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EXHIBIT 1 June 28, 2005 (CAE LOGO) ANNUAL INFORMATION FORM
2005 June 28, 2005
    
    CORPORATE OFFICE
8585 Côte-de-Liesse
Saint-Laurent, Québec
Canada H4T 1G6




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TABLE OF CONTENTS ITEM 1
    
    COVER PAGE
    
    
    1ITEM 2
    
    TABLE OF CONTENTS
    
    
    2ITEM 3
    
    CORPORATE STRUCTURE OF CAE
    
    
    33.1 Name, Address and Incorporation
    
    
    33.2 Inter-corporate Relationships
    
    
    4ITEM 4
    
    GENERAL DEVELOPMENT OF THE BUSINESS
    
    
    44.1(a) General
    
    
    44.1(b) History
    
    
    54.1(c) Industry Overview and Trends
    
    
    94.1(d) Civil Simulation and Training
    
    
    94.1(e) Military Simulation and Training
    
    
    12ITEM 5
    
    NARRATIVE DESCRIPTION OF THE BUSINESS
    
    
    145.1 General
    
    
    145.1(a) Summary of Business Segment
    
    
    155.1(b) Production and Services
    
    
    245.1(c) Specialized Skill and Knowledge
    
    
    255.1(d) Competition
    
    
    255.1(e) Components
    
    
    265.1(f) Intangible Properties
    
    
    265.1(g) Cycles
    
    
    275.1(h) Environmental Protection
    
    
    275.1(i) Employees
    
    
    275.1(j) Foreign Operations
    
    
    285.1(2)  Reorganization
    
    
    295.2 Risk Factors
    
    
    29ITEM 6
    
    DIVIDENDS
    
    
    35ITEM 7
    
    DESCRIPTION OF CAPITAL STRUCTURE
    
    
    35ITEM 8
    
    MARKET FOR SECURITIES
    
    
    358.1 Trading Price and Volume
    
    
    35ITEM 9
    
    DIRECTORS AND OFFICERS
    
    
    369.1 Name and Occupation
    
    
    379.2 Cease, Trade Orders, Bankruptcies, Penalties or Sanctions
    
    
    419.3 Conflicts of Interest
    
    
    41ITEM 10
    
    TRANSFER AGENTS AND REGISTRARS
    
    
    41ITEM 11
    
    MATERIAL CONTRACTS
    
    
    41ITEM 12
    
    AUDIT COMMITTEE
    
    
    4212.1 Mandate
    
    
    4212.2 Membership
    
    
    4612.3 Approval of Services
    
    
    47ITEM 13
    
    ADDITIONAL INFORMATION
    
    
    48SCHEDULE ASUBSIDIARIES
    
    
    50




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INFORMATION INCORPORATED BY REFERENCE The Companys Review of Operations and Managements Discussion and Analysis and its consolidated
financial statements for the year ended March 31, 2005, and the notes thereto (the Consolidated
Financial Statements) appear on pages 16 to 41 and pages 43 to 86 respectively in the Annual
Report to Shareholders for the year ended March 31, 2005 (the Annual Report). The Consolidated
Financial Statements were prepared in accordance with accounting principles generally accepted in
Canada (Canadian GAAP). For a discussion of the principal difference between Canadian GAAP and
the accounting principles generally accepted in the United States, see note 27 to the Consolidated
Financial Statements. The information contained therein is specifically incorporated by reference
into this Annual Information Form (AIF). Any parts of the Annual Report not specifically
incorporated by reference do not form part of this AIF. Unless otherwise noted, all dollar references in this Annual Information Form are expressed in
Canadian dollars. References to fiscal 2005 refer to the period from April 1, 2004 to March 31, 2005, references to
fiscal 2004 refer to the period from April 1, 2003 to March 31, 2004, and references to fiscal 2003
refer to the period from April 1, 2002 to March 31, 2003. This Annual Information Form contains forward-looking statements with respect to CAE and its
subsidiaries based on assumptions which CAE considered reasonable at the time they were prepared
and may include information concerning the Companys future financial performance, business
strategy, plans, goals and objectives. These forward-looking statements, by their nature,
necessarily involve risks and uncertainties that could cause actual results to differ materially
from those contemplated by the forward-looking statements. Statements preceded by the word
believe, expect, anticipate, intend, continue, estimate, may, will, should and
similar expressions are forward-looking statements. CAE cautions the reader that the assumptions
regarding future events, many of which are beyond the control of CAE, may affect the extent to
which a particular projection materializes and/or could ultimately prove to be incorrect. Factors
that could cause actual results or events to differ materially from current expectations are
discussed on pages 36 and 37 of the Annual Report. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. In particular, forward-looking statements do not reflect
the potential impact of any merger, acquisition or other business combinations or divestitures that
may be announced or completed after such statements are made. ITEM 3  CORPORATE STRUCTURE OF CAE 3.1 Name, Address and Incorporation March 17, 1947:
    
    CAE Inc. (the Company or CAE) was incorporated under the name Canadian Aviation Electronics Ltd. under
the laws of Canada by letters patent.July 5, 1965:
    
    The name of the Company was changed to CAE Industries Ltd.




