EXHIBIT3

March 8, 2006

Consolidated Financial Statements(In USdollars)

**FOUR SEASONSHOTELS INC.**

Years endedDecember  31,  2005 and2004

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AUDITORS'REPORT TO THE SHAREHOLDERS

We haveaudited the consolidated balance sheets of Four Seasons Hotels Inc. asat December 31, 2005 and 2004 and the consolidated statements ofoperations, retained earnings, cash provided by operations and cashflows for the years then ended. These financial statements are theresponsibility of the Corporation's management. Our responsibilityis to express an opinion on these financial statements based on ouraudits.

We conducted our audits in accordance withCanadian generally accepted auditing standards. Those standards requirethat we plan and perform an audit to obtain reasonable assurancewhether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation.

In our opinion, theseconsolidated financial statements present fairly, in all materialrespects, the financial position of the Corporation as atDecember 31, 2005 and 2004 and the results of its operations andits cash flows for the years then ended in accordance with Canadiangenerally accepted accounting principles.

/s/KPMG LLPChartered Accountants

Toronto,Canada

March  8,2006

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FOUR SEASONSHOTELS INC.Consolidated Statements ofOperations

Years ended December31,  2005 and 2004 (In thousands of US dollars (note 1(a))except per shareamounts)

|                                                                                         |  |        |          |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                                                                    |  |   | 2005     |    |  |   | 2004    |    |
| **Consolidatedrevenues (note 12)**                                  |  | $      | 248,338  |    |  | $      | 261,267 |    |
| **ManagementOperations:**                                                               |  |   |     |    |  |   |    |    |
| Revenues:                                                                               |  |   |     |    |  |   |    |    |
| Feerevenues (note 12(a))                                                                |  | $      | 117,199  |    |  | $      | 112,014 |    |
| Reimbursed costs                                                                        |  |   | 69,051   |    |  |   | 56,062  |    |
|                                                                                    |  |   | 186,250  |    |  |   | 168,076 |    |
| Expenses:                                                                               |  |   |     |    |  |   |    |    |
| Generaland administrative expenses                                                      |  |   | (41,221  | )  |  |   | (34,522 | )  |
| Reimbursedcosts                                                                         |  |   | (69,051  | )  |  |   | (56,062 | )  |
|                                                                                    |  |   | (110,272 | )  |  |   | (90,584 | )  |
|                                                                                    |  |   | 75,978   |    |  |   | 77,492  |    |
| **OwnershipOperations and CorporateExpenses:**                                          |  |   |     |    |  |   |    |    |
| Revenues                                                                                |  |   | 65,343   |    |  |   | 97,436  |    |
| Distributions from hotelinvestments                                                     |  |   | 132      |    |  |   | 293     |    |
| Expenses:                                                                               |  |   |     |    |  |   |    |    |
| Costof sales and expenses                                                               |  |   | (65,009  | )  |  |   | (98,212 | )  |
| Corporate expenses                                                                      |  |   | (15,128  | )  |  |   | (11,621 | )  |
| Fees toManagement Operations                                                            |  |   | (3,387   | )  |  |   | (4,538  | )  |
|                                                                                    |  |   | (18,049  | )  |  |   | (16,642 | )  |
| **Earningsbefore other operating items**                                                |  |   | 57,929   |    |  |   | 60,850  |    |
| Depreciation andamortization                                                            |  |   | (11,187  | )  |  |   | (11,779 | )  |
| Other expense, net (note 13)                                                            |  |   | (89,208  | )  |  |   | (11,906 | )  |
| **Earnings (loss) fromoperations**                                                      |  |   | (42,466  | )  |  |   | 37,165  |    |
| Interest income,net (note 10(d))                                                        |  |   | 3,402    |    |  |   | 1,106   |    |
| **Earnings (loss) before incometaxes**                                                  |  |   | (39,064  | )  |  |   | 38,271  |    |
| Income tax recovery (expense) (note8):                                                  |  |   |     |    |  |   |    |    |
| Current                                                                                 |  |   | (1,912   | )  |  |   | (9,065  | )  |
| Future                                                                                  |  |   | 12,753   |    |  |   | (3,508  | )  |
|                                                                                    |  |   | 10,841   |    |  |   | (12,573 | )  |
| **Net earnings(loss)**                                                                  |  | $      | (28,223  | )  |  | $      | 25,698  |    |
| **Basic earnings(loss) per share (note 11(e))**                     |  | $      | (0.77    | )  |  | $      | 0.72    |    |
| **Dilutedearnings (loss) per share (notes 1(n)(iii) and11(e))**     |  | $      | (0.77    | )  |  | $      | 0.69    |    |
|                                                                                         |

See accompanying notes toconsolidated financialstatements.

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FOURSEASONS HOTELS INC.

ConsolidatedBalance Sheets

December  31,  2005 and2004(In thousands of US dollars (note 1(a))

|                                                  |  |        |         |        |  |        |         |        |  |                                                    |        |        |         |        |      |        |         |        |      |        |  |  |
|--------------------------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|----------------------------------------------------|--------|--------|---------|--------|------|--------|---------|--------|------|--------|--|--|
|                                             |  |   | 2005    |   |  |   | 2004    |   |  |                                               |   |   |         |   | 2005 |   |         |   | 2004 |   |
| Assets                                           |  |   |    |   |  |   |    |   |  | Liabilitiesand Shareholders'Equity                 |
| Currentassets:                                   |  |   |    |   |  |   |    |   |  | Currentliabilities:                                |        |   |    |   |      |   |    |   |
| Cash and cashequivalents                         |  | $      | 242,178 |   |  | $      | 226,377 |   |  | Accountspayable and accrued liabilities (note 9)   |        | $      | 54,797  |   |      | $      | 60,415  |   |
| Receivables (note 2)                             |  |   | 69,690  |   |  |   | 81,541  |   |  | Long-termobligations due within one year (note 10) |        |   | 4,853   |   |      |   | 3,766   |   |
| Inventory                                        |  |   | 7,326   |   |  |   | 1,439   |   |  |                                               |        |   | 59,650  |   |      |   | 64,181  |   |
| Prepaid expenses                                 |  |   | 2,950   |   |  |   | 2,981   |   |  |                                               |        |   |    |   |      |   |    |   |
|                                             |  |   | 322,144 |   |  |   | 312,338 |   |  | Long-term obligations (note 10)                    |        |   | 273,825 |   |      |   | 253,066 |   |
|                                             |  |   |    |   |  |   |    |   |  |                                               |        |   |    |   |      |   |    |   |
| Long-term receivables (note 3)                   |  |   | 175,374 |   |  |   | 179,060 |   |  | Shareholders' equity (note11):                     |        |   |    |   |      |   |    |   |
|                                             |  |   |    |   |  |   |    |   |  | Capitalstock                                       |        |   | 250,430 |   |      |   | 248,980 |   |
| Investments in hotelpartnerships                 |  |   |    |   |  |   |    |   |  | Convertible notes (note10(a))                      |        |   | 36,920  |   |      |   | 36,920  |   |
| andcorporations (note 4)                         |  |   | 99,928  |   |  |   | 131,338 |   |  | Contributed surplus                                |        |   | 10,861  |   |      |   | 8,088   |   |
|                                             |  |   |    |   |  |   |    |   |  | Retained earnings                                  |        |   | 160,741 |   |      |   | 192,129 |   |
| Fixed assets (note5)                             |  |   | 64,850  |   |  |   | 59,939  |   |  | Equity adjustment from foreign currencytranslation |        |   | 87,774  |   |      |   | 98,783  |   |
|                                             |  |   |    |   |  |   |    |   |  |                                               |        |   | 546,726 |   |      |   | 584,900 |   |
| Investment in management contracts(note 6)       |  |   | 164,932 |   |  |   | 181,273 |   |  | Commitments and contingencies (note15)             |        |   |    |   |      |   |    |   |
|                                             |  |   |    |   |  |   |    |   |  |                                               |        |   |    |   |      |   |    |   |
| Investmentin trademarks and trade names (note 7) |  |   | 4,210   |   |  |   | 4,424   |   |  |                                               |        |   |    |   |      |   |    |   |
|                                             |  |   |    |   |  |   |    |   |  |                                               |        |   |    |   |      |   |    |   |
| Future income taxassets (note 8)                 |  |   | 14,439  |   |  |   | 3,711   |   |  |                                               |        |   |    |   |      |   |    |   |
|                                             |  |   |    |   |  |   |    |   |  |                                               |        |   |    |   |      |   |    |   |
| Other assets                                     |  |   | 34,324  |   |  |   | 30,064  |   |  |                                               |        |   |    |   |      |   |    |   |
|                                             |  |   |    |   |  |   |    |   |  |                                               |        |   |    |   |      |   |    |   |
|                                             |  | $      | 880,201 |   |  | $      | 902,147 |   |  |                                               |        | $      | 880,201 |   |      | $      | 902,147 |   |
|                                                  |

See accompanying notesto consolidated financial statements.

Onbehalf of the Board:

/s/ IsadoreSharp                     Director

/s/ Ronald W. Osborne        Director

    

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FOURSEASONS HOTELS INC.

ConsolidatedStatements of Retained Earnings

Years endedDecember  31,  2005 and 2004(In thousands of US dollars(note 1(a))

|                                      |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                 |  |   | 2005    |    |  |   | 2004    |    |
| Retained earnings, beginning of year |  | $      | 192,129 |    |  | $      | 169,364 |    |
| Net earnings(loss)                   |  |   | (28,223 | )  |  |   | 25,698  |    |
| Dividends declared                   |  |   | (3,165  | )  |  |   | (2,933  | )  |
| Retained earnings,end of year        |  | $      | 160,741 |    |  | $      | 192,129 |    |
|                                      |

See accompanying notesto consolidated financialstatements.

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FOURSEASONS HOTELS INC.

ConsolidatedStatements of Cash Provided by Operations

Yearsended December  31,  2005 and 2004(In thousands of USdollars (note 1(a))

|                                                                        |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                   |  |   | 2005    |    |  |   | 2004    |    |
| Cash provided by (usedin)operations:                                   |
| **ManagementOperations:**                                              |
| Earnings before otheroperating items                                   |  | $      | 75,978  |    |  | $      | 77,492  |    |
| Items not requiring an outlay offunds                                  |  |   | 3,711   |    |  |   | 1,701   |    |
| Working capital provided byManagement Operations                       |  |   | 79,689  |    |  |   | 79,193  |    |
| **OwnershipOperations and Corporate Expenses:**                        |
| Lossbefore other operating items                                       |  |   | (18,049 | )  |  |   | (16,642 | )  |
| Items notrequiring an outlay of funds                                  |  |   | 1,504   |    |  |   | 943     |    |
| Working capital used for OwnershipOperationsand Corporate Expenses     |  |   | (16,545 | )  |  |   | (15,699 | )  |
|                                                                   |  |   | 63,144  |    |  |   | 63,494  |    |
| Interest received                                                      |  |   | 18,576  |    |  |   | 8,280   |    |
| Interest paid                                                          |  |   | (5,056  | )  |  |   | (702    | )  |
| Interest paid on redemption ofconvertible notes (note 10(b))           |  |   | – |    |  |   | (25,840 | )  |
| Proceeds received on termination ofinterest rate swap (note 10(a))     |  |   | – |    |  |   | 9,000   |    |
| Amount paid relating to retirementbenefit plan transition (note 15(b)) |  |   | (36,029 | )  |  |   | – |    |
| Current income tax received (paid)                                     |  |   | (6,376  | )  |  |   | 546     |    |
| Change in non-cash workingcapital                                      |  |   | (7,308  | )  |  |   | (9,302  | )  |
| Other                                                                  |  |   | (474    | )  |  |   | (1,082  | )  |
| Cash provided byoperations                                             |  | $      | 26,477  |    |  | $      | 44,394  |    |
|                                                                        |

See accompanying notes toconsolidated financial statements.

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FOURSEASONS HOTELS INC.

ConsolidatedStatements of Cash Flows

Years ended December31, 2005 and 2004 (In thousands of US dollars (note1(a))

|                                                                                               |  |        |         |         |  |        |          |         |  |  |
|-----------------------------------------------------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                                                          |  |   | 2005    |    |  |   | 2004     |    |
| Cash provided by (usedin):                                                                    |  |   |    |    |  |   |     |    |
| Operations                                                                                    |  | $      | 26,477  |    |  | $      | 44,394   |    |
| Financing:                                                                                    |  |   |    |    |  |   |     |    |
| Issuanceof convertible notes (note 10(a))                                                     |  |   | – |    |  |   | 241,332  |    |
| Redemption of convertible notes(note 10(b))                                                   |  |   | – |    |  |   | (189,670 | )  |
| Other long-term obligations, includingcurrent portion:                                        |
| Issued                                                                                        |  |   | 39      |    |  |   | 36       |    |
| Repaid                                                                                        |  |   | – |    |  |   | (119     | )  |
| Issuance of shares (note11(a))                                                                |  |   | 7,046   |    |  |   | 33,870   |    |
| Dividends paid                                                                                |  |   | (3,142  | )  |  |   | (2,811   | )  |
| Cash provided by financing                                                                    |  |   | 3,943   |    |  |   | 82,638   |    |
| Capitalinvestments:                                                                           |  |   |    |    |  |   |     |    |
| Advances of long-termreceivables                                                              |  |   | (44,865 | )  |  |   | (25,141  | )  |
| Receipt of long-term receivables                                                              |  |   | 34,561  |    |  |   | 8,876    |    |
| Investments in hotel partnershipsand corporations                                             |  |   | (8,732  | )  |  |   | (36,135  | )  |
| Disposal of hotel partnerships and corporations                                               |  |   | 24,607  |    |  |   | 38,395   |    |
| Purchase of fixedassets                                                                       |  |   | (18,706 | )  |  |   | (6,583   | )  |
| Investment in trademarks, trade names and managementcontracts                                 |  |   | 10,473  |    |  |   | (12,135  | )  |
| Other assets                                                                                  |  |   | (7,614  | )  |  |   | (8,506   | )  |
| Cash used incapital investments                                                               |  |   | (10,276 | )  |  |   | (41,229  | )  |
| Increase in cash and cashequivalents                                                          |  |   | 20,144  |    |  |   | 85,803   |    |
| Increase (decrease) in cash and cashequivalents due to unrealizedforeign exchange gain (loss) |  |   | (4,343  | )  |  |   | 8,475    |    |
| Cash and cashequivalents, beginning of year                                                   |  |   | 226,377 |    |  |   | 132,099  |    |
| Cash and cashequivalents, end of year                                                         |  | $      | 242,178 |    |  | $      | 226,377  |    |
|                                                                                               |

See accompanying notes toconsolidated financialstatements.

