SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of June 2003

COUNSEL CORPORATION

(Translations of registrant’s name into English)

Exchange Tower, Suite 1300
130 King Street West
Toronto, Ontario M5X 1E3
(Address of principal executive offices)

[Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.]

Form 20-F [X] Form 40-F [ ]

[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.]

Yes [ ] No [X]

[If “Yes” is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-_____________]

TABLE OF CONTENTS


SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Registrant:

		Counsel Corporation



		By:		/s/ Allan C. Silber Name: Allan C. Silber Title: Chief Executive Officer

		Date: June 17, 2003

COUNSEL CORPORATION

Notice of Annual Shareholders’ Meeting

TAKE NOTICE that the Annual Meeting (the “Meeting”) of the shareholders of COUNSEL CORPORATION (the “Corporation”) will be held in the TSX Conference Centre of The Toronto Stock Exchange, The Exchange Tower, 130 King Street West, Toronto, Ontario, on the 17th day of June, 2003 at the hour of 4:00 o’clock in the afternoon (Toronto time) for the following purposes:


	1.	TO RECEIVE the consolidated financial statements of the Corporation for the year ended December 31, 2002 and the report of the auditors thereon;

	2.	TO APPOINT auditors and to authorize the directors to fix their remuneration;

	3.	TO ELECT directors; and

	4.	TO TRANSACT such other business as may properly come before the Meeting or any adjournment thereof.

A shareholder wishing to be represented by proxy at the Meeting or any adjournment thereof must have deposited his or her duly executed form of proxy not later than 5:00 p.m. (Toronto time) on June 13, 2003 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned Meeting, at the offices of Computershare Trust Company of Canada, 100 University Avenue, 11th Floor, Toronto, Ontario, M5J 2Y1.

A form of proxy solicited by the management of the Corporation in respect of the Meeting is enclosed herewith, together with a copy of the management information circular and the annual report of the Corporation for the year ended December 31, 2002.

Shareholders who are unable to be present personally at the Meeting are requested to sign and return (in the envelope provided for that purpose) such form of proxy.

DATED this 5th day of May, 2003.


	By Order of the Board


	STEPHEN WEINTRAUB
	Secretary

COUNSEL CORPORATION

MANAGEMENT INFORMATION CIRCULAR

as of April 30, 2003

ANNUAL MEETING OF SHAREHOLDERS, JUNE 17, 2003

THIS MANAGEMENT INFORMATION CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION BY THE MANAGEMENT OF COUNSEL CORPORATION (THE “CORPORATION”) OF PROXIES FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS (THE “MEETING”) TO BE HELD AT THE TIME AND PLACE AND FOR THE PURPOSES SET FORTH IN THE ACCOMPANYING NOTICE AND AT ANY ADJOURNMENT OR ADJOURNMENTS THEREOF. The mailing address of the principal executive office of the Corporation is The Exchange Tower, Suite 1300, P.O. Box 435, 130 King Street West, Toronto, Ontario, M5X 1E3. The record date for shareholders of the Corporation who will be entitled to notice of the Meeting is the close of business on May 12, 2003. Registered holders of common shares at the close of business on May 12, 2003 will be entitled to one vote for each common share held on each matter submitted to a vote on a poll at the Meeting.

SOLICITATION OF PROXIES

The cost of soliciting proxies will be borne by the Corporation. In addition to solicitation by mail, certain officers, directors and employees of the Corporation may solicit proxies by telephone, telegraph or personally. These persons will receive no compensation for such solicitation other than their regular salaries.

MANNER PROXIES WILL BE VOTED

The shares represented by the accompanying form of proxy (if the same is properly executed in favour of Allan Silber or Stephen Weintraub, the management nominees, and is received at the offices of Computershare Trust Company of Canada, 100 University Avenue, 11th Floor, Toronto, Ontario, M5J 2Y1 not later than 5:00 p.m. (local time) on June 13, 2003 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned Meeting) will be voted at the Meeting and, where a choice is specified in respect of any matter to be acted upon, will be voted in accordance with the specification made. IN THE ABSENCE OF SUCH A SPECIFICATION, SUCH SHARES WILL BE VOTED IN FAVOUR OF SUCH MATTER.

The accompanying form of proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the accompanying Notice, and with respect to other matters which may properly come before the Meeting. At the date hereof, management of the Corporation knows of no such amendments, variations or other matters.

ALTERNATE PROXY

Each shareholder has the right to appoint a person or company other than the person named in the accompanying form of proxy, who need not be a shareholder, to attend and act for him or her and on his or her behalf at the Meeting or any adjournment thereof. Any shareholder wishing to exercise such right may do so by inserting in the blank space provided in the accompanying form of proxy the name of the person or company whom such shareholder wishes to appoint as proxy, or by duly completing another proper form of proxy, and duly depositing the same before the specified time.

REVOCABILITY OF PROXY

A shareholder giving a proxy has the power to revoke it. Such revocation may be made by the shareholder attending the Meeting, by the shareholder duly executing another form of proxy bearing a later date and duly depositing the same before the specified time, or by written instrument revoking such proxy executed by the shareholder or his or her attorney authorized in writing or, if the shareholder is a body corporate, under its corporate seal or by an officer or attorney thereof duly authorized and deposited either at the registered office of the Corporation, The Exchange Tower, Suite 1300, P.O. Box 435, 130 King Street West, Toronto, Ontario, M5X 1E3 at any time up to and including the last business day preceding the date of the Meeting or any adjournment thereof, or with the Chairman of the Meeting on the day of the Meeting or any adjournment thereof. If such written instrument is deposited with the Chairman of the

Meeting on the day of the Meeting or any adjournment thereof, such instrument will not be effective with respect to any matter on which a vote has already been cast pursuant to such proxy.

OUTSTANDING SECURITIES AND VOTING RIGHTS

At the date hereof the Corporation has outstanding 21,137,272 common shares without par value. The common shares carry one vote per share.

RECORD DATE FOR NOTICE AND VOTING

Only shareholders of record at the close of business on May 12, 2003 need be mailed notice of the Meeting. A quorum for the transaction of business at any meeting of shareholders is two persons present in person, each being either a shareholder entitled to vote thereat or a duly appointed proxy for an absent shareholder so entitled and holding or representing the holder or holders of shares carrying not less than one third of the total number of votes attaching to the outstanding common shares. A holder of common shares of record as at the close of business on May 12, 2003 will be entitled to vote such shares in person or by proxy at the Meeting (subject in the case of voting by proxy to the timely deposit of his or her executed form of proxy with Computershare Trust Company of Canada as specified in the notice of the Meeting) except to the extent that (i) after the close of business on May 12, 2003 he or she transfers any of such shares, (ii) not later than 10 days before the Meeting the transferee of such shares demands by written notice to the Corporation that his or her name be included in the list to be prepared of the holders of the shares who are entitled to vote at the Meeting, and (iii) either prior to the time of the Meeting or at the Meeting such holder produces properly endorsed share certificates representing such transferred shares or otherwise establishes that he or she owns such transferred shares, in which case such transferee will be entitled to vote such shares at the Meeting.

PRINCIPAL SHAREHOLDERS

At the date hereof, to the knowledge of the directors and senior officers of the Corporation, the only shareholder beneficially owning or exercising control or direction over common shares carrying more than 10% of the voting rights attached to any class of outstanding voting securities of the Corporation is:


	Common Shares Beneficially Owned,		Approximate
	Directly or Indirectly, Controlled or		Percentage of Outstanding
Name of Registered Shareholder	Directed at April 30, 2003		Common Shares

Allan Silber ⁽¹⁾		4,177,311		19.8%


(1)	Allan Silber owns 184,150 common shares and CXS Holdings Inc., a corporation controlled by Allan Silber, owns 3,993,161 common shares.

NORMAL COURSE ISSUER BID

The Toronto Stock Exchange (“TSX”) has accepted the Corporation’s notice of intention to renew its normal course issuer bid for the Corporation’s 6% convertible unsecured subordinated debentures (the “Debentures”) and for its common shares in accordance with the by-laws and policies of the TSX (the “Notice”). Under the rules of the TSX, the Corporation may purchase a maximum of 1,088,818 of its common shares (being 5% of the common shares outstanding on December 9, 2002, the currency date of the Notice) during the 12-month period beginning on December 16, 2002 and ending on December 15, 2003, unless extended. The Corporation shall not purchase in excess of 435,527 common shares (being 2% of the common shares outstanding on December 9, 2002) over the course of any given 30-day period. With respect to the Debentures, under the rules of the TSX, the Corporation may purchase a maximum of US$2,128,050 principal amount of Debentures (being approximately 5% of the public float on December 9, 2002, the currency date of the Notice) during the 12 month period beginning on December 16, 2002 and ending on December 15, 2003, unless extended. The Corporation shall not purchase in excess of US$851,220 principal amount of Debentures (being 2% of the principal amount of Debentures outstanding as of December 9, 2002) over the course of any 30-day period. All shares and Debentures purchased pursuant to the normal course issuer bids will be purchased at the market price at the time of acquisition through the facilities of the TSX. The board of directors of the Corporation (the “Board”) concluded at the time of filing the Notice that the ongoing purchase by the Corporation of certain of its outstanding common shares is an appropriate use of the Corporation’s funds due to the disparity between the market price and what it believes to be the inherent value of the common shares. The Board also concluded at the time of the filing of the Notice that the ongoing purchase by the Corporation of certain of its outstanding Debentures is an attractive investment opportunity for the Corporation and that such purchases will benefit shareholders of the Corporation by retiring debt at a discount. Shareholders may obtain, without charge, a copy of the Notice by contacting

the Corporation. As of the date hereof, 358,100 common shares have been purchased pursuant to the normal course issuer bid at an average price, before commissions, of $2.32 per share and US$209,000 principal amount of Debentures have been purchased pursuant to the normal course issuer bid at an average price, before commissions, of US$68.74 per US$100 principal amount of Debenture.

PARTICULARS OF MATTERS TO BE ACTED UPON

(a) Appointment of Auditors — Management proposes that PricewaterhouseCoopers LLP, Chartered Accountants, be reappointed as auditors of the Corporation to hold office until the close of the next annual meeting of shareholders. It is intended that the persons named in the accompanying form of proxy will vote the shares represented thereby in favour of reappointing PricewaterhouseCoopers LLP, Chartered Accountants, as the auditors of the Corporation and authorizing the directors of the Corporation to fix their remuneration.

(b) Election of Directors — Directors of the Corporation are elected annually by the shareholders. The articles of the Corporation provide that the number of directors to be elected shall be a minimum of five and a maximum of twenty. The number of directors to be elected has been fixed at six. It is proposed that a board of six directors is to be elected at the Meeting.

It is intended that the persons named in the accompanying form of proxy will vote the shares represented thereby in favour of electing as directors the nominees named below.

The term of office of all present directors of the Corporation expires at the Meeting. If, prior to the Meeting, any vacancies occur in the slate of proposed nominees herein submitted, the persons named in the accompanying form of proxy will vote the shares represented thereby in favour of election as directors any substitute nominee or nominees recommended by the management of the Corporation as well as in favour of the remaining proposed nominees. Management has been informed by each nominee that he is willing to stand for election and serve as a director.

The following information is submitted with respect to the nominees for directors:

Number of

Voting Securities

Periods During

Beneficially Owned

Which Nominee

Directly or Indirectly,

Positions and Offices

has Served as a

Controlled or

Principal Occupation or

Presently Held in

Director of

Directed at the

Name

Employment at Present

the Corporation

Date Hereof ⁽¹⁾

ALLAN SILBER

Chairman and Chief Executive Officer of the Corporation

Chairman, President and Chief Executive Officer and Director

Since August 2, 1979

4,177,311

⁽²⁾

ANTHONY F. GRIFFITHS ^(ii)(iii)

Independent Consultant and Corporate Director since 1993

Director

June 26, 2002

40,000

NORMAN HILL ^(i)(ii)

President of Norman Hill Realty Inc., a real estate broker

Director

Since March 31, 1984

231,550

WILLIAM H. LOMICKA ^(i)(ii)(iii)

Chairman of Coulter Ridge Capital Inc., a private investment firm, since 1999 and President of Mayfair Capital, Inc., a private investment firm, from 1989 to 1999

Director

June 26, 2002

36,700

Number of

Voting Securities

Periods During

Beneficially Owned

Which Nominee

Directly or Indirectly,

Positions and Offices

has Served as a

Controlled or

Principal Occupation or

Presently Held in

Director of

Directed at the

Name

Employment at Present

the Corporation

Date Hereof ⁽¹⁾

PHILIP REICHMANN ^(i)(iii)

Chief Executive Officer of O&Y Properties Corporation and President of O&Y Properties Inc., a real estate management company

Director

Since November 21, 1984

28,100

⁽³⁾

TIM HEENEY

Partner, Goodmans LLP, a law firm

n/a

nil


(1)	The information as to common shares beneficially owned or controlled by the nominees, not being within the knowledge of the Corporation, has been furnished by the respective proposed nominees.

(2)	Allan Silber owns 184,150 common shares and CXS Holdings Inc. a corporation controlled by Allan Silber, owns 3,993,161 common shares. In addition, Allan Silber’s spouse and children own 2,262,568 common shares.

(3)	Philip Reichmann is a member of the Albert Reichmann family which directly and beneficially owns PF&R Holdings Inc., a private corporation, which owns 1,000,000 common shares in the capital of the Corporation.

(i)	Member of the Compensation Committee.

(ii)	Member of the Audit Committee.

(iii)	Member of the Governance Committee.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and long term compensation earned for services rendered to the Corporation and its subsidiaries during each of the last three financial years in respect of each of the individuals who were at any time during the fiscal year ending December 31, 2002, the Chief Executive Officer and the other four most highly compensated executive officers of the Corporation (the “named executive officers”):

Summary Compensation Table


										Long Term
										Compensation
			Annual Compensation							Awards

							Other Annual			Securities Under			All Other
			Salary		Bonus		Compensation			Options Granted			Compensation
Name and Principal Position	Year		($)		($)		($)			(#)			($)

ALLAN SILBER		2002		580,000		928,000		41,260	⁽¹⁾		—			—
Chairman and Chief		2001		580,000		928,000		86,301	⁽¹⁾		—			—
Executive Officer		2000		580,000		928,000		86,270	⁽¹⁾		—			—
NORMAN CHIRITE ⁽³⁾		2002		431,860		447,564		44,428	⁽¹⁾		—			—
Managing Director		2001		258,795		604,856		1,113	⁽¹⁾		419,375	⁽²⁾		—
SAMUEL SHIMER		2002		431,860		196,300		50,933	⁽¹⁾		—			—
Managing Director,		2001		426,766		232,781		47,022	⁽¹⁾		150,000	⁽²⁾		—
Counsel Corporation(US)		2000		371,694		371,694		55,665	⁽¹⁾		—			—
GARY WASSERSON ⁽⁴⁾		2002		863,720		—		24,739	⁽¹⁾		—			—
Managing Director,		2001		436,465		436,465		652	⁽¹⁾		150,000	⁽²⁾		—
Counsel Corporation(US)		2000		319,657		319,656		—			100,000	⁽²⁾		—
HELEN SELTZER ⁽⁵⁾		2002		419,862		215,930		2,626			—			269,913	⁽⁶⁾
President, I-Link
Incorporated


(1)	This amount reflects imputed interest on interest free loans provided under the Corporation’s securities purchase programs, set out under “Table of Indebtedness Under Securities Purchase Programs”.

(2)	Options to purchase common shares of the Corporation.


(3)	Norman Chirite joined the Corporation on May 24, 2001 and ceased to be a Managing Director effective December 31, 2002.

(4)	Gary Wasserson joined the Corporation on February 1, 2000.

(5)	Helen Seltzer served as the Chief Executive Officer of I-Link Incorporated, a subsidiary of the Corporation, from January 3, 2002 through December 19, 2002 at an annual base salary of US$275,000 and a discretionary bonus entitlement of up to 100% of her annual base salary. In 2002, she was guaranteed a minimum bonus of US$137,500.

(6)	This amount represents Helen Seltzer’s severance payment.

Options

No options to purchase shares of the Corporation or its subsidiaries were granted to the named executive officers during the financial year ended December 31, 2002.

The following table sets forth, in respect of the named executive officers, details of all exercises of options during the financial year ended December 31, 2002 and the financial year-end number and value of unexercised options on an aggregated basis:

Aggregated Option Exercises During 2002

and December 31, 2002 Option Values

Value of Unexercised

Securities

Unexercised Options

in-the-Money Options at

Acquired on

Aggregate Value

at December 31, 2001

December 31, 2001

Exercise

Realized

Exercisable/Unexercisable

Name

(#)

($)

(#)

($)

ALLAN SILBER

—

1,350,000/0

0/0

NORMAN CHIRITE

—

150,000/269,375

15,000/0

SAMUEL SHIMER

—

210,000/240,000

0/0

GARY WASSERSON

—

60,000/190,000

0/0

HELEN SELTZER

—

0/25,000

0/0

Table of Indebtedness Under Securities Purchase Programs

The aggregate indebtedness to the Corporation and its subsidiaries as at the date hereof, of all officers, directors and employees entered into in connection with a purchase of securities of the Corporation or any of its subsidiaries excluding routine indebtedness was $8,234,590.

The following table sets forth information relating to the directors, executive officers and senior officers or associates of directors, executive officers and senior officers of the Corporation, who are, or during the most recently completed financial year were, indebted to the Corporation (other than routine indebtedness) or to any subsidiaries:

Financially

Largest

Assisted

Amount

Securities

Involvement of

Outstanding

Outstanding as

Purchased

Corporation

During 2002

of April 30, 2003

During 2002

Security for

Name and Principal Position

or Subsidiary

($)

(#)

Indebtedness

WILLIAM BARKER
Managing Director, Counsel
Communications LLC

Lender

296,633

—

NIL

100,000 common shares

NORMAN CHIRITE
Managing Director

Lender

1,598,110

NIL

538,750 common shares

MUFIT CINALI
Managing Director, Counsel
Communications LLC

Lender

296,633

—

NIL

100,000 common shares

JENNIFER DORÉ⁽³⁾
Director, Counsel Corporation
(US)

Lender

44,496

NIL

15,000 common shares

KELLY MURUMETS
Executive Vice President

Lender

605,119

250,000

⁽²⁾

250,000 common shares

HELEN SELTZER
President, I-Link Incorporated

Lender

148,316

—

NIL

50,000 common shares

SAMUEL SHIMER
Managing Director, Counsel
Corporation (US)

Lender

1,832,134

NIL

653,011 common shares

ALLAN SILBER
Chairman, President and
Chief Executive Officer

Lender

1,500,000

NIL

300,000 common shares ⁽¹⁾

JOSHUA SILBER
President, Counsel Real
Estate Inc.

Lender

945,468

NIL

317,500 common shares

GARY WASSERSON
Managing Director, Counsel
Corporation (US)

Lender

889,899

NIL

300,000 common

STEPHEN WEINTRAUB
Senior Vice President and
Secretary

Lender

457,471

411,559

NIL

162,500 common shares

HOWARD WORTZMAN
Chief Financial Officer,
Counsel Real Estate Inc.

Lender

453,718

407,806

NIL

157,500 common shares


(1)	These shares were purchased on January 19, 1996 pursuant to the Corporation’s Share Purchase Plan. The Corporation loaned the aggregate purchase price required to purchase 300,000 common shares at the market price on the date of purchase ($6.50 per share). The loan does not bear interest. A trustee holds all of the shares purchased with the proceeds of the loan as security for the indebtedness.

(2)	These shares were purchased in February 2002 pursuant to the Corporation’s 2001 Executive Stock Purchase Plan (see “Report of Compensation Committee — Long Term Incentives”).

(3)	Ms. Doré was an officer of the Corporation’s U.S. subsidiary, Counsel Corporation (US), with the title of “Director”. She was not a member of the Board.

Compensation Committee

Decisions on compensation of the Corporation’s senior executives are made by the compensation committee of the Corporation’s Board (the “Compensation Committee”). All of the members of the Compensation Committee are

outside directors. It is the responsibility of the Compensation Committee to assure the Board that the executive compensation programs are reasonable and appropriate, meet their stated purpose and effectively serve the needs of the Corporation’s shareholders and the Corporation. In addition, pursuant to the rules of the Ontario Securities Commission designed to enhance disclosure of corporate policies toward executive compensation, the Compensation Committee is required to present a report to the shareholders in the information circular for the annual meeting that discusses the Corporation’s compensation policies for executive officers and the Committee’s basis for determining the CEO’s compensation for the most recent financial year. This report must also include a discussion of the relationship of executive compensation and the CEO’s compensation to corporate performance.

