EXHIBIT 3


             Consolidated Financial Statements
             (In Canadian dollars)

             FOUR SEASONS HOTELS INC.

             Years ended December 31, 2004 and 2003



<PAGE>


AUDITORS' REPORT TO THE SHAREHOLDERS


We have audited the  consolidated  balance sheets of Four Seasons Hotels Inc. as
at December 31, 2004 and 2003 and the  consolidated  statements  of  operations,
retained earnings, cash provided by operations and cash flows for the years then
ended.  These financial  statements are the  responsibility of the Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with Canadian  generally accepted auditing
standards.  Those standards  require that we plan and perform an audit to obtain
reasonable  assurance  whether  the  financial  statements  are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation.

In our opinion,  these consolidated  financial statements present fairly, in all
material respects,  the financial position of the Corporation as at December 31,
2004 and 2003 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.



KPMG LLP
Chartered Accountants



Toronto, Canada

March 14, 2005

<PAGE>

FOUR SEASONS HOTELS INC.
Consolidated Statements of Operations

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------
                                                              2004         2003
--------------------------------------------------------------------------------
CONSOLIDATED REVENUES (NOTE 12)                           $339,788     $313,580
--------------------------------------------------------------------------------
MANAGEMENT OPERATIONS:
   Revenues:
      Fee revenues                                        $145,831     $120,530
      Reimbursed costs (note 1(l)(ii))                      72,716       75,303
      --------------------------------------------------------------------------
                                                           218,547      195,833
   -----------------------------------------------------------------------------
   Expenses:
      General and administrative expenses                  (44,783)     (41,008)
      Reimbursed costs (note 1(l)(ii))                     (72,716)     (75,303)
   -----------------------------------------------------------------------------
                                                          (117,499)    (116,311)
   -----------------------------------------------------------------------------
                                                           101,048       79,522
--------------------------------------------------------------------------------
OWNERSHIP AND CORPORATE OPERATIONS:
   Revenues                                                126,726      123,214

   Distributions from hotel investments                        398          153

   Expenses:
      Cost of sales and expenses                          (142,872)    (147,816)
      Fees to Management Operations                         (5,883)      (5,620)
   -----------------------------------------------------------------------------
                                                           (21,631)     (30,069)
--------------------------------------------------------------------------------
EARNINGS BEFORE OTHER OPERATING ITEMS                       79,417       49,453
Depreciation and amortization                              (15,281)     (15,011)
Other expense, net (note 13)                               (16,095)     (25,783)
--------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS                                    48,041        8,659
Interest income, net (note 10(d))                            1,494        3,350
--------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES                                49,535       12,009
--------------------------------------------------------------------------------
Income tax expense (note 8):
   Current                                                 (11,680)      (2,395)
   Future                                                   (4,623)      (4,460)
   Increase in future income tax assets                          -          230
   -----------------------------------------------------------------------------
                                                           (16,303)      (6,625)
--------------------------------------------------------------------------------
NET EARNINGS                                               $33,232      $ 5,384
--------------------------------------------------------------------------------
EARNINGS PER SHARE (NOTE 11(d))                            $  0.93      $  0.15
--------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (NOTE 11(d))                    $  0.89      $  0.15
--------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


                                        1

<PAGE>

FOUR SEASONS HOTELS INC.
Consolidated Balance Sheets

December 31, 2004 and 2003
(In thousands of Canadian dollars)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                    2004       2003                                                   2004     2003
--------------------------------------------------------------------------------------------------------------------
<S>                            <C>         <C>         <C>                                      <C>         <C>
ASSETS                                                 LIABILITIES AND SHAREHOLDERS' EQUITY

Current assets:                                        Current liabilities:
   Cash and cash equivalents    $272,467   $170,725       Accounts payable and accrued
   Receivables (note 2)           98,143     88,636        liabilities (note 9)                    $72,716  $61,045
   Inventory                       1,732      2,169       Long-term obligations due
   Prepaid expenses                3,588      3,780        within oneyear (note 10)                  4,533    2,587
---------------------------------------------------    -------------------------------------------------------------
                                 375,930    265,310                                                 77,249   63,632

Long-term receivables (note 3)   215,517    197,635    Long-term obligations (note 10)             304,590  117,521

Investments in hotel                                   Shareholders' equity (note 11):
 partnerships and                                        Capital stock                             379,227  329,274
 corporations (note 4)           158,079    157,638      Convertible notes (notes 10(a) and (b))    50,373  178,543
                                                         Contributed surplus                        11,402    5,529
Fixed assets (note 5)             72,143     75,789      Retained earnings                         295,218  265,754
                                                         Equity adjustment from foreign
Investment in management                                  currency translation                     (32,234) (13,593)
 contracts (note 6)              218,180    203,670    -------------------------------------------------------------
                                                                                                   703,986  765,507
Investment in trademarks and
 trade names (note 7)              5,325      5,757    Commitments and contingencies (note 15)

Future income tax assets
 (note 8)                          4,466     13,230

Other assets                      36,185     27,631
--------------------------------------------------------------------------------------------------------------------
                              $1,085,825    $946,660                                            $1,085,825 $946,660
--------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.


On behalf of the Board:

/s/ Isadore Sharp                          Director
------------------------

/s/ Ronald W. Osborne                      Director
------------------------


                                        2

<PAGE>

FOUR SEASONS HOTELS INC.
Consolidated Statements of Retained Earnings

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars)

--------------------------------------------------------------------------------
                                                              2004         2003
--------------------------------------------------------------------------------
Retained earnings, beginning of year                      $265,754     $264,016

Net earnings                                                33,232        5,384

Dividends declared                                          (3,768)      (3,646)
--------------------------------------------------------------------------------
Retained earnings, end of year                            $295,218     $265,754
--------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


                                        3

<PAGE>

FOUR SEASONS HOTELS INC.
Consolidated Statements of Cash Provided by Operations

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars)

--------------------------------------------------------------------------------
                                                               2004        2003
--------------------------------------------------------------------------------

Cash provided by (used in) operations:

MANAGEMENT OPERATIONS:
   Earnings before other operating items                   $101,048     $79,522
   Items not requiring an outlay of funds                     2,204       1,476
   -----------------------------------------------------------------------------
   Working capital provided by Management Operations        103,252      80,998
   -----------------------------------------------------------------------------

OWNERSHIP AND CORPORATE OPERATIONS:
   Loss before other operating items                        (21,631)    (30,069)
   Items not requiring an outlay of funds                     1,221         467
   -----------------------------------------------------------------------------
   Working capital used in Ownership and Corporate
     Operations                                             (20,410)    (29,602)
--------------------------------------------------------------------------------
                                                             82,842      51,396

Interest received                                            10,795      11,031
Interest paid                                                  (908)       (605)
Interest paid on redemption of convertible notes
   (note 10(b))                                             (33,057)          -
Proceeds received on termination of interest rate
 swap (note 10(a))                                           11,267           -
Current income tax received                                     427           -
Change in non-cash working capital                          (12,607)     13,709
Other                                                        (1,396)     (9,528)
--------------------------------------------------------------------------------
Cash provided by operations                                 $57,363     $66,003
--------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


                                        4

<PAGE>

FOUR SEASONS HOTELS INC.
Consolidated Statements of Cash Flows

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars)

--------------------------------------------------------------------------------
                                                              2004         2003
--------------------------------------------------------------------------------

Cash provided by (used in):

Operations                                                 $57,363      $66,003
--------------------------------------------------------------------------------
Financing:
   Issuance of convertible notes
    (note 10(a))                                           329,273            -
   Redemption of convertible
    notes (note 10(b))                                    (242,644)           -
   Other long-term obligations,  including current
    portion:
     Issued                                                     45            -
     Repaid                                                   (150)        (200)
   Issuance of shares (note 11(a))                          42,824        7,673
   Dividends paid                                           (3,690)      (3,622)
--------------------------------------------------------------------------------
   Cash provided by financing                              125,658        3,851
--------------------------------------------------------------------------------
Capital investments:
   Advances of long-term receivables                       (32,990)     (18,239)
   Receipt of long-term receivables                         11,720       11,845
   Hotel investments                                       (48,529)      (8,580)
   Disposal of hotel investments (note 4(c))                49,994        1,529
   Purchase of fixed assets                                 (8,360)     (19,331)
   Investment in trademarks, trade names and
    management contracts                                   (16,093)      (2,116)
   Other assets                                            (10,683)      (5,181)
   -----------------------------------------------------------------------------
   Cash used in capital investments                        (54,941)     (40,073)
--------------------------------------------------------------------------------
Increase in cash and cash equivalents                      128,080       29,781

Decrease in cash and cash equivalents due to
  unrealized foreign exchange loss                         (26,338)     (24,092)

Cash and cash equivalents, beginning of year               170,725      165,036
--------------------------------------------------------------------------------
Cash and cash equivalents, end of year                    $272,467     $170,725
--------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


                                        5

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

Four Seasons Hotels Inc.  ("FSHI") is  incorporated  under the Ontario  Business
Corporations Act and, through its subsidiaries, is engaged in the management of,
and the investment in, hotels, resorts, residence clubs (interval and fractional
ownership projects) and other branded residential  projects throughout the world
(note 17). In these consolidated financial statements, FSHI and its subsidiaries
are collectively referred to as the "Corporation".

At December 31, 2004,  the  Corporation  managed 63 hotels and resorts and three
residence clubs and had various projects under  construction or development,  of
which the  Corporation had an equity interest in 14 hotels and resorts and three
residence clubs under management and three projects under construction.

1.  SIGNIFICANT ACCOUNTING POLICIES:

    The  Corporation's  accounting  policies  and  its  standards  of  financial
    disclosure comply with accounting  principles that are generally accepted in
    Canada.  The major differences  between Canadian and United States generally
    accepted  accounting  principles,  insofar as they apply to the Corporation,
    are described in note 18.

    The significant accounting policies are summarized below:

    (a) Principles of consolidation:

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

        The  Corporation  consolidates  its  100%  leasehold  interests  in Four
        Seasons  Hotel  Vancouver  and The  Pierre  in New York  and,  until the
        termination  of the lease on September 26, 2004,  the  Corporation  also
        consolidated its 100% leasehold interest in Four Seasons Hotel Berlin.


                                        6

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

    (b) Translation of foreign currencies and derivative financial instruments:

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

        Revenues and expenses  denominated in foreign  currencies are translated
        at the rates of  exchange on the dates of the  transactions,  except for
        revenues  hedged  by  foreign  exchange  forward  contracts,  which  are
        translated at the contract rates, as discussed below.

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

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

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

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

        Derivative  financial  instruments  are used by the  Corporation  in the
        management of its foreign currency  exposures.  The Corporation does not
        use  derivative   financial   instruments  for  trading  or  speculative
        purposes.


                                        7

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

        The Corporation  enters into hedges of its foreign currency exposures on
        foreign  currency-denominated  long-term  receivables and other monetary
        assets by entering into offsetting  foreign exchange forward  contracts,
        when it is deemed  appropriate.  Foreign exchange  translation gains and
        losses on foreign currency-denominated  derivative financial instruments
        used to hedge foreign currency long-term  receivables and other monetary
        assets  are  accrued  under  other  current  or  non-current  assets  or
        liabilities on the balance sheet and recognized in "Other expense, net",
        offsetting the respective translation losses and gains recognized on the
        underlying  foreign  currency  long-term  receivables and other monetary
        assets.  The forward  premium or discount  on foreign  exchange  forward
        contracts used to hedge foreign currency long-term receivables and other
        monetary  assets is amortized as an adjustment of interest  expense over
        the term of the forward contract.

        Foreign   exchange    translation    gains   and   losses   on   foreign
        currency-denominated  derivative  financial  instruments  used to  hedge
        anticipated foreign  currency-denominated  revenues are recognized as an
        adjustment of the revenues  when the revenues are recorded.  For foreign
        exchange   forward   contracts   used  to  hedge   anticipated   foreign
        currency-denominated  revenues,  the portion of the  forward  premium or
        discount on the contract  relating to the period prior to recognition of
        the revenues is also  recognized  as an  adjustment of the revenues when
        they are  recorded.  The portion of the premium or discount that relates
        to the  resulting  accounts  receivable is amortized as an adjustment of
        interest expense over the remaining term of the contract.

        The Corporation  also enters into interest rate swaps in order to reduce
        the   variability  to  changes  in  the  fair  value  of  its  long-term
        obligations  attributable  to interest rate risk.  These swap agreements
        require the  periodic  exchange of payments  without the exchange of the
        notional   principal  amount  on  which  the  payments  are  based.  The
        Corporation  designates  its  interest  rate  swaps  as  hedges  of  the
        underlying  long-term  obligation.  Interest  expense  on the  long-term
        obligation is adjusted to include  amounts  payable or receivable  under
        the interest rate swaps.


                                       8

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

    (c) Use of estimates:

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

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

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

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


                                       9

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------


1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


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

    (d) Cash and cash equivalents:

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

    (e) Impairment of long-term receivables:

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

    (f) Accounting for investments in hotel partnerships and corporations:

        The Corporation  accounts for its investments in hotel  partnerships and
        corporations by the cost method because either the percentage  ownership
        and structure does not give the Corporation  significant  influence over
        these  investments or the investments were acquired prior to May 1, 2003
        with the intention that they be disposed of in the foreseeable future.

        In conjunction with the issuance of Section 3475, The Canadian Institute
        of  Chartered   Accountants   ("CICA")  eliminated  the  exception  from
        consolidation  for a  temporary  controlled  subsidiary.  This change is
        effective  for  fiscal  years  beginning  on or after  October  1, 2004,
        irrespective of when those investments occurred (notes 4(a) and (b)).


