particularly in light of the reduced population growth forecast for Hong Kong and the already adequate capacity of our railway network
for serving the northern part of Hong Kong Island and our cross-harbor customers.



The Company commenced a feasibility study of the West Island Line and the South Island Line projects in mid-2003 and submitted a project proposal to the Government at the end of March 2004. The project proposal seeks
to achieve a better integration of the West Island Line and the South Island Line with the existing network. Pursuant to the project proposal, the Island Line will be extended from Sheung Wan station to a new interchange station at Sai Ying Pun with
the West Island Line, which will run via 5 intermediate stations (University, Kennedy Town, Cyberport, Wah Fu and Aberdeen) to another interchange station with the South Island Line at Wong Chuk Hang. The proposed South Island Line will run from
South Horizons on Ap Lei Chau via Lei Tung to Wong Chuk Hang, then through Ocean Park with a potential station at Happy Valley to interchange stations with the Island Line at Wan Chai and Admiralty.



The maximum aggregate cost for both the West Island Line and South Island
Line is estimated to be approximately HK$16.5 billion at December 2003 prices. The commercial feasibility of this project will require direct funding support from the Government in an amount of approximately HK$7.2 billion. Subject to reaching an
agreement with the Government in 2004, the Company intends to commence construction in 2005 and to commence operations of both the West Island Line and the South Island Line in 2009/2010.



Disneyland Resort Line



The Company submitted a proposal for the Disneyland Resort Line (previously
named the Pennys Bay Rail Link) project to the Government in March 2000. On January 18, 2001, the Deputy Secretary for Transport (now known as the Secretary for the Environment, Transport and Works) published in the Government Gazette a notice
under the Railways Ordinance (Chapter 519 of the Laws of Hong Kong) authorizing the project. On July 24, 2002, the Company entered into a project agreement with the Government relating to the financing, design, construction, operation and
maintenance of the Disneyland Resort Line. When completed, the Disneyland Resort Line will provide a rail-shuttle service between the Tung Chung Line at Sunny Bay (previously named Yam O) and the new Hong Kong Disneyland theme park, which is
expected to open in 2005 or early 2006. The project involves approximately 2.17 new route miles and two new stations.



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The Government has previously acknowledged that the Company will require an appropriate commercial rate
of return on its investment in any new railway project, which the Government has previously recognized would ordinarily be between 1% and 3% above the estimated weighted average cost of capital of the Company, and that financial and other support
from the Government may be required with respect to any new railway project. In order to provide assistance in respect of the Disneyland Resort Line project, the Government agreed to ensure that any claim for or entitlement to (as against the
Company) such amount of dividends representing the Governments beneficial entitlement to cash dividends in respect of the financial year ended December 31, 2002 and thereafter as is equivalent to the funding gap will be waived as
against the Company. For this purpose, the funding gap means a net present value amount (as at the end of 2001) of HK$798 million, calculated using a discount rate of 11.25% (being the expected rate of return on the project), as more
particularly defined in the project agreement for the Pennys Bay Rail Link (now known as the Disneyland Resort Line). Together with the Governments assistance, the rate of return on the Disneyland Resort Line project is expected to be
approximately 11.25% per annum. The Government has waived HK$219 million and HK$675 million of its entitlement to cash dividends declared and payable by the Company to the Government in 2002 and 2003, respectively.



As of December 31, 2003, the Company had awarded all of the civil engineering
and electrical and mechanical contracts for the Disneyland Resort Line project. Rather than purchase new rolling stock for the line, the Company has decided to pursue the more cost-effective route of converting existing trains. Work on the
Disneyland Resort Line made substantial progress in 2003. Throughout 2003, all major civil and electrical and mechanical contracts were either generally on or ahead of schedule for both the line itself and the two stations, one at the Disneyland
theme park and one at Sunny Bay in North East Lantau, the interchange for the Tung Chung Line. The Company expects to complete this project and open it for service by July 2005 and within the original budget estimate of HK$2 billion. The Company had
cumulative expenditures of HK$285 million as of December 31, 2002 and HK$883 million as of December 31, 2003 on this project, and had authorized outstanding commitments on contracts related to this project totaling HK$446 million as of December 31,
2003. After taking into account the waiver by the Government of HK$219 million and HK$675 million of its entitlement to cash dividends declared and payable by the Company to the Government in 2002 and 2003, respectively, the net balance of the
railway construction in progress relating to this project was zero as of December 31, 2003.



Tung Chung Cable Car



In July 2002, the Government awarded to the Company, on a provisional basis, a 30-year franchise to construct and operate a cable car system to link Tung Chung with Ngong Ping, site of the Po Lin Monastery and the statue of Buddha. The
approximately 17 minute cable car ride will rise 400 meters above sea level and offer views over Tung Chung Valley, the Hong Kong International Airport and out to sea as far as the Macau Special Administrative Region. The Tung Chung Cable Car
project is budgeted to cost HK$950 million and is expected to commence operations in early 2006. In addition, the total costs of works ancillary to the Tung Chung Cable Car project to be performed by the Company on behalf of the Government under
entrustment agreements are approximately HK$100 million and will be funded by the Government. Following the enactment of the Tung Chung Cable Car Ordinance in June 2003, the Company entered an intensive period of consultation with the Government and
other stakeholders. On November 19, 2003, the Company entered into a formal project agreement with the Government to develop, on a build, operate and transfer basis, the Tung Chung Cable Car system under a franchise granted by the Government for a
period of 30 years commencing on December 24, 2003. In November 2003, the Government also signed the entrustment agreements for related works at Ngong Ping that include a landscaped piazza and a public transport interchange, together with a private
treaty grant for a period of 30 years for a theme village adjacent to the Ngong Ping terminal. The environmental permits for



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the cable car and the stream diversion were also granted in November 2003, and subsequently the contract for the building
and civil engineering works was awarded. Construction commenced in December 2003.



The Company had cumulative expenditures of HK$17 million as of December 31, 2002 and HK$137 million as of December 31, 2003 on this project and had authorized outstanding commitments on contracts related to this
project totaling HK$495 million as of December 31, 2003.



Competition



The Company competes with other
modes of public transportation, including franchised buses, public light buses, trams and ferries as well as taxis and private cars. Bus service is the primary mode of competition for daily commuter transportation. Franchised bus companies operate
routes throughout the areas served by the MTR, including routes across Victoria Harbour between Hong Kong Island and Kowloon. Electric trams operate in parts of the area served by the Island Line on Hong Kong Island.



The Company believes that, based on internal studies, its competitive
strengths include speed, reliability and comfort, but recognizes that these strengths have been eroded in recent years with the general improvement in bus services, including wider use of air conditioning on buses, the opening of the Western Harbour
Tunnel and its related highway routes, the expanding bus network and more direct road access to, and improved conditions in, urban areas. The number of bus routes competing with the MTR has increased significantly compared to the number of buses
providing feeder services to the MTR. The number of buses deployed, the bus routes operated and the bus fares are regulated by the Commissioner for Transport, who also regulates the Companys train services.



Although fares on franchised buses are generally lower than the fares charged
by the Company, in recent years franchised bus fares have generally increased at a higher rate than the fares charged by the Company. However, the lower capital costs of the Companys competitors and their greater structural flexibility may
enable them to respond to changing passenger demand more quickly than the Company.



As a result of these competitive pressures, the Company has been considering a number of initiatives to enhance its competitive position, including:



| |  |  | Increasing the range of feeder services. In light of the importance of feeder buses to the patronage of the MTR, the Company is consistently engaged in discussions with the
Government on new feeder services. The Company has also considered operating its own feeder routes but has concluded that it would not be economically viable to do so at present unless it could obtain a bus franchise, thereby enabling it to charge
fares and to avoid paying fuel tax. The Company is in discussions with franchised bus companies, green public light bus operators and residential coach service providers with a view to enhancing the feeder service frequencies together with the
introduction of inter-modal fare discounts and possible route rationalization.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inter-modal fare discounts. Certain journeys may be completed using buses only or by combining a bus journey and a journey on the MTR. By combining a bus journey with a
journey on the MTR, the aggregate fare would generally be higher than the fare that would be charged if the bus were to be used without the MTR. To address this and to compensate for the inconvenience of interchanging between a bus and the MTR, the
Company is pursuing the possibility of offering discounted fares, or free feeder bus travel, to passengers who use both franchised buses, green public light buses or residential coach services and the MTR to complete a single journey. This could be
achieved in conjunction with the Octopus card. The Company has extended the inter-modal fare discount scheme, under which passengers
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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transferring between MTR and feeder buses are given discounted bus fares, to Tung Chung, Tseung Kwan O,
Yau Tong, Kwun Tong, Wong Tai Sin and Causeway Bay.



| |  |  | Promotional initiatives. Periodically, the Company also implements promotional initiatives with a view to stimulating additional patronage. The ride 10 get 1 free
promotion, which was first offered in April 2000, was estimated to have generated an additional 1% in patronage. The same promotion was offered again in December 2001 and August 2002 for six-month periods, and was estimated to have also generated an
additional 1% to 2% in patronage. In February 2003, the Company announced the extension of this fare concession scheme to January 4, 2004 and subsequently to October 3, 2004. In addition, a HK$5 discount on fares for journeys originating at Heng Fa
Chuen station following a minimum HK$100 dining consumption at Paradise Mall is being tested. Furthermore, the Company is currently offering a HK$2 discount on fares to adult Octopus passengers who swipe their Octopus cards on the fare savers and
subsequently use the MTR at the designated entry station. In addition to the ride 10 get 1 free promotion, the Company also offered the ride 5 get cash coupons on the MTR lines, and ride 7 get 1 free tickets for
airport workers during selected periods on the Airport Express Line. The Company is currently also offering the $2 holiday ride for children and the elderly promotions on the MTR Lines, and free tickets for children, half fares for
students and the elderly for selected periods, and discounts for passengers traveling in groups on the Airport Express Line.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other long-term initiatives. The Company is examining alternative feeder arrangements, such as above-ground light rail transit links, escalator and travelator links and
footbridge networks in order to enhance accessibility to particular MTR stations and improve passenger accessibility at certain stations. In 2003, new pedestrian entrances were completed at Kowloon Tong station to provide access from the new
education resource center and passenger transport interchange that are currently under construction, and also to the KCRC station southern concourse that is expected to be completed in early 2004. In addition, a new entrance was completed at Mong
Kok station and a further integrated entrance is under construction as part of the Urban Renewal Authority redevelopment and is due for completion by June 2005. Work began on alterations to the southern concourse of Tsim Sha Tsui station to form
part of the subway network linking to the KCRC East Rail extension project. These alterations are due for completion by the end of August 2004. Work also commenced on a pedestrian link project at Admiralty Station in December 2003 while license
agreements are under negotiation for further projects at Lai Chi Kok and Choi Hung stations. The Company is also discussing further additional pedestrian link developments with various parties.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In its Railway Development Strategy 2000 report, the Government confirmed
that railways are essential to Hong Kongs continued economic, social and land development and will be given priority in the Governments plans for infrastructure development. Within this framework, the Government also recognized that
franchised buses would continue to play an essential role in the public transport system in Hong Kong. As a result, the Company does not expect the Government to take any particular, direct measures which, in the short term, would have the effect of
reducing or containing patronage on franchised buses or public light buses for the purpose of increasing the Companys patronage. Nonetheless, the Governments planning of the provision of passenger transport services to new development
areas, including Tseung Kwan O, will reflect its stated preference for railways to be the backbone of the passenger transport system. As expected, patronage on the MTR has increased following the commencement of operations on the Tseung Kwan O Line.
The completion of the West Rail project by KCRC in December 2003 and future new extensions such as the KCRC line to Ma On Shan are also expected to result in additional patronage on the MTR.



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Regulatory and Related Matters



Mass Transit Railway Ordinance



Under the MTR Ordinance, the Company was granted the franchise to operate the MTR and to construct and operate any extension
to the railway for an initial period of fifty years, subject to the terms and conditions contained in the Operating Agreement. The MTR Ordinance also regulates the operation of the MTR, including all aspects of safety on the MTR. The Companys
franchise may be extended upon application to, and approval by, the Chief Executive of the Hong Kong SAR acting after consultation with the Executive Council of the Hong Kong SAR, which is commonly referred to as the Chief Executive in Council. The
Company is prohibited from transferring its franchise without the approval of the Chief Executive in Council. In addition, the Chief Executive in Council may appoint not more than three persons as additional directors of the Company who can be
removed only by the Chief Executive of the Hong Kong SAR.



The
Company is required to maintain a proper and efficient service in accordance with the MTR Ordinance and the Operating Agreement. In addition, the MTR Ordinance provides that the Chief Executive in Council may, if he considers the public interest so
requires, give directions to the Company in relation to any matter concerning its franchise. If directions are given, the Company is required to comply with them unless they are inconsistent with the MTR Ordinance. The Government is liable to
compensate the Company for loss or damage of any kind attributable to its compliance with these directions. The Company has not to date received any directions from the Chief Executive in Council. The Chief Executive in Council may impose financial
penalties on the Company for substantial and persistent failures to comply with the MTR Ordinance or the Operating Agreement or directions, specifications or requirements given under them.



The Chief Executive in Council may, if he considers that it is in the public
interest to do so, suspend the Companys franchise in whole or in part where he considers that: (1) an emergency exists or is likely to exist; or (2) there is or is likely to be a substantial breakdown in the operation of the MTR, other than a
breakdown that appears capable of being remedied within a reasonable period of time. Moreover, the Chief Executive in Council may revoke the Companys franchise if the Company is in default of its franchise and has failed to remedy the default.
The Company will be deemed to be in default of its franchise if:



| |  |  | there has been a substantial failure by the Company to discharge an obligation under the Operating Agreement; or
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the Company has failed or there is a likelihood of it failing substantially to operate the MTR in accordance with the MTR Ordinance;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



and the failure (or likely failure) results in or is likely to result in:



| | (i) |  | a substantial breakdown of service;
| | --- |  | -----------------------------------



| | (ii) |  | the safety of persons traveling on the MTR or being on the MTR premises being endangered in a manner likely to result in serious injury to those persons; or
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) |  | serious injury to or the death of persons traveling on the MTR or being on the MTR premises; or
| | ----- |  | -----------------------------------------------------------------------------------------------



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| |  |  | a voluntary winding up of the Company is commenced or a winding up order in respect of the Company is made.
| | - |  | -----------------------------------------------------------------------------------------------------------



The Secretary for the Environment, Transport and Works of the Hong Kong SAR
is empowered by the MTR Ordinance to make, and has adopted, regulations for the purpose of effectively carrying out the provisions of the MTR Ordinance, including:



| |  |  | controlling and regulating the maintenance, operations and use of the MTR;
| | - |  | --------------------------------------------------------------------------



| |  |  | providing for the safety of persons being on the MTR; and
| | - |  | ---------------------------------------------------------



| |  |  | regulating the use of transport interchanges.
| | - |  | ---------------------------------------------



As this section is a summary, it does not describe every aspect of the MTR Ordinance. This summary is subject to and qualified in its entirety by
reference to all provisions of the MTR Ordinance.



Operating
Agreement



The Operating Agreement contains the detailed
provisions for the design, construction, maintenance and operation of the MTR under the Companys franchise. The Operating Agreement is governed by the laws of Hong Kong. Matters covered by the Operating Agreement include, among others, the
matters set forth below.



Compensation



The Government is liable to pay compensation to the
Company for the use of, loss of or damage to any property taken possession of by the Government due to the revocation or expiration without extension of the Companys franchise. Compensation for the use of property will be determined by
independent valuers appointed for that purpose. Compensation for the loss of property will be equal to the higher of fair market value or depreciated book value, each as determined by an independent valuer. Compensation for damage to any property
that is returned to the Company will be calculated with reference to the reasonable cost of remedying such damage.



Franchise



The Operating Agreement provides for the extension of the Companys franchise. If the Companys franchise is extended, it will run for a further
period of fifty years from certain specified dates. The Company is not required to pay for the extension of the franchise, and the terms of its franchise for any extended period will not be altered unless: (1) the Company and the Secretary for the
Environment, Transport and Works of the Hong Kong SAR agree to an amendment; or (2) the Secretary for the Environment, Transport and Works of the Hong Kong SAR informs the Company that material circumstances have changed such that it is
inappropriate for the franchise extension to be on the same terms.



New Railway Projects



Under the
Operating Agreement, the Government will ensure that there is a level playing field for the award of future railway projects and a clear framework for those awards. In addition, the Government acknowledged that the Company will require an
appropriate commercial rate of return on its investment in any future railway project and that, in order for the Company to earn a commercial rate of return on particular railway projects and maintain its financial standing and profile, financial
support for those



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railway projects may be required. The Government also agreed that it will not require the Company to construct and
operate any future railway project. This is subject to the Chief Executive in Councils ability to give directions under the MTR Ordinance.



Fare Regulation



The Company has autonomy to set its own fares under the Operating Agreement. Prior to implementing any changes, however, the Company must consult the
relevant governmental authorities, as well as consider the level of public acceptance of any proposed change based on passenger surveys. The relevant governmental authorities must also be formally notified and a public announcement of any new fare
must be made before a fare change is implemented. This consultation and notification procedure does not apply to fare changes which reduce fares and are of a short-term promotional nature. However, the Company is required to notify the relevant
governmental authorities seven days in advance of any promotional arrangements.



Performance Requirements and Customer Service Pledges



Under the Operating Agreement, the Company is required to meet certain performance thresholds regarding its railway-related services. These performance
requirements cover: (1) train service delivery (which is a measure of the actual train trips run by the Company against the train trips scheduled to be run by the Company); (2) passenger journeys on time (which is a measure of passenger journeys
which are delayed by at least five minutes); (3) train punctuality; (4) add value machine reliability; (5) ticket issuing machine reliability; (6) ticket gate reliability; (7) escalator reliability; and (8) passenger lift reliability. In addition,
the Company is required to establish customer service pledges relating to each of the categories covered by the performance requirements as well as train reliability, ticket reliability, temperature and ventilation levels and railway cleanliness.
Unlike the performance requirements, the customer service pledges are voluntary targets established by the Company and are not contractual obligations relating to performance. For the year 2003, all performance requirements were met and all the
Companys customer service pledges were either met or exceeded.



New Regulations



Under the Operating Agreement, the Government must consult the Company and take into account all reasonable representations made by the Company before the Secretary for the Environment, Transport and Works of the Hong Kong SAR introduces
new regulations under the MTR Ordinance.



The Operating
Agreement is subject to review every five years or at such other times as the parties may agree. The Operating Agreement may only be modified with the written consent of both parties. The first five-year review is expected to occur on June 30, 2005.



As this section is a summary, it does not describe every
aspect of the Operating Agreement. This summary is subject to and qualified in its entirety by reference to all provisions of the Operating Agreement.



Organizational Structure



The Company is incorporated in Hong Kong with limited liability under the Companies Ordinance of the laws of Hong Kong. Set forth below are details of the
Companys subsidiaries as of May 31, 2004.



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|                                                          |  |                                                      |             |     |                                      |      |   |                                     |      |   |                                    |     |   |                               |     |      |                                  |                            |                      |                                                                       
|--------------------------------------------------------- |  | ---------------------------------------------------- | ----------- | --- | ------------------------------------ | ---- | - | ----------------------------------- | ---- | - | ---------------------------------- | --- | - | ----------------------------- | --- | ---- | -------------------------------- | -------------------------- | -------------------- | ----------------------------------------------------------------------
|Name of Subsidiaries                                      |  | Issued and Paid Up Ordinary /Registered ShareCapital |             |     | TheGroupsEffectiveOwnershipInterest |      |   | OwnershipInterestheld by theCompany |      |   | OwnershipInterestheld bySubsidiary |     |   | Proportionof VotingPower Held |     |      | Place ofIncorporation /Operation |                            | Principal Activities
|Fasttrack Insurance Ltd.                                  |  | HK$                                                  | 77,500,000  |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Bermuda                    |                      | Insurance underwriting                                                
|MTR Corporation (C.I.) Limited                            |  | US$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Cayman Islands / Hong Kong |                      | Finance                                                               
|MTR Finance Lease (001) Limited                           |  | US$                                                  | 1           |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Cayman Islands / Hong Kong |                      | Finance                                                               
|MTR Engineering Services Limited                          |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Engineering services                                                  
|MTR Property Agency Co. Limited                           |  | HK$                                                  | 2           |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Property agency                                                       
|MTR Travel Limited                                        |  | HK$                                                  | 2,500,000   |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Travel services                                                       
|Octopus Cards Limited                                     |  | HK$                                                  | 42,000,000  |     |                                      | 57.4 | % |                                     | 57.4 | % |                                    |    |   |                               | 49  | %(1) |                                  | Hong Kong                  |                      | Development and operation of smart card system                        
|MTR Consulting (Shenzhen) Co. Ltd.                        |  | HK$                                                  | 1,000,000   |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Peoples Republic of China |                      | Railway consultancy services                                          
|MTR Corporation (Singapore) Pte. Ltd.                     |  | S$                                                   | 50,000      |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Singapore                  |                      | Railway consultancy services                                          
|MTR China Consultancy Company Limited(2)                  |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Railway consultancy services                                          
|MTR (Shanghai Project Management) Limited                 |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Railway consultancy services                                          
|Shanghai Hong Kong Metro Construction Management Co. Ltd. |  | HK$                                                  | 15,000,000  |     |                                      | 60   | % |                                     |     |   |                                    | 60  | % |                               | 60  | %    |                                  | Peoples Republic of China |                      | Railway construction management                                       
|MTR China Property Limited                                |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Property management                                                   
|Shenzhen Donghai Anbo Property Management Co. Ltd.        |  | RMB                                                  | 3,000,000   |     |                                      | 51   | % |                                     |     |   |                                    | 51  | % |                               | 51  | %    |                                  | Peoples Republic of China |                      | Property management                                                   
|Beijing Premier Property Management Co. Ltd.              |  | US$                                                  | 150,000     |     |                                      | 60   | % |                                     |     |   |                                    | 60  | % |                               | 60  | %    |                                  | Peoples Republic of China |                      | Property management                                                   
|MTR Telecommunication Company Limited                     |  | HK$                                                  | 100,000,000 |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Radio communications services                                         
|Candiman Limited                                          |  | US$                                                  | 1           |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | British Virgin Islands     |                      | Investment holding                                                    
|MTR Corporation (Shenzhen) Limited                        |  | HK$                                                  | 100,000,000 | (3) |                                      | 100  | % |                                     |     |   |                                    | 100 | % |                               | 100 | %    |                                  | Peoples Republic of China |                      | Conduct early-stage preparatory work for Shenzhen Metro Line 4 project
|TraxComm Limited                                          |  | HK$                                                  | 15,000,000  |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Fixed telecommunication network services                              
|Hong Kong Cable Car Limited                               |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Dormant                                                               
|Lantau Cable Car Limited                                  |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Dormant                                                               
|MTR (Estates Management) Limited                          |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Dormant                                                               
|MTR (Shanghai Metro Management) Limited                   |  | HK$                                                  | 1,000       |     |                                      | 100  | % |                                     | 100  | % |                                    |    |   |                               | 100 | %    |                                  | Hong Kong                  |                      | Dormant                                                               

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|(1) |  | Although the Company holds 57.4% of the issued shares of Octopus Cards Limited, the Companys voting rights at board meetings of Octopus Cards Limited are limited to 49%. See
Note 18 of Notes to the Financial Statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Formerly MTR (Shanghai Consultancy) Company Limited.
|--- |  | ----------------------------------------------------

|(3) |  | As of May 31, 2004, the Company has paid up a total of HK$25,000,000 in capital to MTR Corporation (Shenzhen) Limited.
|--- |  | ----------------------------------------------------------------------------------------------------------------------



Property, Plant and Equipment



Property and Fixed Assets



Prior to 1993, most of the land on which the Companys railway
operations were situated was not subject to a formal lease, but was provided by the Government, subject to two running line leases, with an acknowledgment of the Companys right to use such property and that the Government had no right to
terminate such use. In 1993 and 1997, the Government granted the Company a formal lease of the land on which its railway stations, depots, other civil works, plant and other equipment are situated for the period up to June 30, 2047. In 2000, these
leases were extended to June 29, 2050. In addition, the Company has the right to use certain other properties under private treaty grants and short-term leases, which it expects to be able to extend to 2050 under the terms of the Joint Declaration.
The Company also has the right to operate the railway part of the Eastern Harbour Crossing until 2008 in return for payment by the Company to the Eastern Harbour Crossing Company Limited of an aggregate of HK$2,600 million, payable in fixed
semi-annual installments of varying amounts through 2007. Pursuant to a letter dated July 14, 2000 from the Secretary for Planning and Lands (now known as the Secretary for Housing, Planning and Lands) to the Company, the Government has agreed that
the land supporting the railway element of the Eastern Harbour Crossing will be leased to the Company thereafter at a nominal premium. In addition, the Company and the Secretary for the Treasury (now known as the Secretary for Financial Services and
the Treasury) for and on behalf of the Government entered into an agreement on June 30, 2000, in respect of the vesting in the Company of certain assets comprised in the Eastern Harbour Crossing by the Government in 2008 for nominal consideration.
Under this agreement, the Company agreed to indemnify the Government for certain amounts which are expected to be nominal.



For information relating to the Companys other tangible fixed assets and facilities, as well as any material plans to construct, expand or improve
the Companys facilities, please see  Business Overview.



Environmental Matters



Environmental issues have assumed an increasingly important role in the design and development of extensions to, and operations of, the MTR and associated property development. In particular, the Company has initiated a proactive
environmental management program, which serves to enforce environmental awareness. Through the implementation of an environmental audit program attached to supplier contracts and based on approved environmental management plans, each contractor must
comply with and implement the required standards throughout the term of the relevant contract.



Further demonstrating the Companys commitment to responsible environment management, the Company received the ISO 14001 certification in 2002. The ISO 14001 quality standard is part of a comprehensive series of
standards for environmental management published by the International Organization for Standardization, and covers environmental management, including efforts undertaken by companies to minimize harmful effects on the environment caused by their
activities.



At many levels within the Company, programs to
reduce energy consumption and to reuse and recycle resources are in effect under the Companys internal environmental management systems policy



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based on the ISO 14000 standard. In addition, the Company continues to focus on the management and monitoring of noise
and wastewater.



Each year, the Company looks for ways to
reduce the consumption of electricity. The Companys traction energy consumption measured in kilowatt hours per kilometer has decreased by 1.6% in 2002 compared to 2001, and has decreased further by 3.3% in 2003, despite an increase in
electricity consumption due to the opening of the Tseung Kwan O Line in August 2002.



The Company has also continued to focus on noise reduction during the construction and operation of its railways. Highlights of the Companys noise reduction program include the removal of a further 32 track
joints in 2003.



In 2002, eight additional new water treatment
plants and pipeline diversions were completed under the Companys water drainage and effluent treatment program to reduce the impact on the water quality in Hong Kong. In 2003, all the water drainage diversion and new water treatment plant
installations were completed.



In addition to
infrastructure improvement, the Company continued to promote recycling throughout its operations. In 2003, 1,204 tons of scrap metal, 449 tons of waste paper and 100% of spent oil were recycled, the latter resulting in a recovery of 15,800 liters of
oil.



To protect the ozone layer, the Company has replaced 10
chillers of its air conditioning systems in stations using chlorofluorocarbon (CFC) refrigerants in 2003 with new chillers using non-CFC refrigerant. The replacement process with respect to the remaining chillers will continue in 2004.



The Company believes that its existing operations are in
compliance with applicable environmental regulations, to the extent that they apply to the Company.



For projects under development, the Company is required to comply with the statutory processes prescribed by the Government, including submission of an
environmental impact assessment to the Environmental Protection Department and satisfactory conclusion of a public consultation period. The Company is also required to comply with the terms of environmental permits issued as a result of its
environment impact assessment and applicable environmental regulations in its construction activities.



Item 5. Operating and Financial Review and Prospects.



The following discussion should be read in conjunction with the selected financial data set forth in Item 3, Key Information and the Financial Statements which appear elsewhere in this Annual Report.



Overview



The Companys financial strategy is to generate sufficient revenues from
customers to cover operating costs, maintain and improve the quality of plant and equipment, service and repay debt and earn a reasonable rate of return for its shareholders. The Companys principal sources of revenue are railway and related
operations (including fare revenue, station commercial revenue, advertising, kiosk rental, consultancy services, telecommunication coverage income and other income related to the operation of the railway), property ownership and management and
property development.



The Companys results of operations
are generally affected by, among other factors, patronage, fare levels, competition, the state of the Hong Kong economy, consumer preferences among transportation modes and frequency of travel and demographic trends. The Airport Express Lines



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contribution to fare revenue is principally driven by tourist arrivals and departures. Since 1998, the economic downturn
in Hong Kong and competition from bus and other transport operators have resulted in a decrease in passenger patronage. In 2001, patronage decreased again primarily as a result of deteriorating economic conditions in Hong Kong, competition from
other modes of transportation and population migration from urban areas to the New Territories, which are not served by the MTR. Despite the decline in passenger patronage, total fare revenue in 2001 increased as compared to 2000. This was primarily
a result of the average fare for passengers on the Airport Express Line increasing from HK$53.1 to HK$62.5 after removal of the 10% fare discount in July 2001, as well as an increase in the average MTR Lines fare from HK$6.73 in 2000 to HK$6.81 in
2001 due to the full year effect of the additional HK$0.10 collected by the Company per journey by each passenger using an Octopus card. In 2002, despite a decrease in patronage on the Airport Express Line, the Companys overall patronage
increased by 2.5% to 786 million passengers. This increase was primarily due to the opening of the Tseung Kwan O Line. The continued decrease in patronage on the Airport Express Line was primarily due to the elimination of the 10% fare discount in
July 2001. In addition, overall air passenger traffic continued to be affected by the weak economic environment. Fare revenues for the MTR Lines increased only marginally in 2002 as compared to 2001, primarily due to promotional offers, while fare
revenues for the Airport Express Line declined by 2.0% to HK$553 million as a result of a decline in passenger patronage.



In 2003, the Companys overall patronage decreased by 1.1% to 777 million passengers, primarily due to the outbreak of SARS in early 2003. The SARS
outbreak severely decreased economic activity and adversely affected economic growth in Hong Kong by, among other things, disrupting consumer spending and adversely affecting tourist arrivals. In particular, patronage on the MTR Lines during the
SARS outbreak was lower despite the additional patronage attributable to the Tseung Kwan O Line and patronage on the Airport Express Line during the SARS outbreak was significantly lower compared to the corresponding period in 2002.



In the second half of 2003, patronage on both the MTR Lines and Airport
Express Line recovered substantially to the levels prior to the SARS outbreak. In particular, after reaching a low of 1.8 million in April 2003, average weekday patronage on the MTR Lines recovered to over 2.1 million in June 2003 and over 2.4
million in December 2003. Moreover, average Airport Express Line daily patronage, after reaching a low of 9,200 in May 2003, increased to 12,700 in June 2003 and 22,200 in December 2003. Patronage on the Airport Express Line, however, continued to
be adversely affected by the reduced air passenger traffic resulting from the weak economic environment. In addition, the average fare for passengers on the MTR Lines decreased by 1.2% to HK$6.57 in 2003 from HK$6.65 in 2002, and the average fare
for passengers on the Airport Express Line decreased by 5.1% to HK$62.07 in 2003 from HK$65.43 in 2002. The decrease in average fares on the MTR Lines was primarily due to fare promotions and concessions. The decrease in average fares on the Airport
Express Line was primarily due to a higher proportional usage of the Airport Express Line by airport workers who benefit from fare concessions together with a significant decrease in tourist arrivals as a result of the SARS outbreak As a result,
fare revenues for the MTR Lines decreased by 2% to HK$5,064 million in 2003 from HK$5,167 million in 2002, while fare revenues for the Airport Express Line decreased by 23% to HK$425 million from HK$553 million in 2002.



The Company aims to increase fare revenue by using differential pricing by
passenger type and journey duration and by keeping fare increases roughly in line with the rate of inflation. The Company also supplements its fare revenue with other sources of revenue, such as advertising and kiosk rentals in MTR stations,
property development and property ownership and management, consultancy services, as well as fees from telecommunications coverage in the railway system and consulting services. The Company controls costs through the adoption of measures designed
to, among other things, increase employee productivity and improve asset efficiency.



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Substantially all of the Companys depreciation charges are attributable to its railway operations.
As a result, following the implementation of new railway projects, the Companys operating profit from railway and related operations after depreciation and the operating margin from railway and related operations are typically adversely
affected by the significantly higher depreciation charges. In addition, the Companys net results are typically affected by the significant amount of interest and finance charges on its indebtedness arising from the financing of such railway
projects. The implementation of new railway projects involves substantial capital expenditure and requires long periods of time to generate the necessary returns. The Companys interest and finance charges and depreciation charges have
increased significantly as a result of the commencement of operations of the Tung Chung and Airport Express Lines in 1998 and the commencement of operations of the Tseung Kwan O Line in August 2002.



Between 1999 and 2003, the total number of passengers carried on MTR Lines
decreased by approximately 1.2% to 770 million from 779 million, primarily due to increased competition from bus operators and the economic downturn in Hong Kong as well as the outbreak of SARS in early 2003. The total number of passengers on the
Airport Express Line decreased from 9.0 million in 2001 to 8.5 million in 2002, primarily as a result of the elimination of the 10% fare discount and the reduced overall air passenger traffic that continued to be affected by the weak economic
environment. The total number of passengers on the Airport Express Line decreased further from 8.5 million in 2002 to 6.8 million in 2003, primarily as a result of the decrease in airport traffic that resulted from the SARS outbreak and the weak
economic environment.



Operating profit from railway and
related operations (before depreciation) decreased from HK$4,053 million in 2001 to HK$4,014 million in 2002. This decrease was primarily due to a write-off in the amount of HK$218 million on project study costs and deferred expenditure for the
Shatin to Central Link and the North Island Link together with its related improvement works, which was partially offset by an increase in revenue from the property ownership and management and the station commercial and other revenue and the
reduction in staff costs. As a result, the Companys operating margin from railway and related operations (operating profit from railway and related operations before depreciation divided by revenue) decreased to 52.2% in 2002 from 53.4% in
2001. Operating profit from railway and related operations (before depreciation) decreased from HK$4,014 million in 2002 to HK$3,747 million in 2003. This decrease was primarily due to: (i) lower fare revenues, (ii) an increase in expenses relating
to the first full year of operations of the Tseung Kwan O Line, (iii) an increase in consultancy service expenses included in station commercial and other businesses and (iv) an increase in other expenses, which was partially offset by lower
write-off for project study and deferred expenditure as compared to 2002, as well as lower operational rent and rates. As a result, the Companys operating margin from railway and related operations (operating profit from railway and related
operations before depreciation divided by revenue) decreased further to 49.3% in 2003 from 52.2% in 2002.



In conjunction with its railway construction activities, the Company has been involved in the development of residential and commercial properties above
and adjacent to MTR stations and depots under agreements with various property developers. Property development has historically produced significant profits for the Company which it has used to supplement associated railway returns, thereby
contributing to an improved rate of return on the investment cost of constructing new railway projects. The amount and timing of property development profits have been largely driven by the scale and progress of various property developments
associated with new railway projects with which the Company has been involved as well as the state of the property market in Hong Kong. There can be no assurance, however, with respect to the future trends of such revenues, which will be heavily
dependent on market conditions. The Company was granted significant rights to develop additional properties in connection with the construction of the Tung Chung Line, the Airport Express Line and the Tseung Kwan O Line, and is currently involved in
the process of developing such properties with third-party developers. See Item 4, Information on the Company  Business Overview  Property Development. In cases where



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payments received from developers exceed the related expenditures incurred by the Company, such excess is recorded as
deferred income. See Note 16 of Notes to the Financial Statements.



The Companys principal railway operating costs are depreciation costs, staff costs, energy and utilities costs and repair and maintenance costs, which accounted for approximately 44%, 32%, 11% and 8%, respectively, of total railway
operating costs in 2003. In addition, the Companys rapidly expanding consultancy service activities have resulted in significant increases in expenses relating to station commercial and other businesses, which totaled HK$351 million and
accounted for approximately 6.0% of total railway operating costs in 2003. The Companys staff costs are influenced by inflation, labor productivity, the relative supply and demand for labor in Hong Kong and other factors. Energy costs are
influenced by car miles operated, asset efficiency, market prices for coal, electricity tariffs and other factors.



The Company has historically relied on equity injections from the Government, debt financing and funds from railway and related operations and property
development profits to finance the construction and operation of the MTR and it is possible that future major railway projects will be financed by a mixture of funds from these different sources. The level of the Companys indebtedness reflects
a decision by the Company as to an appropriate ratio of debt to shareholder funds, which takes into account the Companys cash requirements and the impact of additional indebtedness on its credit ratings and cost of debt financing.



On June 25, 2002, the Government awarded the proposed Shatin to Central
Link railway project to KCRC. The Shatin to Central Link is expected to be completed in 2011. Subject to a possible merger with KCRC, upon completion of the Shatin to Central Link, operation of the Shatin to Central Link by KCRC is expected to
result in a decrease in the Companys revenues and may have a material adverse effect on the Companys results of operation. See Item 3, Key Information  Risk Factors  Risks relating to the Company and its business.



The following table sets forth the Groups operating
profit from railway and related operations before depreciation and operating profit after depreciation but before interest and finance charges for the periods indicated.



|                                                                                      |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  
|------------------------------------------------------------------------------------- |  | --------------------------------- | ----- |  | ------- | - |  | ------- | ----- |  | ------- | - |  | --- | ----- | - |  | ----- | -- |  | --- | --- | -
|                                                                                      |  | Year Ended December 31,           |      
|                                                                                      |  | 2001                              |       |  | 2002(1) |   |  | 2003(2) |       |  | 2003(2) |  
|                                                                                      |  | (in millions, except percentages) |      
|Operating profit from railway and related operations before depreciation(3)           |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  
|Railway(4)                                                                            |  | HK$                               | 2,545 |  | 62.8    | % |  | HK$     | 2,400 |  | 59.8    | % |  | HK$ | 2,191 |   |  | 58.5  | %  |  | US$ | 282 |  
|Station commercial and other revenue                                                  |  |                                   | 776   |  | 19.1    | % |  |         | 794   |  | 19.8    | % |  |     | 766   |   |  | 20.4  | %  |  |     | 99  |  
|Rental and management income                                                          |  |                                   | 732   |  | 18.1    | % |  |         | 820   |  | 20.4    | % |  |     | 790   |   |  | 21.1  | %  |  |     | 102 |  
|                                                                                      |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  
|                                                                                      |  | HK$                               | 4,053 |  | 100.0   | % |  | HK$     | 4,014 |  | 100.0   | % |  | HK$ | 3,747 |   |  | 100.0 | %  |  | US$ | 483 |  
|                                                                                      |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  
|Operating profit/(loss) after depreciation and before interest and finance charges(5) |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  
|Railway(4)                                                                            |  | HK$                               | 466   |  | 9.1     | % |  | HK$     | 37    |  | 0.7     | % |  | HK$ | (98   | ) |  | (1.5  | )% |  | US$ | (13 | )
|Station commercial and other revenue                                                  |  |                                   | 679   |  | 13.3    | % |  |         | 688   |  | 13.0    | % |  |     | 657   |   |  | 9.8   | %  |  |     | 85  |  
|Rental and management income                                                          |  |                                   | 730   |  | 14.2    | % |  |         | 819   |  | 15.4    | % |  |     | 786   |   |  | 11.7  | %  |  |     | 101 |  
|Property development                                                                  |  |                                   | 3,248 |  | 63.4    | % |  |         | 3,755 |  | 70.9    | % |  |     | 5,369 |   |  | 80.0  | %  |  |     | 692 |  
|                                                                                      |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  
|                                                                                      |  | HK$                               | 5,123 |  | 100.0   | % |  | HK$     | 5,299 |  | 100.0   | % |  | HK$ | 6,714 |   |  | 100.0 | %  |  | US$ | 865 |  
|                                                                                      |  |                                   |       |  |         |   |  |         |       |  |         |   |  |     |       |   |  |       |    |  |     |     |  

---

|(1) |  | Includes operating profit and depreciation from the Tseung Kwan O Line since August 18, 2002.
|--- |  | ---------------------------------------------------------------------------------------------



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|(2) |  | Includes full year operating profit and depreciation from the Tseung Kwan O Line.
|--- |  | ---------------------------------------------------------------------------------

|(3) |  | Depreciation was HK$2,178 million in 2001, HK$2,470 million in 2002 and HK$2,402 million in 2003.
|--- |  | -------------------------------------------------------------------------------------------------

|(4) |  | Includes unallocated corporate expenses.
|--- |  | ----------------------------------------

|(5) |  | Interest and finance charges were HK$874 million in 2001, HK$1,125 million in 2002 and HK$1,539 million in 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------



Critical Accounting Policies



The preparation of financial statements requires the Companys
management to make decisions based upon estimates, assumptions and factors that it considers relevant to the circumstances. The Company believes that of its principal accounting policies, as set forth in Note 1 to the Financial Statements, the
following may involve a higher degree of judgment and estimation.



Estimated Useful Life and Depreciation of Property, Plant and Equipment



The Company estimates the useful lives of the various categories of property, plant and equipment on the basis of their design lives, the planned asset maintenance program and actual usage experience. Depreciation is
calculated using the straight-line basis at rates sufficient to write off their cost or valuation over their estimated useful lives. The estimated useful lives are reviewed regularly in the light of actual asset condition, usage experience and the
current asset replacement program. The depreciation charge for current and future periods is adjusted if there are significant changes from previous estimates.



Impairment of Long-lived Assets



The Company reviews long-lived assets for impairment at each balance sheet date to identify indications that the carrying amount of the assets may be
impaired or an impairment loss previously recognized no longer exists or may have decreased. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed
the recoverable amounts of the assets. In analyzing potential impairment, the Company uses projections of future cash flows from the assets. These projections are based on the managements view of the assignment of a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the asset.



Properties Held for Sale



When the Company receives properties as profit distribution from a development project and holds them for sale, those properties are stated in the balance
sheet at the lower of cost, which is deemed to be their net realizable value upon receipt, or their net realizable value at the balance sheet date. Net realizable value represents the estimated selling price less costs to be incurred in selling the
properties. However, depending on actual market conditions, the actual net realizable value may differ materially from the amounts stated in the balance sheet.



Project Provisions



The Company establishes project provisions for the settlement of estimated claims that may arise under various contracts due to time delays, additional
costs or other unforeseen contingencies common to major construction projects. The Company capitalizes the project provisions as part of the assets upon completion of the project. The claims provisions are estimated based on an assessment of the
Companys liabilities under each contract. The actual settlement, however, may differ materially from the claims provision.



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Pensions Costs



The determination of the Companys obligation and expense for the defined benefit element of the Companys
retirement scheme is dependent on certain assumptions and factors. These include assumptions about the discount rate, rate of future compensation increases, long-term expected return on plan assets and the actuarial valuation methodology adopted.
See Note 37 of Notes to the Financial Statements. In addition, the Companys actuarial consultants also use factors to estimate items such as expected rates of mortality, turnover and retirement age. The assumptions and factors used by the
Company may differ materially from actual results due to changing market and economic conditions, earlier or later retirement ages or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of
pension obligation or expense recorded by the Company.



Provisions and Contingent Liabilities



The
Company recognizes provisions for liabilities of uncertain timing or amount when the Company has a legal or constructive obligation arising as a result of a past event, and it is probable that an outflow of economic benefits will be required to
settle the obligation and a reliable estimate can be made. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as contingent liability.



Operating Results



The financial statements included in this Annual Report on Form 20-F for the
years ended December 31, 2001, 2002 and 2003 and as of December 31, 2002 and 2003 include the results of the Company and its subsidiaries (the Group).



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



Revenue decreased by 1.2% to HK$7,594 million (US$978 million) in 2003 from
HK$7,686 million in 2002. This decrease was primarily due to a decrease in fare revenue on both the MTR Lines and Airport Express Line, which was partially offset by an increase in station commercial and other revenue.



Total fare revenue decreased by 4.0% to HK$5,489 million (US$707 million) in
2003 from HK$5,720 million in 2002. In particular, fare revenue for the MTR Lines decreased by 2.0% to HK$5,064 million in 2003 from HK$5,167 million in 2002, while fare revenue for the Airport Express Line decreased by 23.1% to HK$425 million from
HK$553 million in 2002. These decreases were principally due to the adverse effect of the SARS outbreak on patronage on both the MTR Lines and the Airport Express Line in the first half of 2003. As a result, patronage on the MTR Lines decreased by
0.9% to 770 million passengers in 2003 from 777 million passengers in 2002, while patronage on the Airport Express Line decreased by 19.0% to 6.8 million passengers in 2003 from 8.5 million passengers in 2002. The decrease in fare revenue was also
due to fare promotions and concessions on the MTR Lines, which resulted in average fares on the MTR Lines decreasing to HK$6.57 in 2003 from HK$6.65 in 2002. In addition, average fares on the Airport Express Line declined to HK$62.07 in 2003 from
HK$65.43 in 2002, primarily due to a higher proportional usage of the Airport Express Line by airport workers who benefit from fare concessions and a significant decrease in tourist arrivals as a result of the SARS outbreak.



Station commercial and other revenue (which includes advertising, kiosk
rental, telecommunication, consultancy and other income) increased by 14.1% to HK$1,117 million (US$144 million) in 2003 from HK$979 million in 2002. This increase was mainly due to an increase in external



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consultancy income, an increase in rental income from new kiosks at the Tseung Kwan O Line and an increase in income from
telecommunication services, which was partially offset by a decline in advertising revenue due to the adverse impact of the SARS outbreak.



Rental and management income increased by 0.1% to HK$988 million (US$127 million) in 2003 from HK$987 million in 2002. This marginal increase was
primarily due to an increase in revenue from property management resulting from an expansion of the managed portfolio, which was largely offset by the temporary rental concessions that the Company granted to certain tenants to mitigate the adverse
effects of the SARS outbreak.



Total operating expenses
increased by 4.8% to HK$3,847 million (US$495 million) in 2003, from HK$3,672 million in 2002, primarily resulting from the first full year of operations of the Tseung Kwan O Line, which commenced operations on August 18, 2002. In addition, expenses
relating to station commercial and other businesses, which include consultancy service expenses, increased by 89.7% due to significant increases in consultancy activities. Other expenses increased by 78%, after the inclusion of a non-recurring HK$69
million (US$9 million) deficit on revaluation of self-occupied properties. However, these increases were partially offset by a 77.5% decrease in expenses related to write-offs for project study and deferred expenditures, a 75.9% decrease in
operational rent and rates due to rate refunds and a 10.1% decrease in costs relating to railway support services.



As a result of the foregoing, operating profit from railway and related operations before depreciation decreased by 6.7% to HK$3,747 million (US$483
million) in 2003 from HK$4,014 million in 2002. The operating margin from railway and related operations (operating profit from railway and related operations before depreciation divided by revenue) decreased to 49.3% in 2003 from 52.2% in 2002.



The Group recognized property development profits of HK$5,369
million (US$692 million) in 2003 compared to HK$3,755 million in 2002. These profits were primarily attributable to profits recognized from sharing in kind resulting from the issuance of the completion certificate with respect to Two International
Finance Centre on July 15, 2003, which led to the recognition of a net profit of approximately HK$3,000 million, as well as profits recognized from deferred income in line with the construction and sales progress on property developments along the
Airport Railway. As a general matter, construction and sales progress for property developments may be affected by, among other factors, the prevailing conditions in the Hong Kong property market and the timing and schedule for completion of
property development projects.



As a result of the foregoing,
total operating profit before depreciation increased by 17.3% to HK$9,116 million (US$1,174 million) in 2003 from HK$7,769 million in 2002.



Depreciation decreased by 2.8% to HK$2,402 million (US$309 million) in 2003 from HK$2,470 million in 2002. This decrease was primarily due to reduced
depreciation charges with respect to certain assets, particularly locomotives, station architectural finishes and power supply systems, the useful lives of which had been extended in the Companys periodic review of the estimated useful life of
its assets conducted in 2003, which more than offset the full year effect of depreciation charges relating to the Tseung Kwan O Line. See Note 7 of the Notes to the Financial Statements.



As a result of the foregoing, total operating profit after depreciation and before interest and finance charges increased by
26.7% to HK$6,714 million (US$865 million) in 2003 compared to HK$5,299 million in 2002.



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Interest and finance charges (net of interest income) increased by 36.8% to HK$1,539 million (US$198
million) in 2003 from HK$1,125 million in 2002. This increase was primarily due to the discontinuation of capitalization of interest with respect to the Tseung Kwan O Line after it commenced operations in August 2002 and a decrease in interest
income, which was partially offset by lower interest rates in 2003, which reduced the average cost of borrowing, as well as lower levels of borrowing related to railway operations. The average interest rate paid on borrowing decreased to 5.1% in
2003 from 5.4% in 2002.



Following the adoption of the revised
accounting standard on income taxes on January 1, 2003, the Company recognized HK$748 million (US$96 million) of income tax in 2003, compared to HK$634 million (as restated) in 2002, most of which was a recognition of deferred tax expenses not
required under the previous accounting standard on income taxes. Accordingly, the adoption of the revised accounting standard on income taxes has reduced the Groups net profit for 2003 and prior years. Of the total amount of deferred tax
expenses recognized in 2003, HK$300 million was due to an increase in the applicable profits tax rate to 17.5% from 16% on the cumulative deferred tax liabilities brought forward following the announcement of the increase in profits tax rates in the
Governments budget in March 2003. See Note 12 of the Notes to the Financial Statements.



No provision for current Hong Kong profits tax has been made, as the Company and its subsidiaries either had substantial accumulated tax losses brought forward which are available for set off against current
years assessable profits or have sustained tax losses as of year end. As of December 31, 2003, the Company had substantial accumulated tax losses carried forward totaling approximately HK$27 billion (US$3 billion) available for set-off against
future assessable profits.



As a result of the foregoing and
after including the Groups share of Octopus Cards Limiteds earnings of HK$23 million (US$3 million), the Group had a profit attributable to shareholders of HK$4,450 million (US$573 million) in 2003, compared to HK$3,579 million (as
restated) in 2002.



The Company paid an interim dividend of
HK$734 million (US$95 million), or HK$0.14 per share, on October 29, 2003. A final dividend for 2003 of HK$1,481 million (US$191 million), or HK$0.28 per share, was approved by the Companys shareholders at the annual general meeting on June 3,
2004. Both the interim dividend and the final dividend include a scrip alternative for shareholders with Hong Kong addresses, which allows such shareholders to receive all or a portion of their dividend in shares as opposed to cash. The Government
has undertaken to elect to receive its entitlement in scrip form in such an amount as to ensure that a maximum of 50% of the total dividend paid by the Company will be in the form of cash. Furthermore, in order for the Company to achieve an
appropriate commercial rate of return on the Disneyland Resort Line, the Government has agreed to provide assistance to the Company through the waiver by The Financial Secretary Incorporated of its entitlement to cash dividends totaling HK$798
million at net present value as of December 31, 2001 starting from the financial year 2002 onwards. Pursuant to this financing arrangement under the Pennys Bay Rail Link Project Agreement (now known as the Disneyland Resort Line), the
Government waived a total of HK$675 million cash dividend declared and payable by the Company to the Government in respect of 2003. See Item 4, Information on the Company  History and Development of the Company  Capital
Expenditures and Divestitures  Disneyland Resort Line.



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001



Revenue increased by 1.2% to HK$7,686 million in 2002 from HK$7,592 million in 2001. This increase was primarily due to an increase of station commercial and other revenue and an increase of rental and management
income, which was partially offset by a decrease in total fare revenue.



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Total fare revenue decreased by 0.1% to HK$5,720 million in 2002 from HK$5,728 million in 2001. This
decrease was principally a result of a decrease in fare revenue from the Airport Express Line, which was partially offset by an increase in fare revenue from the MTR Lines. The increase in fare revenue from the MTR Lines was primarily due to the
commencement of operations of the Tseung Kwan O Line in August 2002, which more than offset the negative effects on patronage arising from deteriorating economic conditions in Hong Kong, competition from other modes of transportation and population
migration from urban areas to the New Territories. The decrease in fare revenue from the Airport Express Line was primarily due to the elimination of the 10% fare discount. In addition, overall air passenger traffic continued to be affected by the
tragic events of September 11, 2001 in the United States and sustained weak economic conditions in Hong Kong.



Station commercial and other revenue (which includes advertising, kiosk rental, telecommunication, consultancy and other income) increased by 0.6% to
HK$979 million in 2002 from HK$973 million in 2001. This increase was mainly due to an increase in revenue from railway consultancy services, an increase in station commercial revenues as floor space increased following the opening of the Tseung
Kwan O Line, the completion of the renovations to increase the range and quality of retail outlets at Central and Kowloon Bay stations and an increase in revenue from the provision of telecommunication services within the MTR network, which together
more than offset a decrease in revenue from advertising.



Rental and management income rose by 10.8% to HK$987 million in 2002 from HK$891 million in 2001, primarily as a result of higher rental income due to renovations at Telford Boulevard and Paradise Mall and the performance of the
Companys shopping centers, which maintained a 100% occupancy rate, and an increase in management income from newly completed Airport Railway properties.



Total operating expenses increased by 3.8% to HK$3,672 million in 2002 from HK$3,539 million in 2001. This resulted principally from the recognition in
2002 of a non-recurring write-off in the amount of HK$218 million relating to project study costs and deferred expenditures for the Shatin to Central Link and the North Island Link together with its related improvement works, which was partially
offset by a 19.1% decrease in expenses relating to railway support services, a 6.1% decrease in expenses relating to station commercial and other business and a 4.1% decrease in staff costs and related expenses.



As a result of the foregoing, operating profit from railway and related
operations before depreciation decreased by 1.0% to HK$4,014 million in 2002 from HK$4,053 million in 2001. The operating margin from railway and related operations (operating profit from railway and related operations before depreciation divided by
revenue) decreased to 52.2% in 2002 from 53.4% in 2001.



The
Group recognized property development profits of HK$3,755 million in 2002 compared to HK$3,248 million in 2001. These profits were primarily attributable to the profit recognition of deferred income and sharing of profits and assets in kind in
respect of certain Airport Railway developments in line with the progress of construction and pre-sales of the relevant development projects.