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August 3, 1977:
    
    The Company was continued under the Canada Business Corporations Act (the CBCA) by certificate of
continuance.June 10, 1993:
    
    The Company changed its name to its present one, CAE Inc.
 In 1979, the articles of the Company were amended to change its authorized share capital to an
unlimited number of common shares. Each issued and outstanding Class A and Class B share was
redesignated and changed into three common shares. In 1981, the Companys articles were again amended to subdivide the issued and outstanding common
shares on a three-for-one basis, and to authorize an unlimited number of preferred shares, issuable
in series, with such rights, privileges, restrictions and conditions as the directors of the
Company may determine by resolution. The articles were amended further in 1984 and 1986, in each
case to subdivide the issued and outstanding common shares on a two-for-one basis. On June 9, 1995, the Companys articles were amended to authorize the directors to appoint
additional directors in accordance with the provisions of the CBCA. On April 1, 2001, the Company was amalgamated with CAE Electronics Ltd., its wholly-owned
subsidiary. The Companys registered office is located at 8585 Côte-de-Liesse, Saint-Laurent, Québec,Canada
H4T 1G6, telephone: (514) 341-6780, fax: (514) 341-7699. 3.2 Inter-corporate Relationships The direct and indirect subsidiaries and other ownership interests of the Company are set out in
Schedule A hereto. ITEM 4  GENERAL DEVELOPMENT OF THE BUSINESS 4.1(a) General Following incorporation in 1947, CAEs primary business focused on the repair and overhaul of
electronic and electro-mechanical equipment, as well as the design and installation of
telecommunication and navigational systems. By the early 1950s, the Company had started to pursue
new areas of opportunity in the design, development and manufacture of flight, radar and weapons
simulators for Canadian defence requirements. A few years later, CAE began its commercial flight
simulation activities. From the 1960s to the turn of the century, the Company embarked on a program of growth and
diversification. CAE acquired several new businesses, both in its traditional aerospace and
electronics market segment and in several industrial technology segments. The industrial
technology businesses provided a number of diverse engineered products and services for industries
worldwide, chiefly those involved in fiber processing technologies (forest products, 4




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pulp and paper), cleaning technologies (automotive parts, medical equipment and electronic food
processing), and railway technologies and services. The strategy was significantly changed in fiscal 2000, with the focus turned to the Companys core
strengths and key opportunities. Over the last five years, CAE executed this strategy, divesting
itself of its non-core businesses and transforming from being primarily a manufacturer of
simulation equipment to also being a provider of fully integrated training in its core businesses:
Civil Simulation and Training (CS&T) and Military Simulation and Training (MS&T). CAEs strategy going forward revolves around taking the necessary steps to restore shareholder
value. It will do this by leveraging its extensive experience in modeling and simulation to expand
both vertically into other products and services within the aerospace and defence industry, as well
as horizontally to pursue opportunities presented by emerging markets such as homeland defence and
urban simulation. In order to be able to respond to growth opportunities, CAE must continue to
invest in new and innovative technologies. See section 5.1 (2) Reorganization of this AIF for
further details. 4.1(b) History Over the past three fiscal years, CAE completed the following divestitures to better focus on its
core businesses: On June 28, 2002, CAE sold CAE Cleaning Technologies plc, one of CAEs Cleaning Technologies
operations, to the same former management group which previously purchased CAE Ransohoff Inc. and
CAE Ultrasonics, Inc. earlier that year. On August 16, 2002, CAE sold its sawmill businesses to COE Manufacturing Company. On April 30, 2003, CAE sold the operations of CAE Beyss GmbH, another of CAEs Cleaning
Technologies businesses, to Bavaria Industriekapital AG. On May 2, 2003, CAE sold its wood products business to Carmanah Design and Manufacturing Inc., a TD
Capital company. On July 31, 2003, CAE sold substantially all the assets of its last remaining Cleaning Technologies
business, Alpheus Inc. to Cold Jet Inc. of Cincinnati, Ohio. CAE completed the divestiture of substantially the entire Marine Controls segment to L-3
Communications (L-3) of New York, New York during the fourth quarter of fiscal 2005 in a
transaction valued at $239 million, resulting in an after-tax gain of approximately $104 million.
In accordance with the purchase agreement, L-3 will also acquire two other components of the Marine
Controls segment, including the assumption of the CAEs guarantee of £23.0 million of
project-finance related debt for the UK Astute Class submarine training program, following all
required approvals being obtained. 5