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FOURSEASONS HOTELS INC.

Notes toConsolidated Financial Statements

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

Four Seasons Hotels Inc.(‘‘FSHI’’) is incorporated underthe Ontario Business Corporations Act and, through its subsidiaries, isengaged in the management of, and the investment in, hotels, resortsand branded residential projects throughout the world (note 17).In these consolidated financial statements, FSHI and its subsidiariesare collectively referred to as the‘‘Corporation’’.

AtDecember  31,  2005, the Corporation managed 68 propertiesand had various projects under construction or development, of whichthe Corporation had an equity interest in 11 properties undermanagement and three projects under construction.

|          |                                  |
|----------|----------------------------------|
| 1.  | Significant accounting policies: |

The Corporation's accounting policies and itsstandards of financial disclosure comply with accounting principlesthat are generally accepted in Canada.

The significantaccounting policies are summarized below:

|  |           |                               |
|--|-----------|-------------------------------|
|  | (a)  | Change in reporting currency: |

The Corporation has historically prepared its consolidatedfinancial statements in Canadian dollars(‘‘C$’’). Effective January  1,2005, the Corporation adopted US dollars as its reporting currency.With the majority of the Corporation's management fee revenues inUS dollars, reporting in US dollars is expected to reduce thevolatility on reported results relating to the impact of fluctuationsin the rate of exchange between the US and Canadian dollar relating tothese revenues and, as a result, it should provide the financialstatement users with more meaningful information. There have been nochanges in the functional currency of FSHI, which remains Canadiandollars, or the functional currencies of any of itssubsidiaries.

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FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

The 2005 and 2004consolidated financial statements of the Corporation in Canadiandollars have been translated into US dollars using the foreign exchangerates applicable at each balance sheet date for assets and liabilities,and the weighted average exchange rates of the corresponding quartersfor the consolidated statements of operations, consolidated statementsof cash provided by operations and consolidated statements of cashflows. Equity transactions have been translated to US dollars at thehistorical exchange rates with opening equity accounts on January1,  2003 translated at the exchange rate on that date. Anyresulting exchange gain or loss is charged or credited to‘‘Equity adjustment from foreign currencytranslation’’ included as a separate component ofshareholders' equity.

|  |           |                              |
|--|-----------|------------------------------|
|  | (b)  | Principles of consolidation: |

The Corporation consolidates all of its wholly ownedsubsidiaries, including its primary operating subsidiaries - FourSeasons Hotels Limited (‘‘FSHL’’), Four SeasonsHotels and Resorts Asia Pacific Pte Ltd. and Four Seasons Hotels andResorts B.V.

The Corporation consolidates its100% leasehold interest in Four Seasons Hotel Vancouver and,until the disposition of the lease on June  30,  2005 and thetermination of the lease on September  26,  2004, theCorporation also consolidated its 100% leasehold interests inThe Pierre in New York and Four Seasons Hotel Berlin, respectively.

|  |           |                                                                        |
|--|-----------|------------------------------------------------------------------------|
|  | (c)  | Translation of foreign currenciesand derivative financial instruments: |

Foreign currencybalances of the Corporation and of foreign operations designated asintegrated are translated into domestic currencies at the rates ofexchange on the balance sheet date for monetary items and at the ratesof exchange on the date of transaction for non-monetary items. Theresulting translation gains or losses are included in the determinationof net earnings.

Revenues and expenses denominated inforeign currencies are translated at the rates of exchange on the datesof the transactions, except for revenues hedged by foreign exchangeforward contracts, which are translated at the contract rates, asdiscussed below.

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FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

The financialstatements of foreign investments designated as self-sustainingoperations are translated into Canadian dollars as follows:

|  |           |                                                                           |
|--|-----------|---------------------------------------------------------------------------|
|  | (i)  | Assets and liabilities at rates ofexchange on the balance sheet date; and |

|  |            |                                                                                  |
|--|------------|----------------------------------------------------------------------------------|
|  | (ii)  | Revenue and expense items ataverage rates of exchange in effect during the year. |

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

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

Derivative financialinstruments are used by the Corporation in the management of itsforeign currency exposures. The Corporation does not use derivativefinancial instruments for trading or speculative purposes.

The Corporation documents all relationships between hedginginstruments and hedged items, as well as its risk management objectiveand strategy for undertaking various hedge transactions. This processincludes linking all derivatives to specific assets and liabilities onthe balance sheet or to specific firm commitments or forecastedtransactions. The Corporation also assesses, both at the hedge'sinception and on an ongoing basis, whether the derivatives that areused in hedging transactions are highly effective in offsetting changesin fair values or cash flows of hedged items.

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FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

The Corporationenters into hedges of its foreign currency exposures on foreigncurrency-denominated long-term receivables/obligations and othermonetary assets/liabilities by entering into foreigncurrency-denominated derivative financial instruments, when it isdeemed appropriate. Foreign exchange translation gains and losses onforeign currency-denominated derivative financial instruments used tohedge foreign currency long-term receivables/obligations and othermonetary assets/liabilities are accrued under other current ornon-current assets or liabilities on the balance sheet and recognizedin ‘‘Other expense, net’’, offsetting therespective translation losses and gains recognized on the underlyingforeign currency long-term receivables/obligations and other monetaryassets/liabilities. The forward premium or discount on foreign exchangeforward contracts used to hedge foreign currency long-termreceivables/obligations and other monetary assets/liabilities isamortized as an adjustment of interest expense over the term of theforward contract.

Foreign exchange translation gainsand losses on foreign currency-denominated derivative financialinstruments used to hedge anticipated foreign currency-denominatedrevenues are recognized as an adjustment of the revenues when therevenues are recorded. For foreign exchange forward contracts used tohedge anticipated foreign currency-denominated revenues, the portion ofthe forward premium or discount on the contract relating to the periodprior to recognition of the revenues is also recognized as anadjustment of the revenues when they are recorded. The portion of thepremium or discount that relates to the resulting accounts receivableis amortized as an adjustment of interest expense over the remainingterm of the contract.

The Corporation also enters intocurrency and interest rate swap agreements in order to reduce thevariability to changes in the fair value of its long-term obligationsattributable to interest rate and exchange rate risks, when it isdeemed appropriate. These swap agreements require the periodic exchangeof payments and the exchange of the notional principal amount on whichthe payments are based at the maturity of the agreement. TheCorporation designates its currency and interest rate swaps as hedgesof the underlying long-term obligation. Interest expense on thelong-term obligation is adjusted to include amounts payable orreceivable under the swap agreements. Foreign exchange translationgains and losses on the notional principal amount of the swap areaccrued under ‘‘Long-term obligations’’ on thebalance sheet and recognized in ‘‘Other expense,net’’, offsetting the respective translation losses andgains recognized on the long-term obligation.

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FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

Realized andunrealized 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 liabilitieson the balance sheet and recognized in income in the period in whichthe underlying hedged transaction is recognized. In the event adesignated hedged item is sold, extinguished or matures prior to thetermination of the related derivative instrument, any realized orunrealized gain or loss on such derivative instrument is recognized inincome.

|  |           |                   |
|--|-----------|-------------------|
|  | (d)  | Use of estimates: |

The preparation of financial statements requires managementto make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the year. Actual results coulddiffer from those estimates.

Estimates are used whenaccounting for items such as asset impairment assessments, incometaxes, employee future benefits and contingencies.

Themost significant estimates that the Corporation is required to makerelate to the recoverability of its investments in (i) long-termreceivables, (ii) hotel partnerships and corporations, (iii) managementcontracts, and (iv) trademarks and trade names.

Theestimated recoverable amounts of these investments usually depend uponestimates of the profitability of the related managed properties,which, in turn, depend upon assumptions regarding future conditions inthe general or local hospitality industry, including the effects ofwar, terrorism, competition from other hotels, changes in travelpatterns, and other factors that affect the properties' grossoperating revenue (which is the factor on which the Corporation'sbase management and royalty fee revenues are normally based) andprofits (which is the factor on which the Corporation's incentivefee revenues are normally based).

The estimates ofrecoverable amounts of these investments may also depend upon, amongother things, assumptions regarding local real estate marketconditions, property and income taxes, interest rates and theavailability, cost and terms of financing, the impact of present orfuture legislation or regulation, debt incurred by the properties thatrank ahead of the Corporation and other factors affecting theprofitability and saleability of the properties.

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FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

These assumptions arelimited by the availability of reliable comparable data, ongoinggeopolitical concerns and the uncertainty of predictions concerningfuture events. Accordingly, by their nature, estimates of recoverableamounts are subjective and do not necessarily result in precisedeterminations. Should the underlying assumptions change, the estimatedrecoverable amounts could change by a material amount.

|  |           |                            |
|--|-----------|----------------------------|
|  | (e)  | Cash and cash equivalents: |

The Corporation's investments in cash and cashequivalents are highly liquid, with original maturities of less than 90days. These investments include bank deposits, guaranteed investmentcertificates and money market funds held with major financialinstitutions.

|  |           |                                     |
|--|-----------|-------------------------------------|
|  | (f)  | Impairment oflong-term receivables: |

The Corporation measuresimpairment of long-term receivables based on the present value ofexpected future cash flows discounted at the original effectiveinterest rate or the estimated fair value of the collateral. Forimpaired long-term receivables, the Corporation establishes a specificallowance for doubtful long-term receivables for the difference betweenthe recorded investment and the present value of the expected futurecash flows or the estimated fair value of the collateral. TheCorporation applies this impairment policy individually to alllong-term receivables in the portfolio and does not aggregate long-termreceivables for the purpose of applying such policy. For long-termreceivables which are determined to be impaired, interest income isrecognized on a cash basis.

|  |           |                                                                   |
|--|-----------|-------------------------------------------------------------------|
|  | (g)  | Accounting for investments in hotelpartnerships and corporations: |

The Corporation accountsfor its investments in hotel partnerships and corporations by the costmethod when the percentage ownership and structure does not give theCorporation significant influence over these investments. Investmentsin hotel partnerships and corporations, which are not controlled butover which the Corporation has significant influence, are accounted forby the equity method.

In 2004, the Corporation alsoaccounted for all its investments that were acquired prior to May1,  2003, with the intention that they be disposed of in theforeseeable future, by the cost method (note 1(n)(ii)).

11

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

In the event of adecline in value of an investment in the equity of a hotel partnershipor corporation that is other than temporary, the investment is writtendown to the estimated recoverable amount.

|  |           |                 |
|--|-----------|-----------------|
|  | (h)  | Capital assets: |

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

The cost of acquiring or enhancing hotel managementcontracts is capitalized and recorded as ‘‘Investment inmanagement contracts’’.

The cost oftrademarks and trade names includes the cost of registering the‘‘Four Seasons’’ trademarks and trade namesthroughout the world.

|  |           |                                |
|--|-----------|--------------------------------|
|  | (i)  | Depreciation and amortization: |

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

Depreciation of furniture,fixtures and equipment is recorded on a straight-line basis at rateswhich will fully depreciate the assets over their estimated usefullives. The estimated composite useful lives for furniture, fixtures andequipment range from three to 20 years.

Amortization ofleasehold interests and improvements is recorded on a straight-linebasis over the terms of the leases.

The costs allocatedto trademarks and trade names, which do not have indefinite lives, areamortized on a straight-line basis over their useful lives.

The costs capitalized for hotel management contracts areamortized on a straight-line basis over the terms of the contracts inproportion to the benefits received.

12

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

|  |            |             |
|--|------------|-------------|
|  | (ii)  | Impairment: |

Therecoverability of the unamortized cost of capital assets is evaluatedwhenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable from future operations. TheCorporation bases these evaluations upon the projected future cashflows on an undiscounted basis. If the undiscounted future cash flowsare insufficient to recover the remaining net book value, then animpairment charge is recognized equal to the amount by which the netbook value exceeds the fair value of the asset.

|  |           |                   |
|--|-----------|-------------------|
|  | (i)  | Deferred charges: |

The Corporation defers legal, consulting, travel and othercosts directly relating to the negotiation, structuring and executionof new contracts relating to projects which, in management'sjudgment, have a high probability of opening. When the property isopened, these deferred charges are reclassified to‘‘Investment in management contracts’’. If theproject is abandoned, any deferred charges are written off. Thedeferred charges associated with new management contracts developed bythe Corporation are amortized on a straight-line basis, generally overa 10-year period, commencing when the property is opened.

|  |           |                                             |
|--|-----------|---------------------------------------------|
|  | (j)  | Accounting for asset retirementobligations: |

The Corporation records the fair value ofan asset retirement obligation as a liability in the year in which itincurs a legal obligation associated with the retirement of tangiblelong-lived assets that result from the acquisition, construction,development and/or normal use of the assets. The Corporation alsorecords a corresponding asset that is depreciated over the life of theasset. Subsequent to the initial measurement of the asset retirementobligation, the obligation will be adjusted at the end of each periodto reflect the passage of time and changes in the estimated future cashflows underlying the obligation.