As a result of the foregoing, total operating profit before depreciation increased by 6.4% to HK$7,769 million in 2002 from HK$7,301 million in 2001.



Depreciation increased by 13.4% to HK$2,470 million in 2002
from HK$2,178 million in 2001. This increase was primarily a result of the commencement of operations of the Tseung Kwan O Line in August 2002. Substantially all of the depreciation charges were attributable to the Groups railway operations.



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As a result of the foregoing, total operating profit after depreciation and before interest and finance
charges increased by 3.4% to HK$5,299 million in 2002 compared to HK$5,123 million in 2001.



Interest and finance charges (net of interest income) increased by 28.7% to HK$1,125 million in 2002 from HK$874 million in 2001. This increase was primarily due to the discontinuation of capitalization of interest
with respect to the TKE upon its completion, which was partially offset by an increase in interest income and lower interest rates in 2002, which reduced the average cost of borrowing, as well as lower levels of borrowings related to railway
operations. The average interest rate paid on borrowing decreased to 5.4% in 2002 from 6.6% in 2001.



Following the adoption of the revised accounting standard on income taxes on January 1, 2003, the Company recognized HK$634 million (as restated) of
income tax in 2002 retrospectively, most of which was the recognition of deferred income tax expenses. See Note 12 of the Notes to the Financial Statements.



No provision for current Hong Kong profits tax has been made, as the Company and its subsidiaries either had substantial accumulated tax losses brought
forward which are available for set off against current years assessable profits or have sustained tax losses as of year end. As of December 31, 2002, the Company had substantial accumulated tax losses carried forward totaling approximately
HK$27 billion available for set-off against future assessable profits.



As a result of the foregoing and after including the Groups share of Octopus Cards Limiteds earnings of HK$39 million, the Group had a profit attributable to shareholders of HK$3,579 million (as restated) in 2002, compared to
HK$4,278 million in 2001.



The Company paid an interim dividend
of HK$717 million, or HK$0.14 per share, on October 29, 2002. A final dividend for 2002 of HK$1,444 million, or HK$0.28 per share, was approved by the Companys shareholders at the annual general meeting on May 15, 2003. Both the interim
dividend and proposed final dividend for 2002 include a scrip alternative for shareholders with Hong Kong addresses, which allows such shareholders to receive all or a portion of their dividend in shares as opposed to cash. Pursuant to the financing
arrangement under the Pennys Bay Rail Link Project Agreement (now known as the Disneyland Resort Line), the Government waived the HK$219 million cash dividend declared and payable by the Company to the Government in respect of 2002. See Item
4, Information on the Company  History and Development of the Company  Capital Expenditures and Divestitures  Disneyland Resort Line.



Inflation and Fares



From 1995 until 1998, the Company increased its scheduled fares roughly in line with inflation. The average annual fare increase from 1979, when the MTR
became operational, until the end of 2003 has been 5.6%, which is approximately equal to the average annual increase in the Consumer Price Index (A) for the same period but lower than the average Hong Kong payroll index increase of 10.1% for the
same period. In light of the unfavorable economic conditions prevailing in Hong Kong during 1998, the Company decided to forgo a fare increase for the Kwun Tong, Tsuen Wan and Island Lines. Due to the continued economic downturn and the general
deflationary environment in Hong Kong, the Company maintained the same general fare throughout 1999, 2000, 2001, 2002 and 2003 for the MTR Lines. In addition, 30% discounted fares for the Airport Express Line were maintained throughout 1999 and the
first half of 2000. Such 30% discount was adjusted to 10% on July 3, 2000 and discontinued entirely on July 1, 2001. The Company also decided to collect HK$0.10 per journey by each passenger using an Octopus card on the MTR commencing July 3, 2000
to contribute towards a portion of the costs of installing platform screen doors in 30 underground stations on the Kwun Tong, Tsuen Wan and Island



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Lines. Due to the continued poor economic environment in Hong Kong, the Company decided not to implement the 2.3% fare
increase, initially planned for April 2002. The Company did not increase fares in 2003. See Item 4, Information on the Company  Business Overview  Railway Operations  Fares.



Liquidity and Capital Resources



The Group has outstanding capital commitments and plans for capital
expenditures to upgrade and replace assets used in connection with the existing MTR network. See  Capital Requirements,  Capital Resources, Item 4, Information on the Company  History and Development
of the Company  Capital Expenditures and Divestitures and Item 4, Information on the Company  Business Overview  Capital Expenditures.



Capital Requirements



As of December 31, 2003, the Group had an aggregate of approximately HK$1.9 billion (US$0.2 billion) in outstanding contracted commitments for capital
expenditures relating to the operations of the current MTR network and the construction of the Disneyland Resort Line and the Tung Chung Cable Car project. See  Capital Resources, Item 4, Information on the Company 
History and Development of the Company  Capital Expenditures and Divestitures and Item 4, Information on the Company  Business Overview  Capital Expenditures.



On July 24, 2002, the Company entered into a project agreement with the
Government relating to the financing, design, construction, operation and maintenance of the Disneyland Resort Line (previously named the Pennys Bay Rail Link). When completed, the Disneyland Resort Line will provide a rail-shuttle service
between the Tung Chung Line at Sunny Bay (previously named Yam O) and the new Hong Kong Disneyland theme park, which is expected to open in 2005 or early 2006. The project involves approximately 2.17 new route miles and two new stations and is
expected to be completed by July 1, 2005 at an estimated cost of approximately HK$2 billion.



The Government has previously acknowledged that the Company will require an appropriate commercial rate of return on its investment in any new railway project, which the Government has previously recognized would
ordinarily be between 1% and 3% above the estimated weighted average cost of capital of the Company, and that financial and other support from the Government may be required with respect to any new railway project. In order to provide assistance in
respect of the Disneyland Resort Line project, the Government agreed to ensure that any claim for or entitlement to (as against the Company) such amount of dividends representing the Governments beneficial entitlement to cash dividends in
respect of the financial year ended December 31, 2002 and thereafter as is equivalent to the funding gap will be waived as against the Company. For this purpose, the funding gap means a net present value amount (as at the end
of 2001) of HK$798 million, calculated using a discount rate of 11.25% (being the expected rate of return on the project), as more particularly defined in the project agreement for the Pennys Bay Rail Link (now known as the Disneyland Resort
Line). Together with the Governments assistance, the rate of return on the Disneyland Resort Line project is expected to be approximately 11.25% per annum. The Government has waived HK$219 million and HK$675 million of its entitlement to cash
dividends declared and payable by the Company to the Government in 2002 and 2003, respectively.



As of December 31, 2003, the Company had awarded all of the civil engineering and electrical and mechanical contracts for the Disneyland Resort Line
project. Rather than purchase new rolling stock for the line, the Company has decided to pursue the more cost-effective route of converting existing trains. Work on the Disneyland Resort Line made substantial progress in 2003. Throughout 2003, all
major civil and electrical and mechanical contracts were either generally on or ahead of schedule for both



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the line itself and the two stations, one at the Disneyland theme park and one at Yam O in North West Lantau, the
interchange for the Tung Chung Line. The Company expects to complete this project and open it for service by July 2005 and within the original budget estimate of HK$2 billion. The Company had cumulative expenditures of HK$285 million as of December
31, 2002 and HK$883 million as of December 31, 2003 on this project, and had authorized outstanding commitments on contracts related to this project totaling HK$446 million as of December 31, 2003. After taking into account the waiver by the
Government of HK$219 million and HK$675 million of its entitlement to cash dividends declared and payable by the Company to the Government in 2002 and 2003, respectively, the net balance of the railway construction in progress relating to this
project was zero as of December 31, 2003.



In July 2002, the
Government awarded to the Company, on a provisional basis, a 30-year franchise to construct and operate a cable car system to link Tung Chung with Ngong Ping, site of the Po Lin Monastery and the statue of Buddha. The approximately 17 minute cable
car ride will rise 400 meters above sea level and offer views over Tung Chung Valley, the Hong Kong International Airport and out to sea as far as the Macau Special Administrative Region. The Tung Chung Cable Car project is budgeted to cost HK$950
million and is expected to commence operations in early 2006. In addition, the total costs of works ancillary to the Tung Chung Cable Car project to be performed by the Company on behalf of the Government under entrustment agreements are
approximately HK$100 million and will be funded by the Government. Following the enactment of the Tung Chung Cable Car Ordinance in June 2003, the Company entered an intensive period of consultation with the Government and other stakeholders. On
November 19, 2003, the Company entered into a formal project agreement with the Government to develop, on a build, operate and transfer basis, the Tung Chung Cable Car system together with a theme village at Ngong Ping under a franchise granted by
the Government for a period of 30 years commencing on December 24, 2003. In November, 2003, the Government signed the entrustment agreements for related works at Ngong Ping that include a landscaped piazza and a public transport interchange,
together with a private treaty grant for a period of 30 years for a theme village adjacent to the Ngong Ping terminal. The environmental permits for the cable car and the stream diversion were also granted in November 2003 and subsequently the
contract for the building and civil engineering works was awarded. Construction commenced in December 2003. The Company had cumulative expenditures of HK$17 million as of December 31, 2002 and HK$137 million as of December 31, 2003 on this project,
which was regarded as deferred expenditure in the consolidated balance sheet, and had authorized outstanding commitments on contracts related to this project totaling HK$495 million as of December 31, 2003.



On January 21, 2003, the Government requested the Company to proceed with the
planning on the first phase of the West Island Line and the South Island Line. The Company commenced a feasibility study of this project in mid-2003 and submitted a project proposal to the Government at the end of March 2004. The project proposal
seeks to achieve a better integration of the West Island Line and the South Island Line with the existing network. Pursuant to the project proposal, the Island Line will be extended from Sheung Wan to a new interchange station at Sai Ying Pun with
the West Island Line, which will run via 5 intermediate stations (University, Kennedy Town, Cyberport, Wah Fu and Aberdeen) to another interchange station with the South Island Line at Wong Chuk Hang. The proposed South Island Line will run from
South Horizons on Ap Lei Chau via Lei Tung to Wong Chuk Hang, then through Ocean Park with a potential station at Happy Valley to interchange stations with the Island Line at Wan Chai and Admiralty.



The maximum aggregate cost for both the West Island Line and South Island
Line is estimated to be approximately HK$16.5 billion at December 2003 prices. The commercial feasibility of this project will require direct funding support from the Government in an amount of approximately HK$7.2 billion. Subject to reaching an
agreement with the Government in 2004, the Company intends to commence



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construction in 2005 and to commence operation of both the West Island Line and the South Island Line in
2009/2010.



In February 2004, the Company submitted a
proposal for an extension of the Kwun Tong Line from Yau Ma Tei Station to Whampoa, as requested by the Government in November 2003.



On January 15, 2004, the Company and the Shenzhen Municipal Peoples Government entered into an agreement in principle in relation to the
construction of Phase 2 of Line 4 of the proposed Shenzhen metro system and the operation of Line 4 for a term of 30 years. This agreement sets out the principles upon which the Company and the Shenzhen Municipal Peoples Government will
negotiate an authorized operating agreement, which is subject to approval by the National Development and Reform Commission of the PRC. The entire Line 4 is expected to be operational by the end of 2008. The total investment for this project is
expected to be approximately Renminbi 6 billion (equivalent to HK$5.6 billion at an assumed exchange rate of HK$0.938 to Renminbi 1.00 as of December 31, 2003) with the most significant capital expenditures expected to be incurred after 2005.
Approximately 40% of the total project investment will be funded through an equity investment by the Company in the project company, which will have a registered capital of approximately Renminbi 2.4 billion (equivalent to HK$2.3 billion at an
assumed exchange rate of HK$0.938 to Renminbi 1.00 as of December 31, 2003), and the balance of the project costs is expected to be funded through non-recourse project financing in Renminbi.



On April 19, 2004, the Company, and two entities wholly owned by the Beijing
Municipal Peoples Government, Beijing Infrastructure Investment Co. Ltd. and Beijing Capital Group, entered into a memorandum of understanding in relation to the formation of a joint venture in the form of a public-private partnership for the
construction and operation of the proposed Beijing Metro Line 4. The Beijing Metro Line 4 is expected to open for services before the 2008 Olympic Games commence. The total investment for the Beijing Metro Line 4 project is expected to be about
Renminbi 16 billion (equivalent to HK$15 billion at an assumed exchange rate of HK$0.938 to Renminbi 1.00 as of December 31, 2003). Under the contemplated public-private partnership structure, subject to further assessment of the project and
negotiation of the terms of the final agreement, the Companys share of the investment in the project is expected not to exceed Renminbi 2.4 billion (equivalent to HK$2.3 billion at an assumed exchange rate of HK$0.938 to Renminbi 1.00 as of
December 31, 2003).



Taking into account the Disneyland Resort
Line and Tung Chung Cable Car projects, the Companys capital expenditure program for the three years between 2004 and 2006 is estimated to total HK$7.4 billion.



The Group has entered into certain forward foreign exchange contracts with respect to the majority of foreign currency
obligations under past and currently outstanding construction contracts, and expects to enter into additional forward foreign exchange contracts with respect to such obligations on future construction contracts if such contracts are available on
commercially reasonable terms.



The Groups outstanding
indebtedness, as of December 31, 2003, was HK$32,025 million (US$4,125 million). For the year ended December 31, 2003, the Groups principal repayments of outstanding indebtedness amounted to approximately HK$8,906 million (US$1,147 million).
Principal repayment obligations with respect to indebtedness outstanding as of December 31, 2003 in each year through 2007 and thereafter are set forth below:



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|                                                        |  |               |       |      |     |       |  |      |       |            |     |     |  |     |       
|------------------------------------------------------- |  | ------------- | ----- | ---- | --- | ----- |  | ---- | ----- | ---------- | --- | --- |  | --- | ------
|                                                        |  | 2004          |       | 2005 |     | 2006  |  | 2007 |       | Thereafter
|                                                        |  | (in millions)
|Principal repayment obligations as of December 31, 2003 |  | HK$           | 4,815 |      | HK$ | 4,512 |  | HK$  | 5,654 |            | HK$ | 214 |  | HK$ | 16,830



Capital Resources



In order to meet the Groups future capital
requirements, including those for which outstanding commitments have been made, the Group expects to rely principally upon funds provided by operations, profits from property developments and debt financing.



Operations. The Group expects to obtain a portion of its capital
requirements from funds provided by operations. In 2003, operating profit after depreciation (including property development profits) before interest and finance charges were HK$6,714 million. The amount of funds provided by operations in the future
will depend upon the Groups operating profit before depreciation and changes in the major components of working capital, including debtors, creditors, accrued expenses and provisions and losses on asset dispositions. See 
Overview.



Property Developments. The Group may
obtain a portion of its capital requirements from funds provided by its property development activities, including upfront payments from property developers and profit distributions from the sale of developed properties. The amount of funds provided
by its property development activities will be heavily dependent upon the prevailing conditions in the Hong Kong property market and the timing and schedule for the completion of property development projects. Property development profits recognized
in 2003 totaled HK$5,369 million. These profits were primarily attributable to profits recognized from sharing in kind in respect of Two International Finance Centre and the Phase Two of the Sorrento development at Union Square, as well as profits
recognized from deferred income in line with the construction and sales progress on property developments along the Airport Railway.



Debt Financing. The Group also expects to fund a portion of its capital requirements through debt financing. The amount of indebtedness that the
Group will incur will depend upon the actual cost of its capital programs, the results of its existing operations, factors affecting its interest expense, initiation of new capital investment programs and other factors. In view of the anticipated
debt financings by the Group in connection with the Disneyland Resort Line, the Tung Chung Cable Car new projects, including part of the equity investment in the Shenzhen Line 4, and capital expenditures for the existing MTR system, the Group may
incur certain indebtedness in advance of when proceeds will be required, in order to facilitate a more orderly and cost effective capital raising program. The Group would use the proceeds of any such indebtedness to purchase investments which would
be liquidated as funds are required. Such investments would be substantially limited to short-term bank deposits, high quality corporate instruments and government debt instruments, primarily denominated in Hong Kong Dollars.



As part of its financing program, the Group raised approximately HK$3.1
billion in 2003 through a series of long-term notes issued under its debt issuance program, comprising HK$150 million notes with a coupon rate of 4.106%, which will mature in 2010, HK$102 million notes with zero coupon rate, which will mature in
2012, notes equivalent to approximately HK$2,130 million with coupon rates ranging from 4.5% to 5.25%, which will mature in 2013, and HK$750 million notes with coupon rates ranging from 4.9% to 5.8%, which will mature in 2018.



In addition, the Group entered into a number of new loan facilities totaling
HK$5.2 billion with maturities of 5 to 7 years during 2003 and first quarter of 2004.



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The Groups ability to raise funds through debt financings in the amounts required will depend upon
its financial condition and results of operations, its credit rating, economic and political conditions, the liquidity of Hong Kong and international capital markets and other factors. An increase in interest rates or future adverse economic
developments in Hong Kong could have an adverse effect on the Groups borrowing costs, financial condition and results of operations.



Cross-Border Leasing Transaction. In March 2003, the Company and one of its subsidiaries entered into a cross-border lease out/lease back
transaction (the Leasing Transaction) with certain institutional investors with respect to certain of its passengers cars with a total original cost of HK$2,562 million and a total net book value of HK$1,674 million as of March 31, 2003.
Subject to certain events of default under the Leasing Transaction, the Group retains legal title to these assets, and there are no restrictions on the Groups ability to utilize these assets in the operation of the railway business. As a
result of the Leasing Transaction, the Group received total cash of approximately HK$3,688 million and committed to making long-term lease payments with an estimated net present value of approximately HK$3,533 million, which will be made from
special-purpose accounts established by the Group. The resulting net cash amount of HK$141 million, after deducting relevant expenses incurred by the Group in connection with the Leasing Transaction, has been recorded as deferred income and is being
amortized to the Groups profit and loss account over the relevant lease terms. See Note 14G and Note 32 to the Financial Statements for further details.



Liquidity



The Groups liquidity is dependent upon its results of operations as well as the factors discussed under  Capital Requirements and
 Capital Resources above. In addition, the Groups liquidity is subject to a variety of other factors, including those relating to interest rates and rates of currency exchange discussed below.



In 2003, the Group had interest and finance charges (net of interest income
and amounts capitalized) of HK$1,539 million (US$198 million.) The increase of HK$414 million in 2003 was primarily attributable to the discontinuation of capitalization of interest with respect to the Tseung Kwan O Line after it commenced
operations in August 2002 and a decrease in interest income, which was partially offset by lower interest rates in 2003, which reduced the average cost of borrowing, as well as lower levels of borrowing related to railway operations. The weighted
average interest cost on outstanding indebtedness (excluding obligations under finance leases) for 2003 was 5.1%. As of December 31, 2003, HK$19,358 million (US$2,493 million), or 61%, of the Groups outstanding debt (excluding obligations
under finance leases) bore interest at fixed rates or bore interest at floating rates, but was covered by interest rate swap agreements which fixed the interest cost to the Group. The remaining HK$12,162 million (US$1,566 million), or 39%, of the
Groups outstanding debt (excluding obligations under finance leases) bore interest at floating rates.



All outstanding long-term debt is unsecured, with maturities ranging from 2004 to 2018, and a significant portion of such debt will mature in the years
2004, 2005, 2006, 2009 and 2010.



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The following table sets forth the maturity of the Groups notes, long-term and short term bank
loans and bank overdrafts outstanding as of December 31, 2003:



|                           |  |               |        |                 |     |                                      |  |    
|-------------------------- |  | ------------- | ------ | --------------- | --- | ------------------------------------ |  | ---
|                           |  | Notes         |        | Long-term loans |     | Short-term loans and bank overdrafts
|                           |  | (in millions)
|During 2004                |  | HK$           | 4,265  |                 | HK$ | 73                                   |  | 365
|During 2005                |  | HK$           | 4,318  |                 | HK$ | 73                                   |  |   
|During 2006                |  | HK$           | 2,450  |                 | HK$ | 3,073                                |  |   
|During 2007                |  | HK$           |       |                 | HK$ | 73                                   |  |   
|During 2008 and thereafter |  | HK$           | 14,576 |                 | HK$ | 2,254                                |  |   



The following table
sets forth information on the Groups material contractually obligated payments for the periods indicated as of December 31, 2003:



|                                                    |  |                        |        |                  |     |           |  |           |        |                   |     |       |  |     |       
|--------------------------------------------------- |  | ---------------------- | ------ | ---------------- | --- | --------- |  | --------- | ------ | ----------------- | --- | ----- |  | --- | ------
|                                                    |  | Payments Due by Period
|Contractual Obligations                             |  | Total                  |        | Less than 1 Year |     | 1-3 Years |  | 4-5 Years |        | More than 5 Years
|                                                    |  | (in millions)         
|Long-term debt                                      |  | HK$                    | 31,155 |                  | HK$ | 4,338     |  | HK$       | 9,914  |                   | HK$ | 2,645 |  | HK$ | 14,258
|Financial lease obligations                         |  |                        | 505    |                  |     | 112       |  |           | 252    |                   |     | 141   |  |     |      
|Capital lease obligations(1)                        |  |                        | 3,698  |                  |     | 2         |  |           | 2      |                   |     | 49    |  |     | 3,645 
|Operating leases                                    |  |                        | 7      |                  |     | 6         |  |           | 1      |                   |     |      |  |     |      
|Equipment or other purchase obligations             |  |                        | 498    |                  |     | 498       |  |           |       |                   |     |      |  |     |      
|Construction works and assets under construction(2) |  |                        | 1,405  |                  |     | 1,405     |  |           |       |                   |     |      |  |     |      
|                                                    |  |                        |        |                  |     |           |  |           |        |                   |     |       |  |     |       
|Total contractual cash obligations                  |  | HK$                    | 37,268 |                  | HK$ | 6,361     |  | HK$       | 10,169 |                   | HK$ | 2,835 |  | HK$ | 17,903
|                                                    |  |                        |        |                  |     |           |  |           |        |                   |     |       |  |     |       

---

|(1) |  | Capital lease obligations represent all the lease payment commitments in respect of the lease-out and lease-back transaction which do not meet the definition of a liability and are
not recognized as obligations on the balance sheet under Hong Kong GAAP. See Note 14(G) of Notes to the Financial Statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Settlement of construction works and assets under construction may exceed one year as payment of which is dependent on the actual progress of each contract.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



The loan agreements, credit facilities and
guaranty agreements for the obligations of our subsidiaries do not contain any financial covenants. In addition, any downgrade in our ratings will not trigger any events of default on our existing debt, although our cost of financing may increase as
a result. Other covenants could be triggered if the Government ceases to own more than half in nominal value of our voting shares.



The Group anticipates that a portion of its future borrowings will bear interest at floating rates. Changes in prevailing market rates of interest may
therefore affect the Groups liquidity. As a result of borrowings to finance the Disneyland Resort Line, the Tung Chung Cable Car, as well as capital expenditures on the existing system and other capital requirements, the Groups interest
and finance charges will increase in the future. An increase in interest rates or higher volatility in currency exchange rates between the Hong Kong Dollar and other currencies may increase the Groups borrowing costs and therefore adversely
affect its results of operations. The Group will continue to monitor closely the interest rate environment and the foreign exchange market. The Groups policy is to limit its exposure to interest rate and currency fluctuations through the use
of fixed rate instruments, the swapping of foreign currency obligations into Hong Kong Dollars or US Dollars and the hedging of floating rate instruments at fixed rates. The amount of the Groups interest and finance charges will depend upon,
among other factors, the impact on market conditions of substantial borrowings by the Group and other Hong Kong entities.



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Historically, the Group has borrowed in various capital markets and in various currencies, including Hong
Kong Dollars, Japanese Yen, US Dollars, British Pounds Sterling, ECUs, Euros (and, prior to the introduction of the Euro, also Deutsche Marks and French Francs) and Swedish Kronor. The Group generally enters into currency swaps to swap into Hong
Kong Dollars or US Dollars all non-Hong Kong Dollar borrowings, except for a portion of its US Dollar borrowings.



The Group seeks to reduce foreign exchange exposure relating to debt obligations and capital expenditures by entering into currency swaps and foreign
exchange transactions in order to denominate such obligations in either US Dollars or Hong Kong Dollars (the exchange rate of which is tied to the US Dollar by the official Government peg of the two currencies). The Groups use of
derivative instruments is substantially limited to such purposes and for the management of interest rate exposure through the use of interest rate swaps.



As of December 31, 2003, the Group had available undrawn committed and uncommitted credit facilities totaling HK$19,428 million (US$2,502 million),
including a debt issuance program, bank loans and other credit facilities, of which undrawn committed facilities totaled HK$6,700 million (US$863 million). The Group believes that the funds available through these credit facilities, together with
its available cash, cash to be generated from operations and the net proceeds from the issuance of US$600 million in bonds in January 2004 and a new loan facility in an amount of HK$500 million in the first quarter of 2004 will be sufficient to meet
its projected financing needs up to the end of the third quarter of 2005.



Net cash inflow from operating activities was HK$3,837 million (US$494 million) in 2003, compared to HK$4,228 million in 2002 and HK$4,155 million in 2001. The decrease in 2003 compared to 2002 was primarily due to
lower fare revenue and higher operating expenses, partially offset by higher station commercial and other revenue. The increase in 2002 compared to 2001 was primarily due to higher revenue from rental and management income, external consultancy
services and higher property development profits, partially offset by higher operating expenses.



Net cash outflow from investing activities was HK$1,795 million (US$231 million) in 2003 compared to HK$2,354 million in 2002 and HK$5,728 million in
2001. The decrease in 2003 was mainly the result of a decrease in capital expenditures relating to the TKE and the purchase of assets and other capital projects and an increase of proceeds from properties sold, which was partially offset by a
decrease in receipts from property developers and by a decrease in repayments to the Company under its staff housing loan scheme. The decrease in 2002 compared to 2001 was primarily due to a decrease in capital expenditures relating to the TKE and
an increase in receipts from property developers.



Net cash
outflow from financing was HK$3,362 million (US$433 million) in 2003 compared to net cash outflows of HK$356 million in 2002 and net cash inflows of HK$1,609 million in 2001. The increase in net cash outflow in 2003 compared to 2002 was primarily
due to an increase in the repayment of loans, which was partially offset by an increase in the drawdown of loans and a decrease in dividends paid. The net cash outflow in 2002 compared to net cash inflow in 2001 was primarily due to reduced loan
drawdowns, less repayments of outstanding loans and increased dividend payments.



As of December 31, 2003, the Group had no material off-balance sheet financing arrangements and no outstanding OTC commodity contracts. The Group has, however, employed derivative instruments, such as interest rate
swaps and currency swaps, to manage interest rate and foreign exchange exposures. These instruments are used solely to reduce or eliminate the financial risks associated with liabilities and not for trading or speculation purposes. See Item 11,
Quantitative and Qualitative Disclosure about Market Risk.



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##### Table of Contents

US GAAP Reconciliation



The Groups financial statements are prepared in accordance with Hong Kong GAAP, which differ in certain significant
respects from US GAAP. The following table sets forth a summarized comparison of the Groups profit (equivalent to net income under US GAAP) and shareholders funds (equivalent to shareholders equity under US
GAAP) in accordance with Hong Kong GAAP and US GAAP.



|                                         |  |                                          |        |         |     |        |  |      |        |  |     |      
|---------------------------------------- |  | ---------------------------------------- | ------ | ------- | --- | ------ |  | ---- | ------ |  | --- | -----
|                                         |  | For the Year Ended or as of December 31,
|                                         |  | 2001                                     |        | 2002(1) |     | 2003   |  | 2003
|                                         |  | (in millions)                           
|Net income in accordance with:           |  |                                          |        |         |     |        |  |      |        |  |     |      
|                                         |  |                                          |        |        
|Hong Kong GAAP                           |  | HK$                                      | 4,278  |         | HK$ | 3,579  |  | HK$  | 4,450  |  | US$ | 573  
|US GAAP                                  |  | HK$                                      | 4,468  |         | HK$ | 3,261  |  | HK$  | 1,369  |  | US$ | 176  
|Shareholders equity in accordance with: |  |                                          |        |         |     |        |  |      |        |  |     |      
|                                         |  |                                          |        |        
|Hong Kong GAAP                           |  | HK$                                      | 53,893 |         | HK$ | 53,574 |  | HK$  | 57,292 |  | US$ | 7,379
|US GAAP                                  |  | HK$                                      | 44,870 |         | HK$ | 46,942 |  | HK$  | 47,534 |  | US$ | 6,122

---

|(1) |  | With the adoption of revised SSAP 12, Income Taxes, issued by the Hong Kong Society of Accountants, which became effective on January 1, 2003, a restatement of the 2002
financial data was necessary. See Note 43A of Notes to the Financial Statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See Note 47 of Notes to the Financial Statements for a discussion of the significant differences between Hong Kong GAAP and US GAAP as they relate to the Group.



Item 6. Directors, Senior Management and Employees.



Directors and Senior Management



General



The overall management of the
Companys business is vested in the Board of Directors (the Board). Pursuant to the Articles of Association of the Company (the Articles) and the Protocol adopted by the Board, the Board has delegated the day-to-day
management of the Companys business to the Executive Directorate. However, the Board has reserved to itself certain powers such as the approval of the Companys financial statements, dividend policy, significant changes in accounting
policy, its annual operating budget, certain material contracts, strategies for future growth, major financing arrangements and major investments, risk management strategy, treasury policies and fare structures.



The Board currently comprises 11 members, consisting of one executive and ten
non-executive Directors, of which six are independent non-executive Directors. The Articles provide that the number of Directors constituting the Board shall not be less than two and there is no maximum number prescribed. The shareholders can change
these requirements by passing an ordinary resolution at a general meeting.



A person may be appointed as a Director at any time by the shareholders in a general meeting or by the Board upon the recommendation of the nominations committee. Directors who are appointed by the Board must retire
at the conclusion of the first annual general meeting after their appointment. In either case, the Directors so appointed are eligible for re-election. At the annual general meeting of the Company, at least one-third of the Directors are required to
retire from office by rotation.



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Control of the Board of Directors



For as long as The Financial Secretary Incorporated on behalf of the Government is the beneficial owner of the majority of
the issued shares of the Company (the Government Shares), it will be able to cast its votes to appoint persons to the Board on its own. In addition, no other shareholder, or shareholders together, will be able to appoint persons to the
Board unless the Government fails to vote the Government Shares against the appointment of such persons.



The Chief Executive of the Hong Kong SAR may, pursuant to section 8 of the MTR Ordinance, appoint up to three persons as additional directors.
Directors appointed in this way may not be removed from office except by the Chief Executive of the Hong Kong SAR. These Directors are not subject to any requirement to retire by rotation nor will they be counted in the calculation of the number of
Directors who must retire by rotation. In all other respects, additional directors are treated for all purposes in the same way as other Directors. With effect from June 30, 2000, the Chief Executive of the Hong Kong SAR appointed the
office of the Secretary for Transport and the office of the Commissioner for Transport as additional directors pursuant to section 8 of the MTR Ordinance. With effect from July 1, 2002, the office of the Secretary for Transport was
replaced by the office of the Secretary for the Environment, Transport and Works. In the event of any transaction, arrangement or other kind of proposal being considered by the Board in which any additional director has a material interest,
including a material interest that arises as a result of the Government office which he holds, such additional director shall abstain from voting at the relevant meeting of the Board in accordance with the provisions of the Articles which shall
apply to all Directors.



Under the Articles, so long as the
Government controls 50% or more of the voting power of the Company, it will be able to appoint and remove the Chairman of the Company. The Government exercised this power in appointing Dr. Raymond K.F. Chien for the new position of
Non-Executive Chairman in 2003.



In addition, under the
Articles, so long as the Government controls 50% or more of the voting power of the Company, it has the right to appoint and remove any non-executive Director as a member of each of the audit committee, nominations committee and remuneration
committee.



Board of Directors



|                           |  |     |  |                                   
|-------------------------- |  | --- |  | ----------------------------------
|Members of the Board       |  | Age |  | Position                          
|Dr. Raymond K.F. Chien(1) |  | 52  |  | Non-Executive Chairman            
|                           |  |    
|C.K. Chow(2)               |  | 53  |  | Chief Executive Officer           
|                           |  |    
|Professor Yau-Kai Cheung   |  | 69  |  | Independent non-executive Director
|                           |  |    
|David G. Eldon             |  | 58  |  | Independent non-executive Director
|                           |  |    
|Edward S.T. Ho             |  | 65  |  | Independent non-executive Director
|                           |  |    
|Chung-Hing Lo              |  | 52  |  | Independent non-executive Director
|                           |  |    
|T. Brian Stevenson         |  | 59  |  | Independent non-executive Director
|                           |  |    
|Christine M.S. Fang(3)     |  | 45  |  | Independent non-executive Director



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|                                                                       |  |     |  |                                                                                                
|---------------------------------------------------------------------- |  | --- |  | -----------------------------------------------------------------------------------------------
|Members of the Board                                                   |  | Age |  | Position                                                                                       
|Secretary for the Environment, Transport and Works,Dr. Sarah S.T. Liao |  | 52  |  | Non-executive Director and additional director appointed under section 8 of the MTR Ordinance
|                                                                       |  |    
|Commissioner for Transport,Robert Charles Law Footman                  |  | 51  |  | Non-executive Director and additional director appointed under section 8 of the MTR Ordinance
|                                                                       |  |    
|Frederick S.H. Ma                                                      |  | 52  |  | Non-executive Director                                                                         

---

|(1) |  | Mr. Jack C.K. Sos contract as Chairman and Chief Executive expired on July 20, 2003, and the Government appointed Dr. Raymond K.F. Chien for the new position of
Non-Executive Chairman with effect from July 21, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Mr. Jack C.K. Sos contract as Chairman and Chief Executive expired on July 20, 2003, and Mr. Philip Gaffney, then Operations Director of the Company, was appointed the Acting
Chief Executive Officer with effect from July 21, 2003. With effect from December 1, 2003, the Company appointed Mr. C.K. Chow as Chief Executive Officer.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Ms. Fang was appointed as independent non-executive Director with effect from January 1, 2004.
|--- |  | ----------------------------------------------------------------------------------------------



In 2003, the Board decided that the position of Chairman and Chief Executive would be split into the positions of
Non-Executive Chairman and Chief Executive Officer upon the expiration of Mr. Jack C.K. Sos contract as Chairman and Chief Executive. Upon the expiration of Mr. Jack C.K. Sos contract as Chairman and Chief Executive on July 20, 2003, Dr.
Raymond K.F. Chien was appointed as Non-Executive Chairman and Mr. Philip Gaffney, then Operations Director of the Company, became Acting Chief Executive Officer. Mr. C.K. Chow was appointed as Chief Executive Officer with effect from December
1, 2003.



Non-Executive Chairman



Dr. Raymond K.F. Chien is the Non-Executive Chairman of the
Board of Directors. He has been a member of the Board since 1998. Dr. Chien is executive chairman of chinadotcom corporation and chairman of its subsidiary, hongkong.com Corporation. He is also non-executive chairman of HSBC Private Equity
(Asia) Limited. Dr. Chien is a director of Inchcape plc, HSBC Holdings plc, The Hongkong and Shanghai Banking Corporation Limited, Convenience Retail Asia Limited, VTech Holdings Limited and The Wharf (Holdings) Limited. He also serves as
chairman of the Hong Kong/Japan Business Cooperation Committee and the Advisory Committee on Corruption of the Independent Commission Against Corruption. In addition, Dr. Chien is the honorary president and past chairman of the Federation of
Hong Kong Industries. He is also President of the Hong Chi Association, Hong Kongs leading non-government organization helping mentally handicapped persons. From 1992 to 1997, Dr. Chien was a member of the Executive Council of Hong Kong,
then under British Administration. He was appointed a member of the Executive Council of the Hong Kong SAR on July 1, 1997 and served until June 2002. Dr. Chien received a doctoral degree in economics from the University of Pennsylvania in
1978. He was appointed Justice of the Peace in 1993. He was made a Commander in the Most Excellent Order of the British Empire in 1994 and awarded the Gold Bauhinia Star medal in 1999.



Chief Executive Officer



C.K. Chow is the Chief Executive Officer of the Company since
December 1, 2003. Prior to joining the Company, Mr. Chow was chief executive officer of Brambles Industries PLC, a global support services company with dual listings in the United Kingdom and Australia. From 1997 to 2001, Mr. Chow was chief
executive of GKN PLC, a leading engineering company based in the United Kingdom. Mr. Chow is a chartered engineer with a master of science degree in chemical engineering from the University of California. He holds a master of business administration
degree from the Chinese



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University of Hong Kong and was a graduate of the Advanced Management Program of Harvard Business School. He was knighted
in the United Kingdom in 2000 for contribution to industry. Mr. Chow is a member of the Hong Kong Tourism Board and a non-executive director of Standard Chartered PLC.



Non-Executive Directors



Professor Yau-Kai Cheung is a non-executive Director and has been a member of the Board since 1999. Professor Cheung is Honorary Professor of
Engineering and Special Adviser to Vice-Chancellor of the University of Hong Kong. He was Taikoo Professor of Engineering and Acting Deputy Vice-Chancellor of the University of Hong Kong until June 30, 2000. Professor Cheung began his academic
research career at the University College of Swansea, Wales. He was appointed Professor of Civil Engineering at Calgary in 1970 and moved to the University of Adelaide in 1974 as Professor and Chairman of the Department of Civil Engineering. In
1977, he took up the Chair and Headship of the Department of Civil Engineering in the University of Hong Kong. In addition to his academic appointments, Professor Cheung has served as first Senior Vice-President of the Hong Kong Institution of
Engineers and was the Chairman of its Accreditation Board for five years. Professor Cheung has been awarded several honorary degrees at educational institutions, including, an honorary Doctor of Science by the University of Hong Kong and an honorary
Doctor of Laws by the University of Wales. He has also been elected a member of the Chinese Academy of Sciences, and is a fellow of the Royal Academy of Engineering, a fellow of the Royal Society of Canada and President of the Hong Kong Academy of
Engineering Sciences.



David G. Eldon is a
non-executive Director and has been a member of the Board since 1999. He is chairman of The Hongkong and Shanghai Banking Corporation Limited and a director of HSBC Holdings plc, non-executive chairman of Hang Seng Bank Limited, a director of HSBC
Bank Australia Limited and a director of Swire Pacific Limited. Mr. Eldon began his banking career in London in 1964 and joined HSBC Bank Middle East (formerly The British Bank of the Middle East), a principal member of the HSBC Group, in 1968. He
served in many positions at companies in the HSBC Group before being made an executive director of The Hongkong and Shanghai Banking Corporation Limited in 1994. He became chief executive officer in 1996 and chairman in 1999. Mr. Eldon is an
associate of the Chartered Institute of Bankers and a fellow of the Hong Kong Institute of Bankers. In addition, Mr. Eldon is Deputy Chairman of the Hong Kong General Chamber of Commerce, a member of the Exchange Fund Advisory Committee, a Steward
of the Hong Kong Jockey Club, Executive Committee Chairman of The Community Chest of Hong Kong, a member of the Hong Kong Trade Development Council, and President of the Society for the Relief of Disabled Children. Mr. Eldon is also a Justice of the
Peace.



Edward S.T. Ho is a non-executive
Director and has been a member of the Board since 1991. He is an architect and is deputy chairman and managing director of Wong Tung & Partners Limited. Mr. Ho was an elected member of the Legislative Council of Hong Kong from 1991 to 2000,
representing the architectural, surveying and planning functional constituency. He was president of the Hong Kong Institute of Architects in 1983 and 1984 and was chairman of the Hong Kong Industrial Estates Corporation from 1992 to 2001. Mr. Ho
also serves on a number of statutory boards and advisory committees including the Board of Hong Kong Hospital Authority, General Committee of the Hong Kong Philharmonic Society Ltd., the Board of Trustees of the Lord Wilson Heritage Trust. Mr. Ho is
also Chairman of the Antiquities Advisory Board.



Chung-Hing Lo is a non-executive Director and has been a member of the Board since 1995. He became general manager of Bank of China (Hong Kong) Limited after the restructuring of the Bank of China Group in October 2001. Mr. Lo began
his banking career in 1969 and he served in several positions within the Bank of China Group before being appointed to his present post. He is also a board member of the Hospital Authority and a director of the Urban Renewal Authority. He was
appointed as a board



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##### Table of Contents

member of the Provisional Airport Authority in 1994 and served as vice chairman of the Airport Authority from April 1996
to May 1999. He was awarded the Silver Bauhinia Star medal in 1998.



T. Brian Stevenson is a non-executive Director and has been a member of the Board since October 2002. He is a chartered accountant. He served on the Council of the Hong Kong Society of Accountants from 1991 to
1997 and was President of the Society in 1996. Mr. Stevenson is currently a non-executive director of The Hongkong and Shanghai Banking Corporation Limited and the Securities and Futures Commission of Hong Kong. Mr. Stevenson is also a member of the
Public Service Commission and a Steward of the Hong Kong Jockey Club.



Christine M.S. Fang is a non-executive Director and has been a member of the Board since January 2004. Ms. Fang has been the Chief Executive of the Hong Kong Council of Social Service since 2001. Prior to
joining the Hong Kong Council of Social Service, she worked for the Hong Kong Red Cross from 1989 to 2001 and held the position of Secretary General from 1993 to 2001. By training, Ms. Fang is a social worker and has a strong background in community
service. She sits on various government advisory committees, including the Social Welfare Advisory Committee, the Rehabilitation Advisory Committee, the Community Investment & Inclusion Fund Committee, the Manpower Development Committee, the
Hong Kong Housing Authority, the Sustainable Development Council, and the Advisory Council on AIDS.



Secretary for the Environment, Transport and Worksis a non-executive Director appointed as an additional director under section 8 of
the MTR Ordinance. With effect from July 1, 2002, the office of the Secretary for the Environment, Transport and Works has replaced the Secretary for Transport. Dr. Sarah S.T. Liao is currently serving as the Secretary for the Environment, Transport
and Works. Dr. Liao has been a fellow of the Royal Society of Chemistry since 1995 and of the Hong Kong Institution of Engineers since 1996.



Commissioner for Transport is a non-executive Director appointed as an additional director under section 8 of the MTR Ordinance with
effect from June 30, 2000. Mr. Robert C.L. Footman is the current Commissioner for Transport. Mr. Footman came to Hong Kong and joined the civil service in 1974. He was appointed as Commissioner for Transport in 1998, prior to which he had held the
post of Postmaster General since 1995. Previous government posts held by Mr. Footman include the Head of the Efficiency Unit from its establishment in 1992 until 1995 and Deputy Director in the Trade Department from 1989 to 1992. As Commissioner for
Transport, Mr. Footman is also a director of several transport-related companies, including KMB, Long Win Bus, New World First Bus, New Lantao Bus, Citybus, The Star Ferry Company Limited, The New Hong Kong Tunnel Company Limited, Western Harbour
Tunnel Company Limited, Tates Cairn Tunnel Company Limited and Route 3 (CPS) Company Limited.



Frederick S.H. Ma is a non-executive Director and has been a member of the Board since July 1, 2002 upon his appointment as Secretary for Financial
Services and the Treasury of the Government. Before assuming that post, Mr. Ma was an executive director and member of the Executive Committee of Pacific Century Cyberworks Limited since 2001. In May 2002, Mr. Ma was appointed Group Chief Financial
Officer of that company. Mr. Ma has more than 20 years experience in the global financial services industry. He has served in key posts in J.P. Morgan Private Bank, Chase Manhattan Bank, Kumagai Gumi (Hong Kong) Limited and RBC Dominion
Securities Limited. He worked in New York, Toronto and London for nearly 10 years.



There are no family relationships between any of the persons named above.



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Executive Directorate



The members of the Executive Directorate are senior full time employees of the Company. The table below shows certain information relating
to them:



|                   |  |     |  |                                                        
|------------------ |  | --- |  | -------------------------------------------------------
|Name               |  | Age |  | Position                                               
|C.K. Chow(1)       |  | 53  |  | Chief Executive Officer                                
|                   |  |    
|Russell J. Black   |  | 57  |  | Project Director                                       
|                   |  |    
|William F.K. Chan  |  | 55  |  | Human Resources Director                               
|                   |  |    
|Philip Gaffney     |  | 56  |  | Managing Director  Operations and Business Development
|                   |  |    
|Thomas H.K. Ho     |  | 53  |  | Property Director                                      
|                   |  |    
|Lincoln K.K. Leong |  | 43  |  | Finance Director                                       
|                   |  |    
|Leonard B. Turk    |  | 54  |  | Legal Director and Secretary                           

---

|(1) |  | Mr. Jack C.K. Sos contract as Chairman and Chief Executive expired on July 20, 2003, and Mr. Philip Gaffney, then Operations Director of the Company, was appointed the Acting
Chief Executive Officer with effect from July 21, 2003. With effect from December 1, 2003, the Company appointed Mr. C.K. Chow as Chief Executive Officer.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



C.K. Chow. Details relating to Mr. Chow are set forth under  Board of Directors above.



Russell J. Black is the Project Director of the Company, appointed
to that post in 1992. He is responsible for the planning and implementation of all major extension projects, including the Airport Railway project, the QBR, the TKE, the Disneyland Resort Line and the Tung Chung Cable Car. He is also responsible for
undertaking feasibility studies into possible new extensions to the railway, including the South Island Line and the West Island Line. Mr. Black initially worked for the Company on the construction of the MTR from 1976 to 1984. Prior to rejoining
the Company in 1992, Mr. Black was the project director for London Undergrounds Jubilee Line Extension project from 1990 to 1992 and, before that, he worked on Singapores underground railway and on the Eastern Harbour Crossing. Mr. Black
holds an honours degree in civil engineering, and is a fellow of the Hong Kong Institution of Engineers, the Institution of Professional Engineers, New Zealand and the Hong Kong Academy of Engineering Science. He served on the Vocational Training
Council from 1998 to 2002 and currently serves on the Provisional Construction Industry Coordination Board. Mr. Black was awarded the Bronze Bauhinia Star medal in 1999.



William F.K. Chan is the Human Resources Director of the Company, responsible for human resource management,
operational and management training, administration and security management. He joined the Company in 1989 as Human Resources Manager. He joined the Executive Directorate of the Company in 1996 and became Human Resources Director in 1998. Prior to
joining the Company, Mr. Chan held senior managerial positions both in the commerce and in the utility sectors in Hong Kong, including the Government, the Hong Kong Productivity Council, Hutchison Whampoa Limited and Hong Kong Telecommunications
Limited. Mr. Chan is a founding member of the Hong Kong Institute of Human Resource Management. He has served on the Institutes executive council for many years and was elected a Fellow Member in 1985. Mr. Chan also served various public
bodies and tertiary institutions. He is a member of the Employers Federation of Hong Kong, the Remuneration Committee of the Hong Kong Housing Society, and the Labour Relations Committee of the Labour Department. Mr. Chan is also



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a member of the Career Development and Advisory Board for a number of universities. Mr. Chan graduated from the
University of Hong Kong in 1971, majoring in economics.



Philip Gaffney has been the Managing Director of Operations and Business Development of the Company since March 2004. He is responsible for all matters relating to the operations, safety and railway asset management of the MTR. He
also has responsibility for all transport planning-related matters and the development of rail related business opportunities outside Hong Kong. Mr. Gaffney began his career in 1965 as an engineering student in the Signals and Telecomms Department
of British Railways Scottish Region. He joined the Company in 1977 working on the design development, approval and testing of the railways automatic train control system. He became Chief Engineer (Operations) in 1989, Deputy Director
(Operations Engineering) in 1995 and Operations Director in 1998. Mr. Gaffney is also Chairman of TraxComm Limited and a Director of Octopus Cards Limited. Mr. Gaffney is a member of the Hong Kong Institution of Engineers, a fellow of the
Institution of Railway Signal Engineers and a member of the Chartered Institute of Transport in Hong Kong.



Thomas H.K. Ho has been the Property Director since he joined the Company in 1991. He is responsible for the development and management of all
properties above and adjacent to MTR stations and depots. He leads a multi-disciplinary team of managers involved in the planning, design, construction and management of large-scale property developments. Mr. Ho qualified in 1974 as a chartered
surveyor in Hong Kong. Until he joined the Company, he worked for the Government specializing in land administration and latterly held a directorate post in the Lands Department, responsible for formulating policies and procedures to make land
available for the airport and the Airport Railway project.



Lincoln K.K. Leong joined the Company as Finance Director in February 2002. He is responsible for the financial management of all of the Companys affairs, including financial planning and control, budgeting, accounting and
reporting and the treasury function. In addition, he has responsibility for the Companys information technology function and serves as chairman of both Octopus Cards Limited and the board of trustees of the Companys retirement scheme.
Mr. Leong graduated from Cambridge University in 1982 and later qualified as a chartered accountant in England and Canada. Prior to joining the Company, he was a partner at a direct investment company. Mr. Leong has also worked as an accountant in
London and Vancouver and for a number of years as an investment banker in Hong Kong.



Leonard B. Turk is the Legal Director and Secretary to the Board. He is responsible for legal advice, corporate secretarial services and the procurement function within the Company. In particular, Mr.
Turks responsibilities include construction contracts, covering contract drafting and administration, cost control and dispute resolution. Mr. Turk joined the Company in 1981 and became Legal Director and Secretary in 1988. He is a solicitor
admitted to practice in both Hong Kong and in England and Wales. Before joining the Company, Mr. Turk worked in local government in England, concentrating particularly on commercial property development and the financing of large projects.



There are no family relationships between any of the persons
named above.



Compensation



The aggregate compensation paid by the Company to all members of the Board
and the Executive Directorate as a group for 2003 was HK$37 million, including retirement scheme contributions of HK$4 million made by the Company during 2003 for members of the Executive Directorate, and including compensation paid to Mr. Jack C.K.
So, the former Chairman and Chief Executive of the Company, who resigned on July 20, 2003. At the end of June 2002, the Company received the report of the Government-appointed independent consultant on the remuneration packages of senior executives
at the top levels of



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certain statutory and other bodies, including the Company. Based on the findings of this report, in order to better align
the remuneration of members of the Executive Directorate with the performance of the Company, the Board approved a change in the compensation scheme under which, effective in 2003, a greater portion of the compensation of members of the Executive
Directorate was tied to the performance of the Company.



The
following table sets forth the compensation paid to members of the Executive Directorate in 2003:



|                      |  |                                                               |  |                                            |  |        
|--------------------- |  | ------------------------------------------------------------- |  | ------------------------------------------ |  | -------
|Name                  |  | Base pay, allowance,retirement schemecontribution andbenefits |  | Variableremuneration relatedto performance |  | Total  
|                      |  | (in millions)                                                
|C.K. Chow(1)          |  | HK$0.56                                                       |  | HK$0.12                                    |  | HK$0.68
|Russell J. Black      |  | 4.22                                                          |  | 0.43                                       |  | 4.65   
|William F.K. Chan     |  | 4.03                                                          |  | 0.42                                       |  | 4.45   
|Philip Gaffney        |  | 4.68                                                          |  | 0.43                                       |  | 5.11   
|Thomas H.K. Ho        |  | 4.04                                                          |  | 0.42                                       |  | 4.46   
|Lincoln K.K. Leong(2) |  | 3.88                                                          |  | 0.42                                       |  | 4.30   
|Leonard B. Turk       |  | 4.25                                                          |  | 0.42                                       |  | 4.67   

---

|(1) |  | Appointed with effect from December 1, 2003. Mr. Chow will be entitled to receive 700,000 restricted ordinary shares of the Company (or their equivalent value in cash) upon
completion of his three-year contract. The final number of shares (or cash amount) delivered may be adjusted to reflect relevant changes (if any) in the Companys share capital after his appointment. In certain limited circumstances, Mr. Chow
may be entitled to receive some or all of the restricted ordinary shares (or the respective cash amount) prior to the completion of his contract.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Mr. Leong was also awarded stock options as discussed under Share Ownership.
|--- |  | ------------------------------------------------------------------------------



The variable remuneration paid to the members of the Executive Directorate is payable annually based on corporate
performance measures and individual work performance. For a discussion of the stock options granted to members of the Board or the Executive Directorate, see Share Ownership.



Board Practices



General



For a discussion of the term of office of members of the Board, see  General. Other than any agreed upon payments in lieu of notice of
termination as a member of the Board, no benefits are payable to members of the Board upon termination of their service with the Company.



Audit Committee



The audit committee is appointed by the Board and consists of three non-executive Directors, two of whom are independent non-executive Directors. The
current members of the audit committee are Mr. T. Brian Stevenson (chairman since October 1, 2002), Professor Yau-Kai Cheung and the Commissioner for Transport, Mr. Robert Charles Law Footman. The Finance Director of the Company, the Head of
Internal Audit Department of the Company, the Company Secretary and representatives of the external auditors of the Company are entitled and expected to attend committee meetings. At least once a year, the committee is required to meet with the
external auditors without any executive members of the Board in attendance. The quorum necessary for the transaction of any business is two committee members. The committee will normally meet four times a year. The external auditors or the Finance
Director of the Company may request a meeting if they consider that one is necessary.



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The audit committee selects and recommends to the Company the engagement of external auditors to audit
the Companys annual financial statements and considers questions regarding the audit fees and the resignation or dismissal of the external auditors. The audit committee also reviews and approves the planned scope of the Companys annual
audit and non-audit services. In addition, the audit committee reviews the annual and interim financial statements, the accompanying discussion papers to shareholders, the preliminary announcement of results and any other announcement regarding the
Companys results or other financial information to be made public, before submission to the Board. Moreover, the committee discusses problems arising from the audit and reviews the external auditors management letter and
managements response. Furthermore, the audit committee reviews the effectiveness of the system of internal financial controls based on information provided by the Executive Directorate and management of the Company and by the auditors, and
ensures adherence to the Companys control policies so that the Companys assets are safeguarded and that the financial records are complete and accurate. The audit committee meets regularly with the Companys senior financial,
internal audit and compliance management and the external auditors to consider the Companys financial reporting, the nature and scope of audit review and the effectiveness of the systems of internal control and compliance. The audit committee
also reviews any significant transactions that are not in the ordinary course of business of the Company.