                                       10

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

    (g) Capital assets:

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

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

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

        (i)   Depreciation and amortization:

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

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

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

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

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


                                       11

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        (ii)  Impairment:

              The  recoverability  of the unamortized  cost of capital assets is
              evaluated  whenever  events or changes in  circumstances  indicate
              that the carrying  amount of an asset may not be recoverable  from
              future  operations.  The Corporation  bases these evaluations upon
              the projected  future cash flows on an undiscounted  basis. If the
              undiscounted  future  cash flows are  insufficient  to recover the
              remaining net book value,  then an impairment charge is recognized
              equal to the amount by which the net book value  exceeds  the fair
              value of the asset (note 1(l)(iii)).

    (h) Deferred charges:

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

    (i) Revenue recognition:

        The  consolidated  revenues of the Corporation  include  revenues earned
        from hotels,  resorts,  residence  clubs and other  branded  residential
        projects under long-term management contracts, revenues generated by its
        consolidated leasehold hotel operations and distributions from its other
        hotel investments.


                                       12

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        Revenues earned from management  operations include base fees equal to a
        percentage of the gross operating revenues of the managed properties and
        incentive  fees  based  on  certain  operating  results  of the  managed
        properties.  The  revenues  also  include  fees  earned  relating to the
        design, construction and fitting out specifications of hotels during the
        development stage and purchasing fees earned,  generally calculated as a
        percentage  of the cost of goods  purchased  by the  managed  properties
        through the Corporation's centralized purchasing system. The Corporation
        provides  various  services,  including  central  reservation  services,
        worldwide sales offices and marketing programs to managed properties and
        receives  a  charge   calculated  in  accordance   with  the  management
        contracts.  The  Corporation  also  earns a fee for the use of its brand
        name in connection with certain residential  projects and residence club
        properties,  and for services provided in the oversight of the sales and
        marketing of the residential projects and residence club units, which is
        generally based on a percentage of the gross selling price of each unit.

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

        The   Corporation   evaluates  at  the   inception  of  a  contract  all
        deliverables  to determine  whether  they  represent  separate  units of
        accounting.  If  they  do,  the  consideration  to be  received  by  the
        Corporation  under the contract is allocated among the separate units of
        accounting based on their relative fair values or, where fair values for
        all  deliverables  are  unavailable,  based  on the  fair  value  of the
        undelivered item (note 1(l)(vi)).

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

        The  Corporation   recognizes  revenue  from  other  hotel  investments,
        accounted  for  by  the  cost  method,  when  profit  distributions  are
        receivable from the partnerships or corporations.


                                       13

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

    (j) Stock-based compensation and other stock-based payments:

        In December 2003, the CICA amended  Section 3870 to require  entities to
        account for employee  stock options using the fair  value-based  method,
        beginning   January  1,  2004.  Under  the  fair   value-based   method,
        compensation  cost of a stock  option is  measured  at fair value at the
        date of grant and is expensed over the stock  option's  vesting  period,
        with a corresponding  increase to contributed surplus.  When these stock
        options are exercised,  the proceeds,  together with the amount recorded
        in contributed surplus, are recorded in capital stock.

        In accordance with one of the transitional  alternatives permitted under
        amended  Section 3870, the  Corporation  prospectively  adopted the fair
        value-based  method to all employee  stock  options  granted on or after
        January  1,  2003.  Accordingly,  options  granted  prior  to that  date
        continue to be accounted for using the settlement method.

    (k) Income taxes:

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


                                       14

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

    (l) Change in accounting policies:

        (i)   Hedging relationships:

              The  CICA   issued   Accounting   Guideline   No.   13,   "Hedging
              Relationships",    which   establishes    requirements   for   the
              identification,  documentation,  designation and  effectiveness of
              hedging relationships and was effective for fiscal years beginning
              on  or  after  July  1,  2003.  Effective  January  1,  2004,  the
              Corporation  ceased designating its US dollar forward contracts as
              hedges of its US dollar  revenues.  These  contracts  were entered
              into during 2002, and all of these contracts  matured during 2004.
              The foreign  exchange gains on these  contracts of $14,552,  which
              were deferred prior to January 1, 2004, were recognized in 2004 as
              an increase of fee revenues over the course of the year. Effective
              January   1,  2004,   the  US  dollar   forward   contracts   were
              marked-to-market  on a monthly basis with the resulting changes in
              fair values being recorded as a foreign exchange gain or loss. The
              Corporation  ceasing to designate its US dollar forward  contracts
              as hedges of its US dollar  revenues did not have an impact on its
              net earnings for the year ended December 31, 2004.

        (ii)  Reimbursed costs:

              As  a  result  of  adopting  Section  1100,   "Generally  Accepted
              Accounting  Principles",  which was  issued  by the CICA,  and was
              effective   January  1,  2004,   the   Corporation   included  the
              reimbursement of all  out-of-pocket  expenses in both revenues and
              expenses instead of recording certain  reimbursed costs as a "net"
              amount. The change in the accounting treatment of reimbursed costs
              resulted in an increase of both revenues and expenses for the year
              ended  December 31, 2004 of $42,021 (2003 - $46,077),  but did not
              have an impact on net  earnings.  In addition,  for the year ended
              December  31,   2003,   each  of  fee  revenues  and  general  and
              administrative expenses included certain other reimbursed costs of
              $29,226.  These have been reclassified to reimbursed costs in both
              revenues  and  expenses  to  conform  to the  financial  statement
              presentation adopted in 2004.


                                       15

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        (iii) Impairment of long-lived assets:

              The CICA issued Section 3063,  "Impairment of Long-Lived  Assets",
              which establishes  standards for the recognition,  measurement and
              disclosure of the  impairment of long-lived  assets,  and replaces
              the write-down  provisions of Section 3061,  "Property,  Plant and
              Equipment".  In accordance with Section 3063,  long-lived  assets,
              such as property,  plant and equipment  and purchased  intangibles
              subject to  amortization,  are  reviewed for  impairment  whenever
              events or  changes in  circumstances  indicate  that the  carrying
              amount  of an  asset  may not be  recoverable.  Recoverability  of
              assets  to be held and used is  measured  by a  comparison  of the
              carrying amount of an asset to estimated  undiscounted future cash
              flows  expected  to be  generated  by the asset.  If the  carrying
              amount of an asset  exceeds its  estimated  future cash flows,  an
              impairment  charge is recognized  equal to the amount by which the
              carrying  amount of the asset exceeds the fair value of the asset.
              The implementation of Section 3063, effective January 1, 2004, did
              not have an impact on the consolidated financial statements of the
              Corporation for the year ended December 31, 2004.

        (iv)  Accounting for asset retirement obligations:

              The CICA issued  Section 3110,  "Accounting  for Asset  Retirement
              Obligations", which requires companies to record the fair value of
              an asset retirement obligation as a liability in the year in which
              they incur a legal  obligation  associated  with the retirement of
              tangible  long-lived  assets  that  result  from the  acquisition,
              construction,   development  and/or  normal  use  of  the  assets.
              Companies are also required to record a  corresponding  asset that
              is  depreciated  over the  life of the  asset.  Subsequent  to the
              initial  measurement  of  the  asset  retirement  obligation,  the
              obligation  will be  adjusted at the end of each period to reflect
              the passage of time and changes in the estimated future cash flows
              underlying the  obligation.  The  implementation  of Section 3110,
              effective  January  1,  2004,  did  not  have  an  impact  on  the
              consolidated  financial statements of the Corporation for the year
              ended December 31, 2004.

        (v)   Revenue recognition:

              In December 2003,  the Emerging  Issues  Committee  ("EIC") of the
              CICA  issued  Abstract  EIC-141,   "Revenue  Recognition",   which
              provides  revenue  recognition  guidance.  The  implementation  of
              EIC-141,  effective January 1, 2004, did not have an impact on the
              consolidated  financial statements of the Corporation for the year
              ended December 31, 2004.


                                       16

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

1.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        (vi)  Revenue arrangements with multiple deliverables:

              In  December  2003,  the EIC  issued  Abstract  EIC-142,  "Revenue
              Arrangements   with  Multiple   Deliverables",   which   addresses
              accounting for arrangements, entered into after December 31, 2003,
              where an  enterprise  will  perform  multiple  revenue  generating
              activities.  The  implementation of EIC-142 did not have an impact
              on the  consolidated  financial  statements of the Corporation for
              the year ended December 31, 2004.

2.  RECEIVABLES:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Trade accounts of consolidated hotels                  $ 5,213      $ 6,485
    Receivables from hotel partnerships,
      affiliates and managed hotels                         68,212       60,938
    Receivables relating to stock options
      exercised (note 11(a))                                 6,870            -
    Taxes receivable                                         3,292        8,732
    Other                                                   14,556       12,481
    ----------------------------------------------------------------------------
                                                           $98,143      $88,636
    ----------------------------------------------------------------------------

    Receivables  at  December  31, 2004 are  recorded  net of an  allowance  for
    doubtful  accounts of $3,052  (2003 - $3,338).  The net bad debt expense for
    the year ended December 31, 2004 was $13 (2003 - $524).

                                       17

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian  dollars except share amounts)

--------------------------------------------------------------------------------

3.  LONG-TERM RECEIVABLES:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Secured cash flow bond, interest at 10%,
       due 2005, pound sterling 9.7 million (a)            $22,301      $22,304
    Secured loans:
       Secured by shares:
         Interest at 10%, due 2038,
            pound sterling 12.2 million (b)                 28,136       28,140
         Interest at 7.5%, compounded annually,
           AUS $25 million (2003 - AUS $23.2 million)       23,504       22,539
         Interest at 5.625%, compounded annually,
           repayable over the period to 2010,
           US $6.1  million                                  7,292            -
       Secured by property:
         Interest at 7%, compounded annually,
           repayable over the period to 2025,
           US $9.1 million
           (2003 - US $9.3  million)                        10,914       11,964
         Interest at
            LIBOR plus 0.45% to 1.25%
           (2003 - LIBOR plus 0.30% to 0.45%),
           compounded monthly, repayable over the
           period to 2004, US $5 million (c)                 6,018        6,462
         Interest at 9.25%, repayable on demand
           (2003 - US $7.8 million) (d)                          -       10,130
         Interest at 8%, compounded annually, repayable
           over the period to 2025, US $2.1 million
           (2003 - US $2 million)                            2,528        2,585
         Interest at LIBOR plus 4%, repayable over
           the period to 2024, US $5 million                 6,018        6,462
         Interest at LIBOR plus 1.85%, repayable over
           the period to 2015, pound sterling 8.9 million   20,498            -
         Due from officers and employees,
           non-interest bearing mortgages                   14,305       15,345
    Unsecured loans related to managed hotels:
       Interest at 7.75%, due 2010, US $15 million          18,054       19,386
       Interest at 10%, compounded annually,
        repayable over the period to 2061, US $10 million   12,022       13,517
       Interest at 10.5%, compounded monthly,
        AUS $9.9 million                                     9,334        9,644
       Interest at 7.5%, compounded annually,
        repayable on demand,
        AUS $6.4 million (2003 - AUS $5.9 million)           5,988        5,751
       Interest at 7%, US $2.7 million                       3,247        3,487
       Interest at Euribor plus 2%, due 2021,
         euro 6.3 million (2003 - euro 6.6 million)         10,199       10,677
       Interest at 6%, due 2009, euro 3 million              4,888        4,884
       Interest at 9%, compounded annually, repayable
        over the period to 2015, US $2 million               2,359            -
       Non-interest bearing, including US $16.5 million
        (2003 - US $16.8 million)                           23,846       21,761
    ----------------------------------------------------------------------------
                                                           231,451      215,038

    Less allowance for doubtful long-term receivables (e)  (15,934)     (17,403)

    ----------------------------------------------------------------------------
                                                          $215,517     $197,635
    ----------------------------------------------------------------------------


                                       18

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

3.  LONG-TERM RECEIVABLES (CONTINUED):

    (a) Principal and interest on the bond are payable  annually every March out
        of 50% of the  available  cash flow (as  defined in the bond  indenture)
        from Four Seasons Hotel  London.  The bond is due from an affiliate of a
        shareholder of FSHI and is secured by the affiliate's  investment in the
        hotel.

    (b) Principal and interest on the loan are payable  annually every March out
        of the other 50% of the  available  cash  flow from Four  Seasons  Hotel
        London (a). The loan is due from an affiliate of a  shareholder  of FSHI
        and is secured by the affiliate's  additional  indirect  interest in the
        hotel.

    (c) As at December 31, 2004 and 2003, the Corporation had fully provided for
        its US $5 million ($6,018;  2003 - $6,462) loan relating to Four Seasons
        Hotel  Caracas,  which is secured by a second  mortgage  and  registered
        against the hotel, and non-interest  bearing advances of US $1.9 million
        ($2,270)  (2003 - US $1.8  million  ($2,373)).  The  hotel is  currently
        closed.  The  Corporation  is in  dispute  with the  owner of the  hotel
        regarding a variety of matters  relating to the  completion  and ongoing
        operation of the hotel, including the default on the US $5 million loan.
        Formal  notice  of  default  was given to the  owner.  The  dispute  was
        referred to arbitration and the arbitration  tribunal  declared that the
        owner  had  failed  to  perform  all  of  its   obligations   under  the
        Corporation's management agreements,  including, without limitation, its
        obligation  to complete the hotel as a  world-class  luxury hotel and to
        allow  the   Corporation   to  manage  the  hotel  free  from   unlawful
        interference  of the owner.  The  arbitration  tribunal  awarded damages
        totalling  approximately US $8 million  ($9,600),  plus arbitration fees
        and expenses of  approximately  US $240 thousand  ($290).  The owner has
        challenged  the   enforcement  of  the  decision  from  the  arbitration
        tribunal.  The Corporation has not recorded any receivables arising from
        the decision as at December 31, 2004.  Included in "Other expense,  net"
        for the year ended  December  31, 2004 are legal and  enforcement  costs
        relating to the dispute of $273 (2003 - $3,721).

