**Exhibit
      99.3**




























**Consolidated
      Financial Statements**


**(In
      US dollars)**





**FOUR
      SEASONS HOTELS INC.**





Years
      ended December 31, 2006 and 2005






























**MANAGEMENT'S
      RESPONSIBILITY FOR FINANCIAL REPORTING**









The
      accompanying Consolidated Financial Statements of Four Seasons Hotels Inc.
      as at
      and for the years ended December 31, 2006 and 2005 were prepared by management,
      which is responsible for the integrity and fairness of the information
      presented, including the selection of appropriate accounting principles and
      the
      determination of certain amounts in these statements that are based on estimates
      and judgments. These Consolidated Financial Statements were prepared in
      accordance with Canadian generally accepted accounting principles. Management
      has also prepared the related Reconciliation to United States Generally Accepted
      Accounting Principles and the financial information presented throughout our
      Management’s Discussion and Analysis for the year ended December 31, 2006 and
      has ensured that it is consistent with the Consolidated Financial
      Statements.




In
      discharging our responsibility for the integrity and fairness of the
      Consolidated Financial Statements and for the accounting systems from which
      they
      are derived, management maintains the necessary system of internal controls
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external reporting
      purposes in accordance with Canadian generally accepted accounting principles.
      These controls include quality standards in hiring and training of employees,
      policies and procedures manuals, a corporate code of conduct, conflict of
      interest rules and accountability for performance within appropriate and
      well-defined areas of responsibility. The system of internal controls is further
      supported by an internal audit department. Even an effective system of internal
      controls, no matter how well designed, has inherent limitations. Management
      has
      assessed the effectiveness as at December 31, 2006 of disclosure controls and
      procedures and internal control over financial reporting and has reported its
      conclusions in our Management's Discussion and Analysis.




The
      Board of Directors is responsible for overseeing management in performance
      of
      its responsibilities for financial reporting and is ultimately responsible
      for
      approving the Consolidated Financial Statements and the Management's Discussion
      and Analysis. The Board carries out this responsibility principally through
      its
      Audit Committee, which is comprised entirely of independent directors. As part
      of its mandate, the Audit Committee meets with the independent auditors and
      the
      internal auditors (who both have direct access to the Audit Committee,
      independent of management) and with management. The Audit Committee reviews
      the
      Consolidated Financial Statements and the Management's Discussion and Analysis
      and recommends them to the Board for approval.





















































The
      Consolidated Financial Statements have been audited by KPMG LLP, the independent
      auditors recommended by the Audit Committee and appointed by the shareholders,
      in accordance with Canadian generally accepted accounting standards, and their
      report follows. KPMG LLP has, and has had, full and free access to the Audit
      Committee to discuss audit, financial reporting and related
      matters.







/s/
                Isadore Sharp
            
            /s/
                John M. DavisonChairman
                and
            
            Executive
                Vice President andChief
                Executive Officer
            
            Chief
                Financial Officer









Toronto,
      Canada




March
      9, 2007


























































































**AUDITORS'
      REPORT TO THE SHAREHOLDERS**






We
      have
      audited the consolidated balance sheets of Four Seasons Hotels Inc. as at
      December 31, 2006 and 2005 and the consolidated statements of operations,
      retained earnings and cash flows **** for
      the
      years then ended. These financial statements are the responsibility of the
      Corporation's management. Our responsibility is to express an opinion on these
      financial statements based on our audits.




We
      conducted our audits in accordance with Canadian generally accepted auditing
      standards. With respect to the consolidated financial statements for the year
      ended December 31, 2006, we also conducted our audit in accordance with the
      standards of the Public Company Accounting Oversight Board (United States).
      Those standards require that we plan and perform an audit to obtain reasonable
      assurance whether the financial statements are free of material misstatement.
      An
      audit includes examining, on a test basis, evidence supporting the amounts
      and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation.




In
      our
      opinion, these consolidated financial statements present fairly, in all material
      respects, the financial position of the Corporation as at December 31, 2006
      and
      2005 and the results of its operations and its cash flows for the years then
      ended in accordance with Canadian generally accepted accounting
      principles.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Corporation’s internal
      control over financial reporting as of December 31, 2006, based on the criteria
      established in Internal Control - Integrated Framework issued by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO), and our report
      dated March 9, 2007 expressed an unqualified opinion on management’s assessment
      of, and the effective operation of, internal control over financial
      reporting.









/s/
      KPMG LLP




Chartered
      Accountants









Toronto,
      Canada




March
      9, 2007































**REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**






To
      the
      Board of Directors of Four Seasons Hotels Inc.




We
      have
      audited management's assessment, included in Management’s Annual Report on
      Internal Control over Financial Reporting *,* that
      Four Seasons Hotels Inc. maintained effective internal control over financial
      reporting as of December 31, 2006, based on the criteria established in Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO). **** The
      Corporation's management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting. Our responsibility is to express
      an
      opinion on management's assessment and an opinion on the effectiveness of the
      Corporation’s internal control over financial reporting based on our
      audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management's assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      corporation's internal control over financial reporting is a process designed
      to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A corporation's internal control
      over financial reporting includes those policies and procedures that (1) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the corporation;
      (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the corporation
      are
      being made only in accordance with authorizations of management and directors
      of
      the corporation; and (3) provide reasonable assurance regarding prevention
      or
      timely detection of unauthorized acquisition, use, or disposition of the
      corporation’s assets that could have a material effect on the financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.























In
      our
      opinion, management's assessment that the Corporation **** maintained
      effective internal control over financial reporting as of December 31, 2006,
      is
      fairly stated, in all material respects, based on the criteria established
      in
      Internal Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO). Also, in our opinion, the
      Corporation **** maintained,
      in all material respects, effective internal control over financial reporting
      as
      of December  31, 2006, based on the criteria established in Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO).




We
      also
      have conducted our audits on the consolidated financial statements in accordance
      with Canadian generally accepted auditing standards. With respect to the year
      ended December 31, 2006, we also have conducted our audit in accordance with
      the
      standards of the Public Company Accounting Oversight Board (United
      States). **** Our
      report dated March 9, 2007 ****** expressed
      an unqualified opinion on those ** consolidated ** financial
      statements.









/s/
      KPMG LLP




Chartered
      Accountants








Toronto,
      Canada




March
      9, 2007






















**FOUR
      SEASONS HOTELS INC.**


**Consolidated
      Statements of Operations**





Years
      ended December 31, 2006 and 2005


(In
      thousands of US dollars except per share amounts)


**2006**
            
            2005**Revenues:**Hotel
                management fees
            
            **$**
            **123,866**
            
            $
            100,841Other
                fees
            
            
            **17,521**
            
            
            14,048Hotel
                ownership revenues
            
            
            **33,374**
            
            
            65,475Reimbursed
                costs
            
            
            **78,664**
            
            
            67,974**253,425**
            
            
            248,338**Expenses:**General
                and administrative expenses
            
            
            **(62,428**
            **)**
            
            (58,148
            )Hotel
                ownership cost of sales and expenses
            
            
            **(32,212**
            **)**
            
            (66,086
            )Reimbursed
                costs
            
            
            **(78,664**
            **)**
            
            (67,974
            )**(173,304**
            **)**
            
            (192,208
            )**Operating
                earnings before other items**
            
            
            **80,121**
            
            
            56,130**Depreciation
                and amortization**
            
            
            **(14,598**
            **)**
            
            (11,187
            )**Other
                expenses, net (note 12)**
            
            
            **(3,811**
            **)**
            
            (89,208
            )**Interest
                income**
            
            
            **22,405**
            
            
            16,746**Interest
                expense (note 10(e))**
            
            
            **(14,910**
            **)**
            
            (11,545
            )**Earnings
                (loss) before income taxes**
            
            
            **69,207**
            
            
            (39,064
            )**Income
                tax recovery (expense) (note 8):**Current
            
            
            **(13,415**
            **)**
            
            (1,912
            )Future
            
            
            **(5,505**
            **)**
            
            12,753**(18,920**
            **)**
            
            10,841**Net
                earnings (loss)**
            
            **$**
            **50,287**
            
            $
            (28,223
            )**Basic
                earnings (loss) per share (note 11(d))**
            
            **$**
            **1.36**
            
            $
            (0.77
            )**Diluted
                earnings (loss) per share (note 11(d))**
            
            **$**
            **1.33**
            
            $
            (0.77
            )





See
      accompanying notes to consolidated financial statements.









1





**FOUR
      SEASONS HOTELS INC.**


**Consolidated
      Balance Sheets**




December
      31, 2006 and 2005


(In
      thousands of US dollars)





**2006**
            
            2005Assets**Current
                assets:**Cash
                and cash equivalents
            
            **$**
            **358,949**
            
            $
            242,178Receivables
                (note 2)
            
            
            **67,397**
            
            
            69,690Inventory
            
            
            **6,096**
            
            
            7,326Prepaid
                expenses
            
            
            **3,346**
            
            
            2,950**435,788**
            
            
            322,144**Long-term
                receivables (note 3)**
            
            
            **153,224**
            
            
            175,374**Investments
                in hotel partnerships and corporations (note 4)**
            
            
            **65,552**
            
            
            99,928**Fixed
                assets (note 5)**
            
            
            **81,490**
            
            
            64,850**Investment
                in management contracts (note 6)**
            
            
            **187,861**
            
            
            164,932**Investment
                in trademarks (note 7)**
            
            
            **4,224**
            
            
            4,210**Future
                income tax assets (note 8)**
            
            
            **9,099**
            
            
            14,439**Other
                assets**
            
            
            **54,729**
            
            
            34,324**$**
            **991,967**
            
            $
            880,201Liabilities
                and Shareholders' Equity**Current
                liabilities:**Accounts
                payable and accrued liabilities (note 9)
            
            **$**
            **74,307**
            
            $
            54,797Long-term
                obligations due within one year (note 10)
            
            
            **2,350**
            
            
            4,853**76,657**
            
            
            59,650**Long-term
                obligations (note 10)**
            
            
            **266,835**
            
            
            273,825**Shareholders'
                equity (note 11):**Capital
                stock
            
            
            **287,576**
            
            
            250,430Convertible
                notes (note 10(a))
            
            
            **36,920**
            
            
            36,920Contributed
                surplus
            
            
            **11,881**
            
            
            10,861Retained
                earnings
            
            
            **207,600**
            
            
            160,741Equity
                adjustment from foreign currency translation
            
            
            **104,498**
            
            
            87,774**648,475**
            
            
            546,726**Commitments
                and contingencies (note 14)****Subsequent
                event (note 17)****$**
            **991,967**
            
            $
            880,201








See
      accompanying notes to consolidated financial statements.




On
      behalf of the Board:





/s/
                Isadore Sharp
            
            Director/s/
                Ronald W. Osborne
            
            Director













2





**FOUR
      SEASONS HOTELS INC.**


**Consolidated
      Statements of Retained Earnings**




Years
      ended December 31, 2006 and 2005


(In
      thousands of US dollars)


**2006**
            
            2005**Retained
                earnings, beginning of year**
            
            **$**
            **160,741**
            
            $
            192,129**Net
                earnings (loss)**
            
            
            **50,287**
            
            
            (28,223
            )**Dividends
                declared**
            
            
            **(3,428**
            **)**
            
            (3,165
            )**Retained
                earnings, end of year**
            
            **$**
            **207,600**
            
            $
            160,741









See
      accompanying notes to consolidated financial statements.





3





**FOUR
        SEASONS HOTELS INC.**


**Consolidated
      Statements of Cash Flows**





Years
      ended December 31, 2006 and 2005


(In
      thousands of US dollars)


**2006**
            
            2005**Cash
                provided by (used in):****Operating
                activities:**Net
                earnings (loss)
            
            **$**
            **50,287**
            
            $
            (28,223
            )Items
                not affecting cash:Stock-based
                compensation expense
            
            
            **5,255**
            
            
            2,333Depreciation
                and amortization
            
            
            **14,598**
            
            
            11,187Foreign
                exchange loss (gain)
            
            
            **(1,343**
            **)**
            
            24,632Gain
                on
                disposition of assets
            
            
            **(620**
            **)**
            
            (3,175
            )Loss
                on
                retirement benefit plan transition
            
            
            **-**
            
            
            35,467Provision
                for
                loss
            
            
            **3,074**
            
            
            32,284Future
                income tax expense (recovery)
            
            
            **5,505**
            
            
            (12,753
            )Other
            
            
            **1,291**
            
            
            4,969Amount
                paid relating to partial termination of currency and interest rate
                swap
                (note 10(c))
            
            
            **(21,000**
            **)**
            
            -Amount
                paid relating to retirement benefit plan transition (note
                14(b))
            
            
            **-**
            
            
            (36,029
            )Changes
                in non-cash working capital
            
            
            **20,925**
            
            
            (4,215
            )**Cash
                provided by operating activities**
            
            
            **77,972**
            
            
            26,477**Investing
                activities:**Advances
                of
                long-term receivables
            
            
            **(25,568**
            **)**
            
            (44,865
            )Receipt
                of long-term receivables
            
            
            **65,336**
            
            
            34,561Investments
                in
                hotel partnerships and corporations
            
            
            **(190**
            **)**
            
            (8,732
            )Disposal
                of
                hotel partnerships and corporations
            
            
            **16,580**
            
            
            24,607Purchase
                of
                fixed assets
            
            
            **(22,182**
            **)**
            
            (18,706
            )Investments
                in
                trademarks and management contracts
            
            
            **(17,506**
            **)**
            
            10,473Other
                assets
            
            
            **(9,883**
            **)**
            
            (7,614
            )**Cash
                provided by (used in) investing activities**
            
            
            **6,587**
            
            
            (10,276
            )**Financing
                activities:**Long-term
                obligations, including current portion:Issued
            
            
            **-**
            
            
            39Repaid
            
            
            **(3,099**
            **)**
            
            -Issuance
                of
                shares (note 11(a))
            
            
            **36,305**
            
            
            7,046Dividends
                paid
            
            
            **(3,378**
            **)**
            
            (3,142
            )**Cash
                provided by financing activities**
            
            
            **29,828**
            
            
            3,943**Increase
                in cash and cash equivalents**
            
            
            **114,387**
            
            
            20,144**Increase
                (decrease) in cash and cash equivalents due to unrealized foreign
                exchange
                gain (loss)**
            
            
            **2,384**
            
            
            (4,343
            )**Cash
                and cash equivalents, beginning of year**
            
            
            **242,178**
            
            
            226,377**Cash
                and cash equivalents, end of year**
            
            **$**
            **358,949**
            
            $
            242,178**Supplementary
                information:**Interest
                received
            
            **$**
            **21,186**
            
            $
            18,576Interest
                paid
            
            
            **(6,172**
            **)**
            
            (5,056
            )Income
                taxes paid, net
            
            
            **(979**
            **)**
            
            (6,376
            )




See
      accompanying notes to consolidated financial statements.