Report of Compensation Committee

Compensation Philosophy and Policies for Executive Officers

The Corporation believes that the executive compensation program should align the interests of shareholders and executives. The Corporation’s primary objective is to maximize shareholder value. The Compensation Committee seeks to forge a strong link between the Corporation’s strategic business goals and its compensation goals.

The Corporation’s executive compensation program is consistent with the Corporation’s overall philosophy for all management levels. The Corporation believes that the more employees are aligned with the Corporation’s strategic objectives, the greater the Corporation’s success on both a short term and long term basis.

The Corporation’s executive compensation program has been designed to support the overall Corporation’s strategy and objective of creating shareholder value by:


	•	emphasizing pay for performance by having a significant portion of executive compensation “at risk”;

	•	directly aligning the interest of executives with the long term interest of shareholders by awarding stock options at current market prices which have value to the executives only through stock appreciation over the long run;

	•	providing compensation opportunities that attract and retain talented and committed executives on a long term basis; and

	•	appropriately balancing the Corporation’s short term and long-term business, financial and strategic goals.

The Corporation’s strategic goals are:


	•	profitability: to maximize financial returns to its shareholders;

	•	growth: to expand the operations of the Corporation in such a manner as not to imperil the achievement of other objectives; and

	•	stability: to be seen as a desirable employer and a responsible corporate citizen.

Currently, the Corporation’s executive compensation program is comprised of three components: base salary, annual cash incentive (bonus) and long term incentive opportunity through stock options and share purchase loans. The annual executive pay targets (base salary plus incentive) are intended to be market competitive with similar companies when the Corporation or the individual business units meet or exceed their respective annual operating goals. Additional compensation may be awarded based on achievement of specific extraordinary projects or assignments.

Base Salary

Unless determined pursuant to their employment agreements, the base salaries of the Corporation’s executive officers are evaluated annually. In evaluating appropriate pay levels and salary increases for the Corporation’s executives, the Compensation Committee considers achievement of the Corporation’s strategic goals, level of responsibility, individual performance, and internal equity and external pay practices.

Annual Incentives

Annual incentive (bonus) awards are designed to focus management attention on key operational goals for the current fiscal year. The Corporation’s executives may earn a bonus based upon achievement of their specific operational goals and achievement by the Corporation or business unit of its financial targets.

Long Term Incentives

The Corporation’s long-term incentive compensation program consists of stock options and share purchase loans which are related to improvement in long-term shareholder value. Stock option grants and share purchase loans provide an incentive that focuses the executive’s attention on managing the Corporation from the perspective of an owner with an equity stake in the business. These grants and loans also focus operating decisions on long term results that benefit the Corporation and long-term shareholders. As a result of the implementation of the Sarbanes-Oxley Act of 2002, the Corporation no longer provides share purchase loans to its employees.

The option grants to executive officers offer the right to purchase common shares at their fair market value on the date of the grant. These options will have value only if the Corporation’s share price increases. The number of shares covered by each grant is intended to reflect the executive’s level of responsibility and past and anticipated contributions to the Corporation.

Pursuant to the Corporation’s Employee Share Purchase Loan Plan, designated employees are eligible to receive an interest free loan from the Corporation of 80% of the cost of acquisition of the shares purchased by the employee on the open market. The shares are pledged to the Corporation as security for the loan. All employees of the Corporation and its affiliates other than Allan Silber are eligible to participate. The maximum number of shares that may be purchased by an individual employee is equal to 125% of the employee’s outstanding stock options of the Corporation subject to a maximum loan amount of US$600,000 per employee. Each loan is repayable on the earliest (1) of five years from the date it is advanced, (2) the date the shares purchased are sold, and (3) the date the employment of the employee with the Corporation or its affiliates is terminated. If the employee sells the shares purchased with the loan before the third anniversary of their acquisition, the employee is required to pay the Corporation an amount equal to 10% per annum of the loan for the period during which it was outstanding, plus 50% of the gain realized by the employee on the sale of the shares.

Pursuant to the Corporation’s 2001 Executive Stock Purchase Plan (the “2001 Plan”) designated executive employees are eligible to receive an interest free loan from the Corporation of 80% of the cost of acquisition of the shares purchased by the employee on the open market, provided that the maximum aggregate amount lent under the 2001 Plan shall not exceed US$4,000,000. The shares are pledged to the Corporation as security for the loan. All executive employees of the Corporation and its affiliates other than Allan Silber are eligible to participate. Each loan is repayable on the earliest of (1) ten years from the date it is advanced, (2) the date the shares purchased are sold, and (3) 30 days following the date the employment of the employee with the Corporation or its affiliates is terminated, provided that 20% of each loan shall be payable on each of the sixth, seventh, eighth, ninth and tenth anniversaries of the date of advance. If the employee sells the shares purchased with the loan before the third anniversary of their acquisition, the employee is required to pay the Corporation an amount equal to 10% per annum of the loan for the period during which it was outstanding, plus 50% of the gain realized by the employee on the sale of the shares. For each share purchased by an executive employee pursuant to the 2001 Plan, the Corporation will award the employee one-half of an option pursuant to the Corporation’s 1997 Stock Option Plan.

As a result of the implementation of the Sarbanes-Oxley Act of 2002, no new loans may be made pursuant to the Employee Share Purchase Loan Plan or the 2001 Executive Stock Purchase Plan.

In addition, executive officers of the Corporation may be granted options to acquire shares of the Corporation’s subsidiaries and significantly influenced companies. The rationale for such grants is similar to that for option grants of the Corporation’s shares and the quantum reflects the executive’s expected level of involvement in the particular subsidiary or significantly influenced company.

Chief Executive Officer Compensation

Allan Silber is the Corporation’s Chief Executive Officer. His compensation is governed by an employment agreement dated as of the 1st day of February, 1994, as amended by an amendment agreement dated as of the 3rd day of January 1997. The employment agreement provided for payment to Mr. Silber of a base salary of $575,000 for the financial years ending December 31, 1997, 1998 and 1999. After 1999, the base salary is to be reviewed annually and may be increased in the discretion of the Compensation Committee. For 2002, it was set at $580,000. Mr. Silber was also entitled to receive a bonus in an amount determined by the Compensation Committee provided it not exceed his base salary. His base salary for purposes of calculating his bonus includes the base annual amount received in 1997 pursuant to his consulting agreement with American HomePatient, Inc., which provided for a base monthly fee of

US$20,000. In addition, pursuant to his employment agreement in 1997, Mr. Silber was granted options to acquire 1,350,000 common shares of the Corporation. These options expired January 3, 2003.

With respect to 2002, the Compensation Committee awarded Mr. Silber a bonus equal to the full amount to which he was eligible on the basis that he met or exceeded his objectives for 2002. Mr. Silber was instrumental in the successful negotiation, structuring and completion of a number of transactions, the most significant of which were:


	(a)	the settlement of the lawsuit commenced against the Corporation in October 1999 by Bergen Brunswig Corporation in connection with the Corporation’s sale of Stadtlander Drug Co. Inc.;


	(b)	the restructuring of the Corporation’s communications organization to ensure better operating and financial control and the elimination of unprofitable and resource consuming operations;

	(c)	I-Link Incorporated’s sale of its voice-over-Internet Protocol network and customer base in December 2002;

	(d)	I-Link Incorporated’s acquisition of the enterprise and agent business of RSL COM U.S.A., Inc. in December 2002: and

	(e)	the Corporation’s entry into the real estate business, building a portfolio of six properties with over 775,00 square feet of leasable area as well as 13 acres zoned for retail expansion.

Mr. Silber’s pivotal role in these transactions as well as his ongoing involvement in the development and execution of the Corporation’s strategic focus and objectives contributed greatly to the creation of value for the Corporation and its shareholders.

Submitted By:

Philip Reichmann

Norman Hill

William Lomicka

Shareholder Return Performance Graph

The following graph shows changes over the five-year period commencing December 31, 1997 and ending December 31, 2002 in the value of $100 (assuming reinvestment of dividends) invested in (1) the Corporation’s common shares, and (2) the S&P /TSX Composite Total Return Index.

GRAPH




	1997		1998		1999		2000		2001		2002


Counsel Corporation		100.00		65.22		20.59		17.34		19.35		18.72

S&P /TSX Composite Total Return Index		100.00		98.42		129.63		139.23		121.73		106.59

Employment Agreements

The Corporation entered into an employment agreement with Allan Silber, dated as of February 1, 1994. This agreement was amended by an amendment agreement dated as of January 3, 1997. Under this employment agreement, as amended, Mr. Silber is entitled to receive in 1997, and each of the two following financial years, a predetermined base salary of $575,000 and an annual bonus in an amount to be determined by the Compensation Committee. After 1999, the base salary shall be reviewed annually and may be increased in the discretion of the Compensation Committee. The bonus is calculated with reference to the satisfaction of certain objectives to be determined, provided that the bonus for any year shall not exceed Mr. Silber’s base salary for that year. Pursuant to the employment agreement, as amended, in the event of his termination by the Corporation, Mr. Silber shall be paid an amount equal to the aggregate of the base salary and any bonuses paid to Mr. Silber in respect of the two full calendar years immediately preceding the date of termination. Mr. Silber has the option of terminating his agreement and receiving the termination payment if any person, other than Mr. Silber or a person who does not deal at arm’s length with Mr. Silber, acquires control of the Corporation. The Corporation may terminate the employment of Mr. Silber for cause without the requirement to pay the prescribed termination amount.

On January 3, 2002, Acceris Capital Corporation, I-Link Incorporated, the Corporation and Helen Seltzer entered into an agreement whereby Ms. Seltzer became I-Link Incorporated’s Chief Executive Officer. The term of the agreement was four years at an annual base salary of US$275,000. Ms. Seltzer was eligible for a discretionary bonus in an amount to be determined by the Board of Directors of WorldxChange Corp., a wholly owned subsidiary of I-Link Incorporated, up to 100% of her annual salary. In 2002, she was guaranteed a minimum bonus of US$137,500. Ms. Seltzer also entered into an agreement on January 3, 2002 with Counsel Communications LLC and the Corporation. Under that agreement, Ms. Seltzer was issued approximately 0.2% of the common units of Counsel Communications LLC, which common units vest over a four-year period commencing on January 3, 2003. In addition to serving as Chief Executive Officer of I-Link Incorporated, Ms. Seltzer agreed to serve as a member of the Management Executive Committee of Counsel Communications LLC. Ms. Seltzer also had the right to participate in the Corporation’s 2001 Executive Stock Purchase Plan. Ms. Seltzer was terminated as I-Link Incorporated’s Chief Executive Officer on December 19, 2002. As of the date hereof, all obligations under Ms. Seltzer’s employment agreement have been satisfied.

Effective October 31, 2001, Counsel Corporation (US), a wholly owned subsidiary of the Corporation, entered into an employment agreement with Gary Wasserson whereby Mr. Wasserson became a Managing Director of Counsel Corporation (US). The agreement expires on December 31, 2003 and is automatically extended annually unless prior notice of termination is delivered. Mr. Wasserson is entitled to an annualized base salary of US$550,000 until June 30, 2003 and US$275,000 thereafter. For each calendar year commencing with the year ending December 31, 2003, Mr. Wasserson is eligible to receive bonus compensation in an amount up to US$137,500 for the year ending December 31, 2003 and up to 100% of his then base salary for each calendar year thereafter. Mr. Wasserson also has the right to participate in the Corporation’s 2001 Executive Stock Purchase Plan.

Compensation of Directors

The Corporation pays fees to directors who are not officers of the Corporation or its subsidiaries. Effective January 1, 1992 such fees were established at $1,000 per board meeting, $500 per committee meeting and an annual retainer of $12,000. Effective July 1, 2002, these fees were increased to $1,500 per board meeting, $750 per committee meeting and an annual retainer of $15,000. In addition, in 2002, each outside director was granted 25,000 options pursuant to the Corporation’s 1992 Stock Option Plan.

STATEMENT OF CORPORATE GOVERNANCE PRACTICES

General

The Toronto Stock Exchange Committee on Corporate Governance in Canada has issued guidelines for effective corporate governance (the “TSX Guidelines”). The Toronto Stock Exchange requires each listed corporation to disclose its approach to corporate governance with reference to the TSX Guidelines on an annual basis. This statement is designed to address this requirement.

The Corporation is committed to achieving and maintaining the highest level of integrity and ethics in its dealings with its employees, directors, customers, suppliers, shareholders and the public. The Corporation strives to adhere to the highest standards of corporate governance.

The Board of Directors

The Board has overall responsibility for the affairs of the Corporation, including those matters set out in the TSX Guidelines. In discharging its responsibilities, the Board plays two roles.

The first role is that of being a support to the Corporation. Board members act as advisors, bring contacts to the Corporation, provide special skills such as legal and accounting skills, and act as ambassadors to the community.

The second role is that of governance which has, as its primary goal, the protection of the public’s interest. Governance responsibilities for the Board include selecting the top executives and assessing their performance, reviewing and authorizing strategic/business plans and objectives, ensuring compliance with legal and contract requirements, and evaluating the results of the Corporation. Therefore, while Board members should and do act as supporters and builders, they have another role to play as questioners and monitors of the Corporation.

Below is a summary of some of the most important activities that the Board undertakes:


	•	Assess and approve the corporate strategy and any associated risk, while delegating authority to implement.

	•	Sponsor and promote the Corporation publicly.

	•	Approve key personnel policies, including compensation.

	•	Approve new rounds of financing.

	•	Approve offering, merger, acquisition, dissolution or other material liquidity options.

	•	Approve material transactions involving the assets of the Corporation.

	•	Hold the Corporation accountable to the public.

In undertaking the above activities, the Board adheres to the TSX Guidelines and ensures that the Corporation complies with the provisions of the Sarbanes-Oxley Act, as well as the rules and regulations of the NASDAQ Stock Market, Inc.

The division of responsibility between the Board and management of the Corporation, including the Chief Executive Officer, is determined by the materiality of the decisions to be made regarding the business of the Corporation. All material decisions require Board approval.

The TSX Guidelines recommend that a majority of the directors be “unrelated”. An “unrelated” director is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act with a view to the best interests of the Corporation, other than interests and relationships arising from shareholding. The Board is currently comprised of six individuals, four of whom are unrelated. Mr. Silber and Mr. Chirite (who is not nominated for re-election) are related directors as they are or were officers of the Corporation within the last five years. The remaining directors are unrelated as none of them or their associates have worked for the Corporation in the past five years or received remuneration from the Corporation in excess of directors’ fees. The current size of the Board provides for effective participation by all directors. There are six nominees for election to the Board, four of whom, if elected, will be “unrelated” directors. Mr. Heeney (who is nominated for election) is a related director as he is a partner of Goodmans LLP, legal counsel to the Corporation. Although one of the nominees to the Board, Mr. Silber, is an officer of the Corporation holding a significant equity interest in the Corporation, the Board believes that it is properly constituted to act in the best interest of all shareholders of the Corporation.

The Board does not have a formal nominating committee. Any director may nominate candidates for the Board and nominations are reviewed by the full Board. The Board has instituted a formal orientation and education program for new directors. The Board has also adopted an explicit process for measuring the performance of the Board. As part of this process, each year the directors complete an effectiveness survey, which is a confidential, performance-oriented peer review. The Corporation’s Executive Vice President compiles the data and distributes the results of the survey to the Board, ensuring the anonymity of all responses. Following the administration and compilation of the results, the Chairman of the Board meets one-on-one with all directors to further investigate the results of the overall survey.

The TSX Guidelines suggest that every board should have in place appropriate structures and procedures to ensure that it can function independently of management. In order to discharge its responsibilities effectively, the Board has established three committees from its membership: the Audit Committee, the Compensation Committee and the Governance Committee. The structure of these committees, which are all comprised of unrelated directors, helps to

enable the Board to function independently of management. In addition, non-management Board members can meet as required to discuss issues without the presence of management and, subject to approval of the Board, may engage external advisors at the expense of the Corporation in appropriate circumstances.

The responsibility for shareholder communication and the communication policy of the Corporation has been delegated by the Board to senior management of the Corporation. Shareholder communication is generally handled by the Senior Vice President and Secretary of the Corporation. The Corporation sends all of its annual and quarterly disclosure documents and financial statements to its registered shareholders and issues press releases with respect to material events of the Corporation. In addition, the Senior Vice President and Secretary of the Corporation or another appropriate member of management will respond to any inquiries from shareholders.

Board Committees

Audit Committee

During 2002, the Audit Committee was comprised of three directors, all of whom were unrelated directors. Each member of the committee is financially literate. Annual financial statements of the Corporation are reviewed by the Audit Committee and form the basis of a report thereon to the entire Board. The Audit Committee is also responsible for monitoring the Corporation’s internal accounting controls and for reviewing the performance and the remuneration of the Corporation’s independent auditors. The Audit Committee has unrestricted access to the Corporation’s auditors without the presence of management.

The Audit Committee operates pursuant to a written charter that was approved and adopted by the Board on November 16, 2000.

Compensation Committee

The Compensation Committee is composed of three directors, all of whom are unrelated directors. This committee reviews the remuneration of the Corporation’s officers and performs other functions described under “Compensation Committee” elsewhere in this circular.

Governance Committee

During 2001, the Corporation established a Governance Committee to oversee governance matters, to report thereon and to make recommendations to the full Board. During 2002, the members of the committee consisted of Phillip Reichmann, Anthony F. Griffiths and William H. Lomicka, all of whom are unrelated directors.

Specifically, the Corporation’s Governance Committee has been given responsibility for:


	•	Ensuring compliance with and a response to the TSX Guidelines;

	•	Monitoring and assessing the performance of management as a whole and the individual members of management;

	•	Monitoring and assessing the individual and collective performance of the Board; and

	•	Seeking and obtaining comment (whether by way of written questionnaires or through private discussions) on the adequacy of the Corporation’s approach to corporate governance from the remaining members of the Board and from management, and developing responses to the concerns raised, if any.

DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE

The Corporation maintains liability insurance for directors and officers of the Corporation and its subsidiaries. The policy provides insurance for directors and officers of the Corporation and its subsidiaries in respect of losses arising from claims against them for certain of their acts, errors or omissions in their capacity as directors or officers. The Corporation also is insured against any loss arising out of any liability that it may be required or permitted by law to pay to directors or officers in respect of such claims. The policy does not distinguish between the liability insurance for its directors and officers, the coverage being the same for both groups.

The policy limit for such insurance coverage is US$10 million in each policy year with no deductible for individual directors or officers and a deductible of US$500,000 to the Corporation per occurrence. The premium for the 12-month period ending April 29, 2004 was US$525,000 which was paid by the Corporation. The premium is not allocated between the directors and officers as separate groups.

INTERESTS OF INSIDERS IN MATERIAL TRANSACTIONS

To the best of management’s knowledge, no person who has been an insider of the Corporation since January 1, 2002 or any associate or affiliate of such insider has had any material direct or indirect interest in any transaction with the Corporation since January 1, 2002 or in any proposed transaction which has materially affected or would materially affect the Corporation or any of its subsidiaries.

ADDITIONAL INFORMATION

The Corporation is eligible to participate in the prompt offering prospectus system and will provide to any person or company, upon receipt of a request by the secretary of the Corporation, a copy of: (i) the most recent Annual Information Form and Management’s Discussion and Analysis, together with a copy of any document or pertinent pages of any document incorporated therein by reference; (ii) the consolidated financial statements of the Corporation for its fiscal year ended December 31, 2002, and the report of its auditors thereon; (iii) interim financial statements released subsequent to the date hereof; and (iv) this circular.


	By Order of the Board


	STEPHEN WEINTRAUB
	Secretary

May 5, 2003

COUNSEL CORPORATION

PROXY

FOR USE AT THE ANNUAL SHAREHOLDERS’ MEETING

TO BE HELD JUNE 17, 2003

The undersigned shareholder of COUNSEL CORPORATION (the “Corporation”) hereby appoints, ALLAN SILBER, of Toronto, Ontario, or failing him, STEPHEN WEINTRAUB, of Toronto, Ontario or instead of them of as proxy for the undersigned, with power of substitution, to attend and vote in respect of all shares registered in the name of the undersigned at the Annual Meeting (the “Meeting”) of the shareholders of the Corporation to be held in the TSX Conference Centre of The Toronto Stock Exchange, The Exchange Tower, 130 King Street West, Toronto, Ontario, at 4:00 p.m. on Tuesday, the 17th day of June, 2003 and at any and all adjournments thereof to the same extent and with the same power as if the undersigned were personally present at the Meeting or such adjournment or adjournments, and without limiting the generality of the power hereby conferred, with respect to all shares registered in the name of the undersigned, the person acting as proxy hereunder is specifically directed to vote or not to vote as indicated below:


	(a)	FOR o OR WITHHOLD FROM VOTING o in respect of the appointment of the auditors referred to in the Management Information Circular which accompanies the notice of the Meeting; and

	(b)	FOR o OR WITHHOLD FROM VOTING o in respect of the election of the directors referred to in the Management Information Circular which accompanies the notice of the Meeting.