13

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

|  |           |                      |
|--|-----------|----------------------|
|  | (k)  | Revenue recognition: |

The consolidated revenues of the Corporation includerevenues earned from hotels, resorts and branded residential projectsunder long-term management contracts, revenues generated by itsconsolidated leasehold hotel operations and distributions from itsother hotel investments.

Revenues earned frommanagement operations include base fees equal to a percentage of thegross operating revenues of the managed properties and incentive feesbased on certain operating results of the managed properties. Therevenues also include fees earned relating to the design, constructionand fitting out specifications of properties during the developmentstage and purchasing fees earned, generally calculated as a percentageof the cost of goods purchased by the managed properties through theCorporation's centralized purchasing system. The Corporationprovides various services, including central reservation services,worldwide sales offices and marketing programs to managed propertiesand receives a charge calculated in accordance with the managementcontracts. The Corporation also earns royalty fees for the use of itsbrand name in connection with certain residential projects, which aregenerally based on a percentage of the sale proceeds of the residencessold. In addition, the Corporation also manages branded and servicedresidential projects pursuant to management contracts under which itoversees the management of the day-to-day operations of the completedprojects in return for ongoing management fees from the owners ofinterests in these projects.

Fees from managementoperations are recognized as revenue when the services have beenrendered in accordance with the terms of each individual contract, thefees are non-refundable, the amount of the fees is fixed ordeterminable, and there is reasonable assurance that the fees arecollectible. Incentive fees are accrued as earned based on theprofitability of the managed property, subject to the terms of eachindividual contract. The Corporation accrues incentive fees in interimconsolidated financial statements based upon the amount that would bedue under the incentive fee formula as if the relevant managementcontract was terminated at the relevant reporting date. Generally, ontermination, the Corporation's management contracts entitle theCorporation to receive incentive fees up to the date of termination. Ifa property's profitability decreases in a subsequent interimperiod, the incentive fee accrued in a previous interim period could bereduced or eliminated.

14

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

The Corporationevaluates at the inception of a contract all deliverables to determinewhether they represent separate units of accounting. If they do, theconsideration to be received by the Corporation under the contract isallocated among the separate units of accounting based on theirrelative fair values or, where fair values for all deliverables areunavailable, based on the fair value of the undelivered item.

Revenues generated by its consolidated leasehold hoteloperations are recognized at the time of the sale or rendering ofservices by the hotel.

The Corporation recognizesrevenue from other hotel investments, accounted for by the cost method,when profit distributions are receivable from the partnerships orcorporations.

|  |           |                                                         |
|--|-----------|---------------------------------------------------------|
|  | (l)  | Stock-basedcompensation and other stock-based payments: |

Employeestock options granted or modified on or after January  1,2003 are accounted for using the fair value-based method. Under thefair value-based method, compensation cost of a stock option ismeasured at fair value at the date of grant and is expensed over thestock option's vesting period, with a corresponding increase tocontributed surplus. When these stock options are exercised, theproceeds, together with the amount recorded in contributed surplus, arerecorded in capital stock.

Stock options granted priorto January  1,  2003 are accounted for using the settlementmethod.

Under the Corporation’s restricted stockprogram, compensation cost of a restricted share granted is measuredand recorded at fair value at the date of grant, with a correspondingincrease to contributed surplus.

15

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

|  |           |               |
|--|-----------|---------------|
|  | (m)  | Income taxes: |

TheCorporation uses the asset and liability method of accounting forfuture income taxes. Under the asset and liability method, futureincome tax assets and liabilities are determined based on‘‘temporary differences’’ (differences betweenthe 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. Avaluation allowance is recorded against any future income tax asset ifit is more likely than not that the asset will not be realized. Incometax expense or benefit is the sum of the Corporation's provisionfor current income taxes and the difference between the opening andending balances of the future income tax assets and liabilities.

|  |           |                                 |
|--|-----------|---------------------------------|
|  | (n)  | Changes in accounting policies: |

|  |           |                             |
|--|-----------|-----------------------------|
|  | (i)  | Variable interest entities: |

The Canadian Institute of Chartered Accountants(‘‘CICA’’) issued Accounting Guideline No. 15,‘‘Consolidation of Variable Interest Entities’’(‘‘AcG-15’’), which establishes criteria toidentify variable interest entities (‘‘VIEs’’)and the primary beneficiary of such entities. Entities that qualify asVIEs must be consolidated by their primary beneficiary. Theimplementation of AcG-15, effective January  1,  2005, didnot require the Corporation to consolidate any additionalinterests.

|  |            |                                                    |
|--|------------|----------------------------------------------------|
|  | (ii)  | Investments inhotel partnerships and corporations: |

In conjunctionwith the issuance of Section 3475, ‘‘Disposal of Long-LivedAssets and Discontinued Operations’’, the CICA eliminatedthe exception from consolidation for a temporary controlled subsidiaryeffective for fiscal years beginning on or after October  1,2004. Accordingly, effective January  1,  2005, theCorporation accounts for its temporary investments, which are notcontrolled but over which it has significant influence, by the equitymethod, and consolidates its temporary investments which arecontrolled. The change in accounting for these temporary investmentsdid not have a material impact on the consolidated financial statementsof the Corporation for the year ended December  31,2005.

16

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                             |
|----------|---------------------------------------------|
| 1.  | Significantaccounting policies (continued): |

|  |             |                                   |
|--|-------------|-----------------------------------|
|  | (iii)  | Diluted earnings (loss) pershare: |

In June  2005, the Emerging IssuesCommittee of the CICA issued Abstract EIC-155, ‘‘The Effectof Contingently Convertible Instruments on Diluted Earnings perShare’’, which requires the application of the‘‘if-converted method’’ to account for thepotential dilution relating to the conversion of contingentlyconvertible instruments, such as FSHI's convertible senior notes.EIC-155 was effective for interim and annual reporting periodsbeginning on or after October  1,  2005, and is required tobe applied retroactively, with restatement of prior period dilutedearnings per share. The implementation of EIC-155 in 2005 did not havean impact on diluted earnings (loss) per share in 2005 and 2004, as theeffect of the assumed conversion of FSHI's convertible seniornotes to 3,489,525 Limited Voting Shares, by application of the‘‘if-converted method’’, has been excluded fromthe calculations as the inclusion of this conversion resulted in ananti-dilutive effect for the years ended December  31,  2005and 2004.

|  |           |                     |
|--|-----------|---------------------|
|  | (o)  | Comparativefigures: |

Certain 2004 comparative figures have beenreclassified to conform with the financial statement presentationadopted for 2005. In addition, US dollars were adopted as theCorporation's reporting currency effective January  1,2005 (note 1(a)). As a result, 2004 comparative figures have beenrestated in USdollars.

|          |              |
|----------|--------------|
| 2.  | Receivables: |

|                                                                   |
|-------------------------------------------------------------------|
|                                                                   |  |  |  |  |  |  |  |  |  |  |
|                                                              |  |   | 2005 |   |  |   | 2004 |   |
| Trade accounts ofconsolidated hotels                              |  | $ | 1,526 |   |  | $ | 4,331 |   |
| Receivables from hotel partnerships, affiliates and managedhotels |  |   | 52,684 |   |  |   | 56,674 |   |
| Receivablesrelating to stock options exercised (note 11(a))       |  |   | – |   |  |   | 5,708 |   |
| Taxes receivable                                                  |  |   | 6,647 |   |  |   | 2,735 |   |
| Other                                                             |  |   | 8,833 |   |  |   | 12,093 |   |
|                                                              |  |   |   |   |  |   |   |   |
|                                                              |  | $ | 69,690 |   |  | $ | 81,541 |   |
|                                                                   |

Receivables atDecember 31, 2005 are recorded net of an allowance for doubtfulaccounts of $2,792 (2004 - $2,535). The net bad debt expense for theyear ended December 31, 2005 was $18 (2004 - $10).

17

----

FOURSEASONS HOTELS INC.

Notes toConsolidated Financial Statements (continued)

Years ended December  31,  2005 and2004(In thousands of US dollars (note 1(a)) except pershare amounts)

|  |
|--|
|  |  |
|  |

|          |                       |
|----------|-----------------------|
| 3.  | Long-termreceivables: |

|                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                                 |  |  |  |  |  |  |  |  |  |  |
|                                                                                                            |  |   | 2005 |   |  |   | 2004 |   |
| Secured cash flowbond, interest at 10%, due 2007, £9.7 million (a)                                        |  | $ | 16,640 |   |  | $ | 18,529 |   |
| Securedloans:                                                                                                   |  |   |   |   |  |   |   |   |
| Secured byshares:                                                                                               |  |   |   |   |  |   |   |   |
| Interest at 10%, due2038, £12.2 million (b)                                                               |  |   | 20,994 |   |  |   | 23,377 |   |
| Interest at 7.5%, compounded annually, AUS$26.6million (2004  - AUS$25.0 million)                               |  |   | 19,409 |   |  |   | 19,528 |   |
| Interest at 5.625%,compounded annually, repayable over the period to 2010                                       |  |   | 6,399 |   |  |   | 6,058 |   |
| Secured byproperty:                                                                                             |  |   |   |   |  |   |   |   |
| Interest at 7%,compounded annually, repayable over the period to 2012                                           |  |   | 8,865 |   |  |   | 9,068 |   |
| Interest at LIBORplus 1.25% (2004 - LIBOR plus 0.45% to 1.25%),compounded monthly (c)                           |  |   | 5,000 |   |  |   | 5,000 |   |
| Interest at 8%, compounded annually, repayableover the period to 2025                                           |  |   | 6,967 |   |  |   | 2,100 |   |
| Interest at LIBOR plus 4%, repayable overtheperiod to 2024                                                      |  |   | 5,000 |   |  |   | 5,000 |   |
| Interest at LIBOR plus 1.85%, repayable over theperiod to 2015, £10.3 million (2004 - £8.9 million) |  |   | 17,736 |   |  |   | 17,031 |   |
| Interest at5%, repayable over the period to 2009                                                                |  |   | 5,235 |   |  |   | – |   |
| Interest at LIBOR plus2.0%, repayable over the period to 2015, C$7.4 million                                    |  |   | 6,346 |   |  |   | – |   |
| Interest at LIBORplus 2.0%, repayable over the period to 2012                                                   |  |   | 16,676 |   |  |   | – |   |
| Due from officersand employees, non-interest bearing mortgages, C$15.4 million (2004 -C$14.3 million)           |  |   | 13,211 |   |  |   | 11,885 |   |
| Unsecured loans related to managedhotels:                                                                       |  |   |   |   |  |   |   |   |
| Interest at7.75%                                                                                                |  |   | – |   |  |   | 15,000 |   |
| Interest at 10%, compounded annually                                                                            |  |   | – |   |  |   | 9,988 |   |
| Interest at10.5%, compounded monthly, AUS$9.9 million                                                           |  |   | 7,249 |   |  |   | 7,755 |   |
| Interest at 7.5%, compoundedannually, repayable on demand, AUS$6.8 million (2004 - AUS$6.4million)              |  |   | 4,995 |   |  |   | 4,975 |   |
| Interest at 7%                                                                                                  |  |   | 2,698 |   |  |   | 2,698 |   |
| Interest at Euribor plus 2%,due 2021, €6.0 million (2004 - €6.3million)                               |  |   | 7,161 |   |  |   | 8,474 |   |
| Interest at 6%, due 2009, € 3.9million (2004 - € 3.0 million)                                         |  |   | 4,662 |   |  |   | 4,061 |   |
| Interest at 9%, compoundedannually, repayable over the period to 2015                                           |  |   | 3,140 |   |  |   | 1,960 |   |
| Non-interestbearing                                                                                             |  |   | 20,093 |   |  |   | 19,812 |   |
|                                                                                                            |  |   | 198,476 |   |  |   | 192,299 |   |
| Lessallowance for doubtful long-term receivables (d)                                                            |  |   | (23,102 | )  |  |   | (13,239 | )  |
|                                                                                                            |  |   |   |   |  |   |   |   |
|                                                                                                            |  | $ | 175,374 |   |  | $ | 179,060 |   |
|                                                                                                                 |

18

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                   |
|----------|-----------------------------------|
| 3.  | Long-termreceivables (continued): |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (a)  | Principal and interest on the bondare payable annually every March out of 50% of the availablecash flow (as defined in the bond indenture) from Four SeasonsHotel London. The bond is due from an affiliate of Kingdom InvestmentsInc. ("Kingdom"), which is a shareholder ofFSHI, and is secured by the affiliate's investment in the hotel.The maturity date of the bond, which was originally December15,  2005, was extended to December  15,  2007 under thesame terms and conditions. |

|  |           |                                                                                                                                                                                                                                                                               |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (b)  | Principal and interest on the loanare payable annually every March out of the other 50% of theavailable cash flow from Four Seasons Hotel London (a). The loan is duefrom an affiliate of Kingdom and is secured by the affiliate'sadditional indirect interest in the hotel. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (c)  | As at December  31,  2005and 2004, the Corporation had fully provided for its $5,000 loanrelating to Four Seasons Hotel Caracas, which is secured by a secondmortgage and registered against the hotel, and non-interest bearingadvances of $1,887. The hotel is currently closed. The Corporation isin dispute with the owner of the hotel regarding a variety of mattersrelating to the completion and ongoing operation of the hotel,including the default on the $5,000 loan. Formal notice of default wasgiven to the owner. The dispute was referred to arbitration and thearbitration tribunal declared that the owner had failed to perform allof its obligations under the Corporation's management agreements,including, without limitation, its obligation to complete the hotel asa world-class luxury hotel and to allow the Corporation to manage thehotel free from unlawful interference of the owner. The arbitrationtribunal awarded damages totalling approximately $8,000, plusarbitration fees and expenses of approximately $240. The owner haschallenged the enforcement of the decision from the arbitrationtribunal. The Corporation has not recorded any receivables arising fromthe decision as at December  31,  2005. Included in‘‘Other expense, net’’ for the year endedDecember  31,  2005 are legal and enforcement costs relatingto the dispute of $497 (2004 - $233). |

|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | In addition, in 2003, the Corporationreceived judgment in its legal proceedings against the owner, whichinvolved the protection of its proprietary materials. The court foundagainst the owner on all matters, including illegal computer‘‘hacking’’ and unlawful and unauthorized useof the Corporation's proprietary information, and ordered that theowner pay to the Corporation damages totalling approximately $4,900,plus legal costs and expenses of approximately $1,400. The owner hasappealed the judgment from the legal proceeding. The Corporation hasnot recorded any receivable arising from the judgment as atDecember  31,  2005 and 2004. |