The Company has an internal audit department which reviews both manual and computerized systems and procedures in all major financial and business
activities. This department is led by the head of internal audit and business processes, who reports directly to the Chief Executive Officer of the Company and submits regular reports to the audit committee.



Remuneration Committee



The remuneration committee consists of three non-executive directors
appointed by the Board. The current members of the remuneration committee are Mr. Edward S.T. Ho (who was a member of the committee throughout 2003 and succeeded Dr. Raymond K.F. Chien as chairman of the committee with effect from September 4,
2003), Mr. T. Brian Stevenson (with effect from September 4, 2003) and Mr. Frederick S.H. Ma. The secretary of the committee is the Human Resources Director of the Company. The quorum necessary for the transaction of business is two members of the
committee. Meetings are to be held at least once a year. The remuneration committee makes recommendations to the Board on executive remuneration and considers all matters relating to the Companys remuneration policy and the remuneration and
incentives of the Directors and senior management with reference to independent remuneration research and professional advice.



Nominations Committee



The nominations committee consists of three non-executive directors appointed by the Board, two of whom must be independent non-executive directors. The
nominations committee makes recommendations to the Board on candidates for vacancies on the Board. The members of the nominations committee are Mr. David G. Eldon (chairman), Mr. Chung-Hing Lo and the Secretary for the Environment, Transport and
Works (Dr. Sarah S.T. Liao).



In April 2003, the Board
established a temporary board search committee for the appointment of a new Chief Executive Officer. The board search committee consisted of one member of the nominations committee, Mr. David G. Eldon, and two members of the remuneration committee,
Dr. Raymond K.F. Chien and Mr. Frederick S.H. Ma. The board search committee held several meetings during 2003 and made a recommendation on the appointment of Mr. C.K. Chow as the Chief Executive Officer and a member of the Board with effect
from December 1, 2003, as well as the terms of his remuneration.



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Employees



The Company attributes its success to the quality and dedication of its staff. The table below shows the number of employees engaged in each of its
divisions as of December 31, 2003. Substantially all of the Companys employees are located in Hong Kong.



|                                                 |  |                   
|------------------------------------------------ |  | ------------------
|Division                                         |  | Number ofEmployees
|Finance                                          |  | 247               
|Human resources and administration               |  | 421               
|Legal and procurement                            |  | 64                
|Operations                                       |  | 4,730             
|Property                                         |  | 642               
|Project                                          |  | 402               
|Headquarters                                     |  | 114               
|Telecommunications subsidiary (TraxComm Limited) |  | 9                 
|                                                 |  |                   
|Total                                            |  | 6,629             
|                                                 |  |                   



During the past 19
years, the Company has not experienced any strikes, work stoppages, labor disputes or actions which have affected the operation of its business. The Company consults employees when formulating staff policy and on corporate strategies and major
changes that affect employees. In addition to 22 joint consultative committees comprising over 400 elected staff representatives, the Company also has a staff consultative council, chaired by the Human Resources Director, which consists of
councillors elected from the staff representatives of joint consultative committees and management representatives. The staff consultative council meets periodically to discuss various employee matters.



There are two unions for employees, one with membership of approximately 450
train and station staff and the other with membership of over 1,100 staff from various departments. No other trade unions claim to include any of the Companys employees as members and the Company is not aware of any other trade union activity
among its employees.



As a result of continued efforts
at human resources management, hiring freezes and staff redeployment, the Companys total number of employees further decreased to 7,231 at the end of 2001, 6,891 at the end of 2002 and 6,629 at the end of 2003. The staffing requirement of the
Tseung Kwan O Line was met entirely by corporate staff redeployment, resulting in higher productivity and promoting a multi-skilled workforce.



At the beginning of 2003, a voluntary separation scheme was implemented for selected groups of employees as the Company identified approximately 100
surplus positions due to reduced headcount requirements resulting from a rundown of project-related work. Employees of the selected groups who voluntarily chose to leave the Company received enhanced leaving benefits. This scheme helped the Company
to manage the rundown of project-related work and alleviate the surplus situation.



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Share Ownership



As of May 31, 2004, the interests of the members of the Board and the Executive Directorate in the equity securities of the
Company were as follows:



|                                              |  |                          |  |                                                    |  
|--------------------------------------------- |  | ------------------------ |  | -------------------------------------------------- | -
|Members of the Board or Executive Directorate |  | Number ofOrdinary Shares |  | Percentage of totaloutstanding Ordinary Shares (1) |  
|Russell J. Black                              |  | 49,384                   |  | 0.00093                                            | %
|William F.K. Chan                             |  | 46,233                   |  | 0.00087                                            | %
|Philip Gaffney                                |  | 47,081                   |  | 0.00089                                            | %
|Thomas H.K. Ho                                |  | 52,938                   |  | 0.00100                                            | %
|Lincoln K.K. Leong                            |  | 23,000                   |  | 0.00043                                            | %
|T. Brian Stevenson                            |  | 4,292                    |  | 0.00008                                            | %
|Christine M.S. Fang                           |  | 1,675                    |  | 0.00003                                            | %

---

|(1) |  | The calculation of percentage of total outstanding ordinary shares is based on the assumption that 5,294,682,393 ordinary shares were in issue on the relevant date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



All of the ordinary shares of the Company held
by the persons set forth above have the same voting rights as ordinary shares held by other shareholders.



In connection with the initial public offering (IPO) and listing of the Companys shares on the Hong Kong Stock Exchange in October 2000,
an equity-based incentive scheme was introduced to enhance staff motivation and align employees interests with those of the Company and its shareholders. The scheme included preferential offering for the Companys staff to subscribe for
the Companys shares in the IPO, a pre-IPO share option scheme for management (the Share Option Scheme) and share grants for general staff (the Employee Share Grant).



Share Option Schemes



Under the Share Option Scheme, a total of 769 employees, including all the
members of the Executive Directorate, except for Mr. Lincoln K.K. Leong, who was appointed on February 1, 2002, and Mr. C.K. Chow, who was appointed on December 1, 2003, were granted on September 20, 2000 options to subscribe for an aggregate of
48,338,000 shares at an exercise price of HK$8.44 per share, which was equivalent to 90% of the initial public offering price of HK$9.38 per share. The options may be exercised prior to September 11, 2010 subject to the vesting provisions under the
Share Option Scheme. As of December 31, 2003, all options granted under the Share Option Scheme have vested.



In 2003, 15,999,500 options to subscribe for shares were vested and 10,489,500 share options previously vested have been exercised. The weighted average
closing price in respect of share options exercised during 2003 was HK$9.97 per share. In addition, 1,044,500 share options lapsed as a result of the resignation of certain option holders during the year. As of December 31, 2003, total options to
subscribe for 25,229,500 shares remained outstanding.



Members
of the Board were not granted any options to subscribe for ordinary shares under the Share Option Scheme. Options to subscribe for ordinary shares granted to members of the Executive Directorate under the Share Option Scheme are as follows:



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|                                     |  |                         |  |                    |  |                                               |      |                                      |      |                                         |          
|------------------------------------ |  | ----------------------- |  | ------------------ |  | --------------------------------------------- | ---- | ------------------------------------ | ---- | --------------------------------------- | ---------
|Members of the Executive Directorate |  | Number ofOptionsGranted |  | Expiration Date    |  | Price pershare to bepaid onexercise ofoptions |      | Considerationpaid foroptions granted |      | Optionsoutstandingas ofDecember 31,2003
|Russell J. Black                     |  | 1,066,000               |  | September 11, 2010 |  | $                                             | 8.44 |                                      | None |                                         |         
|William F.K. Chan                    |  | 1,066,000               |  | September 11, 2010 |  | $                                             | 8.44 |                                      | None |                                         | 822,000  
|Philip Gaffney                       |  | 1,066,000               |  | September 11, 2010 |  | $                                             | 8.44 |                                      | None |                                         | 1,022,000
|Thomas H.K. Ho                       |  | 1,066,000               |  | September 11, 2010 |  | $                                             | 8.44 |                                      | None |                                         | 621,000  
|Leonard B. Turk                      |  | 1,066,000               |  | September 11, 2010 |  | $                                             | 8.44 |                                      | None |                                         |         



Under the terms of the
Share Option Scheme, each member of the Executive Directorate must, up to and including the date on which the options granted to him under the Share Option Scheme are exercised in full or lapse, continue to beneficially own (i) at all times after
October 26, 2001, at least 23,000 shares, and (ii) at all times after October 26, 2002, at least 46,000 shares.



At the Companys annual general meeting of shareholders held on May 16, 2002, the shareholders adopted the New Joiners Share Option Scheme (the
New Scheme). The New Scheme is intended to provide new members of the top and senior management of the Company who did not participate in the Share Option Scheme and who joined the Company after September 11, 2000 with the opportunity to
participate in the growth of the Company. The exercise price of any option granted under the New Scheme is to be determined by the Company upon the offer of the grant of the option. The exercise price of any option should not be less than the
greater of (i) the average closing price of a share for the five business days immediately preceding the day of the offer of such option; (ii) the closing price of a share on the day of the offer of such option, which must be a business day; and
(iii) the nominal value of a share. Under the New Scheme, a maximum of 5,056,431 shares may be issued pursuant to the exercise of options granted, representing 0.1% of the issued share capital of the Company as of December 31, 2003. The options will
vest over a period of three years, with an equal proportion vesting each year subject to rounding for board lots, and are exercisable for a period up to ten years after the date of offer.



On August 1, 2003, options to subscribe for 1,561,200 shares at an exercise price of HK$9.75 per share were granted to a
total of five employees, including Mr. Lincoln K.K. Leong, a member of the Executive Directorate, who was granted options to subscribe for 1,066,000 shares. As of December 31, 2003, total options to subscribe for 1,561,200 shares were outstanding
under the New Scheme.



Under the terms of the New
Scheme, Mr. Lincoln K.K. Leong, a member of the Executive Direcorate, must, up to and including the date on which the options granted to him under the New Scheme are exercised in full or lapse, continue to beneficially own (i) at all times on and
after August 4, 2004, at least 23,000 shares, and (ii) at all times on and after August 4, 2005, at least 46,000 shares.



Employee Share Grant



Under the Employee Share Grant, The Financial Secretary Incorporated, on behalf of the Government, undertook to make a free transfer of a certain number
of shares to each full time employee who was not eligible to participate in the Share Option Scheme. Subject to certain terms and conditions, each eligible employee was entitled to receive shares with a value of HK$5,000 or the equivalent to
approximately half a months basic salary, whichever was greater. The total number of shares transferred to employees in October 2001 under the Employee Share Grant was 6,177,231.



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Item 7. Major Shareholders and Related Party Transactions.



Major Shareholder



As of
May 31, 2004, The Financial Secretary Incorporated on behalf of the Government owned 4,036,430,908 or approximately 76% of the ordinary shares of the Company. As at the end of May 2004, approximately 1.46% of the shares of the Company were held on
account of the Exchange Fund. The Exchange Fund is a fund established under the Exchange Fund Ordinance (Cap. 66 of the laws of Hong Kong) under the control of the Financial Secretary of Hong Kong. It is used primarily for such purposes as the
Financial Secretary thinks fit to affect, either directly or indirectly, the exchange value of the currency of Hong Kong and for other purposes incidental thereto. All of the ordinary shares of the Company held by The Financial Secretary
Incorporated and the Exchange Fund have the same voting rights as ordinary shares held by other shareholders. To the Companys knowledge, other than The Financial Secretary Incorporated, there are no beneficial owners of 5% or more of the
Companys ordinary shares. Prior to October 5, 2000, the Government through The Financial Secretary Incorporated owned all of the Companys shares except for one share held by Denise C.Y. Yue, former Secretary for the Treasury.



To the Companys knowledge, there were 34 record holders of ordinary
shares with registered addresses in the United States as of May 31, 2004. JPMorgan Chase Bank, the depositary for the Companys Level I American depositary receipt program (the ADR Program), has advised the Company that, as of May
28, 2004, 711,025 American depositary shares were registered in the name of a nominee of The Depository Trust Company under the ADR Program.



The Government has stated that it will remain as the largest shareholder of the Company, and will continue to hold the legal and beneficial interest in
not less than 50% of the Companys ordinary share capital and not less than 50% of the voting rights at general meetings of the Company for at least 20 years from October 5, 2000. In addition, the Government has stated that it does not intend
to use its rights as a majority shareholder to intervene in the commercial decisions of the Company. The Government has also stated that it does not intend to vote its shareholding in opposition to a resolution supported by a majority of the Board,
although it retains the power to do so. Although the Government has stated its intention to dispose of part of its remaining shareholding in the financial years 2001/2002, 2002/2003 and 2003/2004 while maintaining its majority shareholding, subject
to market conditions, budgetary considerations and the state of the Hong Kong economy, it did not dispose of any part of its remaining shareholding in such financial years. A firm timetable for the future sale of its remaining shareholding has not
yet been established.



Related Party Transactions



Transactions



Project Agreements



On July 24, 2002, the Company entered into a project agreement with the
Government relating to the design, construction, financing and operation of the Disneyland Resort Line (previously named Pennys Bay Rail Link). See Item 4, Information on the Company  History and Development of the Company 
Capital Expenditures and Divestitures  Disneyland Resort Line.



On July 31, 2002, the Company entered into a provisional project agreement with the Government relating to the Tung Chung Cable Car project. On November 19, 2003, the Company and the Government entered into a project
agreement for the Tung Chung Cable Car project and the Government



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also signed a private treaty grant for a theme village adjacent to the Ngong Ping terminal. In relation to this project,
the Company also entered into a license agreement with the Government on the same date whereby the Company is granted a license over a parcel of land in Tung Chung for the purpose of constructing, operating, managing and maintaining a coach park.
See Item 4, Information on the Company  History and Development of the Company  Capital Expenditures and Divestitures  Tung Chung Cable Car.



Octopus Cards Limited



On January 17, 2001, the shareholders in Octopus Cards Limited entered into a new shareholders agreement under which
Octopus Cards Limited was converted from a non-profit making entity to a for-profit entity. In connection with this agreement, the Companys shareholding in Octopus Cards Limited was reduced to 57.4% and the KCRCs shareholding was reduced
to 22.1%. Further details of the new shareholders agreement are set out in Note 18 of Notes to the Financial Statements.



On January 17, 2001, the Company entered into an Octopus Card Services Agreement (the Octopus Services Agreement) with Octopus Cards Limited
to formalize the arrangements that had already existed between them as to services provided to each other relating to Octopus cards. Under the terms of the Octopus Services Agreement, the Company will accept use of Octopus cards as payment for its
fares and will provide add-value services, refund handling and other services to Octopus Cards Limited for an indefinite period terminable on six months prior notice (with such notice not to be given prior to July 1, 2010). In 2003, pursuant
to the Octopus Services Agreement, the Company paid Octopus Cards Limited a total of HK$46 million and Octopus Cards Limited paid the Company a total of HK$15 million.



On January 16, 2003, the shareholders of Octopus Cards Limited entered into a supplemental shareholders agreement
pursuant to which the existing shareholders of Octopus Cards Limited provided a non-competition undertaking in relation to the smart card business carried on by Octopus Cards Limited.



On December 9, 2003, the Company entered into an amendment to the Octopus
Services Agreement with Octopus Cards Limited under which the applicable rates of the transaction fees and the percentage fees in respect of the central clearing services provided by Octopus Cards Limited to the Company were revised with
retrospective effect from July 1, 2003.



On January 2, 2004,
the Company and Octopus Cards Limited entered into an agreement for the acquisition by the Company from Octopus Cards Limited of a number of tourist Octopus cards at a consideration of HK$12 million and for the payment by the Company to Octopus
Cards Limited of HK$3.20 for the initialization of each re-used tourist Octopus card.



On April 30, 2004, the Company and Octopus Cards Limited entered into a card issue and refund services agreement, for the Company to provide card issue and refund services. Due to the retrospective effect of this
agreement, the Company is entitled to an aggregate card issue fee and card refund fee of approximately HK$7 million in respect of the service period from January 1, 2003 to March 31, 2004.



Entrustment Agreements



The Company entered into entrustment agreements with the Government in
relation to the TKE and the Airport Railway, under which the Company agreed to carry out works on behalf of the Government in return for monthly payments based on the work completed. The agreements included the following:



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| |  |  | an agreement, dated February 28, 2001, for the Company to carry out the design and construction of noise mitigation measures adjacent to Housing Sites No. 6 & 10 in the northern
part of the West Kowloon reclamation, with a total value of HK$210,500,000;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an agreement, dated June 4, 2001, for the Company to carry out substructure work relating to the Kowloon Regional Education Resource Center cum Public Transport Interchange, with a
total value of HK$78,900,000; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an agreement, dated May 14, 2002, for the Company to design and construct the southern extension to Tsim Sha Tsui station and related pedestrian underpasses, with a total value of
HK$270,000,000.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company entered into an
Airport Automated People Mover Maintenance Agreement with the Airport Authority on March 28, 2001, for the Company to carry out preventive and corrective maintenance of the Airport Automated People Mover for a period of 12 months with a total value
of HK$17,682,432. On March 18, 2002, the Company entered into an Airport Automated People Mover Maintenance Agreement with the Airport Authority, for the Company to carry out preventive and corrective maintenance of the Airport Automated People
Mover for a period of three years, with a total value of HK$48,540,000.



The Company entered into an agreement with the Territory Development Department of the Government (TDD), dated February 1, 2002, under which the Company was entrusted to do certain works in relation to or adjacent to the Hong
Kong Station Development, with a total value of HK$30,417,764.



The Company entered into an agreement with the Civil Engineering Department of the Government, dated May 7, 2003, for the Company to carry out construction works relating to a bridge carrying the vehicular emergency and public access over
Disneyland station with a total value of HK$15,600,000.



The
Company entered into an agreement with TDD, dated May 13, 2003, for TDD to carry out construction works relating to Hong Kong station extended overrun tunnels with a total value of HK$58,600,000.



The Company entered into entrustment agreements with the Government in
relation to the Tung Chung Cable Car Project under which the Company agreed to carry out works on behalf of the Government in return for monthly payments based on the work completed. The agreements included the following:



| |  |  | an agreement, dated November 10, 2003, for the Company to carry out design and construction of a landscaped piazza and associated works at Ngong Ping, with a total value of
HK$72,000,000; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an agreement, dated November 28, 2003, for the Company to carry out the design and construction of a public transport interchange cum car and coach parks at Ngong Ping, with a total
value of HK$22,400,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Land Agreements



The Company entered into the following land documents
with the Government in relation to the development sites adjacent to the Tung Chung and Airport Express Lines.



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| |  |  | Conditions of Exchange No. 12620, dated March 4, 2002, in respect of KIL No. 11151 for development at Olympic station (building covenant period expiration date March 31, 2007), with
a total consideration of HK$815,050,000 and a lease term of 50 years from the date of the Conditions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Modification of New Grant No. 8015, dated August 29, 2001, for additional gross floor area at Tung Chung station (building covenant expiration date March 31, 2003) with a total
consideration or value of HK$116,000,000.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A letter, dated December 17, 2001, for extension of the building covenant of certain accommodation of New Grant No. 8082 for Tung Chung Town Lot No. 4 (the building covenant period
expiration date of certain accommodation extended to December 31, 2002), to develop the lot in accordance with the terms and conditions stipulated in the New Grant No. 8082 and Lands Departments letter dated November 30, 2001, for a total
value of HK$14,763,900.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A letter, dated February 5, 2003, for extension of the building covenant of New Grant No. 8102 for Tung Chung Town Lot No. 5 (building covenant period expiration date June 30, 2004)
for a total value of HK$22,258,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company
entered into an assignment, dated March 9, 2001, of the public transport terminus on ground floor of the development of KIL 11090 to the Government, in compliance with Special Conditions No. 25(a)(i) of Conditions of Grant No. 12434, with a total
value of HK$18,770,000.



The Company entered into an agreement
for sale and purchase, dated October 5, 2001, for the sale to The Financial Secretary Incorporated of levels 55, 56 and 77 to 88 of the office building on Site R of Hong Kong Station Development (IL8898) for a total value of HK$3,699,000,000, a
supplemental agreement, dated October 8, 2003, with the total value adjusted to HK$3,697,358,837 and an assignment, dated October 8, 2003, to The Financial Secretary Incorporated of the aforementioned levels pursuant to the agreement for sale and
purchase and supplemental agreement.



The Company entered into
the following land documents with the Government in relation to the development sites above or adjacent to the Tseung Kwan O Line. Upon payment of the relevant land premium, the Company may develop the relevant site within the building covenant
period. All land grants provide for the sites to have a lease term of 50 years from the date of the land grant.



| |  |  | New Grant No. 9687 for Private Treaty Grant, dated March 28, 2002, of Tseung Kwan O Town Lot No. 75 for development at Area 55b Tseung Kwan O (building covenant period expiry date
March 31, 2007) with a total consideration or value of HK$600,000,000 subject to a Deed of Surrender dated December 28, 2002 for surrender of a stratum of the lot.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New Grant No. 9686 for Private Treaty Grant, dated March 28, 2002, of Tseung Kwan O Town Lot No. 74 for development at Area 57a Tseung Kwan O (building covenant period expiry date
March 31, 2007) with a total consideration or value of HK$202,800,000 subject to a Deed of Surrender dated December 28, 2002 for surrender of a stratum of the lot.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New Grant No. 9689, dated May 16, 2002, of Tseung Kwan O Town Lot No. 70 for development at Tseung Kwan O Area 86 (building covenant period expiry date December 31, 2015 or 60
months from the due date for payment of land premium of Site O, whichever is the later) with a total consideration or value of HK$150,000,000 for site M1 and the consideration for the other sites to be assessed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | New Grant No. 9694 for Private Treaty Grant, dated October 22, 2002, of Tseung Kwan O Town Lot No. 24 for development at Area 38b Tseung Kwan O (building covenant period expiry date
December 31, 2007) with a total consideration or value of HK$1,276,000,000.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New Grant No. 9700 for Private Treaty Grant, dated February 11, 2003, of Tseung Kwan O Town Lot No. 73, for development at Area 73b Tseung Kwan O (building covenant period expiry
date March 31, 2008 for Site A and March 31, 2009 for Site B) with a consideration or value of HK$1,028,000,000 for Site A and the consideration or value for Site B assessed on January 10, 2004, at HK$ 1,227,840,000.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company has entered into a land grant relating to NKIL No. 6179 for
development rights near Choi Hung station in order for the Company to develop the lot in accordance with the terms and conditions stipulated in the Conditions of Grant No. 12611 dated November 12, 2001 (building covenant expiration date June 30,
2006), with a total value of HK$207,000,000 and a lease term of 50 years from the date of grant.



The Company entered into a supplemental lease with the Government on February 11, 2002, and a modification letter, dated May 13, 2002, in respect of the
remaining portion of Mass Transit Railway Lot No. 1. Under this supplemental lease, the Government leased to the Company land occupied by the QBR at an annual rent of 3% of the ratable value of the leased area for a term commencing October 1, 2001
to June 29, 2050 on terms and conditions substantially similar to the lease for the Mass Transit Railway Lot No. 1.



The Company entered into a lease and supplemental agreement with the Government on August 14, 2003, in respect of Mass Transit Railway Lot No. 3 for the
operation of the Tseung Kwan O Line at an annual rent of 3% of the rateable value of the leased area for a term commencing from the respective dates of August 4, 2002, August 18, 2002 and December 29, 2002, in respect of respective portions of the
such lot to June 29, 2050, in all cases on terms and conditions substantially similar to the lease for the Mass Transit Railway Lot No. 2.



The Company executed a deed of surrender of a portion of Mass Transit Railway Lot No. 2 located inside the site of the Nam Cheong station in favor of the
Government on December 20, 2003. The Government released the Company from all obligations imposed upon it by the lease in respect of the premises.



The Company entered into a modification letter with the Government on December 20, 2003 in respect of the remaining portion of Mass Transit Railway Lot
No. 1 for the diversion of cooling water mains and cables to facilitate land grant arrangements for Nam Cheong station.



The Company (as assignee) entered into an assignment with KCRC (as assignor) on December 20, 2003, to assign 30/100th equal undivided parts or shares of
and in New Kowloon Inland Lot No. 6436 and the buildings and erections constructed and to be constructed therein known as Nam Cheong station.



The Company entered into the following agreements with KCRC in respect of the Nam Cheong station:



| |  |  | an agreement, dated June 3, 2003, in respect of certain operations and maintenance arrangements relating to the Nam Cheong station;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | an agreement, dated December 20, 2003, in respect of ownership, commercial and other aspects of the Nam Cheong station; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



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| |  |  | a deed of mutual rights and obligations, dated December 20, 2003, concerning land rights for use of the Nam Cheong station erected on New Kowloon Inland Lot No. 6436.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Loans



On April 18, 2000, the Company and other shareholders of Octopus Cards
Limited extended a subordinated loan to Octopus Cards Limited, in proportion to their respective ownership interests therein, to enable Octopus Cards Limited to fulfill the capital requirements under the Hong Kong Banking Ordinance for becoming a
deposit taking company. In particular, the Companys share of the subordinated loan was HK$18,984,000, with interest payable at prime lending rate, which is subordinate to all other claims against Octopus Cards Limited and may not be repaid by
Octopus Cards Limited without the consent of the Hong Kong Monetary Authority. On October 17, 2001, Octopus Cards Limited repaid HK$9.5 million of the Companys subordinated loan. On January 17, 2002, Octopus Cards Limited repaid the remaining
balance of HK$9.5 million of the Companys subordinated loan.



Item 8. Financial Information.



Consolidated Financial Statements



See Item
17, Financial Statements. Other than as disclosed elsewhere in this annual report, no significant change has occurred since the date of the annual financial statements.



Legal Proceedings



The dispute with the Airport Authority in relation to entrustment works performed by the Airport Authority for the Company under an entrustment agreement
dated December 15, 1995 at the airport station of the Airport Express Line has been settled within the provision made by the Company.



A number of disputes have arisen in relation to entrusted and essential infrastructure works carried out by the Highways Department and the Territories
Development Department of the Government on behalf of the Company for the construction of the Tung Chung Line and the Airport Express Line. These disputes have been referred to mediation, and while a settlement has been concluded with the Highways
Department a small number of disputes remain to be settled with the Territories Development Department. The Company has received a notice of arbitration from one of the contractors under the QBR. The parties have confirmed the appointment of a
mediator and an arbitrator. The Company believes that it is not necessary to make any further provision in relation to this dispute. The Company also believes that it is not necessary to make any further provision under the Lantau and Airport
Railway Project in relation to the outstanding disputes with the Territories Development Department.



Other than as disclosed above, there are no other legal or arbitration proceedings which may have, or have had in the recent past, a material adverse
effect on the Companys financial condition or results of operations.



Policy on Dividend Distributions



The Company may pay dividends out of its distributable profits in accordance with Hong Kong law generally and the Articles.



The declaration of dividends is subject to the discretion of the Board and any final dividend for the year is subject to the approval of the
Companys shareholders. The amounts of dividends actually paid



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to shareholders will depend upon a number of factors, including the Companys earnings, capital requirements,
general financial condition and any other factors considered relevant by the Board.



Dividends will be declared in Hong Kong dollars. Cash dividends receivable by holders of American depositary shares will be paid in US Dollars, net of conversion expenses of the Depositary.



An interim dividend of HK$0.14 per share was paid on October 29, 2003. A
final dividend of HK$0.28 was approved by shareholders at the annual general meeting on June 3, 2004. Both the interim dividend and final dividend for 2003 include a scrip alternative for shareholders with Hong Kong addresses, which allows such
shareholders to receive all or a portion of their dividend in shares as opposed to cash. As the Companys majority shareholder, the Government has agreed to elect to receive all or part of its entitlement to dividends in 2001, 2002 and 2003, in
the form of scrip to the extent necessary to ensure that the amount payable in cash will not exceed 50% of the total dividend payable. On February 26, 2004, the Government agreed to extend the scrip dividend arrangement to each of the three fiscal
years ending December 31, 2006. In addition, the Government has agreed to waive its entitlement to cash dividends totaling HK$798 million at net present value as of December 31, 2001, as assistance to the Company in connection with the Disneyland
Resort Line project. The Government has waived HK$219 million and HK$675 million of its entitlement to cash dividends declared and payable to the Government in 2002 and 2003, respectively. See Item 4 Information on the Company  History
and Development of the Company  Capital Expenditures and Divestitures  Disneyland Resort Line.



For subsequent fiscal years, the Board anticipates that the Company will continue to pay, subject to its actual financial performance, two dividends in
respect of each fiscal year with interim and final dividends payable around October and June, respectively, with the interim dividend representing approximately one third of the total dividends to be paid for the entire year.



Item 9. The Offer and Listing.



Markets



The Companys ordinary shares are
listed on the Hong Kong Stock Exchange and are quoted on the London SEAQ International System. The sponsored American Depositary Shares (ADSs) are traded on the Over-the-Counter (OTC) market in the United States under the
symbol MTRUY. Each ADS represents ten ordinary shares of the Company. The Company is included in the Hang Seng Index, the Hang Seng Hong Kong Composite Index, the Hang Seng London Reference Index, the MSCI Index Series, the FTSE
All-World Hong Kong Index, the Dow Jones Sustainability Index and the FTSE4Good Global Index. The Companys 7.50% Notes Due February 4, 2009 are listed on the Hong Kong Stock Exchange and the Luxembourg Stock Exchange. The Companys 7.50%
Notes Due November 8, 2010 are listed on the Luxembourg Stock Exchange. The Companys floating rate notes due August 2005 issued under its debt issuance program are listed on the London Stock Exchange. Notes with a coupon rate of 4.75% issued
by MTR Corporation (C.I.) Limited under the debt issuance program, which are unconditionally and irrevocably guaranteed by the Company and will mature in January 2014, are also listed on the London Stock Exchange.



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Item 10. Additional Information.



Memorandum and Articles of Association



General



The Companys objects include:



| |  |  | the maintenance and operation of a mass transit railway in Hong Kong;
| | - |  | ---------------------------------------------------------------------



| |  |  | the planning, design, construction, maintenance and operation of new lines and extensions to the MTR which may be approved from time to time by the Government, or any other
transport service; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the investment, development, dealing in, selling and management of real property.
| | - |  | ---------------------------------------------------------------------------------



A more detailed discussion of the Companys objects is set forth in Section 3 of its Memorandum of Association.



Directors



Material Interests and Voting



Directors cannot vote or be counted in the quorum with regard to any
contract, transaction, arrangement or any other kind of proposal in which they have a material interest. For this purpose, interests of persons connected with the Director (including any of his associates (as defined in the Articles)) are treated as
the interests of the Director himself, but interests purely as a result of an interest in the Companys shares, debentures or other securities are disregarded. However, the restriction from voting and being counted in the quorum does not apply
if the only material interest the Director has is included in the following list:



| |  |  | a resolution about giving him or any of his associates any security or indemnity for any money lent or obligations incurred by him, or any of his associates or any other person, at
the request, or for the benefit, of the Company or any of its subsidiaries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a resolution about giving any security or any indemnity to any other person for a debt or obligation which is owed by the Company or any of its subsidiaries, to that other person,
if the Director or any of his associates has taken responsibility for some or all of that debt or obligation by giving a guarantee, indemnity or security;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a resolution about an offer of any shares, debentures or other securities for subscription or purchase by the Company or any other entity which the Company may promote or be
interested in where the Director or any of his associates is to take part in the underwriting or sub-underwriting of the offer;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a resolution about any proposal involving any other company in which the Director (together with any associate) is interested, whether directly or indirectly, provided that he,
together with any of his associates, does not hold more than 5% of either: (1) any class of equity share capital in that company or in a third company through which his interest or that of any of his associates is derived; or (2) the voting rights
in that company;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any arrangement concerning the benefit of employees of the Company or its subsidiaries, including the adoption, modification or operation of: (1) any employees share scheme or
any
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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share incentive or share option scheme (which shall include, without limitation, the Share Option Scheme)
under which the Director or any of his associates may benefit; or (2) a pension fund or retirement, death or disability benefits scheme which relates to Directors, any of their associates and employees of the Company or any of its subsidiaries which
only gives him or any of his associates as such benefits which are also given to the class of persons to whom the arrangement relates; or



| |  |  | any arrangement in which the Director or any of his associates is interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue
of his interest or that of any of his associates in shares or debentures or other securities of the Company.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subject to legislation, shareholders of the Company may, by ordinary resolution, suspend or relax these provisions or ratify any contract which has not
been properly authorized in accordance with the relevant article.



If the Board is considering proposals about appointing two or more Directors to positions with the Company or any company in which the Company is interested or the Directors are considering setting or changing the terms of their
appointment, each Director can vote and be included in the quorum for each resolution, except the one concerning him. However, a Director cannot vote if the resolution relates to the appointment of another Director to a position with a company which
the Company is interested in if that Director has an interest of 1% or more in that company.



Remuneration and Pensions



The total fees paid to the Directors for performing their services as directors must not exceed HK$3 million each year or any greater amount fixed by an ordinary resolution passed at a general meeting. Unless an
ordinary resolution that fixes the fees provides otherwise, the Directors, upon the recommendation of the remuneration committee, will decide the way in which the total fees will be divided. If the Directors do not make such a decision, the fees
will be divided equally, except that any Director holding office for less than the whole of the relevant period for which the fees are paid will only receive part of this amount in proportion to the amount of time he has been a Director.



Each Director is entitled to be reimbursed for all reasonable travel,
hotel and incidental expenses incurred in attending and returning from board meetings, committee meetings, general meetings or any other meetings which that Director is entitled to attend, as well as all other expenses properly and reasonably
incurred in connection with the Companys business or in the performance of his duties as a Director. The Board, upon the recommendation of the remuneration committee, may give special pay to any Director who performs any special or extra
services. Such special pay may be paid to a Director in addition to or in substitution for his ordinary pay, and may be paid by way of lump sum, salary or a combination or in any other way.



The Board or any committee authorized by the Board may decide to provide
pensions or other benefits to any Director or former Director, or any of their relations or dependants. So long as The Financial Secretary Incorporated holds 50% or more of the voting power of the Company and the Chairman concurrently holds the
office of the Chief Executive Officer of the Company or fulfils any other executive function, the provision relating to pensions or other benefits to the Chairman, or any of his relations or dependants, shall be determined by The Financial Secretary
Incorporated.



If the Directors want to provide a benefit to a
Director or former Director who has not held an executive post or place of profit in the Company or in a subsidiary or former subsidiary of the Company



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or in any former owner of the business of the Company or any subsidiary of the Company, the shareholders of the Company
must also pass an ordinary resolution to approve the payment.



Borrowing Powers



The Board may
exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital. The Board may issue debentures and other securities of the Company
and give securities for any debt, liability or obligation of the Company or any third party. These provisions, in common with the Articles in general, can be varied by a special resolution of the Companys shareholders.



Qualification of Directors



No person is required to vacate office or is ineligible for re-election or
re-appointment as a Director, and no person is ineligible for appointment as a Director, by reason only of his having attained any particular age. No Director is required to hold any qualification shares.



Dividend Rights



The declaration of dividends is subject to the discretion of the Board and
any final dividend for the year is subject to shareholders approval. All dividends or other amounts payable on a share may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed and the Company will
not be a trustee or be liable to pay interest in respect thereof. If a dividend has not been claimed for six years after being declared or becoming due for payment, it will be forfeited and will revert to the Company. The Directors can offer
ordinary shareholders the right to choose to receive extra ordinary shares, which are credited as fully paid up, instead of some or all of their cash dividend. Before they can do this, shareholders must have passed an ordinary resolution authorizing
the Directors to make this offer.



Voting Rights



Subject to any special rights or restrictions as to
voting attached to any class of shares under the Articles or under the Hong Kong Stock Exchange Listing Rules, at any general meeting, on a show of hands every shareholder who is present in person has one vote, and on a poll every shareholder
present in person or by proxy has one vote for every share which he holds.



Unless the Directors decide otherwise, a shareholder may not vote at any general meeting of the Company if he has not paid all amounts relating to those shares which are due at the time of the meeting.



A shareholder may authorize such person or persons as it thinks fit to act as
its proxy or proxies at any general meeting of the Company or at any meeting of any class of shareholders of the Company. However, proxies may not vote on a show of hands. A resolution put to the vote at any general meeting of the Company will be
decided on a show of hands unless a poll is demanded.



At every
annual general meeting, one third of the Directors not appointed by the Chief Executive of the Hong Kong SAR must retire as Directors. The Directors to retire by rotation will be those Directors who have been Directors longest since they were last
elected. At the general meeting at which a Director retires, shareholders can pass an ordinary resolution to re-elect the Director or to elect some other eligible person in his place.



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Distribution of Assets



In the event of the Companys liquidation, the shareholders are entitled to share in any surplus remaining after the
payment of debts and interest in a winding up. The liquidator can, with the authority of a special resolution passed by the shareholders and any other sanction required by Hong Kong legislation, divide among the shareholders all or any part of the
Companys assets. This applies whether the assets consist of property of one kind or different kinds. The liquidator has the discretion to transfer any part of the assets to trustees in trust for the benefit of shareholders. However, no
shareholder can be compelled to accept any shares or other property to which any liability is attached.



Redemption of Shares



Subject to Hong Kong legislation and the requirements of the Hong Kong Stock Exchange Listing Rules and any special rights previously given to holders of
existing shares, the Company may issue shares which can be redeemed. This can include shares which can be redeemed at the initiation of the holders or the Company.



Repurchase of Shares



Subject to Hong Kong legislation and any special rights previously given to holders of existing shares, the Company may purchase or contract to purchase
any of its shares (including redeemable shares). The Directors are not required to select the shares to purchase in any particular manner. Purchases by the Company of a redeemable share not made through the market or by tender will be limited to a
maximum price. Purchases of redeemable shares made by tender shall be made to all shareholders on the same basis.



Modification of Rights



Subject to Hong Kong legislation, if at any time the capital of the Company is divided into different classes of shares, the rights attached to any class
may be changed or abrogated either with the consent in writing of the holders of at least three-quarters of the issued shares of that class or by a special resolution passed at a separate meeting of the holders of the shares of that class.



The provisions of the Articles relating to general meetings
apply to any such class meeting, but the quorum is two persons present in person or by proxy who own at least one-third in nominal value of the issued shares of that class, and any holder of the shares of the class present in person or by proxy may
demand a poll. On a poll, every shareholder present in person or by proxy has one vote for every share of that class he owns, subject to any special rights or restrictions attached to any class of shares within the class.



Annual General and Extraordinary General Meetings



The Company must hold an annual general meeting each year in addition to any
other general meetings held in the year. The Directors decide when and where it is to be held. The notice calling the meeting must say that the meeting is the annual general meeting. The Directors may call an extraordinary general meeting at any
time. At least 21 clear days written notice must be given for every annual general meeting and for any other meeting called to pass a special resolution. For all other general meetings, at least 14 clear days written notice must be
given. A meeting may be convened on shorter notice if the requirements of the Hong Kong Companies Ordinance have been fulfilled. The notice for any general meeting must state: (1) where the meeting is to be held, (2) the date and time of the
meeting, and (3) the



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general nature of the business of the meeting. All shareholders must be given notice of every general meeting. Notice
must also be given to the auditors.



Changes in Capital



Subject to Hong Kong legislation, the Hong Kong Stock
Exchange Listing Rules and any special rights previously given to holders of existing shares, the Company may issue shares which can be redeemed, including shares redeemable at the election of the holders, as well as shares redeemable at the
election of the Company.



Subject to Hong Kong legislation and
any special rights previously given to holders of existing shares, the Company may purchase or contract to purchase its own shares (including any redeemable shares) at any price except where the purchase of a redeemable share is not being made
through the market or by tender, in which case there will be a maximum price. The Directors will not be required to select the shares to be purchased in any particular manner.



The Companys shareholders may, subject to Hong Kong legislation and regulation, by special resolution reduce its share
capital.



The Companys shareholders may by ordinary
resolution increase the Companys authorized share capital, and such resolution will fix the amount of the increase and the nominal amount of the new shares. In addition, the shareholders may, by ordinary resolution:



| | (1) |  | consolidate, or consolidate and then divide, all or any of the Companys share capital into shares of a larger nominal value than its existing shares;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | subject to the Companies Ordinance of the laws of Hong Kong, divide some or all of the Companys shares into shares of a smaller nominal value, and provide that as between the
holders of the divided shares different rights and restrictions which the Company can apply to new shares may apply to those divided shares; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and reduce the amount of its share capital by the
amount of the shares so canceled.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Directors
have the power to decide how to deal with any of the Companys shares which have not been issued. The Directors may, for instance, offer for sale, grant options for the acquisition of, allot or dispose in any other way, any shares which have
not been issued, and in doing so the Directors are free to decide who they deal with, when they deal with the shares and the terms on which they deal with the shares.



Other



Dividend Rights



The Company may pay dividends out of its distributable profits. The amount of dividends actually paid to holders of shares will depend upon a number of
factors, including the Companys earnings, capital requirements, general financial condition and any factors considered relevant by the Board.



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Limitations on Rights to Own Securities



There are no limitations on the rights to own securities, including the
rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities, imposed by Hong Kong law or by the Memorandum of Association or the Articles of Association of the Company.



Material Contracts



The Company has entered into the following contract within the two years
preceding the date of this Annual Report which is or may be material:



| |  |  | Project Agreement for the design, construction, financing and operation of the Pennys Bay Rail Link (now known as Disneyland Resort Line), dated July 24, 2002, entered into
between the Deputy Secretary for the Environment, Transport and Works, for and on behalf of the Government, and the Company in respect of a rail-shuttle service between the Tung Chung Line at Yam O and the new Hong Kong Disneyland theme park.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exchange Controls



Under existing Hong Kong law, (1) there are no foreign exchange controls or
other laws which restrict the import or export of capital and which would affect the availability of cash and cash equivalents for use by the Company, (2) there are no foreign exchange controls or other laws, decrees or regulations that affect the
remittance of interest, dividends or other payments on the Companys outstanding debt and equity securities to U.S. residents and (3) there are no limitations on the rights of non-resident or foreign owners to hold the Companys debt or
equity securities.



Taxation



Hong Kong Taxation



Under existing Hong Kong law, (1) neither the Company nor any paying agent
will be required to declare or withhold for or on account of any Hong Kong taxes in respect of payments on the Companys debt securities and (2) the Companys debt securities are not subject to Hong Kong stamp duty upon issue or on any
subsequent transfer, provided that the Companys debt securities do not:



| | (a) |  | carry a right of conversion into stock or to the acquisition of any stock (as defined in the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong)); or
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | carry (or did not carry) a right to interest the amount of which (i) exceeds a reasonable commercial return on the nominal amount of the capital; or (ii) falls or has fallen to be
determined to any extent by reference to the results of, or of any part of, a business or to the value of any property; or
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | carry a right on repayment to an amount which exceeds the nominal amount of the capital and is not reasonably comparable with what is generally repayable in respect of a similar
nominal amount of capital under the terms of issue of loan capital listed on the Hong Kong Stock Exchange.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Hong Kong profits tax is charged on every person carrying on a trade, profession or business in Hong Kong in respect of assessable profits arising in or
derived from Hong Kong from such trade, profession or business. Under the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) as



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it is currently applied, interest on the Companys debt securities will be subject to Hong Kong profits tax where
such interest is received by or accrues to:



| | (a) |  | a financial institution (as defined in the Inland Revenue Ordinance) and such interest arises through or from the carrying on by the financial institution of its business in Hong
Kong;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | a corporation carrying on a trade, profession or business in Hong Kong and such interest is derived from Hong Kong; or
| | --- |  | ----------------------------------------------------------------------------------------------------------------------



| | (c) |  | a person, other than a corporation, carrying on a trade, profession or business in Hong Kong and such interest is derived from Hong Kong and is in respect of the funds of the trade,
profession or business.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Except for a treaty on
the avoidance of double taxation on shipping profits, Hong Kong is not party to any income tax treaty with the United States.



Documents on Display



It is possible to read and copy documents referred to in this Annual Report that have been filed with the U.S. Securities and Exchange Commission (the
SEC) at the SECs public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.



Item 11. Quantitative and Qualitative Disclosure about Market Risk



The Group has employed off-balance sheet derivative instruments such as interest rate swaps and currency swaps to manage its interest rate and foreign
exchange exposures. These instruments are used solely to reduce or eliminate the financial risks associated with the Groups liabilities and not for trading or speculation purposes.



There are four main categories of risk related to using derivative instruments, namely, market risk (including foreign
exchange rate risk and interest rate risk), credit risk, operational risk and legal risk. Since the Group employs derivative instruments purely for hedging purposes, such instruments do not expose the Group to material market risks because any
change in market values generally will be offset by a change in the market values of the underlying liabilities being hedged.



The Group manages credit risk by assigning limits to counterparties and by dealing only with financial institutions with acceptable credit ratings. The
Group further monitors its credit exposure by estimating the fair market values plus any potential adverse movement in the values of the derivative instruments employed. To date, the Group has not experienced nonperformance by any counterparty. The
Group has internal control measures to safeguard compliance with policies and procedures to minimize operational risk. Standardized or master agreements are used whenever practical to reduce legal risk and credit exposure.



The following tables provide information, by maturity date, on the
Groups interest rate sensitive and foreign currency sensitive financial instruments and derivative financial instruments, respectively. For debt obligations, the tables present principal cash flows and related weighted average interest rates
by expected maturity dates. For interest rate and cross currency swaps, and foreign exchange forward contracts and options, the tables present notional amounts and weighted average interest or contract rates by expected maturity dates.



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|                                       |  |                              |   |                         |       |   |                     |       |   |  |      |   |  |       |   |  |            |   |  |        |   |  |                     |  |        |   |  |       
|-------------------------------------- |  | ---------------------------- | - | ----------------------- | ----- | - | ------------------- | ----- | - |  | ---- | - |  | ----- | - |  | ---------- | - |  | ------ | - |  | ------------------- |  | ------ | - |  | ------
|                                       |  | As of December 31, 2003      |   | As of December 31, 2002
|                                       |  | Expected Maturity Dates      |   | Total                   |       |   | AggregateFair Value
|Interest Rate Risk                     |  | 2004                         |   |                         | 2005  |   |                     | 2006  |   |  | 2007 |   |  | 2008  |   |  | Thereafter |   |  | Total  |   |  | AggregateFair Value |  |       
|                                       |  | (HK$ equivalent in millions)
|On-balance sheet financial instruments |  |                              |   |                         |       |   |                     |       |   |  |      |   |  |       |   |  |            |   |  |        |   |  |                     |  |        |   |  |       
|A. Capital Market Instruments:         |  |                              |   |                         |       |   |                     |       |   |  |      |   |  |       |   |  |            |   |  |        |   |  |                     |  |        |   |  |       
|I.   Fixed Rate Notes (US$)            |  |                             |   |                         | 2,329 |   |                     |      |   |  |     |   |  |      |   |  | 11,724     |   |  | 14,053 |   |  | 15,998              |  | 13,338 |   |  | 15,806
|Average Interest Rate                  |  |                             |   |                         | 7.25  | % |                     |      |   |  |     |   |  |      |   |  | 7.34       | % |  | 7.32   | % |  |                    |  | 7.49   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|Fixed Rate Notes (HK$)                 |  | 4,015                        |   |                         | 1,800 |   |                     | 2,450 |   |  |     |   |  | 500   |   |  | 2,318      |   |  | 11,083 |   |  | 11,416              |  | 12,445 |   |  | 13,112
|Average Interest Rate                  |  | 5.23                         | % |                         | 4.96  | % |                     | 5.43  | % |  |     |   |  | 6.12  | % |  | 4.77       | % |  | 5.17   | % |  |                    |  | 5.89   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|II. Variable Rate Notes (US$)          |  |                             |   |                         | 194   |   |                     |      |   |  |     |   |  |      |   |  |           |   |  | 194    |   |  | 194                 |  | 920    |   |  | 920   
|Average Interest Rate                  |  |                             |   |                         | 3.40  | % |                     |      |   |  |     |   |  |      |   |  |           |   |  | 3.40   | % |  |                    |  | 2.68   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|Variable Rate Notes (HK$)              |  | 250                          |   |                         |      |   |                     |      |   |  |     |   |  |      |   |  |           |   |  | 250    |   |  | 250                 |  | 250    |   |  | 250   
|Average Interest Rate                  |  | 0.99                         | % |                         |      |   |                     |      |   |  |     |   |  |      |   |  |           |   |  | 0.99   | % |  |                    |  | 2.36   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|B. Bank Loans:                         |  |                              |   |                         |       |   |                     |       |   |  |      |   |  |       |   |  |            |   |  |        |   |  |                     |  |        |   |  |       
|I.   Fixed Rate (US$)                  |  | 7                            |   |                         | 7     |   |                     | 7     |   |  | 8    |   |  | 8     |   |  | 18         |   |  | 55     |   |  | 59                  |  | 62     |   |  | 67    
|Average Interest Rate                  |  | 5.45                         | % |                         | 5.45  | % |                     | 5.45  | % |  | 5.45 | % |  | 5.45  | % |  | 5.45       | % |  | 5.45   | % |  |                    |  | 5.45   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|Fixed Rate (Euro)                      |  | 22                           |   |                         | 22    |   |                     | 22    |   |  | 22   |   |  | 23    |   |  | 58         |   |  | 169    |   |  | 169                 |  | 159    |   |  | 160   
|Average Interest Rate                  |  | 4.34                         | % |                         | 4.34  | % |                     | 4.34  | % |  | 4.34 | % |  | 4.34  | % |  | 4.34       | % |  | 4.34   | % |  |                    |  | 4.34   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|II. Variable Rate (HK$)                |  | 38                           |   |                         | 38    |   |                     | 3,038 |   |  | 38   |   |  | 2,038 |   |  | 95         |   |  | 5,285  |   |  | 5,285               |  | 5,323  |   |  | 5,323 
|Average Interest Rate                  |  | 1.10                         | % |                         | 2.14  | % |                     | 2.95  | % |  | 3.58 | % |  | 4.02  | % |  | 4.56       | % |  | 3.38   | % |  |                    |  | 2.65   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|Variable Rate (US$)                    |  | 7                            |   |                         | 7     |   |                     | 7     |   |  | 8    |   |  | 8     |   |  | 18         |   |  | 55     |   |  | 55                  |  | 62     |   |  | 62    
|Average Interest Rate                  |  | 2.18                         | % |                         | 2.90  | % |                     | 3.53  | % |  | 4.03 | % |  | 4.44  | % |  | 5.89       | % |  | 3.91   | % |  |                    |  | 4.08   | % |  |      
|                                       |  |                              |   |                         |       |   |                     |       |   | 
|Variable Rate (Yen)                    |  |                             |   |                         |      |   |                     |      |   |  |     |   |  |      |   |  |           |   |  |       |   |  |                    |  | 329    |   |  | 329   
|Average Interest Rate                  |  |                             |   |                         |      |   |                     |      |   |  |     |   |  |      |   |  |           |   |  |       |   |  |                    |  | 0.91   | % |  |      



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|                                         |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|---------------------------------------- |  | --------------------------- |  | ----- | ---------------------- |  | ----- | ---------------------- |  | ---- | - |  | ---- | - |  | ---- | - |  | ---------- | - |  | ----- | - |  | ---------------------- | - |  | ----- | - |  | --- | -
|                                         |  | As of December 31, 2003     |  |       | As of December 31,2002 | 
|                                         |  | Expected Maturity Dates     |  |       | Total                  |  |       | AggregateFair Value(1) | 
|Interest Rate Risk                       |  |                             |  | 2004  |                        |  | 2005  |                        |  | 2006 |   |  | 2007 |   |  | 2008 |   |  | Thereafter |   |  | Total |   |  | AggregateFair Value(1) |   |  |      
|                                         |  | (HK$ equivalent in million) |  |       |                        |  |       |                        | 
|Off-balance sheet financial instruments  |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|                                         |  | Currency                    |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|C. Cross Currency & Interest Rate Swaps: |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|I. Variable to Fixed                     |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|Notional pay amount                      |  | HK$                         |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 233   |   |  | (15 | )
|Notional receive amount                  |  | US$                         |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 234   |   |  |    |  
|Interest pay rate                        |  |                             |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 7.71  | % |  |    |  
|Interest receive rate                    |  |                             |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 1.24  | % |  |    |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|II. Fixed to Variable                    |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|Notional pay amount                      |  | HK$                         |  | 1,555 |                        |  | 1,936 |                        |  |     |   |  |     |   |  |     |   |  | 2,721      |   |  | 6,212 |   |  | 551                    |   |  | 6,213 |   |  | 774 |  
|Notional receive amount                  |  | US$                         |  | 1,553 |                        |  | 1,941 |                        |  |     |   |  |     |   |  |     |   |  | 2,717      |   |  | 6,211 |   |  |                       |   |  | 6,240 |   |  |    |  
|Interest pay rate                        |  |                             |  | 1.59  | %                      |  | 2.47  | %                      |  |     |   |  |     |   |  |     |   |  | 5.23       | % |  | 3.46  | % |  |                       |   |  | 3.64  | % |  |    |  
|Interest receive rate                    |  |                             |  | 7.50  | %                      |  | 7.30  | %                      |  |     |   |  |     |   |  |     |   |  | 6.64       | % |  | 7.06  | % |  |                       |   |  | 7.44  | % |  |    |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|Notional pay amount                      |  | HK$                         |  | 20    |                        |  | 20    |                        |  | 20   |   |  | 20   |   |  | 20   |   |  | 51         |   |  | 151   |   |  | 29                     |   |  | 172   |   |  | 1   |  
|Notional receive amount                  |  | Euro                        |  | 22    |                        |  | 22    |                        |  | 22   |   |  | 22   |   |  | 23   |   |  | 58         |   |  | 169   |   |  |                       |   |  | 159   |   |  |    |  
|Interest pay rate                        |  |                             |  | (0.10 | )%                     |  | 0.94  | %                      |  | 1.76 | % |  | 2.38 | % |  | 2.85 | % |  | 3.45       | % |  | 2.19  | % |  |                       |   |  | 2.38  | % |  |    |  
|Interest receive rate                    |  |                             |  | 4.34  | %                      |  | 4.34  | %                      |  | 4.34 | % |  | 4.34 | % |  | 4.34 | % |  | 4.34       | % |  | 4.34  | % |  |                       |   |  | 4.34  | % |  |    |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|III. Variable to Variable                |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|Notional pay amount                      |  | US$                         |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 331   |   |  | (4  | )
|Notional receive amount                  |  | Yen                         |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 329   |   |  |    |  
|Interest pay rate                        |  |                             |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 2.59  | % |  |    |  
|Interest receive rate                    |  |                             |  |      |                        |  |      |                        |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                       |   |  | 0.91  | % |  |    |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|Notional pay amount                      |  | HK$                         |  | 233   |                        |  | 390   |                        |  |     |   |  |     |   |  |     |   |  | 6,005      |   |  | 6,628 |   |  | 15                     |   |  | 6,179 |   |  | (48 | )
|Notional receive amount                  |  | US$                         |  | 233   |                        |  | 388   |                        |  |     |   |  |     |   |  |     |   |  | 5,978      |   |  | 6,599 |   |  |                       |   |  | 6,185 |   |  |    |  
|Interest pay rate                        |  |                             |  | 2.44  | %                      |  | 2.12  | %                      |  |     |   |  |     |   |  |     |   |  | 4.42       | % |  | 4.21  | % |  |                       |   |  | 4.00  | % |  |    |  
|Interest receive rate                    |  |                             |  | 3.48  | %                      |  | 2.40  | %                      |  |     |   |  |     |   |  |     |   |  | 4.33       | % |  | 4.19  | % |  |                       |   |  | 3.60  | % |  |    |  
|                                         |  |                             |  |       |                        |  |       |                        |  |      |  
|IV. Fixed to Fixed                       |  |                             |  |       |                        |  |       |                        |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                        |   |  |       |   |  |     |  
|Notional pay amount                      |  | HK$                         |  |      |                        |  | 388   |                        |  |     |   |  |     |   |  |     |   |  |           |   |  | 388   |   |  | (43                    | ) |  | 388   |   |  | (43 | )
|Notional receive amount                  |  | US$                         |  |      |                        |  | 388   |                        |  |     |   |  |     |   |  |     |   |  |           |   |  | 388   |   |  |                       |   |  | 390   |   |  |    |  
|Interest pay rate                        |  |                             |  |      |                        |  | 8.00  | %                      |  |     |   |  |     |   |  |     |   |  |           |   |  | 8.00  | % |  |                       |   |  | 8.00  | % |  |    |  
|Interest receive rate                    |  |                             |  |      |                        |  | 7.25  | %                      |  |     |   |  |     |   |  |     |   |  |           |   |  | 7.25  | % |  |                       |   |  | 7.25  | % |  |    |  