If any amendments or variations to the matters above referred to or to any other matters identified in the notice of meeting are proposed at the Meeting or any adjournment thereof or if any other matters which are not now known to management should properly come before the Meeting or any adjournment thereof, this proxy confers discretionary authority on the person voting the proxy to vote on such amendments or variations or such other matters in accordance with the best judgement of such person.

DATED the day of , 2003.



	Name (Please Print)


	Signature of Shareholder

THIS PROXY IS SOLICITED ON BEHALF OF MANAGEMENT OF THE CORPORATION. SHAREHOLDERS HAVE THE RIGHT TO APPOINT A PERSON OR COMPANY OTHER THAN THE NOMINEES DESIGNATED ABOVE, TO REPRESENT THEM AT THE MEETING OR ANY ADJOURNMENT THEREOF, AND MAY EXERCISE SUCH RIGHT BY INSERTING THE NAME OF THEIR NOMINEE IN THE BLANK SPACE PROVIDED ABOVE FOR THAT PURPOSE. THE PERSON OR COMPANY SO APPOINTED NEED NOT BE A SHAREHOLDER OF THE CORPORATION.

NOTE:


1.	This proxy form must be signed by the shareholder or by his or her attorney duly authorized in writing or, if the shareholder is a corporation, under its corporate seal or by an officer or attorney thereof duly authorized.

2.	Unless a choice is specified above, this proxy will be voted for the matters referred to above.

3.	If this proxy is not dated in the space above, it shall be deemed to bear the date on which the form of proxy is mailed by management.


Counsel Corporation	The Exchange Tower Suite 1300, King Street West Toronto, Ontario M5X 1E3	CUSIP 22226R102
RETURN CARD FOR SUPPLEMENTAL MAILING LIST OF REGISTERED SHAREHOLDERS AND BENEFICIAL OWNERS		The undersigned hereby requests that the following information be added to the Supplemental Mailing List of Counsel Corporation for distribution of interim financial statements.

To: All Registered Shareholders and Beneficial Owners: In accordance with National Instrument 54-102 Interim Financial Statement and Report Exemption, Counsel Corporation will mail interim financial statements only to those registered shareholders and beneficial owners of shares of Counsel Corporation who either (i) complete and return this Return Card to Counsel Corporation or Counsel Corporation’s transfer agent, Computershare Trust Company of Canada, 100 University Avenue, 11th Floor, South Tower, Toronto, Ontario, M5J 2Y1 or (ii) otherwise deliver to Counsel Corporation or Computershare Trust Company of Canada a request in writing for such interim financial statements. Beneficial owners are shareholders whose shares are registered in the name of a bank, broker, trust company, etc. This Return Card can be returned along with your proxy form in the enclosed envelope to Computershare Trust Company of Canada, 100 University Avenue, 11th Floor, South Tower, Toronto, Ontario, M5J 2Y1		Shareholder Name: -------------------------------------------- (PLEASE PRINT) Shareholder Address: -------------------------------------------- Shareholder Signature: (if shareholder is a company, signature of authorized signatory) -------------------------------------------- Dated:

TO OUR SHAREHOLDERS:


	“2002 has been a year of transformation and stabilization for the Company as we returned to our more focused, hands-on approach of owning, operating and building businesses – a strategy that has produced many successes over the past years.”

In last year’s Annual Report, we committed to build on our core assets and capital resources to provide a solid foundation for growth. In 2002, the improvement in our operating income reflects the success of our efforts. This year, our goal is to generate positive net earnings, a critical step in our drive to create value for our shareholders. We are confident that we have the right strategic direction and the right people to achieve this objective.

MEANINGFUL ACCOMPLISHMENTS

ARE BUILDING A PROMISING FUTURE

The most important accomplishment in 2002 was a return to our fundamental investment principles and more focused approach to business – strategic imperatives that have led to many successes in our past. Our objective is to create and realize value by acquiring controlling interests and building operating businesses in a discrete number of market sectors. To these businesses, we will apply our experience and skills to create consistent, sustainable cash flow and positive investment returns. Our activities are now focused on communications and real estate, two sectors that we believe will produce imminent and sustainable growth for our shareholders.

ALLAN SILBER Chairman and Chief Executive Officer

TO OUR SHAREHOLDERS 1

We also strengthened and enhanced our management team in 2002, adding the financial and operational skills and knowledge necessary to achieve our goals. Gary Clifford brings considerable acumen and public company experience to his role as the Corporation’s Chief Financial Officer. Kelly Murumets, Counsel’s new Executive Vice President, has already made a significant contribution in guiding us through the many changes we have initiated. Finally, the appointment of Gary Taylor as Director of Taxation has added solid leadership to this important aspect of our business. In addition to these senior management appointments, we strengthened our operating management teams with a number of new people bringing specific industry experience to our businesses.

Now, with solid operating platforms and a strong management team, we are confident that Counsel is securely positioned for profitable growth. We will also apply our proprietary Counsel Management System (CMS) across the entire organization. CMS is a rigorous and disciplined management process that instills individual accountability through detailed performance objectives, while aligning all our activities directly with the Corporation’s strategic plans and objectives. The adoption of this dynamic and team-oriented system in 2001 is one of the key reasons for our improved financial results in 2002.

THE COMMUNICATIONS SECTOR

OFFERS A COMPELLING

OPPORTUNITY

The communications sector has undergone a period of unprecedented dislocation and change over the past few years, creating opportunities perfectly suited to our value-added financial and operating skills. In addition, industry challenges have produced a number of well-valued acquisition candidates with which we can build our existing communications platform. As a result, we believe our communications business presents a compelling proposition to increase value for our shareholders, and we have taken a number of decisive steps to capitalize on these exciting opportunities.

In December we completed the purchase of the Enterprise and Agent business of RSL COM U.S.A. Inc., a provider of voice and data systems to small- and medium-sized businesses. RSL is an important addition to our communications business, and a strong strategic fit with our other activities in this sector.

2 TO OUR SHAREHOLDERS

We restructured our communications business to provide more operating and financial control while reducing costs through more streamlined and integrated processes. We installed new and experienced leadership teams possessing proven track records of building successful telecommunications companies. We launched a highly focused marketing program with an emphasis on meeting the communications needs of carefully targeted business and consumer markets in specific regions. We also upgraded our systems platforms, and sold under-performing assets.

Counsel’s goal is to become a pre-eminent builder of communications businesses in North America, and in 2003, we introduced a new name and brand for our business – Acceris Communications. Acceris’ mission is to provide businesses and consumers with competitively priced voice, data and enhanced communications services via direct and indirect channels, delivering industry-leading customer care and customized solutions supported by a state-of-the-art, full-function back office.

Acceris is currently comprised of three complementary strategic business units:


•	Acceris Communications Partners provides a diverse selection of voice and data products and services to independent agents and their residential and business customers across the United States. With points of presence in 30 cities and 11 switches throughout the United States, it is focused on combining quality back-office support, operational expertise and first-rate customer care with affordable domestic and international long-distance and other enhanced services.

•	Acceris Communications Solutions provides customized and integrated communications solutions to businesses. It offers a complete network approach to meet its customers’ needs for voice, data and professional communications services through an innovative approach to networking, connectivity, and leveraging the latest telecommunications products and services.

•	Acceris Communications Technologies offers a fully developed network convergent solution for voice and data utilizing its patented voice over Internet Protocol communications technology.

Looking ahead, we will leverage the considerable advantages we have developed over the past two years. We

TO OUR SHAREHOLDERS 3

have now installed and implemented “best-in-class” capabilities to serve our heavy international long distance residential customers, and as a result have a significant opportunity to penetrate the small business sector by offering competitive rates and superior service.

We have set a number of key objectives for our communications business in 2003. We will develop and build new sales and marketing channels and offer bundled products and services in specific channels and regions. We will integrate the “best practices” from each of our three strategic business units across the entire operation, and build on the ongoing operational efficiencies we are instituting to generate positive cash flow this year and accelerate growth and enhanced profitability going forward.

A HERITAGE OF SUCCESS IN THE

REAL ESTATE SECTOR

Counsel has a long legacy of success in the real estate business, and we will draw on this considerable experience to buy well, add value, and then realize maximum returns on our property investments for our shareholders. Our real estate strategy follows a two-pronged approach. First, we will pursue value-added opportunities in the commercial sector, treating our investments as inventory rather than long-term assets. Second, we will acquire quality retail centres in secondary markets and apply our expertise to realize cost efficiencies and maximize value.

During 2002 we built a real estate portfolio that is currently comprised of over 750,000 square feet of leaseable space. Going forward, we will expand our presence through acquisitions that meet our criteria of a minimum 10% capitalization rate at the time of purchase and low risk exposure. We are confident that our flexibility and our expertise will allow us to respond quickly and effectively to market opportunities. We will also increase our industry presence, enhance occupancy rates across the portfolio and continue to reduce our operating costs. For example, the internalization of the property management function for our real estate portfolio in early 2003 will generate efficiencies and improve the returns from this segment of our business.

OUR OUTLOOK IS VERY POSITIVE

We are very aware of how difficult the past two years have been for Counsel’s shareholders. Recognizing the need for profound change within the Corporation, we embarked on a path to restore investor confidence. Clearly, considerable progress was made with each

4 TO OUR SHAREHOLDERS

consecutive quarter in 2002, the result of more focused operations, a strengthened management team, and a return to the operating principles that have guided us to so many successes in the past. Going forward, our goal is to build on this foundation and generate positive net earnings in 2003, another key step in earning back the trust of, and enhancing value for, our shareholders. We will also attain financial self-sufficiency by funding operations from internally generated cash and existing debt facilities, providing us with the flexibility and the resources to meet our objectives in the years ahead.

In closing, I want to thank everyone at Counsel and its operating businesses for their efforts and dedication over the past year. 2002 was a year of major transformation as we took the necessary actions to stabilize the Company and concentrate its focus on two profitable and high-growth businesses, setting the stage for an exciting future and what we are confident will be a significant increase in shareholder value.

-s- ALLAN SILBER

ALLAN SILBER Chairman and Chief Executive Officer

TO OUR SHAREHOLDERS 5

MANAGEMENT’S

DISCUSSION

AND ANALYSIS

OF RESULTS OF

OPERATIONS AND

FINANCIAL

CONDITION

(All dollar amounts are in thousands of US dollars, except per share amounts)

INTRODUCTION

The following is management’s discussion and analysis (“MD&A”) of the results of operations for Counsel Corporation (“Counsel”, or the “Company”) for the year ended December 31, 2002 and its financial condition as at December 31, 2002. This MD&A is based on the Company’s consolidated financial statements prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) and the guidance of the Canadian Institute of Public and Private Real Estate companies (“CIPREC”) and should be read in conjunction with the consolidated financial statements and notes thereto. Note 22 of the financial statements includes a reconciliation of Canadian GAAP net loss to net loss determined under generally accepted accounting principles in the United States (“U.S. GAAP”).

Forward-looking information

This MD&A contains forward-looking statements that involve risk and uncertainties. These statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plans”, “continue”, or the negative thereof or other variations thereon or comparable terminology referring to future events or results. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors. These factors include, without limitation, the timing of acquisitions and expansion opportunities, technological change and changes to the business environment that may impact the Company’s capital expenditures and competitive factors that may impact revenue and operating costs and alter the timing and amount of the Company’s capital expenditures. Any of these factors could cause actual results to vary materially from current results or the Company’s currently anticipated future results and financial position. The Company wishes to caution readers not to place undue reliance on such forward-looking statements that speak only as of the date made. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company’s filings with Canadian and United States securities regulatory authorities.

Definitions

The Company’s analysis of financial results focuses on operating income (loss) and net earnings (loss). Operating income (loss) and net earnings (loss) are set out in the Company’s audited consolidated statement of operations. Operating income (loss) is defined as earnings from continuing operations before other gains, other losses and impairments, interest, taxes, equity in losses and minority interests. It is important to note that operating income (loss) is not a measure of performance under Canadian or U.S. GAAP. Operating income (loss) should not be considered in isolation or as a substitute for net earnings (loss) prepared in accordance with Canadian or U.S. GAAP or as a measure of operating performance or profitability. Operating income (loss) does not have a standardized meaning prescribed by generally accepted accounting principles and is not necessarily comparable to similar measures presented by other companies.

MANAGEMENT’S DISCUSSION AND ANALYSIS 7

Certain comparative figures have been reclassified to conform to the current year’s presentation.

OVERVIEW

Counsel is a diversified company focused on acquiring and building businesses in two specific sectors: communications in the United States and real estate in Canada.

The Company marked its entry into the communications sector in March 2001 when it acquired a majority equity position in I-Link Incorporated (“I-Link”). I-Link is a supplier of voice, data and enhanced communications products and services. I-Link operates as a facilities based telecommunications carrier providing long distance voice services to retail customers in the United States and long distance voice and data services to small to medium sized businesses in the United States. I-Link also licenses a fully developed network convergence solution for voice and data based on its Internet Protocol communications technology.

The Company entered the real estate sector in 2002, when it completed the acquisition of five income producing properties, consisting of approximately 730,000 square feet.

Counsel has continued to focus its business strategy by exiting or completing formal plans of disposal to exit all other operating segments in 2002. In 2002, the Company decided to cease funding its portfolio investments, exited the medical products and services segment, allowed dilution to occur in its technology business and has adopted a plan to exit its seniors living business by way of sale of its long-term care facilities, which it expects to occur in 2003.

In 2002, I-Link, the Company’s communications platform, completed a formal plan of disposal for its domestic Voice over Internet Protocol (“VoIP”) network business. The sale of this business unit is currently under contract to Buyers United, Inc. (“BUI”). The Company expects that the sale of this business will be completed in the second quarter of 2003.

As part of the refocusing of Counsel in 2002, the Company closed its New York office and ended its affiliation with Springwell Capital Partners (“Springwell”). Many difficult decisions were taken in 2002 that are expected to assist the Company to return to profitability in 2003.

A summary of significant events during the year:


	•	Resolved the Bergen Brunswig Corporation claim against the Company on the 1999 sale of Stadtlander Drug Company with the claim being dismissed. Resolving this matter eliminated a significant burden on the Company’s management, allowing it to focus on the execution of its strategy.
	•	Disposed of its remaining shares of Bergen for a gain of $26,573.
	•	Exited the medical products and services segment.
	•	Ceased further investment in the technology sector.
	•	Initiated a formal plan of disposal for its long-term care facilities.
	•	Reorganized its communications platform.
	•	Entered the real estate development and commercial income producing property segment with its acquisition of five income producing properties and a development property.
	•	Strengthened its management team with the addition of a new Chief Financial Officer, an Executive Vice President and a new Director of Taxation.

8 MANAGEMENT’S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING POLICIES

The financial statements of Counsel are prepared in conformity with a framework of generally accepted accounting policies selected by management and approved by the Audit Committee of the Board of Directors. These policies are set out in Note 2 to the consolidated financial statements. Certain of the policies are more significant than others and are therefore considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on our reported results or financial position. The policies identified as critical to Counsel are discussed below.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.

The most significant estimates relate to the application of purchase accounting, the assessment of recoverability of customer and loans receivables, portfolio investments, and the cash-flows expected to be derived from long lived assets including property under development, income producing properties, property, plant and equipment and intangible assets. Management makes significant estimates related to the measurement of obligations and the timing of the related cash flows, particularly related to accrued liabilities and future income tax liabilities. Such timing and measurement uncertainty could have a material effect on the reported results of operations and the financial position of the Company.

Actual results could differ materially from those estimates in the near term.

Revenue recognition


	Telecommunication services

Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company’s price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured. Revenue is derived from telecommunications usage, based on minutes of use. Revenue derived from usage is recognized as services are provided, based on agreed upon usage rates. Revenue is recorded net of estimated customer credits.

Management’s estimate of customer credits is based primarily on the historical experience of the Company or, for new services, the history of other telecommunications carriers for similar services. This estimate is subject to significant change in the future based on the nature of the customers and the Company’s processes for limiting usage to customers with a higher collection risk.

MANAGEMENT’S DISCUSSION AND ANALYSIS 9


	Technology licensing

Revenue from the sale of software licenses is recognized when a non-cancelable agreement is in force, the license fee is fixed or determinable, acceptance has occurred and collectibility is reasonably assured. Maintenance and support revenue is recognized ratably over the term of the related agreements. When a license of technology requires continued support or involvement of I-Link, contract revenue is spread over the period of the required support or involvement. In the event that collectibility is in question, revenue (deferred or recognized) is recorded only to the extent of cash receipts.

Valuation of portfolio investments

Portfolio investments represent investments in publicly traded and privately held companies. These investments are accounted for using the cost method. Under the cost method, the investment is initially recorded at cost; earnings from such investments are only recognized to the extent received or receivable. Provisions for loss in value are recorded if a decline in value is considered to be other than temporary. Neither unrealized gains nor recoveries in valuation, if any, are reflected in the consolidated financial statements.

Valuation of intangible assets

Effective 2002, companies are no longer permitted to amortize goodwill on a periodic or routine basis. Instead, the carrying value of goodwill must be assessed at least annually based on a comparison of a reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Under Canadian GAAP, goodwill is to be tested for impairment within six months of adoption as of the beginning of the fiscal year.

Intangible assets are recorded at fair value upon acquisition and finite-life intangible assets are amortized on a straight-line basis over the estimated useful life of one to five years (See Note 9 in the December 31, 2002 financial statements).

On an ongoing basis, management reviews the carrying value of intangible assets and the amortization of finite-life intangible assets, taking into consideration any events and circumstances that might have impaired their carrying value. The Company assesses impairment by determining whether the carrying value exceeds the fair value, determined as the consideration that would be agreed upon in an arm’s length transaction. If the fair value is determined to be less than the net book value, the excess of the net book value over the fair value is charged to operations in the period in which such impairment is determined by management.

Valuation of income producing properties

Income producing properties are carried at the lower of depreciated cost and net recoverable amount. A write-down to net recoverable amount is recognized when a property’s undiscounted cash flows are less than its carrying value. Projections of future cash flows take into account the specific business plan for each property and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market. The use of net recoverable amount to assess the carrying value at which a property is reported assumes the property will be held for the long term. Otherwise, the net realizable value method is used. Estimated net

10 MANAGEMENT’S DISCUSSION AND ANALYSIS

realizable value represents the estimated selling price reduced by any costs expected until final disposition, assuming reasonable market conditions.

Income taxes

Counsel operates throughout North America and is therefore subject to income taxes in multiple jurisdictions. The income tax expense reported in the statement of operations is based on a number of different estimates made by management. The effective tax rate can change from year to year based on the mix of income or loss among the different jurisdictions in which the Company operates, changes in tax laws in these jurisdictions, and changes in the estimated values of future tax assets and liabilities recorded on the balance sheet. The income tax expense reflects an estimate of cash taxes expected to be paid in the current year, as well as a provision for changes arising this year in the value of future tax assets and liabilities. The likelihood of recovering value from future tax assets such as loss carryforwards and the future tax depreciation of capital assets is assessed at each quarter-end and a valuation allowance may be established or modified. Changes in the amount of the valuation allowance required can materially increase or decrease the tax expense in a period. Significant judgment is applied to determine the appropriate amount of valuation allowance to record. Material changes in income tax assets, liabilities, expense and recoveries may occur in the short term.

MANAGEMENT’S DISCUSSION AND ANALYSIS 11

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets out the Company’s consolidated results of operations for each of the three years and eight quarters ended December 31, 2002 under the basis of presentation utilized in its Canadian GAAP financial statements.