19

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                   |
|----------|-----------------------------------|
| 3.  | Long-termreceivables (continued): |

|  |           |                                                                        |
|--|-----------|------------------------------------------------------------------------|
|  | (d)  | Changes in the allowance fordoubtful long-term receivables consist of: |

|                                               |
|-----------------------------------------------|
|                                               |  |  |  |  |  |  |  |  |  |  |
|                                          |  |   | 2005 |   |  |   | 2004 |   |
| Balance, beginningof year                     |  | $ | (13,239 | )  |  | $ | (13,466 | )  |
| Recovery of (provision for) loss (note 13(b)) |  |   | (8,829 | )  |  |   | 489 |   |
| Transfer fromreceivables                      |  |   | (1,364 | )  |  |   | – |   |
| Foreign exchange gain (loss)                  |  |   | 330 |   |  |   | (262 | )  |
|                                          |  |   |   |   |  |   |   |   |
| Balance,end of year                           |  | $ | (23,102 | )  |  | $ | (13,239 | )  |
|                                               |

|          |                                                    |
|----------|----------------------------------------------------|
| 4.  | Investmentsin hotel partnerships and corporations: |

|                                             |
|---------------------------------------------|
|                                             |  |  |  |  |  |  |  |  |  |  |
|                                        |  |   | 2005 |   |  |   | 2004 |   |
| Operating properties (note 13(b) and(c))    |  | $ | 91,020 |   |  | $ | 123,542 |   |
| Propertiesunder construction or development |  |   | 8,908 |   |  |   | 7,796 |   |
|                                        |  |   |   |   |  |   |   |   |
|                                        |  | $ | 99,928 |   |  | $ | 131,338 |   |
|                                             |

|          |              |
|----------|--------------|
| 5.  | Fixedassets: |

|                                      |
|--------------------------------------|
|                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                 |  | 2005 |  | 2004 |
|                                 |  | Cost |  | Accumulated depreciation and amortization |  | Net book value |  | Cost |  | Accumulateddepreciation and amortization |  | Net bookvalue |
| Land                                 |  | $23,322 |  | $            – |  | $23,322 |  | $21,850 |  | $            – |  | $21,850 |
| Buildings                            |  | 8,362 |  | (3,292) |  | 5,070 |  | 8,100 |  | (2,859) |  | 5,241 |
| Buildings under construction         |  | 18,703 |  | – |  | 18,703 |  | 3,396 |  | – |  | 3,396 |
| Furniture, fixtures andequipment     |  | 24,875 |  | (11,008) |  | 13,867 |  | 39,625 |  | (17,193) |  | 22,432 |
| Leasehold interests and improvements |  | 8,618 |  | (4,730) |  | 3,888 |  | 12,808 |  | (5,788) |  | 7,020 |
|                                 |  |   |  |   |  |   |  |   |  |   |  |   |
|                                 |  | $83,880 |  | $(19,030) |  | $64,850 |  | $85,779 |  | $(25,840) |  | $59,939 |
|                                      |

Depreciation and amortizationexpense for fixed assets was $4,526 (2004 - $5,770).

20

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                                    |
|----------|------------------------------------|
| 6.  | Investment inmanagement contracts: |

|                                                   |
|---------------------------------------------------|
|                                                   |  |  |  |  |  |  |  |  |  |  |
|                                              |  |   | 2005 |   |  |   | 2004 |   |
| Managementcontracts (note 13(b) and (c))          |  | $ | 212,187 |   |  | $ | 225,089 |   |
| Less accumulated amortization (note13(b) and (c)) |  |   | (47,255 | )  |  |   | (43,816 | )  |
|                                              |  |   |   |   |  |   |   |   |
|                                              |  | $ | 164,932 |   |  | $ | 181,273 |   |
|                                                   |

Amortization expense formanagement contracts was $6,139 (2004 - $5,464).

|          |                                          |
|----------|------------------------------------------|
| 7.  | Investment in trademarks and tradenames: |

|                              |
|------------------------------|
|                              |  |  |  |  |  |  |  |  |  |  |
|                         |  |   | 2005 |   |  |   | 2004 |   |
| Trademarks and trade names   |  | $ | 10,067 |   |  | $ | 9,713 |   |
| Less accumulatedamortization |  |   | (5,857 | )  |  |   | (5,289 | )  |
|                         |  |   |   |   |  |   |   |   |
|                         |  | $ | 4,210 |   |  | $ | 4,424 |   |
|                              |

Amortization expense fortrademarks and trade names was $527 (2004 - $525).

|          |               |
|----------|---------------|
| 8.  | Income taxes: |

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

|         |
|---------|
|         |  |  |  |  |  |  |  |  |  |  |
|    |  |   | 2005 |   |  |   | 2004 |   |
| Canada  |  | $ | (72,169 | )  |  | $ | 8,231 |   |
| Foreign |  |   | 33,105 |   |  |   | 30,040 |   |
|    |  |   |   |   |  |   |   |   |
|    |  | $ | (39,064 | )  |  | $ | 38,271 |   |
|         |

21

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                          |
|----------|--------------------------|
| 8.  | Income taxes(continued): |

The recovery of (provision for) incometaxes is as follows:

|            |
|------------|
|            |  |  |  |  |  |  |  |  |  |  |
|       |  |   | 2005 |   |  |   | 2004 |   |
| Current:   |  |   |   |   |  |   |   |   |
| Federal    |  | $ | 739 |   |  | $ | (3,418 | )  |
| Provincial |  |   | 1,192 |   |  |   | (2,054 | )  |
| Foreign    |  |   | (3,843 | )  |  |   | (3,593 | )  |
|       |  |   | (1,912 | )  |  |   | (9,065 | )  |
| Future:    |  |   |   |   |  |   |   |   |
| Federal    |  |   | 8,466 |   |  |   | (2,928 | )  |
| Provincial |  |   | 3,631 |   |  |   | (895 | )  |
| Foreign    |  |   | 656 |   |  |   | 315 |   |
|       |  |   | 12,753 |   |  |   | (3,508 | )  |
|       |  |   |   |   |  |   |   |   |
|       |  | $ | 10,841 |   |  | $ | (12,573 | )  |
|            |

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

|                                                   |
|---------------------------------------------------|
|                                                   |  |  |  |  |  |  |  |  |  |  |
|                                              |  |   | 2005 |   |  |   | 2004 |   |
| Earnings (loss)before income taxes                |  | $ | (39,064 | )  |  | $ | 38,271 |   |
| Items not deductible (not subject to taxes)       |  |   | (786 | )  |  |   | 30,331 |   |
|                                              |  |   |   |   |  |   |   |   |
| Earnings(loss) subject to taxes                   |  | $ | (39,850 | )  |  | $ | 68,602 |   |
| Statutory Canadian federal andprovincial tax rate |  |   | 34.66 | %  |  |   | 34.35 | %  |
|                                              |  |   |   |   |  |   |   |   |
| Expectedincome tax recovery (expense)             |  | $ | 13,812 |   |  | $ | (23,565 | )  |
| Reduction in tax due to lower foreigntax rates    |  |   | 6,421 |   |  |   | 10,992 |   |
| Increasein valuation allowance                    |  |   | (7,711 | )  |  |   | – |   |
| Other                                             |  |   | (1,681 | )  |  |   | – |   |
|                                              |  |   |   |   |  |   |   |   |
| Incometax recovery (expense)                      |  | $ | 10,841 |   |  | $ | (12,573 | )  |
|                                                   |

22

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                          |
|----------|--------------------------|
| 8.  | Income taxes(continued): |

The valuation allowance for the yearended December  31,  2005 was $10,525 (2004 - $2,496), whichresults from potential limitations on the use of capital andnon-capital tax losses in Canada and certain foreign jurisdictions, aswell as the uncertainty related to the realization of a future taxasset in respect of long-term obligations. In order to fully realizethe future income tax assets, net of the valuation allowance, of$23,809, the Corporation will need to generate future taxable income ofapproximately $77,000. Based upon projections of future taxable incomeover the years in which the future income tax assets are deductible,management believes it is more likely than not that the Corporationwill realize the benefits of these deductible differences, net of theexisting valuation allowance. The amount of the future income taxassets considered realizable, however, could be reduced in the nearterm if estimated future taxable income during the carryforward periodis reduced.

23

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                          |
|----------|--------------------------|
| 8.  | Income taxes(continued): |

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

|                                                   |
|---------------------------------------------------|
|                                                   |  |  |  |  |  |  |  |  |  |  |
|                                              |  |   | 2005 |   |  |   | 2004 |   |
| Future income taxassets:                          |  |   |   |   |  |   |   |   |
| Investments in hotelpartnerships and corporations |  | $ | 10,753 |   |  | $ | 1,703 |   |
| Tax losses carried forward andother assets        |  |   | 16,271 |   |  |   | 11,293 |   |
| Long-term receivables                             |  |   | 5,270 |   |  |   | 523 |   |
| Investment in trademarks and tradenames           |  |   | 969 |   |  |   | 799 |   |
| Currentassets                                     |  |   | 10 |   |  |   | – |   |
| Long-term obligations                             |  |   | 1,061 |   |  |   | 2,562 |   |
|                                              |  |   | 34,334 |   |  |   | 16,880 |   |
| Valuationallowance                                |  |   | (10,525 | )  |  |   | (2,496 | )  |
| Total gross future income tax assets              |  |   | 23,809 |   |  |   | 14,384 |   |
| Future income taxliabilities:                     |  |   |   |   |  |   |   |   |
| Investment inmanagement contracts                 |  |   | (8,063 | )  |  |   | (6,572 | )  |
| Fixed assets                                      |  |   | (1,192 | )  |  |   | (3,984 | )  |
| Accountspayable and accrued liabilities           |  |   | (115 | )  |  |   | (117 | )  |
| Total gross future income taxliabilities          |  |   | (9,370 | )  |  |   | (10,673 | )  |
|                                              |  |   |   |   |  |   |   |   |
| Futureincome tax assets                           |  | $ | 14,439 |   |  | $ | 3,711 |   |
|                                                   |

At December 31, 2005,the Corporation had accumulated net operating losses carried forward ofapproximately $43,013 (2004 - $21,104) for tax purposes, which expireas follows:

|        |
|--------|
|        |  |  |  |  |  |  |
| 2010   |  | $ | 13,484 |   |
| 2015   |  |   | 29,529 |   |
|   |  |   |   |   |
|   |  | $ | 43,013 |   |
|        |

24

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|          |                          |
|----------|--------------------------|
| 8.  | Income taxes(continued): |

The Corporation has made no provision forincome taxes, or additional foreign taxes, on the cumulative unremittedearnings of foreign subsidiaries, which were approximately $176,000 asat December  31,  2005 (2004 - $158,500), because theCorporation does not intend to repatriate these earnings in theforeseeable future. These earnings could become subject to additionaltaxes if remitted as dividends or if the Corporation sells itsinterests in the affiliates. The Corporation cannot practicallyestimate the amount of additional taxes that might be payable on theunremitted earnings.

|          |                                          |
|----------|------------------------------------------|
| 9.  | Accounts payableand accrued liabilities: |

|                                                      |
|------------------------------------------------------|
|                                                      |  |  |  |  |  |  |  |  |  |  |
|                                                 |  |   | 2005 |   |  |   | 2004 |   |
| Trade accountspayable                                |  | $ | 9,309 |   |  | $ | 15,502 |   |
| Payrolland employee benefits                         |  |   | 20,234 |   |  |   | 17,088 |   |
| Accrued sales, marketing and advertising liabilities |  |   | 2,490 |   |  |   | 4,193 |   |
| Taxes payable                                        |  |   | 4,476 |   |  |   | 9,836 |   |
| Dividends payable                                    |  |   | 1,640 |   |  |   | 1,588 |   |
| Other accruedliabilities                             |  |   | 16,648 |   |  |   | 12,208 |   |
|                                                 |  |   |   |   |  |   |   |   |
|                                                 |  | $ | 54,797 |   |  | $ | 60,415 |   |
|                                                      |

|           |                       |
|-----------|-----------------------|
| 10.  | Long-termobligations: |

|                                                                                           |
|-------------------------------------------------------------------------------------------|
|                                                                                           |  |  |  |  |  |  |  |  |  |  |
|                                                                                      |  |   | 2005 |   |  |   | 2004 |   |
| Convertible notes,issued in 2004 (a)                                                      |  | $ | 222,186 |   |  | $ | 215,316 |   |
| Currency and interest rate swap (a)                                                       |  |   | 17,410 |   |  |   | – |   |
| Deferred gain on termination ofinterest rate swapC$6.9 million (2004 - C$8.8 million) (a) |  |   | 5,871 |   |  |   | 7,278 |   |
| Accrued benefit liability(note 15(b))                                                     |  |   | 25,843 |   |  |   | 27,263 |   |
| Other long-term obligations                                                               |  |   | 7,368 |   |  |   | 6,975 |   |
|                                                                                      |  |   | 278,678 |   |  |   | 256,832 |   |
| Less amounts duewithin one year                                                           |  |   | (4,853 | )  |  |   | (3,766 | )  |
|                                                                                      |  |   |   |   |  |   |   |   |
|                                                                                      |  | $ | 273,825 |   |  | $ | 253,066 |   |
|                                                                                           |

25

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                   |
|-----------|-----------------------------------|
| 10.  | Long-termobligations (continued): |

|  |           |                                   |
|--|-----------|-----------------------------------|
|  | (a)  | Convertible notes, issued in2004: |

In June  2004, FSHI issued $250,000principal amount of convertible senior notes. The net proceeds of theissuance, after deducting offering expenses and underwriters'commission, were $241,332. These notes bear interest at the rate of1.875% per annum (payable semi-annually in arrears onJanuary 30 and July  30 to holders of record onJanuary  15 and July  15, beginning January 30, 2005),and will mature on July  30,  2024, unless earlier redeemedor repurchased. The notes are convertible into Limited Voting Shares ofFSHI at an initial conversion rate of 13.9581  shares per each onethousand US dollar principal amount (equal to a conversion price ofapproximately $71.64 per Limited Voting Share), subject to adjustmentsin certain events, in circumstances in which (i) the Limited VotingShares have traded for more than 130% of the conversion pricefor a specified period, (ii) the notes have a trading price of lessthan 95% of the market price of the Limited Voting Shares intowhich they may be converted for a specified period, (iii) FSHIcalls the notes for redemption, or (iv) specified corporatetransactions or a ‘‘fundamental change’’ occur.In connection with a ‘‘fundamental change’’ onor prior to July  30, 2009, on conversion holders of noteswill be entitled to receive additional Limited Voting Shares having avalue equal to the aggregate of the make whole premium they would havereceived if the notes were purchased plus an amount equal to anyaccrued but unpaid interest. FSHI may choose to settle conversion(including any make whole premium) in Limited Voting Shares, cash or acombination of Limited Voting Shares and cash (at its option).