---

|(1) |  | Fair value for off-balance sheet financial instruments represents the amount the Company would receive (pay) to close out the transactions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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|                                        |  |                                  |  |                      |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |        |   |  |      |  
|--------------------------------------- |  | -------------------------------- |  | -------------------- | ----------------------- | --------------------- | ---- | -------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ---------- | - |  | ----- | - |  | --------------------- | - |  | ------ | - |  | --------------------- | - |  | ------ | - |  | ---- | -
|                                        |  | As of December 31, 2003          |  |                      | As of December 31, 2002 |                      
|                                        |  | Expected Maturity Dates          |  |                      |                         |                       |      |          | 
|Interest Rate Risk                      |  |                                  |  | 2004                 |                         |                       | 2005 |          |  | 2006  |   |  | 2007  |   |  | 2008  |   |  | Thereafter |   |  | Total |   |  | AggregateFairValue(1) |   |  | Total  |   |  | AggregateFairValue(1) |  
|                                        |  | (HK$ equivalent in million)      |  |                      |                         |                       |      |          | 
|Off-balance sheet financial instruments |  |                                  |  |                      |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |  
|D.                                      |  | Interest Rate Swaps and Options: |  |                      |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |       
|                                        |  |                                  |  |                      |                         |                       |      | Currency |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |        |   |  |      |  
|                                        |  | I.                               |  | Variable to Fixed    |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |        |   | 
|                                        |  |                                  |  |                      |                         | Notional amount       |      | HK$      |  | 5,250 |   |  | 3,600 |   |  | 2,400 |   |  | 550        |   |  | 700   |   |  |                      |   |  | 12,500 |   |  | (334                  | ) |  | 15,650 |   |  | (464 | )
|                                        |  |                                  |  |                      |                         | Interest pay rate     |      |          |  | 1.86  | % |  | 5.52  | % |  | 3.07  | % |  | 5.01       | % |  | 3.62  | % |  |                      |   |  | 3.38   | % |  |                      |   |  | 4.50   | % |  |     |  
|                                        |  |                                  |  |                      |                         | Interest receive rate |      |          |  | 0.90  | % |  | 1.94  | % |  | 2.76  | % |  | 3.38       | % |  | 3.85  | % |  |                      |   |  | 1.83   | % |  |                      |   |  | 2.13   | % |  |     |  
|                                        |  |                                  |  |                      |                         |                       |      |          |  |       |   |  |      
|                                        |  | II.                              |  | Fixed to Variable    |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |        |   | 
|                                        |  |                                  |  |                      |                         | Notional amount       |      | US$      |  |      |   |  |      |   |  |      |   |  |           |   |  |      |   |  | 1,553                 |   |  | 1,553  |   |  | 111                   |   |  | 1,560  |   |  | 248  |  
|                                        |  |                                  |  |                      |                         | Interest pay rate     |      |          |  |      |   |  |      |   |  |      |   |  |           |   |  |      |   |  | 5.78                  | % |  | 5.78   | % |  |                      |   |  | 5.46   | % |  |     |  
|                                        |  |                                  |  |                      |                         | Interest receive rate |      |          |  |      |   |  |      |   |  |      |   |  |           |   |  |      |   |  | 7.50                  | % |  | 7.50   | % |  |                      |   |  | 7.50   | % |  |     |  
|                                        |  |                                  |  |                      |                         |                       |      |          |  |       |   |  |       |  
|                                        |  |                                  |  |                      |                         | Notional amount       |      | HK$      |  | 2,200 |   |  | 200   |   |  | 1,450 |   |  |           |   |  | 500   |   |  | 1,468                 |   |  | 5,818  |   |  | 189                   |   |  | 5,700  |   |  | 322  |  
|                                        |  |                                  |  |                      |                         | Interest pay rate     |      |          |  | 1.24  | % |  | 2.07  | % |  | 2.95  | % |  |           |   |  | 4.15  | % |  | 5.73                  | % |  | 3.08   | % |  |                      |   |  | 2.90   | % |  |     |  
|                                        |  |                                  |  |                      |                         | Interest receive rate |      |          |  | 4.90  | % |  | 5.30  | % |  | 5.73  | % |  |           |   |  | 6.12  | % |  | 4.76                  | % |  | 5.19   | % |  |                      |   |  | 5.79   | % |  |     |  
|                                        |  |                                  |  |                      |                         |                       |      |          |  |       |   |  |      
|                                        |  | III.                             |  | Variable to Variable |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |        |   | 
|                                        |  |                                  |  |                      |                         | Notional amount       |      | HK$      |  | 200   |   |  |      |   |  |      |   |  |           |   |  |      |   |  |                      |   |  | 200    |   |  | (0                    | ) |  |       |   |  |     |  
|                                        |  |                                  |  |                      |                         | Interest pay rate     |      |          |  | 0.81  | % |  |      |   |  |      |   |  |           |   |  |      |   |  |                      |   |  | 0.81   | % |  |                      |   |  |       |   |  |     |  
|                                        |  |                                  |  |                      |                         | Interest receive rate |      |          |  | 0.60  | % |  |      |   |  |      |   |  |           |   |  |      |   |  |                      |   |  | 0.60   | % |  |                      |   |  |       |   |  |     |  
|                                        |  |                                  |  |                      |                         |                       |      |          |  |       |   | 
|E.                                      |  | Forward Rate Agreement:          |  |                      |                         |                       |      |          |  |       |   |  |       |   |  |       |   |  |            |   |  |       |   |  |                       |   |  |        |   |  |                       |   |  |       
|                                        |  |                                  |  |                      |                         | Notional amount       |      | HK$      |  | 500   |   |  |      |   |  |      |   |  |           |   |  |      |   |  |                      |   |  | 500    |   |  | (0                    | ) |  |        |   |  |      |  
|                                        |  |                                  |  |                      |                         | Interest pay rate     |      |          |  | 0.67  | % |  |      |   |  |      |   |  |           |   |  |      |   |  |                      |   |  | 0.67   | % |  |                      |   |  |       |   |  |     |  
|                                        |  |                                  |  |                      |                         | Interest receive rate |      |          |  | 0.17  | % |  |      |   |  |      |   |  |           |   |  |      |   |  |                      |   |  | 0.17   | % |  |                      |   |  |       |   |  |     |  

---

|(1) |  | Fair value for off-balance sheet financial instruments represents the amount the Company would receive (pay) to close out the transactions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |   |  |       
|-------------------------------------- |  | --------------------------- |  | --------------------- | ---- | ----------------------- | - | ----------------------- | ----- | - | ---- | ---- | - | ---- | ---- | - | ---------- | ---- | - | ----- | ------ | - | ------------------ | ------ | ----- |  | ------ | ------------------- | ------ | - |  | ------
|                                       |  |                             |  |                       |      | As of December 31, 2003 |   | As of December 31, 2002
|                                       |  |                             |  |                       |      | Expected Maturity Dates |   |                         |       |   |     
|Currency Risk                          |  | 2004                        |  |                       | 2005 |                         |   | 2006                    |       |   | 2007 |      |   | 2008 |      |   | Thereafter |      |   | Total |        |   | AggregateFairValue |        | Total |  |        | AggregateFair Value
|                                       |  | (HK$ equivalent in million) |  |                       |      |                         |  
|On-balance sheet financial instruments |  |                             |  |                       |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                    
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |     
|A.                                     |  | Capital Market Instruments: |  |                       |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |  
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |     
|                                       |  | I.                          |  | US$                   |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |   |  |       
|                                       |  |                             |  | Fixed Rate Notes      |      |                        |   |                         | 2,329 |   |      |     |   |      |     |   |            |     |   |       | 11,724 |   |                    | 14,053 |       |  | 15,998 |                     | 13,338 |   |  | 15,806
|                                       |  |                             |  | Average Interest Rate |      |                        |   |                         | 7.25  | % |      |     |   |      |     |   |            |     |   |       | 7.34   | % |                    | 7.32   | %     |  |       |                     | 7.49   | % |  |      
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |     
|                                       |  |                             |  | Variable Rate Notes   |      |                        |   |                         | 194   |   |      |     |   |      |     |   |            |     |   |       |       |   |                    | 194    |       |  | 194    |                     | 920    |   |  | 920   
|                                       |  |                             |  | Average Interest Rate |      |                        |   |                         | 3.40  | % |      |     |   |      |     |   |            |     |   |       |       |   |                    | 3.40   | %     |  |       |                     | 2.68   | % |  |      
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |     
|B.                                     |  | Bank Loans:                 |  |                       |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |  
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |     
|                                       |  | I.                          |  | US$                   |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |   |  |       
|                                       |  |                             |  | Fixed Rate Notes      |      | 7                       |   |                         | 7     |   |      | 7    |   |      | 8    |   |            | 8    |   |       | 18     |   |                    | 55     |       |  | 59     |                     | 62     |   |  | 67    
|                                       |  |                             |  | Average Interest Rate |      | 5.45                    | % |                         | 5.45  | % |      | 5.45 | % |      | 5.45 | % |            | 5.45 | % |       | 5.45   | % |                    | 5.45   | %     |  |       |                     | 5.45   | % |  |      
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |     
|                                       |  |                             |  | Variable Rate Notes   |      | 7                       |   |                         | 7     |   |      | 7    |   |      | 8    |   |            | 8    |   |       | 18     |   |                    | 55     |       |  | 55     |                     | 62     |   |  | 62    
|                                       |  |                             |  | Average Interest Rate |      | 2.18                    | % |                         | 2.90  | % |      | 3.53 | % |      | 4.03 | % |            | 4.44 | % |       | 5.89   | % |                    | 3.91   | %     |  |       |                     | 4.08   | % |  |      
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |     
|                                       |  | II.                         |  | Euro                  |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |   |  |       
|                                       |  |                             |  | Fixed Rate Notes      |      | 22                      |   |                         | 22    |   |      | 22   |   |      | 22   |   |            | 23   |   |       | 58     |   |                    | 169    |       |  | 169    |                     | 159    |   |  | 160   
|                                       |  |                             |  | Average Interest Rate |      | 4.34                    | % |                         | 4.34  | % |      | 4.34 | % |      | 4.34 | % |            | 4.34 | % |       | 4.34   | % |                    | 4.34   | %     |  |       |                     | 4.34   | % |  |      
|                                       |  |                             |  |                       |      |                         |   |                         |       |   |      |     
|                                       |  | III.                        |  | Yen                   |      |                         |   |                         |       |   |      |      |   |      |      |   |            |      |   |       |        |   |                    |        |       |  |        |                     |        |   |  |       
|                                       |  |                             |  | Variable Rate Notes   |      |                        |   |                         |      |   |      |     |   |      |     |   |            |     |   |       |       |   |                    |       |       |  |       |                     | 329    |   |  | 329   
|                                       |  |                             |  | Average Interest Rate |      |                        |   |                         |      |   |      |     |   |      |     |   |            |     |   |       |       |   |                    |       |       |  |       |                     | 0.91   | % |  |      



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|                                            |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|------------------------------------------- |  | --------------------------- |  | ----- | ---------------------- |  | ----- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---------- | - |  | ----- | - |  | --------------------- | - |  | ----- | - |  | --------------------- | -
|                                            |  | As of December 31, 2003     |  |       | As ofDecember 31, 2002 | 
|                                            |  | Expected Maturity Dates     |  |       |                        |  |       |   | 
|Currency Risk                               |  |                             |  | 2004  |                        |  | 2005  |   |  | 2006 |   |  | 2007 |   |  | 2008 |   |  | Thereafter |   |  | Total |   |  | AggregateFairValue(1) |   |  | Total |   |  | AggregateFairValue(1) |  
|                                            |  | (HK$ equivalent in million) |  |       |                        |  |       |   | 
|Off-balance sheet     financial instruments |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|C. Cross Currency & Interest Rate Swaps:    |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|                                            |  | Currency                    |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|I. Yen to US$                               |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Variable to Variable                        |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Notional pay amount                         |  | US$                         |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 331   |   |  | (4                    | )
|Notional receive amount                     |  | Yen                         |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 329   |   |  |                      |  
|Interest pay rate                           |  |                             |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 2.59  | % |  |                      |  
|Interest receive rate                       |  |                             |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 0.91  | % |  |                      |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|II. US$ to HK$                              |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Fixed to Variable                           |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Notional pay amount                         |  | HK$                         |  | 1,555 |                        |  | 1,936 |   |  |     |   |  |     |   |  |     |   |  | 2,721      |   |  | 6,212 |   |  | 551                   |   |  | 6,213 |   |  | 774                   |  
|Notional receive amount                     |  | US$                         |  | 1,553 |                        |  | 1,941 |   |  |     |   |  |     |   |  |     |   |  | 2,717      |   |  | 6,211 |   |  |                      |   |  | 6,240 |   |  |                      |  
|Interest pay rate                           |  |                             |  | 1.59  | %                      |  | 2.47  | % |  |     |   |  |     |   |  |     |   |  | 5.23       | % |  | 3.46  | % |  |                      |   |  | 3.64  | % |  |                      |  
|Interest receive rate                       |  |                             |  | 7.50  | %                      |  | 7.30  | % |  |     |   |  |     |   |  |     |   |  | 6.64       | % |  | 7.06  | % |  |                      |   |  | 7.44  | % |  |                      |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|Fixed to Fixed                              |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Notional pay amount                         |  | HK$                         |  |      |                        |  | 388   |   |  |     |   |  |     |   |  |     |   |  |           |   |  | 388   |   |  | (43                   | ) |  | 388   |   |  | (43                   | )
|Notional receive amount                     |  | US$                         |  |      |                        |  | 388   |   |  |     |   |  |     |   |  |     |   |  |           |   |  | 388   |   |  |                      |   |  | 390   |   |  |                      |  
|Interest pay rate                           |  |                             |  |      |                        |  | 8.00  | % |  |     |   |  |     |   |  |     |   |  |           |   |  | 8.00  | % |  |                      |   |  | 8.00  | % |  |                      |  
|Interest receive rate                       |  |                             |  |      |                        |  | 7.25  | % |  |     |   |  |     |   |  |     |   |  |           |   |  | 7.25  | % |  |                      |   |  | 7.25  | % |  |                      |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|Variable to Variable                        |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Notional pay amount                         |  | HK$                         |  | 233   |                        |  | 390   |   |  |     |   |  |     |   |  |     |   |  | 6,005      |   |  | 6,628 |   |  | 15                    |   |  | 6,179 |   |  | (48                   | )
|Notional receive amount                     |  | US$                         |  | 233   |                        |  | 388   |   |  |     |   |  |     |   |  |     |   |  | 5,978      |   |  | 6,599 |   |  |                      |   |  | 6,185 |   |  |                      |  
|Interest pay rate                           |  |                             |  | 2.44  | %                      |  | 2.12  | % |  |     |   |  |     |   |  |     |   |  | 4.42       | % |  | 4.21  | % |  |                      |   |  | 4.00  | % |  |                      |  
|Interest receive rate                       |  |                             |  | 3.48  | %                      |  | 2.40  | % |  |     |   |  |     |   |  |     |   |  | 4.33       | % |  | 4.19  | % |  |                      |   |  | 3.60  | % |  |                      |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|Variable to Fixed                           |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Notional pay amount                         |  | HK$                         |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 233   |   |  | (15                   | )
|Notional receive amount                     |  | US$                         |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 234   |   |  |                      |  
|Interest pay rate                           |  |                             |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 7.71  | % |  |                      |  
|Interest receive rate                       |  |                             |  |      |                        |  |      |   |  |     |   |  |     |   |  |     |   |  |           |   |  |      |   |  |                      |   |  | 1.24  | % |  |                      |  
|                                            |  |                             |  |       |                        |  |       |   |  |      |  
|III. Euro to HK$                            |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Fixed to Floating                           |  |                             |  |       |                        |  |       |   |  |      |   |  |      |   |  |      |   |  |            |   |  |       |   |  |                       |   |  |       |   |  |                       |  
|Notional pay amount                         |  | HK$                         |  | 20    |                        |  | 20    |   |  | 20   |   |  | 20   |   |  | 20   |   |  | 51         |   |  | 151   |   |  | 29                    |   |  | 172   |   |  | 1                     |  
|Notional receive amount                     |  | Euro                        |  | 22    |                        |  | 22    |   |  | 22   |   |  | 22   |   |  | 23   |   |  | 58         |   |  | 169   |   |  |                      |   |  | 159   |   |  |                      |  
|Interest pay rate                           |  |                             |  | (0.10 | )%                     |  | 0.94  | % |  | 1.76 | % |  | 2.38 | % |  | 2.85 | % |  | 3.45       | % |  | 2.19  | % |  |                      |   |  | 2.38  | % |  |                      |  
|Interest receive rate                       |  |                             |  | 4.34  | %                      |  | 4.34  | % |  | 4.34 | % |  | 4.34 | % |  | 4.34 | % |  | 4.34       | % |  | 4.34  | % |  |                      |   |  | 4.34  | % |  |                      |  

---

|(1) |  | Fair value for off-balance sheet financial instruments represents the amount the Company would receive (pay) to close out the transactions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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|                                            |  |                         |  |      |                        |      |        |      |        |      |        |      |   |            |       |   |       |        |   |                       |     |   |       |        |   |                       |     |  
|------------------------------------------- |  | ----------------------- |  | ---- | ---------------------- | ---- | ------ | ---- | ------ | ---- | ------ | ---- | - | ---------- | ----- | - | ----- | ------ | - | --------------------- | --- | - | ----- | ------ | - | --------------------- | --- | -
|                                            |  | As of December 31, 2003 |  |      | As ofDecember 31, 2002 |     
|                                            |  | Expected Maturity Dates |  |      |                        |      |        |      |       
|Currency Risk                               |  |                         |  | 2004 |                        | 2005 |        | 2006 |        | 2007 |        | 2008 |   | Thereafter |       |   | Total |        |   | AggregateFairValue(1) |     |   | Total |        |   | AggregateFairValue(1) |    
|Off-balance sheet financial instruments     |  |                         |  |      |                        |      |        |      |        |      |        |      |   |            |       |   |       |        |   |                       |     |   |       |        |   |                       |     |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|D. Interest Rate Swaps and Options:         |  |                         |  |      |                        |      |        |      |        |      |        |      |   |            |       |   |       |        |   |                       |     |   |       |        |   |                       |     |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|I. Fixed to Variable                        |  |                         |  |      |                        |      |        |      |        |      |        |      |   |            |       |   |       |        |   |                       |     |   |       |        |   |                       |     |  
|Notional amount                             |  | US$                     |  |      |                       |      |       |      |       |      |       |      |  |            | 1,553 |   |       | 1,553  |   |                       | 111 |   |       | 1,560  |   |                       | 248 |  
|Interest pay rate                           |  |                         |  |      |                       |      |       |      |       |      |       |      |  |            | 5.78  | % |       | 5.78   | % |                       |    |   |       | 5.46   | % |                       |    |  
|Interest receive rate                       |  |                         |  |      |                       |      |       |      |       |      |       |      |  |            | 7.50  | % |       | 7.50   | % |                       |    |   |       | 7.50   | % |                       |    |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|E. Foreign Exchange Forward Contracts       |  |                         |  |      |                        |      |        |      |        |      |        |      |   |            |       |   |       |        |   |                       |     |   |       |        |   |                       |     |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|I.  Euro (in Euro millions - Purchased)     |  |                         |  |      | 14                     |      | 5      |      | 1      |      |       |      |  |            |      |   |       | 20     |   |                       | 38  |   |       | 229    |   |                       | 12  |  
|Weighted Average Contract Rate (vs HKD)     |  |                         |  |      | 7.8022                 |      | 7.6139 |      | 7.5980 |      |       |      |  |            |      |   |       | 7.7437 |   |                       |    |   |       | 7.7064 |   |                       |    |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|Euro (in Euro millions) - Sold)             |  |                         |  |      | 2                      |      | 3      |      | 1      |      | 1      |      |  |            |      |   |       | 7      |   |                       | (5  | ) |       |       |   |                       |    |  
|Weighted Average Contract Rate (vs HKD)     |  |                         |  |      | 9.0067                 |      | 9.0292 |      | 8.9465 |      | 8.9262 |      |  |            |      |   |       | 8.9926 |   |                       |    |   |       |       |   |                       |    |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|II. Swiss Franc (in CHF millions)           |  |                         |  |      | 8                      |      | 13     |      | 5      |      | 3      |      |  |            |      |   |       | 29     |   |                       | (4  | ) |       | 264    |   |                       | (20 | )
|Weighted Average Contract Rate (vs HKD)     |  |                         |  |      | 6.1967                 |      | 6.4485 |      | 6.6797 |      | 7.0371 |      |  |            |      |   |       | 6.4767 |   |                       |    |   |       | 6.3155 |   |                       |    |  
|                                            |  |                         |  |      |                        |      |        |      |        |      |       
|III. United States Dollar (in USD millions) |  |                         |  |      | 41                     |      | 25     |      |       |      |       |      |  |            |      |   |       | 66     |   |                       | (2  | ) |       |       |   |                       |    |  
|Weighted Average Contract Rate (vs HKD)     |  |                         |  |      | 7.7431                 |      | 7.7480 |      |       |      |       |      |  |            |      |   |       | 7.7449 |   |                       |    |   |       |       |   |                       |    |  

---

|(1) |  | Fair value for off-balance sheet financial instruments represents the amount the Company would receive (pay) to close out the transactions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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The disclosures on market risk mandated by the SEC require that all financial instruments, as defined by
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, should be included in the quantitative disclosure calculation. Leases are not required to be disclosed by SFAS
No. 107, and have not been presented in the tables above. In addition, deposits and short-term borrowings (including overdrafts) have been omitted from the tables. Due to the short-term nature of deposits and short-term borrowings, the fair values
of these instruments approximate costs.



The expected maturity
dates represent the Companys estimate of the timing of required cash flows. The interest rate risk table assumes interest rates based on an implied forward yield curve at year end. Although certain liabilities may have similar maturities or
periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other
types of assets may lag behind changes in market rates. Actual future market conditions may differ materially from such assumptions.



Item 12. Description of Securities Other than Equity Securities.



Not Applicable.



PART II



Item 13. Defaults, Dividend Arrearages and Delinquencies.



None.



Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.



None.



Item 15. Controls and Procedures



In the first half of 2004, an evaluation was carried out under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Finance Director, of the effectiveness of the design and
operation of the Groups disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Finance Director concluded that these disclosure
controls and procedures were effective as of December 31, 2003.



During 2003, no change to the Groups internal control over financial reporting occurred that has materially affected, or is reasonably likely to materially affect, the Groups internal control over financial reporting.



Item 16A. Audit Committee Financial Expert



The Board has determined that Mr. T. Brian Stevenson, the chairman of the Companys audit committee, is an audit committee financial expert as defined under the applicable rules of the SEC issued pursuant to
Section 407 of the Sarbanes-Oxley Act of 2002.



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Item 16B. Code of Ethics



The
Executive Directorate has adopted a Code of Ethics for Senior Finance Officers, which applies to the Chief Executive Officer, Finance Director, General ManagerFinancial Control & Treasury and all staff at the managerial level within the
Financial Control, Treasury and Corporate Finance Departments of the Company.



The Company will provide any person without charge, upon request, a copy of the Code of Ethics for Senior Finance Officers. Any request should be addressed to the Company Secretary of the Company at MTR Tower, Telford
Plaza, Kowloon Bay, Hong Kong.



Item 16C. Principal Accountant Fees and Services



The following table summarizes the fees that the Company paid or accrued for services provided by KPMG for the fiscal years ended December 31, 2002 and 2003:



|                   |  |                |       |      |     |      
|------------------ |  | -------------- | ----- | ---- | --- | -----
|                   |  | 2002           |       | 2003
|                   |  | (in thousands)
|Audit Fees         |  | HK$            | 3,652 |      | HK$ | 4,219
|Audit Related Fees |  |                | 224   |      |     | 181  
|Tax Fees           |  |                | 534   |      |     | 1,059
|All Other Fees     |  |                | 149   |      |     | 67   
|                   |  |                |       |      |     |      
|Total              |  | HK$            | 4,559 |      | HK$ | 5,526
|                   |  |                |       |      |     |      



Audit Fees.
This category includes the audit of our annual financial statements, review of interim financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for
those fiscal years. This category also includes statutory audits required by non-U.S. jurisdictions.



Audit-Related Fees. This category consists primarily of fees for audits of the Companys retirement schemes.



Tax Fees. This category consists of fees for consultation and tax
compliance services.



All Other Fees. This
category consists primarily of fees for professional services rendered in connection with the issuance of notes and the provision of technical training courses to senior management of the Company.



Item 16D. Exemptions from the Listing Standards for Audit Committees



Not applicable.



Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers



Not applicable.



-101-



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##### Table of Contents

PART III



Item 17. Financial Statements.



Index to
Financial Statements:



|                                                        |  |    
|------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm |  | F-1
|                                                        | 
|Consolidated Profit and Loss Accounts                   |  | F-2
|                                                        | 
|Consolidated Balance Sheets                             |  | F-3
|                                                        | 
|Consolidated Statements of Changes in Equity            |  | F-4
|                                                        | 
|Consolidated Cash Flow Statements                       |  | F-5
|                                                        | 
|Notes to the Consolidated Financial Statements          |  | F-6



Item 18. Financial Statements.



The Company has elected to provide the information required under Item 17 in lieu of Item 18.



Item 19. Exhibits.



Exhibits to
this Annual Report:



Exhibit Index



|               |  |                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                           
|1.1            |  | Mass Transit Railway Ordinance (incorporated herein by reference to the Registration Statement on Form F-3, filed by the Company and MTR Corporation (C.I.) Limited on September 10, 2001 (File
No: 333-13904) (the Form F-3)).
|               | 
|1.2            |  | Memorandum of Association of the Company (incorporated herein by reference to the Form F-3).                                                                                                                                     
|               | 
|1.3            |  | Articles of Association of the Company (as amended on June 3, 2004)                                                                                                                                                              
|               | 
|2b.1           |  | The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of the Company and its
subsidiaries.                        
|               | 
|2c.1           |  | Indenture, dated October 1, 1995, between Mass Transit Railway Corporation (the predecessor of the Company) and The First National Bank of Chicago, as Trustee (incorporated herein by
reference to the Form F-3).               
|               | 
|2c.2           |  | First Supplemental Indenture, dated January 25, 1999, between Mass Transit Railway Corporation (the predecessor of the Company) and The First National Bank of Chicago (incorporated herein by
reference to the Form F-3).       



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|2c.3           |  | Second Supplemental Indenture, dated June 12, 2000, between the Company and Bank One Trust Company, N.A. as Trustee and successor in interest to The First National Bank of Chicago
(incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                                                                                                                                                                          
|               | 
|2c.4           |  | Third Supplemental Indenture, dated as of September 7, 2001, between MTR Corporation Limited and Bank One Trust Company, N.A., as Trustee and successor in interest to The First National Bank
of Chicago (incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                                                                                                                                                    
|               | 
|2c.5           |  | Indenture, dated as of September 7, 2001, among MTR Corporation (C.I.) Limited, as Issuer, MTR Corporation Limited, as Guarantor, and Bank One Trust Company, N.A., as Trustee and successor in
interest to The First National Bank of Chicago (incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                                                                                                               
|               | 
|4.1            |  | Operating Agreement, dated June 30, 2000, between Secretary for Transport (now known as Secretary for the Environment, Transport and Works) for and on behalf of the Government of the Hong
Kong Special Administrative Region and the Company (incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                                                                                                               
|               | 
|4.2            |  | Comfort Letter dated July 14, 2000 from Planning and Lands Bureau (now known as Housing, Planning and Lands Bureau) of the Government of the Hong Kong Special Administrative Region, to the
Company regarding land matters relating to the privatization of the Company (incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                                                                                     
|               | 
|4.3            |  | Agreement dated June 30, 2000, in respect of the vesting of certain assets comprised in the Eastern Harbour Crossing, between The Secretary for the Treasury (now known as Secretary for
Financial Services and the Treasury) for and on behalf of the Government of the Hong Kong Special Administrative Region, and the Company (incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                            
|               | 
|4.4            |  | Amendment and Restatement Agreement, dated June 30, 2000 in respect of The Memorandum of Understanding relating to the Eastern Harbour Crossing and The Airport Railway Operating and
Maintenance Terms and The Project Agreement for the Design, Construction, Financing and Operating of the Tseung Kwan O Extension and The Letter Agreement relating to the Quarry Bay Congestion Relief Works, dated June 30, 2000, between Secretary for
Transport (now known as Secretary for the Environment, Transport and Works) for and on behalf of the Government of the Hong Kong Special Administrative Region and the Company (incorporated herein by reference to the Form F-3).
|               | 
|4.5            |  | Indemnity Agreement, dated September 22, 2000, in respect of the global share offering, among the Company, the Members of the Board and the Members of the Executive Directorate and the
Government of the Hong Kong Special Administrative Region (incorporated herein by reference to the Annual Report on Form 20-F for the fiscal year ended December 31, 2000, filed by the Company on June 20, 2001).                                                                                                                                                                                                                                                                      



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.6            |  | Project Agreement for the design, construction, financing and operation of the Pennys Bay Rail Link (now known as Disneyland Resort Line), dated July 24, 2002, between the Company and
the Deputy Secretary for the Environment, Transport and Works for and on behalf of the Government (incorporated herein by reference to the Annual Report on Form 20-F for the fiscal year ended December 31, 2002, filed by the Company on June 25,
2003).
|               | 
|7.1            |  | Computation of Ratio of Debt to Shareholders Funds based on Hong Kong GAAP.                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|7.2            |  | Computation of Ratio of Debt to Shareholders Equity based on US GAAP.                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|7.3            |  | Computation of Ratio of Earnings to Fixed Charges based on Hong Kong GAAP.                                                                                                                                                                                                                                                                                                                                                                         
|               | 
|7.4            |  | Computation of Ratio of Earnings to Fixed Charges based on US GAAP.                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|8.1            |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|10.1           |  | Memorandum on Performance Requirements between Commissioner for Transport for and on behalf of the Government of the Hong Kong Special Administrative Region and the Company (incorporated
herein by reference to the Form F-3).                                                                                                                                                                                                                   
|               | 
|12.1           |  | Certification of Chief Executive Officer required by Rule 15d-14(a) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                        
|               | 
|12.2           |  | Certification of Finance Director required by Rule 15d-14(a) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                               
|               | 
|13.1           |  | Certification of Chief Executive Officer required by Rule 15d-14(b) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                        
|               | 
|13.2           |  | Certification of Finance Director required by Rule 15d-14(b) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                               
|               | 
|23.1           |  | Consent of KPMG, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                    



-104-



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##### Table of Contents

SIGNATURES



The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.



MTR CORPORATION LIMITEDBy:

/s/ Lincoln K.K. LeongLincoln K.K. LeongFinance Director




Date: June 25, 2004



---

##### Table of Contents

LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM



Members of the
Board

MTR Corporation Limited:



We have audited the accompanying consolidated balance sheets of MTR Corporation Limited and its subsidiaries (the Group) as of December 31, 2002 and 2003, the
consolidated statements of changes in equity for the years ended December 31, 2002 and 2003, and the related consolidated profit and loss accounts and consolidated cash flow statements for each of the years in the three-year period ended December
31, 2003. These consolidated financial statements are the responsibility of the Groups management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in Hong Kong
and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31,
2002 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in Hong Kong.



As discussed in Note 43A to the consolidated financial statements in 2003, the Group adopted
on a retrospective basis Statement of Standard Accounting Practice 12 Income Taxes, issued by the Hong Kong Society of Accountants.



Accounting principles generally accepted in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented in Note 47 to the consolidated financial statements.



The accompanying consolidated financial statements as of and for the year ended December 31, 2003 have been translated into United States dollars solely for the
convenience of the reader. We have audited the translation, and in our opinion, the consolidated financial statements expressed in Hong Kong dollars have been translated into United States dollars on the basis set forth in Note 1Z to the
consolidated financial statements.



/s/ KPMG



Hong Kong

March 2, 2004



F-1



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##### Table of Contents

MTR CORPORATION LIMITED



Consolidated Profit and Loss Account



Year ended December 31, in millions, except per share data



|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|------------------------------------------------------------------------ |  | ---- |  | ---- | ------- | - | ---------- | --- | ------- | ---- |  | --- | ------- | - |  | --- | ------ | -
|                                                                         |  | NOTE |  | 2001 |         |   | 2002       |     |         | 2003 |  |     | 2003    |  
|                                                                         |  |      |  |      |         |   | (Note 43A) |     |         |      |  |     |         |  
|Fare revenue                                                             |  | 2    |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|- MTR Lines                                                              |  |      |  | HK$  | 5,164   |   |            | HK$ | 5,167   |      |  | HK$ | 5,064   |   |  | US$ | 652    |  
|- Airport Express Line                                                   |  |      |  |      | 564     |   |            |     | 553     |      |  |     | 425     |   |  |     | 55     |  
|Station commercial and other revenue                                     |  | 3A   |  |      | 973     |   |            |     | 979     |      |  |     | 1,117   |   |  |     | 144    |  
|Rental and management income                                             |  | 3B   |  |      | 891     |   |            |     | 987     |      |  |     | 988     |   |  |     | 127    |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Turnover                                                                 |  |      |  | HK$  | 7,592   |   |            | HK$ | 7,686   |      |  | HK$ | 7,594   |   |  | US$ | 978    |  
|                                                                         |  |      |  |      | ------- |   |            |     | ------- |      |  |     | ------- |   |  |     | ------ |  
|Staff costs and related expenses                                         |  | 4A   |  |      | (1,647  | ) |            |     | (1,579  | )    |  |     | (1,643  | ) |  |     | (212   | )
|Energy and utilities                                                     |  |      |  |      | (501    | ) |            |     | (502    | )    |  |     | (546    | ) |  |     | (70    | )
|Operational rent and rates                                               |  |      |  |      | (78     | ) |            |     | (87     | )    |  |     | (21     | ) |  |     | (3     | )
|Stores and spares consumed                                               |  |      |  |      | (119    | ) |            |     | (121    | )    |  |     | (128    | ) |  |     | (16    | )
|Repairs and maintenance                                                  |  | 4B   |  |      | (437    | ) |            |     | (435    | )    |  |     | (477    | ) |  |     | (61    | )
|Railway support services                                                 |  |      |  |      | (110    | ) |            |     | (89     | )    |  |     | (80     | ) |  |     | (10    | )
|Expenses relating to station commercial and other businesses             |  |      |  |      | (197    | ) |            |     | (185    | )    |  |     | (351    | ) |  |     | (45    | )
|Property ownership and management expenses                               |  |      |  |      | (159    | ) |            |     | (167    | )    |  |     | (198    | ) |  |     | (26    | )
|Project study and deferred expenditures written off                      |  | 4C   |  |      | (16     | ) |            |     | (218    | )    |  |     | (49     | ) |  |     | (6     | )
|General and administration expenses                                      |  | 4D   |  |      | (179    | ) |            |     | (184    | )    |  |     | (167    | ) |  |     | (22    | )
|Other expenses                                                           |  | 4D   |  |      | (96     | ) |            |     | (105    | )    |  |     | (187    | ) |  |     | (24    | )
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Operating expenses before depreciation                                   |  |      |  | HK$  | (3,539  | ) |            | HK$ | (3,672  | )    |  | HK$ | (3,847  | ) |  | US$ | (495   | )
|                                                                         |  |      |  |      | ------- |   |            |     | ------- |      |  |     | ------- |   |  |     | ------ |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Operating profit from railway and related operations before depreciation |  |      |  | HK$  | 4,053   |   |            | HK$ | 4,014   |      |  | HK$ | 3,747   |   |  | US$ | 483    |  
|Profit on property developments                                          |  | 6    |  |      | 3,248   |   |            |     | 3,755   |      |  |     | 5,369   |   |  |     | 691    |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Operating profit before depreciation                                     |  |      |  | HK$  | 7,301   |   |            | HK$ | 7,769   |      |  | HK$ | 9,116   |   |  | US$ | 1,174  |  
|Depreciation                                                             |  | 7    |  |      | (2,178  | ) |            |     | (2,470  | )    |  |     | (2,402  | ) |  |     | (309   | )
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Operating profit before interest and finance charges                     |  |      |  | HK$  | 5,123   |   |            | HK$ | 5,299   |      |  | HK$ | 6,714   |   |  | US$ | 865    |  
|Interest and finance charges                                             |  | 8    |  | HK$  | (874    | ) |            | HK$ | (1,125  | )    |  | HK$ | (1,539  | ) |  | US$ | (198   | )
|Share of profit of non-controlled subsidiary                             |  | 18   |  |      | 29      |   |            |     | 39      |      |  |     | 23      |   |  |     | 3      |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Profit before taxation                                                   |  |      |  | HK$  | 4,278   |   |            | HK$ | 4,213   |      |  | HK$ | 5,198   |   |  | US$ | 670    |  
|Income tax                                                               |  | 12A  |  |      |        |   |            |     | (634    | )    |  |     | (748    | ) |  |     | (97    | )
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Profit attributable to shareholders                                      |  | 9    |  | HK$  | 4,278   |   |            | HK$ | 3,579   |      |  | HK$ | 4,450   |   |  | US$ | 573    |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Dividends                                                                |  | 10   |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Interim dividend declared and paid during the year                       |  |      |  | HK$  | 703     |   |            | HK$ | 717     |      |  | HK$ | 734     |   |  | US$ | 94     |  
|Final dividend proposed after the balance sheet date                     |  |      |  |      | 1,415   |   |            |     | 1,444   |      |  |     | 1,481   |   |  |     | 191    |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|                                                                         |  |      |  | HK$  | 2,118   |   |            | HK$ | 2,161   |      |  | HK$ | 2,215   |   |  | US$ | 285    |  
|                                                                         |  |      |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|Earnings per share:                                                      |  | 11   |  |      |         |   |            |     |         |      |  |     |         |   |  |     |        |  
|- Basic                                                                  |  |      |  | HK$  | 0.85    |   |            | HK$ | 0.70    |      |  | HK$ | 0.85    |   |  | US$ | 0.11   |  
|- Diluted                                                                |  |      |  | HK$  | 0.85    |   |            | HK$ | 0.70    |      |  | HK$ | 0.85    |   |  | US$ | 0.11   |  



The accompanying
notes are an integral part of these consolidated financial statements



F - 2



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##### Table of Contents

MTR CORPORATION LIMITED



Consolidated Balance Sheet



As of December 31, in millions



|                                                          |  |      |  |            |         |      |     |         |  |     |       
|--------------------------------------------------------- |  | ---- |  | ---------- | ------- | ---- | --- | ------- |  | --- | ------
|                                                          |  | NOTE |  | 2002       |         | 2003 |     | 2003   
|                                                          |  |      |  | (Note 43A) |         |      |     |        
|Assets                                                    |  |      |  |            |         |      |     |         |  |     |       
|Fixed assets                                              |  | 14   |  |            |         |      |     |         |  |     |       
|- Investment properties                                   |  |      |  | HK$        | 10,267  |      | HK$ | 14,169  |  | US$ | 1,825 
|- Other property, plant and equipment                     |  |      |  |            | 84,003  |      |     | 82,752  |  |     | 10,658
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|                                                          |  |      |  | HK$        | 94,270  |      | HK$ | 96,921  |  | US$ | 12,483
|Railway construction in progress                          |  | 15   |  |            | 109     |      |     | 181     |  |     | 23    
|Property development in progress                          |  | 16A  |  |            | 2,870   |      |     | 2,309   |  |     | 297   
|Deferred expenditure                                      |  | 17   |  |            | 106     |      |     | 104     |  |     | 13    
|Interest in non-controlled subsidiary                     |  | 18   |  |            | 87      |      |     | 110     |  |     | 14    
|Staff housing loans                                       |  | 20   |  |            | 84      |      |     | 67      |  |     | 9     
|Properties held for sale                                  |  | 21   |  |            | 794     |      |     | 812     |  |     | 105   
|Stores and spares                                         |  | 22   |  |            | 259     |      |     | 249     |  |     | 32    
|Debtors, deposits and payments in advance                 |  | 23   |  |            | 727     |      |     | 1,153   |  |     | 149   
|Amounts due from the Government and other related parties |  | 24   |  |            | 95      |      |     | 84      |  |     | 11    
|Cash and cash equivalents                                 |  | 25   |  |            | 1,718   |      |     | 376     |  |     | 48    
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|                                                          |  |      |  | HK$        | 101,119 |      | HK$ | 102,366 |  | US$ | 13,184
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|Liabilities                                               |  |      |  |            |         |      |     |         |  |     |       
|Bank overdrafts                                           |  | 26B  |  | HK$        | 34      |      | HK$ | 12      |  | US$ | 2     
|Short-term loans                                          |  | 26B  |  |            |        |      |     | 353     |  |     | 45    
|Creditors, accrued charges and provisions                 |  | 28   |  |            | 3,760   |      |     | 3,420   |  |     | 440   
|Taxes payable                                             |  | 33A  |  |            | 1       |      |     | 2       |  |     |      
|Contract retentions                                       |  | 29   |  |            | 496     |      |     | 311     |  |     | 40    
|Amounts due to the Government and other related parties   |  | 30   |  |            | 209     |      |     | 161     |  |     | 21    
|Loans and obligations under finance leases                |  | 26B  |  |            | 33,474  |      |     | 31,660  |  |     | 4,078 
|Deferred liabilities                                      |  | 31   |  |            | 85      |      |     | 86      |  |     | 11    
|Deferred income                                           |  | 32   |  |            | 6,226   |      |     | 5,061   |  |     | 652   
|Deferred tax liabilities                                  |  | 33B  |  |            | 3,252   |      |     | 4,000   |  |     | 515   
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|                                                          |  |      |  | HK$        | 47,537  |      | HK$ | 45,066  |  | US$ | 5,804 
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|Minority interests                                        |  |      |  | HK$        | 8       |      | HK$ | 8       |  | US$ | 1     
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|Net assets                                                |  |      |  | HK$        | 53,574  |      | HK$ | 57,292  |  | US$ | 7,379 
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|Shareholders funds                                       |  |      |  |            |         |      |     |         |  |     |       
|Share capital, share premium and capital reserve          |  | 34   |  | HK$        | 33,910  |      | HK$ | 35,086  |  | US$ | 4,519 
|Other reserves                                            |  | 35   |  |            | 19,664  |      |     | 22,206  |  |     | 2,860 
|                                                          |  |      |  |            |         |      |     |         |  |     |       
|                                                          |  |      |  | HK$        | 53,574  |      | HK$ | 57,292  |  | US$ | 7,379 
|                                                          |  |      |  |            |         |      |     |         |  |     |       



The accompanying
notes are an integral part of these consolidated financial statements



F - 3



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##### Table of Contents

MTR CORPORATION LIMITED



Consolidated Statement of Changes in Equity



Year ended December 31, in millions



|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|--------------------------------------------------------------------------------------------- |  | ---- |  | ---------- | ------ | - | ---- | --- | ------ | ---- |  | --- | ----- | -
|                                                                                              |  | NOTE |  | 2002       |        |   | 2003 |     |        | 2003 | 
|                                                                                              |  |      |  | (Note 43A) |        |   |      |     |        |      | 
|Balance as at January 1, as previously reported                                               |  |      |  | HK$        | 53,848 |   |      | HK$ | 56,827 |      |  | US$ | 7,319 |  
|Prior period adjustment arising from change in accounting policy with respect to deferred tax |  | 43A  |  |            | (2,620 | ) |      |     | (3,253 | )    |  |     | (419  | )
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Balance as at January 1, as restated                                                          |  |      |  | HK$        | 51,228 |   |      | HK$ | 53,574 |      |  | US$ | 6,900 |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|(Deficit) / Surplus on revaluation of investment properties                                   |  | 35   |  | HK$        | (112   | ) |      | HK$ | 276    |      |  | US$ | 36    |  
|Deficit on revaluation of self-occupied office land and buildings, net of deferred tax        |  | 35   |  |            | (92    | ) |      |     | (6     | )    |  |     | (1    | )
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Net (losses) / profits not recognized in the consolidated profit and loss account             |  |      |  | HK$        | (204   | ) |      | HK$ | 270    |      |  | US$ | 35    |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Net profit for the year, as previously reported                                               |  |      |  | HK$        | 4,212  |   |      |     |        |      |  |     |       |  
|Prior period adjustment arising from change in accounting policy with respect to deferred tax |  |      |  |            | (633   | ) |      |     |        |      |  |     |       |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Net profit for the year (2002: as restated)                                                   |  |      |  | HK$        | 3,579  |   |      | HK$ | 4,450  |      |  | US$ | 573   |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Dividends approved during the year                                                            |  | 10   |  | HK$        | (2,132 | ) |      | HK$ | (2,178 | )    |  | US$ | (280  | )
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Shares issued under                                                                           |  | 34   |  |            |        |   |      |     |        |      |  |     |       |  
|- Employee Share Option Scheme                                                                |  |      |  | HK$        | 37     |   |      | HK$ | 88     |      |  | US$ | 11    |  
|- Scrip Dividend Scheme                                                                       |  |      |  |            | 1,066  |   |      |     | 1,088  |      |  |     | 140   |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Net increase in shareholders funds arising from capital transactions                         |  |      |  | HK$        | 1,103  |   |      | HK$ | 1,176  |      |  | US$ | 151   |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  
|Balance as at December 31                                                                     |  |      |  | HK$        | 53,574 |   |      | HK$ | 57,292 |      |  | US$ | 7,379 |  
|                                                                                              |  |      |  |            |        |   |      |     |        |      |  |     |       |  



The accompanying
notes are an integral part of these consolidated financial statements



F - 4



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##### Table of Contents

MTR CORPORATION LIMITED



Consolidated Cash Flow Statement



Year ended December 31, in millions



|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|----------------------------------------------------------------------------------- |  | ---- |  | ---- | ------ | - | ---- | --- | ------ | ---- |  | --- | ------ | - |  | --- | ------ | -
|                                                                                    |  | NOTE |  | 2001 |        |   | 2002 |     |        | 2003 |  |     | 2003   |  
|Cash flows from operating activities                                                |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Operating profit from railway and related operations before depreciation            |  |      |  | HK$  | 4,053  |   |      | HK$ | 4,014  |      |  | HK$ | 3,747  |   |  | US$ | 483    |  
|Adjustments for:                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Decrease in provision for staff housing loans                                       |  |      |  |      | (2     | ) |      |     | (1     | )    |  |     |       |   |  |     |       |  
|(Decrease) / Increase in provision for obsolete stock                               |  |      |  |      | (1     | ) |      |     | (1     | )    |  |     | 7      |   |  |     | 1      |  
|Loss on disposal of fixed assets                                                    |  |      |  |      | 6      |   |      |     | 17     |      |  |     | 16     |   |  |     | 2      |  
|Deficit on revaluation of self-occupied office land and buildings                   |  |      |  |      |       |   |      |     |       |      |  |     | 69     |   |  |     | 9      |  
|Project study and deferred expenditures written off                                 |  |      |  |      |       |   |      |     | 209    |      |  |     | 21     |   |  |     | 3      |  
|Amortization of deferred income from lease transaction                              |  |      |  |      |       |   |      |     |       |      |  |     | (4     | ) |  |     | (1     | )
|Gain on disposal of investment in a non-controlled subsidiary                       |  |      |  |      | (12    | ) |      |     |       |      |  |     |       |   |  |     |       |  
|Exchange (gain) / loss                                                              |  |      |  |      | (4     | ) |      |     | 1      |      |  |     | 1      |   |  |     |       |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Operating profit from railway and related operations before working capital changes |  |      |  | HK$  | 4,040  |   |      | HK$ | 4,239  |      |  | HK$ | 3,857  |   |  | US$ | 497    |  
|Decrease / (Increase) in debtors, deposits and payments in advance                  |  |      |  | HK$  | 82     |   |      | HK$ | (80    | )    |  | HK$ | (217   | ) |  | US$ | (28    | )
|Decrease in stores and spares                                                       |  |      |  |      | 15     |   |      |     | 3      |      |  |     | 4      |   |  |     |       |  
|Increase in creditors, accrued charges and provisions                               |  |      |  |      | 18     |   |      |     | 66     |      |  |     | 196    |   |  |     | 25     |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Cash generated from operations                                                      |  |      |  | HK$  | 4,155  |   |      | HK$ | 4,228  |      |  | HK$ | 3,840  |   |  | US$ | 494    |  
|Overseas tax paid                                                                   |  |      |  |      |       |   |      |     |       |      |  |     | (3     | ) |  |     |       |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Net cash generated from operating activities                                        |  |      |  | HK$  | 4,155  |   |      | HK$ | 4,228  |      |  | HK$ | 3,837  |   |  | US$ | 494    |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Cash flows from investing activities                                                |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Capital expenditure                                                                 |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|- Tseung Kwan O Extension Project                                                   |  |      |  | HK$  | (3,033 | ) |      | HK$ | (2,336 | )    |  | HK$ | (679   | ) |  | US$ | (87    | )
|- Pennys Bay Rail Link                                                             |  |      |  |      | (46    | ) |      |     | (151   | )    |  |     | (457   | ) |  |     | (59    | )
|- Property development projects                                                     |  |      |  |      | (746   | ) |      |     | (377   | )    |  |     | (88    | ) |  |     | (11    | )
|- Purchase of assets and other capital projects                                     |  |      |  |      | (2,788 | ) |      |     | (2,323 | )    |  |     | (1,446 | ) |  |     | (186   | )
|Receipts from property developers                                                   |  |      |  |      | 350    |   |      |     | 2,646  |      |  |     | 675    |   |  |     | 87     |  
|Proceeds from properties sold                                                       |  |      |  |      |       |   |      |     | 127    |      |  |     | 180    |   |  |     | 23     |  
|Receipts on disposal of fixed assets                                                |  |      |  |      |       |   |      |     | 1      |      |  |     | 3      |   |  |     |       |  
|Proceeds received on reduction of investment in a non-controlled subsidiary         |  |      |  |      | 25     |   |      |     | 9      |      |  |     |       |   |  |     |       |  
|Acquisition of subsidiaries, net of cash acquired                                   |  |      |  |      |       |   |      |     | 6      |      |  |     |       |   |  |     |       |  
|Loans made under Staff Housing Loan Scheme                                          |  |      |  |      | (3     | ) |      |     |       |      |  |     |       |   |  |     |       |  
|Principal repayments under Staff Housing Loan Scheme                                |  |      |  |      | 513    |   |      |     | 44     |      |  |     | 17     |   |  |     | 2      |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Net cash used in investing activities                                               |  |      |  | HK$  | (5,728 | ) |      | HK$ | (2,354 | )    |  | HK$ | (1,795 | ) |  | US$ | (231   | )
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Cash flows from financing activities                                                |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Shares issued                                                                       |  |      |  | HK$  | 18     |   |      | HK$ | 37     |      |  | HK$ | 88     |   |  | US$ | 11     |  
|Drawdown of loans                                                                   |  |      |  |      | 11,153 |   |      |     | 3,731  |      |  |     | 7,441  |   |  |     | 958    |  
|Repayment of loans                                                                  |  |      |  |      | (6,843 | ) |      |     | (1,399 | )    |  |     | (8,803 | ) |  |     | (1,134 | )
|Reduction in capital element of finance lease                                       |  |      |  |      | (133   | ) |      |     | (142   | )    |  |     | (103   | ) |  |     | (13    | )
|Receipts of deferred income from lease transaction                                  |  |      |  |      |       |   |      |     |       |      |  |     | 141    |   |  |     | 18     |  
|(Release) / Collection of refundable deposits and asset replacement reserve funds   |  |      |  |      | (2     | ) |      |     | 4      |      |  |     | (3     | ) |  |     |       |  
|Interest paid                                                                       |  |      |  |      | (1,869 | ) |      |     | (1,690 | )    |  |     | (1,643 | ) |  |     | (212   | )
|Interest received                                                                   |  |      |  |      | 22     |   |      |     | 27     |      |  |     | 14     |   |  |     | 2      |  
|Interest element of finance lease rental payments                                   |  |      |  |      | (68    | ) |      |     | (58    | )    |  |     | (47    | ) |  |     | (6     | )
|Finance charges paid                                                                |  |      |  |      | (68    | ) |      |     | (19    | )    |  |     | (32    | ) |  |     | (4     | )
|Dividend paid                                                                       |  |      |  |      | (601   | ) |      |     | (847   | )    |  |     | (415   | ) |  |     | (53    | )
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Net cash generated from / (used in) financing activities                            |  |      |  | HK$  | 1,609  |   |      | HK$ | (356   | )    |  | HK$ | (3,362 | ) |  | US$ | (433   | )
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Net increase / (decrease) in cash and cash equivalents                              |  |      |  | HK$  | 36     |   |      | HK$ | 1,518  |      |  | HK$ | (1,320 | ) |  | US$ | (170   | )
|Cash and cash equivalents at January 1                                              |  |      |  |      | 130    |   |      |     | 166    |      |  |     | 1,684  |   |  |     | 217    |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  
|Cash and cash equivalents at December 31                                            |  | 25   |  | HK$  | 166    |   |      | HK$ | 1,684  |      |  | HK$ | 364    |   |  | US$ | 47     |  
|                                                                                    |  |      |  |      |        |   |      |     |        |      |  |     |        |   |  |     |        |  



The accompanying
notes are an integral part of these consolidated financial statements



F - 5



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2001, 2002, 2003



|1 | Principal Accounting Policies
|- | -----------------------------



| | A | BASIS OF PREPARATION OF ACCOUNTS
| | - | --------------------------------



iThese accounts have been prepared in compliance with the Hong Kong Companies Ordinance. These accounts have also been
prepared in accordance with all applicable Hong Kong Financial Reporting Standards (which include all Statements of Standard Accounting Practice (SSAPs) and Interpretations) issued by the Hong Kong Society of Accountants
(HKSA), accounting principles generally accepted in Hong Kong and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Stock Exchange).



ii    The measurement basis used
in the preparation of the accounts is historical cost modified by the revaluation of investment properties and self-occupied office land and buildings.



| | B | BASIS OF CONSOLIDATION
| | - | ----------------------



The consolidated accounts include the accounts of the Company and all its subsidiaries except for a non-controlled subsidiary (see note
1D) (the Group) made up to 31 December each year. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from or to the date of their acquisition or disposal, as
appropriate. All material inter-company transactions and balances are eliminated on consolidation.



| | C | SUBSIDIARIES
| | - | ------------



A subsidiary in accordance with the Hong Kong Companies Ordinance is a company in which the Group, directly or indirectly, holds more than
half of the issued share capital, or controls more than half of the voting power, or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern the
financial and operating policies, so as to obtain benefits from their activities.