		Unaudited																								Audited


		2001			2001			2001			2001			2002			2002			2002			2002			2000			2001			2002
		Q1			Q2			Q3			Q4			Q1			Q2			Q3			Q4			Total			Total			Total
		$			$			$			$			$			$			$			$			$			$			$


Revenues
United States
	Acceris Communication Partners		–			5,932			20,971			22,386			22,811			20,984			19,834			25,234			–			49,289			88,863
	Acceris Communication Solutions		–			–			–			–			–			–			–			1,547			–			–			1,547
	Acceris Communication Technologies		470			1,420			1,420			1,420			1,581			888			321			47			–			4,730			2,837

			470			7,352			22,391			23,806			24,392			21,872			20,155			26,828			–			54,019			93,247
Canada
	Real estate		–			–			–			11			75			78			1,486			1,704			–			11			3,343

			470			7,352			22,391			23,817			24,467			21,950			21,641			28,532			–			54,030			96,590
Operating costs and expenses:
Telecommunication costs			–			5,315			15,728			14,503			13,273			12,237			10,973			14,453			–			35,546			50,936
Income producing properties			–			–			–			–			–			–			502			946			–			–			1,448
Selling, general and administrative			3,183			7,340			11,496			22,331			12,392			9,865			10,675			14,127			6,300			44,350			47,059
Research and development			896			524			435			307			382			465			317			235			–			2,162			1,399
Provision for doubtful accounts			–			131			305			403			1,357			1,251			1,118			2,605			–			839			6,331
Depreciation and amortization			636			1,978			3,674			2,561			1,684			1,592			1,760			2,079			205			8,849			7,115

Operating loss before undernoted items			(4,245	)		(7,936	)		(9,247	)		(16,288	)		(4,621	)		(3,460	)		(3,704	)		(5,913	)		(6,505	)		(37,716	)		(17,698	)
Gains and other income:
Short-term investments			8,726			2,173			26,861			5,000			26,621			879			162			405			28,256			42,760			28,067
Portfolio investments			–			–			–			64			–			–			–			–			3,693			64			–
Sale of subsidiary			–			–			–			589			–			–			–			–			–			589			–
Retirement of debt			–			–			–			1,093			–			–			–			–			–			1,093			–
Other			–			–			–			–			–			–			–			782			–			–			782
Impairments and other losses:
Write-down of short-term investments			–			(1,833	)		(122	)		(2	)		(136	)		(2,656	)		(1,139	)		(80	)		(22,031	)		(1,957	)		(4,011	)
Portfolio investments			–			(7,036	)		(8,379	)		(3,925	)		–			–			(640	)		–			(2,581	)		(19,340	)		(640	)
Other			–			–			–			–			–			(64	)		501			(1,159	)		(850	)		–			(722	)
Equity in losses of significantly influenced companies			(2,286	)		(2,535	)		(761	)		–			–			–			–			–			(9,547	)		(5,582	)		–
Interest income			1,271			518			327			529			123			146			83			49			2,520			2,645			401
Interest expense			(268	)		(869	)		(676	)		(704	)		(654	)		(713	)		(834	)		(801	)		(752	)		(2,517	)		(3,002	)

Earnings (loss) before income taxes, non-controlling interest and discontinued operations			3,198			(17,518	)		8,003			(13,644	)		21,333			(5,868	)		(5,571	)		(6,717	)		(7,797	)		(19,961	)		3,177
Income taxes			2,477			2,952			9,211			5,261			11,005			465			438			(2,253	)		6			19,901			9,655
Non-controlling interest			(325	)		(930	)		(244	)		(39	)		–			–			–			–			–			(1,538	)		–

Earnings (loss) from continuing operations			1,046			(19,540	)		(964	)		(18,866	)		10,328			(6,333	)		(6,009	)		(4,464	)		(7,791	)		(38,324	)		(6,478	)
Discontinued operations:
Medical products operations			(797	)		(1,077	)		(1,838	)		(1,607	)		(843	)		3			(799	)		(1,213	)		(3,838	)		(5,319	)		(2,852	)
Communications			(1,284	)		(4,674	)		(13,275	)		(4,197	)		(3,099	)		(4,580	)		(1,463	)		(3,366	)		–			(23,430	)		(12,508	)
Long-term care operations			(217	)		13			3,304			(1,043	)		4			76			3			(1,007	)		252			2,057			(924	)
Pharmaceutical products operations			–			–			–			4,519			–			(410	)		(88	)		(209	)		(32,419	)		4,519			(707	)
Pharmacy services operations			–			–			–			(1,716	)		–			–			–			(1,958	)		(1,035	)		(1,716	)		(1,958	)
Home health care operations			–			–			–			–			–			–			–			–			(602	)		–			–

Net earnings (loss)			(1,252	)		(25,278	)		(12,773	)		(22,910	)		6,390			(11,244	)		(8,356	)		(12,217	)		(45,433	)		(62,213	)		(25,427	)

Weighted average number of common shares outstanding (in thousands)			23,460			22,906			22,903			22,858			22,411			22,312			22,131			21,928			24,860			23,030			22,195
Basic net earnings (loss) from:
	Continuing operations		0.01			(0.89	)		(0.08	)		(0.86	)		0.43			(0.32	)		(0.31	)		(0.24	)		(0.43	)		(1.80	)		(0.43	)
	Discontinued operations		(0.10	)		(0.24	)		(0.51	)		(0.18	)		(0.18	)		(0.20	)		(0.11	)		(0.35	)		(1.52	)		(1.04	)		(0.85	)

	Basic net earnings (loss) per share		(0.09	)		(1.13	)		(0.59	)		(1.04	)		0.25			(0.52	)		(0.42	)		(0.59	)		(1.95	)		(2.84	)		(1.28	)

Diluted net earnings (loss) from:
	Continuing operations		0.01			(0.89	)		(0.08	)		(0.86	)		0.21			(0.32	)		(0.31	)		(0.24	)		(0.43	)		(1.80	)		(0.43	)
	Discontinued operations		(0.05	)		(0.24	)		(0.51	)		(0.18	)		(0.08	)		(0.20	)		(0.11	)		(0.35	)		(1.52	)		(1.04	)		(0.85	)

	Diluted net earnings (loss) per share		(0.04	)		(1.13	)		(0.59	)		(1.04	)		0.13			(0.52	)		(0.42	)		(0.59	)		(1.95	)		(2.84	)		(1.28	)

12 MANAGEMENT’S DISCUSSION AND ANALYSIS

Operating losses

The Company suffered significant operating losses from continuing operations in each of the last three years.

In 2000, operating losses of $6.5 million were attributable to the cost of providing management services to the Company’s operating and portfolio investments, including the businesses reported as discontinued operations in the current year’s presentation. The Company does not follow the practice of allocating corporate management services costs to its operating units.

In 2001, operating losses increased primarily as a result of the Company’s entry into the communications sector. The Company acquired a majority equity position in a VoIP technology licensing convergence business, I-Link, a public company, and acquired certain assets out of the bankruptcy of WorldxChange Communications, a long distance telephone services provider.

In 2002, operating losses declined as WorldxChange began to generate positive operating income and technology licensing was restructured to reduce its cost structure. The impact of these changes was enhanced by the Company’s entry, in the third quarter of 2002, into the profitable real estate segment. Offsetting these improvements was the operating loss incurred as a result of the December 2002 acquisition of certain assets out of the RSL USA Inc. bankruptcy, an operation from which the Company expects to generate operating income in 2003.

In 2003, all three communications segments, defined below, are expected to produce positive operating income and the Company’s real estate business is expected to continue to generate positive operating income.

In 2002, the segments from continuing operations under communications are: Acceris Communications Partners, Acceris Communications Solutions, and Acceris Communications Technologies. The Company also presents real estate and corporate as reportable segments. Each segment is discussed below.

Gains and other income

In 2002, the Company completed the liquidation of its shares of AmeriSourceBergen Corp. (“Bergen”) and realized a gain of $26,573 (2001 – $42,578; 2000 – $27,153). These shares were received as partial consideration for the sale of the Company’s pharmacy services operations in January 1999, for which the Company recorded an impairment charge of $142,084 in 1999 and $21,888 in 2000.

There have been no significant sales of portfolio investments in the past two years. In 2000, the Company sold one investment recording a gain of $3,647. It is the Company’s strategy to monetize its portfolio investments, once sufficient liquidity returns to the markets of its investments. Liquidity is not expected in 2003.

In 2001, the Company sold a subsidiary, Nexbell Communications Inc. (“Nexbell”), to an unrelated party. At the time of the sale, Nexbell’s liabilities exceeded its assets and accordingly, the amount of such excess, totaling $589, was recorded as a gain on sale of the subsidiary.

In 2001, a gain on the extinguishment of debt was recorded. Nexbell was in default on two leases and at the time of settlement the Company was liable for $1,273. The liability was settled for $180, resulting in a gain on the retirement of debt in the amount of $1,093.

In 2002, other gains of $782 were recorded due to the settlement of certain liabilities.

MANAGEMENT’S DISCUSSION AND ANALYSIS 13

Impairments and other losses

The Company makes investments in equities of publicly traded companies, categorized as short-term investments. Investments are carried at the lower of cost and market value. The Company recorded impairments on short-term investments of $4,011 in 2002, $1,957 in 2001 and $22,031 in 2000. The most significant impairment in 2000 pertains to Bergen which totalled $21,888. The Company received Bergen shares as partial consideration for the sale of its pharmacy services operations. The Company’s ability to liquidate its Bergen shares was subject to the sale agreement, which phased in permitted sales over an 18 month period following the sale.

The Company invested in early stage technology companies prior to 2002. The reduction in financing available to early stage organizations has affected the growth potential of the various investments. As a result of recurring losses on these investments, impairment charges on these investments were recorded by the Company. The Company no longer provides funding to any of its portfolio investments. The Company has recorded impairments of certain portfolio investments of $640 in 2002, $19,340 in 2001 and $2,581 in 2000. The Company plans to monetize these portfolio investments, on acceptable terms, as liquidity comes back to these companies’ markets. Liquidity is not expected in 2003.

The Company recorded other losses of $722 in 2002 pertaining primarily to the termination of its affiliation with Springwell. In 2000, the Company recorded losses of $850 relating to acquisition investigation costs for transactions which the Company did not close.

Interest income and expense

Interest income was consistent in 2000 and 2001, declining in 2002. In 2001, the Company made advances to fund acquisitions of its communications platform and to fund the operations of its subsidiaries. In 2002, the Company continued funding the operations of its communications platform, including the funding of the RSL acquisition and acquired a real estate business. These acquisitions and investments reduced the cash position of the Company, resulting in a reduction of interest income.

Interest expense was $752 in 2000, $2,517 in 2001 and $3,002 in 2002. The increase in 2001 is primarily due to the mid-year acquisition of a long distance services business by I-Link’s wholly owned subsidiary, WorldxChange Corp. (“WxC”), particularly the inclusion of the interest charges on capital leases at WxC. The increase in 2002 reflects a full year inclusion of interest on the capital leases at WxC, the addition of an asset backed credit facility, and interest on mortgages and debt assumed on entry into the real estate segment. The convertible debentures of Counsel are a hybrid financial instrument, which contains both debt and equity elements. Under Canadian GAAP, the majority of the interest costs associated with the debentures is recorded as a charge to equity and thus, excluded from interest expense reported by the Company. (See note 11(d) to the consolidated financial statements of the Company.)

Income taxes

The Company has significant operating and capital losses available to reduce future income tax expense. A significant amount of the future income tax assets resulting from these losses has been offset by a valuation allowance due to uncertainties associated with their utilization, given

14 MANAGEMENT’S DISCUSSION AND ANALYSIS

the large losses incurred by the Company in recent years. There is significant uncertainty as to when such liabilities will convert to cash liabilities or will be determined as no longer required by the Company.

Equity in losses of significantly influenced companies

In 2000 and 2001, the Company had several investments over which it had significant influence. In 2002, the Company ceased to have significant influence over all of these investments and adopted the cost method of accounting due to this change in circumstance. The equity interests in 2000 and 2001 resulted in charges to the Company due to the fact that significantly influenced companies were not profitable.

Discontinued operations

The Company disposes of operating segments from time to time.

In the second quarter of 2002, the Company settled the final payment due under the definitive agreement with the purchaser regarding the disposition of its pharmaceutical products business in 2001. During the course of the settlement, the purchaser disputed certain payments regarding inventories as set out in the agreement. The Company has assessed the impact of this dispute and has written down its receivable from the purchaser to reflect the related collection risk.

In the second quarter of 2002, the Company completed the sale of its investment in shares of Bergen which were received as partial consideration for the sale of its pharmacy services business in 1999. Losses from discontinued operations for the pharmacy services business in 2000, 2001 and 2002, relate primarily to litigation costs to settle the dispute with Bergen Brunswig Corporation.

In the third quarter of 2002, the Company adopted a formal plan of disposal and entered into an agreement for the disposition of its medical products segment, which closed on October 4, 2002.

During the fourth quarter of 2002, the Company adopted formal plans of disposal for its long-term care facilities as well as the VoIP network operations of its communications business. The long-term care facilities are expected to be sold in 2003, while on December 10, 2002 the Company entered into an agreement to sell its VoIP network operations to BUI. This transaction is expected to close in the second quarter of 2003.

Net loss

The Company suffered a significant net loss in each of the last three years. Net losses were $45,433, $62,213 and $25,427 in 2000, 2001 and 2002 respectively. In 2000, losses primarily related to write-downs on the Bergen shares acquired on the sale of the pharmacy services operations and the operating results of the pharmaceutical products business. In 2001, losses primarily related to write-down of early stage technology and Internet companies (portfolio investments) and to the operating losses of the Company’s communications platform. In 2002, continued operating losses of the communications platform contributed to much of the net loss. Gains on the sale of short-term investments, primarily Bergen shares, were $27,153 in 2000, $42,578 in 2001 and $26,573 in 2002 and significantly reduced the net loss from operations over

MANAGEMENT’S DISCUSSION AND ANALYSIS 15

the last three years. All Bergen shares were disposed of by the end of 2002. Short-term investments have unrealized gains as at December 31, 2002 of $1,591.

The Company expects to generate net income in 2003. The Company sold, curtailed, and reorganized its unprofitable operations in 2002, has plans in place to make its December 2002 acquisition of the enterprise business of RSL COM U.S.A. Inc. (“RSL”) self sufficient within 12 months, expects all of its operating segments to be contributing positively to operating income in 2003 and to realize a gain on the disposition of its long-term care facilities.

Segment Analysis:

The continuing operating segments of the Company for communications are: Acceris Communications Partners, Acceris Communications Solutions and Acceris Communications Technologies. Real estate and corporate segments are reported and analyzed separately. The Company believes that providing business segment operations on a rolling eight quarter basis supplemented by commentary provides meaningful information for users of the consolidated financial statements.


	Acceris Communications Partners

Unaudited

Audited

2001

2002

2000

2001

2002

Total

Revenue

United States

–

5,932

20,971

22,386

22,811

20,984

19,834

25,234

–

49,289

88,863

–

5,932

20,971

22,386

22,811

20,984

19,834

25,234

–

49,289

88,863

Operating costs and expenses

Telecommunication costs

–

5,315

15,728

14,503

13,273

12,237

10,973

13,262

–

35,546

49,745

Selling, general and administrative

–

961

5,880

13,717

7,698

6,179

5,717

9,212

–

20,558

28,806

Provision for doubtful accounts

–

131

305

403

1,357

1,251

1,118

2,572

–

839

6,298

Depreciation and amortization

–

328

1,149

809

980

977

966

1,133

–

2,286

4,056

Operating income/(loss)

–

(803

)

(2,091

)

(7,046

)

(497

)

340

1,060

(945

)

–

(9,940

)

(42

)

Acceris Communications Partners’ business includes the operations acquired by WxC in June 2001 and the assets used to provide long distance and other voice services to small businesses and the consumer/ residential market (“A&R” business) of RSL, which were acquired in December 2002. Acceris Communications Partners is a facilities based telecommunications provider in the retail long distance market. In 2000, the Company did not operate in this segment.

Acceris Communications Partners accounted for $88,863 of telecommunications services revenue in 2002 and $49,289 in 2001.

Comparing Acceris Communication Partners’ 2002 revenue to annualized 2001 revenue shows an increase in revenue. Understanding the change in revenue requires a more detailed review as presented below. Telecommunications services revenue is the result of three primary elements, specifically, volume of minutes, rate per minute and the number of customers.

16 MANAGEMENT’S DISCUSSION AND ANALYSIS

In 2002, the Acceris Communications Partners business experienced an increase of approximately 12% in the volume of minutes over its network compared to 2001 on an annualized basis. This increased network utilization was offset by a 23% decrease in the average rate per minute due to significant price decreases in the long distance market throughout most of 2002.

Similar decreases are not expected to continue in 2003. The average number of active customers in 2002 increased over 2001 by 3%. Part of the source of that increase began in the fourth quarter of 2001, when Acceris Communications Partners embarked on an aggressive direct advertising campaign, which resulted in increases in the number of customers on the network in late 2001 and into the first half of 2002. While the investment in direct advertising increased revenue, its contribution was not profitable. Accordingly, in early 2002, the direct advertising campaign ceased and more profitable methods of attracting and retaining customers were pursued. The alternative methods being used to attract profitable customers was the decision to focus on and grow the commercial agent and multi-level marketing (“MLM”) channels, while also expanding the product offerings to include 1+ long distance services, content provisioning, wholesale carriage, and conference call services. The acquisition of the A&R business of RSL is expected to act as an accelerator to the commercial agent strategy.

Acceris Communications Partners expects to show increasing revenue in 2003. The Company believes the increase will be achieved by (1) increasing the customer base, which in turn increases network utilization and (2) the effect of a full year inclusion of the A&R business of RSL. The expected increase in customer base will come from the customer attraction and retention programs in place, the completing and maturing of the channel transition coupled with potential acquisitions, and by broadening the Company’s product offerings.

Acceris Communications Partners’ telecommunication costs were $49,745 in 2002 and $35,546 in 2001. The increase in 2002 compared to 2001 relates primarily to inclusion of a full year of WxC operations as opposed to seven months in 2001. On an annualized basis, telecommunications network expense decreased from 2001 to 2002. The decrease on an annualized basis correlates with a 16% increase in telecommunications services revenue margin (telecommunication services revenue net of telecommunication network expense) in 2002 over 2001, primarily relating to improved network efficiency derived from reductions in operating costs and efficiencies relating to more scaled utilization of the network. As outlined in the revenue discussions, price erosion was pervasive throughout 2002; however, this erosion was mitigated by price protection clauses in contracts with underlying carriers that also reduce the Company’s carrier costs. In 2003, it is expected that network expense will directly correlate with telecommunication services revenue and that the telecommunications services margin will remain consistent with 2002.

Acceris Communications Partners’ selling, general and administrative expense was $28,806 in 2002 up from $20,558 in 2001. The increase in 2002 compared to 2001 primarily relates to a full year of operations of Acceris Communications Partners in 2002 as compared to seven months of operations in 2001. Selling, general and administrative expense will increase in 2003 due to the inclusion of the A&R business of RSL, which was acquired in December 2002. Selling, general and administrative expense for 2002 includes advertising costs of $1,590 as compared to $7,266 in 2001. The decrease in advertising costs in 2002 compared to 2001 relates to the curtailment, in the first quarter of 2002, of a direct advertising program that commenced in 2001. The program

MANAGEMENT’S DISCUSSION AND ANALYSIS 17

was curtailed, because the returns from the program did not justify the investment. Subsequent to the curtailment of the direct advertising program in early 2002, management focused its attention on the reorganization of its channel strategy by placing greater emphasis on the commercial agent and MLM channels. The transition in strategy reduced advertising costs but introduced a higher level of sales commissions.

Acceris Communications Partners’ provision for doubtful accounts was $6,298 in 2002 compared with $839 in 2001. The increase in 2002 over 2001 primarily relates to a full year of revenue from Acceris Communications Partners in 2002 compared with seven months of operations in 2001. Other than the increase to a full year of operations, the provision increase in 2002 relates to a change in channels resulting in more direct billing of customers, which incurs a larger percentage of uncollectible accounts.


	Acceris Communications Solutions

Unaudited

Audited

2001

2002

2000

2001

2002

Total

Revenue

United States

–

1,547

–

1,547

–

1,547

–

1,547

Operating costs and expenses

Telecommunication costs

–

1,191

–

1,191

Selling, general and administrative

–

777

–

777

Provision for doubtful accounts

–

Depreciation and amortization

–

158

–

158

Operating loss

–

(612

)

–

(612

)

Acceris Communications Solutions is comprised of the operations of the former Enterprise business of RSL acquired in December 2002. In 2001 and 2000, the Company did not operate in this segment.