4





**FOUR
      SEASONS HOTELS INC.**


**Notes
      to Consolidated Financial Statements**




Years
      ended December 31, 2006 and 2005


(In
      thousands of US dollars except per share amounts)










Four
      Seasons Hotels Inc. (" FSHI ")
      is
      incorporated under the Ontario Business Corporations Act and, through its
      subsidiaries, is engaged in the management of, and the investment in, hotels,
      resorts and branded residential projects throughout the world. In these
      consolidated financial statements, FSHI and its subsidiaries are collectively
      referred to as the "Corporation".




At
      December 31, 2006, the Corporation managed 73 properties and had various
      projects under construction or development, of which the Corporation had an
      equity interest in 10 properties under management and one project under
      construction.




**1.** **Significant
      accounting policies:**




The
      Corporation's accounting policies and its standards of financial disclosure
      comply with Canadian generally accepted accounting principles.




The
      significant accounting policies are summarized below:




**(a)** **Reporting
      currency:**




The
      Corporation has historically prepared its consolidated financial statements
      in
      Canadian dollars ("C$"). Effective January 1, 2005, the Corporation adopted
      US
      dollars as its reporting currency. There were no changes in the functional
      currency of FSHI, which remains Canadian dollars, or the functional currencies
      of any of its subsidiaries.




**(b)** **Principles
      of consolidation:**




The
      Corporation consolidates all of its wholly-owned subsidiaries, including its
      primary operating subsidiaries - Four Seasons Hotels Limited ("FSHL"), Four
      Seasons Hotels and Resorts Asia Pacific Pte Ltd. and Four Seasons Hotels and
      Resorts B.V.




The
      Corporation consolidates its 100% leasehold interest in Four Seasons Hotel
      Vancouver and, until the disposition of the lease on June 30, 2005, the
      Corporation also consolidated its 100% leasehold interest in The Pierre in
      New
      York.










5





**FOUR
      SEASONS HOTELS INC.**


**Notes
      to Consolidated Financial Statements (continued)**




Years
      ended December 31, 2006 and 2005


(In
      thousands of US dollars except per share amounts)











**1.** **Significant
      accounting policies (continued):**




**(c)** **Translation
      of foreign currencies and derivative financial
      instruments:**




Foreign
      currency balances of the Corporation and of foreign operations designated as
      integrated are translated into domestic currencies at the rates of exchange
      on
      the balance sheet date for monetary items and at the rates of exchange on the
      date of transaction for non-monetary items. The resulting translation gains
      or
      losses are included in the determination of net earnings (loss).




Revenues
      and expenses denominated in foreign currencies are translated at the rates
      of
      exchange on the dates of the transactions.




The
      financial statements of foreign investments designated as self-sustaining
      operations are translated into Canadian dollars as follows:




(i)  Assets
      and liabilities at rates of exchange on the balance sheet date; and




(ii)  Revenue
      and expense items at average rates of exchange in effect during the
      year.




The
      resulting exchange gains and losses are deferred and included in a separate
      component of shareholders' equity. A gain or loss equivalent to a proportionate
      amount of the exchange gains and losses accumulated in the separate component
      of
      shareholders' equity is recognized in income when there has been a reduction
      in
      the net investment resulting from a sale of part or all of the Corporation's
      interest in the foreign operation, or a reduction in the shareholders' equity
      of
      the foreign operation as a result of dividend distributions or other capital
      transactions.




The
      exchange gains and losses resulting from translating the Corporation's financial
      statements in Canadian dollars to US dollars are included in a separate
      component of shareholders' equity (note 1(a)).




Derivative
      financial instruments are used by the Corporation in the management of its
      foreign currency exposures and its interest rate risk, when it is deemed
      appropriate. The Corporation does not use derivative financial instruments
      for
      trading or speculative purposes.










6





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
  **1.** **Significant
        accounting policies (continued):**




The
      Corporation documents all relationships between hedging instruments and hedged
      items, as well as its risk management objective and strategy for undertaking
      various hedge transactions. This process includes linking all derivatives that
      are designated as hedges to specific assets and liabilities on the balance
      sheet
      or to specific firm commitments or forecasted transactions. The Corporation
      also
      assesses, both at the hedge's inception and on an ongoing basis, whether the
      derivatives that are designated as hedges are highly effective in offsetting
      changes in fair values or cash flows of hedged items.




The
      Corporation enters into currency and interest rate swap agreements in order
      to
      reduce the variability to changes in the fair value of its long-term obligations
      attributable to interest rate and exchange rate risks, when it is deemed
      appropriate. These swap agreements require the periodic exchange of payments
      and
      the exchange of the notional principal amount on which the payments are based
      at
      the maturity of the agreement. If all the conditions for applying hedge
      accounting are met, the Corporation designates its currency and interest rate
      swaps as hedges of the underlying long-term obligation. Interest expense on
      the
      long-term obligation is adjusted to include amounts payable or receivable under
      the swap agreements. Foreign exchange translation gains and losses on the
      notional principal amount of the swap are accrued under "Long-term obligations"
      on the balance sheet and recognized in "Other expenses, net", offsetting the
      respective translation losses and gains recognized on the long-term obligation.




Realized
      and unrealized gains or losses associated with derivative instruments, which
      have been terminated or cease to be effective prior to maturity, are deferred
      under other current or non-current assets or liabilities on the balance sheet
      and recognized in income in the period in which the underlying hedged
      transaction is recognized. In the event a designated hedged item is sold,
      extinguished or matures prior to the termination of the related derivative
      instrument, any realized or unrealized gain or loss on such derivative
      instrument is recognized in income.




Derivative
      financial instruments that are not designated as hedges are marked-to-market
      on
      a monthly basis with the resulting changes in fair values being recognized
      in
“Other expenses, net”.















7





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **1.** **Significant
        accounting policies (continued):**




**(d)** **Use
      of estimates:**




The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the year.
      Actual results could differ from those estimates.




Estimates
      are used when accounting for items such as asset impairment assessments, income
      taxes, employee future benefits and contingencies.




The
      most significant estimates that the Corporation is required to make relate
      to
      the recoverability of its investments in (i) long-term receivables, (ii) hotel
      partnerships and corporations and (iii) management contracts.




The
      estimated recoverable amounts of these investments usually depend upon estimates
      of the profitability of the related managed properties, which, in turn, depend
      upon assumptions regarding future conditions in the general or local hospitality
      industry, including the effects of war, terrorism, competition from other
      hotels, changes in travel patterns, and other factors that affect the
      properties' gross operating revenue (which is the factor on which the
      Corporation's base management and royalty fee revenues are normally based)
      and
      profits (which is the factor on which the Corporation's incentive fee revenues
      are normally based).




The
      estimates of recoverable amounts of these investments may also depend upon,
      among other things, assumptions regarding local real estate market conditions,
      property and income taxes, interest rates and the availability, cost and terms
      of financing, the impact of present or future legislation or regulation, debt
      incurred by the properties that rank ahead of the Corporation and other factors
      affecting the profitability and saleability of the properties.




These
      assumptions are limited by the availability of reliable comparable data, ongoing
      geopolitical concerns and the uncertainty of predictions concerning future
      events. Accordingly, by their nature, estimates of recoverable amounts are
      subjective and do not necessarily result in precise determinations. Should
      the
      underlying assumptions change, the estimated recoverable amounts could change
      by
      a material amount.










8





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)


**1.** **Significant
      accounting policies (continued):**




**(e)** **Cash
      and cash equivalents:**




The
      Corporation's investments in cash and cash equivalents are highly liquid, with
      original maturities of less than 90 days. These investments include bank
      deposits, guaranteed investment certificates and money market funds held with
      major financial institutions.




**(f)** **Impairment
      of long-term receivables:**




The
      Corporation measures impairment of long-term receivables based on the present
      value of expected future cash flows discounted at the original effective
      interest rate or the estimated fair value of the collateral. For impaired
      long-term receivables, the Corporation establishes a specific allowance for
      doubtful long-term receivables for the difference between the recorded
      investment and the present value of the expected future cash flows or the
      estimated fair value of the collateral. The Corporation applies this impairment
      policy individually to all long-term receivables in the portfolio and does
      not
      aggregate long-term receivables for the purpose of applying such policy. For
      long-term receivables which are determined to be impaired, interest income
      is
      recognized on a cash basis.




**(g)** **Investments
      in hotel partnerships and corporations:**




The
      Corporation accounts for its investments in hotel partnerships and corporations
      by the cost method when the percentage ownership and structure does not give
      the
      Corporation significant influence over these investments. Investments in hotel
      partnerships and corporations, which are not controlled but over which the
      Corporation has significant influence, are accounted for by the equity
      method.




In
      the
      event of a decline in value of an investment in the equity of a hotel
      partnership or corporation that is other than temporary, the investment is
      written down to the estimated recoverable amount.






























9







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**1.** **Significant
      accounting policies (continued):**




**(h)** **Capital
      assets:**




Land,
      buildings, furniture, fixtures, equipment and leasehold interests and
      improvements are recorded at cost.




The
      cost of acquiring or enhancing hotel management contracts is capitalized and
      recorded as "Investment in management contracts".




The
      cost of trademarks includes the cost of registering the "Four Seasons"
      trademarks throughout the world.




(i) Depreciation
      and amortization:




Depreciation
      of buildings is recorded on a straight-line basis over 40 years.




Depreciation
      of furniture, fixtures and equipment is recorded on a straight-line basis at
      rates which will fully depreciate the assets over their estimated useful lives.
      The estimated composite useful lives for furniture, fixtures and equipment
      range
      from three to 15 years.




Amortization
      of leasehold interests and improvements is recorded on a straight-line basis
      over the terms of the leases.




The
      costs allocated to trademarks, which do not have indefinite lives, are amortized
      on a straight-line basis over their useful lives.




The
      costs capitalized for hotel management contracts are amortized on a
      straight-line basis over the terms of the contracts.




(ii) Impairment:




The
      recoverability of the unamortized cost of capital assets is evaluated whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable from future operations. The Corporation bases these
      evaluations upon the projected future cash flows on an undiscounted basis.
      If
      the undiscounted future cash flows are insufficient to recover the remaining
      net
      book value, then an impairment charge is recognized equal to the amount by
      which
      the net book value exceeds the fair value of the asset.





10





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)


**1.** **Significant
      accounting policies (continued):**




**(i)** **Deferred
      charges:**




The
      Corporation defers legal, consulting, travel and other costs directly relating
      to the negotiation, structuring and execution of new contracts relating to
      projects, which in management's judgment, have a high probability of opening.
      When the property is opened, these deferred charges are reclassified to
      "Investment in management contracts". If the project is abandoned, any deferred
      charges are written off. The deferred charges associated with new management
      contracts developed by the Corporation are amortized on a straight-line basis,
      generally over a 10-year period, commencing when the property is
      opened.




**(j)** **Accounting
      for asset retirement obligations:**




The
      Corporation records the fair value of an asset retirement obligation as a
      liability in the year in which it incurs a legal obligation associated with
      the
      retirement of tangible long-lived assets that result from the acquisition,
      construction, development and/or normal use of the assets. The Corporation
      also
      records a corresponding asset that is depreciated or amortized over the life
      of
      the asset. Subsequent to the initial measurement of the asset retirement
      obligation, the obligation will be adjusted at the end of each period to reflect
      the passage of time and changes in the estimated future cash flows underlying
      the obligation.




**(k)** **Revenue
      recognition:**




The
      total revenues of the Corporation include revenues earned from hotels, resorts
      and branded residential projects under long-term management contracts, revenues
      earned for the use of its brand name in connection with certain residential
      projects, revenues generated by its consolidated leasehold hotel operations
      and
      distributions from its other hotel investments.