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Through a combination of divestments and consolidations, the Company reduced the number of profit
centers from 21 to 3. April 1, 2005 CAE formed the Simulation Products Group to consolidate all manufacturing activities
as well as engineering, program management, global procurement, and sales and marketing of civil
simulation equipment. Its most important priorities are lowering costs across the board and
shortening manufacturing cycle times. CAE is investing in software and hardware innovations that will sustain its leading-edge
technologies as well as complement its training services for CAE training centers and other
customers. Examples of such innovation are the Companys SimFinity leading-edge simulation-based
courseware, its Tropos and Medallion-S image generators and its STRIVE software development
framework to test, model and design military systems during their planning and acquisition phases. CAE has continued its investment in pilot training, and its increased access to the US and European
military markets, during the past three years. In addition to acquisitions, CAEs move into civil
aviation and training was further accelerated during that period with the following training center
initiatives:  
    
    In May 2004, CAE acquired LANs training facility in Santiago, Chile and commenced
providing flight training to LANs pilots under a 10-year services agreement. CAE added an
Airbus A320 full flight simulator (FFS) in January 2005 to the existing Boeing 737-200
FFS already in operation in the center. A Boeing 767-300ER FFS will be added later in
2005. The A320 device is part of the CAE-Airbus training cooperation.
    
    CAE and Iberia Lineas Aereas de Espana, SA (Iberia) formed an aviation training joint
venture, consolidating the assets of their respective Spanish training centres  CAEs in
Alcala and Iberias at the Barajas airport. CAE contributed its Alcala assets and Iberia
its Barajas assets and related debt to form a new company, in which Iberia is now training
its nearly 2,000 pilots. CAE and Iberia have an 80-20 equity split, respectively.
    
    In August 2002, CAE and Airbus entered into a ten-year renewable co-operation agreement
to develop a global network of training centers with the largest fleet of Airbus FFS in the
world and offering a very high quality of Airbus flight crew training. Under this
agreement, CAE is providing equipment, facilities and advanced training technologies while
Airbus is providing its courseware and training expertise. The result is a worldwide global
network of training centers combining the Miami and Toulouse Airbus facilities with those
of CAE in Denver, Toronto, Madrid, Brussels, Rome, Dubai, Singapore and Sao Paulo. CAE is
responsible for adding FFS and related training technologies in line with Airbus standards
and expanding the global network according to market demand. This network is offering the
whole range of integrated training solutions, from simulator availability to complete
training for initial, recurrent, transition and specialty training.
    
    The Denver, Colorado facility became operational in July 2002. The four-bay center is
currently operating four simulators: an Airbus A320, two Bombardier CRJ200/700 and a 6




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CRJ200. The Denver center is strategically located close to the countrys sixth busiest
airport and is the first independent training center in the US for Bombardier CRJ700
regional jets. Two airlines are the anchor tenants in the new facility: Frontier Airlines
and Air Wisconsin. The two carriers have committed to long-term training agreements of 5
years and 15 years, respectively. Other current customers include Horizon Air and over-flow
training from Mesa Air Group.
    
    CAEs training facility located in an Arizona State University building near Phoenix,
Arizona became operational in March 2003, and the Company signed a 10-year training
contract with Mesa Air Group (Mesa) for services at that center. CAE is providing
training solutions to Mesa, primarily in support of the airlines fleet of Bombardier CRJ
and Embraer ERJ-145 aircraft. CAE has installed a Bombardier CRJ200/700/900 FFS and an
Embraer ERJ-145 FFS in the two-bay facility. With this new facility, CAE became the first
independent training provider for the new CRJ900 regional jet. The contract with Mesa also
includes CAEs SimFinity CRJ200/700/900 Integrated Procedure Trainer, the latest
high-fidelity SimFinity three-dimensional training solution.
    
    CAE and China Southern Airlines (China Southern) announced in November 2002 the
formation of a joint venture to provide aviation-training solutions for Asian carriers. The
joint venture company, Zhuhai Xiang Yi Aviation Technology Company Limited, is owned 51% by
China Southern and 49% by CAE and is operating from China Southerns training facility at
its Zhuhai flight base in Guangdong province. It is focused on developing and delivering
high technology training solutions for aviation, initially offering simulation-based pilot
training and other technical services for carriers operating Boeing 737NG, 737-300, 777,
757-200 and Airbus A320 and A321 aircraft.
    