        In addition,  in 2003, the  Corporation  received  judgment in its legal
        proceedings  against the owner,  which  involved the  protection  of its
        proprietary materials. The court found against the owner on all matters,
        including  illegal computer  "hacking" and unlawful and unauthorized use
        of the Corporation's proprietary information, and ordered that the owner
        pay to the Corporation  damages totalling  approximately US $4.9 million
        ($5,900), plus legal costs and expenses of approximately US $1.4 million
        ($1,700). The owner has appealed the judgment from the legal proceeding.
        The  Corporation  has not  recorded  any  receivable  arising  from  the
        judgment as at December 31, 2004 and 2003.


                                       19

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

3. LONG-TERM RECEIVABLES (CONTINUED):

    (d) Included in "Other expense, net" for the year ended December 31, 2004 is
        a loss of $3,967  relating to the  Corporation's  exit from the proposed
        Four Seasons project in Sedona,  effectively  reducing the book value of
        its  investment in the project to nil at December 31, 2004.  This amount
        included a loss of $2,647 on the  settlement of the  Corporation's  loan
        relating to the project.

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

        ------------------------------------------------------------------------
                                                             2004          2003
        ------------------------------------------------------------------------
        Balance, beginning of year                       $(17,403)     $(25,830)
        Recovery of (provision for) loss                      636          (746)
        Conversion to investment                                -         6,462
        Foreign exchange gain                                 833         2,711
        ------------------------------------------------------------------------
        Balance, end of year                             $(15,934)     $(17,403)
        ------------------------------------------------------------------------

        As at December 31, 2002, long-term  receivables included a loan of US $5
        million ($6,462) to the owner of The Regent Jakarta. The Corporation had
        fully  provided  for this loan as at December  31,  2002.  Pursuant to a
        restructuring  plan,  the  Corporation's  unsecured  loan was ultimately
        converted  in 2003 to an equity  interest in the hotel owner equal to 2%
        of the  outstanding  equity.  As at  December  31,  2004 and  2003,  the
        investment has been recorded in "Investments in hotel  partnerships  and
        corporations," with a carrying value of nil.

        During 2004, the  Corporation  recovered $145 (2003 - $1,755) on amounts
        that had been written off in prior years.  This  recovery is recorded in
        "Other expense, net".


                                       20

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

4.  INVESTMENTS IN HOTEL PARTNERSHIPS AND CORPORATIONS:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------

    Four Seasons Hotel Shanghai (a)                        $25,701      $25,701
    Four Seasons Residence Club
      Scottsdale (b)                                         8,044        8,638
    Other operating properties (c)                         114,951      121,065
    Properties under construction
      or development                                         9,383        2,234

    ----------------------------------------------------------------------------
                                                          $158,079     $157,638
    ----------------------------------------------------------------------------

    (a) Investment in Four Seasons Hotel Shanghai:

        The  Corporation  has  approximately  a 21.2%  equity  interest  in Four
        Seasons  Hotel  Shanghai.  The  Corporation  is in  negotiations  with a
        potential   purchaser   relating  to  the  sale  of  a  portion  of  the
        Corporation's  equity  interest  in the hotel,  which  would  reduce the
        Corporation's equity interest to below 20%. As at December 31, 2004, the
        Corporation had not reduced its equity  interest in the hotel,  and as a
        result,  will begin equity  accounting  for its  investment in the hotel
        effective January 1, 2005 (note 1(f)).

    (b) Investment in Four Seasons Residence Club Scottsdale:

        The Corporation has  approximately a 71% equity interest in Four Seasons
        Residence Club  Scottsdale.  The Corporation is in  negotiations  with a
        potential   purchaser   relating  to  the  sale  of  a  portion  of  the
        Corporation's  equity interest in the residence club, which would reduce
        the Corporation's equity interest to below 20%. As at December 31, 2004,
        the  Corporation  had not reduced its equity  interest in the  residence
        club,  and as a result will begin  consolidating  the  operations of the
        residence club effective January 1, 2005 (note 1(f)).

        In March  2005,  the  Corporation  sold the  majority  of its 71% equity
        interest in the residence club for proceeds approximating book value. As
        a result of the sale, the Corporation's equity interest in the residence
        club is below 20%. The  Corporation  continues  to manage this  property
        under a long-term management contract.

    (c) Sale of ownership interests:

        During 2004, the Corporation sold all of its ownership  interest in Four
        Seasons Resort  Whistler,  the majority of its 8% ownership  interest in
        Four Seasons Hotel Amman and all its ownership interest in land relating
        to Four Seasons Resort  Scottsdale  for gross proceeds of  approximately
        $50,000.  The  Corporation  recorded  a loss  on  disposition  of  these
        ownership interests of $643, which is included in "Other expense,  net".
        The  Corporation  continues to manage these  properties  under long-term
        management contracts.


                                       21

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

5.  FIXED ASSETS:

<TABLE>
    ----------------------------------------------------------------------------------------------
                                                          2004                                2003
    ----------------------------------------------------------------------------------------------
    <S>                      <C>           <C>         <C>        <C>          <C>         <C>

                                        Accumulated                         Accumulated
                                       depreciation                        depreciation
                                                and   Net book                      and   Net book
                                 Cost  amortization      value       Cost  amortization      value
    ----------------------------------------------------------------------------------------------

    ----------------------------------------------------------------------------------------------
    Land                     $ 26,299      $      -    $26,299    $27,288      $      -    $27,288
    Buildings                  13,837        (3,441)    10,396      8,690        (2,543)     6,147
    Furniture, fixtures
      and equipment (a)        47,692       (20,693)    26,999     51,335       (19,156)    32,179
    Leasehold interests
      and improvements (a)     15,416        (6,967)     8,449     15,678        (5,503)    10,175

    ----------------------------------------------------------------------------------------------
                             $103,244      $(31,101)   $72,143   $102,991      $(27,202)   $75,789
    ----------------------------------------------------------------------------------------------
</TABLE>

    (a) During 2003,  the  Corporation  recorded an asset  impairment  charge of
        $3,174 related to the net book value of the fixed assets at Four Seasons
        Hotel Berlin, which is included in "Other expense, net".

    (b) Depreciation and amortization  expense for fixed assets was $7,516 (2003
        - $7,950).

6.  INVESTMENT IN MANAGEMENT CONTRACTS:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Management contracts, at cost                         $270,917     $252,754
    Less accumulated amortization                          (52,737)     (49,084)
    ----------------------------------------------------------------------------
                                                          $218,180     $203,670
    ----------------------------------------------------------------------------

    (a) Amortization  expense  for  management  contracts  was  $7,082  (2003  -
        $6,427).


                                       22

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

6. INVESTMENT IN MANAGEMENT CONTRACTS (CONTINUED):

    (b) During 2003, the Corporation and the owner of Four Seasons Olympic Hotel
        Seattle  settled their  disagreement,  which was subject to arbitration,
        concerning  the  management  of the  hotel.  Under the  settlement,  the
        Corporation  concluded  its  management  of Four Seasons  Olympic  Hotel
        Seattle upon the sale of the hotel, which occurred on August 1, 2003. On
        closing of the sale of the hotel,  the  Corporation  received an initial
        payment,  which  included its share of the sale  proceeds as a result of
        its minority  ownership interest in the hotel. The Corporation will also
        receive annual  payments over the next several years. A portion of these
        future  payments  has been  included in net earnings for the years ended
        December 31, 2004 and 2003. In addition, $5,754 in legal and enforcement
        costs were  incurred  during 2003 and are  included  in "Other  expense,
        net".

7.  INVESTMENT IN TRADEMARKS AND TRADE NAMES:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Trademarks and trade names, at cost                    $11,690      $11,814
    Less accumulated amortization                           (6,365)      (6,057)
    ----------------------------------------------------------------------------
                                                            $5,325      $ 5,757
    ----------------------------------------------------------------------------

    Amortization expense for trademarks and trade names was $683 (2003 - $619).

8.  INCOME TAXES:

    The sources of earnings  before  provision  for income  taxes  comprise  the
    following:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Canada                                                 $10,654     $ 6,319
    Foreign                                                 38,881       5,690
    ----------------------------------------------------------------------------
                                                           $49,535     $12,009
    ----------------------------------------------------------------------------


                                       23

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

8.  INCOME TAXES (CONTINUED):

    The provision for income taxes is as follows:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Current:
       Federal                                             $(4,404)     $ 1,588
       Provincial                                           (2,646)           -
       Foreign                                              (4,630)      (3,983)
    ----------------------------------------------------------------------------
                                                           (11,680)      (2,395)
    Future:
       Federal                                              (3,859)      (3,543)
       Provincial                                           (1,179)        (917)
       Foreign                                                 415            -
    ----------------------------------------------------------------------------
                                                            (4,623)      (4,460)
    ----------------------------------------------------------------------------
    Increase in future income tax assets
       (Canada)                                                  -          230
    ----------------------------------------------------------------------------
                                                          $(16,303)     $(6,625)
    ----------------------------------------------------------------------------

    The  increase  in future  income tax assets  relates to changes in  Canadian
    federal and provincial  income tax rates.  The 2003 increase of $230 was the
    result of an increase in the provincial income tax rate.


                                       24

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

8.  INCOME TAXES (CONTINUED):

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

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Earnings before income taxes                           $49,535      $12,009
    Items not deductible                                    39,258       44,262
    ----------------------------------------------------------------------------
    Earnings subject to taxes                              $88,793      $56,271
    ----------------------------------------------------------------------------
    Statutory Canadian federal and provincial tax rate       34.35%       35.77%
    ----------------------------------------------------------------------------
    Expected income tax expense                           $(30,500)    $(20,128)
    Reduction in tax due to lower foreign tax rates         14,197       13,273
    ----------------------------------------------------------------------------
    Income tax expense before effect of
      change in tax rates                                  (16,303)      (6,855)

    Increase in future income tax assets
      due to change in tax rates                                 -          230
    ----------------------------------------------------------------------------
    Income tax expense                                    $(16,303)     $(6,625)
    ----------------------------------------------------------------------------

    The  significant  components  of future income tax expense  attributable  to
    earnings before income taxes are as follows:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Future income tax expense                              $(4,623)     $(4,460)

    Increase in future income tax assets due to
      change in tax rates                                        -          230
    ----------------------------------------------------------------------------
    Net reduction in future income tax assets              $(4,623)     $(4,230)
    ----------------------------------------------------------------------------


                                       25

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

8.  INCOME TAXES (CONTINUED):

    The valuation  allowance for the years ended  December 31, 2004 and 2003 was
    $3,004.  The valuation  allowance results from potential  limitations on the
    use of tax losses in a foreign  jurisdiction.  In order to fully realize the
    future  income tax assets,  the  Corporation  will need to  generate  future
    taxable income of  approximately  $54,000.  Based upon projections of future
    taxable  income  over the years in which the  future  income  tax assets are
    deductible,  management  believes  it is  more  likely  than  not  that  the
    Corporation will realize the benefits of these deductible  differences,  net
    of the existing  valuation  allowance.  The amount of the future  income tax
    assets considered realizable,  however, could be reduced in the near term if
    estimated future taxable income during the carryforward period is reduced.

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

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Future income tax assets:
       Investments in hotel partnerships and corporations $  2,049      $ 5,641
       Tax losses carried forward and other assets          13,590       18,158
       Long-term receivables                                   630        2,591
       Investment in trademarks and trade names                961        1,055
       Long-term obligations                                 3,083        3,457
    ----------------------------------------------------------------------------
                                                            20,313       30,902
       Valuation allowance                                  (3,004)      (3,004)
    ----------------------------------------------------------------------------
       Total gross future income tax assets                 17,309       27,898

    Future income tax liabilities:
       Investment in management contracts                   (7,909)      (9,346)
       Fixed assets                                         (4,794)      (5,322)
       Accounts payable and accrued liabilities               (140)           -
    ----------------------------------------------------------------------------
       Total gross future income tax liabilities           (12,843)     (14,668)
    ----------------------------------------------------------------------------
    Future income tax assets                              $  4,466      $13,230
    ----------------------------------------------------------------------------
    At December 31, 2004, the Corporation  had accumulated net operating  losses
    carried forward of approximately  $25,400 (2003 - $30,600) for tax purposes,
    which expire as follows:
    ----------------------------------------------------------------------------
    2010                                                                $18,800
    2011                                                                  5,700
    2024                                                                    900
    ----------------------------------------------------------------------------
                                                                        $25,400
    ----------------------------------------------------------------------------


                                       26

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

8.  INCOME TAXES (CONTINUED):

    The  Corporation  has made no  provision  for income  taxes,  or  additional
    foreign   taxes,   on  the   cumulative   unremitted   earnings  of  foreign
    subsidiaries,  which were  approximately  $190,800 as at  December  31, 2004
    (2003 - $151,400),  because the  Corporation  does not intend to  repatriate
    these  earnings in the  foreseeable  future.  These  earnings  could  become
    subject to additional  taxes if remitted as dividends or if the  Corporation
    sells its interests in the affiliates.  The Corporation  cannot  practically
    estimate  the  amount of  additional  taxes  that  might be  payable  on the
    unremitted earnings.