On or after August  4,  2009, FSHI may (at itsoption) redeem all or a portion of the notes, in whole or in part, forcash at 100% of their principal amount, plus any accrued andunpaid interest. On each of July  30,  2009, 2014 and 2019,holders may require FSHI to purchase all or a portion of their notes at100% of their principal amount, plus any accrued and unpaidinterest. FSHI will pay cash for any notes so purchased on July30,  2009. Repurchases made by FSHI on July  30,  2014and July  30,  2019 may be made (at its option) in cash,Limited Voting Shares or a combination of cash and Limited VotingShares.

Upon the occurrence of certain designatedevents, FSHI will be required to make an offer to purchase the notes at100% of their principal amount plus any accrued and unpaidinterest, and, in the case of a ‘‘fundamentalchange’’ that is also a ‘‘change ofcontrol’’ occurring on or before July  30,  2009,FSHI also will pay a make whole premium. FSHI may choose to pay thepurchase price (including any make whole premium) for notes in respectof which its offer is accepted in (at its option) cash, Limited VotingShares, securities of the surviving entity (if FSHI is not thesurviving corporation), or a combination of cash and shares orsecurities.

26

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                   |
|-----------|-----------------------------------|
| 10.  | Long-termobligations (continued): |

In accordance with Canadiangenerally accepted accounting principles, the notes were bifurcated inthe consolidated financial statements into a debt component(representing the principal value of a bond of $211,754, which wasestimated based on the present value of a $250,000 bond maturing in2009, yielding 5.33% per annum, compounded semi-annually, andpaying a coupon of 1.875% per annum) and an equity component(representing the value of the conversion feature of the notes).Accordingly, net proceeds have been allocated $211,754 to long-termobligations and $36,920 to shareholders' equity. The offeringexpenses and underwriters' commission of $7,019 relating to thedebt component are recorded in ‘‘Otherassets’’. The debt component of the notes will increase foraccounting purposes at the compounded interest rate of 5.33%,less the coupon paid of 1.875% per annum.

Inconnection with the offering, FSHI entered into an interest rate swapagreement to July 30, 2009 with an initial notional amount of$211,754, pursuant to which FSHI had agreed to receive interest at afixed rate of 5.33% per annum and pay interest at six-monthLIBOR, in arrears, plus 0.4904%. FSHI had designated theinterest rate swap as a fair value hedge of the notes. As a result,FSHI accounted for the payments under the interest rate swap to thedate of termination on an accrual basis, which resulted in an effectiveinterest rate (for accounting purposes) on the hedged notes ofsix-month LIBOR, in arrears, plus 0.4904%.

InOctober  2004, FSHI terminated the interest rate swap agreementand received proceeds of $9,000. The book value of the interest rateswap at the date of termination was C$2.0 million ($1,617). Thegain of C$9.3 million ($7,383) was deferred for accounting purposes andis being amortized over the period to July  30,  2009, whichwould have been the maturity date of the swap agreement. During 2005,C$1.9 million ($1,579) (2004 - C$0.5 million ($396)) of the deferredgain was amortized and recorded as a reduction of interestexpense.

27

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                   |
|-----------|-----------------------------------|
| 10.  | Long-termobligations (continued): |

In April  2005, FSHIentered into a currency and interest rate swap agreement to July30,  2009, pursuant to which FSHI has agreed to receive interestat a fixed rate of 5.33% per annum on an initial notional amountof $215,842 and pay interest at a floating rate of six-month Canadianbankers' acceptance, in arrears, plus 1.1% per annum on aninitial notional amount of C$269.2 million. The notional amount of theswap will increase semi-annually in conjunction with the increase inthe debt component of the convertible senior notes. On July30,  2009, FSHI will pay C$311.8 million and receive $250,000under the swap. FSHI has designated the swap as a fair value hedge ofthe convertible senior notes, which were issued in 2004. As a result,FSHI accounts for the payments under the interest rate swap on anaccrual basis, which results in an effective interest rate (foraccounting purposes) on the hedged notes of six-month Canadianbankers' acceptance, in arrears, plus 1.1%. In addition,foreign exchange translation gains and losses on the notional amount ofthe swap are accrued on a monthly basis under ‘‘Long-termobligations’’ on the balance sheet and recognized in‘‘Other expense, net’’, offsetting therespective monthly translation losses and gains recognized on theconvertible senior notes.

|  |           |                                   |
|--|-----------|-----------------------------------|
|  | (b)  | Convertible notes, issued in1999: |

During 1999, FSHI issued $655,519 principalamount at maturity (September 23, 2029) of convertible notes for grossproceeds of $172,500. The net proceeds of the issuance, after deductingoffering expenses and underwriters' commission, were approximately$166,000. In accordance with Canadian generally accepted accountingprinciples, the notes were bifurcated into a debt component(representing the present value of a zero coupon bond of $655,519maturing in 2029, yielding 9% per annum, compoundingsemi-annually) and an equity component (representing the value of theconversion feature of the notes). Accordingly, net proceeds wereoriginally allocated $46,731 to long-term obligations and $121,115 toshareholders' equity. The offering expenses and underwriters'commission relating to the debt component of the notes of $1,729 wererecorded in ‘‘Other assets’’. As atDecember  31,  2003, FSHI had 655,404 convertible notesoutstanding.

FSHI was entitled to redeem theconvertible notes commencing in September  2004 for cash equal tothe issue price plus accrued interest calculated at 4.5% perannum. In September  2004, FSHI redeemed for cash all theseconvertible notes for $328.73 per each one thousand dollar principalamount at maturity (the redemption price being the issue price plusunpaid accrued interest to but excluding the date of redemption) for anaggregate payment of $215,451.

28

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                   |
|-----------|-----------------------------------|
| 10.  | Long-termobligations (continued): |

In accordance with Canadiangenerally accepted accounting principles, the consideration paid on theredemption was allocated to the liability and equity components of theconvertible notes based on their relative fair values at the date ofthe redemption. A pre-tax accounting loss of $11,174 was recognizedrelated to the debt component of the convertible notes (representingthe difference between the carrying value of the debt component and therelative fair value of the debt component and calculated at the presentvalue of the amount due on maturity, using an assumed 25-year interestrate of 8.474% per annum, compounding semi-annually). This losswas recorded in ‘‘Other expense, net’’ in theconsolidated statements of operations. In addition, at the interestrate noted above, a pre-tax accounting gain of $6,241 was recognized onthe extinguishment of the equity component of the convertible notes($121,094). The gain of $6,241 was recorded in contributed surplus. Thetax impact of the redemption of both the liability and equitycomponents of the convertible notes was a decrease to future income taxassets and a decrease to contributed surplus of $3,167. The netafter-tax impact on shareholders' equity from the redemption ofboth the debt and equity components of the convertible notes was areduction of $8,100.

In accordance with Canadiangenerally accepted accounting principles, the cash paid on redemptionof the convertible notes relating to the interest accreted fromSeptember  1999 to September  2004, for accounting purposes,of $25,840 on the convertible notes has been recorded in theconsolidated statements of cash provided by operations. The remainingcash paid on redemption of $189,670 has been recorded under‘‘Financing’’ in the consolidated statements ofcash flows.

|  |           |                      |
|--|-----------|----------------------|
|  | (c)  | Bank creditfacility: |

The Corporation has a committed bank creditfacility of $125,000, which expires in September  2007. Borrowingsunder this credit facility bear interest at LIBOR plus a spread rangingbetween 0.875% and 2.25% in respect of LIBOR-basedborrowings (prime rate plus a spread ranging between nil and1.25% in respect of prime rate borrowings), depending uponcertain criteria specified in the loan agreement. As at December31,  2005 and 2004, no amounts were borrowed under this creditfacility. However, approximately $1,600 of letters of credit wereissued under this credit facility as at December  31,  2005.No amounts have been drawn under these letters of credit.

29

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                   |
|-----------|-----------------------------------|
| 10.  | Long-termobligations (continued): |

The bank credit facilitycontains certain covenants which require the Corporation to maintaincertain financial ratios. In addition, the bank credit facilitycontains additional covenants which restrict the Corporation'sability to borrow funds ranking superior to these obligations and toundertake certain types of major transactions. The Corporation was incompliance with these covenants during 2005 and 2004. In addition, thelenders may require repayment of the bank credit facility on a changeof control of FSHI.

|  |           |                       |
|--|-----------|-----------------------|
|  | (d)  | Interest income, net: |

|                                  |
|----------------------------------|
|                                  |  |  |  |  |  |  |  |  |  |  |
|                             |  |   | 2005 |   |  |   | 2004 |   |
| Interestincome                   |  | $ | 16,746 |   |  | $ | 13,023 |   |
| Intereston long-term obligations |  |   | (12,902 | )  |  |   | (11,667 | )  |
| Other interest expense           |  |   | (442 | )  |  |   | (250 | )  |
|                             |  |   |   |   |  |   |   |   |
| Interestincome, net              |  | $ | 3,402 |   |  | $ | 1,106 |   |
|                                  |

30

----

FOURSEASONS HOTELS INC.

Notes toConsolidated Financial Statements (continued)

Years ended December  31,  2005 and2004(In thousands of US dollars (note 1(a)) except pershare amounts)

|  |
|--|
|  |  |
|  |

|           |                      |
|-----------|----------------------|
| 11.  | Shareholders'equity: |

|  |           |                |
|--|-----------|----------------|
|  | (a)  | Capital stock: |

Authorized:

|  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 3,725,698  | Variable Multiple Voting Shares(‘‘VMVS’’), entitling the holder to that numberof votes that results in the aggregate votes attaching to the VMVS,representing approximately 65% of the votes attaching to theVMVS and the Limited Voting Shares (‘‘LVS’’),in aggregate, which, at December  31,  2005, was 16.09 votes(2004 - 16.07 votes) per VMVS. Changes in the number of votes attachingto the VMVS necessary to maintain this level will occur concurrentlywith the issue of additional LVS. |

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

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

|  |                 |                                                                                                                                         |
|--|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|  | Unlimited  | LVS, voting (one vote pershare) and ranking equally with the VMVS as to distributions onliquidation, dissolution or winding-up of FSHI. |

|  |                 |                                                                                                                                                                                                                                                                                                                                                 |
|--|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | Unlimited  | First Preference Shares andSecond Preference Shares, issuable in series, non-voting and rankingprior to all other shares with respect to payment of dividends anddistributions on liquidation or winding-up of FSHI. Thedividend rate, redemption and conversion rights, if any, are to bedetermined prior to issuance by the directors ofFSHI. |

31

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                  |
|-----------|----------------------------------|
| 11.  | Shareholders'equity (continued): |

Issued:

|                    |
|--------------------|
|                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|               |  | VMVS |  | LVS |  |   |   |   |
|               |  | Shares |  | Statedvalue |  | Shares |  | Statedvalue |  | Total |
| December31,  2003  |  |   | 3,832,172 |   |  | $ | 27 |   |  |   | 31,409,420 |   |  | $ | 209,242 |   |  | $ | 209,269 |   |
| Optionsexercised   |  |   | – |   |  |   | – |   |  |   | 1,367,054 |   |  |   | 39,711 |   |  |   | 39,711 |   |
| Conversion of VMVS |  |   | (106,474 | )  |  |   | (1 | )  |  |   | 106,474 |   |  |   | 1 |   |  |   | – |   |
| December31,  2004  |  |   | 3,725,698 |   |  |   | 26 |   |  |   | 32,882,948 |   |  |   | 248,954 |   |  |   | 248,980 |   |
| Options exercised  |  |   | – |   |  |   | – |   |  |   | 32,380 |   |  |   | 1,450 |   |  |   | 1,450 |   |
|               |  |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
| December31,  2005  |  |   | 3,725,698 |   |  | $ | 26 |   |  |   | 32,915,328 |   |  | $ | 250,404 |   |  | $ | 250,430 |   |
|                    |

An amountof $5,708 relating to options exercised in 2004, which was recorded in‘‘Receivables’’ as at December  31,2004, was received by the Corporation in 2005 (note 2).