Intra-group balances and transactions, and any unrealized profits arising from intra-group transactions, are eliminated in full in
preparing the consolidated accounts. Unrealized losses resulting from intra-group transactions are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.



Minority interests at the balance sheet date, being the
portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet separately from liabilities and the
shareholders equity. Minority interests in the results of the Group for the year are also separately presented in the profit and loss account.



F - 6



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



Where losses attributable to the minority exceed the minority interest in the net
assets of a subsidiary, the excess, and any further losses attributable to the minority, are charged against the Groups interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses. All
subsequent profits of the subsidiary are allocated to the Group until the minoritys share of losses previously absorbed by the Group has been recovered.



Investments in subsidiaries are carried in the Companys balance sheet at cost less any impairment losses (see note 1F).



| | D | NON-CONTROLLED SUBSIDIARY
| | - | -------------------------



Octopus Cards Limited (OCL) is regarded as a jointly controlled entity as the Group does not have effective control over the
Board of OCL. The investment in OCL is accounted for in the consolidated accounts of the Company using the equity method which is initially recorded at cost and adjusted thereafter for the post acquisition change in the Groups share of
OCLs net assets. The consolidated profit and loss account reflects the Groups share of the results of OCL for the year.



Unrealized profits and losses resulting from transactions between the Group and OCL are eliminated to the extent of the Groups
interest in OCL, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognized immediately in the profit and loss account.



In the Companys balance sheet, its investment in OCL is stated at cost less impairment losses, if any.



| | E | FIXED ASSETS
| | - | ------------



i    Investment properties with an unexpired lease term of more than 20 years are stated in the balance sheet at open market
value as determined annually by independent professionally qualified valuers.



Changes in the value of investment properties arising upon revaluations are treated as movements in the investment property revaluation
reserve, except:



| |  | where the balance of the investment property revaluation reserve is insufficient to cover a revaluation deficit on a portfolio basis, the excess of the deficit is charged to the
profit and loss account; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | where a revaluation deficit had previously been charged to the profit and loss account and a revaluation surplus subsequently arises, this surplus is firstly credited to the profit
and loss account to the extent of the deficit previously charged to the profit and loss account, and is thereafter taken to the investment property revaluation reserve.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On disposal of an investment property, the related portion of the investment property revaluation reserve is
transferred to the profit and loss account.



F - 7



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



ii    Leasehold land and buildings comprise leasehold land for railway
depots and self-occupied office land and buildings:



(a)    Leasehold land for railway depots is stated at cost less accumulated depreciation and impairment losses.



(b)    Self-occupied office land and buildings are stated in the balance sheet at open market value on the basis of their existing
use at the date of revaluation less any subsequent accumulated depreciation. Revaluations are performed by independent qualified valuers every year. Changes in the value of self-occupied office land and buildings arising upon revaluations are
treated as movements in the fixed asset revaluation reserve, except:



| |  | where the balance of the fixed asset revaluation reserve relating to a self-occupied office land and building is insufficient to cover a revaluation deficit of that property, the
excess of the deficit is charged to the profit and loss account; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | where a revaluation deficit had previously been charged to the profit and loss account and a revaluation surplus subsequently arises, this surplus is firstly credited to the profit
and loss account to the extent of the deficit previously charged to the profit and loss account, and is thereafter taken to the fixed asset revaluation reserve.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



iii    Civil works and plant and equipment are stated at cost less accumulated depreciation and
impairment losses.



iv    Assets under construction for the operational railway are stated at cost less impairment losses. Cost comprises direct costs of construction, such as materials, staff costs and overheads, together with
interest expense capitalized during the period of construction or installation and testing. Capitalization of these costs ceases and the asset concerned is transferred to fixed assets when substantially all the activities necessary to prepare the
asset for its intended use are completed.



v    Leases of assets under which the lessee assumes substantially all the risks and benefits of ownership are classified as finance leases. Where the Group acquires the use of assets under finance leases, the
amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments (computed using the rate of interest implicit in the lease), of such assets are included in fixed assets and the corresponding
liabilities, net of finance charges, are recorded as obligations under finance leases.



Leases of assets under which the lessor has not transferred all the risks and benefits of ownership are classified as operating leases.
Where the Group leases out assets under operating leases, the assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the Groups depreciation policies. Impairment losses are
accounted for in accordance with the accounting policies on impairment of assets. Revenue arising from operating leases is recognized in accordance with the Groups revenue recognition policies as set out in note 1S.



F - 8



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



viSubsequent expenditure relating to an existing fixed asset is added
to the carrying amount of the asset if it is probable that future economic benefit in excess of the originally assessed standard of performance of the asset will flow to the Group.



Expenditure on repairs or maintenance of an existing fixed
asset to restore or maintain the originally assessed standard of performance of that asset is charged as an expense when incurred.



vii    Gains or losses arising from the retirement or disposal of a fixed asset other than an investment property are
determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognized as income or expense in the profit and loss account on the date of retirement or disposal. Any related revaluation
surplus is transferred from the fixed asset revaluation reserve to retained profits.



| | F | IMPAIRMENT OF ASSETS
| | - | --------------------



Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may
be impaired or an impairment loss previously recognized no longer exists or may have decreased:



| |  | fixed assets (other than properties carried at revalued amounts);
| | - | -----------------------------------------------------------------



| |  | railway construction in progress;
| | - | ---------------------------------



| |  | property development in progress;
| | - | ---------------------------------



| |  | deferred expenditure; and
| | - | -------------------------



| |  | investments in subsidiaries.
| | - | ----------------------------



If any such indication exists, the assets recoverable amount is estimated.



The recoverable amount of an asset is the greater of its net
selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to
the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (ie a cash-generating unit).



An impairment loss is recognized whenever the
carrying amount of an asset exceeds its recoverable amount.



An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount of the asset.



A reversal of impairment losses is limited to the assets carrying amount that would have been
determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to the profit and loss account in the year in which the reversals are recognized.



| | G | DEPRECIATION
| | - | ------------



iInvestment properties with an unexpired lease term of more than 20 years are not depreciated.



ii    Fixed assets other than investment
properties and assets under construction are depreciated on a straight line basis at rates sufficient to write off their cost or valuation over their estimated useful lives as follows:



F - 9



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|                                        |  |                                                            |  | 
|--------------------------------------- |  | ---------------------------------------------------------- |  | 
|Leasehold Land and Buildings            |  |                                                           
|Self-occupied office land and buildings |  | the shorter of 50 years and theunexpired term of the lease
|Leasehold land for railway depots       |  | the unexpired term of the lease                           

|                                                                                                                       |  |                   |  | 
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                                                                                                       | 
|Civil Works                                                                                                            |  |                  
|Rails (initial cost)                                                                                                   |  | Indefinite (Note)
|Excavation and boring                                                                                                  |  | Indefinite       
|Tunnel linings, underground civil structures, overhead structures and immersed tubes                                   |  | 100 years        
|Station building structures                                                                                            |  | 80 -100 years    
|Depot structures                                                                                                       |  | 80 years         
|Concrete kiosk structures                                                                                              |  | 20 years         
|Station architectural finishes                                                                                         |  | 20 - 30 years    
|                                                                                                                       | 
|Plant and Equipment                                                                                                    |  |                  
|Rolling stock                                                                                                          |  | 7 - 40 years     
|Platform screen doors                                                                                                  |  | 35 years         
|Environmental control systems, lifts and escalators, fire protection and drainage system                               |  | 20 - 30 years    
|Power supply systems                                                                                                   |  | 20 - 40 years    
|Automatic fare collection systems, metal station kiosks, and other mechanical equipment                                |  | 20 years         
|Fixture and fitting                                                                                                    |  | 10 - 15 years    
|Train control and signalling equipment, station announcement systems, telecommunication systems and advertising
panels |  | 15 years         
|Maintenance equipment, office furniture and equipment                                                                  |  | 10 years         
|Computer software licenses and applications                                                                            |  | 5 - 7 years      
|Cleaning equipment, computer equipment and tools                                                                       |  | 5 years          
|Motor vehicles                                                                                                         |  | 4 years          



Note
: Replacement costs of rails are charged to the profit and loss account as revenue expenses.



The useful lives of the various categories of fixed assets are reviewed regularly in the light of actual asset condition, usage experience
and the current asset replacement programme. The depreciation charge for the current and future periods is adjusted if there are significant changes from previous estimates.



iii    No depreciation is provided on assets under construction until construction is completed
and the assets are ready for their intended use.



iv    Depreciation on assets held under finance leases is provided at rates designed to write off the cost of the asset in equal annual amounts over the shorter of the lease term or the anticipated useful life of
the asset as set out above, except in cases where title to the asset will be acquired by the Group at the end of the lease where depreciation is provided at rates designed to write off the cost of the asset in equal amounts over the anticipated
useful life of the assets.



F - 10



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | H | CONSTRUCTION COSTS
| | - | ------------------



i    Costs incurred by the Group in respect of feasibility studies on proposed railway related construction projects (including
consultancy fees, in-house staff costs and overheads) are dealt with as follows:



| |  | where the proposed projects are at a preliminary review stage with no certainty of materializing, the costs concerned are written off to the profit and loss account; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | where the proposed projects are at a detailed study stage, having been agreed in principle by the Board of Directors based on a feasible financial plan, the costs concerned are
dealt with as deferred expenditure until such time as a project agreement is reached with the Government, whereupon the costs are transferred to railway construction in progress.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ii    After entering into a project agreement
with the Government, all costs incurred in the construction of the railway are dealt with as railway construction in progress until commissioning of the railway line, whereupon the relevant construction costs are transferred to fixed assets.



| | I | PROPERTY DEVELOPMENT
| | - | --------------------



i    Costs incurred by the Group in the preparation of sites for property development are dealt with as property development in
progress.



ii    Payments
received from developers in respect of developments are offset against the amounts in property development in progress attributable to that development. Any surplus amounts of payments received from developers in excess of the balance in property
development in progress are transferred to deferred income. In these cases, further costs subsequently incurred by the Group in respect of that development are charged against deferred income.



iii    Expenditure incurred on the development of
properties for retention by the Group is transferred to fixed assets when the occupation permits are issued and the properties are put into use.



iv    When agreement is reached with a developer to redevelop an existing self-occupied property, the relevant property is
revalued on an existing use basis prior to commencement of redevelopment. The surplus arising on revaluation is credited to fixed asset revaluation reserve. On commencement of redevelopment, the net book value of the property is transferred to
property development in progress.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



v    Profits arising from the development of properties undertaken in
conjunction with property developers are recognized in the profit and loss account as follows:



| |  | where the Group receives payments from developers at the commencement of the project, profits arising from such payments are recognized when the foundation and site enabling works
are complete and acceptable for development, and after taking into account the outstanding risks and obligations, if any, retained by the Group in connection with the development;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | where the Group receives a share of proceeds from sale of the development, profits arising from such proceeds are recognized upon the issue of occupation permits provided the
amounts of revenue and costs can be measured reliably; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | where the Group receives a distribution of the assets of the development upon completion of construction, profit is recognized based on the fair value of such assets at the time of
receipt.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Upon recognition of
profit, the balance of deferred income or property development in progress related to that development is credited or charged to the profit and loss account, as the case may be.



vi    Where the Group is liable to pay the developer consideration for the retention of part of a
property to be redeveloped, profit attributable to the Group in respect of the redevelopment (including any payment received from the developer) will be recognized in the profit and loss account when the quantum of the obligation of the Group and
the amount of realized profit can be determined with reasonable accuracy.



vii    Where properties are received as a profit distribution upon completion of development and are held for sale, those properties are stated at their estimated net realizable value upon
receipt. Net realizable value represents the estimated selling price less costs to be incurred in selling the properties. When properties are sold, the carrying amount of those properties is recognized as cost of properties sold in the period in
which the related revenue is recognized. The amount of any write-down of properties to net realizable value is recognized as an expense in the period the write-down occurs. The amount of any reversal of any write-down of properties, arising from an
increase in net realizable value, is recognized as a reduction in the cost of properties sold in the period in which the reversal occurs.



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | J | JOINTLY CONTROLLED OPERATIONS
| | - | -----------------------------



The arrangements entered into by the Group with developers for property developments along the Airport Railway and the Tseung Kwan O Line
are considered to be jointly controlled operations pursuant to SSAP 21 Accounting for interests in joint ventures. Pursuant to the development arrangements, the Group is normally responsible for its own costs, including in-house staff
costs and the costs of enabling works, and the developers normally undertake to pay for all other project costs such as land premium, construction costs, professional fees, etc. Such costs are deductible from the proceeds of sale before surplus
proceeds are shared. In respect of its interests in such operations, the Group accounts for the costs of enabling works net of up-front payments received as property development in progress. In cases where up-front payments received from developers
exceed the related expenditures incurred by the Group, such excess is recorded as deferred income. Expenses incurred by the Group on staff, overhead and consultancy fees in respect of these developments are also capitalized as property development
in progress. The Groups share of income earned from such operations is recognized in the profit and loss account in accordance with note 1I after netting off any related balance in the property development in progress account at that time.



| | K | DEFEASANCE OF LONG-TERM LEASE PAYMENTS
| | - | --------------------------------------



Where commitments to make long-term lease payments have been defeased by the placement of securities, those commitments and securities
(and income and charges arising therefrom) have been netted off in order to reflect the overall commercial effect of the arrangements. These transactions are not accounted for as leases and these liabilities and investment in securities are not
recognized as obligations and assets. Any net amount of cash received from such transactions is accounted for as deferred income and is amortized over the terms of the respective lease.



| | L | STORES AND SPARES
| | - | -----------------



Stores and spares used for railway and business operation are categorized as either revenue or capital. Revenue items are stated in the
balance sheet at cost, using the weighted average cost method. Provision is made for obsolescence where appropriate. Capital items are included in fixed assets and stated at cost less aggregate depreciation and impairment losses. Depreciation is
charged at the rates applicable to the relevant fixed assets against which the capital spares are held in reserve.



| | M | LONG-TERM CONSULTANCY CONTRACTS
| | - | -------------------------------



The accounting policy for contract revenue is set out in note 1S(iii). When the outcome of a fixed-price consultancy contract can be
estimated reliably, contract costs are recognized as expense by reference to the stage of completion of the contract activity at the balance sheet date. When it is probable that total contract costs will exceed total contract revenue, the expected
loss is recognized as an expense immediately. When the outcome of a consultancy contract cannot be estimated reliably, contract costs are recognized as an expense in the period in which they are incurred.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



Consultancy contracts in progress at the balance sheet date are recorded in the
balance sheet at the net amount of costs incurred plus recognized profit less recognized losses and progress billings, and are presented in the balance sheet as the Gross amount due from customers for contract work (as an asset) or the
Gross amount due to customers for contract work (as a liability), as applicable. Progress billings not yet paid by the customer are included in the balance sheet under Debtors, deposits and payments in advance. Amounts
received before the related work is performed are included in the balance sheet, as a liability, under Creditors, accrued charges and provisions.



| | N | CASH EQUIVALENTS
| | - | ----------------



Cash and cash equivalents comprise cash at banks and in hand, demand deposits with banks and other financial institutions, and short-term,
highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on
demand and form an integral part of the Groups cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.



| | O | EMPLOYEE BENEFITS
| | - | -----------------



i    Salaries, annual leave, leave passage allowance and other costs of non-monetary benefits are accrued and recognized as an
expense in the year in which the associated services are rendered by employees of the Group, except those benefits incurred for project staff in respect of construction projects and capital works, which are capitalized as part of the cost of the
qualifying assets.



ii    Contributions to defined contribution retirement plans, including contributions to Mandatory Provident Funds (MPF) as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are
recognized as an expense in the profit and loss account as incurred, except those contributions on project staff incurred in respect of construction projects and capital works, which are capitalized as part of the cost of the qualifying
assets.



iii    The
Groups net obligation in respect of defined benefit retirement plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that
benefit is discounted to determine the present value, and the fair value of any plan assets is deducted. The discount rate is the yield at balance sheet date on high quality corporate bond that have maturity dates approximating the terms of the
Groups obligations. If there is no deep market in such bonds, the market yield on government bonds would be used. The calculation is performed by a qualified actuary using the projected unit credit method.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



When the benefits of a plan are improved, the portion of the increased benefit
relating to past service by employees is recognized either as an expense in the profit and loss account, or capitalized as part of the cost of the relevant construction projects or capital works in the case of project related employees, as the case
may be, on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in a similar manner.



In calculating the Groups obligation in respect of a
plan, to the extent that any cumulative unrecognized actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognized in the profit and
loss account over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognized.



Where the calculation of the Groups net obligation results in a negative amount, the asset recognized
is limited to the net total of any cumulative unrecognized net actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.



iv    When the Group grants employees options to
acquire shares of the Company, no employee benefit cost or obligation is recognized at the date of grant. When the options are exercised, equity is increased by the amount of the proceeds received.



v    Termination benefits are recognized when,
and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.



| | P | RETIREMENT SCHEMES
| | - | ------------------



The Group operates an Occupational Retirement Scheme (the MTR Corporation Limited Retirement Scheme), which is supplemented by
a top-up scheme (MTR Corporation Limited Retention Bonus Scheme) mainly for project staff to provide extra benefits in the event of redundancy.



In addition, the Group has set up a MPF Scheme by participating in a master trust scheme provided by an independent MPF service provider
to comply with the requirements under the MPF Ordinance.



Employers contributions to the defined contribution section of the MTR Corporation Limited Retirement Scheme and the MPF Scheme are recognized in the accounts in accordance with the policy set out in note
1O(ii).



The employers contributions
paid and payable in respect of employees of the hybrid benefit section of the MTR Corporation Limited Retirement Scheme, as calculated annually by independent actuaries in accordance with the Retirement Scheme Rules and provisions of the
Occupational Retirement Schemes Ordinance, are used to satisfy the pension expenses recognized in the accounts according to note 1O(iii). Any deficit or surplus thereof will be dealt with in the balance sheet as accrued or prepaid benefit expenses,
as the case may be.



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | Q | INCOME TAX
| | - | ----------



i    Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Income tax is
recognized in the profit and loss account except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.



ii    Current tax is the expected tax payable on the taxable income for the year, using tax rates
enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.



iii    Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.



Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the
extent that it is probable that future taxable profits will be available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary
differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same
period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable
temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are
expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.



The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from the initial
recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination) and investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls
the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.



The amount of deferred tax recognized is measured based on
the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



ivCurrent tax balances and deferred tax balances, and movements
therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Company or the Group has the legally
enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:



| |  | in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously;
or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | the same taxable entity; or
| | - | ---------------------------



| |  | different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to
realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | R | PROVISIONS AND CONTINGENT LIABILITIES
| | - | -------------------------------------



Provisions are recognized for liabilities of uncertain timing or amount when the Company or Group has a legal or constructive obligation
arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present
value of the expenditures expected to settle the obligation.



Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of
economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic
benefits is remote.



| | S | REVENUE RECOGNITION
| | - | -------------------



Provided it is probable that the economic benefits associated with the transactions will flow to the Group and the amount of revenue can
be measured reliably, revenue is recognized in the profit and loss account as follows:



i    Fare revenue is recognized when the journey is provided.



ii    Advertising income and service fees from telecommunication services provided within the railway are recognized when the
services are provided.



iii    Contract revenue is recognized when the outcome of a consultancy contract can be estimated reliably. Contract revenue is recognized using the percentage of completion method, measured by reference to the
percentage of contract costs incurred to date to estimated total contract costs for the contract. When the outcome of a consultancy contract cannot be estimated reliably, revenue is recognized only to the extent of contract costs incurred that it is
probable will be recoverable.



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



iv    Rental income from investment properties, station kiosks and other
railway premises under operating leases is accounted for in accordance with the terms of the leases. Lease incentives granted are recognized in the profit and loss account as an integral part of the aggregate net lease payments receivable.
Contingent rentals are recognized as income in the accounting period in which they are earned. Property management income is recognized when the services are provided.



| | T | OPERATING LEASE CHARGES
| | - | -----------------------



Rentals payable under operating leases are charged on a straight-line basis over the period of the lease to the profit and loss account,
except for rentals payable in respect of railway construction, property development in progress and proposed capital projects which are capitalized as part of railway construction in progress, property development in progress and deferred
expenditure respectively.



| | U | INTEREST AND FINANCE CHARGES
| | - | ----------------------------



Interest expense directly attributable to the financing of assets under construction prior to their completion or commissioning is
capitalized. Exchange differences arising from foreign currency borrowings related to the acquisition of assets are capitalized to the extent that they are regarded as an adjustment to interest costs. Interest expense attributable to other purposes
is charged to the profit and loss account.



Finance charges implicit in the lease payments on assets held under finance leases are charged to the profit and loss account over the period of the lease so as to produce an approximately constant periodic rate of charge on the remaining
balance of the obligations for each accounting period.



The differentials paid and received on interest rate swap agreements are accrued and recognized as adjustments to interest expense.



| | V | FOREIGN CURRENCY TRANSLATION
| | - | ----------------------------



Foreign currency transactions during the year are translated into Hong Kong dollars and recorded at exchange rates ruling at the
transaction dates. Foreign currency monetary assets and liabilities are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. Forward foreign exchange contracts, swaps and options used as a hedge against foreign
currency liabilities are revalued at the balance sheet date at the exchange rates ruling at that date. Gains and losses on currency hedging transactions are used to offset gains and losses resulting from currency fluctuations inherent in the
underlying foreign currency liabilities. Differences arising on foreign currency translation and revaluation of forward foreign exchange contracts, swaps and options are dealt with in the profit and loss account.



The results of foreign enterprises are translated into Hong
Kong dollars at the average exchange rates for the year; balance sheet items are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date. The resulting exchange differences are dealt with as a movement in
reserves.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | W | SEGMENT REPORTING
| | - | -----------------



A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in
providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.



In accordance with the Groups internal financial reporting system, the Group has chosen business
segment information as the primary reporting format. As substantially all the principal activities of the Group are carried out in Hong Kong, no geographical segment information is provided.



Segment revenue, expenses, results, assets and liabilities
include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions
are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment.



Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are
expected to be used for more than one year.



Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, share of results of non-controlled subsidiary, corporate and financing expenses and minority interests.



| | X | RELATED PARTIES
| | - | ---------------



For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly
or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related
parties may be individuals or other entities.



| | Y | GOVERNMENT GRANTS
| | - | -----------------



Government grants are assistance by Government in the form of transfer of resources in return for the Companys compliance to the
conditions attached to it. Government grant, which represents compensation for the cost of an asset, will be deducted from the cost of the asset in arriving at its carrying value to the extent of the amounts received and receivable as at the date of
the balance sheet. Any excess of the amount of grant received or receivable over the cost of the asset at the balance sheet date will be carried forward as advance receipts to set off future cost of the asset.



| | Z | TRANSLATION OF 2003 CONSOLIDATED FINANCIAL STATEMENTS TO UNITED STATES DOLLARS
| | - | ------------------------------------------------------------------------------



The Group publishes its consolidated financial statements expressed in Hong Kong Dollars. In these
consolidated financial statements references to US Dollars or US$ are to United States Dollars and references to Hong Kong Dollars or HK$ are to Hong Kong Dollars. Solely for the convenience of the
reader, the 2003 consolidated financial statements have been translated into US Dollars at the specified rate below. These translations should not be construed as representations that the Hong Kong Dollar amounts actually represent such US Dollar
amounts or could be converted into US Dollars at the rate indicated. The translation of Hong Kong Dollars into US Dollars have been made at the rate of US$1.00 to HK$7.764 which was the noon buying rate in New York City for cable transfers in Hong
Kong Dollars as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2003.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|2 | Fare Revenue
|- | ------------



The MTR Lines comprise the Kwun Tong, Tsuen Wan, Island, Tung Chung and Tseung Kwan O Lines. The fare revenue attributable to the Tseung
Kwan O Line relates to the period after the line commenced operation on August 18, 2002.



|3 | Non-fare Revenuein millions
|- | ---------------------------



| | A | STATION COMMERCIAL AND OTHER REVENUE
| | - | ------------------------------------



|                                                |  |      |     |      |     |      |  |     |      
|----------------------------------------------- |  | ---- | --- | ---- | --- | ---- |  | --- | -----
|                                                |  | 2001 |     | 2002 |     | 2003
|Station commercial and other revenue comprises: |  |      |     |      |     |      |  |     |      
|Advertising                                     |  | HK$  | 428 |      | HK$ | 399  |  | HK$ | 386  
|Kiosk rental                                    |  |      | 221 |      |     | 238  |  |     | 275  
|Telecommunication income                        |  |      | 173 |      |     | 186  |  |     | 198  
|Consultancy income                              |  |      | 32  |      |     | 63   |  |     | 143  
|Miscellaneous business revenue                  |  |      | 119 |      |     | 93   |  |     | 115  
|                                                |  |      |     |      |     |      |  |     |      
|                                                |  | HK$  | 973 |      | HK$ | 979  |  | HK$ | 1,117
|                                                |  |      |     |      |     |      |  |     |      



| | B | RENTAL AND MANAGEMENT INCOME
| | - | ----------------------------



|                                   |  |      |     |      |     |      |  |     |    
|---------------------------------- |  | ---- | --- | ---- | --- | ---- |  | --- | ---
|                                   |  | 2001 |     | 2002 |     | 2003
|Rental income was attributable to: |  |      |     |      |     |      |  |     |    
|Telford Plaza                      |  | HK$  | 368 |      | HK$ | 387  |  | HK$ | 365
|Luk Yeung Galleria                 |  |      | 112 |      |     | 113  |  |     | 114
|Paradise Mall                      |  |      | 89  |      |     | 124  |  |     | 119
|Maritime Square                    |  |      | 196 |      |     | 200  |  |     | 209
|Other properties                   |  |      | 52  |      |     | 73   |  |     | 81 
|                                   |  |      |     |      |     |      |  |     |    
|                                   |  | HK$  | 817 |      | HK$ | 897  |  | HK$ | 888
|Management income                  |  |      | 73  |      |     | 85   |  |     | 94 
|Property agency income             |  |      | 1   |      |     | 5    |  |     | 6  
|                                   |  |      |     |      |     |      |  |     |    
|                                   |  | HK$  | 891 |      | HK$ | 987  |  | HK$ | 988
|                                   |  |      |     |      |     |      |  |     |    



Included in rental income is service income of HK$63 million (2002: HK$64 million; 2001: HK$62 million) relating to the provision of air conditioning services.



|4 | Operating Expenses before Depreciationin millions
|- | -------------------------------------------------



A    Included in staff costs and related expenses are the following retirement expenses:



|                                                                         |  |      |     |      |     |      |  |     |    
|------------------------------------------------------------------------ |  | ---- | --- | ---- | --- | ---- |  | --- | ---
|                                                                         |  | 2001 |     | 2002 |     | 2003
|Contributions to defined contribution plans and Mandatory Provident Fund |  | HK$  | 12  |      | HK$ | 13   |  | HK$ | 13 
|Increase in liability for defined benefit plans (Note 37C)               |  |      | 176 |      |     | 149  |  |     | 156
|                                                                         |  |      |     |      |     |      |  |     |    
|                                                                         |  | HK$  | 188 |      | HK$ | 162  |  | HK$ | 169
|                                                                         |  |      |     |      |     |      |  |     |    



Other
staff costs and related expenses of HK$943 million (2002: HK$1,150 million; 2001: HK$1,262 million) are included in construction projects, capital and revenue works, and non-fare related operations.



B    Repairs and maintenance costs relate mainly
to contracted maintenance and revenue works. Other routine repairs and maintenance works are performed by in-house operations, the costs of which are included under staff costs and stores and spares consumed.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



C    Project study and deferred expenditures written off comprise:



|                                                                       |  |      |    |      |     |      |  |     |   
|---------------------------------------------------------------------- |  | ---- | -- | ---- | --- | ---- |  | --- | --
|                                                                       |  | 2001 |    | 2002 |     | 2003
|West Island Link (Note 17)                                             |  | HK$  |   |      | HK$ |     |  | HK$ | 21
|Shatin Central Link (Note 17)                                          |  |      |   |      |     | 42   |  |     |  
|North Island Link (Note 17)                                            |  |      |   |      |     | 85   |  |     |  
|Airport Railway improvement works in connection with North Island Link |  |      |   |      |     | 63   |  |     |  
|Others                                                                 |  |      | 16 |      |     | 28   |  |     | 28
|                                                                       |  |      |    |      |     |      |  |     |   
|                                                                       |  | HK$  | 16 |      | HK$ | 218  |  | HK$ | 49
|                                                                       |  |      |    |      |     |      |  |     |   



D    Included in general and administration expenses and other expenses are the following charges:



|                                                                             |  |      |    |      |     |      |  |     |   
|---------------------------------------------------------------------------- |  | ---- | -- | ---- | --- | ---- |  | --- | --
|                                                                             |  | 2001 |    | 2002 |     | 2003
|Auditors remuneration                                                       |  |      |    |      |     |      |  |     |   
|- audit services                                                             |  | HK$  | 3  |      | HK$ | 3    |  | HK$ | 3 
|- other services                                                             |  |      | 1  |      |     | 1    |  |     | 1 
|Deficit on revaluation of self-occupied office land and buildings (Note 14D) |  | HK$  |   |      | HK$ |     |  | HK$ | 69
|Loss on disposal of fixed assets                                             |  | HK$  | 6  |      | HK$ | 17   |  | HK$ | 16
|Operating lease expenses:                                                    |  |      |    |      |     |      |  |     |   
|Office buildings and staff quarters                                          |  | HK$  | 15 |      | HK$ | 12   |  | HK$ | 12
|Less: Amount capitalized                                                     |  |      | 10 |      |     | 9    |  |     | 5 
|                                                                             |  |      |    |      |     |      |  |     |   
|                                                                             |  | HK$  | 5  |      | HK$ | 3    |  | HK$ | 7 



Other
services under auditors remuneration include an amount of HK$0.4 million (2002: HK$0.5 million; 2001: HK$0.4 million)relating to tax compliance services provided during the year.



|5 | Remuneration of Members of the Board and the Executive Directoratein millions
|- | -----------------------------------------------------------------------------



| | A | REMUNERATION OF MEMBERS OF THE BOARD AND THE EXECUTIVE DIRECTORATE
| | - | ------------------------------------------------------------------



i    The aggregate emoluments of the Members of the Board and the Executive Directorate of the Company disclosed pursuant to
section 161 of the Hong Kong Companies Ordinance were as follows:



|                                                        |  |      |    |      |     |      |  |     |   
|------------------------------------------------------- |  | ---- | -- | ---- | --- | ---- |  | --- | --
|                                                        |  | 2001 |    | 2002 |     | 2003
|Fees                                                    |  | HK$  | 2  |      | HK$ | 2    |  | HK$ | 2 
|Salaries, housing allowances and other benefits-in-kind |  |      | 28 |      |     | 29   |  |     | 28
|Variable remuneration related to performance            |  |      | 4  |      |     | 3    |  |     | 3 
|Retirement scheme contributions                         |  |      | 4  |      |     | 4    |  |     | 4 
|                                                        |  |      |    |      |     |      |  |     |   
|                                                        |  | HK$  | 38 |      | HK$ | 38   |  | HK$ | 37
|                                                        |  |      |    |      |     |      |  |     |   



The
above emoluments do not include realized gains on exercise of share options amounting to HK$8.7 million (2002: HK$0.2 million; 2001: HK$0.6 million) in respect of certain Members of the Executive Directorate.



Non-executive directors of the Company are not appointed for
a specific term but are subject (save as those appointed pursuant to Section 8 of the Mass Transit Railway Ordinance (Chapter 556 of the Laws of Hong Kong)) to retirement by rotation and re-election at the Companys annual general meetings in
accordance with Articles 87 and 88 of the Companys Articles of Association.



F - 21



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



ii    The gross emoluments (excluding share option benefit) of the Members
of the Board and the Members of the Executive Directorate were within the following bands:



|                            |  |        |  |      |  |     
|--------------------------- |  | ------ |  | ---- |  | ----
|                            |  | 2001   |  | 2002 |  | 2003
|EMOLUMENTS                  |  | NUMBER
|HK$0 -    HK$250,000        |  | 9      |  | 13   |  | 8   
|HK$500,001 - HK$1,000,000   |  |       |  | 1    |  | 2   
|HK$3,500,001 - HK$4,000,000 |  |       |  | 1    |  |    
|HK$4,000,001 - HK$4,500,000 |  |       |  | 1    |  | 3   
|HK$4,500,001 - HK$5,000,000 |  | 5      |  | 4    |  | 2   
|HK$5,000,001 - HK$5,500,000 |  | 1      |  |     |  | 1   
|HK$6,000,001 - HK$6,500,000 |  |       |  |     |  | 1   
|HK$7,500,001 - HK$8,000,000 |  | 1      |  | 1    |  |    
|                            |  |        |  |      |  |     
|                            |  | 16     |  | 21   |  | 17  
|                            |  |        |  |      |  |     



The
information shown in the above table includes the five highest paid employees. The independent non-executive directors emoluments are included in the first remuneration band except the non-executive Chairman, whose emolument is included in the
second remuneration band. Emolument of the ex-Chairman, Jack C K So who resigned on July 20, 2003, is included under the highest remuneration band in 2001, 2002 and 2003.



iii    The remuneration details (excluding share option benefit) of the current members of the
Executive Directorate are shown below:



|                                 |  |       |       |                                                             |     |                                           |  |       |      |  |     |      
|-------------------------------- |  | ----- | ----- | ----------------------------------------------------------- | --- | ----------------------------------------- |  | ----- | ---- |  | --- | -----
|                                 |  | 2002  |       | 2003                                                       
|                                 |  | TOTAL |       | BASE PAY,ALLOWANCE,RETIREMENTSCHEMECONTRIBUTIONAND BENEFITS |     | VARIABLEREMUNERATIONRELATED TOPERFORMANCE |  | TOTAL
|Chief Executive Officer (CEO)* |  | HK$   |      |                                                             | HK$ | 0.56                                      |  | HK$   | 0.12 |  | HK$ | 0.68 
|Finance Director #               |  |       | 3.96  |                                                             |     | 3.88                                      |  |       | 0.42 |  |     | 4.30 
|Human Resources Director         |  |       | 4.49  |                                                             |     | 4.03                                      |  |       | 0.42 |  |     | 4.45 
|Legal Director and Secretary     |  |       | 4.72  |                                                             |     | 4.25                                      |  |       | 0.42 |  |     | 4.67 
|Operations Director              |  |       | 4.78  |                                                             |     | 4.68                                      |  |       | 0.43 |  |     | 5.11 
|Project Director                 |  |       | 4.72  |                                                             |     | 4.22                                      |  |       | 0.43 |  |     | 4.65 
|Property Director                |  |       | 4.52  |                                                             |     | 4.04                                      |  |       | 0.42 |  |     | 4.46 
|                                 |  |       |       |                                                             |     |                                           |  |       |      |  |     |      
|                                 |  | HK$   | 27.19 |                                                             | HK$ | 25.66                                     |  | HK$   | 2.66 |  | HK$ | 28.32
|                                 |  |       |       |                                                             |     |                                           |  |       |      |  |     |      



| | * | Appointed in December 2003
| | - | --------------------------

| | # | Appointed in February 2002
| | - | --------------------------



As the current disclosure of remuneration details by post is adopted for the first time in 2003, no comparative figures were
produced for 2001.



iv    The
CEO will be entitled to receive 700,000 shares in the Company (or their equivalent value in cash) on completion of his three-year contract (i.e. November 30, 2006). The final number of shares (or cash amount) delivered may be adjusted to reflect
relevant changes (if any) in the Companys share capital after his appointment. This ensures that the CEOs compensation is closely tied to the Companys longer-term performance and aligns his interests with those of shareholders. In
certain limited circumstances, the CEO may be entitled to receive some or all of the shares (or the cash amount) prior to completion of his contract.



The restricted shares were offered in order to provide a sufficiently competitive level of compensation and to ensure the
CEOs total pay is more closely tied to the performance of the Company.



F - 22



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | B | SHARE OPTIONS
| | - | -------------



Options exercised and outstanding in respect of each Member of the Executive Directorate as at December 31, 2003 are set out under the
paragraph Board Members and Executive Directorates Interest in Shares of the Report of the Members of the Board. Details of the options granted to Members of the Executive Directorate are as follows:



i    Pre-Global Offering Share Option
Scheme



Under the Companys
Pre-Global Offering Share Option Scheme (Pre-IPO Option Scheme) described in note 42A, Jack C K So (ex-Chairman) and each of the other Members of the Executive Directorate, except C K Chow and Lincoln K K Leong, were granted options on
September 20, 2000 to acquire 1,599,000 and 1,066,000 shares respectively. C K Chow and Lincoln K K Leong joined the Company on December 1, 2003 and February 1, 2002 respectively and are not beneficiaries of the Pre-IPO Option Scheme.



Under the vesting terms of the Pre-IPO Option Scheme, each
eligible Member of the Executive Directorate must continue to beneficially own (i) at all times after October 26, 2001, at least 40,000 shares in the case of the ex-Chairman and at least 23,000 shares in the case of other Members of the Executive
Directorate, and (ii) at all times after October 26, 2002, at least 80,000 shares in the case of the ex-Chairman and at least 46,000 shares in the case of other Members of the Executive Directorate.



Options exercised and outstanding in respect of each Member
of the Executive Directorate as at December 31, 2003 are as follows:



|                      |  |             |  |                      |  |                                                        |  |                                       |  |                             |  |                            |  |                                |  |                                         |      |                                         |           |                                                                                              |     |      
|--------------------- |  | ----------- |  | -------------------- |  | ------------------------------------------------------ |  | ------------------------------------- |  | --------------------------- |  | -------------------------- |  | ------------------------------ |  | --------------------------------------- | ---- | --------------------------------------- | --------- | -------------------------------------------------------------------------------------------- | --- | -----
|ExecutiveDirectorate  |  | Dategranted |  | No. ofoptionsgranted |  | Period during which rightsexercisable (month/day/year) |  | Optionsoutstandingas atJanuary 1,2003 |  | Optionsvestedduringthe year |  | Optionslapsedduringtheyear |  | Optionsexercisedduring theyear |  | Price pershare paidonexercise ofoptions |      | Optionsoutstandingas atDecember31, 2003 |           | Weightedaverageclosingprice ofsharesimmediatelybefore thedate(s) onwhichoptionswereexercised
|Philip Gaffney        |  | 9/20/2000   |  | 1,066,000            |  | 4/5/2001-9/11/2010                                     |  | 1,022,000                             |  | 355,000                     |  |                           |  |                               |  |                                         |     |                                         | 1,022,000 |                                                                                              |     |     
|Russell John Black    |  | 9/20/2000   |  | 1,066,000            |  | 4/5/2001-9/11/2010                                     |  | 1,022,000                             |  | 355,000                     |  |                           |  | 1,022,000                      |  | HK$                                     | 8.44 |                                         |          |                                                                                              | HK$ | 10.48
|William Chan Fu-keung |  | 9/20/2000   |  | 1,066,000            |  | 4/5/2001-9/11/2010                                     |  | 1,022,000                             |  | 355,000                     |  |                           |  | 200,000                        |  | HK$                                     | 8.44 |                                         | 822,000   |                                                                                              | HK$ | 10.38
|Thomas Ho Hang-kwong  |  | 9/20/2000   |  | 1,066,000            |  | 4/5/2001-9/11/2010                                     |  | 1,021,000                             |  | 355,000                     |  |                           |  | 400,000                        |  | HK$                                     | 8.44 |                                         | 621,000   |                                                                                              | HK$ | 10.43
|Leonard Bryan Turk    |  | 9/20/2000   |  | 1,066,000            |  | 4/5/2001-9/11/2010                                     |  | 1,022,500                             |  | 355,000                     |  |                           |  | 1,022,500                      |  | HK$                                     | 8.44 |                                         |          |                                                                                              | HK$ | 10.61



ii    New Joiners Share Option Scheme



Under the New Joiners Share Option Scheme (New Option Scheme) as described in note 42B, Lincoln K K Leong, a Member of the
Executive Directorate, was granted options to acquire 1,066,000 shares on August 1, 2003.



The options will be vested in three equal annual instalments and under the vesting terms of the New Option Scheme, the grantee must
continue to beneficially own (i) at all times on and after August 4, 2004, at least 23,000 shares; and (ii) at all times on and after August 4, 2005, at least 46,000 shares.



Options outstanding in respect of Lincoln K K Leong as at December 31, 2003 are as follows:



|                        |  |             |  |                      |  |                                                         |  |                                       |  |                            |  |                            |  |                                |  |                                       |  |                                         |  |                                                                                             
|----------------------- |  | ----------- |  | -------------------- |  | ------------------------------------------------------- |  | ------------------------------------- |  | -------------------------- |  | -------------------------- |  | ------------------------------ |  | ------------------------------------- |  | --------------------------------------- |  | --------------------------------------------------------------------------------------------
|ExecutiveDirectorate    |  | Dategranted |  | No. ofoptionsgranted |  | Period during which rights exercisable (month/day/year) |  | Optionsoutstandingas atJanuary 1,2003 |  | Optionsvestedduringtheyear |  | Optionslapsedduringtheyear |  | Optionsexercisedduringthe year |  | Pricepersharepaid onexerciseofoptions |  | Optionsoutstandingas atDecember31, 2003 |  | Weightedaverageclosingprice ofsharesimmediatelybefore thedate(s) onwhichoptionswereexercised
|Lincoln Leong Kwok-kuen |  | 8/1/2003    |  | 1,066,000            |  | 7/14/2004-7/14/2013                                     |  |                                      |  |                           |  |                           |  |                               |  |                                      |  | 1,066,000                               |  |                                                                                            



|6 | Profit on Property Developmentsin millions
|- | ------------------------------------------



|                                           |  |      |       |   |      |     |       |      |  |     |       |  
|------------------------------------------ |  | ---- | ----- | - | ---- | --- | ----- | ---- |  | --- | ----- | -
|                                           |  | 2001 |       |   | 2002 |     |       | 2003 | 
|Profit on property developments comprises: |  |      |       |   |      |     |       |      |  |     |       |  
|Transfer from deferred income (Note 16B)   |  | HK$  | 2,110 |   |      | HK$ | 2,548 |      |  | HK$ | 1,286 |  
|Share of surplus from development          |  |      | 1,096 |   |      |     | 6     |      |  |     | 7     |  
|Profit on sale of properties held for sale |  |      |      |   |      |     |      |      |  |     | 44    |  
|Profit recognized from sharing in kind     |  |      | 56    |   |      |     | 1,203 |      |  |     | 4,034 |  
|Other overhead costs                       |  |      | (14   | ) |      |     | (2    | )    |  |     | (2    | )
|                                           |  |      |       |   |      |     |       |      |  |     |       |  
|                                           |  | HK$  | 3,248 |   |      | HK$ | 3,755 |      |  | HK$ | 5,369 |  
|                                           |  |      |       |   |      |     |       |      |  |     |       |  



Included in profit on sale of properties held for sale are write-down provision of properties held for sale of HK$16 million (2002: HK$44 million; 2001: Nil) and cost of properties sold of HK$243 million (2002: HK$118 million;
2001: Nil).



F - 23



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|7 | Depreciationin millions
|- | -----------------------



| | A | DEPRECIATION
| | - | ------------



Depreciation for the year ended December 31, 2003 includes full years charges relating to assets of the Tseung Kwan O Line
capitalized upon commissioning in August 2002. Depreciation for the year comprised charges on:



|                                                                           |  |      |       |      |     |       |  |     |      
|-------------------------------------------------------------------------- |  | ---- | ----- | ---- | --- | ----- |  | --- | -----
|                                                                           |  | 2001 |       | 2002 |     | 2003 
|Railway operations                                                         |  |      |       |      |     |       |  |     |      
|- on fixed assets held under finance leases                                |  | HK$  | 19    |      | HK$ | 19    |  | HK$ | 19   
|- on other railway fixed assets                                            |  |      | 2,036 |      |     | 2,321 |  |     | 2,251
|Assets relating to station advertising, kiosk and miscellaneous businesses |  |      | 97    |      |     | 106   |  |     | 109  
|Unallocated corporate assets                                               |  |      | 26    |      |     | 24    |  |     | 23   
|                                                                           |  |      |       |      |     |       |  |     |      
|                                                                           |  | HK$  | 2,178 |      | HK$ | 2,470 |  | HK$ | 2,402
|                                                                           |  |      |       |      |     |       |  |     |      



| | B | CHANGE IN DEPRECIATION RATES
| | - | ----------------------------



In accordance with the Companys policy to conduct asset life review at regular intervals, a review of the estimated useful lives of
the Companys fixed assets was carried out during the year, taking into account the assets actual condition, level of technical obsolescence, future maintenance and replacement programmes as well as depreciation lives adopted by
international rail transportation companies. As a result of the review, the estimated useful lives of certain assets were changed. The changes took effect from January 1, 2003 with the following resultant financial effects for the year:



|                                                   |                     |                                         |                    |                                               |  |            |     |  
|-------------------------------------------------- | ------------------- | --------------------------------------- | ------------------ | --------------------------------------------- |  | ---------- | --- | -
|ASSET CATEGORY                                     |                     | TYPICAL USEFUL LIFEWITHIN ASSETCATEGORY |                    | NET DECREASE/ (INCREASE) INDEPRECIATIONCHARGE | 
|                                                   | ORIGINALLIFE(YEARS) |                                         | REVISEDLIFE(YEARS) |                                              
|                                                   |                     |                                         |                    |                                               |  | (millions) |    
|Rolling stock                                      |                     | 10-40                                   |                    | 7-40                                          |  | HK$        | 20  |  
|Power supply and environmental control systems     |                     | 20-30                                   |                    | 20-40                                         |  |            | 71  |  
|Station architectural finishes                     |                     | 20-25                                   |                    | 20-30                                         |  |            | 60  |  
|Fixture and fitting                                |                     | 10                                      |                    | 10-15                                         |  |            | 30  |  
|Automatic fare collection systems                  |                     | 15                                      |                    | 20                                            |  |            | 11  |  
|Fire protection and drainage systems               |                     | 20-25                                   |                    | 20-30                                         |  |            | 21  |  
|Station announcement and telecommunication systems |                     | 10                                      |                    | 15                                            |  |            | 29  |  
|Computer software licenses and applications        |                     | 7                                       |                    | 5 - 7                                         |  |            | (10 | )
|                                                   |                     |                                         |                    |                                               |  |            |     |  
|                                                   |                     |                                         |                    |                                               |  | HK$        | 232 |  
|                                                   |                     |                                         |                    |                                               |  |            |     |  



F - 24



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|8 | Interest and Finance Chargesin millions
|- | ---------------------------------------



|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | --- | ------ | ---- |  | --- | ------ | -
|                                                                                          |  | 2001 |         |   | 2002 |     |        | 2003 | 
|Interest expenses in respect of:                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|Bank loans and overdrafts, and capital market instruments wholly repayable within 5 years |  | HK$  | 910     |   |      | HK$ | 823    |      |  | HK$ | 680    |  
|Capital market instruments not wholly repayable within 5 years                            |  |      | 861     |   |      |     | 867    |      |  |     | 901    |  
|Obligations under finance leases                                                          |  |      | 64      |   |      |     | 53     |      |  |     | 43     |  
|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|                                                                                          |  | HK$  | 1,835   |   |      | HK$ | 1,743  |      |  | HK$ | 1,624  |  
|                                                                                          |  |      | ------- |   |      |     | ------ |      |  |     | ------ |  
|Finance charges                                                                           |  | HK$  | 88      |   |      | HK$ | 28     |      |  | HK$ | 36     |  
|                                                                                          |  |      | ------- |   |      |     | ------ |      |  |     | ------ |  
|Exchange gain                                                                             |  | HK$  | (1      | ) |      | HK$ |       |      |  | HK$ | (7     | )
|                                                                                          |  |      | ------- |   |      |     | ------ |      |  |     | ------ |  
|Interest expenses capitalized:                                                            |  |      |         |   |      |     |        |      |  |     |        |  
|Tseung Kwan O Extension Project                                                           |  | HK$  | (661    | ) |      | HK$ | (423   | )    |  | HK$ |       |  
|Property projects                                                                         |  |      | (144    | ) |      |     | (86    | )    |  |     |       |  
|Other capital projects                                                                    |  |      | (167    | ) |      |     | (81    | )    |  |     | (82    | )
|Assets under construction                                                                 |  |      | (54     | ) |      |     | (28    | )    |  |     | (20    | )
|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|                                                                                          |  | HK$  | (1,026  | ) |      | HK$ | (618   | )    |  | HK$ | (102   | )
|                                                                                          |  |      | ------- |   |      |     | ------ |      |  |     | ------ |  
|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|                                                                                          |  | HK$  | 896     |   |      | HK$ | 1,153  |      |  | HK$ | 1,551  |  
|                                                                                          |  |      | ------- |   |      |     | ------ |      |  |     | ------ |  
|Interest income in respect of:                                                            |  |      |         |   |      |     |        |      |  |     |        |  
|Deposits with banks and other financial institutions                                      |  | HK$  | (2      | ) |      | HK$ | (25    | )    |  | HK$ | (10    | )
|Staff housing loans                                                                       |  |      | (20     | ) |      |     | (3     | )    |  |     | (2     | )
|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|                                                                                          |  | HK$  | (22     | ) |      | HK$ | (28    | )    |  | HK$ | (12    | )
|                                                                                          |  |      | ------- |   |      |     | ------ |      |  |     | ------ |  
|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  
|                                                                                          |  | HK$  | 874     |   |      | HK$ | 1,125  |      |  | HK$ | 1,539  |  
|                                                                                          |  |      |         |   |      |     |        |      |  |     |        |  



Interest expenses have been capitalized at the average cost of funds to the Group calculated on a monthly basis. The average interest rates for each month varied from 4.0% to 5.5% per annum during the year (2002: 5.2% to 5.4%; 2001: 5.4%
to 7.5% per annum).



|9 | Profit Attributable to Shareholders
|- | -----------------------------------



The consolidated profit attributable to shareholders includes a profit of HK$4,379 million (2002: HK$3,512 million, as restated; 2001:
HK$4,242 million) which has been dealt with in the accounts of the Company.



F - 25



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|10 | Dividendsin millions
|-- | --------------------



Dividends paid and proposed during the year comprised:



|                                                                                                              |  |      |       |      |     |       |  |     |      
|------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | --- | ----- |  | --- | -----
|                                                                                                              |  | 2001 |       | 2002 |     | 2003 
|Dividend approved and paid                                                                                    |  |      |       |      |     |       |  |     |      
|- 2002 final dividend of 28 cents (2001: 28 cents; 2000: 10 cents) per share approved and paid in 2003        |  | HK$  | 500   |      | HK$ | 1,415 |  | HK$ | 1,444
|- 2003 interim dividend of 14 cents (2002: 14 cents; 2001: 14 cents) per share                                |  |      | 703   |      |     | 717   |  |     | 734  
|                                                                                                              |  |      |       |      |     |       |  |     |      
|                                                                                                              |  | HK$  | 1,203 |      | HK$ | 2,132 |  | HK$ | 2,178
|                                                                                                              |  |      |       |      |     |       |  |     |      
|Dividend proposed                                                                                             |  |      |       |      |     |       |  |     |      
|- Final dividend proposed after the balance sheet date of 28 cents (2002: 28 cents; 2001: 28 cents) per share |  | HK$  | 1,415 |      | HK$ | 1,444 |  | HK$ | 1,481
|                                                                                                              |  |      |       |      |     |       |  |     |      



The
final dividend proposed after the balance sheet date has not been recognized as a liability at the balance sheet date.