9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Trade accounts payable                                 $18,658      $20,772
    Payroll and employee benefits                           20,568       16,941
    Accrued sales, marketing and advertising                 5,047        4,109
    Taxes payable                                           11,840        8,631
    Dividends payable                                        1,911        1,833
    Other accrued liabilities                               14,692        8,759
    ----------------------------------------------------------------------------
                                                           $72,716      $61,045
    ----------------------------------------------------------------------------

10. LONG-TERM OBLIGATIONS:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Convertible notes, issued in 2004,
      US $215.3 million (a)                               $259,155     $      -
    Convertible notes, issued in 1999
      (2003 - US $68.1 million) (b)                              -       88,029
    Deferred gain on termination of interest
       rate swap (a)                                         8,760            -
    Accrued benefit liability (note 15(b))                  32,813       29,492
    Other long-term obligations                              8,395        2,587
    ----------------------------------------------------------------------------
                                                           309,123      120,108

    Less amounts due within one year                        (4,533)      (2,587)
    ----------------------------------------------------------------------------
                                                          $304,590     $117,521
    ----------------------------------------------------------------------------


                                       27

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

10. LONG-TERM OBLIGATIONS (CONTINUED):

    (a) Convertible notes, issued in 2004:

        In June 2004, FSHI issued US $250 million ($341,100) principal amount of
        convertible  senior  notes.  The net  proceeds  of the  issuance,  after
        deducting   offering   expenses  and  underwriters'   commission,   were
        approximately US $241.3 million ($329,273). These notes bear interest at
        the rate of 1.875%  per  annum  (payable  semi-annually  in  arrears  on
        January  30 and July 30 to  holders of record on January 15 and July 15,
        beginning  January 30, 2005),  and will mature on July 30, 2024,  unless
        earlier redeemed or repurchased.  The notes are convertible into Limited
        Voting Shares of FSHI at an initial  conversion  rate of 13.9581  shares
        per each one thousand US dollar  principal amount (equal to a conversion
        price of  approximately  US $71.64  ($86.23) per Limited  Voting Share),
        subject to adjustments in certain events,  in circumstances in which (i)
        the  Limited  Voting  Shares  have  traded  for  more  than  130% of the
        conversion price for a specified  period,  (ii) the notes have a trading
        price of less than 95% of the market price of the Limited  Voting Shares
        into which they may be  converted  for a  specified  period,  (iii) FSHI
        calls the notes for redemption, or (iv) specified corporate transactions
        or a  "fundamental  change"  occur.  In connection  with a  "fundamental
        change" on or prior to July 30,  2009,  on  conversion  holders of notes
        will be entitled to receive  additional  Limited  Voting Shares having a
        value equal to the  aggregate of the make whole  premium they would have
        received if the notes were purchased plus an amount equal to any accrued
        but unpaid interest. FSHI may choose to settle conversion (including any
        make whole premium) in Limited  Voting Shares,  cash or a combination of
        Limited Voting Shares and cash (at its option).

        On or after  August 4, 2009,  FSHI may (at its  option)  redeem all or a
        portion  of the  notes,  in whole or in part,  for cash at 100% of their
        principal amount, plus any accrued and unpaid interest.  On each of July
        30, 2009,  2014 and 2019,  holders may require FSHI to purchase all or a
        portion  of  their  notes at 100% of their  principal  amount,  plus any
        accrued  and  unpaid  interest.  FSHI  will pay  cash  for any  notes so
        purchased  on July 30, 2009.  Repurchases  made by FSHI on July 30, 2014
        and July 30,  2019 may be made (at its option) in cash,  Limited  Voting
        Shares or a  combination  of cash and Limited  Voting  Shares.  Upon the
        occurrence of certain designated  events,  FSHI will be required to make
        an offer to purchase  the notes at 100% of their  principal  amount plus
        any accrued  and unpaid  interest,  and,  in the case of a  "fundamental
        change"  that is also a "change of control"  occurring on or before July
        30, 2009,  FSHI also will pay a make whole  premium.  FSHI may choose to
        pay the purchase  price  (including any make whole premium) for notes in
        respect of which its offer is accepted in (at its option) cash,  Limited
        Voting  Shares,  securities of the surviving  entity (if FSHI is not the
        surviving  corporation),   or  a  combination  of  cash  and  shares  or
        securities.


                                       28

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

10. LONG-TERM OBLIGATIONS (CONTINUED):

        In accordance with Canadian  generally accepted  accounting  principles,
        the notes were bifurcated in the consolidated  financial statements into
        a debt  component  (representing  the  principal  value  of a bond of US
        $211.8  million  ($288,918),  which was  estimated  based on the present
        value of a US $250 million  ($341,100)  bond maturing in 2009,  yielding
        5.33% per annum, compounded semi-annually, and paying a coupon of 1.875%
        per  annum)  and an  equity  component  (representing  the  value of the
        conversion  feature of the notes).  Accordingly,  net proceeds have been
        allocated $288,918 to long-term obligations and $50,373 to shareholders'
        equity.   The  offering   expenses  and   underwriters'   commission  of
        approximately  $10,018  relating to the debt component,  are recorded in
        "Other  assets".  The debt  component  of the notes  will  increase  for
        accounting  purposes at the compounded  interest rate of 5.33%, less the
        coupon paid of 1.875% per annum.

        In connection with the offering, FSHI entered into an interest rate swap
        agreement to July 30, 2009 with an initial  notional amount of US $211.8
        million  ($288,918),  pursuant  to which  FSHI  had  agreed  to  receive
        interest  at a fixed  rate of  5.33%  per  annum  and  pay  interest  at
        six-month  LIBOR,  in arrears,  plus 0.4904%.  FSHI had  designated  the
        interest rate swap as a fair value hedge of the notes. As a result, FSHI
        accounted  for the payments  under the interest rate swap to the date of
        termination on an accrual basis, which resulted in an effective interest
        rate (for accounting  purposes) on the hedged notes of six-month  LIBOR,
        in arrears, plus 0.4904%.

        In October 2004,  FSHI  terminated  the interest rate swap agreement and
        received  proceeds  of US $9  million  ($11,267).  The book value of the
        interest rate swap at the date of  termination  was $2,024.  The gain of
        $9,243 was deferred for accounting  purposes and is being amortized over
        the next 4.75  years,  which  would have been the  remaining  swap term.
        During 2004,  $483 of the deferred  gain was amortized and recorded as a
        reduction of interest expense.


                                       29
<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

10. LONG-TERM OBLIGATIONS (CONTINUED):

    (b) Convertible notes, issued in 1999:

        During 1999, FSHI issued US $655.5 million  principal amount at maturity
        (September  23,  2029) of  convertible  notes for gross  proceeds  of US
        $172.5  million.  The net  proceeds  of the  issuance,  after  deducting
        offering expenses and underwriters' commission, were US $166 million. In
        accordance with Canadian generally accepted accounting  principles,  the
        notes were  bifurcated into a debt component  (representing  the present
        value of a zero  coupon  bond of US  $655.5  million  maturing  in 2029,
        yielding  9%  per  annum,  compounding   semi-annually)  and  an  equity
        component  (representing  the  value of the  conversion  feature  of the
        notes).  Accordingly,  net proceeds were originally allocated $68,902 to
        long-term obligations and $178,574 to shareholders' equity. The offering
        expenses and underwriters'  commission relating to the debt component of
        the notes of $2,549 were recorded in "Other assets".  As at December 31,
        2003, FSHI had 655,404 convertible notes outstanding.

        FSHI  was  entitled  to  redeem  the  convertible  notes  commencing  in
        September  2004 for cash equal to the issue price plus accrued  interest
        calculated  at 4 1/2% per annum.  In September  2004,  FSHI redeemed for
        cash all these convertible notes for US $328.73 per each one thousand US
        dollar  principal  amount at maturity  (the  redemption  price being the
        issue price plus unpaid  accrued  interest to but  excluding the date of
        redemption) for an aggregate payment of US $215.5 million ($275,701).

        In accordance with Canadian  generally accepted  accounting  principles,
        the consideration  paid on the redemption was allocated to the liability
        and equity  components of the convertible  notes based on their relative
        fair values at the date of the redemption.  A pre-tax accounting loss of
        $14,611 was recognized  related to the debt component of the convertible
        notes  (representing  the  difference  between the carrying value of the
        debt  component  and the relative  fair value of the debt  component and
        calculated at the present value of the amount due on maturity,  using an
        assumed  25-year   interest  rate  of  8.474%  per  annum,   compounding
        semi-annually).  This loss was recorded in "Other  expense,  net" in the
        consolidated statements of operations. In addition, at the interest rate
        noted above, a pre-tax  accounting  gain of $8,160 was recognized on the
        extinguishment   of  the  equity  component  of  the  convertible  notes
        ($178,543).  The gain of $8,160 was recorded in contributed surplus. The
        tax impact of the redemption of both the liability and equity components
        of the convertible  notes was a decrease to future income tax assets and
        a decrease to contributed surplus of $4,141. The net after-tax impact on
        shareholders'  equity  from the  redemption  of both the debt and equity
        components of the convertible notes was a reduction of $10,592.


                                       30

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

10. LONG-TERM OBLIGATIONS (CONTINUED):

        In accordance with Canadian  generally accepted  accounting  principles,
        the cash paid on redemption  of the  convertible  notes  relating to the
        interest  accreted from September 1999 to September 2004, for accounting
        purposes,  of US $25.8 million  ($33,057) on the  convertible  notes has
        been  recorded  in the  consolidated  statements  of  cash  provided  by
        operations.  The remaining  cash paid on redemption of US $189.7 million
        ($242,644)  has been  recorded  under  "Financing"  in the  consolidated
        statements of cash flows.

    (c) Bank credit facility:

        During  2004,  the  Corporation  finalized a new  committed  bank credit
        facility of US $125 million ($150,500), which expires in September 2007.
        Borrowings  under this  credit  facility  bear  interest at LIBOR plus a
        spread  ranging  between  0.875%  and 2.25% in  respect  of  LIBOR-based
        borrowings  (prime rate plus a spread  ranging  between nil and 1.25% in
        respect of  prime-rate  borrowings),  depending  upon  certain  criteria
        specified  in  the  loan  agreement.   As  at  December  31,  2003,  the
        Corporation had bank credit facilities of US $212.5 million  ($255,800),
        which expired in 2004. As at December 31, 2004 and 2003, no amounts were
        borrowed under these credit facilities.  However, approximately US $10.9
        million  ($13,100) of letters of credit were issued under the new credit
        facility as at December 31, 2004. No amounts have been drawn under these
        letters of credit.

        The bank credit facility  contains  certain  covenants which require the
        Corporation to maintain certain financial ratios. In addition,  the bank
        credit  facility  contains  additional   covenants  which  restrict  the
        Corporation's   ability  to  borrow  funds  ranking  superior  to  these
        obligations and to undertake  certain types of major  transactions.  The
        Corporation  was in  compliance  with these  covenants  during 2004.  In
        addition,  the lenders may require repayment of the bank credit facility
        on a change of control of FSHI.

    (d) Interest income, net:

        ------------------------------------------------------------------------
                                                             2004         2003
        ------------------------------------------------------------------------
        Interest income                                   $16,911      $14,351
        Interest on long-term obligations                 (15,093)     (10,769)
        Other interest expense                               (324)        (232)
        ------------------------------------------------------------------------
        Interest income, net                              $ 1,494      $ 3,350
        ------------------------------------------------------------------------


                                       31

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

11. SHAREHOLDERS' EQUITY:

    (a) Capital stock:

        Authorized:

        3,725,698   Variable  Multiple  Voting  Shares  ("VMVS"),  entitling the
                    holder to that number of votes that results in the aggregate
                    votes attaching to the VMVS, representing  approximately 65%
                    of the votes  attaching  to the VMVS and the Limited  Voting
                    Shares ("LVS"),  in aggregate,  which, at December 31, 2004,
                    was 16.07  votes (2003 - 15.35  votes) per VMVS.  Changes in
                    the  number  of votes  attaching  to the VMVS  necessary  to
                    maintain this level will occur  concurrently  with the issue
                    of additional LVS.

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

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

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

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


                                       32

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

11. SHAREHOLDERS' EQUITY (CONTINUED):

        Issued:
        ------------------------------------------------------------------------
                                    VMVS               LVS
                                       Stated             Stated
                               Shares  value     Shares    value          Total
        ------------------------------------------------------------------------
        December 31, 2002    3,982,172  $44   30,893,160  $321,557     $321,601
        Options exercised            -    -      366,260     7,673        7,673
        Conversion of VMVS    (150,000)  (2)     150,000         2            -
        ------------------------------------------------------------------------
        December 31, 2003    3,832,172   42   31,409,420   329,232      329,274
        Options exercised            -    -    1,367,054    49,953       49,953
        Conversion of VMVS    (106,474)  (1)     106,474         1            -
        ------------------------------------------------------------------------
        December 31, 2004    3,725,698  $41   32,882,948  $379,186     $379,227
        ------------------------------------------------------------------------

        As at December  31,  2004,  an amount of $6,870 was recorded in accounts
        receivable relating to options exercised in 2004 (note 2).