Pursuant to an agreement approved by the shareholders ofFSHI at a special meeting held on December 19, 1989, FSHI andits principal operating subsidiary, FSHL, have agreed that FSHL willmake a payment to Mr. Isadore Sharp on an arm's-length sale ofcontrol of FSHI. The first portion of the payment will be an amountequal to 5% of the product of (i) the total number of VMVS andLVS outstanding at the time of the sale, and (ii) the per shareconsideration received by holders of LVS minus C$6.30. If the per shareconsideration received by holders of LVS on the sale is equal to ormore than 125% of the weighted average price of LVS traded inboard lots on The Toronto Stock Exchange during the period commencingsix months and ending one month before the first public announcement ofthe sale, Mr.  Sharp will be entitled to an additional paymentequal to 5% of the product of (i)  the total number of VMVSand LVS outstanding at the time of the sale, and (ii) the per shareconsideration received by holders of LVS minus C$20.84.

The right to receive the two payments may be transferredamong members of Mr.  Sharp's family, their holding companiesand trusts. Upon the death of Mr.  Sharp, the right to thepayments passes to his legal or personal representatives, heirs orpermitted assigns.

32

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                  |
|-----------|----------------------------------|
| 11.  | Shareholders'equity (continued): |

|  |           |                   |
|--|-----------|-------------------|
|  | (b)  | Stock optionplan: |

Under the Corporation's stock option plan,eligible directors, executives and employees may be granted options toacquire LVS at a price which is not less than the weighted averageprice of board lots traded on The Toronto Stock Exchange in the fivetrading days preceding the date of grant. The options are nottransferable, have a term of 10 years, and generally vest in varyingproportions on the first, second, third, fourth and fifth anniversariesof the date of grant. All vested options must be exercised withinspecified periods in the event of retirement, termination other thanfor cause (including as a result of a change of control ofFSHI), incapacity or death of the director, executive oremployee.

Changes in stock options for the years endedDecember  31,  2005 and 2004 were as follows:

|                                            |
|--------------------------------------------|
|                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                       |  | Optionsoutstanding |  | Weighted averageexercise price |  | Availableforgrant |
| Balance at December  31,  2003             |  | 5,839,697 |  | C$53.91 |  | 166,366 |
| Additional optionsapproved by shareholders |  | – |  | – |  | 500,000 |
| Granted                                    |  | 160,900 |  | 71.14 |  | (160,900) |
| Exercised                                  |  | (1,367,054) |  | 36.35 |  | – |
| Cancelled                                  |  | (58,160) |  | 88.05 |  | 58,160 |
| Balance at December  31,2004               |  | 4,575,383 |  | 59.32 |  | 563,626 |
| Exercised                                  |  | (32,380) |  | 55.22 |  | – |
| Cancelled                                  |  | (57,540) |  | 67.53 |  | 57,540 |
|                                       |  |   |  |   |  |   |
| Balanceat December  31,  2005              |  | 4,485,463 |  | C$59.25 |  | 621,166 |
|                                            |

Informationrelating to stock options outstanding at December  31,  2005was as follows:

|                         |
|-------------------------|
|                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                    |  | Optionsoutstanding |  | Options exercisable |  |   |
| Rangeof exercise prices |  | Optionsoutstanding |  | Weightedaverageremainingcontractual life |  | Weightedaverage exerciseprices |  | Optionsexercisable |  | Weightedaverageexerciseprices |
| C$21.52- C$37.47        |  | 312,548 |  | 2.1 years |  | C$30.94 |  | 294,346 |  | C$30.25 |
| C$39.25 - C$50.23       |  | 1,385,214 |  | 4.0 years |  | 47.07 |  | 1,129,614 |  | 47.20 |
| C$53.28- C$67.07        |  | 1,278,085 |  | 4.4 years |  | 54.97 |  | 1,069,005 |  | 54.68 |
| C$68.80 - C$84.00       |  | 820,140 |  | 6.4 years |  | 73.43 |  | 290,140 |  | 75.35 |
| C$86.97 - C$108.14      |  | 689,476 |  | 4.5 years |  | 87.63 |  | 658,096 |  | 87.66 |
|                    |  |   |  |   |  |   |  |   |  |   |
| C$21.52- C$108.14       |  | 4,485,463 |  | 4.5 years |  | C$59.25 |  | 3,441,201 |  | C$58.18 |
|                         |

33

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                  |
|-----------|----------------------------------|
| 11.  | Shareholders'equity (continued): |

The Corporation uses the fairvalue-based method for all employee stock options granted or modifiedon or after January  1,  2003. There were no stock optionsgranted in 2005. The fair value of stock options granted in 2004 wasestimated using a Black-Scholes option pricing model with the followingassumptions: risk-free interest rates ranging from 2.96% to4.39%; semi-annual dividend per LVS of C$0.055; volatilityfactor of the expected market price of LVS ranging from 28% to30%; and expected lives of the options ranging between four andseven years, depending on the level of the employee who was grantedstock options. For the options granted in 2004, the weighted averagefair value of the options at the grant dates was C$25.32 ($19.46). Forpurposes of stock option expense and pro forma disclosures, theestimated fair value of the options is amortized to compensationexpense over the options' vesting period.

Proforma disclosure is required to show the effect of the application ofthe fair value-based method to employee stock options granted during2002, which were not accounted for using the fair value-based method.For the years ended December  31,  2005 and 2004, if theCorporation had applied the fair value-based method to options grantedduring 2002, the Corporation's net earnings and basic and dilutedearnings per share would have been reduced to the pro forma amountsindicated below:

|                                                                                                                       |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                       |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                  |  |   | 2005 |   |  |   | 2004 |   |
| Stock optionexpense included in compensation expense                                                                  |  | $ | (2,333 | )  |  | $ | (1,633 | )  |
|                                                                                                                  |  |   |   |   |  |   |   |   |
| Netearnings (loss), as reported                                                                                       |  | $ | (28,223 | )  |  | $ | 25,698 |   |
| Additional expense that would have beenrecorded if all outstanding stock options granted during 2002 had beenexpensed |  |   | (1,626 | )  |  |   | (2,622 | )  |
|                                                                                                                  |  |   |   |   |  |   |   |   |
| Proforma net earnings (loss)                                                                                          |  | $ | (29,849 | )  |  | $ | 23,076 |   |
| Earnings (loss) pershare:                                                                                             |  |   |   |   |  |   |   |   |
| Basic, as reported                                                                                                    |  | $ | (0.77 | )  |  | $ | 0.72 |   |
| Basic, proforma                                                                                                       |  |   | (0.81 | )  |  |   | 0.65 |   |
| Diluted,as reported                                                                                                   |  |   | (0.77 | )  |  |   | 0.69 |   |
| Diluted, pro forma                                                                                                    |  |   | (0.81 | )  |  |   | 0.62 |   |
|                                                                                                                  |  |   |   |   |  |   |   |   |
|                                                                                                                       |

34

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                  |
|-----------|----------------------------------|
| 11.  | Shareholders'equity (continued): |

|  |           |                          |
|--|-----------|--------------------------|
|  | (c)  | Restrictedstock program: |

The Corporation has implemented arestricted stock program, under which eligible employees will beentitled to earn performance-based compensation in the form of LVSpurchased on their behalf by a third party administrative agent withfunds deposited by the Corporation. Subject to limited exceptions,participants in the plan will not be able to dispose of those LVS for athree-year period. During 2005, the Corporation recorded compensationexpense of $445 relating to the restricted stock program.

|  |           |                      |
|--|-----------|----------------------|
|  | (d)  | Contributed surplus: |

Changes in contributed surplus for the years endedDecember  31,  2005 and 2004 were as follows:

|                                                                                                           |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                           |  |  |  |  |  |  |  |  |  |  |
|                                                                                                      |  |   | 2005 |   |  |   | 2004 |   |
| Contributedsurplus, beginning of year                                                                     |  | $ | 8,088 |   |  | $ | 3,593 |   |
| Stock option expense (b)                                                                                  |  |   | 2,333 |   |  |   | 1,633 |   |
| Adjustment relating to stock optionsexercised                                                             |  |   | (5 | )  |  |   | (212 | )  |
| Restrictedstock program (c)                                                                               |  |   | 445 |   |  |   | – |   |
| Gain on redemption of the equity component ofconvertiblenotes, net of income taxes of $3,167 (note 10(b)) |  |   | – |   |  |   | 3,074 |   |
|                                                                                                      |  |   |   |   |  |   |   |   |
| Contributedsurplus, end of year                                                                           |  | $ | 10,861 |   |  | $ | 8,088 |   |
|                                                                                                           |

35

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                  |
|-----------|----------------------------------|
| 11.  | Shareholders'equity (continued): |

|  |           |                           |
|--|-----------|---------------------------|
|  | (e)  | Earnings(loss) per share: |

Basic earnings (loss) per share iscalculated by dividing net earnings (loss) by the weighted averagenumber of VMVS and LVS outstanding during the year. Potentiallyissuable 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 stockmethod’’, which takes into account the dilution relating toLVS issuable under the Corporation's stock option plan, and byapplication of the ‘‘if-converted method’’,which takes into account the potential dilution relating to theconversion of the Corporation's convertible notes.

A reconciliation of net earnings and the weighted averagenumber of VMVS and LVS used to calculate basic earnings per share anddiluted earnings per share is as follows:

|                                          |
|------------------------------------------|
|                                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                     |  | 2005 |  | 2004 |
|                                     |  | Netloss |  | Shares |  | Netearnings |  | Shares |
| Basic earnings (loss) per shareamounts   |  | $ | (28,223 | )  |  |   | 36,628,206 |   |  | $ | 25,698 |   |  |   | 35,647,986 |   |
| Effect of assumed dilutiveconversions:   |  |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
| Stock optionplan                         |  |   | – |   |  |   | – |   |  |   | – |   |  |   | 1,666,230 |   |
|                                     |  |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
| Dilutedearnings (loss) per share amounts |  | $ | (28,223 | )  |  |   | 36,628,206 |   |  | $ | 25,698 |   |  |   | 37,314,216 |   |
|                                          |

The diluted earnings(loss) per share calculation excluded the effect of the assumedconversions of 4,485,463 stock options to LVS, under theCorporation's stock option plan, during the year endedDecember  31,  2005 (2004 - 847,876 stock options), as theinclusion of these conversions resulted in an anti-dilutive effect. Asthe Corporation incurred a net loss for the year ended December31,  2005, all outstanding stock options were excluded from thecalculation of diluted loss per share for 2005. There was no dilutionin 2005 and 2004 relating to the convertible senior notes issued in2004 (note 1(n)(iii)). In addition, the effect of the assumedconversion of convertible notes (issued in 1999 and subsequentlyredeemed in 2004) (note 10(b)) to 3,463,155 LVS, by application of the‘‘if-converted method’’, has been excluded fromthe calculation for 2004 as the inclusion of this conversion resultedin an anti-dilutive effect.

36

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                  |
|-----------|----------------------------------|
| 11.  | Shareholders'equity (continued): |

|  |           |                                                     |
|--|-----------|-----------------------------------------------------|
|  | (f)  | Equityadjustment from foreign currency translation: |

Changesin equity adjustment from foreign currency translation for the yearsended December 31, 2005 and 2004 were as follows:

|                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                                    |  |  |  |  |  |  |  |  |  |  |
|                                                                                                               |  |   | 2005 |   |  |   | 2004 |   |
| Balance, beginningof year                                                                                          |  | $ | 98,783 |   |  | $ | 97,058 |   |
| Changesin exchange rates used to translate the Corporation's netinvestment in foreign self-sustaining subsidiaries |  |   | (29,393 | )  |  |   | (14,327 | )  |
| Changes arising fromUS dollar reporting currency                                                                   |  |   | 18,384 |   |  |   | 16,052 |   |
|                                                                                                               |  |   |   |   |  |   |   |   |
| Balance,end of year                                                                                                |  | $ | 87,774 |   |  | $ | 98,783 |   |
|                                                                                                                    |

|           |                       |
|-----------|-----------------------|
| 12.  | Consolidatedrevenues: |

|                                                        |
|--------------------------------------------------------|
|                                                        |  |  |  |  |  |  |  |  |  |  |
|                                                   |  |   | 2005 |   |  |   | 2004 |   |
| Revenues fromManagement Operations (a)                 |  | $ | 186,250 |   |  | $ | 168,076 |   |
| Revenues from OwnershipOperations                      |  |   | 65,343 |   |  |   | 97,436 |   |
| Distributions from hotel investments                   |  |   | 132 |   |  |   | 293 |   |
| Fees from Ownership Operations toManagement Operations |  |   | (3,387 | )  |  |   | (4,538 | )  |
|                                                   |  |   |   |   |  |   |   |   |
|                                                   |  | $ | 248,338 |   |  | $ | 261,267 |   |
|                                                        |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (a)  | EffectiveJanuary  1,  2004, the Corporation ceased designating its USdollar foreign exchange forward contracts as hedges of its US dollarfee revenues. These contracts were entered into during 2002, and all ofthese contracts matured during 2004. The foreign exchange gains onthese contracts of $11,201, which were deferred prior to January1,  2004, were recognized in 2004 as an increase of fee revenuesover the course of the year. In addition, effective January1,  2004, the US dollar foreign exchange forward contracts weremarked-to-market on a monthly basis with the resulting changes in fairvalues being recorded as a foreign exchange gain or loss and wasincluded in ‘‘Other expense, net’’. Thisresulted in a $497 foreign exchange gain being recorded in 2004. TheCorporation did not hedge any of its US dollar fee revenues during2005. |