    In operation since June 2002, Emirates-CAE Flight Training Center resulted from a July
2001 teaming agreement between Emirates Airlines and CAE. Located in a new 14 bay-facility,
the center includes Airbus A319/A320/A321, Airbus A330/340, Boeing 737 NG/BBJ, Gulfstream
IV and Gulfstream V FFS and a convertible Hawker 800/800XP FFS. The Dubai center is
offering the highest standard in aviation training and facilities in the region for both
airlines and corporate aircraft operators. It trains pilots to European Joint Aviation
Authorities (JAA), UAE GCAA and US Federal Aviation Administration (FAA) standards on
CAE-designed FFS. Emirates-CAE Flight Training is equipped with the industrys latest
integrated training technologies including CAEs SimFinity classroom trainer and
convertible A320/B737 Integrated Procedures Trainer (IPT). CAE has experienced significant successes in military simulation and training in recent fiscal
years:  
    
    CAE-led Landmark Training Ltd. (Landmark) was selected in 2004 as the intended
preferred bidder for the British Armys Armoured Vehicles Training Service (AVTS) program.
The AVTS program was to have been a private finance initiative designed to provide turnkey
driver, gunnery and command information systems training to crews of armoured fighting
vehicles. Landmark was notified on June 15, 2005 by the UK Ministry 7




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of Defence of a change of approach to the program as it now intends to proceed with a
conventional procurement strategy.
    
    In June 2003, CAE announced the creation of a consortium named Rotorsim, owned equally
by CAE and Agusta S.p.A., to operate a new helicopter training facility in Sesto Calende,
Italy and to provide integrated training solutions for AgustaWestland helicopters. The
Rotorsim facility will open in early 2006 with the delivery of a CAE-built A109 full
mission simulator (FMS). Later in 2006, Rotorsim will add a CAE-built AB139 FMS to the
training centre. CAE subsequently signed a $7.8 million contract with Agusta S.p.A. for an
upgrade to the Italian armys A129 helicopter flight simulator located at the army-training
base in Viterbo, Italy. CAE will provide its CAE Medallion-STM image generator
as part of the upgrade program.
    
    CAEs Medium Support Helicopter Aircrew Training Facility (MSHATF) opened at Royal Air
Force (RAF) Base Benson in Oxfordshire in 2000. The facility is the product of a highly
innovative, 20 year, private finance initiative contract with the UK MoD. Payment is based
on a guaranteed minimum usage and also allows for third party usage. Currently third party
training is being provided to the Air Forces of The Netherlands, Republic of Singapore,
Canada and others. The facility provides training to the RAF and third party customers on
the Eurocopter Puma, Boeing CH-47 Chinook, and AgustaWestland EH-101 Merlin helicopters.
The MSHATF is equipped with six CAE-built FMS (three Chinook, two Merlin, one Puma), four
computer-based training classrooms, and a state-of-the-art tactical control center to plan
and monitor training missions. It is staffed with a team of highly experienced former
military instructors.
    
    Over the past several fiscal years, CAE USA has played a key role in establishing CAEs
presence in the critical US defence market. CAE USA is qualified as a prime contractor for
each of the major US services (Air Force, Army, Navy), thus affording CAE USA the
opportunity to pursue key US defence training and simulation programs. CAE USA is
qualified as a prime contractor on the US Air Force Training Systems Acquisition II
contract, US Army STRICOM Omnibus Contract, and US Navy Training Systems Contract.
Recently, CAE USA qualified as a prime contractor for the first time on the US Navys
Fielded Training Systems Support contract.
    
    The past three fiscal years have seen CAE USA establish a growing relationship with the
US Armys 160th Special Operations Aviation Regiment, an elite unit known as the
Night Stalkers. CAE USA has been awarded contracts valued at more than $150 million over
the past three years to design and develop a range of mission rehearsal and training
systems for this customer. Included in CAEs development has been the worlds first A/MH-6
Little Bird combat mission simulator, which is being delivered to the 160th
during the summer of 2005. CAE is working on a range of innovative developments for the
Special Operations Forces.
    
    In fiscal 2005, CAE USA secured a significant program win with the US Navy to develop a
range of training systems for the new MH-60S Knighthawk helicopter. CAE USA is under
contract to design and manufacture three MH-60S tactical operational flight trainers and
four MH-60S weapons tactics trainers in a program valued at more than $80 8