During the year, scrip dividend elections were offered to shareholders with Hong Kong addresses. The Companys majority shareholder,
the Financial Secretary Incorporated (FSI), had elected to receive part of its entitlement to dividends in the form of scrip to the extent necessary to ensure that the amount payable in cash would not exceed 50% of the total dividend
payable. Details of dividends paid to the FSI are disclosed in note 40J. On February 26, 2004, the Government agreed to extend the scrip dividend arrangement for the three financial years ending December 31, 2006.



Pursuant to the financing arrangement under the Pennys
Bay Rail Link Project Agreement entered into between the Group and the Government, HK$675 million (2002: HK$219 million; 2001: Nil) cash dividend declared and payable to the Government during the year had been waived (Note 40E).



|11 | Earnings Per Share
|-- | ------------------



The calculation of basic earnings per share is based on the profit for the year attributable to shareholders of HK$4,450 million (2002:
HK$3,579 million, as restated; 2001: HK$4,278 million) and the weighted average number of ordinary shares of 5,214,028,094 in issue during the year (2002: 5,098,511,864; 2001: 5,015,601,057).



The calculation of diluted earnings per share is based on
the profit for the year attributable to shareholders of HK$4,450 million (2002: HK$3,579 million, as restated; 2001: HK$4,278 million) and the weighted average number of ordinary shares of 5,217,462,182 (2002: 5,105,400,689; 2001:
5,030,188,894) after adjusting for the number of dilutive potential ordinary shares under the employee share option schemes calculated as follows:



|                                                                                               |  |               |  |               |  |              
|---------------------------------------------------------------------------------------------- |  | ------------- |  | ------------- |  | -------------
|                                                                                               |  | 2001          |  | 2002          |  | 2003         
|Weighted average number of ordinary shares used in calculating basic earnings per share        |  | 5,015,601,057 |  | 5,098,511,864 |  | 5,214,028,094
|Number of ordinary shares deemed to be issued for no consideration                             |  | 14,587,837    |  | 6,888,825     |  | 3,434,088    
|                                                                                               |  |               |  |               |  |              
|Weighted average number of ordinary shares used for calculating the diluted earnings per share |  | 5,030,188,894 |  | 5,105,400,689 |  | 5,217,462,182
|                                                                                               |  |               |  |               |  |              



F - 26



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|12 | Income Taxin millions
|-- | ---------------------



A    Income tax in the consolidated profit and loss account represents:



|                                                                       |  |      |   |      |     |      |  |     |    
|---------------------------------------------------------------------- |  | ---- | - | ---- | --- | ---- |  | --- | ---
|                                                                       |  | 2001 |   | 2002 |     | 2003
|Current tax                                                            |  |      |   |      |     |      |  |     |    
|- overseas tax for the year                                            |  | HK$  |  |      | HK$ | 1    |  | HK$ | 4  
|                                                                       |  |      |   |      |     |      |  |     |    
|Deferred tax                                                           |  |      |   |      |     |      |  |     |    
|- origination and reversal of temporary differences                    |  | HK$  |  |      | HK$ | 630  |  | HK$ | 443
|- effect of increase in tax rate on deferred tax balances at January 1 |  |      |  |      |     |     |  |     | 300
|                                                                       |  |      |   |      |     |      |  |     |    
|                                                                       |  | HK$  |  |      | HK$ | 630  |  | HK$ | 743
|                                                                       |  |      |   |      |     |      |  |     |    
|Share of non-controlled subsidiarys taxation                          |  | HK$  |  |      | HK$ | 3    |  | HK$ | 1  
|                                                                       |  |      |   |      |     |      |  |     |    
|                                                                       |  | HK$  |  |      | HK$ | 634  |  | HK$ | 748
|                                                                       |  |      |   |      |     |      |  |     |    



No
provision for current Hong Kong profits tax has been made in the consolidated profit and loss account in respect of the Company and its subsidiaries, as the Company and its subsidiaries either have substantial accumulated tax losses brought forward
which are available for set off against current years assessable profits or have sustained tax losses for the year ended December 31, 2003. Taxation for overseas subsidiaries is charged at the appropriate current rates of taxation ruling in
the relevant countries.



In March 2003, the
Hong Kong Government announced an increase in the Profits Tax rate applicable to the Groups operations in Hong Kong from 16% to 17.5%. This increase is taken into account in the preparation of the Groups 2003 accounts.



No deferred tax assets/liabilities were recognized in 2001
as the adoption of the revised SSAP 12 Income Taxes effected from January 1, 2003 and prior period adjustment only made to 2002 balances.



B    Reconciliation between tax expense and accounting profit at applicable tax rates



|                                                                                                                    |  |      |       |   |      |      |   |  |     |       |   |  |       |  
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | ---- | - |  | --- | ----- | - |  | ----- | -
|                                                                                                                    |  | 2002 |       |   | 2003 |     
|                                                                                                                    |  |      |       |   | %    |      |   |  |     |       | % | 
|Profit before tax                                                                                                   |  | HK$  | 4,213 |   |      |      |   |  | HK$ | 5,198 |   |  |       |  
|                                                                                                                    |  |      |       |   |      |      |   |  |     |       |   |  |       |  
|Notional tax on profit before tax, calculated at the rates applicable to profits in the tax jurisdictions concerned |  | HK$  | 691   |   |      | 16.4 |   |  | HK$ | 926   |   |  | 17.8  |  
|Tax effect of non-deductible expenses                                                                               |  |      | 5     |   |      | 0.1  |   |  |     | 53    |   |  | 1.0   |  
|Tax effect of non-taxable revenue                                                                                   |  |      | (62   | ) |      | (1.5 | ) |  |     | (531  | ) |  | (10.2 | )
|Effect on opening deferred tax balances resulting from an increase in tax rate during the year                      |  |      |      |   |      |     |   |  |     | 300   |   |  | 5.8   |  
|                                                                                                                    |  |      |       |   |      |      |   |  |     |       |   |  |       |  
|Actual tax expenses                                                                                                 |  | HK$  | 634   |   |      | 15.0 |   |  | HK$ | 748   |   |  | 14.4  |  
|                                                                                                                    |  |      |       |   |      |      |   |  |     |       |   |  |       |  



No
reconciliation for 2001 is provided as the adoption of the revised SSAP 12 Income Taxes effected from January 1, 2003 and prior period adjustment only made to 2002 balances.



F - 27



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|13 | Segmental Informationin millions
|-- | --------------------------------



The results of major business activities are summarized below:



|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|------------------------------------------------ |  | ----------------- | ------ | ----------------------------------- | --- | ------------------------------ |  | ------------------------------------------ | ------ | -------------------- | --- | ------ |  | --- | ----- |  | --- | ------ | -
|                                                 |  | RAILWAYOPERATIONS |        | STATIONCOMMERCIALANDOTHERBUSINESSES |     | PROPERTYOWNERSHIPANDMANAGEMENT |  | TOTALRAILWAYOPERATIONSANDRELATEDACTIVITIES |        | PROPERTYDEVELOPMENTS |     | TOTAL  | 
|2001                                             |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Revenue                                          |  | HK$               | 5,728  |                                     | HK$ | 973                            |  | HK$                                        | 891    |                      | HK$ | 7,592  |  | HK$ |      |  | HK$ | 7,592  |  
|Less: Operating expenses before depreciation     |  |                   | 2,856  |                                     |     | 197                            |  |                                            | 159    |                      |     | 3,212  |  |     |      |  |     | 3,212  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|                                                 |  | HK$               | 2,872  |                                     | HK$ | 776                            |  | HK$                                        | 732    |                      | HK$ | 4,380  |  | HK$ |      |  | HK$ | 4,380  |  
|Profit on property developments                  |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 3,248 |  |     | 3,248  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Operating profit before depreciation             |  | HK$               | 2,872  |                                     | HK$ | 776                            |  | HK$                                        | 732    |                      | HK$ | 4,380  |  | HK$ | 3,248 |  | HK$ | 7,628  |  
|Less: Depreciation                               |  |                   | 2,053  |                                     |     | 97                             |  |                                            | 2      |                      |     | 2,152  |  |     |      |  |     | 2,152  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|                                                 |  | HK$               | 819    |                                     | HK$ | 679                            |  | HK$                                        | 730    |                      | HK$ | 2,228  |  | HK$ | 3,248 |  | HK$ | 5,476  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Unallocated corporate expenses                   |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | (353   | )
|Interest and finance charges (net)               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | (874   | )
|Share of profit of non-controlled subsidiary     |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 29     |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Profit for the year ended December 31, 2001      |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  | HK$ | 4,278  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Assets                                           |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Operational assets                               |  | HK$               | 64,415 |                                     | HK$ | 1,207                          |  | HK$                                        | 10,417 |                      | HK$ | 76,039 |  | HK$ | 301   |  | HK$ | 76,340 |  
|Railway construction in progress                 |  |                   | 12,873 |                                     |     |                               |  |                                            |       |                      |     | 12,873 |  |     |      |  |     | 12,873 |  
|Railway assets under construction                |  |                   | 3,024  |                                     |     |                               |  |                                            |       |                      |     | 3,024  |  |     |      |  |     | 3,024  |  
|Property development in progress                 |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 3,361 |  |     | 3,361  |  
|Properties held for sale                         |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 689   |  |     | 689    |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|                                                 |  | HK$               | 80,312 |                                     | HK$ | 1,207                          |  | HK$                                        | 10,417 |                      | HK$ | 91,936 |  | HK$ | 4,351 |  | HK$ | 96,287 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Interest in non-controlled subsidiary            |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 49     |  
|Unallocated assets                               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 1,790  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Total assets                                     |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  | HK$ | 98,126 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Liabilities                                      |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Segmented liabilities                            |  | HK$               | 3,773  |                                     | HK$ | 164                            |  | HK$                                        | 359    |                      | HK$ | 4,296  |  | HK$ | 141   |  | HK$ | 4,437  |  
|Deferred income                                  |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 8,411 |  |     | 8,411  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|                                                 |  | HK$               | 3,773  |                                     | HK$ | 164                            |  | HK$                                        | 359    |                      | HK$ | 4,296  |  | HK$ | 8,552 |  | HK$ | 12,848 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Unallocated liabilities                          |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 31,385 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Total liabilities                                |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  | HK$ | 44,233 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Other Information                                |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Capital expenditure on:                          |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Operational assets and assets under construction |  | HK$               | 2,201  |                                     | HK$ | 581                            |  | HK$                                        | 196    |                      |     |        |  |     |       |  |     |        |  
|Railway construction in progress                 |  | HK$               | 3,679  |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |        |  
|Property development in progress                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  | HK$ | 789   |  |     |        |  
|Non-cash expenses other than depreciation        |  | HK$               | 6      |                                     | HK$ | 1                              |  | HK$                                        | 3      |                      |     |        |  |     |       |  |     |        |  



F - 28



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|------------------------------------------------ |  | ----------------- | ------ | ----------------------------------- | --- | ------------------------------ |  | ------------------------------------------ | ------ | -------------------- | --- | ---------- |  | --- | ----- |  | --- | ------- | -
|                                                 |  | RAILWAYOPERATIONS |        | STATIONCOMMERCIALANDOTHERBUSINESSES |     | PROPERTYOWNERSHIPANDMANAGEMENT |  | TOTALRAILWAYOPERATIONSANDRELATEDACTIVITIES |        | PROPERTYDEVELOPMENTS |     | TOTAL      | 
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     | (Note 43A) | 
|2002                                             |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Revenue                                          |  | HK$               | 5,720  |                                     | HK$ | 979                            |  | HK$                                        | 987    |                      | HK$ | 7,686      |  | HK$ |      |  | HK$ | 7,686   |  
|Less: Operating expenses before depreciation     |  |                   | 2,804  |                                     |     | 185                            |  |                                            | 167    |                      |     | 3,156      |  |     |      |  |     | 3,156   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|                                                 |  | HK$               | 2,916  |                                     | HK$ | 794                            |  | HK$                                        | 820    |                      | HK$ | 4,530      |  | HK$ |      |  | HK$ | 4,530   |  
|Profit on property developments                  |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |           |  |     | 3,755 |  |     | 3,755   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Operating profit before depreciation             |  | HK$               | 2,916  |                                     | HK$ | 794                            |  | HK$                                        | 820    |                      | HK$ | 4,530      |  | HK$ | 3,755 |  | HK$ | 8,285   |  
|Less: Depreciation                               |  |                   | 2,339  |                                     |     | 106                            |  |                                            | 1      |                      |     | 2,446      |  |     |      |  |     | 2,446   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|                                                 |  | HK$               | 577    |                                     | HK$ | 688                            |  | HK$                                        | 819    |                      | HK$ | 2,084      |  | HK$ | 3,755 |  | HK$ | 5,839   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Unallocated corporate expenses                   |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | (540    | )
|Interest and finance charges (net)               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | (1,125  | )
|Share of profit of non-controlled subsidiary     |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | 39      |  
|Income tax                                       |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | (634    | )
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Profit for the year ended December 31, 2002      |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  | HK$ | 3,579   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Assets                                           |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Operational assets                               |  | HK$               | 80,216 |                                     | HK$ | 1,327                          |  | HK$                                        | 10,380 |                      | HK$ | 91,923     |  | HK$ | 104   |  | HK$ | 92,027  |  
|Railway construction in progress                 |  |                   | 109    |                                     |     |                               |  |                                            |       |                      |     | 109        |  |     |      |  |     | 109     |  
|Railway assets under construction                |  |                   | 2,453  |                                     |     | 1                              |  |                                            |       |                      |     | 2,454      |  |     |      |  |     | 2,454   |  
|Property development in progress                 |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |           |  |     | 2,870 |  |     | 2,870   |  
|Properties held for sale                         |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |           |  |     | 794   |  |     | 794     |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|                                                 |  | HK$               | 82,778 |                                     | HK$ | 1,328                          |  | HK$                                        | 10,380 |                      | HK$ | 94,486     |  | HK$ | 3,768 |  | HK$ | 98,254  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Interest in non-controlled subsidiary            |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | 87      |  
|Unallocated assets                               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | 2,778   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Total assets                                     |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  | HK$ | 101,119 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Liabilities                                      |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Segmented liabilities                            |  | HK$               | 3,690  |                                     | HK$ | 182                            |  | HK$                                        | 367    |                      | HK$ | 4,239      |  | HK$ | 312   |  | HK$ | 4,551   |  
|Deferred income                                  |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |           |  |     | 6,226 |  |     | 6,226   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|                                                 |  | HK$               | 3,690  |                                     | HK$ | 182                            |  | HK$                                        | 367    |                      | HK$ | 4,239      |  | HK$ | 6,538 |  | HK$ | 10,777  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Unallocated liabilities                          |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | 36,760  |  
|Minority interests                               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     | 8       |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Total liabilities                                |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  | HK$ | 47,545  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Other Information                                |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Capital expenditure on:                          |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Operational assets and assets under construction |  | HK$               | 4,215  |                                     | HK$ | 722                            |  | HK$                                        | 39     |                      |     |            |  |     |       |  |     |         |  
|Railway construction in progress                 |  | HK$               | 220    |                                     |     |                                |  |                                            |        |                      |     |            |  |     |       |  |     |         |  
|Property development in progress                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |            |  | HK$ | 356   |  |     |         |  
|Non-cash expenses other than depreciation        |  | HK$               | 14     |                                     | HK$ | 3                              |  | HK$                                        |       |                      |     |            |  |     |       |  |     |         |  



F - 29



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|------------------------------------------------ |  | ----------------- | ------ | ----------------------------------- | --- | ------------------------------ |  | ------------------------------------------ | ------ | -------------------- | --- | ------ |  | --- | ----- |  | --- | ------- | -
|                                                 |  | RAILWAYOPERATIONS |        | STATIONCOMMERCIALANDOTHERBUSINESSES |     | PROPERTYOWNERSHIPANDMANAGEMENT |  | TOTALRAILWAYOPERATIONSANDRELATEDACTIVITIES |        | PROPERTYDEVELOPMENTS |     | TOTAL  | 
|2003                                             |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Revenue                                          |  | HK$               | 5,489  |                                     | HK$ | 1,117                          |  | HK$                                        | 988    |                      | HK$ | 7,594  |  | HK$ |      |  | HK$ | 7,594   |  
|Less: Operating expenses before depreciation     |  |                   | 2,878  |                                     |     | 351                            |  |                                            | 198    |                      |     | 3,427  |  |     |      |  |     | 3,427   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|                                                 |  | HK$               | 2,611  |                                     | HK$ | 766                            |  | HK$                                        | 790    |                      | HK$ | 4,167  |  | HK$ |      |  | HK$ | 4,167   |  
|Profit on property developments                  |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 5,369 |  |     | 5,369   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Operating profit before depreciation             |  | HK$               | 2,611  |                                     | HK$ | 766                            |  | HK$                                        | 790    |                      | HK$ | 4,167  |  | HK$ | 5,369 |  | HK$ | 9,536   |  
|Less: Depreciation                               |  |                   | 2,266  |                                     |     | 109                            |  |                                            | 4      |                      |     | 2,379  |  |     |      |  |     | 2,379   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|                                                 |  | HK$               | 345    |                                     | HK$ | 657                            |  | HK$                                        | 786    |                      | HK$ | 1,788  |  | HK$ | 5,369 |  | HK$ | 7,157   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Unallocated corporate expenses                   |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | (443    | )
|Interest and finance charges (net)               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | (1,539  | )
|Share of profit of non-controlled subsidiary     |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 23      |  
|Income tax                                       |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | (748    | )
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Profit for the year ended December 31, 2003      |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  | HK$ | 4,450   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Assets                                           |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Operational assets                               |  | HK$               | 80,556 |                                     | HK$ | 1,323                          |  | HK$                                        | 14,450 |                      | HK$ | 96,329 |  | HK$ | 364   |  | HK$ | 96,693  |  
|Railway construction in progress                 |  |                   | 181    |                                     |     |                               |  |                                            |       |                      |     | 181    |  |     |      |  |     | 181     |  
|Railway assets under construction                |  |                   | 930    |                                     |     | 10                             |  |                                            |       |                      |     | 940    |  |     |      |  |     | 940     |  
|Property development in progress                 |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 2,309 |  |     | 2,309   |  
|Properties held for sale                         |  |                   |       |                                     |     |                               |  |                                            |       |                      |     |       |  |     | 812   |  |     | 812     |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|                                                 |  | HK$               | 81,667 |                                     | HK$ | 1,333                          |  | HK$                                        | 14,450 |                      | HK$ | 97,450 |  | HK$ | 3,485 |  | HK$ | 100,935 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Interest in non-controlled subsidiary            |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 110     |  
|Unallocated assets                               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 1,321   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Total assets                                     |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  | HK$ | 102,366 |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Liabilities                                      |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Segmented liabilities                            |  | HK$               | 3,000  |                                     | HK$ | 254                            |  | HK$                                        | 358    |                      | HK$ | 3,612  |  | HK$ | 368   |  | HK$ | 3,980   |  
|Deferred income                                  |  |                   | 137    |                                     |     |                               |  |                                            |       |                      |     | 137    |  |     | 4,924 |  |     | 5,061   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|                                                 |  | HK$               | 3,137  |                                     | HK$ | 254                            |  | HK$                                        | 358    |                      | HK$ | 3,749  |  | HK$ | 5,292 |  | HK$ | 9,041   |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Unallocated liabilities                          |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 36,025  |  
|Minority interests                               |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     | 8       |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Total liabilities                                |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  | HK$ | 45,074  |  
|                                                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Other Information                                |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Capital expenditure on:                          |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Operational assets and assets under construction |  | HK$               | 2,586  |                                     | HK$ | 179                            |  | HK$                                        | 3,629  |                      |     |        |  |     |       |  |     |         |  
|Railway construction in progress                 |  | HK$               | 719    |                                     |     |                                |  |                                            |        |                      |     |        |  |     |       |  |     |         |  
|Property development in progress                 |  |                   |        |                                     |     |                                |  |                                            |        |                      |     |        |  | HK$ | 161   |  |     |         |  
|Non-cash expenses other than depreciation        |  | HK$               | 19     |                                     | HK$ | 2                              |  | HK$                                        |       |                      |     |        |  |     |       |  |     |         |  



No
geographical analysis is shown as substantially all the principal activities of the Company and its subsidiaries are carried out in Hong Kong.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|14 | Fixed Assetsin millions
|-- | -----------------------



|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|----------------------------------------------------------------------- |  | -------------------- | ------ | -------------------------- | --- | ----- | ---------- |  | --- | ------------------ | - |  | ------------------------ | ------ | - | ----- | --- | ------ | - |  | --- | ------- | -
|                                                                        |  | INVESTMENTPROPERTIES |        | LEASEHOLDLAND ANDBUILDINGS |     |       | CIVILWORKS |  |     | PLANT ANDEQUIPMENT |   |  | ASSETS UNDERCONSTRUCTION |        |   | TOTAL |    
|Cost or Valuation                                                       |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|At January 1, 2003                                                      |  | HK$                  | 10,267 |                            | HK$ | 1,638 |            |  | HK$ | 45,092             |   |  | HK$                      | 52,519 |   |       | HK$ | 2,454  |   |  | HK$ | 111,970 |  
|Additions                                                               |  |                      | 3,626  |                            |     | 52    |            |  |     |                   |   |  |                          | 66     |   |       |     | 1,148  |   |  |     | 4,892   |  
|Disposals / Write-offs                                                  |  |                      |       |                            |     |      |            |  |     | (11                | ) |  |                          | (265   | ) |       |     | (4     | ) |  |     | (280    | )
|Surplus / (Deficit) on revaluation (Note 35)                            |  |                      | 276    |                            |     | (23   | )          |  |     |                   |   |  |                          |       |   |       |     |       |   |  |     | 253     |  
|Deficit on revaluation written off to profit and loss account (Note 4D) |  |                      |       |                            |     | (69   | )          |  |     |                   |   |  |                          |       |   |       |     |       |   |  |     | (69     | )
|Reclassification                                                        |  |                      |       |                            |     |      |            |  |     | 268                |   |  |                          | (268   | ) |       |     |       |   |  |     |        |  
|Other assets commissioned                                               |  |                      |       |                            |     |      |            |  |     | 391                |   |  |                          | 2,267  |   |       |     | (2,658 | ) |  |     |        |  
|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|At December 31, 2003                                                    |  | HK$                  | 14,169 |                            | HK$ | 1,598 |            |  | HK$ | 45,740             |   |  | HK$                      | 54,319 |   |       | HK$ | 940    |   |  | HK$ | 116,766 |  
|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|At Cost                                                                 |  | HK$                  |       |                            | HK$ | 731   |            |  | HK$ | 45,740             |   |  | HK$                      | 54,319 |   |       | HK$ | 940    |   |  | HK$ | 101,730 |  
|At December 31, 2003 Valuation                                          |  | HK$                  | 14,169 |                            | HK$ | 867   |            |  | HK$ |                   |   |  | HK$                      |       |   |       | HK$ |       |   |  | HK$ | 15,036  |  
|Aggregate depreciation                                                  |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|At January 1, 2003                                                      |  | HK$                  |       |                            | HK$ | 84    |            |  | HK$ | 2,324              |   |  | HK$                      | 15,292 |   |       | HK$ |       |   |  | HK$ | 17,700  |  
|Charge for the year                                                     |  |                      |       |                            |     | 35    |            |  |     | 374                |   |  |                          | 1,993  |   |       |     |       |   |  |     | 2,402   |  
|Written back on disposal                                                |  |                      |       |                            |     |      |            |  |     | (3                 | ) |  |                          | (233   | ) |       |     |       |   |  |     | (236    | )
|Written back on revaluation (Note 35)                                   |  |                      |       |                            |     | (21   | )          |  |     |                   |   |  |                          |       |   |       |     |       |   |  |     | (21     | )
|Reclassification                                                        |  |                      |       |                            |     |      |            |  |     | 10                 |   |  |                          | (10    | ) |       |     |       |   |  |     |        |  
|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|At December 31, 2003                                                    |  | HK$                  |       |                            | HK$ | 98    |            |  | HK$ | 2,705              |   |  | HK$                      | 17,042 |   |       | HK$ |       |   |  | HK$ | 19,845  |  
|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|Net book value at December 31, 2003                                     |  | HK$                  | 14,169 |                            | HK$ | 1,500 |            |  | HK$ | 43,035             |   |  | HK$                      | 37,277 |   |       | HK$ | 940    |   |  | HK$ | 96,921  |  
|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  
|Net book value at December 31, 2002                                     |  | HK$                  | 10,267 |                            | HK$ | 1,554 |            |  | HK$ | 42,768             |   |  | HK$                      | 37,227 |   |       | HK$ | 2,454  |   |  | HK$ | 94,270  |  
|                                                                        |  |                      |        |                            |     |       |            |  |     |                    |   |  |                          |        |   |       |     |        |   |  |     |         |  



A    The analysis of the investment properties and leasehold land and buildings held in Hong Kong are as follows:



|                               |  |                      |                                  |                              |                          |        |  |      |     |      |     |      |  |     |       |  |     |    
|------------------------------ |  | -------------------- | -------------------------------- | ---------------------------- | ------------------------ | ------ |  | ---- | --- | ---- | --- | ---- |  | --- | ----- |  | --- | ---
|                               |  | INVESTMENTPROPERTIES |                                  | LEASEHOLD LAND AND BUILDINGS
|                               |  |                      | LEASEHOLD LAND FORRAILWAY DEPOTS |                              | OFFICE LAND ANDBUILDINGS
|As of December 31,in millions  |  | 2002                 |                                  | 2003                         |                          | 2002   |  | 2003 |     | 2002 |     | 2003
|At net book value or valuation |  |                      |                                  |                              |                          |        |  |      |     |      |     |      |  |     |       |  |     |    
|- long leases                  |  | HK$                  | 1,436                            |                              | HK$                      | 1,283  |  | HK$  | 169 |      | HK$ | 166  |  | HK$ | 15    |  | HK$ | 15 
|- medium-term leases           |  |                      | 8,831                            |                              |                          | 12,886 |  |      | 478 |      |     | 468  |  |     | 1,623 |  |     | 852
|                               |  |                      |                                  |                              |                          |        |  |      |     |      |     |      |  |     |       |  |     |    
|                               |  | HK$                  | 10,267                           |                              | HK$                      | 14,169 |  | HK$  | 647 |      | HK$ | 634  |  | HK$ | 1,638 |  | HK$ | 867
|                               |  |                      |                                  |                              |                          |        |  |      |     |      |     |      |  |     |       |  |     |    



None
of the Groups investment properties carries an unexpired lease term of 20 years or less.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



B    The lease of the land on which the civil works, plant and equipment
are situated for the operation of the railway was granted to the Company under a running line lease for the period up to June 30, 2047, which has been extended to June 29, 2050. It is assumed that the lease will be renewed and that the operation of
the railway will continue after 2050.



Under
the terms of the lease, the Company undertakes to keep and maintain all the leased areas, including underground and overhead structures, at its own cost. With respect to parts of the railway situated in structures where access is shared with other
users, such as the Lantau Fixed Crossing, the Companys obligation for maintenance is limited to the railway only. All maintenance costs incurred under the terms of the lease have been dealt with as railway operating costs in the profit and
loss account.



C    All the
investment properties of the Group, other than the properties at Two International Finance Centre (Two IFC) were revalued at December 31, 2003 by DTZ Debenham Tie Leung, Chartered Surveyors, at open market value. The majority of the
valuations are based on the income capitalization method, which capitalizes the net income receivable at an appropriate capitalization rate, taking into account the reversionary income potential. The investment properties at Two IFC were revalued at
December 31, 2003 by Jones Lang LaSalle, Chartered Surveyors, at open market value based on, (i) the direct comparison method, which compares the properties to be valued directly with other comparable properties, and (ii) the income capitalization
method. The net revaluation surplus of HK$276 million (2002: deficit of HK$112 million) arising from the revaluation has been credited to the investment property revaluation reserve (note 35).



D    All self-occupied office land and buildings
were revalued at December 31, 2003 by DTZ Debenham Tie Leung and Jones Lang LaSalle, Chartered Surveyors, at open market value on an existing use basis. The valuation resulted in a net revaluation deficit of HK$71 million (2002: HK$92
million). HK$2 million of the deficit arising from the revaluation has been transferred to the fixed asset revaluation reserve to offset against the balance of the prior period revaluation surpluses (note 35), the remaining HK$69 million has
been charged to the profit and loss account according to the Companys policy (note 1E(ii)(b)).



The carrying amount of the self-occupied land and buildings at December 31, 2003 would have been HK$958 million (2002: HK$928
million) had the office land and buildings been stated at cost less accumulated depreciation.



E    Fixed assets include the following assets held under agreements which are treated as finance leases:



|                              |  |                    |       |           |     |                           |  |                    |     |  |     |      
|----------------------------- |  | ------------------ | ----- | --------- | --- | ------------------------- |  | ------------------ | --- |  | --- | -----
|As of December 31,in millions |  | NET BOOK VALUE2002 |       | COST 2003 |     | AGGREGATEDEPRECIATION2003 |  | NET BOOK VALUE2003
|Civil works                   |  |                    |       |           |     |                           |  |                    |     |  |     |      
|- Eastern Harbour Crossing    |  | HK$                | 1,024 |           | HK$ | 1,254                     |  | HK$                | 249 |  | HK$ | 1,005
|                              |  |                    |       |           |     |                           |  |                    |     |  |     |      



The
Company has entered into a Management Agreement (the Agreement) with New Hong Kong Tunnel Company Limited to operate the Eastern Harbour Crossing until 2008. Included in the assets held under the Agreement are railway and ancillary works
relating to the rail tunnel.



At the expiry of
the Agreement, title to the assets will, pursuant to the Eastern Harbour Crossing Ordinance, be vested in the Government which has in turn entered into a Memorandum of Understanding dated October 17, 1986 with the Company to the effect that the
assets will be vested in the Company on terms to be agreed between the Company and the Government. On June 30, 2000, the Company entered into a further agreement with the Government pursuant to which the relevant assets will be vested by the
Government into the Company in 2008 for a nominal consideration and the Company agreed to indemnify the Government for certain amounts which are expected to be nominal. On this basis, the semi-annual payments made by the Company to New Hong Kong
Tunnel Company Limited in respect of the Eastern Harbour Crossing are dealt with in these accounts as payments under a finance lease.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



F    The Group leases out investment properties and station kiosks under
operating leases. The leases typically run for an initial period of one to ten years, with an option to renew the lease after that date at which time all terms will be renegotiated. Lease payments are usually adjusted annually to reflect market
rentals. Certain leases carry additional rental based on turnover and lease incentives granted are amortized in the profit and loss account as an integral part of the net lease payment receivable.



The gross carrying amounts of investment properties of the
Group and the Company held for use in operating leases were HK$14,169 million (2002: HK$10,267 million). The gross carrying amounts of station kiosks held for use in operating leases were HK$352 million (2002: HK$314 million) and the
related accumulated depreciation charges were HK$65 million (2002: HK$52 million).



The Groups total future minimum lease payments under non-cancellable operating leases are receivable as follows:



|                                |  |      |       |      |     |      
|------------------------------- |  | ---- | ----- | ---- | --- | -----
|As of December 31,in millions   |  | 2002 |       | 2003
|Within 1 year                   |  | HK$  | 910   |      | HK$ | 925  
|After 1 year but within 5 years |  |      | 1,261 |      |     | 1,121
|Later than 5 years              |  |      | 168   |      |     | 355  
|                                |  |      |       |      |     |      
|                                |  | HK$  | 2,339 |      | HK$ | 2,401
|                                |  |      |       |      |     |      



G    In March 2003, the Group entered into a series of structured transactions with unrelated third parties to lease out and lease back certain of its passenger cars (Lease Transaction) involving a
total original cost of HK$2,562 million and a total net book value of HK$1,674 million as at March 31, 2003. Under the Lease Transaction, the Group has leased the assets to institutional investors in the United States (the Investors),
who have prepaid all the rentals in relation to the lease agreement. Simultaneously, the Group has leased the assets back from the Investors with obligation to pay rentals in accordance with a pre-determined payment schedule. The Group has an option
to purchase the Investors leasehold interest in the assets at pre-determined dates for fixed amounts. Part of the rental prepayments received from the Investors has been invested in debt securities which will be sufficient to meet the
Groups rental obligations and the amount payable for exercising the purchase option under the Lease Transaction. In addition, the Group retains legal title to the assets and there are no restrictions on the Groups ability to utilize
these assets in the operation of the railway business.



As a result of the Lease Transaction, the Group received total cash of approximately HK$3,688 million and committed to long-term lease payments with an estimated net present value of approximately HK$3,533 million,
which have been defeased by purchase of debt securities to meet the payment obligations. The Group received cash amount of HK$141 million net of costs from the Lease Transaction.



As the Group is not able to control the investment account in pursuit of its own objectives and is not
obligated to pay the lease payments, those liabilities and investments in debt securities are not recognized as obligations and assets of the Group. The net amount of cash received by the Group has been accounted for as deferred income and is being
amortized to the Groups profit and loss account over the terms of the respective leases.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|15 | Railway Construction in Progressin millions
|-- | -------------------------------------------



|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|----------------------------------------------------- |  | --------------------- | ---- | - | -------------------------------------------- | --- | ----------------------------- |  | --- | ---------------------- | - |  | --- | ---- | -
|                                                      |  | BALANCEAT JAN 1, 2003 |      |   | TRANSFERREDFROMDEFERREDEXPENDITURE (NOTE 17) |     | EXPENDITURE/(GOVERNMENTGRANT) |  |     | BALANCEAT DEC 31, 2003 |  
|Tseung Kwan O Extension Further Capital Works Project |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|Construction costs                                    |  | HK$                   | 1    |   |                                              | HK$ |                              |  | HK$ |                       |   |  | HK$ | 1    |  
|Consultancy fees                                      |  |                       | 23   |   |                                              |     |                              |  |     |                       |   |  |     | 23   |  
|Staff costs and general expenses                      |  |                       | 15   |   |                                              |     |                              |  |     | 1                      |   |  |     | 16   |  
|Finance costs                                         |  |                       | 4    |   |                                              |     |                              |  |     |                       |   |  |     | 4    |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|                                                      |  | HK$                   | 43   |   |                                              | HK$ |                              |  | HK$ | 1                      |   |  | HK$ | 44   |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|Pennys Bay Rail Link Project                         |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|Construction costs                                    |  | HK$                   | 139  |   |                                              | HK$ |                              |  | HK$ | 506                    |   |  | HK$ | 645  |  
|Consultancy fees                                      |  |                       | 35   |   |                                              |     |                              |  |     | 6                      |   |  |     | 41   |  
|Staff costs and general expenses                      |  |                       | 109  |   |                                              |     |                              |  |     | 85                     |   |  |     | 194  |  
|Finance costs                                         |  |                       | 2    |   |                                              |     |                              |  |     | 1                      |   |  |     | 3    |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|                                                      |  | HK$                   | 285  |   |                                              | HK$ |                              |  | HK$ | 598                    |   |  | HK$ | 883  |  
|Government grant (Notes 40E and 40J)                  |  |                       | (219 | ) |                                              |     |                              |  |     | (664                   | ) |  |     | (883 | )
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|                                                      |  | HK$                   | 66   |   |                                              | HK$ |                              |  | HK$ | (66)                   |   |  | HK$ |     |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|Tung Chung Cable Car Project                          |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|Construction costs                                    |  | HK$                   |     |   |                                              | HK$ | 3                             |  | HK$ | 79                     |   |  | HK$ | 82   |  
|Consultancy fees                                      |  |                       |     |   |                                              |     | 4                             |  |     | 20                     |   |  |     | 24   |  
|Staff costs and general expenses                      |  |                       |     |   |                                              |     | 10                            |  |     | 19                     |   |  |     | 29   |  
|Finance costs                                         |  |                       |     |   |                                              |     |                              |  |     | 2                      |   |  |     | 2    |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|                                                      |  | HK$                   |     |   |                                              | HK$ | 17                            |  | HK$ | 120                    |   |  | HK$ | 137  |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  
|Total                                                 |  | HK$                   | 109  |   |                                              | HK$ | 17                            |  | HK$ | 55                     |   |  | HK$ | 181  |  
|                                                      |  |                       |      |   |                                              |     |                               |  |     |                        |   |  |     |      |  



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|16 | Property Development in Progress
|-- | --------------------------------



Under the Airport Railway Agreement related to the construction of the Airport Railway, the Government had granted to the Company land on
five station sites along the railway at full market value for property development. In preparing the sites for development, the Company incurs costs related to foundation and site enabling works and expects the costs to be reimbursed by property
developers in the form of up-front cash payments when development packages are awarded. In accordance with the development agreements entered into with property developers, the developers are also responsible for the balance of the development
costs.



Despite having entered into the
development agreements with the developers, the Company being the grantee of the land remains primarily responsible for the fulfilment of all the conditions and obligations in the Land Grant. Such conditions and obligations include the type and
quantity of the developments that must be built, public facilities to be provided, and the completion date of the project.



Costs of foundation and site enabling works incurred by the Company are capitalized as property development in progress and payments
received from developers are credited to property development in progress to offset costs incurred in respect of the same development. In cases where payments received from developers exceed the related expenditure incurred by the Company, such
excess is recorded as deferred income (note 16B). In these cases, any subsequent expenditure incurred by the Company in respect of that development will be charged against deferred income. It is expected that the majority of deferred income will be
recognized as profits of the Company at the appropriate time after charging any remaining costs related to foundation and site enabling works, and after taking into account the outstanding risks and obligations retained by the Company relating to
each development. Until such time as deferred income is recognized as profit, it is recorded as a liability of the Company in recognition of the Companys obligations under the Land Grant.



The TKE Project Agreement entered into between the then
Secretary for Transport, for and on behalf of the Government, and the Company in respect of the construction of the Tseung Kwan O Extension provides the Company with the right to undertake property developments at four station and depot sites along
the Tseung Kwan O Line (Tseung Kwan O Extension Property Projects). The basis of accounting for development costs incurred by the Company and payments received by the Company related thereto is consistent with that for the property
developments along the Airport Railway (Airport Railway Property Projects).



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | A | PROPERTY DEVELOPMENT IN PROGRESS in millions
| | - | --------------------------------------------



|                                                    |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      
|--------------------------------------------------- |  | --------------- | ----- | ----------- | --- | -------------------------------------------------------- |  | --- | -------------------------------- | - | ---------------- | --- | ----- |  | --- | -----
|                                                    |  | BALANCE ATJAN 1 |       | EXPENDITURE |     | OFFSET AGAINSTPAYMENTSRECEIVED FROMDEVELOPERS (NOTE 16B) |  |     | TRANSFER OUTON PROJECTCOMPLETION |   | BALANCE ATDEC 31
|2002                                                |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      
|Airport Railway Property Projects                   |  | HK$             | 583   |             | HK$ | 76                                                       |  | HK$ | (62                              | ) |                  | HK$ |      |  | HK$ | 597  
|Tseung Kwan O Extension and other property projects |  |                 | 2,778 |             |     | 280                                                      |  |     | (785                             | ) |                  |     |      |  |     | 2,273
|                                                    |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      
|                                                    |  | HK$             | 3,361 |             | HK$ | 356                                                      |  | HK$ | (847                             | ) |                  | HK$ |      |  | HK$ | 2,870
|                                                    |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      
|2003                                                |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      
|Airport Railway Property Projects                   |  | HK$             | 597   |             | HK$ | 122                                                      |  | HK$ | (63                              | ) |                  | HK$ | (656) |  | HK$ |     
|Tseung Kwan O Extension and other property projects |  |                 | 2,273 |             |     | 39                                                       |  |     | (3                               | ) |                  |     |      |  |     | 2,309
|                                                    |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      
|                                                    |  | HK$             | 2,870 |             | HK$ | 161                                                      |  | HK$ | (66                              | ) |                  | HK$ | (656) |  | HK$ | 2,309
|                                                    |  |                 |       |             |     |                                                          |  |     |                                  |   |                  |     |       |  |     |      



| | B | DEFERRED INCOME ON PROPERTY DEVELOPMENT in millions
| | - | ---------------------------------------------------



|                                          |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      
|----------------------------------------- |  | --------------- | ----- | ------------------------------- | --- | ------------------------------------------------------- |  | --- | ---------------------------------- | - | -------------------------- | --- | ------- |  | --- | -----
|                                          |  | BALANCE ATJAN 1 |       | PAYMENTSRECEIVED FROMDEVELOPERS |     | OFFSET AGAINSTPROPERTYDEVELOPMENTIN PROGRESS (NOTE 16A) |  |     | AMOUNTRECOGNIZEDAS PROFIT (NOTE 6) |   | BALANCE ATDEC 31 (NOTE 32)
|2002                                      |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      
|Airport Railway Property Projects         |  | HK$             | 8,401 |                                 | HK$ | 425                                                     |  | HK$ | (62                                | ) |                            | HK$ | (2,548) |  | HK$ | 6,216
|Tseung Kwan O Extension Property Projects |  |                 | 10    |                                 |     | 785                                                     |  |     | (785                               | ) |                            |     |        |  |     | 10   
|                                          |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      
|                                          |  | HK$             | 8,411 |                                 | HK$ | 1,210                                                   |  | HK$ | (847                               | ) |                            | HK$ | (2,548) |  | HK$ | 6,226
|                                          |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      
|2003                                      |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      
|Airport Railway Property Projects         |  | HK$             | 6,216 |                                 | HK$ | 50                                                      |  | HK$ | (63                                | ) |                            | HK$ | (1,286) |  | HK$ | 4,917
|Tseung Kwan O Extension Property Projects |  |                 | 10    |                                 |     |                                                        |  |     | (3                                 | ) |                            |     |        |  |     | 7    
|                                          |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      
|                                          |  | HK$             | 6,226 |                                 | HK$ | 50                                                      |  | HK$ | (66                                | ) |                            | HK$ | (1,286) |  | HK$ | 4,924
|                                          |  |                 |       |                                 |     |                                                         |  |     |                                    |   |                            |     |         |  |     |      



| | C | STAKEHOLDING FUNDS in millions
| | - | ------------------------------



As stakeholder under certain Airport Railway Property Projects, the Company receives and manages deposit monies and sales proceeds in
respect of sales of properties under those developments. These monies are placed in separate designated bank accounts and, together with any interest earned, will be released to the developers for the reimbursement of costs of the respective
developments in accordance with the terms and conditions of the Government Consent Schemes and development agreements. Accordingly, the balances of the stakeholding funds and the corresponding bank balances have not been included in the Groups
and the Companys balance sheets. Movements in stakeholding funds during the year were as follows:



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|                                                       |  |      |         |   |      |     |         |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | --- | ------- | -
|                                                       |  | 2002 |         |   | 2003 |    
|Balance as at January 1                                |  | HK$  | 5,686   |   |      | HK$ | 3,231   |  
|Stakeholding funds received and receivable             |  |      | 8,399   |   |      |     | 13,472  |  
|Add: Interest earned thereon                           |  |      | 65      |   |      |     | 25      |  
|                                                       |  |      |         |   |      |     |         |  
|                                                       |  | HK$  | 14,150  |   |      | HK$ | 16,728  |  
|Disbursements during the year                          |  |      | (10,919 | ) |      |     | (13,156 | )
|                                                       |  |      |         |   |      |     |         |  
|Balance as at December 31                              |  | HK$  | 3,231   |   |      | HK$ | 3,572   |  
|                                                       |  |      |         |   |      |     |         |  
|Represented by :                                       |  |      |         |   |      |     |         |  
|Balances in designated bank accounts as at December 31 |  | HK$  | 3,229   |   |      | HK$ | 3,570   |  
|Retention receivable                                   |  |      | 2       |   |      |     | 2       |  
|                                                       |  |      |         |   |      |     |         |  
|                                                       |  | HK$  | 3,231   |   |      | HK$ | 3,572   |  
|                                                       |  |      |         |   |      |     |         |  



|17 | Deferred Expenditurein millions
|-- | -------------------------------



|                                      |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|------------------------------------- |  | --------------- | --- | --------------------------------------------------- | --- | --- | -------------------------------- |  | --- | ------------------------------------------ | - |  | ---------------------------------------------------- | -- | - | ----------------- | --- | ---- | - |  | --- | ---
|                                      |  | BALANCE ATJAN 1 |     | TRANSFER TORAILWAYCONSTRUCTIONIN PROGRESS (NOTE 15) |     |     | DISCOUNT /(PREMIUM) ONBOND ISSUE |  |     | EXPENDITURE /(AMORTIZATION)DURING THE YEAR |   |  | AMOUNTWRITTEN OFFTO PROFIT AND LOSSACCOUNT (NOTE
4C) |    |   | BALANCE AT DEC 31
|2002                                  |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|Deferredfinancecharges                |  | HK$             | 133 |                                                     | HK$ |    |                                  |  | HK$ | (53                                        | ) |  | HK$                                                  | (8 | ) |                   | HK$ |     |   |  | HK$ | 72 
|Expenditureon proposedcapitalprojects |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|- Pennys BayRail Link                |  |                 | 68  |                                                     |     | (68 | )                                |  |     |                                           |   |  |                                                      |   |   |                   |     |     |   |  |     |   
|- North Island Link                   |  |                 | 77  |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 8  |   |                   |     | (85  | ) |  |     |   
|- Shatin Central Link                 |  |                 | 42  |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      |   |   |                   |     | (42  | ) |  |     |   
|- Tung Chung CableCar Project         |  |                 | 6   |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 11 |   |                   |     |     |   |  |     | 17 
|- WestIsland Link                     |  |                 |    |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 16 |   |                   |     |     |   |  |     | 16 
|- Other                               |  |                 |    |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 1  |   |                   |     |     |   |  |     | 1  
|                                      |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|                                      |  | HK$             | 326 |                                                     | HK$ | (68 | )                                |  | HK$ | (53                                        | ) |  | HK$                                                  | 28 |   |                   | HK$ | (127 | ) |  | HK$ | 106
|                                      |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|                                      |  |                 |     |                                                     |     |    
|2003                                  |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|Deferredfinancecharges                |  | HK$             | 72  |                                                     | HK$ |    |                                  |  | HK$ | 10                                         |   |  | HK$                                                  | (6 | ) |                   | HK$ |     |   |  | HK$ | 76 
|Expenditureon proposedcapitalprojects |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|- Tung Chung CableCar Project         |  |                 | 17  |                                                     |     | (17 | )                                |  |     |                                           |   |  |                                                      |   |   |                   |     |     |   |  |     |   
|- WestIsland Link                     |  |                 | 16  |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 5  |   |                   |     | (21  | ) |  |     |   
|- South Island Line                   |  |                 |    |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 25 |   |                   |     |     |   |  |     | 25 
|- AirportExhibitionCentre Project     |  |                 |    |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      | 3  |   |                   |     |     |   |  |     | 3  
|- Other                               |  |                 | 1   |                                                     |     |    |                                  |  |     |                                           |   |  |                                                      |   |   |                   |     | (1   | ) |  |     |   
|                                      |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    
|                                      |  | HK$             | 106 |                                                     | HK$ | (17 | )                                |  | HK$ | 10                                         |   |  | HK$                                                  | 27 |   |                   | HK$ | (22  | ) |  | HK$ | 104
|                                      |  |                 |     |                                                     |     |     |                                  |  |     |                                            |   |  |                                                      |    |   |                   |     |      |   |  |     |    



Deferred expenditures relating to the Tung Chung Cable Car Project were transferred to Railway Construction in Progress upon signing of the Tung Chung Cable Car Project Agreement with the Government in November 2003.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|18 | Interest in Non-controlled Subsidiaryin millions
|-- | ------------------------------------------------



The Group and the Company had the following interest in a non-controlled subsidiary at December 31, 2003:



|                         |  |            |    |      |     |    
|------------------------ |  | ---------- | -- | ---- | --- | ---
|                         |  | 2002       |    | 2003
|                         |  | (Note 43A) |    |     
|Unlisted shares, at cost |  | HK$        |   |      | HK$ |   
|Share of net assets      |  |            | 87 |      |     | 110
|                         |  |            |    |      |     |    
|                         |  | HK$        | 87 |      | HK$ | 110
|                         |  |            |    |      |     |    



|                      |  |                                          |            |                                               |      |   |                       |           |                     |                                            
|--------------------- |  | ---------------------------------------- | ---------- | --------------------------------------------- | ---- | - | --------------------- | --------- | ------------------- | -------------------------------------------
|NAME OF COMPANY       |  | ISSUED AND PAID UP ORDINARYSHARE CAPITAL |            | INTEREST IN EQUITY SHARES HELD BY THE COMPANY |      |   | PLACE OFINCORPORATION |           | PRINCIPALACTIVITIES
|Octopus Cards Limited |  | HK$                                      | 42,000,000 |                                               | 57.4 | % |                       | Hong Kong |                     | Developmentand operationof smart cardsystem



In
June 1994, the Company entered into an agreement with four local transport companies, Kowloon-Canton Railway Corporation, The Kowloon Motor Bus Company (1933) Limited (subsequently replaced by KMB Public Bus Services Holdings Limited), Citybus
Limited and The Hongkong and Yaumati Ferry Co., Limited (subsequently replaced by New World First Bus Services Limited and New World First Ferry Services Limited), to incorporate a company, Creative Star Limited, now Octopus Cards Limited
(OCL), to undertake the development and operation of the Octopus contactless smart card ticketing system, which was initially used by the shareholding transport companies. Although the Company holds a majority interest in the
issued shares of OCL, its appointees to the Board of Directors of OCL are limited to 49% of the voting rights at board meetings. The shareholders have agreed to provide the necessary funding to OCL for its operations and for the development of the
Octopus system.



On April 20,
2000, OCL received approval from The Hong Kong Monetary Authority to become a deposit-taking company (DTC) for purposes of extending the use of Octopus cards to a wider range of services, including those that are non-transport related.
Prior to becoming a DTC, the Octopus card was exempted from the definition of multi-purpose card under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) on the basis that its use was restricted to transport related services
only. In connection with the application, the Company and the other shareholders of OCL injected HK$28 million and HK$42 million in the form of subordinated loan and share capital respectively into OCL on April 18, 2000 in order to fulfill the
capital requirements pursuant to the Banking Ordinance. The contributions were made in proportion to each shareholders interest in the shares of OCL.



On January 17, 2001, the Company entered into a new Shareholders Agreement with the other shareholders of OCL. Under this agreement,
the Company disposed of a shareholding interest of 10.4% in OCL to certain other shareholders of OCL for a consideration of HK$16 million, together with a deferred consideration to be received in the event of OCL subsequently becoming a stock
exchange listed company. In 2002, OCL fully repaid the Companys subordinated loans.



During the year ended December 31, 2003, a total amount of HK$46 million (2002: HK$45 million) was paid by the Company to OCL in
respect of the central clearing services provided by OCL to the Company. During the same period, load agent fees and fees for handling Octopus card issuance and refund amounting to HK$10 million (2002: HK$11 million) and HK$5 million
(2002: Nil) respectively were received from OCL in respect of services and facilities provided by the Company at various MTR stations.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



In addition, services fees amounting to HK$2 million (2002: HK$2 million) were
received from OCL in respect of rental of computer equipment and services and warehouse storage space payable to the Company under a service agreement.