37

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                    |
|-----------|--------------------|
| 13.  | Other expense,net: |

|                                                                |
|----------------------------------------------------------------|
|                                                                |  |  |  |  |  |  |  |  |  |  |
|                                                           |  |   | 2005 |   |  |   | 2004 |   |
| Loss on retirementbenefit plan transition (a) and (note 15(b)) |  | $ | (35,467 | )  |  | $ | – |   |
| Asset provisions and write-downs(b)                            |  |   | (31,787 | )  |  |   | – |   |
| Foreignexchange gain (loss) (note 14)                          |  |   | (24,632 | )  |  |   | 3,173 |   |
| Loss on redemption of convertible notes(note 10(b))            |  |   | – |   |  |   | (11,174 | )  |
| Gain (loss) on disposition of assets (c)                       |  |   | 3,175 |   |  |   | (3,672 | )  |
| Legal and enforcement costs (note3(c))                         |  |   | (497 | )  |  |   | (233 | )  |
|                                                           |  |   |   |   |  |   |   |   |
|                                                           |  | $ | (89,208 | )  |  | $ | (11,906 | )  |
|                                                                |

|  |           |                                                                                                                                                                                                                                                                                                                                                                |
|--|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (a)  | Losson retirement benefit plan transition includes past service costsrecognized on curtailment of $1,595, actuarial loss recognized on plansettlement of $1,497, realignment of pension liability between theCorporation and managed hotels and resorts of $12,331, costs relatingto settlement with employees of $10,321 and other settlement costs of$9,723. |

|  |           |                                                                                                                                                                                                                                                                                       |
|--|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (b)  | Asset provisions andwrite-downs for the year ended December  31,  2005 includes aprovision for loss of $8,829 on long-term receivables, a write-down of$17,853 on investments in hotel partnerships and corporations and awrite-down of $5,105 on investment in management contracts. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (c)  | Gain (loss) on disposition of assetsfor the year ended December  31,  2005 includes a net gain of$9,337 (2004 - net loss of $3,672) on the dispositions of investmentsin hotel partnerships and corporations, the settlement of long-termreceivables and the exit from certain management contracts, and a lossof $6,162 on the assignment of leases and the sale of related assets ofThe Pierre (note 15(c)(i)). |

|           |                              |
|-----------|------------------------------|
| 14.  | Foreignexchange gain (loss): |

During 2005, the Corporationrecorded a net foreign exchange loss of $24,632(2004 - net foreign exchange gain of $3,173), which isincluded in ‘‘Other expense, net’’. The netforeign exchange loss in 2005 and the net foreign exchange gain in 2004related primarily to the foreign currency translation gains and losseson unhedged net asset and liability positions, primarily inUS dollars, euros, pounds sterling and Australian dollars, andlocal currency foreign exchange gains and losses on net monetary assetsincurred by the Corporation's designated foreign self-sustainingsubsidiaries.

38

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                          |
|-----------|------------------------------------------|
| 14.  | Foreignexchange gain (loss) (continued): |

In December2005, the Corporation entered into 24 foreign exchange forwardcontracts to convert $21,189 of US dollars to Canadian dollars at aweighted average forward exchange rate of 1.16 over the period endingJune  2006. The Corporation entered into these contracts toprotect itself in the event of a strengthening Canadian currency as itrelates to expenditures incurred by the Corporation for its managementoperations and corporate expenses, which are denominated primarily inCanadian dollars. These contracts are being marked-to-market on amonthly basis with the resulting changes in fair values being recordedas a foreign exchange gain or loss. This resulted in a $127 foreignexchange loss being recorded in 2005.

EffectiveJanuary  1,  2004, the Corporation ceased designating its USdollar foreign exchange forward contracts as hedges of its 2004 USdollar revenue and, as a result, these contracts were marked-to-marketon a monthly basis with the resulting changes in fair values beingrecorded as a foreign exchange gain or loss (note 12(a)).

|           |                                |
|-----------|--------------------------------|
| 15.  | Commitments and contingencies: |

|  |           |                    |
|--|-----------|--------------------|
|  | (a)  | Lease commitments: |

The Corporation has entered into lease agreements forcertain hotel properties and corporate offices for periods up to theyear 2054.

|  |           |                                                                                                                                                                                                                                                             |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (i)  | Future minimum leasepayments for Four Seasons Hotel Vancouver and certain corporate offices(but exclusive of any contingent rentals, occupancy costs, and leasecommitments relating to Four Seasons Hotel London, which is discussedbelow), are as follows: |

|                    |
|--------------------|
|                    |  |  |  |  |  |  |
| 2006               |  | $ | 4,281 |   |
| 2007               |  |   | 3,491 |   |
| 2008               |  |   | 3,142 |   |
| 2009               |  |   | 2,995 |   |
| 2010               |  |   | 2,922 |   |
| Subsequent to 2010 |  |   | 22,984 |   |
|               |  |   |   |   |
|               |  | $ | 39,815 |   |
|                    |

39

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

|  |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (ii)  | TheCorporation is the tenant of the land and premises constituting FourSeasons Hotel London pursuant to the terms of a lease (the‘‘FS Lease’’) expiring on January 28,2054. The leasehold interest of the Corporation in the hotel is acontinuing obligation which survived the sale by the Corporation of itsownership interest in the hotel in 1995. The Corporation has enteredinto a sublease of the hotel with the entity(the ‘‘Sub-Tenant’’) on whose behalf theCorporation manages the hotel. The Sub-Tenant is owned12.5% by the Corporation and 87.5% by an affiliate ofKingdom. The annual rent payable by the Corporation under the FS Leaseis currently £3.9  million. The same amount of annual rent ispayable by the Sub-Tenant to the Corporation pursuant to the subleaseand is payable out of the operating accounts of the hotel. |

Pursuant to the arrangements relating to the ownership ofthe Sub-Tenant, the Corporation would be required to fund itsproportionate 12.5% share of any amounts required to ensure thatthe Sub-Tenant honoured all of the obligations necessary for theoperation of the hotel, including the sublease payments, to the extentthe majority shareholder makes payment of its proportionate share ofsuch amounts. The Corporation has not been required either to makepayment of any amount of rent under the FS Lease that has not firstbeen paid to the Corporation under the sublease or to fund any amountsunder the terms of the ownership arrangements relating to theSub-Tenant. Historically, hotel operating cash flow has been more thansufficient to meet the rent obligation. In the event of a non-paymentof rent under the sublease, the Corporation would be entitled toforfeit the sublease. The ongoing management of the hotel by theCorporation is subject to a non-disturbance agreement with the seniorlender of the Sub-Tenant. Future minimum lease payments of the hotel,exclusive of any contingent rentals and occupancy costs, are asfollows:

|                    |
|--------------------|
|                    |  |  |  |  |  |  |
| 2006               |  | $ | 6,790 |   |
| 2007               |  |   | 6,876 |   |
| 2008               |  |   | 6,883 |   |
| 2009               |  |   | 6,883 |   |
| 2010               |  |   | 6,883 |   |
| Subsequent to 2010 |  |   | 296,551 |   |
|               |  |   |   |   |
|               |  | $ | 330,866 |   |
|                    |

40

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

|  |           |                                     |
|--|-----------|-------------------------------------|
|  | (b)  | Retirement benefit plancommitments: |

The Corporation maintains an unfundedmulti-employer, non-contributory, defined benefit retirement plan onbehalf of the Corporation and the owners of certain managed properties.This plan provides retirement benefits for certain senior executives ofthe 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 ofits senior executives and hotel and resort general managers from thisunfunded defined benefit retirement plan to a fully funded retirementplan based on a defined contribution format. The change in theretirement plan was made to improve the certainty and predictabilityrelated to the cost of the retirement benefits. 

Thetransition to this defined contribution retirement plan resulted in acash funding by the Corporation in 2005 of $36,029 and a pre-taxaccounting charge of $35,467, which is recorded in ‘‘Otherexpense, net’’. During the year ended December31,  2005, the Corporation incurred a pension expense of $2,243related to the defined contribution retirement plan.

The Corporation continues to maintain the unfundedmulti-employer, non-contributory, defined benefit retirement plan onbehalf of four active executives and 14 retired executives and generalmanagers, as well as the owner of two of its managed properties. As atDecember  31,  2005, the Corporation has an accrued definedbenefit liability of $25,843 in respect of this plan, which is includedin ‘‘Long-term obligations’’. This accrueddefined benefit liability excludes the defined benefit obligation ofthe owner of the two managed properties for their current generalmanagers.

41

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

The measurement date forthe accrued benefit obligation was December  31,  2005 (2004- December  31,  2004). The Corporation uses the corridormethod to amortize actuarial gains and losses (such as changes inactuarial assumptions and experience gains and losses). Under thecorridor method, amortization is recorded only if the accumulated netactuarial gains or losses exceed 10% of the accrued benefitobligation.

The transition to the defined contributionretirement plan results in both a curtailment and a settlement ofdefined benefit obligations and the Corporation accounts for thecurtailment before it accounts for the settlement. The Corporationamortizes past service costs from plan amendments on a straight-linebasis over the expected average remaining service period of employeeswho were active on the day of the amendment.

Information relating to the defined benefit retirement planfor the years ended December  31,  2005 and 2004 based onprojections of employees' compensation levels to the date ofretirement were as follows:

|                                                          |
|----------------------------------------------------------|
|                                                          |  |  |  |  |  |  |  |  |  |  |
|                                                     |  |   | 2005 |   |  |   | 2004 |   |
| Accrued benefitobligation, beginning of year             |  | $ | 58,702 |   |  | $ | 46,942 |   |
| Change in accrued benefitobligation:                     |  |   |   |   |  |   |   |   |
| Service cost                                             |  |   | 1,927 |   |  |   | 1,715 |   |
| Past servicecost                                         |  |   | 3,507 |   |  |   | – |   |
| Interestcost                                             |  |   | 3,401 |   |  |   | 3,257 |   |
| Benefitspaid                                             |  |   | (1,129 | )  |  |   | (1,121 | )  |
| Actuarial loss                                           |  |   | 15,712 |   |  |   | 3,824 |   |
| Curtailment                                              |  |   | (14,720 | )  |  |   | – |   |
| Plan settlement                                          |  |   | (37,834 | )  |  |   | – |   |
| Foreign currency exchange ratechanges                    |  |   | 1,811 |   |  |   | 4,085 |   |
| Accrued benefit obligation, end ofyear                   |  |   | 31,377 |   |  |   | 58,702 |   |
| Unamortized past service cost                            |  |   | (1,040 | )  |  |   | – |   |
| Unamortizedactuarial loss for changes in assumptions     |  |   | (4,099 | )  |  |   | (9,060 | )  |
| Accrued benefitliability, end of year, before allocation |  |   | 26,238 |   |  |   | 49,642 |   |
| Portion allocatedto managed properties                   |  |   | (395 | )  |  |   | (22,379 | )  |
|                                                     |  |   |   |   |  |   |   |   |
| Accruedbenefit liability, end of year, after allocation  |  | $ | 25,843 |   |  | $ | 27,263 |   |
|                                                          |

42

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FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

Under the defined benefitretirement plan, the benefits expected to be paid in each of the nextfive years, and in the aggregate for the five fiscal years thereafter,to retired employees of the Corporation, including benefitsattributable to estimated future employee service, are approximately:2006 - $1,200; 2007 - $1,500; 2008 - $1,600; 2009 - $1,700; 2010 -$3,000; 2011 to 2015 - $13,400.

|                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                               |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                          |  |   | 2005 |   |  |   | 2004 |   |
| Assumptions as of December31:                                                                                                 |  |   |   |   |  |   |   |   |
| Discount rates - benefitobligation                                                                                            |  |   | 4.75 | %  |  |   | 6.00 | %  |
| Discount rates - benefit expense                                                                                              |  |   | 6.00 | %  |  |   | 6.50 | %  |
| Ratesof increase in compensation levels - benefit obligation                                                                  |  |   | 4.00 | %  |  |   | 3.00 | %  |
| Ratesof increase in compensation levels - benefit expense                                                                     |  |   | 3.00 | %  |  |   | 3.00 | %  |
|                                                                                                                          |  |   |   |   |  |   |   |   |
| Componentsof defined benefit expense beforeallocation:                                                                        |  |   |   |   |  |   |   |   |
| Service cost                                                                                                                  |  | $ | 1,927 |   |  | $ | 1,715 |   |
| Past servicecost                                                                                                              |  |   | 3,507 |   |  |   | – |   |
| Interestcost                                                                                                                  |  |   | 3,401 |   |  |   | 3,257 |   |
| Actuarialloss                                                                                                                 |  |   | 15,712 |   |  |   | 3,824 |   |
| Curtailment                                                                                                                   |  |   | (14,720 | )  |  |   | – |   |
| Elements ofemployee future benefit costs before adjustments to recognize thelong-term nature of employee future benefit costs |  |   | 9,827 |   |  |   | 8,796 |   |
| Difference betweenactuarial loss recognized for the year and actual actuarial loss onaccrued benefit                          |  |   | (15,435 | )  |  |   | (3,625 | )  |
| Difference between amortization of pastservice costs for the year and actual plan amendments                                  |  |   | (3,499 | )  |  |   | – |   |
| Actuarial loss recognized oncurtailment                                                                                       |  |   | 14,720 |   |  |   | – |   |
| Actuarial loss recognized on plansettlement                                                                                   |  |   | 5,930 |   |  |   | – |   |
| Past service costrecognized on curtailment                                                                                    |  |   | 2,467 |   |  |   | – |   |
| Defined benefit expense beforeallocation                                                                                      |  |   | 14,010 |   |  |   | 5,171 |   |
| Portion allocated to managedproperties                                                                                        |  |   | (7,992 | )  |  |   | (2,802 | )  |
|                                                                                                                          |  |   |   |   |  |   |   |   |
| Definedbenefit expense after allocation                                                                                       |  | $ | 6,018 |   |  | $ | 2,369 |   |
|                                                                                                                               |

43

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

The Corporation'sshare of the defined benefit expense for the year ended December31,  2005 of $6,018 (2004 - $2,369), includes pension expense of$2,001 (2004 - $2,369). In 2005, it also includes past service costrecognized on curtailment of $1,595, actuarial loss recognized on plansettlement of $1,497 and other costs of $925, all of which are includedin ‘‘Loss on retirement benefit plantransition’’ (note 13(a)).

|  |           |                                              |
|--|-----------|----------------------------------------------|
|  | (c)  | Guarantees, commitments andindemnifications: |

|  |           |                            |
|--|-----------|----------------------------|
|  | (i)  | Guarantees andcommitments: |

As at December  31,  2005, theCorporation had provided certain guarantees in connection withproperties under its management. These include guarantees in respect offour projects totalling a maximum of approximately $18,500, as well asa guarantee of $300 for relocation costs for certain employees. TheCorporation has lease guarantees in respect of Four Seasons HotelLondon, which are more fully described in note 15(a)(ii), and FourSeasons Hotel Prague of approximately €0.8  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 hoteloperations and/or has various forms of security or recourse to theowner of the property.