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

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

    (b) Stock option plan:

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


                                       33

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

11. SHAREHOLDERS' EQUITY (CONTINUED):

        Changes in stock options for the years ended  December 31, 2004 and 2003
        were as follows:

        ------------------------------------------------------------------------
                                           Options Weighted average   Available
                                       outstanding   exercise price   for grant
        ------------------------------------------------------------------------
        Balance at December 31, 2002     5,795,677           $52.41     576,646
        Granted                            445,200            46.00    (445,200)
        Exercised                         (366,260)           20.95           -
        Cancelled                          (37,720)           68.50      37,720
        ------------------------------------------------------------------------
        Balance at December 31, 2003     5,836,897            53.91     169,166
        Additional options approved by
          shareholders                          -                 -     500,000
        Granted                           152,900             71.16    (152,900)
        Exercised                      (1,367,054)            36.35           -
        Cancelled                         (58,160)            88.05      58,160
        ------------------------------------------------------------------------
        Balance at December 31, 2004    4,564,583            $59.33     574,426
        ------------------------------------------------------------------------

        Information  relating to stock options  outstanding at December 31, 2004
        was as follows:

<TABLE>
        -------------------------------------------------------------------------------------
                                    Options outstanding                 Options exercisable
                          ---------------------------------------   -------------------------
        <S>               <C>           <C>              <C>        <C>           <C>
                                              Weighted   Weighted                    Weighted
                                               average    average                     average
        Range of exercise     Options   remaining life   exercise       Options   exercisable
        prices            outstanding      contractual      price   exercisable         price
        -------------------------------------------------------------------------------------
        $16.25 - $ 32.91      296,608        2.7 years     $30.25       283,286        $29.97
        $37.47 - $ 49.33    1,418,134        5.1 years      46.88     1,050,454         47.23
        $50.23 - $ 67.07    1,309,485        5.4 years      55.05     1,020,181         54.64
        $68.80 - $ 84.00      846,980        7.3 years      73.78       188,000         76.43
        $86.97 - $108.14      693,376        5.5 years      87.63       196,720         88.83
        -------------------------------------------------------------------------------------
        $16.25 - $108.14    4,564,583        5.5 years     $59.33     2,738,641        $53.20
        -------------------------------------------------------------------------------------
</TABLE>


                                       34

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

11. SHAREHOLDERS' EQUITY (CONTINUED):

        The  Corporation  adopted the fair  value-based  method for all employee
        stock  options  granted on or after  January 1, 2003.  The fair value of
        stock options granted has been estimated  using a  Black-Scholes  option
        pricing model with the following  assumptions:  risk-free interest rates
        in 2004 ranging from 2.96% to 4.39% (2003 - 4.44% to 5.02%); semi-annual
        dividend  per LVS in 2004 and 2003 of $0.055;  volatility  factor of the
        expected  market  price of FSHI's  LVS in 2004  ranging  from 28% to 30%
        (2003 - 32%); and expected lives of the options in 2004 and 2003 ranging
        between four and seven years, depending on the level of the employee who
        was granted stock options. For the options granted in 2004 and 2003, the
        weighted  average  fair  value of the  options  at the grant  dates were
        $25.32 and $18.46,  respectively.  For purposes of stock option  expense
        and pro forma  disclosures,  the estimated  fair value of the options is
        amortized to compensation expense over the options' vesting period.

        Section 3870 of the CICA Handbook  requires pro forma  disclosure of the
        effect of the  application  of the fair  value-based  method to employee
        stock options  granted on or after January 1, 2002 and not accounted for
        using the fair value-based method. For the years ended December 31, 2004
        and 2003, if the Corporation had applied the fair value-based  method to
        options  granted  from  January  1,  2002  to  December  31,  2002,  the
        Corporation's  net  earnings  and basic and diluted  earnings  per share
        would have been reduced to the pro forma amounts indicated below:

        ------------------------------------------------------------------------
                                                               2004        2003
        ------------------------------------------------------------------------
        Stock option expense included in
          compensation expense                             $ (2,113)    $  (893)
        ------------------------------------------------------------------------
        Net earnings, as reported                          $ 33,232     $ 5,384
        Additional expense that would have been recorded
          if all outstanding stock options granted on
          or after January 1, 2002 had been expensed         (3,407)     (3,450)
        ------------------------------------------------------------------------
        Pro forma net earnings                             $ 29,825     $ 1,934
        ------------------------------------------------------------------------
        Earnings per share:
          Basic, as reported                               $   0.93     $  0.15
          Basic, pro forma                                     0.84        0.06
          Diluted, as reported                                 0.89        0.15
          Diluted, pro forma                                   0.80        0.05
        ------------------------------------------------------------------------


                                       35

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

11. SHAREHOLDERS' EQUITY (CONTINUED):

    (c) Contributed surplus:

        Changes in contributed surplus for the years ended December 31, 2004 and
        2003 were as follows:

        ------------------------------------------------------------------------
                                                              2004         2003
        ------------------------------------------------------------------------
        Contributed surplus, beginning of year              $5,529       $4,636
        Stock option expense (b)                             2,113          893
        Adjustment relating to stock options exercised        (259)           -
        Gain on redemption of the equity component of
         convertible notes, net of income taxes
         of $4,141 (note 10(b))                              4,019            -
        ------------------------------------------------------------------------
        Contributed surplus, end of year                   $11,402       $5,529
        ------------------------------------------------------------------------

    (d) Earnings per share:

        Basic  earnings per share is  calculated by dividing net earnings by the
        weighted  average  number of VMVS and LVS  outstanding  during the year.
        Potentially  issuable LVS are  excluded  from the  calculation  of basic
        earnings  per share,  but are  included  in the  calculation  of diluted
        earnings per share by application of the "treasury  stock method", which
        takes into  account  the  dilution  relating to LVS  issuable  under the
        Corporation's stock option plan, and by application of the "if-converted
        method", which takes into account the potential dilution relating to the
        conversion of the Corporation's convertible notes. During 2004 and 2003,
        no convertible notes were redeemed by the issuance of LVS.

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

        ------------------------------------------------------------------------
                                           2004                    2003
        ------------------------------------------------------------------------
                                       Net                     Net
                                    earnings    Shares       earnings   Shares
        ------------------------------------------------------------------------
        Basic earnings per share
         amounts                     $33,232  35,647,986      $5,384  4,996,389
        Effect of assumed dilutive
         conversions:
          Stock option plan                -   1,666,230           -    870,135
        ------------------------------------------------------------------------
        Diluted earnings per share
         amounts                     $33,232  37,314,216      $5,384 35,866,524
        ------------------------------------------------------------------------


                                       36

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

11. SHAREHOLDERS' EQUITY (CONTINUED):

        The diluted  earnings per share  calculation  excluded the effect of the
        assumed   conversions  of  847,876  stock  options  to  LVS,  under  the
        Corporation's stock option plan, during the year ended December 31, 2004
        (2003 - 1,958,842 stock options),  as the inclusion of these conversions
        resulted in an anti-dilutive effect. In addition,  the dilution relating
        to the  assumed  conversion  of  convertible  notes  (issued in 1999 and
        subsequently  redeemed  in 2004)  (note  10(b))  to  3,463,155  LVS,  by
        application  of the  "if-converted  method",  has been excluded from the
        calculation  for  2004  and  2003 as the  inclusion  of this  conversion
        resulted in an  anti-dilutive  effect for the years ended  December  31,
        2004 and 2003. There was no dilution relating to the convertible  senior
        notes issued in 2004 (note 10(a)) as the contingent conversion price was
        not reached during 2004.

    (e) Equity adjustment from foreign currency translation:

        Changes in equity  adjustment from foreign currency  translation for the
        years ended December 31, 2004 and 2003 were as follows:

        ------------------------------------------------------------------------
                                                              2004         2003
        ------------------------------------------------------------------------
        Balance, beginning of year                        $(13,593)     $32,412
        Changes in exchange rates used to translate
          the Corporation's net investment in foreign
          self-sustaining subsidiaries                     (18,641)     (46,005)
        ------------------------------------------------------------------------
        Balance, end of year                              $(32,234)    $(13,593)
        ------------------------------------------------------------------------

12. CONSOLIDATED REVENUES:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Revenues from Management Operations                   $218,547     $195,833
    Revenues from Ownership and Corporate Operations       126,726      123,214
    Distribution from hotel investments                        398          153
    Fees from Ownership and Corporate Operations to
      Management Operations                                 (5,883)      (5,620)
    ----------------------------------------------------------------------------
                                                          $339,788     $313,580
    ----------------------------------------------------------------------------


                                       37

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

13. OTHER EXPENSE, NET:

    ----------------------------------------------------------------------------
                                                             2004         2003
    ----------------------------------------------------------------------------
    Loss on redemption of convertible notes (note 10(b)) $(14,611)     $     -
    Foreign exchange gain (loss) (note 14)                  3,615      (14,703)
    Provision for loss, net (notes 3(d), 3(e) and 5(a))    (3,822)      (1,419)
    Loss on disposal of ownership interests (note 4(c))      (643)           -
    Legal and enforcement costs (notes 3(c) and 6(b))        (273)      (9,475)
    Other expense                                            (361)        (186)
    ----------------------------------------------------------------------------
                                                         $(16,095)    $(25,783)
    ----------------------------------------------------------------------------

14. FOREIGN EXCHANGE GAIN (LOSS):

    During 2004, the Corporation  recorded a net foreign exchange gain of $3,615
    (2003 - net foreign  exchange loss of $14,703),  which is included in "Other
    expense,  net". The net  foreign  exchange  gain in 2004 and the net foreign
    exchange loss in 2003 related primarily to the foreign currency  translation
    gains and losses on unhedged net asset and liability positions, primarily in
    US  dollars,  euros,  pounds  sterling  and  Australian  dollars,  and local
    currency  foreign  exchange gains and losses on net monetary assets incurred
    by the Corporation's designated foreign self-sustaining subsidiaries.

    Effective January 1, 2004, the Corporation  ceased designating its US dollar
    forward contracts as hedges of its 2004 US dollar revenues, and as a result,
    these contracts were  marked-to-market on a monthly basis with the resulting
    changes in fair values  being  recorded as a foreign  exchange  gain or loss
    (note 1(l)(i)).


                                       38

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES:

    (a) Lease commitments:

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

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

              ------------------------------------------------------------------
              2005                                                      $10,402
              2006                                                        9,595
              2007                                                        8,920
              2008                                                        8,840
              2009                                                        8,781
              Subsequent to 2009                                         38,333
              ------------------------------------------------------------------
                                                                        $84,871
              ------------------------------------------------------------------


                                       39

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES (CONTINUED):

        (ii)  The   Corporation   is  the  tenant  of  the  land  and   premises
              constituting  Four Seasons Hotel London pursuant to the terms of a
              lease (the "FS Lease") expiring on January 28, 2054. The leasehold
              interest  of  the   Corporation  in  the  hotel  is  a  continuing
              obligation  which  survived  the  sale by the  Corporation  of its
              ownership  interest  in the  hotel in 1995.  The  Corporation  has
              entered  into a  sublease  of  the  hotel  with  the  entity  (the
              "Sub-Tenant")  on whose behalf the Corporation  manages the hotel.
              The annual rent payable by the  Corporation  under the FS Lease is
              currently  (pound)3.9  million.  The same amount of annual rent is
              payable  by the  Sub-Tenant  to the  Corporation  pursuant  to the
              sublease  and is  payable  out of the  operating  accounts  of the
              hotel.  Indirectly,  the  Corporation  now holds a 12.5% ownership
              interest in the Sub-Tenant.

              Pursuant  to the  arrangements  relating to the  ownership  of the
              Sub-Tenant,   the  Corporation  would  be  required  to  fund  its
              proportionate  12.5% share of any amounts  required to ensure that
              the Sub-Tenant  honoured all of the obligations  necessary for the
              operation of the hotel,  including the sublease  payments,  to the
              extent the majority shareholder makes payment of its proportionate
              share of such  amounts.  The  Corporation  has not  been  required
              either to make  payment  of any  amount of rent under the FS Lease
              that has not first been paid to the Corporation under the sublease
              or  to  fund  any  amounts   under  the  terms  of  the  ownership
              arrangements  relating  to  the  Sub-Tenant.  Historically,  hotel
              operating cash flow has been more than sufficient to meet the rent
              obligation.  In the  event  of a  non-payment  of rent  under  the
              sublease,  the  Corporation  would  be  entitled  to  forfeit  the
              sublease.  The ongoing  management of the hotel by the Corporation
              is subject to a  non-disturbance  agreement with the senior lender
              of the  Sub-Tenant.  Future  minimum lease  payments of the hotel,
              exclusive of any contingent  rentals and occupancy  costs,  are as
              follows:

              ------------------------------------------------------------------
              2005                                                     $  8,985
              2006                                                        9,100
              2007                                                        9,215
              2008                                                        9,225
              2009                                                        9,225
              Subsequent to 2009                                        406,663
              ------------------------------------------------------------------
                                                                       $452,413
              ------------------------------------------------------------------


                                       40

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES (CONTINUED):

    (b) Pension commitments:

        The Corporation maintains an unfunded multi-employer,  non-contributory,
        defined  benefit  pension plan (the "Plan") on behalf of the Corporation
        and the owners of certain managed properties.  The Plan provides pension
        benefits for certain  senior  executives of the  Corporation  as well as
        hotel and resort general  managers,  based on years and level of service
        and annual salary.

        The accrued  benefit  liability  as at December 31, 2004 and the benefit
        expense for the year ended  December 31, 2004 were  determined  based on
        January 1, 2004 valuations of the Plan and an  extrapolation to December
        31, 2004 for  disclosure  purposes.  The  Corporation  uses the corridor
        method to  amortize  actuarial  gains and  losses  (such as  changes  in
        actuarial  assumptions  and  experience  gains  and  losses).  Under the
        corridor  method,  amortization  is recorded only if the accumulated net
        actuarial  gains or losses exceed 10% of the greater of accrued  benefit
        obligation and the value of the Plan assets.