Hotel
      management fees include base fees typically equal to a percentage of the gross
      operating revenues of the managed hotels and resorts and incentive fees based
      on
      certain operating results of the managed hotels and resorts.










11





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **1.** **Significant
        accounting policies (continued):**




Other
      fees include fees earned relating to the design, construction and fitting out
      specifications of properties during the development stage and purchasing fees
      earned, generally calculated as a percentage of the cost of goods purchased
      by
      the managed properties through the Corporation's centralized purchasing system.
      It also includes royalty fees earned by the Corporation for the use of its
      brand
      name in connection with certain residential projects, which are generally based
      on a percentage of the sale proceeds of the residences sold. In addition, the
      Corporation also manages branded and serviced residential projects pursuant
      to
      management contracts under which it oversees the management of the day-to-day
      operations of the completed projects in return for ongoing management fees
      from
      the owners of interests in these projects.




The
      Corporation provides various other services, including central reservation
      services, worldwide sales offices and marketing programs to managed properties,
      and receives various charges calculated in accordance with the management
      contracts. The central reservation service charges, corporate sales and
      marketing charges and corporate advertising charges enable the Corporation
      to
      recover substantially all of the costs of providing these services. These
      charges are included in reimbursed costs.




Fees
      from management operations are recognized as revenue when the services have
      been
      rendered in accordance with the terms of each individual contract, the fees
      are
      non-refundable, the amount of the fees is fixed or determinable, and there
      is
      reasonable assurance that the fees are collectible. Incentive fees are accrued
      as earned based on the profitability of the managed property, subject to the
      terms of each individual contract. The Corporation accrues incentive fees in
      interim consolidated financial statements based upon the amount that would
      be
      due under the incentive fee formula as if the relevant management contract
      was
      terminated at the relevant reporting date. Generally, on termination, the
      Corporation's management contracts entitle the Corporation to receive incentive
      fees up to the date of termination. If a property's profitability decreases
      in a
      subsequent interim period, the incentive fee accrued in a previous interim
      period could be reduced or eliminated.




The
      Corporation evaluates at the inception of a contract all deliverables to
      determine whether they represent separate units of accounting. If they do,
      the
      consideration to be received by the Corporation under the contract is allocated
      among the separate units of accounting based on their relative fair values
      or,
      where fair values for all deliverables are unavailable, based on the fair value
      of the undelivered item.





12





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **1. Significant
        accounting policies (continued):**




Hotel
      ownership revenues include revenues generated by the Corporation’s consolidated
      leasehold hotel operations, which are recognized at the time of the sale or
      rendering of services by the hotel. It also includes revenues recognized by
      the
      Corporation from other hotel investments, accounted for by the cost method,
      when
      profit distributions are receivable from the partnerships or
      corporations.




**(l)** **Stock-based
      compensation and other stock-based payments:**




Employee
      stock options granted or modified on or after January 1, 2003 are accounted
      for
      using the fair value-based method. Under the fair value-based method,
      compensation cost of a stock option is measured at fair value at the date of
      grant and is expensed over the stock option's vesting period, with a
      corresponding increase to contributed surplus. When these stock options are
      exercised, the proceeds, together with the amount recorded in contributed
      surplus, are recorded in capital stock. Stock options granted prior to January
      1, 2003 are accounted for using the settlement method.




Share
      appreciation rights (“SARs”) granted pursuant to phantom equity agreements are
      settled in cash. The total compensation cost of these SARs is measured based
      on
      the amount by which the quoted market price of Limited Voting Shares (“LVS”) of
      FSHI exceeds the grant prices. Changes in the market price of LVS between the
      grant date and measurement date result in changes to the total compensation
      cost. Total compensation cost is amortized over the rights’ vesting period and
      accrued as compensation expense. SARs vest over a maximum period of five years
      and can be exercised over a maximum period of 10 years. The compensation expense
      accrued for a right that is forfeited is adjusted by decreasing the compensation
      expense in the period of forfeiture.




**(m)** **Income
      taxes:**




The
      Corporation uses the asset and liability method of accounting for future income
      taxes. Under the asset and liability method, future income tax assets and
      liabilities are determined based on "temporary differences" (differences between
      the accounting basis and the tax basis of the assets and liabilities), and
      are
      measured using the currently enacted, or substantively enacted, tax rates and
      laws expected to apply when these differences reverse. A valuation allowance
      is
      recorded against any future income tax asset if it is more likely than not
      that
      the asset will not be realized. Income tax expense or benefit is the sum of
      the
      Corporation's provision for current income taxes and the difference between
      the
      opening and ending balances of the future income tax assets and
      liabilities.





13







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
    **1.** **Significant
        accounting policies (continued):**




**(n)** **Changes
      in accounting policies:**




(i) Non-monetary
      transactions:




In
      June
      2005, the Canadian Institute of Chartered Accountants (“CICA”) issued Section
      3831, “Non-Monetary Transactions”, which introduces new requirements for
      non-monetary transactions initiated on or after January 1, 2006. The amended
      requirements will result in non-monetary transactions being measured at fair
      values unless certain criteria are met, in which case, the transaction is
      measured at carrying value. The implementation of Section 3831, on a prospective
      basis for transactions initiated on or after January 1, 2006, did not have
      an
      impact on the consolidated financial statements of the Corporation for the
      year
      ended December 31, 2006.




(ii) Financial
      instruments:




In
      January 2005, the CICA issued three new accounting standards related to
      financial instruments: Section 3855, “Financial Instruments - Recognition and
      Measurement”, Section 3865, “Hedges”, and Section 1530, “Comprehensive Income”.
      These new standards are effective for fiscal years beginning on or after October
      1, 2006. Section 3855 prescribes when a financial instrument is to be recognized
      on the balance sheet and at what amount, and also specifies how financial
      instrument gains and losses are to be presented. Section 3865 provides
      additional accounting treatments to Section 3855 for entities, which choose
      to
      designate qualifying transactions as hedges for accounting purposes, by
      specifying how hedge accounting is applied and the required disclosures. It
      also
      defines a fair value hedge, a cash flow hedge and a hedge of a net investment
      in
      a self-sustaining foreign operation and provides guidance on how to account
      for
      each. In addition, it requires that any ineffectiveness in a hedging
      relationship be recorded immediately in income. Section 1530 introduces a new
      requirement to present certain revenues, expenses, gains and losses, which
      may
      include the impact of certain financial instruments, that otherwise would not
      be
      immediately recorded in income, in a statement of comprehensive income with
      the
      same prominence as other statements that constitute a complete set of financial
      statements. The Corporation is still assessing the implications of these new
      standards and has not yet determined the impact of the implementation of these
      standards on its 2007 consolidated financial statements.










14





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **1.** **Significant
        accounting policies (continued):**




(iii) Stock-based
      compensation:




In
      July
      2006, the Emerging Issues Committee of the CICA issued Abstract EIC-162,
“Stock-Based Compensation for Employees Eligible to Retire Before the Vesting
      Date”, which requires compensation cost to be recognized over the period from
      the grant date to the date the employee becomes eligible to retire. The
      implementation of EIC-162, on a retroactive basis from January 1, 2006, did
      not
      have an impact on the consolidated financial statements of the Corporation
      for
      the year ended December 31, 2006.





(o)     
      Comparative
      figures:




Certain 2005 comparative figures have been reclassified to conform with the
      financial statement presentation adopted for 2006.




**2.** **Receivables:**


**2006**
              
              2005Trade
                  accounts of consolidated hotel
              
              **$**
              **1,389**
              
              $
              1,526Receivables
                  from hotel partnerships, affiliates and managed hotels
              
              
              **58,125**
              
              
              52,684Taxes
                  receivable
              
              
              **1,733**
              
              
              6,647Other
              
              
              **6,150**
              
              
              8,833**$**
              **67,397**
              
              $
              69,690





Receivables
      at December 31, 2006 are recorded net of an allowance for doubtful accounts
      of
      $3,186 (2005 - $2,792). The net bad debt expense for the year ended December
      31,
      2006 was $237 (2005 - $18).





15





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **3.** **Long-term
        receivables:**


**2006**
            
            2005Secured
                cash flow bond, interest at 10% (2005 - £9.7 million) (a)
            
            **$**
            **-**
            
            $
            16,640Secured
                loans:Secured
                by bank guarantee:Non-interest
                bearing, due 2008, AUS$38.1 million
            
            
            **30,048**
            
            
            -Secured
                by shares:Interest
                at
                5.625%, compounded annually, repayable over the period to
                2010
            
            
            **6,758**
            
            
            6,399Interest
                at 10%
                (2005 - £12.2 million) (b)
            
            
            **-**
            
            
            20,994Interest
                at
                7.5%, compounded annually (2005 - AUS$26.6 million)
            
            
            **-**
            
            
            19,409Secured
                by property:Interest
                at
                LIBOR plus 1.85%, repayable over the period to 2015, £11.4 million (2005 -
                £10.3 million)
            
            
            **22,402**
            
            
            17,736Interest
                at
                LIBOR plus 2.0%, repayable over the period to 2012 (c)
            
            
            **19,374**
            
            
            16,676Interest
                at
                LIBOR plus 4.5%, due 2009
            
            
            **10,014**
            
            
            -Interest
                at SIBOR plus 1.5%, compounded annually, repayable over the period
                to
                2011
            
            
            **10,000**
            
            
            -Interest
                at LIBOR plus 2.0%, repayable over the period to 2016, C$9.3 million
                (2005
                - C$7.4 million) (c)
            
            
            **7,980**
            
            
            6,346Interest
                at 7%, compounded annually, repayable over the period to
                2012
            
            
            **7,463**
            
            
            8,865Interest
                at 8%, compounded annually, repayable over the period to
                2025
            
            
            **6,967**
            
            
            6,967Interest
                at
                LIBOR plus 4%, repayable over the period to 2024
            
            
            **6,291**
            
            
            5,000Interest
                at
                LIBOR plus 1.25%, compounded monthly (d)
            
            
            **5,000**
            
            
            5,000Interest
                at
                5%
            
            
            **-**
            
            
            5,235Due
                from officers and employees, non-interest bearing mortgages, C$15.4
                million (2005 - C$15.4 million)
            
            
            **13,240**
            
            
            13,211Unsecured
                loans related to managed hotels:Interest
                at
                Euribor plus 2%, due 2021,€5.8
                million (2005 - €6.0 million)
            
            
            **7,683**
            
            
            7,161Interest
                at 6%,
                due 2009, €4.3 million (2005 - €3.9 million)
            
            
            **5,689**
            
            
            4,662Interest
                at 9%,
                compounded annually, repayable over the period to 2015
            
            
            **2,890**
            
            
            3,140Interest
                at
                10.5%, compounded monthly (2005 - AUS$9.9 million)
            
            
            **-**
            
            
            7,249Interest
                at
                7.5%, compounded annually (2005 - AUS$6.8 million)
            
            
            **-**
            
            
            4,995Interest
                at
                7%
            
            
            **-**
            
            
            2,698Non-interest
                bearing
            
            
            **8,451**
            
            
            20,093**170,250**
            
            
            198,476Less
                allowance for doubtful long-term receivables (e)
            
            
            **(17,026**
            **)**
            
            (23,102
            )**$**
            **153,224**
            
            $
            175,374





16







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **3.****Long-term receivables (continued):**




(a) Principal
      and interest on the bond were payable annually every March out of 50% of the
      available cash flow (as defined in the bond indenture) from Four Seasons
      Hotel London. The bond was due from an affiliate of Kingdom Investments Inc.,
      which is a shareholder of FSHI, and was secured by the affiliate's investment
      in
      the hotel. The principal and interest on the bond were fully repaid in December
      2006.




(b) Principal
      and interest on the loan were payable annually every March out of the other
      50%
      of the available cash flow from Four Seasons Hotel London (a). The loan was
      due
      from an affiliate of Kingdom Investments Inc. and was secured by the affiliate's
      additional indirect interest in the hotel. The principal and interest on the
      loan were fully repaid in December 2006.




(c) The
      loans are due from affiliates of Kingdom Investments Inc.




(d) As
      at
      December 31, 2006 and 2005, the Corporation had fully provided for its $5,000
      loan relating to Four Seasons Hotel Caracas, which is secured by a second
      mortgage and registered against the hotel, and non-interest bearing advances
      of
      $1,887. The Corporation is in dispute with the owner of the hotel regarding
      a
      variety of matters relating to the completion and ongoing operation of the
      hotel, including the default on the $5,000 loan. Formal notice of default was
      given to the owner. The dispute was referred to arbitration and the arbitration
      tribunal declared that the owner had failed to perform all of its obligations
      under the Corporation's management agreements, including, without limitation,
      its obligation to complete the hotel as a world-class luxury hotel and to allow
      the Corporation to manage the hotel free from unlawful interference of the
      owner. The arbitration tribunal awarded damages totalling approximately $8,000,
      plus arbitration fees and expenses of approximately $240. The owner has
      challenged the enforcement of the decision from the arbitration tribunal. The
      Corporation has not recorded any receivables arising from the decision as at
      December 31, 2006 and 2005.