Revenue of $1,547 has been included in 2002 for the period from December 11, 2002 through December 31, 2002. While in bankruptcy, the Enterprise business of RSL found it very difficult to attract new customers. Despite competitive pricing, prospective customers were unwilling to make significant and long term contractual commitments given RSL’s financial uncertainty. This financial uncertainty also affected the existing customer base as their contracts expired, resulting in higher than normal customer attrition rates compared to the pre-bankruptcy operations of RSL. Price competition is expected to continue in 2003, however the Company believes that the contribution margin from revenue in this segment will remain comparable with 2002.

While in bankruptcy, the Enterprise business of RSL concentrated on maintaining its customer base. Since the acquisition of the business, the Company has focused on stabilizing the existing customer base and has instituted a customer acquisition plan which is expected to take several months for significant customer acquisitions to materialize, due to the long sales cycle in its

18 MANAGEMENT’S DISCUSSION AND ANALYSIS

market. Steady growth in revenue from current sales efforts is expected to materialize in the second half of 2003 and beyond.

It is expected that Acceris Communications Solutions will be self-funding beyond its acquisition capitalization. Like Acceris Communications Partners, in order to obtain working capital, Acceris Communications Solutions plans to enter into an asset backed debt facility, utilizing its accounts receivable and underlying assets as collateral.

Acceris Communications Solutions accounted for $1,191 of the total network expense in 2002. It is anticipated that its telecommunications network expense will increase in 2003 at a slower rate than its revenue growth thus increasing telecommunications services margins.

Acceris Communications Solutions accounted for $777 of selling, general and administrative expense in 2002. It is anticipated that this expense will remain constant on an annualized basis in 2003.

Acceris Communications Solutions recorded a provision for doubtful accounts of $33 in 2002. Acceris Communications Solutions anticipates that its 2003 provision for doubtful accounts as a percentage of revenue will remain consistent with 2002.


	Acceris Communications Technologies



		Unaudited																								Audited


		2001			2001			2001			2001			2002			2002			2002			2002			2000		2001			2002
		Q1			Q2			Q3			Q4			Q1			Q2			Q3			Q4			Total		Total			Total
		$			$			$			$			$			$			$			$			$		$			$


Revenue
	United States		470			1,420			1,420			1,420			1,581			888			321			47			–		4,730			2,837

			470			1,420			1,420			1,420			1,581			888			321			47			–		4,730			2,837
Operating costs and expenses
	Selling, general and administrative		–			1,874			2,402			4,646			1,002			968			942			1,350			–		8,922			4,262
	Research and development		896			524			435			307			382			465			317			235			–		2,162			1,399
	Depreciation and amortization		281			1,243			2,111			1,437			558			559			536			470			–		5,072			2,123

Operating loss			(707	)		(2,221	)		(3,528	)		(4,970	)		(361	)		(1,104	)		(1,474	)		(2,008	)		–		(11,426	)		(4,947	)

Acceris Communications Technologies is the former technology services segment of I-Link, which licenses a fully developed technology platform to third party users that facilitates the convergence of traditional telecommunications equipment and internet protocol technologies. The Company entered this segment via the acquisition of I-Link in March 2001.

Revenue from Acceris Communications Technologies was $2,837 in 2002 and $4,730 in 2001. Revenue in 2002 and 2001 was largely from a $10 million licensing agreement entered with a single customer that was recognized over a twenty-four month period, which ended in May 2002. When examining the technology licensing market it is important to appreciate that revenue is project based and, as such, revenue will vary from year to year based on timing of technology licensing, development projects and payments. The primary decrease in revenue in 2002 from 2001 was due to the expiry of the revenue recognition period relating to the $10 million licensing agreement.

MANAGEMENT’S DISCUSSION AND ANALYSIS 19

Historically, Acceris Communications Technologies has focused its sales on international markets while focusing domestically on its own network development. In December 2002, the Company entered into an agreement to sell the domestic network operations conducted in a subsidiary of I-Link, I-Link Communications Inc. (“ILC”) to BUI as part of a formal plan of disposal pursuant to a refocusing of strategy by management. The sale is anticipated to close in the second quarter of 2003. While the operations of ILC will be sold, the Company will retain ownership of the technology that was licensed to BUI. While the licensing to BUI was the first domestic licensing of the domestic technology, in January 2003, the Company entered into a second domestic licensing agreement and expects to sell several additional licenses throughout 2003.

Acceris Communications Technologies’ selling, general and administrative expense includes overhead for the technology licensing business and corporate head office related expenses, related to the communications business. These costs were $8,922 in 2001, and $4,262 in 2002. 2002 costs decreased from 2001 due to cost cutting measures following the March 2001 acquisition of this business. Costs are expected to decrease further in 2003 as a result of the fourth quarter 2002 significant downsizing at the segment’s corporate head office in Draper, Utah.

Acceris Communications Technologies incurred research and development costs of $1,399 in 2002 compared with $2,162 in 2001. The decrease is a result of the consolidation of research operations and the curtailment of research and development activities in order to concentrate on sales and marketing of existing products. With the sale of the ILC business, the Company has stopped research and development activities and expects there will be minimal research and development activities in 2003 as concentration on sales of existing products continues.

Acceris Communications Technologies had no bad debts in any year presented due to the nature of the revenue.


	Real estate

Unaudited

Audited

2001

2002

2000

2001

2002

Total

Revenue

Canada

–

1,486

1,704

–

3,343

–

1,486

1,704

–

3,343

Operating costs and expenses

Income producing properties

–

502

946

–

1,448

Depreciation and amortization

–

107

–

199

Operating income

–

877

698

–

1,696

Counsel purchased five income producing properties in the third quarter of the current year, which were immediately accretive to earnings.

Revenue generated by the real estate segment in 2002 was $3,343. This revenue was generated by six income producing properties, five of which were acquired in the third quarter of 2002 for $35,512. The leasable area of these properties is 775,957 square feet with occupancy of

20 MANAGEMENT’S DISCUSSION AND ANALYSIS

94% at December 31, 2002. The real estate segment has generated positive operating and net income since acquisition and is self funding. During fiscal 2003, the Company plans to acquire additional properties.


	Corporate operating costs and expenses

Unaudited

Audited

2001

2002

2000

2001

2002

Total

Revenue

Canada

–

United States

–

Operating costs and expenses

Selling, general and administrative

3,183

4,505

3,214

3,968

3,692

2,718

4,016

2,788

6,300

14,870

13,214

Depreciation and amortization

355

407

414

312

130

151

258

205

1,488

579

Operating loss

(3,538

)

(4,912

)

(3,628

)

(4,280

)

(3,822

)

(2,758

)

(4,167

)

(3,046

)

(6,505

)

(16,358

)

(13,793

)

Head office costs, which are included in selling, general and administrative expense, amounted to $6,300 in 2000. Costs increased in 2001 due to the Company taking a control position in Proscape Technologies Inc. (“Proscape”), a company that develops, markets and supports marketing and sales information systems, and the affiliation with Springwell to oversee the Company’s investments in communications. In 2002, costs were reduced to $13,214 as the Company closed its New York office, curtailed its relationship with Springwell and ceased consolidating the operating costs of Proscape due to the dilution of the Company’s ownership to a minority position. It is anticipated that head office costs will continue to decrease in 2003, primarily due to experiencing a full year of savings from both the New York office closure and the wind down of the Springwell relationship.

CAPITAL RESOURCES AND LIQUIDITY

Sources of funding

The Company remains financially sound with $12.1 million in cash equivalents and short-term investments. Management expects the Company to be generating positive operating income and net earnings in 2003 based on the assumptions outlined in the various segmented results discussed previously.

Management will continue to monetize its position in its short-term and portfolio investments on acceptable terms in order to provide capital to complete acquisitions in support of the Company’s communications and real estate platforms and for general corporate purposes. In 2003, management expects to monetize its investment in long-term care facilities on favourable terms.

The proceeds from the sale of long-term care facilities, cash and cash equivalents and short-term investments, as well as anticipated operating profits, are expected to provide Counsel with adequate near term financing. In the event that proposed transactions do not materialize or actual

MANAGEMENT’S DISCUSSION AND ANALYSIS 21

results vary materially from expected results, Counsel would need to obtain additional funding from capital or debt markets or through the sale of other assets.

There is no certainty that management has the ability to raise sufficient debt or equity in the current markets, or that management can monetize its investments on a timely basis to fund a cash settlement of the Company’s convertible debentures when they become due on October 31, 2003.

Uses of funding

During 2001, the Company changed its focus and commenced investing in United States based communications and Canadian based real estate. Currently, all other lines of business are under formal plans of disposal. Over the past two years the most significant use of funds was the acquisition of businesses in the communications and real estate sectors.

Significant outflows included funding acquisitions to expand the telecommunications business and subsequently funding operating losses through 2001 and 2002. The purchase of the telecommunications business began with the purchase of I-Link in 2001. The Company acquired I-Link for cash consideration of $5,113. Subsequently, the Company purchased net assets related to the dial-around long distance business of WxC for cash consideration of $13,000, which is the reportable segment Acceris Communications Partners. It is expected that this business will generate cash and positive net income in 2003. In 2002 the Company purchased the Enterprise and A&R business of RSL for cash consideration of $7,500.

In the third quarter of 2002, the Company purchased five income producing properties, which marked its strategic entry into the Canadian real estate business. The Company invested approximately $15,000 in cash. These properties were immediately accretive to cash flow and net income.

Financing

With the repayment of a $40,000 note in 2001, the Company limited its general corporate debt to its convertible debentures, which are discussed in more detail below. All new indebtedness in 2001 and 2002 was a result of acquisition financing. Other than the convertible debentures, all indebtedness is at the operating company level and the cost of this debt is expected to be funded by operating cash flows during 2003.

Convertible debentures

The Company has convertible debentures, which are publicly traded (TSX: CXS.DB.U). At the end of 2002, the outstanding debentures had a market value of $27,882 and a face value of $42,561. The convertible debentures mature on October 31, 2003. Management is considering a number of options relating to the convertible debentures besides repayment for cash at maturity. In addition to its right to repay the debentures with common stock, these options include arranging an extension of the term of the debentures, issuing other debt to replace the debentures, and settling the obligation with a combination of cash, debt and/or common shares. While management believes it can deal with the Company’s maturing debentures without issuing a significant number of common shares at what management believes is currently a low price for the common shares,

22 MANAGEMENT’S DISCUSSION AND ANALYSIS

resulting from current market conditions and the Company’s financial performance, there is no certainty that this will occur.

Under Canadian GAAP, the Company accounts for such a financial instrument as a hybrid because of its debt and equity attributes. At December 31, 2002, $44,652 of the instrument is included in shareholders’ equity, while $2,515 of the instrument is included in liabilities of the Company.

Stock purchase loans

The Company has provided stock purchase loans to certain employees and former employees of the Company. The collateral for these loans is the common shares of the Company and personal guarantees. If the price of the Company’s common stock were to decrease substantially, there is a risk that employees and former employees may not have the resources to pay loans as they come due.

Property, plant and equipment

Investment in property, plant and equipment for the year ended December 31, 2002 was $1,739 (2001 – $1,163; 2000 – $73). The Company expects to invest approximately $3,400 in property, plant and equipment during fiscal 2003. Funding for these investments is expected to come from cash on hand and operating cash flows.

Obligations

The following table summarizes all of the outstanding obligations of the Company’s continuing operations by the year that they become due (excluding the convertible debentures discussed above). The Company expects to fund these obligations from operating income, cash on hand, and the renewal of mortgages and loans.


	2003		2004		2005		2006		2007		Thereafter		Total
	$		$		$		$		$		$		$


Usage commitments		14,184		923		–		–		–		–		15,107
Operating leases		5,332		4,947		1,834		1,078		467		186		13,844
Operating facility expiry		9,086		–		–		–		–		–		9,086
Mortgages and loans		3,630		1,723		736		998		655		18,416		26,158
Capital leases		3,036		3,015		1,514		–		–		–		7,565

Total		35,268		10,608		4,084		2,076		1,122		18,602		71,760

In addition, the Company has provided a keep well letter to its communications platform company, I-Link. Under this letter, the Company is obligated to fund the ongoing operations of I-Link through March 2004. The Company expects that funding, if any, under this agreement will be minimal since the unprofitable portion of I-Link’s operations were substantially eliminated in 2002 and the acquisition of RSL is expected to be self-sustaining in 2003.

The Company expects to renew loans and mortgages as they become due and is subject to volatility in interest rates and property valuations at the time of renewal.

MANAGEMENT’S DISCUSSION AND ANALYSIS 23

Dividends

There are no restrictions on the repayment of advances or payment of dividends by any of the Company’s subsidiaries other than WorldxChange, which has certain restrictions as a result of a three-year loan and security agreement, consisting of an accounts receivable-based revolving credit facility that it entered into in December 2001. On July 20, 1999, the Company paid a special dividend of C$1.50 per share primarily related to the realization of value on the successful sale of Stadtlander. As a result of the dividend, the conversion price of the Company’s convertible debentures was reduced to $11.726 per share from $13.875. On April 30, 2000 the Company paid a dividend in kind of all of its shares of American HomePatient Inc. to complete the disposition of this discontinued operation, which resulted in a further reduction of the debenture conversion price to $11.472. Counsel does not currently pay a dividend and is not planning on paying a dividend in the foreseeable future.

Normal course issuer bids

On December 12, 2002, the Company renewed its normal course issuer bids through the facilities of The Toronto Stock Exchange to purchase up to 1,089,000 common shares or 5% of the outstanding common shares of the Company, and $2,128 face value of convertible debentures during the 12-month period beginning December 16, 2002 and ending on October 31, 2003 for the convertible debentures and on December 15, 2003 for its common shares.

During 2002, pursuant to normal course issuer bids, the Company acquired 748,000 (2001 – 1,444,000; 2000 – 1,688,000) common shares for cancellation. The excess of the average issue price over the repurchase price was credited to contributed surplus. During 2002, $1,886 was credited to contributed surplus (2001 – $3,878; 2000 – $2,220).

During 2002, pursuant to normal course issuer bids, the Company purchased for cancellation $200 (2001 – $5,740) of debentures for cash consideration of $141 (2001 – $3,180) reducing the liability component of the debentures payable by $9 (2001 – $720). The fair value of the debentures as at December 31, 2002 was $27,882 (2001 – $23,519). As a result of the cancellation of repurchased convertible debentures, the outstanding face amount as at December 31, 2002 was $42,561 (2001 – $42,761).

Risks and uncertainties

This section outlines risks and uncertainties that can have an impact on the Company’s operating results and financial position over the course of a year other than those discussed above.


	Credit risk

The Company’s financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, and loans receivable. Cash and cash equivalents are on deposit at major financial institutions. The Company’s retail communications subscribers are primarily residential subscribers and are not concentrated in any specific geographic region of the United States. The Company’s wholesale communications customers are primarily based in Utah, U.S.A. with no single customer accounting for greater than 10% of 2002 revenue. An allowance for doubtful accounts is established based upon the overall credit worthiness of specific customers.

24 MANAGEMENT’S DISCUSSION AND ANALYSIS


	Interest rate risk

Interest rate risk arises due to the exposure to the effects of future changes in the prevailing level of interest rates. The Company is exposed to interest rate risk arising from fluctuations in interest rates primarily on its revolving credit facility, and on its mortgages depending on prevailing rates at renewal.


	Market value risk

The business model for the real estate segment involves the leveraging of acquired assets with third party debt, normally in the form of mortgages. The debt level attributed to a particular property is normally determined as a percentage of market value for the asset at the time the asset is leveraged up. Should market values decline for a particular property, the ability of the Company to replace the debt at renewal at previous levels and on favourable terms could be in doubt.


	Foreign exchange risk

Foreign exchange risk arises to the extent of net assets invested in Canadian dollars and operations derived from those Canadian dollar investments. The consolidated financial statements are expressed in U.S. dollars as it is the currency of the primary economic environment in which the Company conducts its operations.


	Acquisitions and integration

Counsel pursues a strategy of acquiring businesses in order to achieve growth, scale and ultimately, profitability. If Counsel is unable to find suitable acquisitions or the funding to complete them, the Company may not realize on its strategic goals. Likewise, the speed and effectiveness with which the Company is able to integrate acquired companies into existing businesses and realize anticipated synergies could have a significant short-term impact on profitability.

In recent years, Counsel has focused on acquiring telecommunications companies from bankruptcy proceedings. These companies add an additional element of risk over that of a profitable business.


	Disposition of investments

An integral part of Counsel’s strategy is the ability to sell acquired businesses once a targeted level of growth has been achieved. There can be no guarantee that Counsel will be able to find a buyer once a decision to sell has been made. Changes in capital markets, economic environments and other factors could delay a sale or substantially reduce the planned selling price, thereby reducing profitability and planned sources of future funding.

In addition, Counsel has a number of self-sustaining operations, the disposal of which could result in deferred exchange gains or losses being included in income. The deferred gain or loss could materially alter the accounting gain or loss that might otherwise have been recorded.

MANAGEMENT’S DISCUSSION AND ANALYSIS 25


	Volatile telecommunications market

During the last several years, the telecommunications industry has been very volatile as a result of over capacity, which has led to price erosion and bankruptcies. If the Company cannot control subscriber and customer attrition through maintaining competitive services and pricing, revenue could decrease significantly. Likewise, by maintaining competitive pricing policies, the revenue per minute earned by the Company may decrease significantly. Both scenarios could result in the Company not meeting profitability targets.


	Telecommunications billing

Acceris Communications Partners relies on an enterprise billing solution to bill customers. If that technology fails to operate as expected, there is a risk that revenue could be lost or customers could be billed incorrectly.


	Telecommunications trends

Acceris Communications Partners and Acceris Communications Solutions provide a number of wireline products and services. Recent studies have shown that wireless communications are increasing in acceptance and are eroding wireline revenue. If this trend continues, communications revenue could be materially impacted.


	Technology changes

A portion of the communications business is built on the licensing of certain technology. New technologies may emerge that would make the Company’s product offering obsolete. This could impact the results of Counsel due to impairments to intangible assets if it does not achieve budgeted sales.


	Government regulation

The telecommunications industry is subject to government regulation at federal, state and local levels. Any change in current government regulation regarding telecommunications pricing, system access, consumer protection, or other relevant legislation could have a material impact on the results of operations.

Recent legislation in the U.S. (the Sarbanes-Oxley Act of 2002) is increasing the scope and cost of work provided to Counsel by its auditors and legal advisors. Many guidelines have not yet been finalized and there is a risk that Counsel will incur significant costs in the future to comply with legislative requirements, thereby reducing profitability.


	Key employees

The Company has certain employees that it considers to be key. Many of these employees are involved in executing the strategy that will result in the planned results discussed above. If these key employees cease to be employed with Counsel, planned results could be delayed or might not materialize. The Company mitigates this risk through the use of employment contracts, the

26 MANAGEMENT’S DISCUSSION AND ANALYSIS

formalization of the Company’s strategy and business plans and by ensuring the existence of timely knowledge exchange and collaboration.


	Litigation and insurance

The Company, from time to time, is involved in various claims, legal proceeds and complaints arising in the ordinary course of business. The Company is not aware of any pending or threatened proceedings that would have a material adverse effect on the consolidated financial condition or future results of the Company.

Counsel maintains insurance coverage that includes liability coverage to protect the Company from claims made against it. Recent events have made liability insurance more expensive while at the same time have reduced the scope of coverage. The Company’s ability to maintain adequate insurance coverage at a reasonable cost may be impacted by market conditions beyond the control of the Company.

MANAGEMENT’S DISCUSSION AND ANALYSIS 27

CONSOLIDATED

FINANCIAL

STATEMENTS

AUDITORS’ REPORT

TO THE SHAREHOLDERS OF COUNSEL CORPORATION

We have audited the consolidated balance sheets of Counsel Corporation as at December 31, 2002 and 2001 and the consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

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

The consolidated financial statements for the year ended December 31, 2000, prior to the reclassification of discontinued operations as described in Note 17 and the restatement of certain information reported under United States generally accepted accounting principles as described in Note 22, were audited by other auditors who expressed an opinion without reservation on those statements in their report dated March 26, 2001.