        Information  relating to the Plan for the years ended  December 31, 2004
        and 2003 based on projections of employees'  compensation  levels to the
        date of retirement were as follows:

        ------------------------------------------------------------------------
                                                              2004         2003
        ------------------------------------------------------------------------
        Accrued benefit  obligation,  beginning of year   $ 60,668     $ 52,092
        Change in accrued benefit obligation:
          Service cost                                       2,232        1,863
          Interest cost                                      4,238        3,610
          Benefits paid                                     (1,459)        (951)
          Actuarial loss                                     4,975        4,054
        ------------------------------------------------------------------------
        Accrued benefit obligation, end of year             70,654       60,668

        Unamortized actuarial loss for changes
          in assumptions                                   (10,905)      (6,189)
        ------------------------------------------------------------------------
        Accrued benefit liability, end of year,
          before allocation                                 59,749       54,479

        Portion allocated to managed properties            (26,936)     (24,987)
        ------------------------------------------------------------------------
        Accrued benefit liability, end of year,
           after allocation                               $ 32,813     $ 29,492
        ------------------------------------------------------------------------

        Under the Plan,  the  benefits  expected  to be paid in each of the next
        five years,  and in the aggregate for the five fiscal years  thereafter,
        to certain  senior  executives of the  Corporation,  including  benefits
        attributable to estimated future employee  service,  are  approximately:
        2005 - $1,300;  2006 -  $2,100;  2007 -  $2,500;  2008 - $2,500;  2009 -
        $3,300; 2010 to 2014 - $25,800.

        During part of 2003, the accrued benefit  liability was financed by life
        insurance  policies on the lives of certain of the  participants  in the
        Plan.  During  2003,  most of the  policies  were  liquidated  for  cash
        proceeds generally equal to their carrying value.


                                       41

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian  dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES (CONTINUED):

        ------------------------------------------------------------------------
                                                               2004        2003
        ------------------------------------------------------------------------
        Assumptions as of December 31:
          Discount rates - benefit obligation                  6.00%       6.50%
          Discount rates - benefit expense                     6.50%       6.75%
          Rates of increase in compensation levels             3.00%       3.00%
        ------------------------------------------------------------------------
        Components of benefit expense before allocation:
          Service cost                                       $2,232      $1,863
          Interest cost                                       4,238       3,610
          Actuarial loss                                      4,975       4,054
        ------------------------------------------------------------------------
        Elements of employee future benefit costs before
         adjustments to recognize the long-term nature of
         employee future benefit costs                       11,445       9,527

        Difference between actuarial loss recognized for
         the year and actual actuarial loss on accrued
         benefit                                             (4,716)     (4,054)
        ------------------------------------------------------------------------
        Benefit expense before allocation                     6,729       5,473

        Portion allocated to managed properties              (3,655)     (2,803)
        ------------------------------------------------------------------------
        Benefit expense after allocation                     $3,074      $2,670
        ------------------------------------------------------------------------

    (c) Guarantees, commitments and indemnifications:

        (i)   Guarantees and commitments:

              As at December  31, 2004,  the  Corporation  has provided  certain
              guarantees  and has  other  commitments  in  connection  with  the
              properties   under  its   management.   These  include  four  bank
              guarantees  in respect  of four  projects  totalling  a maximum of
              $24,000,  as well as a $361  guarantee  of  relocation  costs  for
              certain  employees.  The  Corporation  has  lease  commitments  in
              respect  of Four  Seasons  Hotel  London,  which  are  more  fully
              described  in note  15(a)(ii),  and Four  Seasons  Hotel Prague of
              approximately  (euro)0.8 million. In addition, the Corporation has
              four other commitments totalling $29,300. The Corporation also has
              guaranteed  certain  obligations of various officers and employees
              in the  aggregate  amount of $296,  all of which were entered into
              before 2002.


                                       42

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES (CONTINUED):

              To the  extent  it is  called  upon to  honour  any  one of  these
              commitments,  the Corporation generally has either the right to be
              repaid from hotel operations  and/or has various forms of security
              or recourse to the owner of the property. The Corporation does not
              anticipate funding any amount pursuant to these commitments during
              2005,   with  the  exception  of  $8,500  relating  to  its  other
              commitments.   The  Corporation's   assessment  of  its  potential
              liability  for such  matters  could  change as a result of,  among
              other things, the associated risks and uncertainties.

        (ii)  Disposition indemnification arrangements:

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

              In the  context  of two of  the  Corporation's  dispositions,  the
              Corporation  received indemnity  agreements in its favour, for its
              existing  guarantee  obligations  related to the disposed interest
              that have remained  outstanding  notwithstanding  the disposition.
              The Corporation  believes that the  indemnification  agreements in
              its favour will fully  indemnify the  Corporation for any possible
              payment under these existing guarantees.

        (iii) Director and officer indemnification arrangements:

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


                                       43

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES (CONTINUED):

        (iv)  Other indemnification arrangements:

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

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

    (d) Other commitments and contingencies:

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

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


                                       44

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

15. COMMITMENTS AND CONTINGENCIES (CONTINUED):

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

16. FAIR VALUES OF FINANCIAL INSTRUMENTS:

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

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

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

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


                                       45

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

16. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED):

    The Corporation  enters into foreign exchange forward  contracts that oblige
    it to buy or sell specific amounts of foreign currencies at set future dates
    at  predetermined  exchange  rates.  Because a  significant  portion  of the
    Corporation's  revenues  is  derived  in foreign  currencies  (primarily  US
    dollars) and  expenditures  incurred by the  Corporation  for its management
    operations are denominated  primarily in Canadian  dollars,  the Corporation
    enters into such  contracts from time to time to protect itself in the event
    of a strengthening  Canadian currency.  Management  estimates future foreign
    currency cash flows on an ongoing basis, based on its projections of foreign
    currency-denominated  management  fees and  other  transactions.  Management
    negotiates foreign exchange forward contracts in proportion to the magnitude
    and timing of these cash flows. As at December 31, 2004, the Corporation had
    no foreign exchange  forward  contracts  outstanding  (2003 - US $50 million
    ($80,617) at a weighted  average  forward  exchange rate of $1.61,  under 24
    forward  contracts,  maturing  over a  12-month  period).  The fair value of
    foreign  exchange  forward  contracts is estimated from quotes obtained from
    the  Corporation's   counterparties   for  the  same  or  similar  financial
    instruments.

    The fair values of financial instruments are as follows:

    ----------------------------------------------------------------------------
                                                         Estimated    Carrying
                                                        fair value      amount
    ----------------------------------------------------------------------------
    2004:
       Convertible notes, issued in 2004 (a)            $(388,000)   $(311,337)
    2003:
       Convertible notes, issued in 1999 (a)             (289,000)    (273,433)
       Foreign exchange forward contracts                  15,000          604
    ----------------------------------------------------------------------------

    (a) The  carrying  amount of the  convertible  notes  includes  the  amounts
        allocated to both long-term  obligations and  shareholders'  equity.  It
        excludes,  however,  the offering expenses and underwriter's  commission
        related to the shareholders'  equity component of the notes of $1,809 in
        2004 (2003 - $6,861), which are recorded in "Shareholders' equity".


                                       46

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

17. SEGMENTED INFORMATION:

    The Corporation has two distinct operating segments:  management  operations
    and ownership  and corporate  operations.  Under its  management  operations
    segment,   the  Corporation   generally  supervises  all  aspects  of  hotel
    operations  on  behalf  of the  hotel  owners,  including  hotel  sales  and
    marketing, hotel reservations,  hotel accounting,  purchasing, budgeting and
    the hiring, training and supervising of staff. For providing these services,
    the Corporation  typically receives a base fee calculated as a percentage of
    gross  revenues  of the hotel.  In  addition,  the  Corporation  may receive
    incentive fees based on the operating performance of the hotels.  Generally,
    the hotels' owners, and not the Corporation,  fund substantially all capital
    expenditures and working capital of the hotels, including all employment and
    operating  costs.  This segment also  includes the licensing and managing of
    residential  projects and residence  clubs.  The  Corporation is entitled to
    receive  a fee for the  use of its  brand  name  in  connection  with  these
    projects,  and for  services  provided  in the  oversight  of the  sales and
    marketing of the residential projects and residence club units. In addition,
    the Corporation  receives a fee from the owners of the residential  projects
    and residence club units for services provided in the ongoing  management of
    these units.

    Under its ownership and corporate operations segment, the Corporation had an
    equity  interest in 14 hotels and resorts  and three  residence  clubs under
    management and three projects  under  construction  as at December 31, 2004.
    Earnings are primarily  derived from the  consolidation  of its wholly owned
    interests in two hotels (note 1(a)) and distributions  from its other equity
    interests.  Generally,  the ownership and  corporate  operations  segment is
    subject to greater  economic  fluctuations  than the  management  operations
    segment.  Ownership  and corporate  earnings can be materially  affected by,
    among other things, changes in travel patterns, local wage rate factors, the
    level of capital  spending  that is required to  appropriately  maintain and
    renew the hotels,  volatility of  construction  costs,  the  availability of
    hotel  financing and changes in interest rates.  The Corporation  structures
    its ownership  interests  separately from its management  interests so as to
    enable  the   Corporation   to  dispose  of  ownership   interests  as  sale
    opportunities arise, without affecting its management interests.


                                       47

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

17. SEGMENTED INFORMATION (CONTINUED):

    (a) Consolidated revenues:

        Revenues have been  allocated to specific  geographic  segments based on
        the location of each hotel or resort.
<TABLE>
<CAPTION>

        ----------------------------------------------------------------------------------------------------------
                                               2004                                      2003
                           ---------------------------------------------------------------------------------------
                                            Ownership                                  Ownership
                                               and                                        and
                                           corporate                                   corporate
                                            revenues                                    revenues
                              Management       and        Consolidated  Management        and          Consolidated
                               revenues   distributions     revenues     revenues    distributions       revenues
        ----------------------------------------------------------------------------------------------------------
        <S>                   <C>          <C>           <C>           <C>             <C>               <C>
         United States         $ 76,948    $ 80,500      $  157,448    $ 69,600        $  76,506         $146,106
         Other
          Americas/Caribbean     19,798      31,826          51,624      12,434           26,746           39,180
         Europe                  25,164      14,798          39,962      21,945           20,115           42,060
         Asia/Pacific            17,405           -          17,405      13,039                -           13,039
         Middle East              6,516           -           6,516       3,512                -            3,512
        ----------------------------------------------------------------------------------------------------------
                                145,831     127,124         272,955     120,530          123,367          243,897

         Reimbursed costs        72,716           -          72,716      75,303                -           75,303
         Less intersegment
          revenues               (5,883)          -          (5,883)     (5,620)               -           (5,620)
        ----------------------------------------------------------------------------------------------------------
                               $212,664    $127,124        $339,788    $190,213         $123,367         $313,580
        ----------------------------------------------------------------------------------------------------------
</TABLE>

    (b) Total assets:

        ------------------------------------------------------------------------
                                                              2004         2003
        ------------------------------------------------------------------------
        United States                                   $  332,404     $335,375
        Other Americas/Caribbean                           392,933      290,098
        Europe                                             230,568      193,393
        Asia/Pacific                                       108,074      100,521
        Middle East                                         21,846       27,273
        ------------------------------------------------------------------------
                                                        $1,085,825     $946,660
        ------------------------------------------------------------------------


                                       48

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

    The consolidated financial statements of the Corporation for the years ended
    December 31, 2004 and 2003 have been prepared in accordance  with  generally
    accepted  accounting  principles as applied in Canada ("Canadian  GAAP"). In
    the following respects,  generally accepted accounting principles as applied
    in the United States ("US GAAP") differ from those applied in Canada.

    If US GAAP were employed, net earnings would be adjusted as follows:

    ----------------------------------------------------------------------------
                                                            2004         2003
    ----------------------------------------------------------------------------
    Net earnings based on Canadian GAAP                   $33,232      $ 5,384
    Impact on net earnings of US GAAP adjustments:
       Hotel partnerships and corporations (a)             (9,037)      (3,966)
       Future income taxes (c)                              6,823       (7,596)
       Convertible notes (d)                               16,382       (4,909)
       Deferred charges (e)                                (4,841)      (3,861)
       Foreign exchange translation (g)                    (6,487)      53,770
       Pension plan (h)                                      (543)        (488)
       Stock compensation expense (m)                       2,113          893
    ----------------------------------------------------------------------------
    Net earnings based on US GAAP                         $37,642      $39,227
    ----------------------------------------------------------------------------
    Basic earnings per share based on US GAAP             $  1.06      $  1.12
    ----------------------------------------------------------------------------
    Diluted earnings per share based on US GAAP ((i)(ii)) $  1.01      $  1.09
    ----------------------------------------------------------------------------
    Weighted average shares - basic                    35,647,986   34,996,389
    ----------------------------------------------------------------------------
    Weighted average shares - diluted ((i)(ii))        37,426,090   35,982,715
    ----------------------------------------------------------------------------


                                       49

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

    The impact of the US GAAP differences  discussed above on the  Corporation's
    consolidated shareholders' equity is as follows:

    ----------------------------------------------------------------------------
                                                              2004         2003
    ----------------------------------------------------------------------------
    Shareholders' equity based on Canadian GAAP         $  703,986   $  765,507
    Impact on shareholders' equity of US GAAP
      adjustments:
       Hotel partnerships and corporations (a)             (89,702)     (78,870)
       Hotel disposition program (b)                        27,842       27,842
       Future income taxes (c)                              10,651         (313)
       Convertible notes (d)                               (79,579)    (214,270)
       Deferred charges (e)                                (35,700)     (31,448)
       Foreign exchange translation (g)                     48,210       52,996
       Pension plan (h)                                      3,688        4,231
    ----------------------------------------------------------------------------
    Shareholders' equity based on US GAAP                 $589,396     $525,675
    ----------------------------------------------------------------------------

    (a) Investments in hotel partnerships and corporations:

        (i)   The Corporation has minority  interests  (generally less than 20%)
              in certain hotel  partnerships  which,  under  Canadian  GAAP, the
              Corporation  accounts  for on a cost basis (note  1(f)).  Under US
              GAAP  (AICPA   Statement  of  Position   78-9,   "Accounting   for
              Investments in Real Estate Ventures"), the Corporation is required
              to account for its investments in these hotel  partnerships  using
              the equity method of accounting, pursuant to which the Corporation
              records in income its  proportionate  share of the  investee's net
              earnings or loss.