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million. These last few examples underscore the close relationship that CAE has established in the US
military market over the past several years. 4.1(c) Industry Overview and Trends The civil and military markets CAE serves are driven by factors particular to each market. CAE
believes the civil market is most affected by the nature and composition of aircraft fleets, pilot
demographics, certification requirements and market demand for commercial and business air travel.
The Company believes the military market is most influenced by a combination of defence spending
and the nature of military activity. 4.1(d) Civil Simulation and Training The use of flight simulators in pilot and crew training is well established within the commercial
and business markets. Increased use of simulators has occurred as a result of the growth in
commercial and business air travel which, in turn, has driven fleet expansion and increased demand
for pilot training. Civil simulator usage has also increased due to advances in technology that
enable increased realism and the significant cost savings provided by flight simulation training
compared to actual flight time. The use of synthetically-generated reproductions of airport
configurations and use of satellite terrain imagery incorporated into the simulation further
enhance the effectiveness of simulation training. Simulators are also utilized by pilots to
supplement actual flying time to maintain their certification. Todays most sophisticated civil
flight simulators are rated Level D by the FAA or receive similar ratings from regulatory
authorities in other countries, indicating that a pilot can be certified to fly an aircraft type
based solely on simulator training. Flight simulators also allow pilots to experience and learn
emergency procedures that cannot be practiced safely aboard the actual aircraft. Flight simulation equipment is purchased by major and regional airlines, aircraft manufacturers and
independent training providers. Simulators are manufactured by a limited number of companies and
are sold based on the criteria of product quality, service, delivery, supplier reputation, price
and life cycle costs. In fiscal 2005, 17 FFS were sold to third parties in the global competed
market, in which contracts are awarded on the basis of a competitive bidding process. Average
prices for civil flight simulation equipment can range from up to US$1 million for sophisticated
procedure trainers, from US$2 to US$6 million for a flight training device (FTD) to US$11 to US$15
million for an FFS, assuming that OEM-supplied data, parts and equipment are included. Within the flight simulation industry, training services is the largest and fastest growing market
segment. The training services market consists of sales of training equipment, facilities, tools,
programs, and instructors designed to enable pilots to obtain and retain the necessary
qualifications to pilot a particular aircraft, and to enable maintenance workers to inspect,
maintain and repair aircraft. Training is carried out by airlines as well as independent training
providers. Currently, approximately half of the FFS in use around the world are owned and operated
by commercial airlines to provide training to their pilots, with the vast majority owned by large
commercial airlines. These large commercial airlines also use independent training 9




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facilities to supplement their training programs. Ownership of simulators by regional airlines is
considerably less common and virtually not the case for business aircraft operators. As a result
these companies primarily use independent training providers. CAE believes the following trends and developments will continue to drive the civil simulation and
training industry: Effectiveness and Cost Advantages of Simulation-Based Training Simulation-based training is an essential element in civil pilot and crew training. The realism of
the simulated flight experience has made procedure trainers, fixed training devices and FFS
effective tools for training pilots and crew. Pilots and crew can be trained for a variety of
aircraft, using visualizations of most of the civil airports around the world, and in varying
environmental conditions. The cost savings to aircraft operators are substantial as it is 5 to 10
times cheaper to train in a simulator than in a civil aircraft. In addition, simulator training
minimizes the risk of accidents and resulting injury to personnel and damage to equipment. FFS
training users are also accorded more favorable liability insurance premiums. Simulator-based
training also offers considerable flexibility with respect to the timing and duration of training
sessions. In the past, the use of independent training services was limited by the availability of
convenient training centers. With the development of additional independent training centers around
the world, CAE believes that this historical deterrent will be addressed. CAE believes that the
costs of acquiring and maintaining FFS will encourage additional usage of independent training
providers by commercial airlines. Pilot Certification and License Requirements Piloting an aircraft is a regulated activity requiring both initial and recurring training to
achieve defined levels of competence and experience. To keep a license to fly an aircraft weighing
over 12,500 pounds, certain regulations require pilots to demonstrate proficiency for that aircraft
type at least once a year. Certification and license requirements can be satisfied through
simulated flight and many pilots elect to do so. Expansion and Diversification of Aircraft Fleets The introduction of new aircraft and expansion and diversification of fleets creates incremental
pilot training requirements. Simulation training is now considered an essential element in pilot
and crew training for the large commercial, regional and business segments of the market. An
experienced pilot typically needs between 15 and 40 hours on a simulator to learn the intricacies
of a new aircraft. CAE estimates that approximately one simulator is required to support every 20
wide-bodied commercial aircraft in operation, with that ratio changing to one for 40 regional jets
and one for 80 business aircrafts. New aircraft deliveries are a major driver for this market. In The World Market for Large
Commercial Jet Transports, Forecast International/DMS Inc. projects that 6,075 large commercial
jet transports will be produced from 2005 to 2014. 10