In
      addition, in 2003, the Corporation received judgment in its legal proceedings
      against the owner, which involved the protection of its proprietary materials.
      The court found against the owner on all matters, including illegal computer
      "hacking" and unlawful and unauthorized use of the Corporation's proprietary
      information, and ordered that the owner pay to the Corporation damages totalling
      approximately $4,900, plus legal costs and expenses of approximately $1,400.
      On
      appeal by the owner, the judgement was reduced to $1,400, plus legal costs
      and
      expenses. The Corporation has not recorded any receivable arising from the
      judgment as at December 31, 2006 and 2005.






17
 
  **FOUR
          SEASONS HOTELS INC.**
 **Notes
          to Consolidated Financial Statements (continued)**
  Years
          ended December 31, 2006 and 2005
 (In
          thousands of US dollars except per share amounts)
 
    **3.** **Long-term
          receivables (continued):**




In
      addition, the owner of the hotel received judgment against Four Seasons Caracas,
      C.A., a wholly-owned Venezuelan subsidiary of FSHL, in the amount of $1,300
      from
      the Venezuelan Tenth Court of First Instance for alleged breaches of the
      management agreement. The judgement was affirmed by the Sixth Superior Court,
      but then remanded by the Venezuelan Supreme Court back to the Superior Court
      for
      reconsideration. The Superior Court has not yet conducted its reconsideration
      of
      the appeal of the judgment.




(e) Changes
      in the allowance for doubtful long-term receivables consist of:


**2006**
            
            2005Balance,
                beginning of year
            
            **$**
            **(23,102**
            **)**
            $
            (13,239
            )Additional
                provisions
            
            
            (**1,748**
            **)**
            
            (8,829
            )Settlement
                of long-term receivables
            
            
            **7,950**
            
            
            -Transfer
                from receivables
            
            
            **-**
            
            
            (1,364
            )Conversion
                to investment
            
            
            **1,600**
            
            
            -Foreign
                exchange gain (loss)
            
            
            **(1,726**
            **)**
            
            330Balance,
                end of year
            
            **$**
            **(17,026**
            **)**
            $
            (23,102
            )




**4.** **Investments
      in hotel partnerships and corporations:**


**2006**
            
            2005Operating
                properties (notes 12(a) and 12(b))
            
            **$**
            **63,634**
            
            $
            91,020Properties
                under construction or development
            
            
            **1,918**
            
            
            8,908**$**
            **65,552**
            
            $
            99,928





In
      February 2006, the Corporation exchanged its equity interest in a property
      under
      its management for a management contract enhancement of approximately the same
      fair value. No gain or loss was recorded in connection with this
      transaction.





























18




**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**5.** **Fixed
      assets:**


**2006**
            
            
            
            
            
            2005**Cost**
            
            **Accumulated**
              **depreciation**
              **and**
              **amortization**
            
            **Net
                book**
              **value**
            
            Cost
            
            Accumulated
              depreciation
              and
              amortization
            
            Net
                book
              valueLand
            
            **$**
            **23,765**
            ****
            **$**
            **-**
            ****
            **$**
            **23,765**
            
            $
            23,322
            
            $
            -
            
            $
            23,322Buildings
            
            
            **42,226**
            
            
            **(3,112**
            **)**
            
            **39,114**
            
            
            8,362
            
            
            (3,292
            )
            
            5,070Building
                under construction
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            18,703
            
            
            -
            
            
            18,703Furniture,
                fixtures and equipment
            
            
            **28,350**
            
            
            **(12,743**
            **)**
            
            **15,607**
            
            
            24,875
            
            
            (11,008
            )
            
            13,867Leasehold
                interests and improvements
            
            
            **8,696**
            
            
            **(5,692**
            **)**
            
            **3,004**
            
            
            8,618
            
            
            (4,730
            )
            
            3,888**$**
            **103,037**
            ****
            **$**
            **(21,547**
            **)**
            **$**
            **81,490**
            
            $
            83,880
            
            $
            (19,030
            )
            $
            64,850




Depreciation
      and amortization
      expense for fixed assets was $4,214 (2005 - $4,526).




**6.** **Investment
      in management contracts:**


**2006**
            
            2005Management
                contracts (notes 4, 12(a) and 12(b))
            
            **$**
            **244,117**
            
            $
            212,187Less
                accumulated amortization (notes 12(a) and 12(b))
            
            
            **(56,256**
            **)**
            
            (47,255
            )**$**
            **187,861**
            
            $
            164,932




Amortization
      expense for
      management contracts was $9,965 (2005 - $6,139).




**7.**  **Investment
      in trademarks:**


**2006**
            
            2005Trademarks
            
            **$**
            **10,486**
            
            $
            10,067Less
                accumulated amortization
            
            
            **(6,262**
            **)**
            
            (5,857
            )**$**
            **4,224**
            
            $
            4,210




Amortization
      expense for
      trademarks was $403 (2005 - $527).















19




**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**8.**  **Income
      taxes:**




The
      sources of earnings (loss)
      before income taxes comprise the following:


**2006**
            
            2005Canada
            
            **$**
            **4,405**
            
            $
            (72,169
            )Foreign
            
            
            **64,802**
            
            
            33,105**$**
            **69,207**
            
            $
            (39,064
            )




The
      recovery of (provision for)
      income taxes is as follows:


**2006**
            
            2005Current:Federal
            
            **$**
            **(2,802**
            **)**
            $
            739Provincial
            
            
            **(1,144**
            **)**
            
            1,192Foreign
            
            
            **(9,469**
            **)**
            
            (3,843
            )**(13,415**
            **)**
            
            (1,912
            )Future:Federal
            
            
            **(4,080**
            **)**
            
            8,466Provincial
            
            
            **(1,666**
            **)**
            
            3,631Foreign
            
            
            **241**
            
            
            656**(5,505**
            **)**
            
            12,753**$**
            **(18,920**
            **)**
            $
            10,841
















20




**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)







**8.** **Income
      taxes (continued):**




Income
      tax recovery
      (expense) varies from the amount computed by applying combined Canadian federal
      and provincial tax rates to earnings (loss) before income taxes as
      follows:


**2006**
            
            2005Earnings
                (loss) before income taxes
            
            **$**
            **69,207**
            
            $
            (39,064
            )Items
                not deductible (not subject to taxes)
            
            
            **15,167**
            
            
            (786
            )Earnings
                (loss) subject to taxes
            
            **$**
            **84,374**
            
            $
            (39,850
            )Statutory
                Canadian federal and provincial tax rate
            
            
            **34.73**
            **%**
            
            34.66
            %Expected
                income tax recovery (expense)
            
            **$**
            **(29,303**
            **)**
            $
            13,812Reduction
                in tax due to lower foreign tax rates
            
            
            **16,590**
            
            
            6,421Increase
                in valuation allowance
            
            
            **(4,398**
            **)**
            
            (7,711
            )Other
            
            
            **(1,809**
            **)**
            
            (1,681
            )Income
                tax recovery (expense)
            
            **$**
            **(18,920**
            **)**
            $
            10,841




The
      valuation allowance for the year ended December 31, 2006 was $13,640 (2005
      -
      $10,525), which results from potential limitations on the use of capital and
      non-capital tax losses in Canada and certain foreign jurisdictions. In order
      to
      fully realize the future income tax assets, net of the valuation allowance,
      of
      $23,676, the Corporation will need to generate future taxable income of
      approximately $68,000. Based upon projections of future taxable income over
      the
      years in which the future income tax assets are deductible, management believes
      it is more likely than not that the Corporation will realize the benefits of
      these deductible differences, net of the existing valuation allowance. The
      amount of the future income tax assets considered realizable, however, could
      be
      reduced in the near term if estimated future taxable income during the
      carryforward period is reduced.















21





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**8.**  **Income
      taxes (continued):**




Future
      income taxes arise from temporary differences in the basis of the Corporation's
      assets and liabilities for tax and financial reporting purposes. Tax effects
      of
      these differences are as follows:


**2006**
            
            2005Future
                income tax assets:Investments
                in
                hotel partnerships and corporations
            
            **$**
            **10,912**
            
            $
            10,753Tax
                losses carried forward and other assets
            
            
            **22,173**
            
            
            16,271Long-term
                receivables
            
            
            **3,311**
            
            
            5,270Investment
                in
                trademarks
            
            
            **808**
            
            
            969Fixed
                assets
            
            
            **112**
            
            
            -Current
                assets
            
            
            **-**
            
            
            10Long-term
                obligations
            
            
            **-**
            
            
            1,061**37,316**
            
            
            34,334Valuation
                allowance
            
            
            **(13,640**
            **)**
            
            (10,525
            )Total
                gross future income tax assets
            
            
            **23,676**
            
            
            23,809Future
                income tax liabilities:Investment
                in
                management contracts
            
            
            **(11,644**
            **)**
            
            (8,063
            )Fixed
                assets
            
            
            **-**
            
            
            (1,192
            )Current
                assets
            
            
            **(344**
            **)**
            
            -Long-term
                obligations
            
            
            **(1,805**
            **)**
            
            -Accounts
                payable and accrued liabilities
            
            
            **(784**
            **)**
            
            (115
            )Total
                gross future income tax liabilities
            
            
            **(14,577**
            **)**
            
            (9,370
            )Future
                income tax assets
            
            **$**
            **9,099**
            
            $
            14,439




At
      December 31, 2006, the Corporation had accumulated net operating losses
      carried forward of approximately $56,500 (2005 - $43,013) for tax purposes,
      which expire as follows:





2014
            
            **$**
            **13,491**2015
            
            
            **34,937**2026
            
            
            **8,072****$**
            **56,500**








22





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)






**8.**  **Income
      taxes (continued):**




In
      2006
      and 2005, the Corporation made no provision for income taxes, or additional
      foreign taxes, on the cumulative unremitted earnings of foreign subsidiaries,
      which were approximately $240,000 as at December 31, 2006 (2005 - $176,000),
      because the Corporation did not intend to repatriate these earnings in the
      foreseeable future. These earnings could become subject to additional taxes
      if
      remitted as dividends or if the Corporation sells its interests in the
      affiliates. The Corporation cannot practically estimate the amount of additional
      taxes that might be payable on the unremitted earnings.






**9.**  **Accounts
      payable and accrued liabilities:**


**2006**
            
            2005Trade
                accounts payable
            
            **$**
            **13,430**
            
            $
            9,309Payroll
                and employee benefits (a)
            
            
            **25,958**
            
            
            20,234Taxes
                payable
            
            
            **7,749**
            
            
            4,476Accrued
                sales, marketing and advertising liabilities
            
            
            **6,370**
            
            
            4,030Professional
                fees
            
            
            **5,599**
            
            
            1,506Dividends
                payable
            
            
            **1,677**
            
            
            1,640Other
                accrued liabilities
            
            
            **13,524**
            
            
            13,602**$**
            **74,307**
            
            $
            54,797




(a) As
        at
        December 31, 2006, payroll and employee benefits include compensation expense
        accrued of $2,950 (2005 - nil) relating to SARs granted pursuant to phantom
        equity agreements.




























23





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **10.** **Long-term
        obligations:**





**2006**
            
            2005Convertible
                notes (a)
            
            **$**
            **229,436**
            
            $
            222,186Deferred
                  gain
                  on termination of interest rate swap C$4.9 million (2005 - C$6.9
                  million)
                  (b)
            
            
            **4,231**
            
            
            5,871Currency
                and interest rate swap (c)
            
            
            **6,757**
            
            
            17,410Accrued
                benefit liability (note 14(b))
            
            
            **26,324**
            
            
            25,843Other
                long-term obligations
            
            
            **2,437**
            
            
            7,368**269,185**
            
            
            278,678Less
                amounts due within one year
            
            
            **(2,350**
            **)**
            
            (4,853
            )**$**
            **266,835**
            
            $
            273,825





**(a)** **Convertible
      notes:**




In
      June
      2004, FSHI issued $250,000 principal amount of convertible senior notes. The
      net
      proceeds of the issuance, after deducting offering expenses and underwriters'
      commission, were $241,332. These notes bear interest at the rate of 1.875%
      per
      annum (payable semi-annually in arrears on January 30 and July 30 to
      holders of record on January 15 and July 15, beginning January 30,
      2005), and will mature on July 30, 2024, unless earlier redeemed or repurchased.
      The notes are convertible into LVS of FSHI at an initial conversion rate of
      13.9581 shares per each one thousand US dollar principal amount (equal to a
      conversion price of approximately $71.64 per LVS, subject to adjustments in
      certain events, in circumstances in which (i) the LVS have traded for more
      than
      130% of the conversion price for a specified period, (ii) the notes have a
      trading price of less than 95% of the market price of the LVS into which they
      may be converted for a specified period, (iii) FSHI calls the notes for
      redemption, or (iv) specified corporate transactions or a "fundamental change"
      occur. In connection with a "fundamental change" on or prior to July 30,
      2009, such as the implementation of a proposal to take FSHI private (note 17),
      on conversion holders of notes will be entitled to receive additional LVS having
      a value equal to the aggregate of the make whole premium they would have
      received if the notes were purchased plus an amount equal to any accrued but
      unpaid interest. FSHI may choose to settle conversion (including any make whole
      premium) in LVS, cash or a combination of LVS and cash (at its
      option).