        (ii)  Under Canadian GAAP, the Corporation  accounts for its investments
              in hotel partnerships and corporations,  which were acquired prior
              to May 1, 2003 with the intention  that they be disposed of in the
              foreseeable  future,  by  the  cost  method,  irrespective  of its
              percentage  ownership  interest (notes 1(f), 4(a) and 4(b)). Under
              US GAAP,  effective January 1, 2002, the Corporation  accounts for
              these  temporary  investments  based on its  percentage  ownership
              interest  for  each  investment,   as  the  Financial   Accounting
              Standards  Board  ("FASB")   Statement  of  Financial   Accounting
              Standards No. 144,  "Accounting  for the Impairment or Disposal of
              Long-Lived   Assets"  ("FAS  144")  eliminated  the  exception  to
              consolidate a temporary  controlled  subsidiary.  As a result, the
              Corporation  has  consolidated  one temporary  investment  and has
              equity  accounted one temporary  investment in 2004 and 2003 under
              US GAAP.


                                       50

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

        (iii) During  2004,  the   Corporation   entered  into  a  multi-element
              arrangement  whereby the  Corporation  (i) sold its  interest in a
              hotel property, (ii) entered into a hotel management contract with
              the purchaser, and (iii) entered into a guarantee arrangement with
              the  purchaser.  Under  Canadian  GAAP, as all three elements were
              entered into with the same party at the same time, the Corporation
              applied  EIC-142.  Pursuant to the  requirements  of EIC-142,  the
              Corporation  determined that the sale of the hotel property should
              be accounted for as a separate  unit of accounting  that should be
              accounted for in 2004 as the disposal of the hotel  property;  and
              that the hotel management  contract and the guarantee  arrangement
              should be accounted for as a combined unit of accounting, with the
              related costs and revenues being  recognized  over the term of the
              hotel management contract as management services are delivered.

              Under  US GAAP,  the  Corporation  determined  that  Statement  of
              Financial  Accounting  Standards No. 66,  "Accounting for Sales of
              Real  Estate",   overrides  the  US  GAAP  equivalent  of  EIC-142
              (Emerging  Issues Task Force  Abstract  No.  EITF 00-21,  "Revenue
              Arrangements  with  Multiple   Deliverables")   and  requires  the
              guarantee arrangement to be accounted for as a part of the sale of
              the hotel property. As a result, the Corporation's estimate of the
              fair value of the  payments  it would  likely be  required to make
              under the guarantee  arrangement  was accounted for as a reduction
              of the proceeds  received on the sale of the hotel  property under
              US GAAP.

        (iv)  Summarized   balance  sheet   information  of  the  equity  method
              investments, presented on a 100% basis, is as follows:

              ------------------------------------------------------------------
                                                               2004        2003
              ------------------------------------------------------------------
              Current assets                               $111,361    $ 70,319
              Long-term assets, net                         433,175     498,376
              ------------------------------------------------------------------
                                                           $544,536    $568,695
              ------------------------------------------------------------------
              Current liabilities                          $114,608    $231,919
              Long-term obligations                         351,956     268,647
              Equity                                         77,972      68,129
              ------------------------------------------------------------------
                                                           $544,536    $568,695
              ------------------------------------------------------------------

              Summarized results of operations of the equity method investments,
              presented on a 100% basis, are as follows:

              ------------------------------------------------------------------
                                                               2004        2003
              ------------------------------------------------------------------
              Revenues                                     $247,033    $234,757
              Expenses                                     (255,929)   (252,233)
              ------------------------------------------------------------------
              Net loss                                     $ (8,896)   $(17,476)
              ------------------------------------------------------------------

              The proportionate taxable income or loss of all hotel partnerships
              is included in the taxable  income of their  respective  partners.
              Accordingly,  no provisions  for income taxes on such entities are
              included in the above statements.


                                       51

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

    (b) Hotel disposition program:

        In November  1993, the  Corporation  implemented a program to dispose of
        seven hotel  properties.  Under  Canadian GAAP,  this hotel  disposition
        program  represented  the  disposition  of a significant  portion of the
        Corporation's  Ownership and Corporate Operations segment;  accordingly,
        in both 1993 and 1994, the Corporation made an estimate as to whether it
        would  realize a net gain or loss on the program in total.  As a result,
        in 1993,  the  Corporation  recorded a  provision  of  $127,000  for the
        estimated  probable loss on the sale of the hotels included in the hotel
        disposition  program.  The  program  ended in 1996,  and the  total  net
        proceeds received by the Corporation, resulting from the dispositions of
        the hotels included in the program,  approximated the proceeds estimated
        in 1993;  therefore,  the program required no further gain or loss to be
        recorded.

        Under US GAAP,  the  Corporation  was required to account for the hotels
        remaining  in the  program  as  individual  assets  held for sale.  This
        resulted in the requirement  under US GAAP to record, in 1994, a further
        provision  for loss on certain of the hotels  remaining  in the program,
        with the offsetting  gains on other hotels  recorded when the gains were
        realized.  On the sale by the  Corporation of its equity interest in one
        of its  hotels in 1995,  $27,813  of the gain was  deferred  for US GAAP
        purposes,  and will be  recognized  in  proportion  to the cash payments
        received  on the cash flow bond  received as  consideration  on the sale
        (note 3(a)).  The Corporation did not recognize any of the deferred gain
        in 2004 and 2003 as no principal payments were received on the cash flow
        bond.  As at December  31,  2004,  $21,345 of the gain  continues  to be
        deferred.

    (c) Accounting for future income taxes:

        The income tax  adjustment  from  Canadian to US GAAP  results  from the
        differences  between US GAAP and Canadian GAAP in  calculating  earnings
        before income taxes.


                                       52

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

    (d) Convertible notes:

        (i)   Convertible notes, issued in 2004:

              During 2004,  FSHI issued  US$250  million  ($341,100)  (principal
              amount)  senior notes  convertible  into Limited  Voting Shares of
              FSHI for net proceeds of US$241.3 million ($329,273) (note 10(a)).
              Under  Canadian  GAAP,  the  notes  were  bifurcated  into  a debt
              component  (representing the principal value of a bond of US$211.8
              million ($288,918), which was estimated based on the present value
              of a US$250  million  ($341,100)  bond maturing in 2009,  yielding
              5.33% per annum, compounded semi-annually,  and paying a coupon of
              1.875% per annum) and an equity component  (representing the value
              of the conversion feature of the notes). Accordingly, net proceeds
              have been allocated $288,918 to long-term  obligations and $50,373
              to shareholders'  equity.  The offering expenses and underwriters'
              commission  relating to the debt component of the notes of $10,018
              were recorded in "Other assets".

              Under US GAAP,  gross proceeds of US$250 million  ($341,100)  were
              recorded as long-term obligations,  yielding 1.875% per annum. The
              total offering expenses and underwriters'  commission  relating to
              the notes of $11,827 were recorded in "Other assets". Accordingly,
              lower  interest  expense of $4,332 was recognized in 2004 under US
              GAAP.

        (ii)  Interest rate swap agreement:

              In  connection  with the  convertible  notes issued in 2004,  FSHI
              entered  into an  interest  rate swap  agreement  with an  initial
              notional amount of US$211.8 million ($288,918),  pursuant to which
              FSHI had agreed to receive  interest  at a fixed rate of 5.33% per
              annum and pay  interest  at  six-month  LIBOR,  in  arrears,  plus
              0.4904% (note 10(a)). Under Canadian GAAP, FSHI had designated the
              interest  rate  swap as a fair  value  hedge of the  notes,  which
              resulted in an effective  accounting  interest  rate on the hedged
              notes to the date of termination of the swap, of six-month  LIBOR,
              in arrears,  plus 0.4904%.  Subsequently  in 2004, FSHI terminated
              the interest  rate swap  agreement  and received  proceeds of US$9
              million  ($11,267).  Under  Canadian  GAAP, the gain of $9,243 was
              deferred and is being  amortized  over the next 4.75 years,  which
              would  have  been the  remaining  swap  term,  as a  reduction  to
              interest expense.


                                       53

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

              Under US GAAP,  Statement of Financial  Accounting  Standards  No.
              133,   "Accounting   for   Derivative   Instruments   and  Hedging
              Activities"  ("FAS 133"),  establishes  accounting  and  reporting
              standards  for  derivatives  and  hedging.  It  requires  that all
              derivatives  be recognized as either assets or liabilities at fair
              value and  establishes  specific  criteria  for the use of hedging
              accounting.

              Under  US  GAAP,   the  interest   rate  swap  did  not  meet  the
              requirements  in order to hedge the  convertible  notes,  and as a
              result,  was  being  marked-to-market.   Accordingly,   additional
              interest  expense of $2,591 was  recognized in 2004 under US GAAP.
              In  addition,  a gain  on  the  marked-to-market  adjustments  and
              termination of the swap of $11,267 was recognized in 2004 under US
              GAAP.

        (iii) Convertible notes, issued in 1999:

              During 1999,  FSHI issued US $655.5  million  principal  amount at
              maturity  (September 23, 2029) of notes  convertible  into Limited
              Voting  Shares of FSHI for  gross  proceeds  of US $172.5  million
              (note 10(b)).  Under Canadian GAAP, the notes were bifurcated into
              a debt component  (representing the present value of a zero coupon
              bond of US  $655.5  million,  maturing  in 2029,  yielding  9% per
              annum,   compounding   semi-annually)   and  an  equity  component
              (representing  the value of the conversion  feature of the notes).
              Accordingly,  net proceeds were  originally  allocated  $68,902 to
              long-term  obligations and $178,574 to shareholders'  equity.  The
              offering  expenses and  underwriters'  commission  relating to the
              debt  component  of the notes of $2,549  were  recorded  in "Other
              assets".

              During 2004,  FSHI redeemed for cash all these  convertible  notes
              for US$328.73 per each one thousand US dollar  principal amount at
              maturity (the redemption price being the issue price plus interest
              that was accrued but unpaid) for an aggregate  payment of US$215.5
              million   ($275,701)  (note  10(b)).   Under  Canadian  GAAP,  the
              consideration   paid  on  the  redemption  was  allocated  to  the
              liability and equity  components of the convertible notes based on
              their relative fair values at the date of the redemption. Based on
              this  allocation,   a  pre-tax  accounting  loss  of  $14,611  was
              recognized,  and recorded in "Other expense,  net", related to the
              debt component of the convertible  notes, and a pre-tax accounting
              gain  of  $8,160  was  recognized,  and  recorded  in  contributed
              surplus, related to the equity component of the convertible notes.


                                       54

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

              Under US GAAP,  gross  proceeds of US $172.5 million were recorded
              as  long-term  obligations,  with a yield  to  maturity  of  4.5%,
              compounding   semi-annually.   The  total  offering  expenses  and
              underwriters'  commission  relating  to the notes of  $9,410  were
              recorded  in  "Other  assets".  Accordingly,  additional  interest
              expense of $3,355 (2003 - $4,909) was recognized under US GAAP. In
              addition,  under US GAAP, a pre-tax  accounting loss of $7,882 was
              recognized,   and  recorded  in  "Other  expense,   net",  on  the
              redemption  of the  convertible  notes,  instead  of  the  amounts
              recognized above under Canadian GAAP.

              In addition,  under  Canadian  GAAP,  at December  31,  2003,  the
              Corporation  classified  the  debt  component  of the  notes  as a
              long-term obligation.  Under US GAAP, in accordance with Statement
              of  Financial  Accounting  Standards  No.  6,  "Classification  of
              Short-Term Obligations Expected to Be Refinanced", the notes would
              be classified as a current liability at December 31, 2003.

    (e) Deferred charges:

        The Corporation defers expenditures directly related to the negotiation,
        structuring  and  execution  of  new  management  contracts,  and if the
        property is opened,  amortizes  these deferred costs on a  straight-line
        basis over a 10-year  period (note 1(h)).  Under US GAAP,  such start-up
        costs are expensed.

    (f) Investment in  management  contracts  and  investment in trademarks  and
        trade names:

        On a Canadian GAAP basis,  amortization  expense of approximately $7,800
        related to intangible  assets with finite lives was recorded  during the
        year ended  December  31,  2004 (2003 -  $7,000).  Amortization  expense
        relating to these  assets is expected to be $8,000 in each of the fiscal
        years 2005 through 2009.


                                       55

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

    (g) Foreign exchange translation:

        (i)   Under US GAAP,  the impact on the  Corporation in 2004 and 2003 of
              applying FAS 133 to the accounting for the Corporation's US dollar
              forward contracts was the  marked-to-market  of these contracts in
              2002  and  2003.  For US GAAP  purposes,  these  forward  exchange
              contracts  were not  accounted  for as  hedges  in 2002 and  2003;
              therefore,  the  marked-to-market  adjustments  were recognized in
              income  in 2002 and  2003.  Under  Canadian  GAAP,  these  forward
              exchange contracts were accounted for as hedges in 2002 and 2003.

              Effective  January 1, 2004,  under Canadian GAAP, the  Corporation
              ceased  designating  its US dollar forward  contracts as hedges of
              its US dollar  revenues  and, as a result,  the US dollar  forward
              contracts were marked-to-market as of that date (note 1(I)(i)). In
              2004, this accounting treatment was the same as under US GAAP. All
              of these forward  contracts matured during 2004. The difference in
              accounting  treatment in 2002 and 2003 resulted in a lower foreign
              exchange  gain in 2004,  under US GAAP,  of $14,441 (2003 - higher
              foreign exchange gain of $14,024).

        (ii)  Under US GAAP, the US dollar amount of convertible notes allocated
              to  long-term  obligations  is higher  than  under  Canadian  GAAP
              ((d)(i)  and  (iii)).  The US  dollar  monetary  liabilities  are,
              therefore,  higher under US GAAP, which resulted in an increase in
              the foreign  exchange gain in 2004, under US GAAP, of $7,954 (2003
              - $39,746).