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Demand in recent years for civil air travel and the timing of delivery of new aircraft were
adversely affected by the September 11, 2001 terrorist attacks, the ensuing war in Afghanistan, the
SARS epidemic and the war on Iraq. As a result, aircraft orders suffered and CAE experienced a
reduction in new third party orders for FFS. The market uncertainty caused by these events had a
very negative effect on commercial airlines, aircraft manufacturers and, by extension, CAE, the
Civil simulation division of which is somewhat dependent on the health and success of those
industries. However, the impact of these events has been less severe on the demand for flight
training services as pilots still need to be trained. Virtually every business aircraft transaction, whether a new or after-market transaction, triggers
the need for pilot training. Business aircraft simulation training is provided by independent
training providers. CAE believes that additional demand for business aircraft simulation training
will be driven by growth in new business aircraft sales  11,036 are forecast to be produced
between 2005 and 2014  and the increase in fractional ownership and unscheduled charter flights.
Long-term growth in civil air travel will drive increased aircraft deliveries across the spectrum
of aviation service providers and, in turn, the demand for simulation technology and training. Pilot Demographics According to AIR Inc., US pilot hiring in 2004 doubled from 2003. In 2004, 9,382 were hired and
more than 10,800 are expected to be hired in 2005. The most active airlines in the hiring are the
low-cost, nationals and regional airlines. As pilots retire, other pilots must be trained to fly
the aircraft. Historically, the major commercial airlines hired a substantial number of pilots from
the military as these pilots retired or otherwise left military service. In recent years, there
have been fewer available military pilots. The relative lack of available military pilots has
caused increased demand for qualified pilots throughout the industry. As a result, the major
airlines have begun to more actively promote pilots to larger aircraft from within their existing
ranks or from regional airlines operating smaller aircraft. This increased mobility within a fleet
results in more pilots needing to be certified on different aircraft and a corresponding increase
in training requirements. The number of pilots on furlough in the US declined by 6% in 2004. Other Factors The September 11, 2001 terrorist attacks had an immediate and severe adverse impact on the
passenger traffic and yields of CAEs customers in the civil airline industry. Even as the
after-effect on the industry of the shock of that event and the subsequent war in Afghanistan were
receding, the SARS epidemic and Iraqi war again caused a sharp drop-off in commercial travel
coupled with higher fuel and other costs. Civil airline operators have continued to experience
significantly lower revenue and have incurred additional costs for increased security, higher
insurance premiums and jet fuel. Despite increased passenger traffic, the market is still fragile.
Because of these events, resulting airline bankruptcies and funding problems and continuing weak
domestic and international economic conditions, CAE expects that the delivery of new aircraft will
be slightly higher than in 2004. 11




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4.1(e) Military Simulation and Training Military forces increasingly rely on sophisticated and interrelated weapons systems and equipment,
computer systems, visual systems and other advanced technologies to operate in a broadening range
of conditions and scenarios. Achieving a high state of operational readiness is a constant goal and
challenge for militaries. Simulators enable military organizations to achieve their training goals
while minimizing the physical use of expensive systems and equipment. In addition, the use of
simulators helps to avoid injuries to personnel and the loss of equipment due to training
accidents. Simulators allow for the training of tasks and missions that cannot be practiced in the
real world. Flight simulators are used to train pilots to operate a variety of military aircraft including
fighter jets, helicopters and transport aircraft. Flight simulators permit the crews of military
aircraft to coordinate and improve their essential combat skills in a safe, cost-effective and
realistic range of environments. It is 15 to 25 times cheaper to train in a simulator than in a
military aircraft. The simulators enable pilots to realistically practice both offensive and
defensive tactics, such as firing aircraft weapons systems and avoiding attack from enemy surface
and air threats. The immersive environment provided by simulators allows pilots to train for highly
demanding maneuvers and life threatening scenarios, such as rotor failure, missile impact or the
effects of exceptional turbulence. Simulators for land systems provide similar advantages. Though land systems equipment is generally
less complex than that found in aircraft, the systems often operate in conjunction with other
equipment in environments involving many soldiers and various weapons systems. CAE believes the following trends will influence the development of the military simulation and
training market: Increasing Defence Spending Following the September 11, 2001 terrorist attacks, the US government increased its defence
spending. The fiscal 2005 national defence budget in the US was more than US$455 billion, which
does not include additional funding requested to support the war effort in Iraq. In fiscal 2006,
according to the US Office of Management and Budget the US defence budget is expected to be about
US$420 billion plus an anticipated $50 billion to $75 billion in supplemental funding expected for
the war on terror. The US governments defence spending has recently represented close to 50% of
the worlds total defence spending and this is expected to continue through this decade. Apart from
spending on defence, there is an increased emphasis on security in most Western nations in the face
of increased terrorist threats. CAE expects that some of this spending will address new
technologies and training for counter-terrorism activities. Rapid Evolution of Technology and Warfare Technological advances and the changing nature of warfare have resulted in a rapid evolution of
weapons systems and equipment. This has been illustrated by recent events in Afghanistan and Iraq,
where the coalition forces faced asymmetric threats and where extensive use was made of unmanned
air vehicles (UAV) such as the Predator and Global Hawk. Military forces face a 12