24





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **10.** **Long-term
        obligations (continued):**




On
      or
      after August 4, 2009, FSHI may (at its option) redeem all or a portion of the
      notes, in whole or in part, for cash at 100% of their principal amount, plus
      any
      accrued and unpaid interest. On each of July 30, 2009, 2014 and 2019, holders
      may require FSHI to purchase all or a portion of their notes at 100% of their
      principal amount, plus any accrued and unpaid interest. FSHI will pay cash
      for
      any notes so purchased on July 30, 2009. Repurchases made by FSHI on July 30,
      2014 and July 30, 2019 may be made (at its option) in cash, LVS or a combination
      of cash and LVS.




Upon
      the occurrence of certain designated events, FSHI will be required to make
      an
      offer to purchase the notes at 100% of their principal amount plus any accrued
      and unpaid interest, and, in the case of a "fundamental change" that is also
      a
      "change of control" occurring on or before July 30, 2009, such as the
      implementation of a proposal to take FSHI private (note 17), FSHI also will
      pay
      a make whole premium. FSHI may choose to pay the purchase price (including
      any
      make whole premium) for notes in respect of which its offer is accepted in
      (at
      its option) cash, LVS, securities of the surviving entity (if FSHI is not the
      surviving corporation), or a combination of cash and shares or
      securities.




In
      accordance with Canadian generally accepted accounting principles, the notes
      were bifurcated in the consolidated financial statements into a debt component
      (representing the principal value of a bond of $211,754, which was estimated
      based on the present value of a $250,000 bond maturing in 2009, yielding 5.33%
      per annum, compounded semi-annually, and paying a coupon of 1.875% per annum)
      and an equity component (representing the value of the conversion feature of
      the
      notes). Accordingly, net proceeds were allocated $211,754 to long-term
      obligations and $36,920 to shareholders' equity. The offering expenses and
      underwriters' commission of $7,019 relating to the debt component were recorded
      in "Other assets". The debt component of the notes will increase for accounting
      purposes at the compounded interest rate of 5.33%, less the coupon paid of
      1.875% per annum.




**(b)** **Interest
      rate swap:**




In
      connection with the issuance of convertible senior notes, FSHI entered into
      an
      interest rate swap agreement to July 30, 2009 with an initial notional
      amount of $211,754, pursuant to which FSHI had agreed to receive interest at
      a
      fixed rate of 5.33% per annum and pay interest at six-month LIBOR, in arrears,
      plus 0.4904%. FSHI had designated the interest rate swap as a fair value hedge
      of the notes. As a result, FSHI accounted for the payments under the interest
      rate swap to the date of termination on an accrual basis, which resulted in
      an
      effective interest rate (for accounting purposes) on the hedged notes of
      six-month LIBOR, in arrears, plus 0.4904%.





25





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **10.** **Long-term
        obligations (continued):**




In
      October 2004, FSHI terminated the interest rate swap agreement and received
      proceeds of $9,000. The book value of the interest rate swap at the date of
      termination was C$2.0  million
      ($1,617). The gain of C$9.3 million ($7,383) was deferred for accounting
      purposes and is being amortized over the period to July 30, 2009, which would
      have been the maturity date of the swap agreement. During 2006, C$2.0 million
      ($1,688) (2005 - C$1.9 million ($1,579)) of the deferred gain was
      amortized and recorded as a reduction of interest expense.




**(c)** **Currency
      and interest rate swap:**




In
      April 2005, FSHI entered into a currency and interest rate swap agreement to
      July 30, 2009, pursuant to which FSHI had agreed to receive interest at a fixed
      rate of 5.33% per annum on an initial notional amount of $215,842 and pay
      interest at a floating rate of six-month Canadian bankers' acceptance, in
      arrears, plus 1.1% per annum on an initial notional amount of C$269.2 million.
      The notional amount of the swap will increase semi-annually in conjunction
      with
      the increase in the debt component of the convertible senior notes. On July
      30,
      2009, FSHI had agreed to pay C$311.8 million and receive $250,000 under the
      swap. FSHI had designated the swap as a fair value hedge of the convertible
      senior notes. As a result, FSHI accounted for the payments under the interest
      rate swap on an accrual basis, which resulted in an effective interest rate
      (for
      accounting purposes) on the hedged notes of six-month Canadian bankers'
      acceptance, in arrears, plus 1.1%. In addition, foreign exchange translation
      gains and losses on the notional amount of the swap were accrued on a monthly
      basis under "Long-term obligations" on the balance sheet and recognized in
      "Other expenses, net", offsetting the respective monthly translation losses
      and
      gains recognized on the convertible senior notes.




In
      December 2006, FSHI terminated 80% of the notional amount of the currency
      component of the swap relating to the final exchange of principal by making
      a
      payment of $21,000. The book value of the terminated portion of the swap at
      the
      date of termination was C$19.5 million ($16,980). The loss of C$4.6 million
      ($4,020) was deferred for accounting purposes and recorded in “Other assets”,
      and is being amortized over the period to July 30, 2009, which is the maturity
      date of the swap agreement. During 2006, $87 of the deferred loss was amortized
      and recorded as a foreign exchange loss.




















26







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **10.****Long-term
        obligations (continued):**




Under
      the amended swap, FSHI will pay C$62.4 million and receive $50,000 on July
      30,
      2009. There were no other changes to the original swap, including the notional
      amounts relating to the exchange of interest.




As
      a
      result of the partial termination of the swap, FSHI no longer met all the
      conditions for designating the amended swap as a fair value hedge of the
      convertible senior notes and, therefore, ceased hedge accounting as at this
      date. The unrealized loss relating to the remaining notional amount of the
      currency component of the swap of C$1.2 million ($1,005) and the unrealized
      loss
      relating to the notional amount of the interest component of the swap of C$2.1
      million ($1,794) were deferred for accounting purposes and recorded in “Other
      assets”. These deferred losses are being amortized over the period to July 30,
      2009. During 2006, $22 of the deferred loss relating to the currency component
      of the swap was amortized and recorded as a foreign exchange loss and $39 of
      the
      deferred loss relating to the interest component of the swap was amortized
      and
      recorded as interest expense.




The
      amended swap is being marked-to-market on a monthly basis and accrued under
      “Long-term obligations”, with the resulting changes in fair values being
      recognized in “Other expenses, net”. During 2006, a gain of $752 was recognized
      on the marked-to-market valuation.




Pursuant
      to a cross default provision, a default under the bank credit facility, in
      turn,
      would cause a default under the currency and interest rate swap agreement (notes
      10(d) and 17).




**(d)** **Bank
      credit facility:**




The
      Corporation has a committed bank credit facility of $125,000, which expires
      in
      September 2007. Borrowings under this credit facility bear interest at LIBOR
      plus a spread ranging between 0.875% and 2.25% in respect of LIBOR-based
      borrowings (prime rate plus a spread ranging between nil and 1.25% in respect
      of
      prime rate borrowings), depending upon certain criteria specified in the loan
      agreement. As at December 31, 2006 and 2005, no amounts were borrowed under
      this
      credit facility. However, approximately $1,600 of letters of credit were issued
      under this credit facility as at December 31, 2006. No amounts have been drawn
      under these letters of credit.










27


**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)






**10.** **Long-term
      obligations (continued):**




The
      bank credit facility contains certain covenants, which require the Corporation
      to maintain certain financial ratios. In addition, the bank credit facility
      contains additional covenants, which restrict the Corporation's ability to
      borrow funds ranking superior to these obligations and to undertake certain
      types of major transactions. The Corporation was in compliance with these
      covenants during 2006 and 2005. In addition, the lenders may require repayment
      of the bank credit facility on a change of control of FSHI
      (note17).




**(e)** **Interest
      expense:**


**2006**
            
            2005Interest
                on long-term obligations
            
            **$**
            **(14,434**
            **)**
            $
            (11,103
            )Other
                interest expense
            
            
            **(476**
            **)**
            
            (442
            )**$**
            **(14,910**
            **)**
            $
            (11,545
            )




**11.****Shareholders'
      equity:**




**(a)** **Capital
      stock:**




Authorized:




3,725,698 Variable
      Multiple Voting Shares ("VMVS"), entitling the holder to that number of votes
      that results in the aggregate votes attaching to the VMVS, representing
      approximately 65% of the votes attaching to the VMVS and the LVS, in aggregate,
      which, at December 31, 2006, was 16.45 votes (2005 - 16.09 votes) per VMVS.
      Changes in the number of votes attaching to the VMVS necessary to maintain
      this
      level will occur concurrently with the issue of additional LVS.




The
      VMVS rank equally with the LVS as to distributions on liquidation, dissolution
      or winding-up of FSHI .
      Dividends declared and paid on the VMVS are in amounts per share equal to 50%
      of
      the dividends per share declared and paid on the LVS, regardless of whether
      the
      number of votes attaching to the VMVS is further increased.










28







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **11.** **Shareholders'
        equity (continued):**




VMVS
      are convertible into LVS on a one-for-one basis at the option of the holder.
      The
      shares automatically convert into LVS upon any transfer outside of the family
      of
      Mr. Isadore Sharp, the Chief Executive Officer of FSHI, except a transfer of
      a
      majority of the shares to a purchaser who makes an equivalent offer to purchase
      all outstanding VMVS and LVS.




Unlimited LVS,
      voting (one vote per share) and ranking equally with the VMVS as to
      distributions on liquidation, dissolution or winding-up of FSHI .




Unlimited First
      Preference Shares and Second Preference Shares, issuable in series, non-voting
      and ranking prior to all other shares with respect to payment of dividends
      and
      distributions on liquidation or winding-up of FSHI .
      The
      dividend rate, redemption and conversion rights, if any, are to be determined
      prior to issuance by the directors of FSHI .




Issued:


**VMVS**
            
            **LVS****Stated**
            
            
            
            **Stated****Shares**
            
            **value**
            
            **Shares**
            
            **value**
            
            **Total**December
                31, 2004
            
            
            3,725,698
            
            $
            26
            
            
            32,882,948
            
            $
            248,954
            
            $
            248,980Options
                exercised
            
            
            -
            
            
            -
            
            
            32,380
            
            
            1,450
            
            
            1,450December
                31, 2005
            
            
            3,725,698
            
            
            26
            
            
            32,915,328
            
            
            250,404
            
            
            250,430Options
                exercised
            
            
            -
            
            
            -
            
            
            746,310
            
            
            37,146
            
            
            37,146**December
                31, 2006**
            
            
            **3,725,698**
            
            **$**
            **26**
            
            
            **33,661,638**
            
            $
            287,550
            
            **$**
            **287,576**




An
      amount of $5,708 relating to options exercised in 2004 was received by the
      Corporation in 2005.





29





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)
 
   **11.** **Shareholders'
        equity (continued):**




Pursuant
      to an agreement approved by the shareholders of FSHI at a special meeting held
      on December 19, 1989, FSHI and its principal operating subsidiary, FSHL,
      have agreed that FSHL will make a payment to Mr. Isadore Sharp on an
      arm's-length sale of control of FSHI (note 17). The first portion of the payment
      will be an amount equal to 5% of the product of (i) the total number of VMVS
      and
      LVS outstanding at the time of the sale, and (ii) the per share consideration
      received by holders of LVS minus C$6.30. If the per share consideration received
      by holders of LVS on the sale is equal to or more than 125% of the weighted
      average price of LVS traded in board lots on The Toronto Stock Exchange during
      the period commencing six months and ending one month before the first public
      announcement of the sale, Mr. Sharp will be entitled to an additional payment
      equal to 5% of the product of (i) the total number of VMVS and LVS outstanding
      at the time of the sale, and (ii) the per share consideration received by
      holders of LVS minus C$20.84.




The
      right to receive the two payments may be transferred among members of Mr.
      Sharp's family, their holding companies and trusts. Upon the death of Mr. Sharp,
      the right to the payments passes to his legal or personal representatives,
      heirs
      or permitted assigns.




**(b)** **Stock
      option plan:**




Under
      the Corporation's stock option plan, eligible directors, executives and
      employees may be granted options to acquire LVS at a price which is not less
      than the weighted average price of board lots traded on The Toronto Stock
      Exchange in the five trading days preceding the date of grant. The options
      are
      not transferable, have a term of 10 years, and generally vest in varying
      proportions on the first, second, third, fourth and fifth anniversaries of
      the
      date of grant (note 17). All vested options must be exercised within specified
      periods in the event of retirement, termination other than for cause (including
      as a result of a change of control of FSHI ),
      incapacity or death of the director, executive or employee.