The condensed profit and loss account and the balance sheet for OCL are shown below:



|                                                        |  |                        |        |   |           |     |        |  
|------------------------------------------------------- |  | ---------------------- | ------ | - | --------- | --- | ------ | -
|Profit and loss account Year ended December
31          |  | 2002                   |        |   | 2003      |    
|in millions                                             |  | (Audited and restated) |        |   | (Audited) |    
|Turnover                                                |  | HK$                    | 170    |   |           | HK$ | 177    |  
|Other operating income                                  |  |                        | 58     |   |           |     | 62     |  
|                                                        |  |                        |        |   |           |     |        |  
|                                                        |  | HK$                    | 228    |   |           | HK$ | 239    |  
|Staff costs                                             |  |                        | (53    | ) |           |     | (54    | )
|Load agent fees and bank charges for add value services |  |                        | (28    | ) |           |     | (31    | )
|Other expenses                                          |  |                        | (48    | ) |           |     | (62    | )
|                                                        |  |                        |        |   |           |     |        |  
|Operating profit before depreciation                    |  | HK$                    | 99     |   |           | HK$ | 92     |  
|Depreciation                                            |  |                        | (61    | ) |           |     | (80    | )
|                                                        |  |                        |        |   |           |     |        |  
|Operating profit before interest and finance charges    |  | HK$                    | 38     |   |           | HK$ | 12     |  
|Net interest income                                     |  |                        | 30     |   |           |     | 28     |  
|                                                        |  |                        |        |   |           |     |        |  
|Profit before taxation                                  |  | HK$                    | 68     |   |           | HK$ | 40     |  
|Income tax                                              |  |                        | (4     | ) |           |     | (1     | )
|                                                        |  |                        |        |   |           |     |        |  
|Profit for the year                                     |  | HK$                    | 64     |   |           | HK$ | 39     |  
|                                                        |  |                        |        |   |           |     |        |  
|Groups share of profit before taxation                 |  | HK$                    | 39     |   |           | HK$ | 23     |  
|                                                        |  |                        |        |   |           |     |        |  
|                                                        |  |                       
|Balance sheet at December
31                            |  | 2002                   |        |   | 2003      |    
|in millions                                             |  | (Audited and restated) |        |   | (Audited) |    
|Assets                                                  |  |                        |        |   |           |     |        |  
|Fixed assets                                            |  | HK$                    | 306    |   |           | HK$ | 243    |  
|Investments                                             |  |                        | 590    |   |           |     | 704    |  
|Cash at banks and in hand                               |  |                        | 236    |   |           |     | 327    |  
|Other assets                                            |  |                        | 67     |   |           |     | 91     |  
|                                                        |  |                        |        |   |           |     |        |  
|                                                        |  | HK$                    | 1,199  |   |           | HK$ | 1,365  |  
|                                                        |  |                        |        |   |           |     |        |  
|Liabilities                                             |  |                        |        |   |           |     |        |  
|Card floats and card deposits due to cardholders        |  | HK$                    | (996   | ) |           | HK$ | (1,075 | )
|Amounts due to shareholders                             |  |                        | (18    | ) |           |     | (22    | )
|Other liabilities                                       |  |                        | (33    | ) |           |     | (76    | )
|                                                        |  |                        |        |   |           |     |        |  
|                                                        |  | HK$                    | (1,047 | ) |           | HK$ | (1,173 | )
|                                                        |  |                        |        |   |           |     |        |  
|Net assets                                              |  | HK$                    | 152    |   |           | HK$ | 192    |  
|                                                        |  |                        |        |   |           |     |        |  
|Shareholders funds                                     |  |                        |        |   |           |     |        |  
|Share capital                                           |  | HK$                    | 42     |   |           | HK$ | 42     |  
|Retained profits                                        |  |                        | 110    |   |           |     | 150    |  
|                                                        |  |                        |        |   |           |     |        |  
|                                                        |  | HK$                    | 152    |   |           | HK$ | 192    |  
|                                                        |  |                        |        |   |           |     |        |  
|Groups share of net assets                             |  | HK$                    | 87     |   |           | HK$ | 110    |  
|                                                        |  |                        |        |   |           |     |        |  



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|19 | Investments in Subsidiariesin millions
|-- | --------------------------------------



|                         |  |      |     |      |     |    
|------------------------ |  | ---- | --- | ---- | --- | ---
|                         |  | 2002 |     | 2003
|Unlisted shares, at cost |  | HK$  | 166 |      | HK$ | 181
|Less: Impairment losses  |  |      | 3   |      |     | 3  
|                         |  |      |     |      |     |    
|                         |  | HK$  | 163 |      | HK$ | 178
|                         |  |      |     |      |     |    



The
following list contains details of subsidiaries as at December 31, 2003, other than the non-controlled subsidiary the relevant details of which are disclosed in note 18. All of these are controlled subsidiaries as defined under note 1C and have been
consolidated into the Groups financial statements.



|                                                          |  |                                                    |             |                                 |     |   |                   |     |   |                   |    |   |                                    |                                             |                      |                                        
|--------------------------------------------------------- |  | -------------------------------------------------- | ----------- | ------------------------------- | --- | - | ----------------- | --- | - | ----------------- | -- | - | ---------------------------------- | ------------------------------------------- | -------------------- | ---------------------------------------
|                                                          |  |                                                    |             | PROPORTION OF OWNERSHIPINTEREST |     |   |                   |     |  
|NAME OF COMPANY                                           |  | ISSUED AND PAIDUP ORDINARY/REGISTEREDSHARE CAPITAL |             | GROUPSEFFECTIVEINTEREST        |     |   | HELD BYTHECOMPANY |     |   | HELD BYSUBSIDIARY |    |   | PLACE OFINCORPORATIONAND OPERATION |                                             | PRINCIPAL ACTIVITIES
|Fasttrack Insurance Ltd.                                  |  | HK$                                                | 77,500,000  |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Bermuda                                     |                      | Insurance underwriting                 
|MTR Corporation (C.I.) Limited                            |  | US$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Cayman Islands                              |                      | Finance                                
|MTR Finance Lease (001) Limited                           |  | US$                                                | 1           |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Cayman Islands                              |                      | Finance                                
|MTR Engineering Services Limited                          |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Engineering services                   
|MTR Property Agency Co. Limited                           |  | HK$                                                | 2           |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Property agency                        
|MTR Travel Limited                                        |  | HK$                                                | 2,500,000   |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Travel services                        
|MTR Consulting (Shenzhen) Co. Ltd.                        |  | HK$                                                | 1,000,000   |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | The PeoplesRepublic of China(Incorporated) |                      | Railway consultancyservices            
|MTR Corporation (Singapore) Pte. Ltd.                     |  | S$                                                 | 50,000      |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Singapore                                   |                      | Railway consultancyservices            
|MTR (Shanghai Consultancy) Company Limited                |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Railway consultancyservices            
|MTR (Shanghai Project Management) Limited                 |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Railway consultancyservices            
|Shanghai Hong Kong Metro Construction Management Co. Ltd. |  | HK$                                                | 15,000,000  |                                 | 60  | % |                   |    |   |                   | 60 | % |                                    | The PeoplesRepublic of China(Incorporated) |                      | Railway constructionmanagement         
|MTR China Property Limited                                |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Property management                    
|Shenzhen Donghai Anbo Property Management Co. Ltd.        |  | RMB                                                | 3,000,000   |                                 | 51  | % |                   |    |   |                   | 51 | % |                                    | The PeoplesRepublic of China(Incorporated) |                      | Property management                    
|Beijing Premier Property Management Co. Ltd.              |  | US$                                                | 150,000     |                                 | 60  | % |                   |    |   |                   | 60 | % |                                    | The PeoplesRepublic of China(Incorporated) |                      | Property management                    
|MTR TelecommunicationCompany Limited                      |  | HK$                                                | 100,000,000 |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Radio communicationservices            
|TraxComm Limited                                          |  | HK$                                                | 15,000,000  |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Fixed telecommunicationnetwork services
|Hong Kong Cable Car Limited                               |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Dormant                                
|Lantau Cable Car Limited                                  |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Dormant                                
|MTR (Estates Management) Limited                          |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Dormant                                
|MTR (Shanghai Metro Management) Limited                   |  | HK$                                                | 1,000       |                                 | 100 | % |                   | 100 | % |                   |   |   |                                    | Hong Kong                                   |                      | Dormant                                



No
dividend has been paid or is payable to the Company by the above subsidiaries for the year ended to December 31, 2003 (2002: Nil).



F - 40



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|20 | Staff Housing Loansin millions
|-- | ------------------------------



|                         |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   
|------------------------ |  | --------------- | --- | ---------- | --- | --- | --------- |  | --- | --------------------- | - |  | ---------------- | -- | - |  | --- | --
|                         |  | BALANCE ATJAN 1 |     | REDEMPTION |     |     | REPAYMENT |  |     | REDUCTION INPROVISION |   |  | BALANCE ATDEC 31
|2002                     |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   
|Housing loans receivable |  | HK$             | 128 |            | HK$ | (34 | )         |  | HK$ | (10                   | ) |  | HK$              |   |   |  | HK$ | 84
|Less: General provision  |  |                 | 1   |            |     |    |           |  |     |                      |   |  |                  | (1 | ) |  |     |  
|                         |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   
|                         |  | HK$             | 127 |            | HK$ | (34 | )         |  | HK$ | (10                   | ) |  | HK$              | 1  |   |  | HK$ | 84
|                         |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   
|2003                     |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   
|Housing loans receivable |  | HK$             | 84  |            | HK$ | (9  | )         |  | HK$ | (8                    | ) |  | HK$              |   |   |  | HK$ | 67
|Less: General provision  |  |                 |    |            |     |    |           |  |     |                      |   |  |                  |   |   |  |     |  
|                         |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   
|                         |  | HK$             | 84  |            | HK$ | (9  | )         |  | HK$ | (8                    | ) |  | HK$              |   |   |  | HK$ | 67
|                         |  |                 |     |            |     |     |           |  |     |                       |   |  |                  |    |   |  |     |   



|                   |  |      |    |      |     |   
|------------------ |  | ---- | -- | ---- | --- | --
|                   |  | 2002 |    | 2003
|Amount receivable: |  |      |    |      |     |   
|- within 1 year    |  | HK$  | 9  |      | HK$ | 7 
|- after 1 year     |  |      | 75 |      |     | 60
|                   |  |      |    |      |     |   
|                   |  | HK$  | 84 |      | HK$ | 67
|                   |  |      |    |      |     |   



The
MTR Staff Housing Loan Scheme, a Company financed scheme, was introduced in 1997 to replace, on a phased basis, the previous arrangements whereby interest subsidies were paid by the Company to eligible employees. All housing loans granted to
employees carry interest either at the prevailing Best Lending Rate less 1.75% per annum or at the Companys Average Cost of Borrowings plus 0.75% per annum, and are secured by mortgage over the relevant properties.



|21 | Properties Held for Salein millions
|-- | -----------------------------------



|                          |  |      |     |      |     |    
|------------------------- |  | ---- | --- | ---- | --- | ---
|                          |  | 2002 |     | 2003
|Properties held for sale  |  |      |     |      |     |    
|- at cost                 |  | HK$  | 271 |      | HK$ | 405
|- at net realizable value |  |      | 523 |      |     | 407
|                          |  |      |     |      |     |    
|                          |  | HK$  | 794 |      | HK$ | 812
|                          |  |      |     |      |     |    



The
properties held for sale at December 31, 2002 and 2003 comprised residential units, retail and car parking spaces at the Olympic Station and Kowloon Station developments. They are properties received by the Company, either as property sharing in
kind or as part of the profit distribution upon completion of the development (note 6). The properties are stated in the balance sheet at the lower of cost, which is deemed to be their net realizable value upon recognition (note 1I(vii)), or their
net realizable value at the balance sheet date. Net realizable value represents the estimated selling price less costs to be incurred in selling the properties. The net realizable values as at December 31, 2002 and 2003 are determined by reference
to an open market valuation of the properties as at those dates, undertaken by DTZ Debenham Tie Leung, Chartered Surveyors.



Properties held for sale at net realizable value are stated net of general provision, made in order to state these properties at the lower
of their cost and estimated net realizable value. The amount of write-down of properties to estimated net realizable value recognized in the consolidated profit and loss account is HK$16 million(2002: HK$44 million).



F - 41



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|22 | Stores and Sparesin millions
|-- | ----------------------------



|                                            |  |      |     |      |     |    
|------------------------------------------- |  | ---- | --- | ---- | --- | ---
|                                            |  | 2002 |     | 2003
|Stores and spares expected to be consumed:  |  |      |     |      |     |    
|- within 1 year                             |  | HK$  | 138 |      | HK$ | 126
|- after 1 year                              |  |      | 127 |      |     | 136
|                                            |  |      |     |      |     |    
|                                            |  | HK$  | 265 |      | HK$ | 262
|Less: Specific provision for obsolete stock |  |      | 6   |      |     | 13 
|                                            |  |      |     |      |     |    
|                                            |  | HK$  | 259 |      | HK$ | 249
|                                            |  |      |     |      |     |    



Stores
and spares expected to be consumed after 1 year comprise mainly contingency spares and stocks kept to meet cyclical maintenance requirements.



|23 | Debtors, Deposits and Payments in Advancein millions
|-- | ----------------------------------------------------



|                                                                                                             |  |      |     |      |     |      
|------------------------------------------------------------------------------------------------------------ |  | ---- | --- | ---- | --- | -----
|                                                                                                             |  | 2002 |     | 2003
|Debtors (net of specific allowances for bad and doubtful debts), deposits and payments in advance relate to: |  |      |     |      |     |      
|- Tseung Kwan O Extension Project                                                                            |  | HK$  | 1   |      | HK$ |     
|- Railway operations and other projects                                                                      |  |      | 726 |      |     | 1,153
|                                                                                                             |  |      |     |      |     |      
|                                                                                                             |  | HK$  | 727 |      | HK$ | 1,153
|                                                                                                             |  |      |     |      |     |      



The
Groups credit policy in respect of receivables arising from its principal activities are as follows:



i    Rentals, advertising and telecommunications fees are billed monthly with due dates ranging from 7 to 50 days. Tenants of
the Groups investment properties and station kiosks are required to pay three months rental deposit upon the signing of lease agreements.



ii    Amounts receivable under interest rate and currency swap agreements with financial institutions are due in accordance
with the respective terms of the agreements.



iii    Debtors in relation to contracts and capital works entrusted to the Group, subject to any agreed retentions, are due within 21 days upon the certification of work in progress.



Fare revenue is collected either in cash for single and
two-ride tickets or through Octopus Cards with daily settlement.



The ageing analysis of debtors included above is as follows:



|                                 |  |      |     |      |     |      
|-------------------------------- |  | ---- | --- | ---- | --- | -----
|                                 |  | 2002 |     | 2003
|Amount not yet due               |  | HK$  | 548 |      | HK$ | 775  
|Overdue by 30 days               |  |      | 82  |      |     | 67   
|Overdue by 60 days               |  |      | 10  |      |     | 16   
|Overdue by 90 days               |  |      | 4   |      |     | 9    
|Overdue by more than 90 days     |  |      | 13  |      |     | 10   
|                                 |  |      |     |      |     |      
|Total debtors                    |  | HK$  | 657 |      | HK$ | 877  
|Deposits and payments in advance |  |      | 70  |      |     | 276  
|                                 |  |      |     |      |     |      
|                                 |  | HK$  | 727 |      | HK$ | 1,153
|                                 |  |      |     |      |     |      



As at
December 31, 2003, all debtors, deposits and payments in advance were expected to be recovered within one year except for HK$238 million (2002: HK$25 million) included in the amounts relating to railway operations and other projects, which
were expected to be recovered after one year.



Included in amount not yet due are HK$328 million (2002: HK$70 million) receivable from property purchasers, which are due for payment in accordance with the terms of individual agreements on sales and purchases.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|24 | Amounts Due from the Government and Other Related Partiesin millions
|-- | --------------------------------------------------------------------



|                                                                  |  |      |    |      |     |   
|----------------------------------------------------------------- |  | ---- | -- | ---- | --- | --
|                                                                  |  | 2002 |    | 2003
|Amounts due from:                                                 |  |      |    |      |     |   
|- the Government                                                  |  | HK$  | 57 |      | HK$ | 68
|- the Housing Authority                                           |  |      | 30 |      |     | 11
|- the Kowloon-Canton Railway Corporation (KCRC)                 |  |      | 8  |      |     | 3 
|- non-controlled subsidiary                                       |  |      |   |      |     | 2 
|- other subsidiaries of the Company (net of provision for losses) |  |      |   |      |     |  
|                                                                  |  |      |    |      |     |   
|                                                                  |  | HK$  | 95 |      | HK$ | 84
|                                                                  |  |      |    |      |     |   



The
amount due from the Government relates to outstanding receivable and retention, as well as provision for contract claims recoverable from the Government, in connection with infrastructure works entrusted to the Company.



The amount due from the Housing Authority relates to site
formation works entrusted to the Company by the Housing Authority in respect of the Tseung Kwan O Extension Project. The entrustment enabled early possession of a site by the Group to facilitate railway construction.



The amount due from KCRC relates to works entrusted to the
Company in connection with the provision of interchange stations between the MTR and KCRC systems.



As at December 31, 2003, the contract retentions on the above entrusted works due for release after one year were HK$6 million (2002:
HK$7 million). All other amounts due from the Government and other related parties were expected to be received within 12 months.



|25 | Cash and Cash Equivalentsin millions
|-- | ------------------------------------



|                                                     |  |      |       |   |      |     |     |  
|---------------------------------------------------- |  | ---- | ----- | - | ---- | --- | --- | -
|                                                     |  | 2002 |       |   | 2003 |    
|Deposits with banks and other financial institutions |  | HK$  | 1,651 |   |      | HK$ | 135 |  
|Cash at banks and in hand                            |  |      | 67    |   |      |     | 241 |  
|                                                     |  |      |       |   |      |     |     |  
|Cash and cash equivalents in the balance sheet       |  | HK$  | 1,718 |   |      | HK$ | 376 |  
|Bank overdrafts (Note 26B)                           |  |      | (34   | ) |      |     | (12 | )
|                                                     |  |      |       |   |      |     |     |  
|Cash and cash equivalents in the cash flow statement |  | HK$  | 1,684 |   |      | HK$ | 364 |  
|                                                     |  |      |       |   |      |     |     |  



During
the year, the Group recognized property development profit out of deferred income and received properties as sharing in kind totalling HK$5,320 million (2002: HK$3,751 million), which were transactions not involving movements of cash or cash
equivalents.



F - 43



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|26 | Loans and Obligations under Finance Leases
|-- | ------------------------------------------



| | A | BY TYPE in millions
| | - | -------------------



|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|------------------------------------------------ |  | ----------- | ------ | ---------------------------------- | --- | ---------------------------------------------------------- |  | --- | ----------- | - |  | --- | ------
|                                                 |  | BALANCE2002 |        | BALANCE ATYEAR ENDCLOSING RATE2003 |     | EXCHANGE (GAIN)/LOSSONRELATED FORWARDEXCHANGECONTRACTS2003 |  |     | BALANCE2003
|Capital market instruments                       |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|Listed or publicly traded:                       |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|US dollar Yankee notes due 2005                  |  | HK$         | 2,324  |                                    | HK$ | 2,329                                                      |  | HK$ | (5          | ) |  | HK$ | 2,324 
|US dollar Global notes due 2009                  |  |             | 5,835  |                                    |     | 5,823                                                      |  |     | 11          |   |  |     | 5,834 
|US dollar Global notes due 2010                  |  |             | 4,679  |                                    |     | 4,658                                                      |  |     | 19          |   |  |     | 4,677 
|Debt issuance programme notes due 2005           |  |             | 195    |                                    |     | 194                                                        |  |     |            |   |  |     | 194   
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|                                                 |  | HK$         | 13,033 |                                    | HK$ | 13,004                                                     |  | HK$ | 25          |   |  | HK$ | 13,029
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|Unlisted:                                        |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|Debt issuance programme notes due 2003 to 2018   |  | HK$         | 7,534  |                                    | HK$ | 6,726                                                      |  | HK$ | 4           |   |  | HK$ | 6,730 
|HK dollar note issuance programme notes due 2003 |  |             | 500    |                                    |     |                                                           |  |     |            |   |  |     |      
|HK dollar notes due 2004 to 2008                 |  |             | 2,350  |                                    |     | 2,350                                                      |  |     |            |   |  |     | 2,350 
|HK dollar retail bonds due 2004 to 2006          |  |             | 3,500  |                                    |     | 3,500                                                      |  |     |            |   |  |     | 3,500 
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|                                                 |  | HK$         | 13,884 |                                    | HK$ | 12,576                                                     |  | HK$ | 4           |   |  | HK$ | 12,580
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|Total capital market instruments                 |  | HK$         | 26,917 |                                    | HK$ | 25,580                                                     |  | HK$ | 29          |   |  | HK$ | 25,609
|Bank loans and overdrafts                        |  |             | 5,983  |                                    |     | 5,928                                                      |  |     | (17         | ) |  |     | 5,911 
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|                                                 |  | HK$         | 32,900 |                                    | HK$ | 31,508                                                     |  | HK$ | 12          |   |  | HK$ | 31,520
|Obligations under finance leases(Note 26C)       |  |             | 608    |                                    |     | 505                                                        |  |     |            |   |  |     | 505   
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       
|Total                                            |  | HK$         | 33,508 |                                    | HK$ | 32,013                                                     |  | HK$ | 12          |   |  | HK$ | 32,025
|                                                 |  |             |        |                                    |     |                                                            |  |     |             |   |  |     |       



As at
December 31, 2003, the Group had available undrawn committed bank loan facilities amounting to HK$6,700 million (2002: HK$6,000 million). In addition, the Group had a number of uncommitted facilities with undrawn amounts totalling HK$12,728
million (2002: HK$11,943 million), comprising a multi-currency debt issuance programme and short-term bank loan facilities.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | B | BY REPAYMENT TERMS in millions
| | - | ------------------------------



|                                                           |  |            |        |                              |     |                              |  |                                     |       |            |     |     |  |     |       
|---------------------------------------------------------- |  | ---------- | ------ | ---------------------------- | --- | ---------------------------- |  | ----------------------------------- | ----- | ---------- | --- | --- |  | --- | ------
|                                                           |  | TOTAL 2002 |        | CAPITALMARKETINSTRUMENTS2003 |     | BANK LOANS ANDOVERDRAFTS2003 |  | OBLIGATIONSUNDER FINANCELEASES 2003 |       | TOTAL 2003
|Long-term loans and obligations under finance leases       |  |            |        |                              |     |                              |  |                                     |       |            |     |     |  |     |       
|Amounts repayable beyond 5 years                           |  | HK$        | 11,737 |                              | HK$ | 14,076                       |  | HK$                                 | 182   |            | HK$ |    |  | HK$ | 14,258
|Amounts repayable within a period of between 2 and 5 years |  |            | 8,380  |                              |     | 2,950                        |  |                                     | 5,218 |            |     | 272 |  |     | 8,440 
|Amounts repayable within a period of between 1 and 2 years |  |            | 8,600  |                              |     | 4,318                        |  |                                     | 73    |            |     | 121 |  |     | 4,512 
|Amounts repayable within 1 year                            |  |            | 4,757  |                              |     | 4,265                        |  |                                     | 73    |            |     | 112 |  |     | 4,450 
|                                                           |  |            |        |                              |     |                              |  |                                     |       |            |     |     |  |     |       
|                                                           |  | HK$        | 33,474 |                              | HK$ | 25,609                       |  | HK$                                 | 5,546 |            | HK$ | 505 |  | HK$ | 31,660
|                                                           |  |            |        |                              |     |                              |  |                                     |       |            |     |     |  |     |       
|Bank overdrafts                                            |  | HK$        | 34     |                              | HK$ |                             |  | HK$                                 | 12    |            | HK$ |    |  | HK$ | 12    
|Short-term loans                                           |  |            |       |                              |     |                             |  |                                     | 353   |            |     |    |  |     | 353   
|                                                           |  |            |        |                              |     |                              |  |                                     |       |            |     |     |  |     |       
|                                                           |  | HK$        | 33,508 |                              | HK$ | 25,609                       |  | HK$                                 | 5,911 |            | HK$ | 505 |  | HK$ | 32,025
|                                                           |  |            |        |                              |     |                              |  |                                     |       |            |     |     |  |     |       



The
amounts repayable within 1 year in respect of long-term loans and obligations under finance leases are included in long-term loans as these amounts are intended to be refinanced on a long-term basis.



| | C | OBLIGATIONS UNDER FINANCE LEASES in millions
| | - | --------------------------------------------



As at December 31, 2003, the Group and the Company had obligations under finance leases repayable as follows:



|                                                           |  |                                             |     |                                              |     |                               |  |                                             |     |                                              |     |                               |  |     |    |  |     |    
|---------------------------------------------------------- |  | ------------------------------------------- | --- | -------------------------------------------- | --- | ----------------------------- |  | ------------------------------------------- | --- | -------------------------------------------- | --- | ----------------------------- |  | --- | -- |  | --- | ---
|                                                           |  | PRESENTVALUE OF THEMINIMUMLEASEPAYMENTS2002 |     | INTERESTEXPENSERELATING TOFUTUREPERIODS 2002 |     | TOTALMINIMUMLEASEPAYMENTS2002 |  | PRESENTVALUE OF THEMINIMUMLEASEPAYMENTS2003 |     | INTERESTEXPENSERELATING TOFUTUREPERIODS 2003 |     | TOTALMINIMUMLEASEPAYMENTS2003
|Amounts repayable within a period of between 2 and 5 years |  | HK$                                         | 393 |                                              | HK$ | 57                            |  | HK$                                         | 450 |                                              | HK$ | 272                           |  | HK$ | 28 |  | HK$ | 300
|Amounts repayable within a period of between 1 and 2 years |  |                                             | 112 |                                              |     | 38                            |  |                                             | 150 |                                              |     | 121                           |  |     | 29 |  |     | 150
|Amounts repayable within 1 year                            |  |                                             | 103 |                                              |     | 47                            |  |                                             | 150 |                                              |     | 112                           |  |     | 38 |  |     | 150
|                                                           |  |                                             |     |                                              |     |                               |  |                                             |     |                                              |     |                               |  |     |    |  |     |    
|                                                           |  | HK$                                         | 608 |                                              | HK$ | 142                           |  | HK$                                         | 750 |                                              | HK$ | 505                           |  | HK$ | 95 |  | HK$ | 600
|                                                           |  |                                             |     |                                              |     |                               |  |                                             |     |                                              |     |                               |  |     |    |  |     |    



Obligations under finance lease are the Groups and the Companys commitments to make future payments to New Hong Kong Tunnel Company Limited under the management agreement for the Eastern Harbour Crossing which is treated as a
finance lease (note 14E).



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | D | BONDS AND NOTES ISSUED AND REDEEMED in millions
| | - | -----------------------------------------------



Bonds and notes issued during the year ended December 31, 2002 and 2003 comprise:



|                              |  |                 |       |                          |     |                 |  |                          |       |  |     |      
|----------------------------- |  | --------------- | ----- | ------------------------ | --- | --------------- |  | ------------------------ | ----- |  | --- | -----
|                              |  | 2002            |       | 2003                    
|                              |  | PRINCIPALAMOUNT |       | NETCONSIDERATIONRECEIVED |     | PRINCIPALAMOUNT |  | NETCONSIDERATIONRECEIVED
|Debt issuance programme notes |  | HK$             |      |                          | HK$ |                |  | HK$                      | 3,099 |  | HK$ | 3,091
|HK dollar retail bonds        |  |                 | 3,500 |                          |     | 3,553           |  |                          |      |  |     |     
|                              |  |                 |       |                          |     |                 |  |                          |       |  |     |      
|                              |  | HK$             | 3,500 |                          | HK$ | 3,553           |  | HK$                      | 3,099 |  | HK$ | 3,091
|                              |  |                 |       |                          |     |                 |  |                          |       |  |     |      



All
the above bonds and notes were issued by a subsidiary, MTR Corporation (C.I.) Limited. The bonds and notes issued are unconditionally and irrevocably guaranteed by the Company; and are direct, unsecured, unconditional and unsubordinated to other
unsecured and unsubordinated obligations of MTR Corporation (C.I.) Limited. The obligations of the Company under the guarantee are direct, unsecured, unconditional, and unsubordinated to other unsecured and unsubordinated obligations of the Company.
The net proceeds received from the issues were on lent to the Company for general working capital, refinancing or other corporate purposes.



During the year, the Group redeemed HK$500 million (2002: Nil) unlisted Hong Kong dollar notes upon maturity.



| | E | GUARANTEES
| | - | ----------



There were no guarantees given by the Government in respect of loan facilities as at December 31, 2003 and 2002.



| | F | INTEREST RATES
| | - | --------------



The total borrowings, excluding obligations under finance leases, of HK$31,520 million (2002: HK$32,900 million) comprise:



|                                                      |  |            |        |              |           |            |     |              |  |          
|----------------------------------------------------- |  | ---------- | ------ | ------------ | --------- | ---------- | --- | ------------ |  | ---------
|                                                      |  | 2002       |        | 2003        
|                                                      |  | LOANAMOUNT |        | INTERESTRATE |           | LOANAMOUNT |     | INTERESTRATE
|                                                      |  | millions   |        | % p.a.       |           | millions   |     | % p.a.      
|Fixed rate loans and loans swapped to fixed rates     |  | HK$        | 20,325 |              | 4.3 - 8.4 |            | HK$ | 19,358       |  | 2.2 - 8.4
|Variable rate loans and loans swapped from fixed rate |  |            | 12,575 |              | (Note)    |            |     | 12,162       |  | (Note)   
|                                                      |  |            |        |              |           |            |     |              |  |          
|                                                      |  | HK$        | 32,900 |              |           |            | HK$ | 31,520       |  |          
|                                                      |  |            |        |              |           |            |     |              |  |          



Note:
Interest rates are determined by reference to either the Hong Kong prime rate, the Hong Kong Interbank Offered Rate or the London Interbank Offered Rate.



F - 46



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|27 | Off-balance Sheet Financial Instruments
|-- | ---------------------------------------



The Group has employed off-balance sheet derivative instruments such as interest rate swaps and currency swaps to manage its interest rate
and foreign exchange exposure. These instruments are used solely to reduce or eliminate the financial risk associated with the Groups liabilities and not for trading or speculation purposes.



The contracted notional amounts of derivative instruments
outstanding by maturity and type at December 31, 2003 are as follows:



|                                       |  |       |        |                  |     |           |  |              |       |       |     |        |  |     |       
|-------------------------------------- |  | ----- | ------ | ---------------- | --- | --------- |  | ------------ | ----- | ----- | --- | ------ |  | --- | ------
|                                       |  | 2002  |        | 2003 MATURING IN
|Notional amount in
millions            |  | TOTAL |        | LESS THAN2 YEARS |     | 2-5 YEARS |  | OVER 5 YEARS |       | TOTAL
|Foreign exchange forwards              |  | HK$   | 495    |                  | HK$ | 844       |  | HK$          | 77    |       | HK$ |       |  | HK$ | 921   
|Cross currency and interest rate swaps |  |       | 13,514 |                  |     | 4,542     |  |              | 60    |       |     | 8,777  |  |     | 13,379
|Interest rate swaps and options        |  |       | 22,910 |                  |     | 11,950    |  |              | 5,600 |       |     | 3,021  |  |     | 20,571
|                                       |  |       |        |                  |     |           |  |              |       |       |     |        |  |     |       
|                                       |  | HK$   | 36,919 |                  | HK$ | 17,336    |  | HK$          | 5,737 |       | HK$ | 11,798 |  | HK$ | 34,871
|                                       |  |       |        |                  |     |           |  |              |       |       |     |        |  |     |       



There
are four main categories of risk related to using derivative instruments, namely market risk, credit risk, operational risk and legal risk. Since the Group employs derivative instruments purely for hedging purposes, it is not exposed to market risk
because any change in market values will be offset by an opposite change in the market values of the underlying liabilities being hedged.



The Group manages credit risk by assigning limits to counter-parties and by dealing only with financial institutions with acceptable
credit ratings. The Group further monitors its credit exposure by estimating the fair market values plus any potential adverse movement in the values of the derivative instruments employed. The Group has not experienced non-performance by any
counter-party.



The Group has internal control
measures to safeguard compliance with policies and procedures to minimize operational risk. Standardized or master agreements are used whenever practicable to reduce legal risk and credit exposure.



F - 47



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|28 | Creditors, Accrued Charges and Provisionsin millions
|-- | ----------------------------------------------------



|                                                |  |      |       |      |     |      
|----------------------------------------------- |  | ---- | ----- | ---- | --- | -----
|                                                |  | 2002 |       | 2003
|Creditors, accrued charges and provisions       |  |      |       |      |     |      
|-  Airport Railway Project                      |  | HK$  | 282   |      | HK$ | 242  
|-  Tseung Kwan O Extension Project              |  |      | 814   |      |     | 256  
|-  Property Projects                            |  |      | 281   |      |     | 359  
|-  Railway operations and other projects        |  |      | 2,379 |      |     | 2,495
|Gross amount due to customers for contract work |  |      | 4     |      |     | 68   
|                                                |  |      |       |      |     |      
|                                                |  | HK$  | 3,760 |      | HK$ | 3,420
|                                                |  |      |       |      |     |      



The
above amounts are mainly related to capital projects which are settled upon certification of work in progress and swap interest payable. The Group has no significant balances of trade creditors resulting from its provision of transportation
services.



The aggregate amount of costs
incurred plus recognized profits less recognized losses to date, included in the gross amount due to customers for contract work at December 31, 2003, is HK$121 million (2002: Nil).



The gross amount due to customers for contract work at
December 31, 2003 that is expected to be settled after more than one year is HK$56 million (2002: Nil).



The analysis of creditors included above by due dates is as follows:



|                                     |  |      |       |      |     |      
|------------------------------------ |  | ---- | ----- | ---- | --- | -----
|                                     |  | 2002 |       | 2003
|Due within 30 days or on demand      |  | HK$  | 547   |      | HK$ | 541  
|Due after 30 days but within 60 days |  |      | 667   |      |     | 590  
|Due after 60 days but within 90 days |  |      | 50    |      |     | 75   
|Due after 90 days                    |  |      | 2,043 |      |     | 1,767
|                                     |  |      |       |      |     |      
|                                     |  | HK$  | 3,307 |      | HK$ | 2,973
|Rental and other refundable deposits |  |      | 295   |      |     | 297  
|Accrued employee benefits            |  |      | 158   |      |     | 150  
|                                     |  |      |       |      |     |      
|Total                                |  | HK$  | 3,760 |      | HK$ | 3,420
|                                     |  |      |       |      |     |      



Creditors, accrued charges and provisions in respect of the Airport Railway and Tseung Kwan O Extension projects include provisions for claims on completed contracts, which were capitalized as part of the railway assets upon commissioning
of the Tung Chung and Airport Express Lines in 1998 and the Tseung Kwan O Line in August 2002. Most of these claims have been resolved and it is anticipated that, subject to unforeseen circumstances, the remaining amount required to be paid will be
sufficiently covered by the above mentioned provisions of the respective projects. The carrying amounts of such claim provisions and their movements are not separately disclosed in view of their commercial sensitivity.



As at December 31, 2003, all creditors, accrued charges and
provisions were expected to be settled within one year except for HK$729 million (2002: HK$382 million) included in the amounts relating to railway operations and other projects, which were expected to be settled after one year. The amounts
due after one year are mainly rental deposits received from shop and station kiosk tenants and advance income received from telecommunication services operators.



F - 48



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|29 | Contract Retentionsin millions
|-- | ------------------------------



|                                      |  |                               |    |                                |     |       |  |     |    
|------------------------------------- |  | ----------------------------- | -- | ------------------------------ | --- | ----- |  | --- | ---
|                                      |  | DUE FORRELEASE AFTER12 MONTHS |    | DUE FORRELEASE WITHIN12 MONTHS |     | TOTAL
|2002                                  |  |                               |    |                                |     |       |  |     |    
|Tseung Kwan O Extension Project       |  | HK$                           |   |                                | HK$ | 237   |  | HK$ | 237
|Property Projects                     |  |                               |   |                                |     | 31    |  |     | 31 
|Railway operations and other projects |  |                               | 62 |                                |     | 166   |  |     | 228
|                                      |  |                               |    |                                |     |       |  |     |    
|                                      |  | HK$                           | 62 |                                | HK$ | 434   |  | HK$ | 496
|                                      |  |                               |    |                                |     |       |  |     |    
|2003                                  |  |                               |    |                                |     |       |  |     |    
|Tseung Kwan O Extension Project       |  | HK$                           |   |                                | HK$ | 99    |  | HK$ | 99 
|Property Projects                     |  |                               |   |                                |     | 9     |  |     | 9  
|Railway operations and other projects |  |                               | 89 |                                |     | 114   |  |     | 203
|                                      |  |                               |    |                                |     |       |  |     |    
|                                      |  | HK$                           | 89 |                                | HK$ | 222   |  | HK$ | 311
|                                      |  |                               |    |                                |     |       |  |     |    



|30 | Amounts Due to the Government and Other Related Partiesin millions
|-- | ------------------------------------------------------------------



The following are amounts due to the Government and Airport Authority in respect of works entrusted to them
by the Group and the amounts due to the subsidiaries:



|                              |  |      |     |      |     |    
|----------------------------- |  | ---- | --- | ---- | --- | ---
|                              |  | 2002 |     | 2003
|Amounts due to:               |  |      |     |      |     |    
|-  the Government             |  | HK$  | 129 |      | HK$ | 113
|-  the Airport Authority      |  |      | 76  |      |     | 48 
|-  non-controlled subsidiary  |  |      | 4   |      |     |   
|-  the Companys subsidiaries |  |      |    |      |     |   
|                              |  |      |     |      |     |    
|                              |  | HK$  | 209 |      | HK$ | 161
|                              |  |      |     |      |     |    



As at
December 31, 2003, HK$100 million (2002: HK$209 million) due to the Government and Airport Authority and HK$125 million (2002: HK$90 million) due to the subsidiaries are expected to be settled within one year.



|31 | Deferred Liabilitiesin millions
|-- | -------------------------------



|                                                            |  |      |    |      |     |   
|----------------------------------------------------------- |  | ---- | -- | ---- | --- | --
|                                                            |  | 2002 |    | 2003
|Estate management funds                                     |  |      |    |      |     |   
|-  Refundable deposits on managed properties                |  | HK$  | 31 |      | HK$ | 33
|-  Building maintenance and asset replacement reserve funds |  |      | 54 |      |     | 53
|                                                            |  |      |    |      |     |   
|                                                            |  | HK$  | 85 |      | HK$ | 86
|                                                            |  |      |    |      |     |   



|32 | Deferred Incomein millions
|-- | --------------------------



|                                                                   |  |      |        |      |     |       
|------------------------------------------------------------------ |  | ---- | ------ | ---- | --- | ------
|                                                                   |  | 2002 |        | 2003
|Deferred income on property development (note 16B)                 |  | HK$  | 6,226  |      | HK$ | 4,924 
|                                                                   |  |      | ------ |      |     | ------
|Deferred income on lease out and lease back transaction (note 14G) |  | HK$  |       |      | HK$ | 141   
|Less: Amount recognized as income                                  |  |      |       |      |     | 4     
|                                                                   |  |      |        |      |     |       
|                                                                   |  | HK$  |       |      | HK$ | 137   
|                                                                   |  |      | ------ |      |     | ------
|                                                                   |  |      |        |      |     |       
|                                                                   |  | HK$  | 6,226  |      | HK$ | 5,061 
|                                                                   |  |      |        |      |     |       



F - 49



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|33 | Income Tax in the Balance Sheetin millions
|-- | ------------------------------------------



A    Taxes payable in the consolidated balance sheet comprised overseas tax liabilities in respect of consultancy services
income earned offshore, chargeable at the appropriate current tax rates of taxation ruling in the relevant countries.



B    Deferred tax assets and liabilities recognized



The components of deferred tax assets and liabilities recognized in the balance sheet and the movements
during the year are as follows:



|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|------------------------------------------------------------ |  | ------------------------------------------------------- | ----- | ----------------------- | --- | --------------------------------------- |  | --- | ---------- | - |  | ----- | ------ | - |  | --- | -----
|                                                             |  | DEFERRED TAX ARISING FROM                              
|                                                             |  | DEPRECIATION ALLOWANCESIN EXCESS OFRELATED DEPRECIATION |       | REVALUATIONOFPROPERTIES |     | PROVISION AND OTHERTEMPORARYDIFFERENCES |  |     | TAX LOSSES |   |  | TOTAL
|2002                                                         |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|At January 1, 2002                                           |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|- as previously reported                                     |  | HK$                                                     |      |                         | HK$ |                                        |  | HK$ |           |   |  | HK$   |       |   |  | HK$ |     
|- prior period adjustments                                   |  |                                                         | 7,151 |                         |     |                                        |  |     | (79        | ) |  |       | (4,450 | ) |  |     | 2,622
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|- as restated                                                |  | HK$                                                     | 7,151 |                         | HK$ |                                        |  | HK$ | (79        | ) |  | HK$   | (4,450 | ) |  | HK$ | 2,622
|Charged / (credited) to consolidated profit and loss account |  |                                                         | 533   |                         |     |                                        |  |     | (4         | ) |  |       | 101    |   |  |     | 630  
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|At December 31, 2002                                         |  | HK$                                                     | 7,684 |                         | HK$ |                                        |  | HK$ | (83        | ) |  | HK$   | (4,349 | ) |  | HK$ | 3,252
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|2003                                                         |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|At January 1, 2003                                           |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|- as previously reported                                     |  | HK$                                                     |      |                         | HK$ |                                        |  | HK$ |           |   |  | HK$   |       |   |  | HK$ |     
|- prior period adjustments                                   |  |                                                         | 7,684 |                         |     |                                        |  |     | (83        | ) |  |       | (4,349 | ) |  |     | 3,252
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|- as restated                                                |  | HK$                                                     | 7,684 |                         | HK$ |                                        |  | HK$ | (83        | ) |  | HK$   | (4,349 | ) |  | HK$ | 3,252
|Charged / (credited) to consolidated profit and loss account |  |                                                         | 1,069 |                         |     |                                        |  |     | (28        | ) |  |       | (297   | ) |  |     | 744  
|Charged to reserves (Note 35)                                |  |                                                         |      |                         |     | 4                                       |  |     |           |   |  |       |       |   |  |     | 4    
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|At December 31, 2003                                         |  | HK$                                                     | 8,753 |                         | HK$ | 4                                       |  | HK$ | (111       | ) |  | HK$   | (4,646 | ) |  | HK$ | 4,000
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      
|                                                             |  |                                                         |       |                         |    
|                                                             |  |                                                         |       |                         |     |                                         |  |     | 2002       |   |  | 2003 
|Net deferred tax liability recognized in the balance sheet   |  |                                                         |       |                         |     |                                         |  |     |            |   |  | HK$   | 3,252  |   |  | HK$ | 4,000
|                                                             |  |                                                         |       |                         |     |                                         |  |     |            |   |  |       |        |   |  |     |      



F - 50



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|34 | Share Capital, Share Premium and Capital Reservein millions
|-- | -----------------------------------------------------------



|                                                                  |  |      |        |      |     |       
|----------------------------------------------------------------- |  | ---- | ------ | ---- | --- | ------
|                                                                  |  | 2002 |        | 2003
|Authorized:                                                       |  |      |        |      |     |       
|6,500,000,000 shares of HK$1.00 each                              |  | HK$  | 6,500  |      | HK$ | 6,500 
|                                                                  |  |      |        |      |     |       
|Issued and fully paid:                                            |  |      |        |      |     |       
|5,288,695,393 shares (2002: 5,158,748,655 shares) of HK$1.00 each |  | HK$  | 5,159  |      | HK$ | 5,289 
|Share premium                                                     |  |      | 1,563  |      |     | 2,609 
|Capital reserve                                                   |  |      | 27,188 |      |     | 27,188
|                                                                  |  |      |        |      |     |       
|                                                                  |  | HK$  | 33,910 |      | HK$ | 35,086
|                                                                  |  |      |        |      |     |       



Pursuant to the Articles of Association of the Company, the capital reserve can only be applied in paying up in full unissued shares to be allotted and distributed as fully paid bonus shares to the shareholders of the Company.



Share premium represents the amount by which the issue
price of shares exceeds the par value of those shares. The application of the share premium account is governed by section 48B of the Hong Kong Companies Ordinance.



New shares issued and fully paid up during the year comprise:



|                                       |  |                 |  |                     |      |                      |     |                     |  |          |       |  |     |      
|-------------------------------------- |  | --------------- |  | ------------------- | ---- | -------------------- | --- | ------------------- |  | -------- | ----- |  | --- | -----
|                                       |  |                 |  |                     |      | PROCEEDS CREDITED TO |     |                    
|                                       |  | NUMBER OFSHARES |  | OPTION /SCRIP PRICE |      | SHARECAPITAL ACCOUNT |     | SHAREPREMIUMACCOUNT |  | TOTAL   
|                                       |  |                 |  |                     |      | millions             |     | millions            |  | millions
|Employee share options exercised       |  | 10,489,500      |  | HK$                 | 8.44 |                      | HK$ | 10                  |  | HK$      | 78    |  | HK$ | 88   
|Issued as 2002 final scrip dividends   |  | 82,018,666      |  | HK$                 | 8.80 |                      |     | 82                  |  |          | 640   |  |     | 722  
|Issued as 2003 interim scrip dividends |  | 37,438,572      |  | HK$                 | 9.79 |                      |     | 38                  |  |          | 328   |  |     | 366  
|                                       |  |                 |  |                     |      |                      |     |                     |  |          |       |  |     |      
|                                       |  | 129,946,738     |  |                     |      |                      | HK$ | 130                 |  | HK$      | 1,046 |  | HK$ | 1,176
|                                       |  |                 |  |                     |      |                      |     |                     |  |          |       |  |     |      



Outstanding share options under the Pre-Global Offering Share Option Scheme and New Joiners Share Option Scheme as at December 31, 2003 are disclosed in note 42.



F - 51



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|35 | Other Reservesin millions
|-- | -------------------------



|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|-------------------------------------------------------------------------- |  | ------------------------------------ | ----- | - | ----------------------------- | --- | --- | --------------- |  | --- | ------ | - |  | --- | ------ | -
|                                                                           |  | INVESTMENTPROPERTYREVALUATIONRESERVE |       |   | FIXED ASSETREVALUATIONRESERVE |     |     | RETAINEDPROFITS |  |     | TOTAL  |  
|2002                                                                       |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|Balance as at January 1, 2002 as previously reported                       |  | HK$                                  | 6,518 |   |                               | HK$ | 116 |                 |  | HK$ | 14,407 |   |  | HK$ | 21,041 |  
|Prior period adjustment in respect of deferred tax (Note 43A)              |  |                                      |      |   |                               |     |    |                 |  |     | (2,620 | ) |  |     | (2,620 | )
|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|Balance as at January 1, 2002 as restated                                  |  | HK$                                  | 6,518 |   |                               | HK$ | 116 |                 |  | HK$ | 11,787 |   |  | HK$ | 18,421 |  
|Dividends paid                                                             |  |                                      |      |   |                               |     |    |                 |  |     | (2,132 | ) |  |     | (2,132 | )
|Deficits on revaluation                                                    |  |                                      | (112  | ) |                               |     | (92 | )               |  |     |       |   |  |     | (204   | )
|Profit for the year (as restated)                                          |  |                                      |      |   |                               |     |    |                 |  |     | 3,579  |   |  |     | 3,579  |  
|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|Balance as at December 31, 2002                                            |  | HK$                                  | 6,406 |   |                               | HK$ | 24  |                 |  | HK$ | 13,234 |   |  | HK$ | 19,664 |  
|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|2003                                                                       |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|Balance as at January 1, 2003 as previously reported                       |  | HK$                                  | 6,406 |   |                               | HK$ | 24  |                 |  | HK$ | 16,487 |   |  | HK$ | 22,917 |  
|Prior period adjustment in respect of deferred tax (Note 43A)              |  |                                      |      |   |                               |     |    |                 |  |     | (3,253 | ) |  |     | (3,253 | )
|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|Balance as at January 1, 2003 as restated                                  |  | HK$                                  | 6,406 |   |                               | HK$ | 24  |                 |  | HK$ | 13,234 |   |  | HK$ | 19,664 |  
|Dividends paid                                                             |  |                                      |      |   |                               |     |    |                 |  |     | (2,178 | ) |  |     | (2,178 | )
|Surplus / (Deficits) on revaluation, net of deferred tax (Notes 14 and 33) |  |                                      | 276   |   |                               |     | (6  | )               |  |     |       |   |  |     | 270    |  
|Profit for the year                                                        |  |                                      |      |   |                               |     |    |                 |  |     | 4,450  |   |  |     | 4,450  |  
|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  
|Balance as at December 31, 2003                                            |  | HK$                                  | 6,682 |   |                               | HK$ | 18  |                 |  | HK$ | 15,506 |   |  | HK$ | 22,206 |  
|                                                                           |  |                                      |       |   |                               |     |     |                 |  |     |        |   |  |     |        |  



The
investment property and fixed asset revaluation reserves were set up to deal with the surpluses or deficits arising from the revaluation of investment properties and self-occupied office land and buildings respectively (note 1E).



The investment property and fixed asset revaluation reserves
are not available for distribution to shareholders because they do not constitute realized profits. As at December 31, 2003, the total amount of reserves available for distribution to shareholders under the Hong Kong Companies Ordinance amounted to
HK$15,305 million (2002: HK$13,104 million, as restated).



Included in the Groups retained profits as at December 31, 2003 is an amount of HK$86 million (2002: HK$64 million), being the retained profits attributable to the non-controlled subsidiary.



F - 52



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|36 | Retirement Schemes
|-- | ------------------



The Company operates two occupational retirement schemes, the MTR Corporation Limited Retirement Scheme (the Retirement
Scheme) and a top-up scheme, the MTR Corporation Limited Retention Bonus Scheme (the RBS). In addition, in accordance with the Mandatory Provident Fund (MPF) Schemes Ordinance, the Company has set up an MPF Scheme on
December 1, 2000 by participating in a master trust scheme provided by an independent MPF service provider. Employees eligible to join the Retirement Scheme can choose between the Retirement Scheme and the MPF Scheme while temporary employees are
required to join the MPF Scheme.



The assets
of these schemes are held under the terms of separate trust arrangements. These trusts ensure that the assets are kept separate from those of the Company.



| | A | RETIREMENT SCHEME
| | - | -----------------



The Retirement Scheme was established under trust at the beginning of 1977. The Retirement Scheme contains both defined benefit and
defined contribution elements. The Retirement Scheme was registered under the Occupational Retirement Schemes Ordinance (Chapter 426 of the Laws of Hong Kong) (ORSO) with effect from October 31, 1994. On July 3, 2000, exemption was
granted by the MPF Authority to maintain the Retirement Scheme and offer it as an alternative to the MPF Scheme.



The Retirement Scheme provides both a hybrid benefit section and a defined contribution benefit section, offering benefits on retirement,
permanent disability, death and leaving service to its members. The hybrid benefit section provides benefits based on the greater of a multiple of final salary and accumulated contributions with investment returns. The defined contribution benefit
section, which was implemented on April 1, 1999, is a member choice plan which provides retirement benefits based on accumulated contributions and investment returns only. Promotees who are promoted after April 1, 1999 can choose to join either the
defined contribution benefit section or to remain in the hybrid benefit section. As the hybrid benefit section was closed to new entrants on March 31, 1999, staff joining the Company on or after April 1, 1999 who would be eligible to join the
Retirement Scheme can choose to join either the defined contribution benefit section or, commencing December 1, 2000, the MPF Scheme.



| | (a) | The Hybrid Benefit Section
| | --- | --------------------------



Members contributions to the hybrid benefit section are based on a fixed percentage of basic salary. The Companys
contributions are determined by the Executive Directorate with reference to an actuarial valuation. At December 31, 2003, the total membership was 6,093 (2002: 6,397; 2001: 6,715). In 2003, members contributed HK$70 million (2002: HK$75
million; 2001: HK$78 million) and the Company contributed HK$238 million (2002: HK$256 million; 2001: HK$267 million) to the hybrid benefit section. The net asset value of the hybrid benefit section as at December 31, 2003 was HK$4,639
million (2002: HK$3,769 million; 2001: HK$3,726 million).



F - 53



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | (b) | The Defined Contribution Benefit Section
| | --- | ----------------------------------------



Both members and the Companys contributions to the defined contribution benefit section are based on fixed percentages of
members basic salary. As at December 31, 2003, the total membership under this section was 405 (2002: 363; 2001: 368). In 2003, total members contributions were HK$5.3 million (2002: HK$5.2 million; 2001: HK$4.4 million)
and the total contribution from the Company was HK$11.1 million (2002: HK$10.6 million; 2001: HK$9.1 million). The net asset value as at December 31, 2003 was HK$49.5 million (2002: HK$28.6 million; 2001: HK$19.7 million).



According to the terms of the trust deed, forfeitures
were transferred to the reserve account to be utilized at the discretion of the Company.



| | (c) | Actuarial Valuations
| | --- | --------------------



Actuarial valuations are carried out annually in accordance with the ORSO. A full actuarial valuation of the Retirement Scheme, comprising
both the hybrid and the defined contribution benefit sections, was carried out at December 31, 2003 by Towers, Perrin, Forster & Crosby, Inc., an independent firm of consulting actuaries, using the Attained Age Method. The principal actuarial
assumptions used included a long-term rate of investment return net of salary increases of 2.0% (2002: 2.25%; 2001: 2%) per annum, together with appropriate allowances for expected rates of mortality, turnover, redundancy and retirement and
an adjustment for salary increases expected over the short term. The actuary confirmed that, at the valuation date:



| | i | the Scheme was solvent, with assets more than adequate to cover the aggregate value of members vested benefits had all members left the Scheme; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | ii | the value of the Schemes assets was more than sufficient to cover the aggregate past service liability on the assumption that the Scheme continued in force.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | B | RBS
| | - | ---



The RBS was established under trust as of January 1, 1995. The RBS is a defined benefit scheme and applies to all employees classified by
the Company as staff working on designated projects and who are not on gratuity terms. The RBS provides for benefits to be payable only in the event of redundancy for accrued service up to December 31, 2002. The RBS was registered under the
Occupational Retirement Schemes Ordinance with effect from December 1, 1995. As at December 31, 2003, there were 424 members (2002: 520; 2001: 692) under the RBS.



F - 54



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



The RBS is non-contributory for members. The Companys contributions are
determined by the Executive Directorate with reference to an actuarial valuation and are charged as part of the staff costs to various projects on the basis of the amount contributed. During 2003, the Companys contributions amounted to HK$2
million (2002: HK$2 million; 2001: HK$3 million). The net asset value of the RBS as at December 31, 2003 was HK$14 million (2002: HK$23 million; 2001: HK$45 million).



Actuarial valuations are carried out annually. A full actuarial valuation of the RBS was carried out at
December 31, 2003 by Towers, Perrin, Forster & Crosby, Inc. using the Attained Age Method. The principal actuarial assumptions used included an expected weighted rate of investment return net of salary increases, of approximately 0% (2002:
1.25%; 2001: 0%) per annum, together with appropriate allowance for expected rates of redundancy. The actuary confirmed that, at the valuation date:



| | i | due to the nature of the RBS which provides for benefits only on redundancy, there was no aggregate vested liability, and thus the RBS was technically solvent; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii | the value of the RBS assets, together with the future contributions recommended by the actuary and to be adopted by the Company, would be sufficient to meet the liabilities of the
RBS on an on-going basis.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | C | MPF SCHEME
| | - | ----------



Effective from the MPF commencement date of December 1, 2000, the Company joined The Bank Consortium MPF Plan which has been registered
with the Mandatory Provident Fund Schemes Authority and authorized by the Securities and Futures Commission. As at December 31, 2003, the total number of employees of the Company participating in the MPF Scheme was 504 (2002: 502; 2001: 438).
In 2003, total members contributions were HK$1.7 million (2002: HK$2.0 million; 2001: HK$2.5 million) and total contribution from the Company was HK$2.0 million (2002: HK$2.3 million; 2001: HK$2.7 million).