CHARTERED ACCOUNTANTS

March 25, 2003

CONSOLIDATED BALANCE SHEETS

As at December 31 (In thousands of U.S. dollars)


	2002		2001
	$		$


Assets
CURRENT ASSETS
Cash and cash equivalents		9,004		23,066
Short-term investments (note 4)		3,071		8,932
Accounts receivable (net of allowance for doubtful accounts of $4,596; 2001 – $1,863)		22,184		19,376
Income taxes recoverable		3,329		2,202
Future income tax assets (note 16)		274		970
Prepaid expenses and deposits		6,991		4,815
Assets of discontinued operations (note 17)		2,239		8,306

		47,092		67,667
LONG-TERM ASSETS
Income producing properties (note 5(a))		34,919		2,081
Properties under development (note 5(b))		3,063		352
Loans receivable (note 6)		6,473		7,305
Portfolio investments (note 7)		4,420		4,219
Property, plant and equipment (note 8)		12,657		15,393
Intangible assets (note 9)		9,318		9,699
Assets of discontinued operations (note 17)		21,598		32,172
Goodwill (note 9)		–		3,434

		139,540		142,322

Liabilities
CURRENT LIABILITIES
Accounts payable		7,725		5,435
Accrued liabilities (note 10)		22,215		26,269
Current portion of deferred revenue		958		1,986
Revolving credit facility (note 11(b))		9,086		6,996
Current portion of mortgages and loans payable (note 11(a))		3,630		2,302
Current portion of capital leases (note 12)		2,714		3,034
Convertible debentures payable (note 13)		2,515		–
Liabilities of discontinued operations (note 17)		7,269		8,789

		56,112		54,811
LONG-TERM LIABILITIES
Mortgages and loans payable (note 11(a))		22,528		3,848
Capital leases (note 12)		4,146		6,986
Convertible debentures payable (note 13)		–		4,801
Future income tax liabilities (note 16)		36,550		23,282
Liabilities of discontinued operations (note 17)		11,816		13,100

		131,152		106,828
Commitments, contingencies, guarantees and concentrations (note 12)
Shareholders’ Equity		8,388		35,494

		139,540		142,322

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

On behalf of the Board of Directors:

Allan C. Silber, Director William H. Lomicka, Director

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31 (In thousands of U.S. dollars)



	Capital Stock								Equity
									component of
									convertible			Retained			Total
	Number of						Contributed		debentures			earnings			Shareholders’
	common			Amount			surplus		payable			(Deficit)			Equity
	shares
	(In 000’s)			$			$		$			$
															$


Balance – December 31, 1999		25,533			116,251			–		42,293			(1,819	)		156,725
Common shares issued		92			143			–		–			–			143
Common shares purchased for cancellation		(1,688	)		(6,942	)		2,220		–			(8	)		(4,730	)
Accretion of equity component of debentures payable		–			–			–		3,017			(3,017	)		–
Gain on retirement of debentures payable net of income taxes of $131		–			–			491		(1,268	)		–			(777	)
Gain on issuances of stock by significantly influenced corporations		–			–			–		–			366			366
Dividends		–			–			–		–			(1,791	)		(1,791	)
Net loss		–			–			–		–			(45,433	)		(45,433	)

Balance – December 31, 2000		23,937			109,452			2,711		44,042			(51,702	)		104,503
Common shares purchased for cancellation		(1,444	)		(6,600	)		3,878		–			–			(2,722	)
Accretion of equity component of debentures payable		–			–			–		3,159			(3,159	)		–
Gain on retirement of debentures payable net of income taxes of $613		–			–			2,294		(5,368	)		–			(3,074	)
Net loss		–			–			–		–			(62,213	)		(62,213	)

Balance – December 31, 2001		22,493			102,852			8,883		41,833			(117,074	)		36,494
Adjustment to goodwill related to the adoption of new accounting pronouncement (note 2)		–			–			–		–			(1,000	)		(1,000	)

Restated balance – December 31, 2001		22,493			102,852			8,883		41,833			(118,074	)		35,494
Common shares purchased for cancellation		(748	)		(3,418	)		1,886		–			–			(1,532	)
Accretion of equity component of debentures payable		–			–			–		3,029			(3,029	)		–
Gain on retirement of debentures payable net of income taxes of $15		–			–			63		(210	)		–			(147	)
Net loss		–			–			–		–			(25,427	)		(25,427	)

Balance – December 31, 2002		21,745			99,434			10,832		44,652			(146,530	)		8,388

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

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31 (In thousands of U.S. dollars, except per share amounts)


	2002			2001			2000
	$			$			$


Revenues
Telecommunication services		90,410			49,289			–
Communication technology licensing		2,837			4,730			–
Income producing properties		3,343			11			–

		96,590			54,030			–

Operating costs and expenses
Telecommunication costs (exclusive of depreciation shown below)		50,936			35,546			–
Income producing properties		1,448			–			–
Selling, general and administrative		47,059			44,350			6,300
Research and development		1,399			2,162			–
Provision for doubtful accounts		6,331			839			–
Depreciation and amortization		7,115			8,849			205

		114,288			91,746			6,505

Operating loss before undernoted items		(17,698	)		(37,716	)		(6,505	)
Gains and other income
Sale of short-term investments		28,067			42,760			28,256
Portfolio investments		–			64			3,693
Sale of subsidiary		–			589			–
Debt retirement		–			1,093			–
Other		782			–			–
Impairments and other losses
Write-down of short-term investments		(4,011	)		(1,957	)		(22,031	)
Write-down of portfolio investments		(640	)		(19,340	)		(2,581	)
Other		(722	)		–			(850	)

Earnings (loss) before the undernoted		5,778			(14,507	)		(18	)
Equity in losses of significantly influenced companies		–			(5,582	)		(9,547	)
Interest income		401			2,645			2,520
Interest expense (note 11 (d))		(3,002	)		(2,517	)		(752	)

Earnings (loss) before income taxes, non-controlling interest and discontinued operations		3,177			(19,961	)		(7,797	)
(Provision for) recovery of income taxes (note 16)		(9,655	)		(19,901	)		6
Non-controlling interest		–			1,538			–

Loss from continuing operations		(6,478	)		(38,324	)		(7,791	)
Loss from discontinued operations (note 17)		(18,949	)		(23,889	)		(37,642	)

Net loss		(25,427	)		(62,213	)		(45,433	)

Basic and diluted net loss per share (note 20)
Loss from continuing operations		(0.43	)		(1.80	)		(0.43	)
Loss from discontinued operations		(0.85	)		(1.04	)		(1.51	)

Basic and diluted net loss per share		(1.28	)		(2.84	)		(1.95	)

Weighted average number of common shares outstanding (in thousands)		22,195			23,030			24,860

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31 (In thousands of U.S. dollars)


		2002			2001			2000
		$			$			$


Cash provided by (used in)
OPERATING ACTIVITIES
Loss from continuing operations			(6,478	)		(38,324	)		(7,791	)
Non-cash items included in loss
	Future income taxes		10,701			19,154			1,567
	Amortization of deferred revenue		(1,643	)		(3,197	)		–
	Depreciation of property, plant and equipment		4,110			4,119			170
	Amortization of goodwill and intangible assets		3,005			4,730			35
	Gain on sale of short-term investments		(28,067	)		(42,760	)		(28,256	)
	Write-down of short-term investments		4,011			1,957			22,031
	Gain on sale of portfolio investments		–			(64	)		(3,693	)
	Write-down of portfolio investments		640			19,340			2,581
	Sale of other assets		(782	)		(589	)		–
	Other impairments and losses		722			–			850
	Gain on retirement of debt		–			(1,093	)		–
	Equity interests in significantly influenced corporations		–			5,582			9,547
	Accretion of liability component of debentures payable		289			528			732
	Non-controlling interest		–			(1,538	)		–
Changes in non-cash working capital related to operations
(Increase) decrease in accounts receivable			5,893			(3,102	)		(1,363	)
(Increase) decrease in income taxes recoverable			(1,127	)		379			1,020
(Increase) decrease in loans receivable, prepaid expenses and deposits			(3,523	)		(13,465	)		(10,243	)
Increase (decrease) in accounts payable and accrued liabilities			732			4,425			(3,770	)

Cash used in continuing operations			(11,517	)		(43,918	)		(16,583	)
Cash provided by (used in) discontinued operations			280			(18,904	)		2,949

			(11,237	)		(62,822	)		(13,634	)

INVESTING ACTIVITIES
Acquisition of communications businesses (net of cash acquired of $287 and $811 in 2002 and 2001 respectively)			(8,275	)		(18,842	)		–
Acquisition of income producing properties			(15,505	)		(737	)		–
Purchase of short-term investments			(9,748	)		(3,183	)		(1,137	)
Purchase of portfolio investments			(503	)		(50	)		(3,700	)
Purchase of property, plant and equipment			(1,739	)		(1,163	)		(73	)
Investment in property under development			(87	)		–			–
Investment in significantly influenced corporations			–			(2,516	)		(15,982	)
Proceeds on sale of short-term investments			40,767			58,885			54,334
Proceeds on sale of portfolio investments			–			–			5,621
Proceeds on sale of property, plant and equipment			692			–			–
Discontinued operations			(2,105	)		70,780			–

			3,497			103,174			39,063

FINANCING ACTIVITIES
Net draws on revolving credit facility			2,090			6,997			–
Repayment of mortgages and loans payable			(989	)		–			–
Repayment of note payable			–			(40,000	)		–
Capital lease repayments			(3,160	)		(1,043	)		–
Common shares purchased for cancellation			(1,532	)		(2,722	)		(4,730	)
Retirement of debentures payable			(141	)		(3,180	)		(877	)
Proceeds from exercise of stock options			–			–			84
Repayment of liability component of debentures payable			(2,566	)		(2,749	)		(3,000	)
Discontinued operations			(1,269	)		(29,645	)		24,452

			(7,567	)		(72,342	)		15,929

Increase (decrease) in cash and cash equivalents			(15,307	)		(31,990	)		41,358
Cash and cash equivalents – beginning of period			25,357			57,347			15,989

Cash and cash equivalents – end of period			10,050			25,357			57,347
Less: cash and cash equivalents – discontinued operations			1,046			2,291			6,513

Cash and cash equivalents – continuing operations			9,004			23,066			50,834

Supplementary information (note 21)

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001 and 2000 (In thousands of U.S. dollars, except per share amounts)

1 DESCRIPTION OF THE BUSINESS

Counsel Corporation (the “Company” or “Counsel”) is a diversified company focused on acquiring and building businesses in two specific sectors: communications in the United States and real estate in Canada.

The Company engages in the communications sector through its investment in I-Link Incorporated (“I-Link”). I-Link is a supplier of voice, data and enhanced communications products and services. Through direct and indirect subsidiaries, I-Link operates as a facilities based telecommunications carrier providing long distance voice services to retail customers in the United States, and long distance voice and data services to small to medium sized businesses in the United States. I-Link also licenses a fully developed network convergence solution for voice and data based on its Internet Protocol communications technology. The Company entered this sector in March 2001.

The Company entered the real estate sector during the third quarter of 2002 through the acquisition of five retail shopping centres in Canada (see note 3).

To gain a full appreciation of all the assets currently under management, a review of discontinued operations is required. During 2002, the Company adopted formal plans of disposal for its medical products business segment, long-term care business segment and a communications network segment (see note 17).

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). In the case of the Company, these principles conform in all material respects with United States generally accepted accounting principles (“U.S. GAAP”), except as described in note 22.

The Company’s accounting policies and its financial disclosures related to its real estate operating segment are in accordance with the recommendations of the Canadian Institute of Public and Private Real Estate Companies (“CIPREC”).

These consolidated financial statements include the accounts of the Company and all companies which it controls. The Company’s principal operating subsidiaries comprising continuing operations and its respective ownership interest in each subsidiary as at December 31, 2002, 2001 and 2000 are as follows:


	2002		2001		2000
	%		%		%


Counsel Corporation (US)		100.0		100.0		100.0
Counsel Communications LLC (i)		88.4		88.4		100.0
I-Link (i)		60.2		60.2		–
Proscape Technologies Inc. (“Proscape”)		(ii)		56.5		(ii)

34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(i)	On January 2, 2003, the Company acquired the minority interest of Counsel Communications LLC, which owns all of the Company’s shares of I-Link. As a result, the Company’s ownership in Counsel Communications LLC and its effective ownership in I-Link increased to 100% and 68.4% respectively.

(ii)

On March 15, 2002, the Company’s ownership percentage in Proscape was significantly diluted as a result of Proscape completing a financing in which the Company did not participate. As a result, Proscape has been accounted for as a portfolio investment (note 7) since that date, and the Company ceased consolidating Proscape as of that date. The Company’s interest in Proscape was approximately 12% and 36% at December 31, 2002 and December 31, 2000, respectively.

Intercompany balances and transactions are eliminated on consolidation.

Use of estimates

The most significant estimates made by management relate to the application of purchase accounting, the assessment of recoverability of customer and loans receivables, portfolio investments, and the cash-flows expected to be derived from long lived assets including Property under development, Income producing properties, property, plant and equipment and intangible assets. Management make significant estimates related to the measurement of obligations and the timing of the related cash flows, particularly as it relates to accrued liabilities and future income tax liabilities. Such timing and measurement uncertainty could have a material affect on the reported results of operations and the financial position of the Company.

Actual results could differ materially from those estimates in the near term.

Comparative figures

Certain comparative figures have been reclassified to conform to the 2002 presentation.

Non-controlling interest

The Company owns less than 100% of some of its subsidiaries. Non-controlling interest is the accounting mechanism that eliminates from the Company’s earnings, the profit or loss attributable to minority partners. As at December 31, 2002, no minority interest is recorded in the consolidated balance sheet of the Company because the equity interest of minority partners is in a deficit position and minority shareholders have no obligation to fund losses. Comparatively, as at December 31, 2002, $161 (2001 – $702) of non-controlling interest is carried in the liabilities of discontinued operations.

Revenue recognition


	Telecommunication services

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35

from telecommunications usage, based on minutes of use. Revenue derived from usage is recognized as services are provided, based on agreed upon usage rates. Revenue is recorded net of estimated customer credits.


	Technology licensing

Revenue from the sale of software licenses is recognized when a non-cancellable agreement is in force, the license fee is fixed or determinable, acceptance has occurred and collectibility is reasonably assured. Maintenance and support revenues are recognized rateably over the term of the related agreements. When a license of I-Link technology requires continued support or involvement of the Company, contract revenues are spread over the period of the required support or involvement. In the event that collectibility is in question, revenue (deferred or recognized) is recorded only to the extent of cash receipts.


	Real estate

Revenue from real estate rentals is recognized as due and collection is reasonably assured. Leases with tenants have been accounted for by the Company as operating leases as substantially all of the risks and benefits of ownership have been retained by the Company. Income producing property revenue includes percentage participating rent and recoveries of operating expenses.


	Long-term care

Revenue from long-term care includes revenue from the Company’s nursing and retirement facilities and revenue from operating leases for certain facilities. Revenue from the Company’s retirement and nursing facilities is recognized when services are provided or when rent becomes due. Revenue from operating leases is recognized on a straight-line basis over the term of the lease. All long-term care revenue is included in the results of discontinued operations.


	Medical products

Revenue from the sale of medical products is recognized upon shipment and transfer of title. All medical product revenue is included in the results of discontinued operations.

Cash and cash equivalents

Cash and cash equivalents comprise cash and highly liquid investments with original maturities of three months or less. As at December 31, 2002, there are no cash equivalents. At December 31, 2001 there were cash equivalents of $12,546 consisting of short-term deposits and money market investments.

36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Short-term investments

Short-term investments represent liquid investments in publicly traded companies. These investments are carried at the lower of cost and market value, and accordingly, unrealized gains are not reflected in these consolidated financial statements. Unrealized losses in value are charged to operations as a write-down of investments. Any subsequent recoveries are not reflected in the Company’s financial statements until the short-term investment is sold.

Portfolio investments

Portfolio investments represent long-term investments in publicly traded and privately held companies. These investments are accounted for using the cost method. Under the cost method, the investment is initially recorded at cost; earnings from such investments are only recognized to the extent received or receivable. Provisions for loss in value are recorded if a decline in value is considered to be other than temporary. Neither unrealized gains nor recoveries in valuation, if any, are reflected in these consolidated financial statements.

Property, plant and equipment

Long-term care facilities, now included in assets of discontinued operations, are recorded at the lower of cost and estimated net recoverable amount. Depreciation is provided using the sinking fund method, which provides for a depreciation charge of an annual amount increasing on a compounded basis of 5% per annum.

Other property, plant and equipment are recorded at cost with depreciation being provided over their estimated useful lives as follows:


Furniture, fixtures and office equipment		straight-line or accelerated method over periods from 3 to 7 years and declining balance method at 20% per annum
Leasehold improvements		straight-line over the shorter of the term of the lease or estimated useful life of the asset
Telecommunications network equipment		straight-line over 3 to 5 years
Software and information systems		straight-line over 1 to 3 years

Assets held under capital leases are depreciated using the above rates.

Property, plant and equipment are carried at the lower of depreciated cost and net recoverable amount. A write-down to net recoverable amount is recognized when projected undiscounted cash flows are less than the carrying value.

Income producing properties

Income producing properties are recorded at cost. Depreciation is provided on the sinking fund basis over the estimated useful lives of the properties to a maximum of 30 years. The sinking fund method provides for a depreciation charge of an annual amount increasing on a compounded basis of 5% per annum. Depreciation is determined in relation to each property’s carrying value, remaining estimated useful life and residual value.

Income producing properties are carried at the lower of depreciated cost and net recoverable amount. A write-down to net recoverable amount is recognized when a property’s projected

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 37

undiscounted cash flows are less than its carrying value. Projections of future cash flows take into account the specific business plan for each property and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market. The use of net recoverable amount to assess the amount at which a property is carried in the accounts assumes the property will be held for the long term. Otherwise, the net realizable value method is used. Estimated net realizable value represents the estimated selling price reduced by any costs expected until final disposition.

Properties under development

Properties under development are recorded at cost and reduced for impairment where applicable. Properties are classified as properties under development until the properties are substantially completed and available for immediate sale, at which time, they are classified as properties held for sale or as income producing properties. The cost of real estate under development includes the acquisition cost of land, pre-development expenses, interest, realty taxes and other expenses directly related to the property.

Tenant improvements and inducements

Tenant improvements are deferred and amortized on a straight-line basis over the term of the respective lease.

Maintenance and repair costs

Maintenance and repair costs are charged to operations as incurred. Planned major maintenance activities, significant building improvements, replacements and major renovations, all of which improve or extend the useful life of the properties, are capitalized and amortized over their estimated useful lives.

Goodwill and intangible assets

Effective January 1, 2002, the Company adopted the new provisions of the Canadian Institute of Chartered Accountants Handbook Section 3062 “Goodwill and Other Intangible Assets” (“CICA HB 3062”). Under CICA HB 3062, goodwill is no longer amortized but is reviewed at least annually for impairment. Under CICA HB 3062, goodwill is required to be tested for impairment within six months of the beginning of the fiscal year of adoption. As of June 30, 2002, the Company completed the assessment of the quantitative impact of the transitional impairment test on its goodwill and other intangible assets. An impairment of $1,000 was charged to retained earnings as of January 1, 2002 relating to the impaired goodwill of Sage BioPharma Inc. (“Sage”).

38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The table below discloses the pro forma effect had the years ended December 31, 2001 and 2000 been subject to CICA HB 3062:


	2002			2001			2000
	$			$			$


Loss from continuing operations		(6,478	)		(38,324	)		(7,791	)
Goodwill amortization expense		–			(2,385	)		(2,999	)

Adjusted loss from continuing operations		(6,478	)		(35,939	)		(4,792	)

Adjusted basic and diluted loss from continuing operations per share		(0.43	)		(1.70	)		(0.31	)

Net loss as reported		(25,427	)		(62,213	)		(45,433	)
Goodwill amortization expense		–			(3,791	)		(7,381	)

Adjusted net loss		(25,427	)		(58,422	)		(38,052	)

Adjusted basic and diluted loss per share		(1.28	)		(2.67	)		(1.65	)

Goodwill represents the excess of the purchase consideration over the fair value of net identifiable assets of businesses acquired. Prior to the adoption of CICA HB 3062, goodwill was being amortized on a straight-line basis over its estimated useful life which ranged from five to forty years.

Intangible assets are recorded at fair value upon acquisition and are amortized on a straight-line basis over their estimated useful life of one to five years (Note 9).

On an ongoing basis, management reviews the carrying value and amortization of intangible assets taking into consideration any events and circumstances that might have impaired their carrying value. The Company assesses impairment by determining whether the carrying value exceeds the fair value, determined as the consideration that would be agreed upon in an arm’s length transaction. If the fair value is determined to be less than the net book value, the excess of the net book value over the fair value is charged to operations in the period in which such impairment is determined by management.