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wide range of operations which are increasingly likely to be asymmetric or involve operations in
urban terrain. In light of these changing circumstances, the key focus of military forces has
evolved towards information dominance linked with networked weapons systems. These highly technical
networked systems lend themselves to modeling, simulation, and simulation-based training. Accelerated developments in computer and visual technologies enable devices of greater fidelity and
promote the proliferation of simulation technologies. In particular, the rapid evolution of
commodity graphics technologies of recent years has substantially redefined the price/performance
envelope of visual equipment. Visual systems provide simulator-correlated, geo-specific
representations of the synthetically generated environment under a broad range of weather,
illumination and other conditions. Visual database representations can be rapidly synthesized from
the Geographical Information System, including satellite data, and applied to military mission
rehearsal exercises. The introduction of new aircraft and weapons platforms, as well as upgrades and life extensions to
existing aircraft and weapons platforms will necessitate new training requirements for military
operators. For example, CAE expects programs in Europe such as the Eurofighter 2000, the A400M
military airlifter and the NH90 helicopters to provide significant simulation and training
opportunities. In addition, upgrades to aircraft such as the German Tornado tactical aircraft and
the UK Lynx helicopter fleets will create additional flight simulation requirements. In North
America, the US Air Forces upgrade of its C-130 fleet under the C-130 Avionics Modernization
Program will also require corresponding upgrades and new simulators to train aircrews on upgraded
aircraft. Other aircraft programs such as the F-35 (Joint Strike Fighter), the US Navys
Multi-mission Maritime Aircraft and the US Armys Armed Reconnaissance Helicopter will also enter
service in the US over the next decade and produce opportunities for training systems. CAE is
actively pursuing these opportunities. Evolving Role of Simulation Training CAE believes that the military will continue to make greater use of simulation as an effective
solution for more frequent and sophisticated training requirements for several reasons. First,
advances in technology have enhanced the realism that can be achieved in simulation training. As a
result, militaries are more receptive to utilizing this technology. The achieved realism combined
with the development of extensive environment databases offer militaries the ability to train in
situations and conditions either difficult or impossible to consistently replicate in a physical
setting. Second, simulation training also is more cost effective than training personnel on actual
equipment. Third, simulation training involves less potential for accidents and resulting injury to
personnel and damage to equipment. Finally, CAE believes simulation will increasingly be used in
areas consistent with the Simulation Based Acquisition initiatives of the US Department of Defense
which seek to use simulation to evaluate competing system designs prior to commitment to full scale
design and development. Increasing Interest of Governments in Privately Financed Long-Term Training Models The increasing sophistication of weapons systems has resulted in the need for more sophisticated
training equipment and services. The development, construction and delivery of these training 13




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resources require a high level of specialized technology and knowledge, and often involve
significant expense. The UK government has increasingly turned to private sector companies to
build, maintain and deliver training equipment and services under long-term private financed
initiatives (PFI) because these companies can deliver an integrated training solution more
quickly and efficiently and at lower cost. CAEs MSHATF is already in full scale operation in the
UKs first military training PFI. CAE-led Landmark Training Ltd. (Landmark) was selected in 2004
as the intended preferred bidder for the British Armys Armoured Vehicles Training Service (AVTS)
program. The AVTS program was to have been a private finance initiative designed to provide turnkey
driver, gunnery and command information systems training to crews of armoured fighting vehicles.
Landmark was notified on June 15, 2005 by the UK Ministry of Defence of a change of approach to the
program as it now intends to proceed with a conventional procurement strategy. The government of
Germany awarded a consortium that includes CAE, Eurocopter, Rheinmetall Defence Electronics GmbH
and Thales a contract to provide NH90 helicopter training services to the German Armed Forces over
14.5 years beginning in 2008. ITEM 5 NARRATIVE DESCRIPTION OF THE BUSINESS 5.1 General CAE is a world leading designer and manufacturer of advanced simulation equipment and provider of
integrated training solutions for the military and civil aviation markets. With nearly 60 years of
experience, strong technical capabilities, a highly trained workforce and a global reach, CAE has
built an excellent reputation and long-standing customer relationships. CAE has delivered simulation products to the military forces of more than 30 countries. The
Company is the worlds leading supplier of civil flight simulators in the competed market and is
the second largest independent provider of civil aviation training services based on the number of
simulators in operations. CAE has a global presence with about 4,800 employees at manufacturing operations and training
facilities in 17 countries on five continents. CAE reported fiscal 2005 results based on two
business segments: (i) Civil Simulation and Training; and (ii) Military Simulation and Training.
The Companys consolidated revenue from continuing operations in fiscal 2004 and 2005 was $938.4
and $986.2 million, respectively, and is broken down as follows: Revenue by Product Line (%)2005
    
    
    2004Civil Simulation and Training
    
    
    53
    %
    
    
    49
    %Military Simulation and
Training
    
    
    47
    %
    
    
    51
    %100
    
    
    
    100
 Geographic Distribution of Revenue (%)2005
    
    
    2004US
    
    
    42
    %
    
    
    32
    %Germany
    
    
    11
    %
    
    
    14
    %UK
    
    
    9
    %
    
    
    9
    %Canada
    
    
    8
    %
    
    
    12
    %Other European countries
    
    
    14
    %
    
    
    16
    %Other countries
    
    
    16
    %
    
    
    17
    %100
    
    
    
    100
 The following sets out, by business segment, the locations of CAEs primary subsidiaries and
divisions: 14




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CIVIL SIMULATION AND TRAINING  Canada§
    