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|37 | Defined Benefit Retirement Plan Obligationsin millions
|-- | ------------------------------------------------------



The Group makes contributions to two defined benefit plans that provide benefits for employees upon retirement or termination of
services for other reasons (note 36). The movements in respect of these defined benefit plans during the year are summarized as follows:



| | A | The amounts recognized in the balance sheets:
| | - | ---------------------------------------------



|                                            |  |                       |        |   |         |     |     |           |  |     |                        |   |  |         |        |   |           |     |     |   |  |     |        |  
|------------------------------------------- |  | --------------------- | ------ | - | ------- | --- | --- | --------- |  | --- | ---------------------- | - |  | ------- | ------ | - | --------- | --- | --- | - |  | --- | ------ | -
|                                            |  | RETIREMENTSCHEME 2002 |        |   | RBS2002 |     |     | TOTAL2002 |  |     | RETIREMENT SCHEME 2003 |   |  | RBS2003 |        |   | TOTAL2003 |    
|Present value of funded obligations         |  | HK$                   | 3,775  |   |         | HK$ | 31  |           |  | HK$ | 3,806                  |   |  | HK$     | 4,277  |   |           | HK$ | 14  |   |  | HK$ | 4,291  |  
|Fair value of plan assets                   |  |                       | (3,768 | ) |         |     | (23 | )         |  |     | (3,791                 | ) |  |         | (4,638 | ) |           |     | (14 | ) |  |     | (4,652 | )
|Net unrecognized actuarial (losses) / gains |  |                       | (6     | ) |         |     | (6  | )         |  |     | (12                    | ) |  |         | 322    |   |           |     | 2   |   |  |     | 324    |  
|                                            |  |                       |        |   |         |     |     |           |  |     |                        |   |  |         |        |   |           |     |     |   |  |     |        |  
|Net liability / (asset)                     |  | HK$                   | 1      |   |         | HK$ | 2   |           |  | HK$ | 3                      |   |  | HK$     | (39    | ) |           | HK$ | 2   |   |  | HK$ | (37    | )
|                                            |  |                       |        |   |         |     |     |           |  |     |                        |   |  |         |        |   |           |     |     |   |  |     |        |  



The
plans had no investment in shares or debt securities issued by the Company.



| | B | Movements in the net liability / (asset) recognized in the balance sheets:
| | - | --------------------------------------------------------------------------



|                                  |  |                       |      |   |         |     |    |           |  |     |                       |   |  |         |      |   |           |     |    |   |  |     |      |  
|--------------------------------- |  | --------------------- | ---- | - | ------- | --- | -- | --------- |  | --- | --------------------- | - |  | ------- | ---- | - | --------- | --- | -- | - |  | --- | ---- | -
|                                  |  | RETIREMENTSCHEME 2002 |      |   | RBS2002 |     |    | TOTAL2002 |  |     | RETIREMENTSCHEME 2003 |   |  | RBS2003 |      |   | TOTAL2003 |    
|At January 1                      |  | HK$                   | 44   |   |         | HK$ | 1  |           |  | HK$ | 45                    |   |  | HK$     | 1    |   |           | HK$ | 2  |   |  | HK$ | 3    |  
|Contributions paid to the Schemes |  |                       | (256 | ) |         |     | (2 | )         |  |     | (258                  | ) |  |         | (238 | ) |           |     | (2 | ) |  |     | (240 | )
|Expense recognized (Note 37C)     |  |                       | 213  |   |         |     | 3  |           |  |     | 216                   |   |  |         | 198  |   |           |     | 2  |   |  |     | 200  |  
|                                  |  |                       |      |   |         |     |    |           |  |     |                       |   |  |         |      |   |           |     |    |   |  |     |      |  
|At December 31                    |  | HK$                   | 1    |   |         | HK$ | 2  |           |  | HK$ | 3                     |   |  | HK$     | (39  | ) |           | HK$ | 2  |   |  | HK$ | (37  | )
|                                  |  |                       |      |   |         |     |    |           |  |     |                       |   |  |         |      |   |           |     |    |   |  |     |      |  



| | C | Expense recognized in the consolidated profit and loss account:
| | - | ---------------------------------------------------------------



|                               |  |                       |      |   |          |     |    |           |  |     |                       |   |  |          |      |   |           |     |    |   |  |     |      |  
|------------------------------ |  | --------------------- | ---- | - | -------- | --- | -- | --------- |  | --- | --------------------- | - |  | -------- | ---- | - | --------- | --- | -- | - |  | --- | ---- | -
|                               |  | RETIREMENTSCHEME 2002 |      |   | RBS 2002 |     |    | TOTAL2002 |  |     | RETIREMENTSCHEME 2003 |   |  | RBS 2003 |      |   | TOTAL2003 |    
|Current service cost           |  | HK$                   | 220  |   |          | HK$ | 3  |           |  | HK$ | 223                   |   |  | HK$      | 235  |   |           | HK$ |   |   |  | HK$ | 235  |  
|Interest cost                  |  |                       | 220  |   |          |     | 1  |           |  |     | 221                   |   |  |          | 195  |   |           |     | 1  |   |  |     | 196  |  
|Expected return on plan assets |  |                       | (227 | ) |          |     | (1 | )         |  |     | (228                  | ) |  |          | (232 | ) |           |     | (1 | ) |  |     | (233 | )
|Net actuarial loss recognized  |  |                       |     |   |          |     |   |           |  |     |                      |   |  |          |     |   |           |     | 2  |   |  |     | 2    |  
|                               |  |                       |      |   |          |     |    |           |  |     |                       |   |  |          |      |   |           |     |    |   |  |     |      |  
|Expense recognized (Note 37B)  |  | HK$                   | 213  |   |          | HK$ | 3  |           |  | HK$ | 216                   |   |  | HK$      | 198  |   |           | HK$ | 2  |   |  | HK$ | 200  |  
|Less: Amount capitalized       |  |                       | 64   |   |          |     | 3  |           |  |     | 67                    |   |  |          | 42   |   |           |     | 2  |   |  |     | 44   |  
|                               |  |                       |      |   |          |     |    |           |  |     |                       |   |  |          |      |   |           |     |    |   |  |     |      |  
|                               |  | HK$                   | 149  |   |          | HK$ |   |           |  | HK$ | 149                   |   |  | HK$      | 156  |   |           | HK$ |   |   |  | HK$ | 156  |  
|                               |  |                       |      |   |          |     |    |           |  |     |                       |   |  |          |      |   |           |     |    |   |  |     |      |  



The
retirement expense is recognized under staff costs and related expenses in the consolidated profit and loss account.



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | D | Actual (loss) / gain on plan assets
| | - | -----------------------------------



|                             |  |      |     |   |      |     |    
|---------------------------- |  | ---- | --- | - | ---- | --- | ---
|                             |  | 2002 |     |   | 2003
|MTRCL Retirement Scheme      |  | HK$  | (60 | ) |      | HK$ | 791
|                             |  |      |     |   |      |     |    
|MTRCL Retention Bonus Scheme |  | HK$  | 1   |   |      | HK$ |   
|                             |  |      |     |   |      |     |    



| | E | The principal actuarial assumptions used as at December 31, 2003 (expressed as weighted average) are as follows:
| | - | ----------------------------------------------------------------------------------------------------------------



|                                       |  |                       |   |  |         |   |  |                       |   |  |         |  
|-------------------------------------- |  | --------------------- | - |  | ------- | - |  | --------------------- | - |  | ------- | -
|                                       |  | RETIREMENTSCHEME 2002 |   |  | RBS2002 |   |  | RETIREMENTSCHEME 2003 |   |  | RBS2003 |  
|Discount rate at December 31           |  | 5.25                  | % |  | 1.50    | % |  | 5.25                  | % |  | 1.25    | %
|Expected rate of return on plan assets |  | 6.00                  | % |  | 2.00    | % |  | 6.00                  | % |  | 1.50    | %
|Future salary increases                |  | 3.75                  | % |  | 0.75    | % |  | 4.00                  | % |  | 1.50    | %



Certain 2001 comparative information is not provided as an independent actuarial valuation is not required and has not been conducted to ascertain the Schemes position as at January 1, 2001.



|38 | Construction Projects
|-- | ---------------------



| | A | PENNYS BAY RAIL LINK
| | - | ---------------------



The Project Agreement between the Government and the Company for the design, construction, financing and operation of the Pennys Bay
Rail Link was signed on July 24, 2002.



Since
the signing of the Agreement, all major contracts of the project have been awarded and the construction works are well underway. The project is on programme and scheduled to be completed and opened for service on July 1, 2005.



In view of most of the contracts being awarded at prices
within the engineers estimate, it is expected that the capital cost estimate of the project will not exceed the original budget of HK$2 billion.



At December 31, 2003, the Company had incurred expenditure of HK$883 million (2002: HK$285 million) on the project and had
authorized outstanding commitments on contracts totalling HK$446 million (2002: HK$825 million) related to the project.



| | B | TUNG CHUNG CABLE CAR PROJECT
| | - | ----------------------------



The Project Agreement between the Government and the Company for the design, construction, financing and operation of the Tung Chung Cable
Car Project was signed on November 19, 2003.



The opening of Cable Car service to the Public is planned for early 2006. The capital cost estimate for the project based on the defined scope of works and programme is HK$950 million.



Subsequent to the signing of the Project Agreement, a
contract for the building and civil engineering works was awarded. Construction will commence in early 2004.



At December 31, 2003, the Company had incurred expenditure of HK$137 million (2002: HK$17 million regarded as deferred expenditure)
on the project and had authorized outstanding commitments on contracts totalling HK$495 million (2002: HK$192 million) related to the project.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|39 | Interests in Jointly Controlled Operations
|-- | ------------------------------------------



The Group has the following jointly controlled operations in respect of its property development projects as at December 31, 2003.



|                            |  |                                                            |  |                    |  |                                     
|--------------------------- |  | ---------------------------------------------------------- |  | ------------------ |  | ------------------------------------
|LOCATION /                  |  |                                                            |  | TOTAL GROSS        |  | ACTUAL OR EXPECTED                  
|DEVELOPMENT PACKAGE         |  | LAND USE                                                   |  | FLOOR AREA (sq.m.) |  | COMPLETION DATE                     
|Hong Kong Station           |  | Office / Retail / Hotel                                    |  | 415,894            |  | By phases from 1998 - 2005          
|                            |  |                                                            | 
|Kowloon Station             |  |                                                            |  |                    |  |                                     
|Package One                 |  | Residential                                                |  | 147,547            |  | Completed in 2000                   
|Package Two                 |  | Residential                                                |  | 210,319            |  | Completed by phases from 2002 - 2003
|Package Three               |  | Residential                                                |  | 105,886            |  | 2005                                
|Package Four                |  | Residential                                                |  | 128,845            |  | Completed in 2003                   
|Package Five, Six and Seven |  | Residential / Office / Retail / Hotel / Serviced
Apartment |  | 504,350            |  | By phases from 2006 - 2008          
|                            |  |                                                            | 
|Olympic Station             |  |                                                            |  |                    |  |                                     
|Package One                 |  | Residential / Office / Retail                              |  | 309,069            |  | Fully completed in 2000             
|Package Two                 |  | Residential / Retail                                       |  | 268,650            |  | Completed by phases from 2001 - 2002
|Package Three               |  | Residential                                                |  | 104,452            |  | 2005                                
|                            |  |                                                            | 
|Tsing Yi Station            |  | Residential / Retail                                       |  | 292,795            |  | Fully completed in 1999             
|                            |  |                                                            | 
|Tung Chung Station          |  |                                                            |  |                    |  |                                     
|Package One                 |  | Residential / Office / Retail / Hotel                      |  | 361,686            |  | By phases from 1999 - 2005          
|Package Two                 |  | Residential / Retail                                       |  | 255,949            |  | By phases from 2002 - 2007          
|Package Three               |  | Residential / Retail                                       |  | 413,154            |  | By phases from 2002 - 2007          
|                            |  |                                                            | 
|Hang Hau Station            |  | Residential / Retail                                       |  | 142,152            |  | 2005                                
|                            |  |                                                            | 
|Tiu Keng Leng Station       |  | Residential / Retail                                       |  | 253,765            |  | 2006                                
|                            |  |                                                            | 
|Tseung Kwan O Station       |  |                                                            |  |                    |  |                                     
|Area 55b                    |  | Residential / Retail                                       |  | 96,797             |  | 2006                                
|Area 57a                    |  | Residential / Retail                                       |  | 29,642             |  | 2005                                
|                            |  |                                                            | 
|Choi Hung Park-and-Ride     |  | Residential / Retail                                       |  | 21,582             |  | 2005                                



The
Groups assets held in relation to these joint venture operations include various site foundation works and related staff and overhead costs. The costs incurred by the Group on each development package are set off against any up-front payments
received from developers in relation to that development package, and the balance is shown on the balance sheet either as property development in progress or deferred income (note 16) as the case may be. As at December 31, 2003, total property
development in progress in respect of these jointly controlled operations was HK$540 million (2002: HK$1,126 million) and total deferred income was HK$4,924 million(2002: HK$6,226 million).



As the Group is not involved in the financing of the
construction of the developments, the only financial liability in respect of these developments as at December 31, 2003 was HK$108 million (2002: HK$56 million) in respect of accruals related to property enabling works.



During the year ended December 31, 2003, profits of HK$5,369
million (2002: HK$3,755 million; 2001: HK$3,248 million) were recognized (note 6).



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|40 | Material Related Party Transactions
|-- | -----------------------------------



The Financial Secretary Incorporated, which holds approximately 76% of the Companys issued share capital on trust for the Government
of the Hong Kong SAR, is the majority shareholder of the Company. Transactions between the Group and Government departments, agencies or Government controlled entities, other than those transactions such as the payment of fees, taxes, leases and
rates, etc. that arise in the normal dealings between the Government and the Group, are considered to be related party transactions pursuant to SSAP 20 Related party disclosures and are identified separately in these accounts.



Members of the Board and Members of the
Executive Directorate, and parties related to them, are also considered to be related parties of the Group. Transactions with these parties, except for those involving a Member of the Board or his related parties where the relevant Member abstains
from voting, are separately disclosed in the accounts.



Major related party transactions entered into by the Group in prior years which are still relevant for the current year include:



A    The Company entered into the Airport Railway Agreement with the Government on July 5, 1995 for the construction of the
Airport Railway. In addition to specifying the parameters for the design, construction and operation of the Tung Chung and Airport Express Lines, the Agreement also included provisions for the granting of land to the Company for property development
(note 16).



B    The
Company entered into the TKE Project Agreement with the Government on November 4, 1998 for the design, construction, financing and operation of the Tseung Kwan O Extension and the granting of land for commercial and residential property developments
along the railway extension.



C    On June 30, 2000, the Appointed Day for the purposes of the Mass Transit Railway Ordinance, the Company was granted a franchise, for an initial period of 50 years, to operate the existing mass transit
railway, and to operate and construct any extension to the railway. On the same day, the Company entered into an Operating Agreement with the Government which detailed provisions for the design, construction, maintenance and operation of the railway
under the franchise. The Government has also acknowledged in the Operating Agreement that the Company will require an appropriate commercial rate of return on its investment in any new railway project (which would ordinarily be between 1% to 3%
above the estimated weighted average cost of capital of the Company) and that financial and other support from the Government may be required.



D    On July 14, 2000, the Company received a comfort letter from the Government pursuant to which Government agreed to extend
the period of certain of the Companys land interests so that they are coterminous with the Companys initial 50-year franchise.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



E    On July 24, 2002, the Company entered into an agreement with the
Government specifying the parameters for the design, construction, financing and operation of the Pennys Bay Rail Link (the PBL Agreement). In connection with the financing of the PBL Project, the Government agreed to provide
financial support to the Company in order to bridge the funding gap between the Companys required rate of return of 11.25% per annum in respect of the PBL Project, and the projected return of the PBL pursuant to the terms of the Operating
Agreement (note 40C). Such financial support, which amounted to HK$798 million at net present value on January 1, 2002, has been provided through the Government waivers of its entitlement to cash dividends in respect of its shareholding, commencing
from the financial year ended December 31, 2002 and thereafter as is equivalent to the funding gap.



During the year, the Group has had the following material related party transactions:



F    In connection with the construction of
various railway projects, certain essential project works are embedded within the infrastructure works to be undertaken by the Government or certain of its related parties. These works have been entrusted to the Government and its related parties
and are payable on an actual cost basis according to architectural certifications. The Government and certain of its related parties, on the other hand, have entered into entrustment agreements with the Company for the construction of various other
infrastructure works that are also reimbursable according to actual costs certified. Details of the amounts paid and the amounts receivable and payable as at December 31, 2003 are provided in notes 15, 24 and 30 respectively.



G    On November 19, 2003, the Company entered
into a formal project agreement with the Government to develop, on a build, operate and transfer basis, the Tung Chung Cable Car System together with a Theme Village at Ngong Ping on the Lantau Island under a franchise granted by the Government for
a period of 30 years commencing on December 24, 2003. Details of the project are set out in note 38B.



H    The Company has business transactions with its non-controlled subsidiary in the normal course of operations, details of
which are disclosed in note 18.



I    The Group has paid remuneration to the Members of the Board and Members of the Executive Directorate. Details of these transactions are described in note 5A. In addition, the Members of the Executive
Directorate were granted share options under the Companys Pre-Global Offering Share Option Scheme and New Joiners Share Option Scheme. Details of these directors options are disclosed in note 5B.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | J | During the year, the following dividends were paid to or waived by the Government:
| | - | ----------------------------------------------------------------------------------



|                                              |  |      |       |      |     |      
|--------------------------------------------- |  | ---- | ----- | ---- | --- | -----
|(in millions)                                 |  | 2002 |       | 2003
|Cash dividends paid                           |  | HK$  | 470   |      | HK$ |     
|Cash dividends waived (Note 40E)              |  |      | 219   |      |     | 675  
|Shares allotted in respect of scrip dividends |  |      | 944   |      |     | 986  
|                                              |  |      |       |      |     |      
|                                              |  | HK$  | 1,633 |      | HK$ | 1,661
|                                              |  |      |       |      |     |      



Out
of the HK$675 million (2002: HK$219 million) cash dividends waived by the Government, HK$664 million (2002: HK$219 million) have been offset against the construction costs of the PBL Project (note 15). The remaining HK$11 million
(2002: Nil) has been included in creditors, accrued charges and provisions.



|41 | Commitmentsin millions
|-- | ----------------------



| | A | CAPITAL COMMITMENTS
| | - | -------------------



i    Outstanding capital commitments as at December 31, 2003 not provided for in the accounts were as follows:



|                                      |  |                   |       |                                                     |     |                             |  |       |       |  |     |      
|------------------------------------- |  | ----------------- | ----- | --------------------------------------------------- | --- | --------------------------- |  | ----- | ----- |  | --- | -----
|                                      |  | RAILWAYOPERATIONS |       | PENNYS BAYRAIL LINK ANDTUNG CHUNGCABLE CARPROJECTS |     | PROPERTYDEVELOPMENTPROJECTS |  | TOTAL
|2002                                  |  |                   |       |                                                     |     |                             |  |       |       |  |     |      
|Authorized but not yet contracted for |  | HK$               | 499   |                                                     | HK$ |                            |  | HK$   | 1,934 |  | HK$ | 2,433
|Authorized and contracted for         |  |                   | 1,321 |                                                     |     | 1,017                       |  |       | 67    |  |     | 2,405
|                                      |  |                   |       |                                                     |     |                             |  |       |       |  |     |      
|                                      |  | HK$               | 1,820 |                                                     | HK$ | 1,017                       |  | HK$   | 2,001 |  | HK$ | 4,838
|                                      |  |                   |       |                                                     |     |                             |  |       |       |  |     |      
|2003                                  |  |                   |       |                                                     |     |                             |  |       |       |  |     |      
|Authorized but not yet contracted for |  | HK$               | 470   |                                                     | HK$ |                            |  | HK$   | 1,817 |  | HK$ | 2,287
|Authorized and contracted for         |  |                   | 892   |                                                     |     | 941                         |  |       | 70    |  |     | 1,903
|                                      |  |                   |       |                                                     |     |                             |  |       |       |  |     |      
|                                      |  | HK$               | 1,362 |                                                     | HK$ | 941                         |  | HK$   | 1,887 |  | HK$ | 4,190
|                                      |  |                   |       |                                                     |     |                             |  |       |       |  |     |      



Included in the amounts authorized but not yet contracted for are costs that will not be subject to capital contracts such as staff costs, overhead expenses and capitalized interest.



ii    The commitments under railway operations
comprise the following:



|                                      |  |                                |       |                                           |     |       |  |     |      
|------------------------------------- |  | ------------------------------ | ----- | ----------------------------------------- | --- | ----- |  | --- | -----
|                                      |  | IMPROVEMENTANDENHANCEMENTWORKS |       | ACQUISITIONOF PROPERTY,PLANT ANDEQUIPMENT |     | TOTAL
|2002                                  |  |                                |       |                                           |     |       |  |     |      
|Authorized but not yet contracted for |  | HK$                            | 338   |                                           | HK$ | 161   |  | HK$ | 499  
|Authorized and contracted for         |  |                                | 665   |                                           |     | 656   |  |     | 1,321
|                                      |  |                                |       |                                           |     |       |  |     |      
|                                      |  | HK$                            | 1,003 |                                           | HK$ | 817   |  | HK$ | 1,820
|                                      |  |                                |       |                                           |     |       |  |     |      
|2003                                  |  |                                |       |                                           |     |       |  |     |      
|Authorized but not yet contracted for |  | HK$                            | 348   |                                           | HK$ | 122   |  | HK$ | 470  
|Authorized and contracted for         |  |                                | 394   |                                           |     | 498   |  |     | 892  
|                                      |  |                                |       |                                           |     |       |  |     |      
|                                      |  | HK$                            | 742   |                                           | HK$ | 620   |  | HK$ | 1,362
|                                      |  |                                |       |                                           |     |       |  |     |      



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



iii    Commitments in respect of jointly controlled operations have been
included in the commitments for Property Development Projects above and were as follows:



|                                      |  |      |       |      |     |      
|------------------------------------- |  | ---- | ----- | ---- | --- | -----
|                                      |  | 2002 |       | 2003
|Authorized but not yet contracted for |  | HK$  | 1,931 |      | HK$ | 1,817
|Authorized and contracted for         |  |      | 57    |      |     | 61   
|                                      |  |      |       |      |     |      
|                                      |  | HK$  | 1,988 |      | HK$ | 1,878
|                                      |  |      |       |      |     |      



| | B | OPERATING LEASE COMMITMENTS
| | - | ---------------------------



The Group had operating leases on office buildings and staff quarters as at December 31, 2003. The total future minimum lease payments
under non-cancellable operating leases are payable as follows:



|                                          |  |      |   |      |     |  
|----------------------------------------- |  | ---- | - | ---- | --- | -
|                                          |  | 2002 |   | 2003
|Payable within one year                   |  |      |   |      |     |  
|Leases expiring within one year           |  | HK$  | 3 |      | HK$ | 3
|Leases expiring between one to five years |  |      | 4 |      |     | 3
|                                          |  |      |   |      |     |  
|                                          |  | HK$  | 7 |      | HK$ | 6
|Payable after one but within five years   |  |      | 2 |      |     | 1
|                                          |  |      |   |      |     |  
|                                          |  | HK$  | 9 |      | HK$ | 7
|                                          |  |      |   |      |     |  



The
above includes HK$3 million (2002: HK$6 million) in respect of the office accommodation and quarters for construction project staff. The majority of the leases are subject to rent reviews.



| | C | LIABILITIES AND COMMITMENTS IN RESPECT OF PROPERTY MANAGEMENT CONTRACTS
| | - | -----------------------------------------------------------------------



The Group had, over the years, jointly developed with outside property developers certain properties above or adjacent to railway depots
and stations. Under most of the development agreements, the Group retained the right to manage these properties after their completion. The Group, as manager of these properties, enters into services contracts with outside contractors for the
provision of security, cleaning, maintenance and other services on behalf of the managed properties. The Group is primarily responsible for these contracts, but any contract costs incurred will be reimbursed by the owners and tenants of the managed
properties from the management funds as soon as they are paid.



As at December 31, 2003, the Group had total outstanding liabilities and contractual commitments of HK$490 million (2002: HK$445 million) in respect of these works and services. Cash funds totalling HK$568
million (2002: HK$530 million) obtained through monthly payments of management service charges from the managed properties are held by the Group on behalf of those properties for settlement of works and services provided.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|42 | Employee Share Option Schemes
|-- | -----------------------------



| | A | PRE-GLOBAL OFFERING SHARE OPTION SCHEME
| | - | ---------------------------------------



In connection with the Initial Public Offering (IPO) and Stock Exchange listing of the Companys shares in October 2000,
a Pre-Global Offering Share Option Scheme (Pre-IPO Option Scheme) was established. Under the Pre-IPO Option Scheme, a total of 769 employees including all the Members of the Executive Directorate, except C K Chow and Lincoln K K Leong
who were appointed on December 1, 2003 and February 1, 2002 respectively, were granted on September 20, 2000 options to purchase an aggregate of 48,338,000 shares, representing 0.9% of the issued share capital of the Company as at December 31, 2003.
The options carry an exercise price of HK$8.44 per share, which was equivalent to 90% of the IPO offer price of HK$9.38 per share. The options may be exercised prior to September 11, 2010, subject to the vesting provisions under the Scheme. As of
December 31, 2003, all options granted under the Pre-IPO Option Scheme have been vested.



In 2003, 15,999,500 options to subscribe for shares were vested and 10,489,500 share options vested have been exercised. The weighted
average closing price in respect of the share options exercised during the year was HK$9.97 per share. In addition, 1,044,500 share options lapsed as a result of the resignation of certain option holders during the year. As at December 31, 2003,
total options to subscribe for 25,229,500 (2002: 36,763,500)shares remained outstanding.



| | B | NEW JOINERS SHARE OPTION SCHEME
| | - | -------------------------------



In May 2002, the New Joiners Share Option Scheme (the New Option Scheme) was adopted at the 2002 Annual General Meeting to
provide share options to new members of the top and senior management of the Company who did not participate in the Pre-IPO Option Scheme. Under the Rules of the New Option Scheme, a maximum of 5,056,431 shares, which represent 0.1% of the issued
share capital of the Company as at December 31, 2003, may be issued pursuant to the exercise of options granted under the New Option Scheme. Options granted will be evenly vested in respect of their underlying shares over a period of three years
from the date on which the relevant option is offered. The exercise price of any option granted under the New Option Scheme is to be determined by the Company upon the offer of grant of the option and which should not be less than the greatest of
(i) the average closing price of an MTR share for the five business days immediately preceding the day of offer of such option; (ii) the closing price of an MTR share on the day of offer of such option, which must be a business day; and (iii) the
nominal value of an MTR share.



On August 1,
2003, a total of 5 employees, including Lincoln K K Leong, a Member of the Executive Directorate, were granted options to purchase an aggregate of 1,561,200 shares at an exercise price of HK$9.75 per share, being the closing price of an MTR share on
the day of offer. Subject to the vesting provisions under the New Option Scheme, the options will be vested starting from July 14, 2004 and are exercisable on or prior to July 14, 2013.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|43 | Adoption of New Accounting Policies
|-- | -----------------------------------



| | A | DEFERRED TAX in millions
| | - | ------------------------



The Hong Kong Society of Accountants issued SSAP 12 Income taxes in August 2002, which supercedes the previous SSAP 12
Accounting for deferred taxes. The new standard became effective for accounting period beginning on or after January 1, 2003. The Group has therefore adopted the new standard for preparation of the Groups financial statements for
the years ended December 31, 2002 and 2003.



The revised SSAP 12 requires deferred tax assets and liabilities to be provided in full using the liability method, on temporary differences arising between the tax base of an asset or a liability and its carrying value in the financial
statements at the balance sheet date. Deferred tax assets or liabilities arising from temporary differences need to be measured at the tax rates enacted or substantively enacted by the balance sheet date. The principal temporary differences in
respect of the Company arise from depreciation of fixed assets, various expense provisions and tax losses carried forward.



Deferred tax liabilities are provided in full on all taxable temporary differences while deferred tax assets are recognized to the extent
that it is probable that future taxable profit will be available against which the deductible temporary difference can be utilized.



In accordance with the previous deferred tax standard, the Group did not provide for deferred taxation on timing differences unless they
are expected to crystallize in the foreseeable future. Adoption of the revised SSAP 12 therefore constituted a change in accounting policy and pursuant to SSAP 2 (which outlines the disclosure requirements when a change in accounting policy has a
material effect on the current or prior periods presented), the Group has retrospectively restated the opening balances of the retained profits as at January 1, 2002 and 2003. The previously reported net profit for the year ended December 31, 2002
have also been adjusted to reflect movements in the deferred income taxes account during the year. These effects are summarized as follows:



|                                                  |  |                                        |        |   |                            |      |   |                             |     |        |  
|------------------------------------------------- |  | -------------------------------------- | ------ | - | -------------------------- | ---- | - | --------------------------- | --- | ------ | -
|                                                  |  | NET MOVEMENTS IN DEFERRED INCOME TAXES |       
|                                                  |  | BALANCE AS ATJANUARY 1,2002            |        |   | YEAR ENDEDDECEMBER 31,2002 |      |   | BALANCE AS ATJANUARY 1,2003 |    
|Retained profit as previously reported            |  | HK$                                    | 14,407 |   |                            |      |   |                             | HK$ | 16,487 |  
|Prior period adjustments in respect of :          |  |                                        |        |   |                            |      |   |                             |     |        |  
|Deferred tax                                      |  |                                        | (2,622 | ) |                            | (630 | ) |                             |     | (3,252 | )
|Share of non-controlled subsidiarys deferred tax |  |                                        | 2      |   |                            | (3   | ) |                             |     | (1     | )
|                                                  |  |                                        |        |   |                            |      |   |                             |     |        |  
|Retained profit as restated                       |  | HK$                                    | 11,787 |   |                            |      |   |                             | HK$ | 13,234 |  
|                                                  |  |                                        |        |   |                            |      |   |                             |     |        |  



| | B | LEASE OUT AND LEASE BACK TRANSACTIONS
| | - | -------------------------------------



During the year, the Group entered into a series of structured transactions with unrelated third parties to lease out and lease back
certain of its passenger cars (Lease Transaction). Details of the Lease Transaction and the accounting treatment relating to the transaction are disclosed in note 14G.



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##### Table of Contents

MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|44 | Subsequent Events
|-- | -----------------



| | A | RAILWAY PROJECT IN SHENZHEN, THE PEOPLES REPUBLIC OF CHINA (PRC)
| | - | -------------------------------------------------------------------



On January 15, 2004, the Company entered into an Agreement in Principle (the Agreement) for a
Build, Operate and Transfer project with the Shenzhen Municipal Government, PRC to construct Phase 2 of Line 4 of the proposed Shenzhen Metro System and to operate Line 4 for a term of 30 years.



The Agreement sets out the principles upon which the Company
and the Shenzhen Municipal Government will negotiate an Authorized Operating Agreement, subject to the National Development and Reform Commissions approval, to allow a project company to be established by the Company in PRC with the right to
construct Phase 2 of Line 4 and to operate Line 4, and the right to use the facilities of Phase 1 of Line 4. The Agreement also provides that the project company will acquire land along Line 4 with an aggregate gross floor area of 2.9 million sq.m.
for the purpose of property development.



The
total investment of the project company will be approximately RMB6 billion with a registered capital of approximately RMB2.4 billion.



| | B | DEBT ISSUANCE
| | - | -------------



On January 20, 2004, MTR Corporation (C.I.) Limited successfully completed the issuance of US$600 million 10-year Eurobonds (the
Bonds). The Bonds are unconditionally and irrevocably guaranteed by the Company and carry a coupon of 4.75% per annum, as well as a maturity date of January 21, 2014. The net proceeds from the MTR Corporation (C.I.) Limiteds issue
were on-lent to the Company for use by it for general corporate purposes, which may include working capital, capital expenditures, refinancing and repayment of existing debts. The Bonds are listed on the London Stock Exchange.



| | C | POSSIBLE MERGER WITH THE KCRC
| | - | -----------------------------



On February 24, 2004, the Government announced its invitation to the Company and KCRC to commence discussions on the possible merger
between the two companies. Conclusion of the negotiations is required to be reported to the Government by August 31, 2004.



| | D | EXTENSION OF SCRIP DIVIDEND ARRANGEMENT
| | - | ---------------------------------------



On February 26, 2004, the Government agreed to extend the scrip dividend arrangement (its agreement to elect to receive all or part of its
entitlement to dividends in the form of new shares under any scrip dividend election to be offered by the Company to its shareholders in respect of a financial year to the extent necessary to ensure that a maximum of 50% of the total dividend paid
by the Company to its shareholders in respect of the relevant financial year will be paid in the form of cash) to each of the three financial years ending December 31, 2006.



|45 | Comparative Figures
|-- | -------------------



Certain comparative figures have been restated and reclassified based on the requirement of the new accounting standards adopted as set
out in note 43.



|46 | Approval of Accounts
|-- | --------------------



The accounts were approved by the Board on March 2, 2004.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



|47 | Summary of Differences Between Hong Kong and United States GAAP
|-- | ---------------------------------------------------------------



The Groups consolidated financial statements are prepared in accordance with the accounting principles generally accepted applicable
in Hong Kong (HK GAAP), which differ in certain significant respects from those applicable in the United States (US GAAP). The significant differences relate principally to the following items, and the adjustments considered
necessary to restate profit (net income) and shareholders funds (shareholders equity) in accordance with US GAAP are shown in the tables set out below.



| | A | REVENUE RECOGNITION ON PROPERTY DEVELOPMENTS
| | - | --------------------------------------------



Under HK GAAP, where the Group receives payments from developers at the commencement of the project, profits arising from such payments
are recognized when the foundation and site enabling works are complete and acceptable for development, and after taking into account the outstanding risks and obligations, if any, retained by the Group in connection with the development. In
addition, under HK GAAP, where the Group receives a distribution of the assets of the development upon completion of construction, profit is recognized based on the fair value of such assets at the time of receipt. Under US GAAP, such profits would
be recognized during construction of the property on a percentage-of-completion basis.



| | B | TELFORD HEADQUARTERS REDEVELOPMENT
| | - | ----------------------------------



The Group entered into a joint venture agreement with a property developer to redevelop the headquarters building. Under HK GAAP, the
redeveloped headquarters building retained by the Group was recorded as an addition of land and buildings at open market value. The shopping centre and cash received from the developer, net of related costs, were recognized as property development
profits. Under US GAAP, the redevelopment would be accounted for as a non-monetary transaction, and such redevelopment would be recorded at historical cost with no profit recognition thereon.



| | C | ASSET REVALUATIONS AND DEPRECIATION
| | - | -----------------------------------



Under HK GAAP, investment properties are stated on the basis of appraised value, and depreciation expense is not provided on such
properties. Also under HK GAAP, self-occupied land and buildings are stated at their open market values on the basis of their existing use at the date of revaluation less any subsequent accumulated depreciation. Under US GAAP, such revaluations are
not permitted. Accordingly, for the purposes of the reconciliation between HK GAAP and US GAAP, the properties of the Group, which are stated at appraised or open market value, have been restated at historical cost less accumulated depreciation.
Depreciation has been based on the historical cost of the properties and the shorter of the unexpired lease term or useful life of 50 years. The approximate gross historical cost of investment properties subject to depreciation under US GAAP, which
are not depreciated under HK GAAP, amounted to HK$3,250 million and HK$6,876 million at December 31, 2002 and 2003, respectively.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | D | DEPRECIATION OF CERTAIN FIXED ASSETS
| | - | ------------------------------------



Prior to 1995, under HK GAAP, the historical cost of the Groups tunnel lining and underground civil structures was not depreciated.
Under established industry practice in the United States for similar costs, depreciation is provided for financial accounting purposes over extended periods. For US GAAP purposes, the Group has depreciated such costs over a 100-year period.



Effective January 1, 1995, under HK GAAP, the
Group re-appraised the estimated useful life of the tunnel lining and underground civil structures. In accordance with such re-appraisal, such costs are being depreciated over the number of years remaining using an original life of 100-year period.
Such change in useful life was accounted for prospectively, with no cumulative adjustment recognized in 1995.



In addition, prior to 1995 under HK GAAP, the cost of leasehold land was not amortized based on assumed extensions of the leases. Under US
GAAP, the amortization of the historical cost of leasehold land is provided over the life of the leases, without any consideration of renewals.



Effective January 1, 1995, under HK GAAP, all leasehold land is amortized over the unexpired terms of the leases. This change in
accounting policy under HK GAAP was applied prospectively, with no cumulative adjustment recognized in 1995.



| | E | PENSION COSTS
| | - | -------------



Under HK GAAP, the provision for the defined benefit element of the MTR Corporation Limited Retirement Scheme (the Retirement
Scheme) was based on the contributions made to the Retirement Scheme. The adoption of the new Statement of Standard Accounting Practice (SSAP) 34 under HK GAAP has resulted in the provisions for deficiency of the Retirement
Schemes present value of the defined benefit obligations over the fair value of the assets. Such transitional liability was recognized immediately against the opening balance of the retained profits as of January 1, 2002 under HK GAAP. Under
US GAAP, the defined benefit element of the Retirement Scheme is recognized as a charge to income over the employees approximate service period, in accordance with Statement of Financial Accounting Standards (SFAS) No. 87. SFAS
No.87 focuses on the Retirement Schemes benefit formula as the basis for determining the benefit earned, and therefore the cost incurred, in each year. The determination of the benefit earned is actuarially determined and includes components
for service cost, time value of money, return on plan assets and gains or losses from changes in previous assumptions. The actuarial valuation methods used are different under HK GAAP and US GAAP and so are the pension expenses recognized. As such,
the transitional liability of HK$44 million recognized immediately against the opening balance of the retained profits under HK GAAP is reversed under US GAAP. Adjustment on pension costs calculated by the actuarial method in accordance with SFAS
No. 87 is made accordingly.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | F | INCOME TAXES
| | - | ------------



In the past, the Groups deferred taxation is provided using the liability method in respect of the taxation effect arising from all
material timing differences, which are expected with reasonable probability to become payable in the foreseeable future. With respect to deferred tax assets (a net deferred tax debit), HK GAAP includes recognition criteria providing for net deferred
tax assets, which are probable of recovery in the foreseeable future, with assurance beyond a reasonable doubt that taxable income will be generated in the future. Under US GAAP, full provision is made for all deferred taxes as they arise, except
that a valuation allowance is provided on deferred tax assets to the extent that it is not more likely than not that such deferred tax assets will be realized. Under US GAAP, more likely than not is defined as a likelihood of
more than 50 percent. With effect from January 1, 2003, the Groups accounting policy under HK GAAP for the recognition of deferred tax as set out in note 1Q is similar to US GAAP. As shown in note 43A, the adoption of this policy resulted in a
decrease of HK$2,620 million to the balance of the shareholders funds as of January 1, 2002 and, accordingly, the US GAAP adjustment to the shareholders funds arising in prior years for deferred tax accounting has been fully eliminated.



| | G | CAPITALIZATION OF CERTAIN COSTS
| | - | -------------------------------



Under HK GAAP, certain costs of a non-incremental nature are capitalized relative to the Airport Railway Project and other capital
projects. Under US GAAP, it is not permissible to capitalize these non-incremental costs. The preponderance of the capitalized costs relating to the capital projects is incremental in nature and accordingly, is properly capitalized under both HK
GAAP and US GAAP.



| | H | INTEREST
| | - | --------



Under HK GAAP, interest earned on funds obtained by the Group specifically for the construction of the Airport Railway prior to the date
of expenditure for such purpose is credited to railway construction in progress related to the Airport Railway. Interest earned for this purpose includes notional interest on funds temporarily applied by the Group for purposes other than related to
the construction of the Airport Railway. Under US GAAP, actual interest earned is included in the determination of profit for such period, and notional interest on funds temporarily applied is not recognized.



| | I | STOCK BASED COMPENSATION
| | - | ------------------------



Under HK GAAP, share options granted by the Company and shares granted by the principal shareholder (defined as shareholding larger than
10%) for no consideration to the employees of the Company are not required to be recognized in the profit and loss account of the Company. Under US GAAP, such share options and shares granted are accounted for in accordance with Accounting
Principles Board Opinion 25 as contributions to capital with the offsetting charge to the profit and loss account as compensation expense. The compensation expense for the share grants is measured based on the quoted market price of the shares, and
in case of share options, the difference between the quoted market price of the shares less the exercise price, at a defined measurement date. The measurement date is the first date on which both the number of shares that an individual employee is
entitled to receive and the exercise price are known.



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | J | OTHERS
| | - | ------



Other adjustments primarily represent the net effect of costs deferred under HK GAAP which are required to be recognized as expenses under
US GAAP, and certain anticipated expenses recognized under HK GAAP which are not recognized as expenses under US GAAP until the related goods or services are received or provided.



| | K | DERIVATIVE INSTRUMENTS
| | - | ----------------------



Under US GAAP, effective January 1, 2001, the Group adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the profit and loss account when the
hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.



The Group uses derivative instruments to manage exposures to foreign currency and interest rate risks. The Groups objectives for
holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures.



Under HK GAAP, derivative instruments are not required to be recorded on the balance sheet at fair value.



| | L | LEASE OUT AND LEASE BACK TRANSACTION
| | - | ------------------------------------



Under HK GAAP, where commitments by the Group to make long-term lease payments have been defeased by the placement of securities under the
lease out and lease back transaction as described in note 14(G), those commitments and securities are not recognized as obligations and assets of the Group, respectively. Under US GAAP, the securities are not allowed to offset with the commitments
to make long-term lease payments as there is no legal right of offset. Accordingly, the securities placed to defease the lease obligations and the related commitments to make long-term lease payments would be reflected separately in the balance
sheet and the net cash provided by financing activities and net cash used by investing activities would be increased by HK$3,698 million under US GAAP.



| | M | RECONCILIATION OF NET INCOME TO US GAAP
| | - | ---------------------------------------



|                                                                                    |  |                        |       |   |      |     |       |      |  |     |        |   |  |     |      |  
|----------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | --- | ----- | ---- |  | --- | ------ | - |  | --- | ---- | -
|                                                                                    |  | Year Ended December 31 |      
|(in millions, except per share data)                                                |  | 2001                   |       |   | 2002 |     |       | 2003 |  |     | 2003   |  
|Profit for the year in accordance with HK GAAP                                      |  | HK$                    | 4,278 |   |      | HK$ | 3,579 |      |  | HK$ | 4,450  |   |  | US$ | 573  |  
|Adjustments required under US GAAP                                                  |  |                        |       |   |      |     |       |      |  |     |        |   |  |     |      |  
|Revenue recognition on property developments                                        |  |                        | 1,216 |   |      |     | (115  | )    |  |     | (3,522 | ) |  |     | (454 | )
|Depreciation on revalued properties and redevelopment                               |  |                        | (64   | ) |      |     | (66   | )    |  |     | (38    | ) |  |     | (5   | )
|Depreciation on certain fixed assets                                                |  |                        | 10    |   |      |     | 10    |      |  |     | 10     |   |  |     | 1    |  
|Difference in periodic pension cost                                                 |  |                        | 112   |   |      |     | 45    |      |  |     | (74    | ) |  |     | (10  | )
|Deferred tax accounting                                                             |  |                        | (724  | ) |      |     | (128  | )    |  |     | (15    | ) |  |     | (2   | )
|Capitalization of certain costs                                                     |  |                        | (65   | ) |      |     | (66   | )    |  |     | (19    | ) |  |     | (2   | )
|Interest                                                                            |  |                        | (21   | ) |      |     | (20   | )    |  |     | (19    | ) |  |     | (2   | )
|Stock based compensation                                                            |  |                        | (60   | ) |      |     | (5    | )    |  |     | (19    | ) |  |     | (2   | )
|Derivative instruments including cumulative effect of adopting SFAS No. 133 in 2001 |  |                        | (53   | ) |      |     | (11   | )    |  |     | (22    | ) |  |     | (3   | )
|Other                                                                               |  |                        | (1    | ) |      |     | 3     |      |  |     |       |   |  |     |     |  
|Tax effect of above adjustments                                                     |  |                        | (160  | ) |      |     | 35    |      |  |     | 637    |   |  |     | 82   |  
|                                                                                    |  |                        |       |   |      |     |       |      |  |     |        |   |  |     |      |  
|Net income for the year in accordance with US GAAP                                  |  | HK$                    | 4,468 |   |      | HK$ | 3,261 |      |  | HK$ | 1,369  |   |  | US$ | 176  |  
|                                                                                    |  |                        |       |   |      |     |       |      |  |     |        |   |  |     |      |  
|Basic and diluted earnings per share                                                |  | HK$                    | 0.89  |   |      | HK$ | 0.64  |      |  | HK$ | 0.26   |   |  | US$ | 0.03 |  
|                                                                                    |  |                        |       |   |      |     |       |      |  |     |        |   |  |     |      |  



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MTR CORPORATION LIMITED



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



December 31, 2001, 2002, 2003



| | N | RECONCILIATION OF SHAREHOLDERS EQUITY TO US GAAP
| | - | -------------------------------------------------



|                                                                                    |  |                   |        |   |      |     |        |      |  |     |       |  
|----------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---- | --- | ------ | ---- |  | --- | ----- | -
|                                                                                    |  | As of December 31 |       
|(in millions)                                                                       |  | 2002              |        |   | 2003 |     |        | 2003 | 
|Shareholders funds in accordance with HK GAAP                                      |  | HK$               | 53,574 |   |      | HK$ | 57,292 |      |  | US$ | 7,379 |  
|Adjustments required under US GAAP                                                  |  |                   |        |   |      |     |        |      |  |     |       |  
|Revenue recognition on property developments                                        |  |                   | 2,162  |   |      |     | (1,360 | )    |  |     | (175  | )
|Accumulated depreciation on revalued properties and redevelopment                   |  |                   | (364   | ) |      |     | (402   | )    |  |     | (52   | )
|Asset revaluation reserves                                                          |  |                   | (6,430 | ) |      |     | (6,704 | )    |  |     | (864  | )
|Accumulated depreciation on certain fixed assets                                    |  |                   | (771   | ) |      |     | (761   | )    |  |     | (98   | )
|Difference in periodic pension cost                                                 |  |                   | (110   | ) |      |     | (184   | )    |  |     | (24   | )
|Deferred tax accounting                                                             |  |                   | 11     |   |      |     |       |      |  |     |      |  
|Capitalization of certain costs                                                     |  |                   | (1,239 | ) |      |     | (1,258 | )    |  |     | (162  | )
|Interest                                                                            |  |                   | 656    |   |      |     | 637    |      |  |     | 82    |  
|Derivative instruments including cumulative effect of adopting SFAS No. 133 in 2001 |  |                   | (501   | ) |      |     | (366   | )    |  |     | (47   | )
|Other                                                                               |  |                   | 40     |   |      |     | 40     |      |  |     | 5     |  
|Tax effect of above adjustments                                                     |  |                   | (86    | ) |      |     | 600    |      |  |     | 78    |  
|                                                                                    |  |                   |        |   |      |     |        |      |  |     |       |  
|Shareholders equity in accordance with US GAAP                                     |  | HK$               | 46,942 |   |      | HK$ | 47,534 |      |  | US$ | 6,122 |  
|                                                                                    |  |                   |        |   |      |     |        |      |  |     |       |  



| | O | STATEMENT OF CASHFLOWS
| | - | ----------------------



Under HK GAAP, cash flows from interest and finance charges are included in financing activities. Under US GAAP, cash flows from interest
and finance charges for the years presented would be included as operating activities. In addition, HK GAAP includes bank overdrafts within the definition of cash and cash equivalents, whereas US GAAP classifies bank overdrafts as financing
activities. Summarized cash flow data by operating, investing and financing activities in accordance with US GAAP are set out below:



|                                               |  |                        |        |   |      |     |        |      |  |     |        |   |  |     |      |  
|---------------------------------------------- |  | ---------------------- | ------ | - | ---- | --- | ------ | ---- |  | --- | ------ | - |  | --- | ---- | -
|                                               |  | Year ended December 31 |       
|(in millions)                                  |  | 2001                   |        |   | 2002 |     |        | 2003 |  |     | 2003   |  
|Net cash provided / (used) by:                 |  |                        |        |   |      |     |        |      |  |     |        |   |  |     |      |  
|Operating activities                           |  | HK$                    | 1,571  |   |      | HK$ | 2,488  |      |  | HK$ | 2,129  |   |  | US$ | 274  |  
|Investing activities                           |  |                        | (5,728 | ) |      |     | (2,354 | )    |  |     | (1,795 | ) |  |     | (231 | )
|Financing activities                           |  |                        | 4,198  |   |      |     | 1,369  |      |  |     | (1,676 | ) |  |     | (216 | )
|                                               |  |                        |        |   |      |     |        |      |  |     |        |   |  |     |      |  
|Change in cash and cash equivalents            |  | HK$                    | 41     |   |      | HK$ | 1,503  |      |  | HK$ | (1,342 | ) |  | US$ | (173 | )
|Cash and cash equivalents at beginning of year |  |                        | 174    |   |      |     | 215    |      |  |     | 1,718  |   |  |     | 221  |  
|                                               |  |                        |        |   |      |     |        |      |  |     |        |   |  |     |      |  
|Cash and cash equivalents at end of year       |  | HK$                    | 215    |   |      | HK$ | 1,718  |      |  | HK$ | 376    |   |  | US$ | 48   |  
|                                               |  |                        |        |   |      |     |        |      |  |     |        |   |  |     |      |  



F - 70



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##### Table of Contents

Exhibit Index



|               |  |                                                                                                                                                                                                                                                                                                                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                               
|1.1            |  | Mass Transit Railway Ordinance (incorporated herein by reference to the Registration Statement on Form F-3, filed by the Company and MTR Corporation (C.I.) Limited on September 10, 2001 (File
No: 333-13904) (the Form F-3)).                                                                                                                                                    
|               | 
|1.2            |  | Memorandum of Association of the Company (incorporated herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                         
|               | 
|1.3            |  | Articles of Association of the Company (as amended on June 3, 2004)                                                                                                                                                                                                                                                                                                                  
|               | 
|2b.1           |  | The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of the Company and its
subsidiaries.                                                                                                                                                                            
|               | 
|2c.1           |  | Indenture, dated October 1, 1995, between Mass Transit Railway Corporation (the predecessor of the Company) and The First National Bank of Chicago, as Trustee (incorporated herein by
reference to the Form F-3).                                                                                                                                                                   
|               | 
|2c.2           |  | First Supplemental Indenture, dated January 25, 1999, between Mass Transit Railway Corporation (the predecessor of the Company) and The First National Bank of Chicago (incorporated herein by
reference to the Form F-3).                                                                                                                                                           
|               | 
|2c.3           |  | Second Supplemental Indenture, dated June 12, 2000, between the Company and Bank One Trust Company, N.A. as Trustee and successor in interest to The First National Bank of Chicago
(incorporated herein by reference to the Form F-3).                                                                                                                                              
|               | 
|2c.4           |  | Third Supplemental Indenture, dated as of September 7, 2001, between MTR Corporation Limited and Bank One Trust Company, N.A., as Trustee and successor in interest to The First National Bank
of Chicago (incorporated herein by reference to the Form F-3).                                                                                                                        
|               | 
|2c.5           |  | Indenture, dated as of September 7, 2001, among MTR Corporation (C.I.) Limited, as Issuer, MTR Corporation Limited, as Guarantor, and Bank One Trust Company, N.A., as Trustee and successor in
interest to The First National Bank of Chicago (incorporated herein by reference to the Form F-3).                                                                                   
|               | 
|4.1            |  | Operating Agreement, dated June 30, 2000, between Secretary for Transport (now known as Secretary for the Environment, Transport and Works) for and on behalf of the Government of the Hong
Kong Special Administrative Region and the Company (incorporated herein by reference to the Form F-3).                                                                                   
|               | 
|4.2            |  | Comfort Letter dated July 14, 2000 from Planning and Lands Bureau (now known as Housing, Planning and Lands Bureau) of the Government of the Hong Kong Special Administrative Region, to the
Company regarding land matters relating to the privatization of the Company (incorporated herein by reference to the Form F-3).                                                         
|               | 
|4.3            |  | Agreement dated June 30, 2000, in respect of the vesting of certain assets comprised in the Eastern Harbour Crossing, between The Secretary for the Treasury (now known as Secretary for
Financial Services and the Treasury) for and on behalf of the Government of the Hong Kong Special Administrative Region, and the Company (incorporated herein by reference to the Form F-3).



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.4            |  | Amendment and Restatement Agreement, dated June 30, 2000 in respect of The Memorandum of Understanding relating to the Eastern Harbour Crossing and The Airport Railway Operating and
Maintenance Terms and The Project Agreement for the Design, Construction, Financing and Operating of the Tseung Kwan O Extension and The Letter Agreement relating to the Quarry Bay Congestion Relief Works, dated June 30, 2000, between Secretary for
Transport (now known as Secretary for the Environment, Transport and Works) for and on behalf of the Government of the Hong Kong Special Administrative Region and the Company (incorporated herein by reference to the Form F-3).
|               | 
|4.5            |  | Indemnity Agreement, dated September 22, 2000, in respect of the global share offering, among the Company, the Members of the Board and the Members of the Executive Directorate and the
Government of the Hong Kong Special Administrative Region (incorporated herein by reference to the Annual Report on Form 20-F for the fiscal year ended December 31, 2000, filed by the Company on June 20, 2001).                                                                                                                                                                                                                                                                      
|               | 
|4.6            |  | Project Agreement for the design, construction, financing and operation of the Pennys Bay Rail Link (now known as Disneyland Resort Line), dated July 24, 2002, between the Company and
the Deputy Secretary for the Environment, Transport and Works for and on behalf of the Government (incorporated herein by reference to the Annual Report on Form 20-F for the fiscal year ended December 31, 2002, filed by the Company on June 25,
2003).                                                                                                                                                                                                                              
|               | 
|7.1            |  | Computation of Ratio of Debt to Shareholders Funds based on Hong Kong GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|7.2            |  | Computation of Ratio of Debt to Shareholders Equity based on US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|7.3            |  | Computation of Ratio of Earnings to Fixed Charges based on Hong Kong GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|7.4            |  | Computation of Ratio of Earnings to Fixed Charges based on US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|               | 
|8.1            |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|10.1           |  | Memorandum on Performance Requirements between Commissioner for Transport for and on behalf of the Government of the Hong Kong Special Administrative Region and the Company (incorporated
herein by reference to the Form F-3).                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|               | 
|12.1           |  | Certification of Chief Executive Officer required by Rule 15d-14(a) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|12.2           |  | Certification of Finance Director required by Rule 15d-14(a) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|13.1           |  | Certification of Chief Executive Officer required by Rule 15d-14(b) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|13.2           |  | Certification of Finance Director required by Rule 15d-14(b) under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|23.1           |  | Consent of KPMG, Independent Registered Public Accounting Firm.