The Corporation also has fourother commitments totalling approximately $16,000 to four propertiesunder its management. In addition, during 2005, the Corporationassigned its leases and sold the related assets of The Pierre. As partof the sale, in accordance with statutory provisions, the purchaseragreed to assume a portion of the Corporation's contributionhistory with a multi-employer pension fund for the unionizedhotel employees (the ‘‘NYC Pension’’). Thispermitted the Corporation to withdraw from the NYC Pension withoutincurring a withdrawal liability estimated at $10,700.

If the purchaser withdraws as a result of the leasecancellation by the landlord in certain circumstances in 2008 or 2011,the Corporation has agreed to indemnify the purchaser for that portionof the withdrawal liability relating to their assumption of theCorporation’s contribution history. The amount of any potentialfuture liability resulting from this indemnity is not determinable atthis time as it would be based upon future events related to the NYCpension.

44

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

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

The Corporationbelieves that the likelihood of it being required to make a payment isremote, and no amount has been recorded as at December  31,2005 in respect of a potential NYC Pension withdrawal liability.

During 2006, the Corporation expects to fund $1,700relating to one of these commitments. The Corporation's assessmentof its potential liability for such matters could change as a resultof, among other things, the associated risks and uncertainties.

|  |            |                                          |
|--|------------|------------------------------------------|
|  | (ii)  | Disposition indemnificationarrangements: |

In connection with the sale of all or apart of its interest in a property, the Corporation and itssubsidiaries may agree to indemnify against claims relating to breachesof specific covenants or representations and warranties. The maximumamount of the indemnification in these transactions is generallylimited to the purchase price paid for that interest. The nature ofthese indemnities prevents the calculation of an exact amount that maybe payable to the indemnified parties.

45

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                           |
|-----------|-------------------------------------------|
| 15.  | Commitments andcontingencies (continued): |

(iii) Director and officerindemnification arrangements:

To the extent permittedby law, the Corporation and its subsidiaries indemnify individuals thatare, or have been, directors or officers against certain claims thatmay be made against them as a result of their being, or having been, adirector or officer at the request of the Corporation or itssubsidiaries. The Corporation has purchased directors' andofficers' liability insurance that may be available in respect ofcertain of these claims.

|  |            |                                    |
|--|------------|------------------------------------|
|  | (iv)  | Otherindemnification arrangements: |

In the ordinary course oftheir business, the Corporation and its subsidiaries enter into otheragreements with third parties that may contain indemnificationprovisions pursuant to which the parties to the agreements agree toindemnify one another if certain events occur (such as, but not limitedto, changes in laws and regulations or as a result of litigation claimsor liabilities which arise in respect of tax or environmentalmatters).

The terms of the Corporation'sindemnification provisions vary based on the contract, which (togetherwith the fact that any amounts that could be payable would be dependenton the outcome of future, contingent events, the nature and likelihoodof which cannot be determined at this time) precludes the Corporationfrom making a reasonable estimate of the maximum potential amount theCorporation and its subsidiaries could be required to pay tocounterparties. The Corporation believes that the likelihood that it orits subsidiaries would incur significant liability under theseobligations is remote. Historically, the Corporation and itssubsidiaries have not made any significant payments under suchindemnification agreements. No amount has been recorded in theconsolidated financial statements with respect to these indemnificationprovisions. The Corporation's assessment of its potentialliability could change in the future as a result of currentlyunforeseen circumstances.

46

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

15. Commitments and contingencies(continued):

|  |           |                                     |
|--|-----------|-------------------------------------|
|  | (d)  | Other commitmentsand contingencies: |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (i)  | In theordinary course of its business, the Corporation is named as adefendant in legal proceedings resulting from incidents taking place athotels owned or managed by it. The Corporation maintains comprehensiveliability insurance and also requires hotel owners to maintain adequateinsurance coverage. The Corporation believes such coverage to be of anature and amount sufficient to ensure that it is adequately protectedfrom suffering any material financial loss as a result of suchclaims. |

|  |            |                                                                                                                                                                                                                                                                                                                                                                                          |
|--|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (ii)  | A number of theCorporation's management contracts are subject to certainperformance tests which, if not met, could allow a contract to beterminated prior to its maturity. The Corporation generally has variousrights to cure any such defaults to avoid termination. In addition,certain management contracts are terminable by the hotel owner on adefined change of control of FSHI. |

|  |             |                                                                                                                                |
|--|-------------|--------------------------------------------------------------------------------------------------------------------------------|
|  | (iii)  | The Corporation is currently indispute with the owner of Four Seasons Hotel Caracas (note 3(c))over a variety of matters. |

47

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FOURSEASONS HOTELS INC.

Notes toConsolidated Financial Statements (continued)

Years ended December  31,  2005 and2004(In thousands of US dollars (note 1(a)) except pershare amounts)

|  |
|--|
|  |  |
|  |

|           |                                      |
|-----------|--------------------------------------|
| 16.  | Fair values offinancial instruments: |

The estimated fair value of afinancial instrument is the amount at which the instrument could beexchanged in a current transaction between willing parties, other thana forced or liquidation sale. These estimates, although based on therelevant market information about the financial instrument, aresubjective in nature and involve uncertainties and matters ofsignificant judgment and, therefore, cannot be determined withprecision. Changes in assumptions could significantly affect theestimates.

As cash equivalents, current receivables,current accounts payable and certain other short-term financialinstruments are all short-term in nature, their carrying amountsapproximate fair values.

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

Other financial instruments held by the Corporation includelong-term receivables due from owners of managed hotels(note 3). The Corporation does not have plans to sell theseloans to third parties and expects to realize or settle them in theordinary course of business. The fair values of these instrumentscannot be reasonably estimated because no active and liquid marketexists for these instruments, and a market rate of interest (forinstruments having similar terms and characteristics) which is requiredto be used in estimation techniques, such as discounted cash flowanalysis, cannot reasonably be determined due to the unusual terms ofthese instruments.

The Corporation enters into foreignexchange forward contracts that oblige it to buy or sell specificamounts of foreign currencies at set future dates at predeterminedexchange rates. Because a significant portion of the Corporation'srevenues is derived in foreign currencies (primarily US dollars) andexpenditures incurred by the Corporation for its management operationsare denominated primarily in Canadian dollars, the Corporation entersinto such contracts from time to time to protect itself in the event ofa strengthening Canadian currency. Management estimates future foreigncurrency cash flows on an ongoing basis, based on its projections offoreign currency-denominated management fees and other transactions.Management negotiates foreign exchange forward contracts in proportionto the magnitude and timing of these cash flows.

48

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                                  |
|-----------|--------------------------------------------------|
| 16.  | Fair values offinancial instruments (continued): |

As atDecember  31,  2005, the Corporation had sold forward $21,189of US dollars to receive Canadian dollars at a weighted average forwardexchange rate of 1.16, under 24 foreign exchange forward contracts,maturing over the period ending June  2006. There were no foreignexchange forward contracts outstanding as at December  31,2004. The fair value of foreign exchange forward contracts is estimatedfrom quotes obtained from the Corporation's counterparties for thesame or similar financial instruments.

The fair valuesof financial instruments are as follows:

|                                              |
|----------------------------------------------|
|                                              |  |  |  |  |  |  |  |  |  |  |
|                                         |  | Estimatedfairvalue |  | Carryingamount |
| 2005:                                        |
| Convertiblenotes, issued in 2004 (a)         |  | $ | (243,000 | )  |  | $ | (260,432 | )  |
| Currency and interest rateswap (note 10 (a)) |  |   | (24,000 | )  |  |   | (17,129 | )  |
| Foreign exchange forward contracts           |  |   | (127 | )  |  |   | (127 | )  |
| 2004:                                        |
| Convertiblenotes, issued in 2004 (a)         |  |   | (322,000 | )  |  |   | (253,562 | )  |
|                                         |  |   |   |   |  |   |   |   |
|                                              |

|  |           |                                                                                                                                                                                                                                                                                                                                                      |
|--|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (a)  | Thecarrying amount of the convertible notes includes the amounts allocatedto both long-term obligations and shareholders' equity. Itexcludes, however, the offering expenses and underwriters'commission related to the shareholders' equity component of thenotes of $1,326, which are recorded in ‘‘Shareholders'equity’’. |

49

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                       |
|-----------|-----------------------|
| 17.  | Segmentedinformation: |

The Corporation has two distinctoperating segments: Management Operations and Ownership Operations andCorporate Expenses. Under its Management Operations segment, theCorporation generally oversees, as agent for the property owner, allaspects of the day-to-day operations of the hotels and resorts that itmanages on behalf of the owners, including sales and marketing,reservations, accounting, purchasing, budgeting and the hiring,training and supervising of staff. For providing these services, theCorporation typically receives a base fee calculated as a percentage ofgross revenues of the hotel. In addition, the Corporation may receiveincentive fees based on the operating performance of the hotels andresorts. Generally, the properties’ owners, and not theCorporation, fund substantially all capital expenditures and workingcapital of the hotels and resorts, including all employment andoperating costs. This segment also includes the licensing and managingof branded residential projects. The Corporation is entitled to receivea royalty fee for the use of its brand name in connection with certainresidential projects, which is generally based on a percentage of thesales proceeds of the residences sold. In addition, the Corporationreceives a fee from the owners of interests in these residentialprojects for services provided in the ongoing management of theseunits.

Under its Ownership Operations and CorporateExpenses segment, the Corporation had an equity interest in 11properties under management and three projects under construction as atDecember 31, 2005. Earnings are primarily derived from theconsolidation of its wholly owned interest in one hotel (note 1(b)) anddistributions from its other equity interests. Generally, the OwnershipOperations and Corporate Expenses segment is subject to greatereconomic fluctuations than the Management Operations segment. Ownershipearnings can be materially affected by, among other things, changes intravel patterns, local wage rate factors, the level of capital spendingthat is required to appropriately maintain and renew the properties,volatility of construction costs, the availability of propertyfinancing and changes in interest rates. The Corporation structures itsownership interests separately from its management interests so as toenable the Corporation to dispose of ownership interests as saleopportunities arise, without affecting its managementinterests.

50

----

FOUR SEASONS HOTELSINC.

Notes to Consolidated FinancialStatements (continued)

Years endedDecember  31,  2005 and 2004(In thousands of USdollars (note 1(a)) except per share amounts)

|  |
|--|
|  |  |
|  |

|           |                                   |
|-----------|-----------------------------------|
| 17.  | Segmentedinformation (continued): |

|  |           |                        |
|--|-----------|------------------------|
|  | (a)  | Consolidated revenues: |

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

|                           |
|---------------------------|
|                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                      |  | 2005 |  | 2004 |
|                      |  | Managementrevenues |  | Ownershiprevenuesanddistributions |  | Consolidatedrevenues |  | Managementrevenues |  | Ownershiprevenuesanddistributions |  | Consolidatedrevenues |
| United States             |  | $55,554 |  | $35,539 |  | $91,093 |  | $59,049 |  | $61,880 |  | $120,929 |
| Other Americas/Caribbean  |  | 16,214 |  | 29,936 |  | 46,150 |  | 15,223 |  | 24,471 |  | 39,694 |
| Europe                    |  | 20,638 |  | – |  | 20,638 |  | 19,349 |  | 11,378 |  | 30,727 |
| Asia/Pacific              |  | 14,643 |  | – |  | 14,643 |  | 13,383 |  | – |  | 13,383 |
| Middle East               |  | 10,150 |  | – |  | 10,150 |  | 5,010 |  | – |  | 5,010 |
|                      |  | 117,199 |  | 65,475 |  | 182,674 |  | 112,014 |  | 97,729 |  | 209,743 |
| Reimbursedcosts           |  | 69,051 |  | – |  | 69,051 |  | 56,062 |  | – |  | 56,062 |
| Lessintersegment revenues |  | (3,387) |  | – |  | (3,387) |  | (4,538) |  | – |  | (4,538) |
|                      |  |   |  |   |  |   |  |   |  |   |  |   |
|                      |  | $182,863 |  | $65,475 |  | $248,338 |  | $163,538 |  | $97,729 |  | $261,267 |
|                           |

|  |           |              |
|--|-----------|--------------|
|  | (b)  | Totalassets: |

|                         |
|-------------------------|
|                         |  |  |  |  |  |  |  |  |  |  |
|                    |  |   | 2005 |   |  |   | 2004 |   |
| United States           |  | $ | 228,565 |   |  | $ | 276,175 |   |
| OtherAmericas/Caribbean |  |   | 359,536 |   |  |   | 326,465 |   |
| Europe                  |  |   | 203,004 |   |  |   | 191,565 |   |
| Asia/Pacific            |  |   | 78,858 |   |  |   | 89,792 |   |
| Middle East             |  |   | 10,238 |   |  |   | 18,150 |   |
|                    |  |   |   |   |  |   |   |   |
|                    |  | $ | 880,201 |   |  | $ | 902,147 |   |
|                         |

51

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