30






**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)


11. **Shareholders'
      equity (continued):**




Changes
      in stock options for the years ended December 31, 2006 and 2005 were as
      follows:


**Options**
            
            
            **Weighted
                average**
            
            **Available****outstanding**
            
            
            **exercise
                price**
            
            **for
                grant**Balance
                at December 31, 2004
            
            
            4,575,383
            
            
            
            
            C$  
                  59.32
            
            
            563,626Exercised
            
            
            (32,380
            )
            
            
            
            55.22
            
            
            -Cancelled
            
            
            (57,540
            )
            
            
            
            67.53
            
            
            57,540Balance
                at December 31, 2005
            
            
            4,485,463
            
            
            
            
            59.25
            
            
            621,166Granted
            
            
            41,650
            
            
            
            
            62.61
            
            
            (41,650
            )Exercised
            
            
            (746,310
            )
            
            
            
            57.99
            
            
            -Cancelled
            
            
            (114,724
            )
            
            
            
            71.83
            
            
            114,724**Balance
                at December 31, 2006**
            
            
            **3,666,079**
            
            
            
            
            **C$  
                  59.70**
            
            
            **694,240**




Information
      relating to stock options outstanding at December 31, 2006 was as
      follows:


**Options
                outstanding**
            
            **Options
                exercisable****Weighted**
            
            **Weighted**
            
            
            
            **Weighted****average**
            
            **average**
            
            
            
            **average****Range
                of**
            
            **Options**
            
            **remaining**
            
            **exercise**
            
            **Options**
            
            **exercise****exercise
                prices**
            
            **outstanding**
            
            **contractual
                life**
            
            **price**
            
            **exercisable**
            
            **price**C$28.10
                - C$39.61
            
            
            260,110
            
            
            2.5
                years
            
            
            C$
                33.91
            
            
            224,990
            
            
            C$
                33.16C$40.51
                - C$50.23
            
            
            1,143,094
            
            
            2.9
                years
            
            
            47.46
            
            
            998,974
            
            
            47.44C$53.28
                - C$67.07
            
            
            1,028,359
            
            
            3.6
                years
            
            
            55.34
            
            
            885,999
            
            
            54.91C$68.80
                - C$84.00
            
            
            654,200
            
            
            5.4
                years
            
            
            73.38
            
            
            329,900
            
            
            75.64C$86.97
                - C$108.14
            
            
            580,316
            
            
            3.5
                years
            
            
            87.68
            
            
            578,116
            
            
            87.69**C$28.10
                - C$108.14**
            
            
            **3,666,079**
            
            
            **3.6
                years**
            
            
            **C$
                59.70**
            
            
            **3,017,979**
            
            
            **C$
                59.36**




The
      Corporation uses the fair value-based method for all employee stock options
      granted or modified on or after January 1, 2003. Stock options to acquire 41,650
      LVS were granted in 2006 at a weighted average exercise price of C$62.61
      ($53.65). The fair value of stock options granted in 2006 was estimated using
      a
      Black-Scholes option pricing model with the following assumptions: risk-free
      interest rates ranging from 4.09% to 4.17%; semi-annual dividend per LVS of
      C$0.055; volatility factor of the expected market price of LVS of 27%; and
      expected lives of the options ranging between four and seven years, depending
      on
      the level of the employee who was granted stock options. For the options granted
      in 2006, the weighted average fair value of the options at the grant dates
      was
      C$21.49 ($18.41). For purposes of stock option expense and pro forma
      disclosures, the estimated fair value of the options is amortized to
      compensation expense over the options' vesting period. There were no stock
      options granted in 2005.










31







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)






**11.Shareholders'
      equity (continued):**




Pro
      forma disclosure is required to show the effect of the application of the fair
      value-based method to employee stock options granted during 2002, which were
      not
      accounted for using the fair value-based method. For the years ended December
      31, 2006 and 2005, if the Corporation had applied the fair value-based method
      to
      options granted during 2002, the Corporation's net earnings (loss) and basic
      and
      diluted earnings (loss) per share would have been reduced to the pro forma
      amounts indicated below:


**2006**
            
            2005Stock
                option expense included in compensation expense
            
            **$**
            **(2,305**
            **)**
            $
            (2,333
            )Net
                earnings (loss), as reported
            
            **$**
            **50,287**
            
            $
            (28,223
            )Additional
                expense that would have been recorded if all outstanding stock options
                granted during 2002 had been expensed
            
            
            **(2,579**
            **)**
            
            (1,626
            )Pro
                forma net earnings (loss)
            
            **$**
            **47,708**
            
            $
            (29,849
            )Earnings
                (loss) per share:Basic,
                as reported
            
            **$**
            **1.36**
            
            $
            (0.77
            )Basic,
                pro forma
            
            
            **1.29**
            
            
            (0.81
            )Diluted,
                as
                reported
            
            
            **1.33**
            
            
            (0.77
            )Diluted,
                pro
                forma
            
            
            **1.27**
            
            
            (0.81
            )




**(c)** **Contributed
      surplus:**




Changes
      in contributed surplus for the years ended December 31, 2006 and 2005 were
      as
      follows **:**


**2006**
            
            2005Contributed
                surplus, beginning of year
            
            **$**
            **10,861**
            
            $
            8,088Stock
                option expense (b)
            
            
            **2,305**
            
            
            2,333Adjustment
                relating to stock options exercised
            
            
            **(840**
            **)**
            
            (5
            )Restricted
                stock program
            
            
            **(445**
            **)**
            
            445Contributed
                surplus, end of year
            
            **$**
            **11,881**
            
            $
            10,861





32




**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)






**11.** **Shareholders'
      equity (continued):**




**(d)**  **Earnings
      (loss) per share:**




Basic
      earnings (loss) per share is calculated by dividing net earnings (loss) by
      the
      weighted average number of VMVS and LVS outstanding during the year. Potentially
      issuable LVS are excluded from the calculation of basic earnings (loss) per
      share, but are included in the calculation of diluted earnings (loss) per share
      by application of the "treasury stock method", which takes into account the
      dilution relating to LVS issuable under the Corporation's stock option plan,
      and
      by application of the "if-converted method", which takes into account the
      potential dilution relating to the conversion of the Corporation's convertible
      notes.




A
      reconciliation of net earnings (loss) and the weighted average number of VMVS
      and LVS used to calculate basic earnings (loss) per share and diluted earnings
      (loss) per share is as follows:


**2006**
              
              2005**Net
                  earnings**
              
              **Shares**
              
              Net
                  loss
              
              SharesBasic
                  earnings (loss) per share amounts
              
              **$**
              **50,287**
              
              
              **36,843,367**
              
              $
              (28,223
              )
              
              36,628,206Effect
                  of assumed dilutive conversions:Stock
                  option plan
              
              
              -
              
              
              **886,929**
              
              
              -
              
              
              -Diluted
                  earnings (loss) per share amounts
              
              **$**
              **50,287**
              
              
              **37,730,296**
              
              $
              (28,223
              )
              
              36,628,206




The
      diluted earnings (loss) per share calculation excluded the effect of the assumed
      conversions of 804,436 stock options to LVS, under the Corporation's stock
      option plan, during the year ended December 31, 2006, as the inclusion of these
      conversions resulted in an anti-dilutive effect.   As the Corporation
      incurred a net loss for the year ended December 31, 2005, all 4,485,463
      outstanding stock options were excluded from the calculation of diluted loss
      per
      share for 2005. In addition, the dilution relating to the assumed conversion
      of
      convertible senior notes to 3,489,525 LVS has been excluded from the
      calculation, as the inclusion of this conversion resulted in an anti-dilutive
      effect for the years ended December 31, 2006 and 2005.





33







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)






**11.** **Shareholders'
      equity (continued):**




**(e)   Equity adjustment from foreign currency
      translation:**




Changes
      in equity adjustment from foreign currency translation for the years ended
      December 31, 2006 and 2005 were as follows:


**2006**
            
            2005Balance,
                beginning of year
            
            **$**
            **87,774**
            
            $
            98,783Changes
                in exchange rates used to translate the Corporation's net investment
                in
                foreign self-sustaining subsidiaries
            
            
            **19,040**
            
            
            (29,393
            )Changes
                arising from US dollar reporting currency
            
            
            **(2,316**
            **)**
            
            18,384Balance,
                end of year
            
            **$**
            **104,498**
            
            $
            87,774




**12.** **Other
      expenses, net:**


**2006**
            
            2005Costs
                related to pending arrangement transaction (note 17)
            
            **$**
            **(3,452**
            **)**
            $
            -Asset
                provisions and write-downs (a)
            
            
            **(3,074**
            **)**
            
            (32,284
            )Foreign
                exchange gain (loss) (note 13)
            
            
            **1,343**
            
            
            (24,632
            )Unrealized
                swap derivative gain (note 10(c))
            
            
            **752**
            
            
            -Gain
                on disposition of assets (b)
            
            
            **620**
            
            
            3,175Loss
                on retirement benefit plan transition (c) (note 14(b))
            
            
            **-**
            
            
            (35,467
            )**$**
            **(3,811**
            **)**
            $
            (89,208
            )




(a) Asset
      provisions and write-downs of $3,074 for the year ended December 31, 2006
      relates primarily to a write-down on investments in hotel partnerships and
      corporations. In 2005, it included a provision for loss of $8,829 on long-term
      receivables, a write-down of $17,853 on investments in hotel partnerships and
      corporations, a write-down of $5,105 on investment in management contracts
      and
      other provisions of $497.





















34






**FOUR
      SEASONS HOTELS INC.**


**Notes
      to Consolidated Financial Statements (continued)**




Years
      ended December 31, 2006 and 2005


(In
      thousands of US dollars except per share amounts)









**12.** **Other
      expenses, net (continued):**




(b)
            Gain
                on disposition of assets for the year ended December 31, 2006 includes
                a
                net gain of $620 (2005 - net gain of $9,337) on the dispositions
                of
                investments in hotel partnerships and corporations and the settlement
                of
                long-term receivables and, in 2005, also included a gain on the exit
                from
                certain management contracts. In 2005, it also included a loss of
                $6,162
                on the assignment of leases and the sale of related assets of The
                Pierre
                (note 14(c)(i)).




(c) For
      the
      year ended December 31, 2005, loss on retirement benefit plan transition
      includes past service costs recognized on curtailment of $1,595, actuarial
      loss
      recognized on plan settlement of $1,497, realignment of pension liability
      between the Corporation and managed hotels and resorts of $12,331, costs
      relating to settlement with employees of $10,321 and other settlement costs
      of
      $9,723.




**13.** **Foreign
      exchange gain (loss):**




During
      2006, the Corporation recorded a net foreign exchange gain of $1,343 (2005
      - net
      foreign exchange loss of $24,632), which is included in “Other expenses, net”.
      The net foreign exchange gain in 2006 and the net foreign exchange loss in
      2005
      related primarily to the foreign currency translation gains and losses on
      unhedged net monetary asset and liability positions, primarily in US dollars,
      pounds sterling, euros and Australian dollars, and local currency foreign
      exchange gains and losses on net monetary assets incurred by the Corporation’s
      designated foreign self-sustaining subsidiaries.




As
      at
      December 31, 2006, the Corporation has foreign exchange forward contracts in
      place to sell forward $39,068 of US dollars to receive Canadian dollars at
      a
      weighted average forward exchange rate of 1.11 Canadian dollars to a US dollar
      maturing over the period to April 2008 (2005 - $21,189 at a weighted average
      forward exchange rate of 1.16 maturing over the period to June 2006). The
      Corporation entered into these contracts to protect itself in the event of
      a
      strengthening Canadian currency as it relates to general and administrative
      expenditures incurred by the Corporation, which are denominated primarily in
      Canadian dollars. These foreign exchange forward contracts are being
      marked-to-market on a monthly basis with the resulting changes in fair value
      being recorded as a foreign exchange gain or loss. This resulted in a foreign
      exchange loss of $544 being recorded in 2006 (2005 - foreign exchange loss
      of
      $127).





35





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies:**




**(a)** **Lease
      commitments:**




The
      Corporation has entered into lease agreements for certain hotel properties
      and
      corporate offices for periods up to the year 2054.




(i) Future
      minimum lease payments for Four Seasons Hotel Vancouver and certain corporate
      offices (but exclusive of any contingent rentals, occupancy costs, and lease
      commitments relating to Four Seasons Hotel London, which is discussed below),
      are as follows:


2007
            
            **$**
            **4,824**2008
            
            
            **3,815**2009
            
            
            **3,206**2010
            
            
            **3,012**2011
            
            
            **2,780**Subsequent
                to 2011
            
            
            **20,266****$**
            **37,903**




(ii) The
      Corporation is the tenant of the land and premises constituting Four Seasons
      Hotel London pursuant to the terms of a lease (the "FS Lease") expiring on
      January 28, 2054. The FS Lease is a continuing obligation which survived
      the sale by the Corporation of its ownership interest in the hotel. The
      Corporation is also a party to a sublease of the hotel with a third party
      (the "Sub-Tenant") on whose behalf the Corporation manages the hotel.
      Currently, ₤3.9 million of annual rent is payable by the Sub-Tenant to the
      Corporation pursuant to the sublease and is payable out of the operating
      accounts of the hotel. The same amount of rent is payable by the Corporation
      under the FS Lease.





36




**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies (continued):**




Historically,
      hotel operating cash flow has been more than sufficient to meet the rent
      obligation. The Corporation has not been required to make payment of any amount
      of rent under the FS Lease that has not first been paid to the Corporation
      under
      the sublease. In the event of a non-payment of rent under the sublease, the
      Sub-Tenant would forfeit the sublease. The ongoing management of the hotel
      by
      the Corporation is subject to a non-disturbance agreement with the senior lender
      of the Sub-Tenant. Future minimum lease payments of the hotel, exclusive of
      any
      contingent rentals and occupancy costs, are as follows:


2007
            
            **$**
            **7,828**2008
            
            
            **7,836**2009
            
            
            **7,836**2010
            
            
            **7,836**2011
            
            
            **7,836**Subsequent
                to 2011
            
            
            **329,782****$**
            **368,954**




**(b)** **Retirement
      benefit plan commitments:**




The
      Corporation maintains an unfunded multiemployer, non-contributory, defined
      benefit retirement plan on behalf of the Corporation and the owners of certain
      managed properties. This plan provides retirement benefits for certain senior
      executives of the Corporation, as well as for hotel and resort general managers,
      based on years and level of service and annual salary.