Software development expenditures

Costs incurred in the research, design and development of software for sale are expensed until technological feasibility is established, after which, the remaining software development costs are capitalized. Amortization commences when the product is available for general release to customers. Amortization is computed using the straight-line method over the estimated remaining useful life of the product, which generally does not exceed two years. The Company periodically compares the unamortized portion of capitalized software development costs to the undiscounted net recoverable amount of the related product. The undiscounted net recoverable amount is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product. The amount by which the unamortized capitalized costs exceed the net recoverable amount is reflected as an impairment loss.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39

Research and development expenditures

Research costs, other than capital expenditures that do not have alternative uses, are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria under Canadian generally accepted accounting principles for deferral and amortization. The Company has not deferred any such development costs to date.

Advertising costs

Advertising production costs are expensed the first time the advertisement is run. Media (television and print) placement costs are expensed in the month the advertising appears.

Foreign currency translation

These consolidated financial statements are expressed in U.S. dollars because it is the currency of the primary economic environment in which the Company conducts its operations.

Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated at year-end exchange rates. Revenues and expenses denominated in foreign currencies are translated at average exchange rates during the year. The resulting gains and losses are included in the results of operations, except exchange gains and losses arising from the translation of the Company’s self-sustaining Canadian operations.

Assets and liabilities of self-sustaining Canadian entities are translated into U.S. dollars at the exchange rates prevailing at the year-end. Revenues and expenses for these operations are translated at average exchange rates during the year. Net exchange adjustments arising on translation of self-sustaining Canadian entities are charged or credited directly to shareholders’ equity and shown as cumulative unrealized translation adjustments. When there is a reduction in the Company’s net investment in a self-sustaining operation, a proportionate amount of the cumulative translation account is included in the determination of the consolidated results of operations.

Effective January 1, 2002, the Company adopted CICA revised Handbook section 1650, “Foreign Currency Translation” which requires the immediate recognition in income of the unrealized foreign currency exchange gains and losses on long-term monetary items with a fixed or ascertainable life as opposed to unrealized gains and losses being deferred and amortized over the remaining term of the long-term monetary items. The adoption of CICA HB 1650 did not have an effect on the Company’s consolidated financial statements.

Loans receivable

Loans receivable are written down to net realizable value when, in the opinion of management, there is reasonable doubt as to the ultimate collectibility of a portion of principal and interest. Accrual of interest income is suspended if collection of a loan becomes doubtful.

Debt issue costs

Costs incurred in connection with obtaining debt financing are deferred and amortized as a component of interest expense, over the term to maturity of the related debt obligation.

40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Income taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities, and are measured using the substantially enacted tax rates for years when the differences are expected to reverse. The Company provides a valuation allowance to reduce future income tax assets when it appears more likely than not that some or all of the future income tax assets will not be realized.

Stock-based compensation plans

Effective January 1, 2002, the Company adopted Section 3870 of the CICA Handbook, “Stock-based Compensation and Other Stock-based Payments” (“CICA HB 3870”). CICA HB 3870 addresses the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It sets out a fair value based method of accounting that is required for certain, but not all, stock-based transactions. The adoption of CICA HB 3870 did not have an impact on the Company’s consolidated financial statements.

The Company and its subsidiary, I-Link, have stock-based compensation plans that are described in note 15. No compensation expense is recognized for these plans when stock options are granted to employees and directors. Any consideration paid by employees and directors on exercising of stock options or purchase of common shares is credited to capital stock.

Financial instruments

The Company’s convertible debentures are presented in these consolidated financial statements in their component parts measured at their respective fair values at the time of issue. The debt component has been calculated as the present value of the required interest payments discounted at a rate approximating the interest rate that would have been applicable to non-convertible debt at the time the debentures were issued. Interest expense is determined on the debt component; such component being reduced by the required interest payments. The difference between the debt component and the face value of the debentures at the date of issuance is classified as equity. The equity component of the debentures, net of the value ascribed to the holders’ conversion option, is increased over the term to the full face value by charges to retained earnings (deficit).

The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values because of the immediate or short-term maturity of these financial instruments. The fair values of other financial instruments are disclosed in notes 4, 6, 7, 11 and 13. The fair values of short-term investments are estimated based on quoted market values at year-end. Other fair value amounts are estimated based upon discounted future cash flows using discount rates that reflect current market conditions for financial instruments with similar terms and risks. Fair value estimates are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 41


	Credit risk

The Company’s financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, and loans receivable. Cash and cash equivalents are on deposit at major financial institutions. The Company’s retail communications subscribers are primarily residential subscribers and are not concentrated in any specific geographic region of the United States. The Company’s wholesale communications customers are primarily based in Utah, U.S.A. with no single customer accounting for greater than 10% of 2002 revenues. An allowance for doubtful accounts is established based upon the overall credit worthiness of specific customers.

The Company evaluates the collectibility of its accounts receivable on an ongoing basis, based upon various factors including the financial condition and payment history of major customers, an overall review of collections experience on other accounts and economic factors or events expected to affect the Company’s future collections.


	Interest rate risk


	Market value risk

The Company’s business model for real estate involves the leveraging of acquired assets with third party debt, normally in the form of mortgages. This debt level attributed to a particular property is normally determined as a percentage of market value for the asset at the time the mortgage proceeds are received. Should market values decline for a particular property, the ability of the Company to replace the debt at renewal, at previous levels and on favourable terms, could be in doubt.


	Foreign exchange risk

Foreign exchange risk arises to the extent of net assets invested in Canadian dollars and operations derived from those Canadian dollar investments.

Discontinued operations

In 2002, the Company adopted the new provisions of the CICA Handbook Section 3475 “Disposal of Long-lived Assets and Discontinued Operations” (“CICA HB 3475”). Under CICA HB 3475, the accrual of future losses on the date that the criteria for recognition as a discontinued operation are met is not permitted. The Company completed the assessment of the quantitative impact of adoption of CICA HB 3475 on prior interim periods of the current year and has determined there is no impact. In compliance with CICA HB 3475, the Company has not applied the new provisions retroactively to operations that were discontinued in prior periods.

42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Basic and diluted earnings per share

Basic and diluted earnings per share is calculated using the treasury stock method. Under the treasury stock method, earnings per share data are computed as if the options were exercised at the beginning of the year (or at the time of issuance, if later) and as if the funds obtained from exercise were used to purchase common shares of the Company at the average market price during the year.

Business combinations

The CICA issued Handbook Section 1581, “Business Combinations” (“CICA HB 1581”), which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of CICA HB 1581 effective January 1, 2002 did not have an impact on the Company’s consolidated financial statements.

Recently issued accounting pronouncements


	Hedging transactions

In December 2001, the CICA issued Accounting Guideline 13 (“AcG 13”) “Hedging Relationships,” which will be effective for years beginning on or after July 1, 2003. AcG 13 addresses the identification, designation, documentation, and effectiveness of hedging transactions for the purposes of applying hedge accounting. It also establishes conditions for applying, and deals with the discontinuance of hedge accounting. The adoption of this guideline is not expected to have an impact on the Company.


	Impairment of long-lived assets

In November 2002, the CICA issued Handbook Section 3063, “Impairment of long-lived assets” (“CICA HB 3063”). The new Section provides guidance on the recognition, measurement and disclosure of the impairment of long-lived assets. It replaces the write-down provisions in Handbook Section 3061 “Property, Plant and Equipment”. The Section requires an impairment loss for a long-lived asset (to be held and used) to be recognized when its carrying amount exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition; requires an impairment loss for a long-lived asset (to be held and used) to be measured as the amount by which its carrying amount exceeds its fair value; and provides guidance on determining fair value. CICA HB 3063 is effective for years beginning on or after April 1, 2003. The Company is currently evaluating the effects that the adoption of this standard will have on its financial position and results of operations.


	Asset retirement obligations

In December 2002, the CICA issued Handbook Section 3110, “Asset Retirement Obligations” to replace the current guidance on future removal and site restoration costs. The standard is effective for years beginning on or after January 1, 2004. The standard requires recognition of a liability at its fair value for the obligation associated with the retirement of a tangible long-lived asset. A corresponding asset retirement cost would be added to the carrying amount of the

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 43

related asset and amortized to expense over the useful life of the asset. The Company is currently evaluating the effects that the adoption of this standard will have on its financial position and results of operations.


	Guarantees

In February 2003, the CICA issued Accounting Guideline 14 (“AcG 14”) “Disclosure of Guarantees”. The guideline requires disclosure of key information about certain types of guarantee contracts that may potentially require the Company to make payments contingent on specified types of future events. The guideline is effective for periods beginning on or after January 1, 2003. The Company will adopt this guideline in the first quarter of 2003.

3 BUSINESS ACQUISITIONS

During 2002 and 2001, several acquisitions, which were accounted for using the purchase method, were completed by the Company. The results of operations of these acquisitions have been included in the consolidated statements from the acquisition dates.


	2002 Acquisitions


	Real estate

On July 3 and July 10, 2002, the Company completed the acquisition of five income producing properties and approximately 13 acres of vacant land zoned for retail development in Canada. “Real estate” represents a new reportable segment in 2002.

The purchase price amounted to $35,512 including closing costs of $1,040. These acquisitions were funded by the assumption of $20,007 of first mortgage debt on the properties and $15,505 in cash.


	Communications

On December 10, 2002, the Company, through its controlling interest in I-Link, indirectly acquired the assets of the Enterprise and Agent business of RSL COM U.S.A. Inc. (“RSL”), including the assumption of certain liabilities. The purchase price totalled $9,437 including cash of $7,500, a non-interest bearing note payable of $1,000, which was discounted. The preliminary allocation of the purchase price is as follows: $6,813 of net tangible assets and $2,624 of intangible assets. The purchase price is subject to adjustment as set forth in the asset purchase agreement. In addition, the purchase price and the cost of the acquisition may be increased by up to an additional $2,000 in cash for contingent purchase consideration based on revenues of the Enterprise Business for the calendar year 2003.

2001 Acquisitions


	Nexbell Communications Inc.

On February 22, 2001, the Company acquired a 97.5% interest in Nexbell Communications Inc. (“Nexbell”), a packet telephony network company, for cash consideration of $1,540. The cost of the Company’s acquisition was allocated on the basis of the fair market value of the assets

44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

acquired of $1,814 and the liabilities assumed of $9,410. These valuations gave rise to $9,136 of goodwill, which was being amortized over a period of five years.

During the quarter ended September 30, 2001, the Company performed a recoverability analysis, based on undiscounted cash flows, with respect to the goodwill recorded on its acquisition of Nexbell. The analysis resulted in an impairment charge of $8,040, which is classified as discontinued operations, as a consequence of projected losses associated with Nexbell’s prime product and the decision to adopt a plan to discontinue this product.


	I-Link Incorporated

On March 1, 2001, the Company acquired a 65.2% interest in I-Link, an enhanced Internet Protocol voice and data communications services provider, for cash consideration of $5,113. The cost was allocated on the basis of the fair market value of the assets acquired of $27,695 and the liabilities assumed of $22,582. Included in the fair market value of the assets acquired was $13,898 of communications technology, which is being amortized over a period of five years.

On April 17, 2001, as a result of a merger between I-Link and Nexbell, the Company’s interest in Nexbell was exchanged for an additional 5.3% interest in I-Link, resulting in an overall interest in I-Link of 70.5% as at that date.

On September 6, 2001, all outstanding shares of I-Link’s Class C, preferred stock automatically converted into shares of common stock in accordance with the terms of the Class C, preferred stock. Accordingly, I-Link issued additional common stock in satisfaction of this conversion and its obligation to pay dividends to the conversion date. This issuance diluted the Company’s interest to 68.1% as at that date.

The Company’s interest in I-Link was further reduced to 60.2% on October 31, 2001. On January 2, 2003, the Company acquired the remaining minority interest of Counsel Communications LLC. As a result, the Company’s ownership in Counsel Communications LLC and its effective ownership in I-Link increased to 100% and 68.4% respectively.

As at December 31, 2002, the Company has $60,346 in loans receivable from I-Link. The Company is in the process of converting $29,282, of these loans into equity. Once this transaction is completed, the Company will own approximately 85% of I-Link (note 19). Under consolidation accounting these loans are eliminated in the presentation of these financial statements.


	WorldxChange Corp.

On June 4, 2001, through its wholly owned subsidiary WorldxChange Corp. (“WorldxChange”), I-Link acquired certain net assets related to the dial-around long distance business of WorldxChange Communications Inc. from a bankruptcy proceeding. Consideration consisted of $13,000 in cash. The cost of the acquisition was allocated on the basis of the fair market value of the assets acquired of $16,967 and the liabilities assumed of $3,286. I-Link also incurred $681 of acquisition costs.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 45

4 SHORT-TERM INVESTMENTS

The Company holds a portfolio of short-term investments comprised of liquid public company stocks.


	2002			2001
	$			$


Beginning balance		1,249			447
Purchases		9,748			3,183
Reclassified from portfolio investments		1,102			–
Impairments		(4,011	)		(1,957	)
Dispositions		(5,017	)		(424	)

		3,071			1,249
AmeriSourceBergen Corp. (“Bergen”)		–			7,683

		3,071			8,932

During 2002, the Company recorded gains on the sale of short-term investments (excluding Bergen) of $1,494 (2001 – $182; 2000 – $1,103). During 2002, the Company recorded losses on the impairment of investments of $4,011 (2001 – $1,957; 2000 – $144) and as at December 31, 2002, has unrealized gains of $1,591 (2001 – $577; 2000 – $340). At December 31, 2002, the market value of the Company’s short-term investments is $4,662. Comparatively, at December 31, 2001, the market value of the Company’s short-term investments, excluding Bergen, was $1,826.

Since 1999, the largest component of the Company’s short-term investments was its holding of the shares of Bergen, which it received as partial consideration for the sale of its pharmacy services operations in January 1999 to Bergen Brunswig Corp. The Company’s ability to liquidate shares was, subject to the sale agreement, phased in over an 18 month period following the sale. Subsequent to the initial share price declines and recognized impairment losses, the Company decided it was appropriate to hold the securities, disposing of them in an orderly fashion through to 2002. During the post impairment period the Company realized $96,304 in gains as follows:


	Opening										Closing
	carrying										carrying		Market
	value		Impairments			Gains		Proceeds			value		value
	$		$			$		$			$		$


1999		207,035		(142,084	)		–		–			64,951		64,951
2000		64,951		(21,888	)		27,153		(46,833	)		23,383		67,110
2001		23,383		–			42,578		(58,278	)		7,683		32,755
2002		7,683		–			26,573		(34,256	)		–		–

				(163,972	)		96,304		(139,367	)

46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5 REAL ESTATE ASSETS

(a) Income producing properties

Income producing properties are as follows at December 31:

2002

2001

Accumulated

Net book

Net book

Cost

depreciation

value

value

Property

Location

Portage Place

Peterborough, Ontario

15,855

15,772

–

Southland Mall

Winkler, Manitoba

5,983

5,953

–

Suncoast Mall

Goderich, Ontario

6,393

6,360

–

Willowcreek Mall I

Peterborough, Ontario

3,834

3,814

–

Humboldt Mall

Humboldt, Saskatchewan

958

953

–

1250 Steeles Ave. West I

Brampton, Ontario

2,098

2,067

2,081

35,121

202

34,919

2,081

Income producing properties have been pledged as collateral for certain of the mortgages and/or loans outlined in note 11.

Depreciation for income producing properties for 2002 was $200 (2001 – $2; 2000 – $nil).

(b) Properties under development

Properties under development are as follows at December 31:

2002

2001

Property

Location

Willowcreek II

Peterborough, Ontario

2,624

–

1250 Steeles Ave. West II

Brampton, Ontario

439

352

3,063

352

Properties under development have been pledged as collateral for certain of the mortgages and/or loans outlined in note 11.

6 LOANS RECEIVABLE

Loans receivable are as follows at December 31:


	2002		2001
	$		$


Share purchase loans		5,873		5,680
Other		600		1,625

		6,473		7,305

The share purchase loans have been granted to certain key employees and former employees. The loans are non-interest bearing and are collateralized by the shares purchased and personal guarantees. At December 31, 2002, share purchase loans outstanding are for the purchase of

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 47

3,131,761 (2001 – 2,921,761) common shares of the Company having a market value of $5,543 (2001 – $5,055). These loans have various maturity dates ranging from December 17, 2004 to February 25, 2012. As these loans are non-interest bearing, the fair value of these loans is $4,393 (2001 – $4,480).

7 PORTFOLIO INVESTMENTS

Portfolio investments are as follows at December 31:


	2002		2001
	$		$


Core Communications Corporation		1,093		1,093
Systeam Holdings LLC		1,000		1,000
HIP Interactive Corp.		–		1,014
Proscape Technologies Inc.		902		–
Impower Inc.		775		–
DBP Group Holdings Inc.		399		399
Other		251		713

		4,420		4,219

During 2002, the Company recognized an impairment of $640 (2001 – $19,340; 2000 – $2,581) on its portfolio investments where the decline in value was considered other then temporary in nature. The estimated fair value of the Company’s portfolio investments approximates its carrying value as at December 31, 2002 and 2001.

Core Communications Corporation provides internet and data communications solutions for the meetings and hospitality industries.

Systeam Holdings LLC owns an Italian software development and consulting firm.

HIP Interactive Corp. is a provider of electronic entertainment, including PC and video games, movies and proprietary games and accessories.

Proscape develops, markets and supports marketing and sales information systems for middle market and Fortune 1000 companies. On March 15, 2002, the Company’s ownership percentage in Proscape was significantly diluted as a result of Proscape completing a financing in which the Company did not participate. As a result, Proscape has been accounted for as a portfolio investment since that date, and the Company ceased consolidating Proscape as of that date.

Impower Inc. provides transaction-based Internet direct marketing and electronic database management products and services. At December 31, 2001, the Company had loans receivable from Impower Inc. and its wholly owned subsidiary Datamark of $1,025. In 2002, $250 of these loans were repaid with the remainder being converted to equity in Impower consisting of voting, non-voting and preferred shares. As such, these loans were classified as portfolio investments in 2002.

DBP Group Holdings Inc. (formerly ci4net.com Inc.) provides Internet infrastructure technologies and operational and management resources.

48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8 PROPERTY, PLANT AND EQUIPMENT



	2002


			Accumulated
	Cost		depreciation			Net
	$		$			$


Telecommunications network equipment		14,432		(5,015	)		9,417
Furniture, fixtures and office equipment		4,281		(1,615	)		2,666
Leasehold improvements		343		(128	)		215
Software and information systems		682		(323	)		359

		19,738		(7,081	)		12,657



	2001


			Accumulated
	Cost		depreciation			Net
	$		$			$


Building		632		(23	)		609
Telecommunications network equipment		11,135		(844	)		10,291
Furniture, fixtures and office equipment		4,015		(1,679	)		2,336
Leasehold improvements		117		(58	)		59
Software and information systems		2,133		(35	)		2,098

		18,032		(2,639	)		15,393

Depreciation expense for 2002 was $3,910 (2001 – $4,117; 2000 – $170).

Included in telecommunications network equipment is $9,781 in assets under capital leases as at December 31, 2002 (2001 – $10,138). Accumulated depreciation on these leased assets was $3,932 as at December 31, 2002, (2001 – $1,675).

9 INTANGIBLE ASSETS AND GOODWILL

Details of acquired intangible assets and goodwill are as follows:



	2002


					Accumulated
	Amortization		Cost		amortization			Net
	period		$		$			$


Telecommunications technology		60 months		13,628		(6,884	)		6,744
Customer contracts and relationships		60 months		1,786		(20	)		1,766
Agent relationships		36 months		588		(15	)		573
Agent contracts		12 months		250		(15	)		235

				16,252		(6,934	)		9,318

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 49



	2001


	Amortization				Accumulated
	period		Cost		amortization			Net


Telecommunications technology		60 months		13,628		(3,929	)		9,699
Goodwill				4,271		(837	)		3,434

				17,899		(4,766	)		13,133

Amortization expense for intangible assets for 2002 was $3,005 (2001 – $4,730; 2000 – $35).

As at December 31, 2002, goodwill is reported as $nil due to the deconsolidation of Proscape (note 2), the sale of SageBiopharma Inc. and its inclusion in discontinued operations (note 17).