    (h) Pension plan:

        Under Canadian GAAP, the Corporation, effective January 1, 2000, changed
        its accounting  policy  relating to the  accounting for future  employee
        benefits,  including pension  benefits,  to comply with the new Canadian
        GAAP standard for accounting for pension plans. The Corporation  adopted
        the new standard for pension benefits  retroactively,  without restating
        the financial statements of prior periods. This eliminated substantially
        all of the  differences  between US and  Canadian  GAAP  relating to the
        accounting for pension benefits.


                                       56

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian  dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

        The only remaining  significant  difference between US and Canadian GAAP
        relates to the treatment of actuarial  gains and losses.  Under Canadian
        GAAP,  the  transitional  provisions  relating to the new Canadian  GAAP
        standard for  accounting  for pension plans  permitted the impact of the
        change of the new standard to be accounted  for  retroactively,  without
        restatement  of prior  years'  financial  statements.  As a result,  the
        Corporation recorded in 2000 a charge to retained earnings, representing
        the differences  between the amount accrued by the Corporation under the
        prior accounting standard and the actuarial obligation as measured under
        the new standard, which included the net unamortized actuarial losses as
        at December  31,  1999.  Under US GAAP,  the net  unamortized  actuarial
        losses as at December 31, 1999 are amortized,  on a straight-line basis,
        over the expected average remaining  service life of employees  expected
        to receive benefits under the Plan.

    (i) New accounting standards adopted in 2004:

        (i)   Consolidation of variable interest entities:

              In  January  2003,   the  FASB  issued   Interpretation   No.  46,
              "Consolidation of Variable  Interest  Entities" ("FIN 46"), and in
              December  2003  issued FIN 46R,  an  amendment  of FIN 46. In June
              2003, the CICA issued Accounting Guideline No. 15,  "Consolidation
              of  Variable  Interest  Entities"  ("AcG-15").  FIN 46R and AcG-15
              establish  criteria to identify variable interest entities ("VIE")
              and the  primary  beneficiary  of  such  entities.  Entities  that
              qualify as VIEs must be consolidated by their primary beneficiary.
              All other holders of significant  variable interests in a VIE must
              disclose  the nature,  purpose,  size and  activity of the VIE, as
              well  as  their  maximum   exposure  to  losses  as  a  result  of
              involvement with a VIE. FIN 46R was effective  January 1, 2004 for
              the  Corporation for VIEs created before February 1, 2003, but was
              effective immediately for VIEs created after January 31, 2003. The
              implementation   of  FIN  46R  did  not  have  an  impact  on  the
              consolidated  financial statements for either 2003 or 2004. AcG-15
              is   applicable  to  all  VIEs  and  will  be  effective  for  the
              Corporation for fiscal periods beginning after December 31, 2004.


                                       57

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

        (ii)  Diluted earnings per share:

              In  December  2004,  the  Emerging  Issues  Task Force of the FASB
              issued Issue No.  04-8,  "The Effect of  Contingently  Convertible
              Instruments on Diluted  Earnings per Share" ("EITF  04-8"),  which
              requires the  application of the "if-converted  method",  under US
              GAAP,  to  account  for the  potential  dilution  relating  to the
              conversion of contingently convertible instruments, such as FSHI's
              convertible senior notes (note 10(a)).  EITF 04-8 is effective for
              reporting periods ending after December 15, 2004.

              Under US GAAP,  the dilution  relating to the conversion of FSHI's
              convertible  senior notes to 3,489,525  Limited Voting Shares,  by
              application of the "if-converted  method",  has been excluded from
              the  calculation  of  2004  diluted  earnings  per  share  as  the
              inclusion of this conversion  resulted in an anti-dilutive  effect
              for the year ended December 31, 2004.

              Under Canadian  GAAP, the potential  dilution of the conversion of
              FSHI's  convertible  senior notes is excluded from the calculation
              of diluted earnings per share, as the contingent  conversion price
              was not reached during 2004 (note 11(d)).

    (j) Recent accounting standards issued but not yet adopted:

        (i)   Share-based payment:

              In  December  2004,   the  FASB  issued   Statement  of  Financial
              Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
              ("FAS 123R"),  which requires an entity to recognize in the income
              statement  the  grant-date  fair value of stock  options and other
              equity-based compensation issued to employees. FAS 123R eliminates
              an  entity's  ability  to  account  for  share-based  compensation
              transactions using the intrinsic value method of accounting in APB
              Opinion No. 25, "Accounting for Stock Issued to Employees",  which
              was permitted  under Statement of Financial  Accounting  Standards
              No. 123 ("FAS 123"), as originally issued. Entities that adopt the
              fair value-based method of accounting must use either the modified
              prospective or modified retrospective  transition method. FAS 123R
              is  substantially  the same as Section  3870 of the CICA  Handbook
              (note 1(j)), but is not required to be adopted by the Corporation,
              under US GAAP, until January 1, 2006.


                                       58

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

        (ii)  Real estate time-sharing transactions:

              The FASB issued  Statement of Financial  Accounting  Standards No.
              152,  "Accounting for Real Estate  Time-Sharing  Transactions:  an
              Amendment of FASB  Statements  No. 66 and 67" ("FAS  152"),  which
              amends  FASB  Statement  No.  66,  "Accounting  for  Sales of Real
              Estate",  to reference  accounting and reporting guidance for real
              estate  time-sharing   transactions  that  is  provided  in  AICPA
              Statement  of  Position   04-02,   "Accounting   for  Real  Estate
              Time-Sharing Transactions" ("SOP 04-02"). FAS 152 also amends FASB
              Statement  No.  67,  "Accounting  for  Costs  and  Initial  Rental
              Operations  of Real  Estate  Projects"  ("FAS  67"),  so that  the
              guidance in FAS 67 about incidental  operations and costs incurred
              to sell  real  estate  projects  does  not  apply  to real  estate
              time-sharing  transactions.  Both  FAS 152 and SOP  04-02  will be
              effective for the  Corporation  for fiscal years  beginning  after
              June 15, 2005.

    (k) Statements of cash provided by operations and cash flows:


        (i)   For Canadian GAAP purposes,  the Corporation's  statements of cash
              provided by operations show intermediate subtotals,  and only show
              the total change in non-cash operating assets and liabilities.  US
              GAAP does not permit  intermediate  subtotals in cash  provided by
              operations,  and  requires  the  statement  to show the details of
              changes in non-cash operating assets and liabilities.

              In addition, the above adjustments to US GAAP earnings relating to
              temporary   controlled   subsidiaries   ((a)(ii)),   interest   on
              convertible  notes redeemed  ((d)(iii))  and deferred  charges (e)
              would also affect cash  provided  by  operations,  as well as cash
              used in financing and cash used in capital investments.

              Under Canadian  GAAP, the proceeds  received on termination of the
              interest  rate swap are recorded as cash  provided by  operations.
              Under US GAAP,  the  proceeds  are  recorded  as cash  provided by
              capital investments ((d)(ii)).


                                       59

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

              As a result,  cash  provided by  operations  would be presented as
              follows on a US GAAP basis:

              ------------------------------------------------------------------
                                                              2004         2003
              ------------------------------------------------------------------
              Net earnings based on US GAAP                $37,642      $39,227
              Adjustments:
                Depreciation and amortization               12,816       12,802
                Unrealized foreign exchange loss (gain)      2,872      (39,067)
                Provision for loss                           2,101        1,552
                Loss on disposal of hotel investments        7,890            -
                Gain on termination of interest rate swap  (11,267)           -
                Loss on redemption of convertible notes      7,882            -
                Equity in losses of and distributions
                 from hotel investments                        740        2,807
                Minority interest                             (428)        (472)
                Future income taxes                         (2,200)      11,826
                Other                                          215          861
              Interest paid on redemption of  convertible
               notes                                       (54,986)           -
              Change in non-cash working capital:
                Accounts and notes receivable               (4,366)      25,178
                Inventory                                      867        2,961
                Prepaid expenses and other assets            1,020        1,688
                Accounts payable and accrued liabilities    20,733        3,758
              Foreign currency translation effect on
               non-cash working capital                     (4,492)        (877)
              ------------------------------------------------------------------
              Cash provided by operations based on US GAAP $17,039      $62,244
              ------------------------------------------------------------------


                                       60

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

        (ii)  As a result of the above  adjustments,  the major  captions on the
              Corporation's  statements  of cash flows on a Canadian  GAAP basis
              are reconciled to a US GAAP basis as follows:

              ------------------------------------------------------------------
                                                              2004         2003
              ------------------------------------------------------------------

              Cash provided by operations based on
               Canadian GAAP                                $ 57,363   $ 66,003
              Temporary controlled subsidiary                  1,513      2,706
              Termination of interest rate swap              (11,267)         -
              Redemption of convertible notes                (21,929)         -
              Deferred charges                                (8,641)    (6,465)
              ------------------------------------------------------------------
              Cash provided by operations based on US GAAP  $ 17,039   $ 62,244
              ------------------------------------------------------------------
              Cash provided by financing based on
               Canadian GAAP                                $125,658   $  3,851
              Temporary controlled subsidiary                 (1,987)    (5,893)
              Redemption of convertible notes                 21,929          -
              ------------------------------------------------------------------
              Cash provided by (used in) financing
               based on US GAAP                             $145,600   $ (2,042)
              ------------------------------------------------------------------
              Cash used in capital investments based on
               Canadian GAAP                                $(54,941)  $(40,073)
              Temporary controlled subsidiary                      -      4,724
              Termination of interest rate swap               11,267          -
              Deferred charges                                 8,641      6,465
              ------------------------------------------------------------------
              Cash used in capital investments based on
               US GAAP                                      $(35,033)  $(28,884)
              ------------------------------------------------------------------
              Increase in cash based on US GAAP             $127,606   $ 31,318
              ------------------------------------------------------------------


                                       61

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------

18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

    (l) Comprehensive income:

        Statement  of  Financial   Accounting  Standards  No.  130  ("FAS  130")
        establishes  standards  under  US  GAAP  for  reporting  and  displaying
        comprehensive income and its components (revenues,  expenses,  gains and
        losses) in a full set of general-purpose  financial statements.  FAS 130
        requires  that  all  items  that are  required  to be  recognized  under
        accounting  standards as components of comprehensive  income be reported
        in a financial  statement that is displayed with the same  prominence as
        other financial statements.

        FAS 130 requires companies to (i) classify items of other  comprehensive
        income by their  nature in a financial  statement,  and (ii) display the
        accumulated  balance  of  other  comprehensive  income  separately  from
        capital  stock,   contributed  surplus  and  retained  earnings  in  the
        shareholders' equity section of the balance sheet.

        The statements of comprehensive  income for the years ended December 31,
        2004 and 2003 would be presented as follows on a US GAAP basis:

        ------------------------------------------------------------------------
                                                              2004         2003
        ------------------------------------------------------------------------
        Net earnings based on US GAAP                      $37,642     $ 39,227
        Other comprehensive loss, net of income taxes:
          Foreign currency translation loss                (19,847)     (54,490)
        ------------------------------------------------------------------------
        Comprehensive income (loss) based on US GAAP       $17,795     $(15,263)
        ------------------------------------------------------------------------

        The accumulated other comprehensive  income balances for the years ended
        December  31, 2004 and 2003 would be  presented  as follows on a US GAAP
        basis:

        ------------------------------------------------------------------------
        Balance, December 31, 2002                                     $ 34,197
        Foreign currency translation loss                               (54,490)
        ------------------------------------------------------------------------
        Balance, December 31, 2003                                      (20,293)
        Foreign currency translation loss                               (19,847)
        ------------------------------------------------------------------------
        Balance, December 31, 2004                                     $(40,140)
        ------------------------------------------------------------------------


                                       62

<PAGE>

FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)

Years ended December 31, 2004 and 2003
(In thousands of Canadian dollars except share amounts)

--------------------------------------------------------------------------------


18. RECONCILIATION  TO UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES
    (CONTINUED):

    (m) Stock-based compensation plan:

        FAS 123 provides guidance on the accounting for stock-based compensation
        plans under US GAAP, such as the  Corporation's  stock option plan (note
        11(b)).  As allowed by FAS 123, the  Corporation has decided to continue
        to  use  Accounting   Principles   Board  Opinion  No.  25  ("APB  25"),
        "Accounting for Stock Issued to Employees",  in accounting for its stock
        option plan, and as a result, no stock option expense was recorded under
        US GAAP.  Under Canadian GAAP, stock option expense was recorded for all
        options issued on or after January 1, 2003.

        For the years ended December 31, 2004 and 2003, had compensation expense
        for the  Corporation's  stock-based  compensation  plan been  determined
        based on the fair  value at the grant  dates for  stock  options  issued
        under the plan after  December 31, 1994, the  Corporation's  US GAAP net
        earnings,  US GAAP basic earnings per share and US GAAP diluted earnings
        per share would have been  adjusted to the pro forma  amounts  indicated
        below:

        ------------------------------------------------------------------------
                                                              2004         2003
        ------------------------------------------------------------------------
        Net earnings in accordance with US GAAP,
         as reported                                      $ 37,642     $ 39,227
        Deduct pro forma stock option expense              (24,899)     (31,291)
        ------------------------------------------------------------------------
        Pro forma net earnings                            $ 12,743     $  7,936
        ------------------------------------------------------------------------
        Earnings per share:
          Basic, as reported                              $   1.06     $   1.12
          Basic, pro forma                                    0.36         0.23
          Diluted, as reported                                1.01         1.09
          Diluted, pro forma                                  0.35         0.23
        ------------------------------------------------------------------------


                                       63