During
      2005, the Corporation transitioned the majority of its senior executives and
      hotel and resort general managers from this unfunded defined benefit retirement
      plan to a fully funded retirement plan based on a defined contribution format.
      The change in the retirement plan was made to improve the certainty and
      predictability related to the cost of the retirement benefits.










37





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies (continued):**




The
      transition to this defined contribution retirement plan resulted in a cash
      funding by the Corporation in 2005 of $36,029 and a pre-tax accounting charge
      of
      $35,467, which is recorded in "Other expenses, net". During the year ended
      December 31, 2006, the Corporation incurred a pension expense of $2,160 (2005
      -
      $2,243) related to the defined contribution retirement plan.




The
      Corporation continues to maintain the unfunded multiemployer, non-contributory,
      defined benefit retirement plan on behalf of four active executives and 14
      retired executives and general managers, as well as the owner of two of its
      managed properties. As at December 31, 2006, the Corporation has an accrued
      defined benefit liability of $26,324 (2005 - $25,843) in respect of this plan,
      which is included in "Long-term obligations". This accrued defined benefit
      liability excludes the defined benefit obligation of the owner of the two
      managed properties for their current general managers.




The
      measurement date for the accrued benefit obligation was December 31, 2006 (2005
      - December 31, 2005). The Corporation uses the corridor method to amortize
      actuarial gains and losses (such as changes in actuarial assumptions and
      experience gains and losses). Under the corridor method, amortization is
      recorded only if the accumulated net actuarial gains or losses exceed 10% of
      the
      accrued benefit obligation.




The
      transition to the defined contribution retirement plan in 2005 resulted in
      both
      a curtailment and a settlement of defined benefit obligations and the
      Corporation accounted for the curtailment before it accounted for the
      settlement. The Corporation amortizes past service costs from plan amendments
      on
      a straight-line basis over the expected average remaining service period of
      employees who were active on the day of the amendment.










38




**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies (continued):**




Information
      relating to the defined benefit retirement plan for the years ended December
      31,
      2006 and 2005 based on projections of employees' compensation levels to the
      date
      of retirement were as follows:


**2006**
            
            2005Accrued
                benefit obligation, beginning of year
            
            **$**
            **31,377**
            
            $
            58,702Change
                in accrued benefit obligation:Service
                cost
            
            
            **182**
            
            
            1,927Past
                service cost
            
            
            **-**
            
            
            3,507Interest
                cost
            
            
            **1,485**
            
            
            3,401Benefits
                paid
            
            
            **(1,331**
            **)**
            
            (1,129
            )Actuarial
                loss
            
            
            **(980**
            **)**
            
            15,712Curtailment
            
            
            **-**
            
            
            (14,720
            )Plan
                settlement
            
            
            **-**
            
            
            (37,834
            )Foreign
                currency exchange rate changes
            
            
            **29**
            
            
            1,811Accrued
                benefit obligation, end of year
            
            
            **30,762**
            
            
            31,377Unamortized
                past service cost
            
            
            **(953**
            **)**
            
            (1,040
            )Unamortized
                actuarial loss for changes in assumptions
            
            
            **(3,090**
            **)**
            
            (4,099
            )Liability
                belonging to managed properties
            
            
            **(395**
            **)**
            
            (395
            )Accrued
                benefit liability, end of year
            
            **$**
            **26,324**
            
            $
            25,843




Under
      the defined benefit retirement plan, the benefits expected to be paid in each
      of
      the next five years, and in the aggregate for the five fiscal years thereafter,
      to retired employees of the Corporation, including benefits attributable to
      estimated future employee service, are approximately: 2007 - $1,300; 2008 -
      $1,300; 2009 - $1,500; 2010 - $1,600; 2011 - $1,600; 2012 to 2016 -
      $14,000.





39





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies (continued):**


**2006**
            
            2005Assumptions
                as of December 31:Discount
                rates
                - benefit obligation
            
            
            **4.75**
            **%**
            
            4.75
            %Discount
                rates
                - benefit expense
            
            
            **4.75**
            **%**
            
            6.00
            %Rates
                of increase in compensation levels - benefit obligation
            
            
            **4.00**
            **%**
            
            4.00
            %Rates
                of increase in compensation levels - benefit expense
            
            
            **4.00**
            **%**
            
            3.00
            %Components
                of defined benefit expense before allocation:Service
                cost
            
            **$**
            **182**
            
            $
            1,927Past
                service cost
            
            
            **-**
            
            
            3,507Interest
                cost
            
            
            **1,485**
            
            
            3,401Actuarial
                loss
                (gain)
            
            
            **(980**
            **)**
            
            15,712Curtailment
            
            
            **-**
            
            
            (14,720
            )Elements
                of employee future benefit costs before adjustments to recognize
                the
                long-term nature of employee future benefit costs
            
            
            **687**
            
            
            9,827Difference
                between actuarial loss recognized for the year and actual actuarial
                loss
                on accrued benefit
            
            
            **1,039**
            
            
            (15,435
            )Difference
                between amortization of past service costs for the year and actual
                plan
                amendments
            
            
            **90**
            
            
            (3,499
            )Actuarial
                loss recognized on curtailment
            
            
            **-**
            
            
            14,720Actuarial
                loss recognized on plan settlement
            
            
            **-**
            
            
            5,930Past
                service cost recognized on curtailment
            
            
            **-**
            
            
            2,467Expense
                belonging to managed properties
            
            
            **-**
            
            
            (7,992
            )Defined
                benefit expense
            
            **$**
            **1,816**
            
            $
            6,018





40


**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)






**14.** **Commitments
      and contingencies (continued):**




The
      Corporation incurred a defined benefit expense for the year ended December
      31,
      2006 of $1,816 (2005 - $6,018). In 2005, defined benefit expense included past
      service cost recognized on curtailment of $1,595, actuarial loss recognized
      on
      plan settlement of $1,497 and other costs of $925, all of which are included
      in
      "Loss on retirement benefit plan transition" (note 12(c)), and pension
      expense of $2,001.




**(c)** **Guarantees,
      commitments and indemnifications:**




(i) Guarantees
      and commitments:




As
      at
      December 31, 2006, the Corporation had provided certain guarantees in connection
      with properties under its management. These include guarantees in respect of
      four projects totalling a maximum of approximately $21,900, as well as a
      guarantee of $300 for relocation costs for certain employees. The Corporation
      has a lease guarantee in respect of Four Seasons Hotel Prague of approximately
      €0.9 million. To the extent it is called upon to honour any one of these
      guarantees, the Corporation generally has either the right to be repaid from
      hotel operations and/or has various forms of security or recourse to the owner
      of the property.




In
      addition, in 2006, the Corporation also had four other commitments totalling
      approximately $11,200 to four properties under its management. During 2005,
      the
      Corporation assigned its leases and sold the related assets of The Pierre.
      As
      part of the sale, in accordance with statutory provisions, the purchaser agreed
      to assume a portion of the Corporation's contribution history with a
      multiemployer pension fund for the unionized hotel employees (the "NYC
      Pension"). This permitted the Corporation to withdraw from the NYC Pension
      without incurring a withdrawal liability estimated at $10,700.




If
      the
      purchaser withdraws as a result of the lease cancellation by the landlord in
      certain circumstances in 2008 or 2011, the Corporation has agreed to indemnify
      the purchaser for that portion of the withdrawal liability relating to their
      assumption of the Corporation's contribution history. The amount of any
      potential future liability resulting from this indemnity is not determinable
      at
      this time as it would be based upon future events related to the NYC
      Pension.





41







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies (continued):**




If
      the
      purchaser withdraws from the NYC Pension prior to 2011 in any circumstances
      other than those described above and does not pay its withdrawal liability,
      the
      Corporation remains secondarily liable for its withdrawal liability up to an
      amount of $10,700. The Corporation has been indemnified by the purchaser for
      any
      such liability.




The
      Corporation believes that the likelihood of it being required to make a payment
      is remote, and no amount has been recorded as at December 31, 2006 in respect
      of
      a potential NYC Pension withdrawal liability.




The
      Corporation does not expect to fund any of these commitments during 2007. The
      Corporation's assessment of its potential liability for such matters could
      change as a result of, among other things, the associated risks and
      uncertainties.




(ii) Disposition
      indemnification arrangements:




In
      connection with the sale of all or a part of its interest in a property, the
      Corporation and its subsidiaries may agree to provide an indemnify against
      claims relating to breaches of specific covenants or representations and
      warranties. The maximum amount of the indemnification in these transactions
      is
      generally limited to the purchase price paid for the interest being purchased.
      The nature of these indemnities prevents the calculation of an exact amount
      that
      may be payable to the indemnified parties.




(iii) Director
      and officer indemnification arrangements:




To
      the
      extent permitted by law, the Corporation and its subsidiaries indemnify
      individuals that are, or have been, directors or officers against certain claims
      that may be made against them as a result of their being, or having been, a
      director or officer at the request of the Corporation or its subsidiaries.
      The
      Corporation has documented these indemnification arrangements in agreements
      with
      each of its directors and certain of its senior officers. The Corporation has
      purchased directors' and officers' liability insurance that may be available
      in
      respect of certain of these claims.





42







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)


**14.** **Commitments
      and contingencies (continued):**




(iv) Other
      indemnification arrangements:




In
      the
      ordinary course of their business, the Corporation and its subsidiaries enter
      into other agreements with third parties that may contain indemnification
      provisions pursuant to which the parties to the agreements agree to indemnify
      one another if certain events occur (such as, but not limited to, changes in
      laws and regulations or as a result of litigation claims or liabilities which
      arise in respect of tax or environmental matters).




The
      terms of the Corporation's indemnification provisions vary based on the
      contract, which (together with the fact that any amounts that could be payable
      would be dependent on the outcome of future, contingent events, the nature
      and
      likelihood of which cannot be determined at this time) precludes the Corporation
      from making a reasonable estimate of the maximum potential amount the
      Corporation and its subsidiaries could be required to pay to counterparties.
      The
      Corporation believes that the likelihood that it or its subsidiaries would
      incur
      significant liability under these obligations is remote. Historically, the
      Corporation and its subsidiaries have not made any significant payments under
      such indemnification agreements. No amount has been recorded in the consolidated
      financial statements with respect to these indemnification provisions. The
      Corporation's assessment of its potential liability could change in the future
      as a result of currently unforeseen circumstances.




**(d)** **Other
      commitments and contingencies:**




(i) In
      the
      ordinary course of its business, the Corporation is named as a defendant in
      legal proceedings resulting from incidents taking place at hotels owned or
      managed by it. The Corporation maintains comprehensive liability insurance
      and
      also requires hotel owners to maintain adequate insurance coverage. The
      Corporation believes such coverage to be of a nature and amount sufficient
      to
      ensure that it is adequately protected from suffering any material financial
      loss as a result of such claims.




(ii) A
      number of the Corporation's management contracts are subject to certain
      performance tests which, if not met, could allow a contract to be terminated
      prior to its maturity. The Corporation generally has various rights to cure
      any
      such defaults to avoid termination.















43







**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**14.** **Commitments
      and contingencies (continued):**




(iii) The
      Corporation is currently in dispute with the owner of Four Seasons Hotel Caracas
      (note 3(d)) over a variety of matters.




**15.** **Fair
      values of financial instruments:**




The
      estimated fair value of a financial instrument is the amount at which the
      instrument could be exchanged in a current transaction between willing parties,
      other than a forced or liquidation sale. These estimates, although based on
      the
      relevant market information about the financial instrument, are subjective
      in
      nature and involve uncertainties and matters of significant judgment and,
      therefore, cannot be determined with precision. Changes in assumptions could
      significantly affect the estimates.




As
      cash
      equivalents, current receivables, current accounts payable and certain other
      short-term financial instruments are all short-term in nature, their carrying
      amounts approximate fair values.




The
      fair value of the Corporation's convertible notes is based on market quotes
      obtained from one of the Corporation's financial advisors.




Other
      financial instruments held by the Corporation include long-term receivables
      due
      from owners of managed hotels (note 3). The Corporation does not have plans
      to sell these loans to third parties and expects to realize or settle them
      in
      the ordinary course of business. There is no active and liquid market for these
      instruments.




The
      Corporation enters into foreign exchange forward contracts that oblige it to
      buy
      or sell specific amounts of foreign currencies at set future dates at
      predetermined exchange rates. Because a significant portion of the Corporation's
      revenues is derived in foreign currencies (primarily US dollars) and
      expenditures incurred by the Corporation for its management operations are
      denominated primarily in Canadian dollars, the Corporation enters into such
      contracts from time to time to protect itself in the event of a strengthening
      Canadian currency. Management estimates future foreign currency cash flows
      on an
      ongoing basis, based on its projections of foreign currency-denominated
      management fees and other transactions. Management negotiates foreign exchange
      forward contracts in proportion to the magnitude and timing of these cash
      flows.




















44










**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)







**15.** **Fair
      values of financial instruments (continued):**




As
      at
      December 31, 2006, the Corporation had sold forward $39,068 of US dollars to
      receive Canadian dollars at a weighted average forward exchange rate of 1.11,
      under 125 foreign exchange forward contracts, maturing over the period ending
      April 2008 (2005 - $21,189 at a weighted average forward exchange rate of 1.16,
      under 24 forward contracts, maturing over the period ending June 2006). The
      fair
      value of foreign exchange forward contracts is estimated from quotes obtained
      from the Corporation's counterparties for the same or similar financial
      instruments.