10 ACCRUED LIABILITIES


	2002		2001
	$		$


Telecommunications network accrued liabilities		9,540		6,486
Sales and other taxes payable		2,362		726
Accrued payroll and payroll related expenses		2,647		3,629
Litigation settlement and related accruals		1,020		3,494
Accrued interest		986		318
Accrued legal fees		430		1,504
Other accrued liabilities		5,230		10,112

		22,215		26,269

11 DEBT


(a)	Mortgages and loans payable

Details of mortgages and loans payable as at December 31 are as follows:

2002

2001

Effective

Current

Long-term

Current

Long-term

Maturity

interest

Total

portion

Total

portion

date

rate

Portage Place

Mar. 1/08

7.04%

8,536

327

8,209

–

Southland Mall

Sep. 01/08

7.84%

4,440

110

4,330

–

Suncoast Mall

Feb. 01/08

7.10%

3,844

148

3,696

–

Willowcreek Mall

Dec. 01/09

8.28%

3,308

3,251

–

1250 Steeles Ave. West (i)

Demand

Prime + 1%

1,709

–

1,709

1,696

–

1,696

Canadian $ denominated debt

21,837

642

21,195

1,696

–

1,696

Note payable to service provider

Demand

7.00%

747

–

747

705

Note payable to network provider

Jul. 1/04

10.00%

396

242

154

613

219

394

Note payable, Winter Harbor (ii)

Demand

Prime + 9%

1,999

–

1,999

–

Note payable to RSL estate

Mar. 31/04

10%, imputed

881

–

881

–

Corporate debenture

Nov. 15/06

8.50%

298

–

298

298

–

298

Building mortgage payable

Aug. 17/12

9.84%

–

797

755

US $ denominated debt

4,321

2,988

1,333

4,454

2,302

2,152

Total – Mortgages and loans payable

26,158

3,630

22,528

6,150

2,302

3,848

50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(i)	On April 8, 2003, the Company entered into an agreement to extend the maturity date with the lender to April 1, 2004, under the same terms and thus the facility has been classified as long-term.

(ii)

As of September 30, 2001, I-Link was in default on an equipment lease. This lease was collateralized by a letter of credit issued by an affiliate of Winter Harbor LLC, a former majority shareholder of I-Link. On October 11, 2001, the leasing company drew against the letter of credit in the amount of $1,999. At that time, the Company recorded the liability related to this draw on the letter of credit in the consolidated financial statements. On October 26, 2001, I-Link received a demand for payment from Winter Harbor LLC for the amount of the draw on the letter of credit and interest (at prime plus 9%) since October 11, 2001. I-Link is evaluating Winter Harbor LLC’s demand in light of the various agreements entered into among I-Link, Counsel Communications LLC and Winter Harbor LLC.

(b) Revolving credit facility

The Company has a facility that enables the Company to borrow up to a maximum of $20,000 subject to certain restrictions and borrowing base limitations. The maximum available borrowing base is determined as a specific percentage of eligible accounts receivable in WorldxChange, a subsidiary in which, through I-Link, the Company has an indirect ownership interest of 60.2% as at December 31, 2002. The balance outstanding is reduced by the application of payments received on collection of accounts receivable on a daily basis. The facility bears interest at United States prime + 1.75% with a minimum interest rate of 6%. Outstanding balances under the loan are collateralized by substantially all the assets of WorldxChange. Additionally, the loan contains certain financial covenants related to WorldxChange for 2003 and 2004. At December 31, 2002 borrowings under this facility are $9,086 (2001 – $6,996) with $2,634 of unused availability under the facility. The facility expires in December 2004.

(c) Principal repayments

Principal repayments of debt are due as follows:


	Canadian dollar		US dollar
	denominated		denominated		Total
	debt		debt		debt


2003		642		2,988		3,630
2004		688		1,035		1,723
2005		736		–		736
2006		700		298		998
2007		655		–		655
Thereafter		18,416		–		18,416

		21,837		4,321		26,158

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 51

The estimated fair value of the Company’s debt approximates its carrying value at December 31, 2002 and 2001.

(d) Interest expense

Interest charges consist of:


	2002			2001			2000
	$			$			$


Interest costs:
Mortgages and loans on income producing properties and properties under development		783			4			–
Convertible debentures		3,317			3,688			3,749
Capital leases		635			329			–
Revolving credit line		447			25			–
Other		956			1,631			20
Less:
Interest capitalized to properties under development		(107	)		(1	)		–
Interest on convertible debenture charged to equity		(3,029	)		(3,159	)		(3,017	)

Interest expense		3,002			2,517			752

12 COMMITMENTS, CONTINGENCIES, GUARANTEES AND CONCENTRATIONS

(a) Commitments

Future minimum payments required under capital leases, operating leases and usage commitments consist of the following as at December 31:


	Capital		Operating		Usage
	leases		leases		commitments (i)
	$		$		$


2003		3,036		5,332		14,184
2004		3,015		4,947		923
2005		1,514		1,834		–
2006		–		1,078		–
2007		–		467		–
Thereafter		–		186

		7,565		13,844		15,107

Less: Amount representing interest at rates of approximately 8% to 12%		705

Present value of net minimum lease payments		6,860
Less: current portion		2,714

Long-term obligations under capital leases		4,146


(i)	Communication subsidiaries have various agreements with U.S. national carriers to lease local access spans and to purchase carrier services. The agreements contain minimum usage commitments with termination penalties up to 100% of the remaining commitment.

52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(b) Contingencies

The Company, from time to time, is involved in various claims, legal proceedings and complaints arising in the ordinary course of business. The Company is not aware of any pending or threatened proceedings that would have a material adverse effect on the consolidated financial condition or future results of the Company.

I-Link had been engaged in legal proceedings with Red Cube International AG (“Red Cube”). On July 9, 2002, an evidentiary hearing was held before a panel of arbitrators of the American Arbitration Association (“AAA”) and an award was issued in favour of I-Link effective October 7, 2002. The AAA panel dismissed all of Red Cube’s claims with prejudice and determined that it was Red Cube that had breached the agreements between the parties. The arbitration panel awarded I-Link $6,700 in damages against Red Cube. I-Link has recorded a valuation allowance of $6,700 to reflect uncertainty associated with collectibility of the award. The amounts awarded will be recorded as income of the Company when payment is received.

(c) Guarantees

The Company has guaranteed the repayment of certain mortgages amounting to $33,506. One of these mortgages, amounting to $25,678, is payable by a limited partnership in which the Company has a 50% equity interest. The Company’s investment in this limited partnership has a carrying value of $nil. Long-term care facilities of this limited partnership, which are leased to the Company, are pledged as collateral. The Company’s guarantee for this mortgage expires in 2004.

In addition, the Company has provided a guarantee of $7,828 for another mortgage of another limited partnership, in which the Company has no equity interest, which expires in 2015.

(d) Concentrations

The Company utilizes the services of certain Local Exchange Carriers (“LECs”) to bill and collect from customers. Approximately 93% and 94% of revenues in the year ended December 31, 2002 and the period from June 4, 2001 (date of acquisition of WorldxChange) to December 31, 2001 were derived from customers billed to LECs. If the LECs were to refuse to provide such services in the future, the Company would be required to significantly enhance its billing and collection capabilities in a short amount of time and its collection experience could be adversely affected during this transition period.

The Company depends on certain large telecommunications carriers to provide network services for significant portions of the Company’s telecommunications traffic. If these carriers were to refuse to provide such services in the future, the Company’s ability to provide services to its customers would be adversely affected and the Company might not be able to obtain similar services from alternative carriers on a timely basis.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 53

13 CONVERTIBLE DEBENTURES PAYABLE


	2002		2001
	$		$


Liability component of debentures payable		2,515		4,801

On October 31, 1996, the Company issued $50,000 of convertible, unsecured, subordinated debentures bearing interest at 6% per annum payable semi-annually on April 30 and October 31 and maturing on October 31, 2003. The Company may redeem the debentures at any time on or after November 1, 2001 at par, plus accrued interest.

The Company may elect to satisfy its obligation to pay principal upon redemption or at maturity by the issuance of its own common shares to the holders of the debentures. The number of shares to be issued is obtained by dividing the face amount of the debentures by 95% of the weighted average trading price of the common shares for the 20 consecutive trading days, ending on the fifth trading day prior to the date of notice of such election.

The debentures are convertible into common shares of the Company at the option of the holder at any time prior to the earlier of the maturity date and the last business day immediately preceding the date fixed for redemption at a conversion price of $11.47 per share.

As a result of the debentures being convertible into common shares of the Company at the option of the holder and the Company’s option to satisfy its obligations to pay principal upon redemption or maturity by the issuance of its own common shares, the debentures have both liability and equity components.

At issuance on October 31, 1996, these components were as follows:


	$


Financial liability component – present value of future interest obligations at a discount rate of 8.15%		15,852
Principal equity component – present value of principal obligation at maturity at a discount rate of 8.15%		28,868
Holder option equity component		5,280

Face amount		50,000

During 2002, pursuant to normal course issuer bids, the Company purchased for cancellation $200 (2001 – $5,740) of debentures for cash consideration of $141 (2001 – $3,180) which reduced the liability component of the debentures payable by $9 (2001 – $720). As a result of the cancellation of repurchased debentures, the outstanding face amount as at December 31, 2002 is $42,561 (2001 – $42,761). The fair value of the debentures as at December 31, 2002 is $27,882 (2001 – $23,519).

On December 12, 2002, the Company renewed its normal course issuer bid through the facilities of The Toronto Stock Exchange to purchase up to $2,128 face value of the debentures, or 5% of the outstanding debentures, from December 16, 2002 until October 31, 2003, the maturity date of the debentures.

54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14 CAPITAL STOCK

The authorized capital stock consists of an unlimited number of common and preferred shares.

During 2002, pursuant to normal course issuer bids, the Company acquired 748,000 (2001 – 1,444,000; 2000 – 1,688,000) common shares for cancellation for cash of $1,532 (2001 – $2,722; 2000 – $4,730). The excess of the average issue price over the repurchase price is credited to contributed surplus. During 2002, $1,886 was credited to contributed surplus (2001 – $3,878; 2000 – $2,220).

On December 12, 2002, the Company renewed its normal course issuer bid through the facilities of The Toronto Stock Exchange to purchase up to 1,089,000 common shares, or 5% of the outstanding common shares, from December 16, 2002 through to December 15, 2003.

15 STOCK-BASED COMPENSATION PLANS

Counsel plans

Under the 1992 Director, Officer and Employee Stock Option Plan, the Company may grant options to its directors, officers and employees for up to 2,700,000 common shares. Under the 1997 Stock Option Plan, the Company may grant options to its directors, officers, employees and any other person or company engaged to provide ongoing management or consulting services for the Company for up to 4,200,000 common shares. Under both plans, the exercise price of each option equals the market price of the Company’s common shares on the date of grant. Unless otherwise provided, the maximum term of the grant is six years from the date of initial vesting of any portion of the grant and options vest 20% on the date of grant and 20% on each of the first through fourth anniversaries of the grant date. All unvested options vest upon a change of control of the Company.

A summary of the status of the Company’s stock option plans and changes during the years is as follows:

2002

2001

2000

Weighted

average

Number

exercise

Number

exercise

Number

exercise

of shares

price

of shares

price

of shares

price

(in thousands)

CDN$

(in thousands)

CDN$

(in thousands)

CDN$

Outstanding – beginning of year

3,181

10.03

3,192

13.04

3,570

14.11

Granted

608

2.81

1,045

3.20

564

6.63

Exercised

–

(92

)

2.30

Forfeited

(94

)

9.05

(1,056

)

12.38

(850

)

14.46

Outstanding – end of year

3,695

8.87

3,181

10.03

3,192

13.04

Options exercisable – end of year

2,072

13.21

1,922

13.80

2,173

13.91

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 55

The following table summarizes the stock options outstanding and exercisable as at December 31, 2002:


	Options outstanding						Options exercisable

			Weighted
			average		Weighted				Weighted
			remaining		average				average
Range of	Number		contractual		exercise		Number		exercise
exercise prices	outstanding		life		price		exercisable		price
CDN$	(in thousands)		(years)		CDN$		(in thousands)		CDN$

2.39 to 5.60		1,767		6.84		3.12		236		3.79
5.90 to 10.40		360		2.36		9.08		268		9.32
12.40 to 15.20		950		0.01		13.72		950		13.72
16.40 to 18.00		618		0.20		17.71		618		17.71

		3,695		3.54		8.87		2,072		13.21

The Company applies the intrinsic value based method of accounting for its fixed employee stock compensation plans. Options are granted with an exercise price that is equal to the market value of the underlying stock at the date of grant and accordingly, no compensation expense has been recognized.

As the Company has elected to use the intrinsic value method, the following disclosures are required to give pro-forma effects as if the fair value based method of accounting had been used to account for employee stock compensation plans.


	2002			2001			2000
	$			$			$


Net loss, as reported		(25,427	)		(62,213	)		(45,433	)
Pro forma adjustments		(1,995	)		(4,249	)		(580	)

Pro forma net loss for the year		(27,422	)		(66,462	)		(46,013	)

Pro forma net loss per share		(1.37	)		(3.02	)		(1.97	)

For purposes of these pro-forma disclosures, the fair value of each option of the Company was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively: risk-free interest rates of 5.0%; expected dividend yields of nil%; expected lives of six years; and expected volatility of 60.0%, 65.5% and 48.7%. The pro forma disclosures in 2002 and 2001 include the effects of options issued by I-Link following the acquisition of I-Link by the Company.

The Black-Scholes model requires highly subjective assumptions, including volatility and the expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that the model does not necessarily provide a reliable single measure of the fair value of the Company’s stock option awards.

The Company plans to grant additional stock options each year and as a result, the above pro forma amounts are not likely to be representative of the effects on reported net loss for future years.

56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

I-Link plans

At December 31, 2002, I-Link has several stock-based compensation plans. I-Link applies the intrinsic value method of APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed option plans.

A summary of the status of I-Link’s stock option plans and warrants and changes during the years it was controlled by Counsel is as follows:

2002

2001

Weighted

average

Number

exercise

Number

exercise

of shares

price

of shares

price

(in thousands)

Outstanding – beginning of year

28,033

2.27

45,355

2.57

Granted

–

20,509

0.76

Exercised

–

Expired

(2,605

)

6.34

(1,643

)

3.43

Forfeited

(354

)

4.27

(36,188

)

1.42

Outstanding – end of year

25,169

1.82

28,033

2.27

Options and warrants exercisable – end of year

25,137

1.82

27,090

2.21

The following table summarizes the stock options and warrants outstanding and exercisable as at December 31, 2002:


							Options and warrants
	Options and warrants outstanding						exercisable

			Weighted
			average		Weighted				Weighted
			remaining		average				average
	Number		contractual		exercise		Number		exercise
Range of	outstanding		life		price		exercisable		price
exercise prices	(in thousands)		(years)		$		(in thousands)		$

$0.07 to $ 1.00		15,336		0.60		0.60		15,311		0.60
$1.13 to $ 3.00		2,813		6.32		2.61		2,813		2.61
$3.14 to $ 5.87		6,403		4.25		3.93		6,403		3.93
$6.25 to $13.88		617		7.09		6.55		610		6.55

		25,169		2.32		1.82		25,137		1.82

In June 2001, the Company received warrants to purchase 15,000,000 common shares of I-Link at $1.60 per share.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 57

16 INCOME TAXES

The Company’s income tax provision (recovery) differs from the recovery computed at statutory rates as follows:


		2002			2001			2000
		$			$			$


Earnings (loss) before income taxes, non-controlling interest and discontinued operations			3,177			(19,961	)		(7,797	)

Income tax expense (recovery), based on a statutory income tax rate of 38.62% (2001 – 41.74%; 2000 – 43.95%)			1,227			(8,331	)		(3,426	)
Increase (decrease) in income taxes resulting from:
	Change in valuation allowance relating to continuing operations		8,542			10,270			3,830
	Effect of change in income tax rates		190			5,932			126
	Non-taxable items		–			5,242			(486	)
	Non-deductible items		2,200			4,264			–
	Lower effective tax rate of foreign subsidiaries		(681	)		267			2
	Large corporations tax provision (recovery) and other taxes		160			64			(52	)
	Other		(1,983	)		2,193			–

Actual income tax provision (recovery)			9,655			19,901			(6	)

Represented by:
	Current income tax provision (recovery)		(1,206	)		683			(1,521	)
	Future income tax provision (recovery)		10,701			19,154			1,567
	Large corporations tax provision (recovery)		160			64			(52	)

			9,655			19,901			(6	)

An analysis of earnings (loss) before income taxes, non-controlling interest and discontinued operations by country is as follows:


	2002			2001			2000
	$			$			$


Canada		(9,488	)		(14,085	)		6,241
United States		12,665			(5,876	)		(14,038	)

		3,177			(19,961	)		(7,797	)

58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company’s income tax provision (recovery) by country is as follows:


		2002			2001		2000
		$			$		$


Canada
	Current provision (recovery)		160			740		(52	)
	Future provision (recovery)		(1,190	)		3,389		1,116

			(1,030	)		4,129		1,064

United States
	Current provision (recovery)		(1,206	)		7		(1,521	)
	Future provision		11,891			15,765		451

			10,685			15,772		(1,070	)

Total
	Current provision (recovery)		(1,046	)		747		(1,573	)
	Future provision		10,701			19,154		1,567

			9,655			19,901		(6	)

The composition of the Company’s net future income tax assets and liabilities as at December 31 is as follows:


		2002			2001
		$			$


Current future income tax asset:
	Deferred revenue		220			146
	Basis differences of investments		2,823			–
	Accrued charges and reserves currently not deductible for income taxes		562			884
	Valuation allowance		(3,331	)		(60	)

Net current future income tax asset			274			970


		2002			2001
		$			$


Long-term future income tax asset:
	Deferred revenue		–			936
	Accrued charges and reserves currently not deductible for income taxes		2,238			1,311
	Acquired intangible assets		3,435			3,503
	Amortization of deferred compensation		1,933			1,933
	Basis differences of property, plant and equipment		1,708			–
	Other		150			450
	Net losses available for carry-forward		57,332			48,113
	Valuation allowance		(66,796	)		(55,723	)

			–			523
Long-term future income tax liability:
	Basis differences of investments		(33,045	)		(19,690	)
	Basis differences of property, plant and equipment		(1,638	)		(1,066	)
	Other		(1,867	)		(3,049	)

Net long-term future income tax liability			(36,550	)		(23,282	)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59

The amount recognized in the consolidated financial statements for long-term future income tax liabilities includes estimates made by management. It is reasonably possible that the amounts recognized could change by a material amount in the near term.

At December 31, 2002, certain operating subsidiaries in Canada and certain tax groups in the United States had federal net operating (non-capital) tax loss carryforwards available of approximately $145,000 to reduce future income taxes. These loss carryforwards expire between 2006 and 2022. The utilization of approximately $79,000 of total net operating loss carryforwards against future taxable income will be subject to an annual limitation of approximately $2,246 per annum because of the change in ownership tax rules in the United States associated with the acquisition of I-Link in 2001. Therefore, as a result of this annual limitation and the expiration of these net operating loss carryforwards, approximately $45,000 of the $79,000 net operating loss carryforwards generally may only be available for utilization. In addition, certain operating subsidiaries in Canada and tax groups in the United States have capital losses with no expiry limit aggregating approximately $10,600 available for application against future capital gains.

In the United States, certain entities are subject to U.S. state income tax in multiple jurisdictions. Available state tax loss carryforwards differ by jurisdiction and have not been presented.

17 DISCONTINUED OPERATIONS

The Company has a number of discontinued operations, some of which have been sold while others are the subject of formal plans of disposal.

Discontinued operations have been presented on a segmented basis to enhance the reader’s understanding of the financial information presented.

Medical products and services (“MPS”) represents the discontinued medical products operations, pharmaceutical products operations, pharmacy services operations and home health care operations.

60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

A summary of the carrying value of the assets and liabilities for discontinued operations as at December 31 is as follows:



	2002


					Long-term
	MPS		Communications		care		Total
	$		$		$		$


Assets
CURRENT
Cash and cash equivalents		26		–		1,020		1,046
Accounts receivable		188		–		355		543
Other assets		250		–		400		650

		464		–		1,775		2,239

LONG-TERM
Mortgage receivable		–		–		1,528		1,528
Property, plant and equipment, net		50		1,080		18,424		19,554
Telecommunications technology		–		270				270
Goodwill, net		–		–		246		246

		50		1,350		20,198		21,598

		514		1,350		21,973		23,837

Liabilities
CURRENT
Accounts payable and accrued liabilities		536		–		5,976		6,512
Deferred revenue		–		–		576		576
Mortgages and loans payable		–		–		181		181

		536		–		6,733		7,269

LONG-TERM
Deferred revenue						115		115
Mortgages and loans payable		–		–		11,540		11,540
Non-controlling interest		161		–		–		161

		161		–		11,655		11,816

		697

COUNSEL CORP 6-K