The
      fair values of financial instruments are as follows:


**Estimated**
            
            **Carrying****fair
                value**
            
            **amount****2006:**Convertible
                notes (a)
            
            **$**
            **(307,520**
            **)**
            **$**
            **(267,682**
            **)**Currency
                and
                interest rate swap (note 10(c))
            
            
            **(6,757**
            **)**
            
            **(6,757**
            **)**Foreign
                exchange forward contracts
            
            
            **(1,463**
            **)**
            
            **(1,463**
            **)**2005:Convertible
                notes (a)
            
            $
            (243,000
            )
            $
            (260,432
            )Currency
                and
                interest rate swap (note 10(c))
            
            
            (24,000
            )
            
            (17,129
            )Foreign
                exchange forward contracts
            
            
            (127
            )
            
            (127
            )




(a)
            The
                carrying amount of the convertible notes includes the amounts allocated
                to
                both long-term obligations and shareholders' equity. It excludes,
                however,
                the offering expenses and underwriters' commission related to the
                shareholders' equity component of the notes of $1,326, which are
                recorded
                in "Shareholders' equity".








































45





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)







**16.** **Segmented
      information:**




The
      Corporation’s strategy is to focus on Management Operations rather than
      Ownership Operations. Four Seasons Hotel Vancouver is its only remaining hotel
      whose results the Corporation currently consolidates. As a result, commencing
      January 1, 2006, corporate expenses are reflected as general and administrative
      expenses in the consolidated statements of operations for the year ended
      December 31, 2006. Corporate expenses for the year ended December 31, 2005
      that
      previously were included in its Ownership Operations segment have been
      reclassified to its Management Operations segment and included in general and
      administrative expenses in the consolidated statements of
      operations.




**(a)** **Operating
      earnings (loss) before other items:**




Revenues
      have been allocated to specific geographic segments based on the location of
      each property.


**2006**
            
            2005**Management**
            
            **Ownership**
            
            
            
            Management
            
            Ownership**Operations**
            
            **Operations**
            
            **Total**
            
            Operations
            
            Operations
            
            Total**Revenues:**United
                States
            
            **$**
            **62,582**
            
            **$**
            **2,589**
            ****
            **$**
            **65,171**
            
            $
            54,301
            
            $
            35,539
            
            $
            89,840Other
                Americas/Caribbean
            
            
            **17,367**
            
            
            **30,785**
            
            
            **48,152**
            
            
            15,157
            
            
            29,936
            
            
            45,093Europe
            
            
            **25,675**
            
            
            **-**
            
            
            **25,675**
            
            
            20,638
            
            
            -
            
            
            20,638Asia/Pacific
            
            
            **19,147**
            
            
            **-**
            
            
            **19,147**
            
            
            14,643
            
            
            -
            
            
            14,643Middle
                East
            
            
            **16,616**
            
            
            **-**
            
            
            **16,616**
            
            
            10,150
            
            
            -
            
            
            10,150**141,387**
            
            
            **33,374**
            
            
            **174,761**
            
            
            114,889
            
            
            65,475
            
            
            180,364Reimbursed
                costs
            
            
            **78,664**
            
            
            **-**
            
            
            **78,664**
            
            
            67,974
            
            
            -
            
            
            67,974**220,051**
            
            
            **33,374**
            
            
            **253,425**
            
            
            182,863
            
            
            65,475
            
            
            248,338**Expenses:**General
                and administrative expenses
            
            
            **(62,428**
            **)**
            
            **-**
            
            
            **(62,428**
            **)**
            
            (58,148
            )
            
            -
            
            
            (58,148
            )Hotel
                ownership cost of sales and expenses
            
            
            **-**
            
            
            **(32,212**
            **)**
            
            **(32,212**
            **)**
            
            -
            
            
            (66,086
            )
            
            (66,086
            )Reimbursed
                costs
            
            
            **(78,664**
            **)**
            
            **-**
            
            
            **(78,664**
            **)**
            
            (67,974
            )
            
            -
            
            
            (67,974
            )**(141,092**
            **)**
            
            **(32,212**
            **)**
            
            **(173,304**
            **)**
            
            (126,122
            )
            
            (66,086
            )
            
            (192,208
            )**Operating
                      earnings (loss) before other
                      items**
            
            **$**
            **78,959**
            ****
            **$**
            **1,162**
            ****
            **$**
            **80,121**
            
            $
            56,741
            
            $
            (611
            )
            $
            56,130










46





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)







**16.****Segmented
      information (continued):**




**(b)** **Total
      assets:**


**2006**
            
            2005United
                States
            
            **$**
            **231,022**
            
            $
            228,565Other
                Americas/Caribbean
            
            
            **408,281**
            
            
            359,536Europe
            
            
            **234,888**
            
            
            203,004Asia/Pacific
            
            
            **99,531**
            
            
            78,858Middle
                East
            
            
            **18,245**
            
            
            10,238**$**
            **991,967**
            
            $
            880,201




**17.** **Subsequent
      event:**




On
      February 12, 2007, the Corporation announced that it had entered into a
      definitive acquisition agreement (the “Acquisition Agreement”) to implement a
      previously announced proposal to take FSHI private at a price of $82.00 cash
      per
      LVS (the “Arrangement Transaction”). Following completion of the Arrangement
      Transaction, FSHI would be owned by affiliates of Cascade Investment, L.L.C.
      (“Cascade”) (an entity owned by William H. Gates III), Kingdom Hotels
      International (“Kingdom”), a company owned by a trust created for the benefit of
      His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud and his
      family, and Isadore Sharp (collectively the “Purchaser”).




The
      Arrangement Transaction, which would be implemented by way of a court-approved
      plan of arrangement under Ontario law, has been approved unanimously by the
      Corporation’s Board of Directors (with interested directors abstaining)
      following the report and favourable, unanimous recommendation of the Special
      Committee of independent directors. A meeting of shareholders to consider the
      Arrangement Transaction is anticipated to take place in April 2007. It is
      anticipated that the Arrangement Transaction, if approved by shareholders,
      will
      be completed in the second quarter of 2007.




Pursuant
      to the Acquisition Agreement, FSHI agreed to certain customary negative and
      affirmative covenants relating to the operation of its business between the
      date
      of execution of the Acquisition Agreement and the closing of the Arrangement
      Transaction.















47


**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**17.** **Subsequent
      event (continued):**




FSHI
      and the Purchaser may terminate the Acquisition Agreement by mutual written
      consent and abandon the Arrangement Transaction at any time prior to the
      effective time. In addition, either FSHI or the Purchaser (and, in certain
      circumstances, only one of these parties) may terminate the Acquisition
      Agreement and abandon the Arrangement Transaction any time prior to the
      effective time of the Arrangement Transaction if certain specified events occur.
      The Acquisition Agreement provides that FSHI will pay a termination fee of
      $75,000 less any amounts actually paid or required to be paid by FSHI to the
      Purchaser for reimbursement of expenses (as described below) if the Acquisition
      Agreement is terminated in certain circumstances. The Acquisition Agreement
      provides that the Purchaser will pay to FSHI a termination fee of $100,000
      if
      the Acquisition Agreement is terminated in certain circumstances. This
      obligation is guaranteed by Kingdom and Cascade. The Acquisition Agreement
      also
      provides that FSHI will pay to the Purchaser reasonable documented expenses
      of
      the Purchaser and its affiliates incurred in connection with the transactions
      contemplated by the Acquisition Agreement (up to a maximum of $10,000) if the
      Acquisition Agreement is terminated in certain circumstances.




Although
      there is no certainty that the Arrangement Transaction, or any other
      transaction, will be completed or the timing of completion of the pending
      Arrangement Transaction, some of the Corporation’s arrangements and agreements
      may be impacted by the pending Arrangement Transaction, including the
      following:




**(a)**
            **Convertible
                notes:**




The
      convertible senior notes issued by FSHI in 2004 are convertible into LVS
      (although at its option, FSHI may make a cash payment in lieu of all or some
      of
      those LVS) in certain circumstances, including upon the occurrence of a
“fundamental change”, as defined in the indenture pursuant to which the notes
      were issued. The Arrangement Transaction, if completed, would result in a
      fundamental change. As a result, holders may convert the notes during the period
      from and after the tenth day prior to the anticipated closing date of the
      Arrangement Transaction until and including the close of business on the later
      of the tenth day after the actual closing date and the thirtieth business day
      after notice of an offer to repurchase the notes has been mailed, as described
      below. Upon such conversion, holders of the notes would be entitled to receive,
      subject to our right to make a cash payment in lieu of some or all of the LVS
      that otherwise would be issued, 13.9581 LVS for each one thousand US dollar
      principal amount of notes and an additional number of LVS equal to (a) the
      sum
      of a make whole premium, and an amount equal to any accrued but unpaid interest
      to, but not including, the conversion date, divided by (b) the average of the
      closing
      sale price (or, in certain circumstances, an average of bid and ask prices)
      of
      the LVS on the New York Stock Exchange for the ten trading days before the
      conversion date.





48





**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)







**17.** **Subsequent
      event (continued):**




If
      the
      Arrangement Transaction is completed, FSHI will be required to make an offer
      to
      repurchase the notes at a purchase price equal to the principal amount of the
      notes plus a make whole premium (as described above), and an amount equal to
      any
      accrued and unpaid interest to, but not including, the date of repurchase.
      FSHI
      must make this offer by providing a notice to the trustee and the holders of
      notes within 30 days of the completion of the Arrangement
      Transaction.




Further
      information regarding the terms of the convertible senior notes is set out
      in
      the indenture pursuant to which the notes were issued.




**(b)**  **Long-term
      incentive arrangement:**




Pursuant
      to an agreement approved by the shareholders of FSHI in 1989, FSHI and its
      principal operating subsidiary, FSHL, agreed to make a cash payment to Mr.
      Isadore Sharp, the Chief Executive Officer of FSHI, upon an arm’s length sale of
      control of FSHI. Under the plan of arrangement through which the Arrangement
      Transaction will be implemented, Mr. Sharp will receive the amount payable
      to
      him calculated in accordance with this long-term incentive plan in full
      satisfaction of all obligations to him under the plan. Based on an acquisition
      price of $82.00 for each LVS and VMVS, and using the noon rate of exchange
      as
      quoted by the Bank of Canada for the conversion of Canadian dollars into United
      States dollars on March 9, 2007, Mr. Sharp would receive approximately $289,000
      in satisfaction of the obligations to him under the long-term incentive
      plan.




**(c)**
            **Stock options:**




On
      February 9, 2007, the vesting of a total of 616,980 unvested stock options
      (which excludes those outstanding options with an unsatisfied performance
      condition) was accelerated for the purpose of allowing these individuals to
      participate in respect of such options in the Arrangement Transaction. If the
      Arrangement Transaction is not completed, the vesting of the 616,980 stock
      options will not be accelerated and the stock options will continue to vest
      in
      accordance with their terms in existence prior to the acceleration. Pursuant
      to
      the plan of arrangement in respect of the Arrangement Transaction, any options
      that
      have not been exercised prior to the effective time of the Arrangement
      Transaction will be transferred by each holder thereof to FSHI without any
      further act or formality in exchange for a cash amount equal to the excess,
      if
      any, of (a) the product of the number of LVS underlying the options held by
      such
      holder and $82.00, over (b) the sum of the exercise prices for each LVS
      underlying the options held by such holder (converted at the applicable foreign
      exchange rate).










49






**FOUR
        SEASONS HOTELS INC.**
 **Notes
        to Consolidated Financial Statements (continued)**
  Years
        ended December 31, 2006 and 2005
 (In
        thousands of US dollars except per share amounts)




**17.**  **Subsequent
      event (continued):**





**(d)** **Other
      arrangements and agreements:**




Certain other arrangements and agreements are subject to “change of control”
provisions. These include, among others, the following:




(i)
            Under
                the terms of the current $125,000 bank credit facility of FSHI, a
                change
                of control triggers a default under the bank credit facility, and
                if not
                waived, would require the repayment of all amounts outstanding under
                this
                credit facility and would also result in the termination of this
                credit
                facility. As at March 9, 2007, no amounts were borrowed under this
                credit
                facility, but approximately $1,600 of letters of credit were issued
                under
                this credit facility.




(ii) Pursuant
      to a cross default provision, a default under the bank credit facility, in
      turn,
      would cause a default under FSHI’s currency and interest rate swap agreement. In
      such circumstances, the counterparty to the swap agreement may demand that
      the
      swap be terminated. As at March 9, 2007, the net amount that would be required
      to be paid by FSHI to the counterparty on termination was approximately $5,800.
      As at December 31, 2006, the estimated fair value of the swap on that date
      of
      $6,757 is included in “Long-term obligations”.




**(e)****Costs related to pending Arrangement
      Transaction:**




In
      connection with the pending Arrangement Transaction, the Corporation incurred
      costs of $3,452 in 2006 and expect to incur costs of approximately $12,600
      during 2007, primarily relating to legal fees, filing fees, financial advisory,
      printing, proxy solicitation and consulting services.








50