    Montreal, Quebec§
    
    Toronto, OntarioUnited States§
    
    Dallas, Texas§
    
    Denver, Colorado§
    
    Fort Worth, TexasEurope§
    
    Amsterdam, The Netherlands§
    
    Brussels, Belgium§
    
    Burgess Hill, United Kingdom (shared
with MS&T)§
    
    Madrid, Spain§
    
    Maastricht, The Netherlands§
    
    Evora, PortugalOther§
    
    Dubai, United Arab Emirates§
    
    Sao Paulo, Brazil§
    
    Santiago, Chile§
    
    Zhuhai Guangdong, China MILITARY SIMULATION AND TRAINING  Canada§
    
    Montreal, Quebec§
    
    Ottawa (CAE Professional Services)United States§
    
    Tampa, FloridaEurope§
    
    Burgess Hill, United Kingdom§
    
    Royal Air Force base, Oxfordshire, United
Kingdom§
    
    Stolberg, GermanyOther§
    
    Silverwater, Australia 5.1 (a) Summary of Business Segments Civil Simulation and Training The Company builds civil simulators for all categories of aircraft including those built by Airbus,
Boeing, Bombardier, Cessna, Dassault, Embraer, Fairchild/Dornier, Gulfstream and Raytheon. CAE
also builds simulators for civil helicopters, including models by Bell Helicopter and Sikorsky.
During fiscal 2005, CAE was awarded 17 of 22 FFS orders or 77% of the worldwide-competed market
(fiscal 2004  16 of 19 FFS orders). CAE also captured 10 of 22 competed visual systems, or 45% of
the worldwide competed visual systems market. Since its inception, CAE has taken orders for more
than 500 FFS and FTDs from over 110 commercial airlines, aircraft manufacturers and external
training centers in 38 countries, and to date has delivered nearly 490. With half a century of
experience in designing and manufacturing FFS, CAE has established long-standing relationships with
leading commercial airlines throughout the world. In 2001, CAE entered the civil flight training business by opening its first pilot training center
in Sao Paulo, Brazil in April and launching its Toronto, Canada facility in December. During 2001, 15




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the Company also acquired Schreiner Aviation Training BV (Schreiner) and SimuFlite Training
International, Inc. (Simuflite), adding six new pilot training centers to its operations. CAE is
the worlds second largest independent provider of training services, based on the number of
simulators available for third party training. As at March 31, 2005, CAE had an installed base of
106 civil FFS in 23 locations on four continents. CAE intends to continue to expand its global network of strategically located training centers.
The Companys practice is to endeavour to secure at least one long-term training agreement with a
major or regional airline prior to establishing a new civil training center. CAEs customers at
the commercial aviation training centers include major, low-cost and regional airlines that elect
to outsource some of the training of their pilots and other crew members using either the Companys
training instructors or their own. The third party aviation training centers are used by more than
3,000 customers who tend to use third party training centers as their primary source for simulation
training. CAE will continue to execute its pilot training strategy, with the focus now on ramping
up utilization and increasing yield (through enhanced service offerings) in the training centers
owned or operated by CAE. During fiscal year 2005, CAE and Dassault Aviation have signed a contract making CAE the exclusive
provider of entitlement training for the new Falcon 7X aircraft. Entitlement training is the
initial training provided by the aircraft manufacturer with the purchase of the aircraft. The
agreement covers pilot, maintenance and cabin crew training. As part of this agreement, CAE is
developing two Falcon 7X FFS and a comprehensive training program that will incorporate CAE
Simfinity training technology. All the Falcon FFS will be deployed in North America and Europe. The
North American location will be CAEs new training center in Morris County, New Jersey (US). The
European location will be in CAEs existing facilities in Burgess Hill, UK. In June 2004, CAE was awarded a contract to train easyJet pilots on the Airbus A320. The contract
included the installation of two A320 FFS, two CAE Simfinity Maintenance/Flight Training Devices
(M/FTD), classrooms and related support services as well as the establishment of a comprehensive
training curriculum. EasyJet pilots started training in our Burgess Hill training facility in
November 2004. CAE also inaugurated the A320 FFS it operates in Aeroflot training facility in Moscow. The 8-year
training agreement with Aeroflot was signed in 2003 and is expected to generate about C$2.6 million
(US$2 million) per year in revenue over eight years. CAE became a Bell Associated Training Facility for Middle East-based operators of the Bell 412.
Emirates-CAE Flight Training is scheduled to install a Bell 412 FFS at its facility in Dubai early
in 2006. CAE expects to maintain a commanding leadership position in civil simulation and visual systems by
anticipating future customer needs through both its own training experience and trusted
relationships with equipment customers, commitment to innovation and technology, product quality,
reliability and efficiency, and continuing efforts to shorten delivery cycles through process
improvements. CAE expects to improve on its lead-time, cost, quality and reputation for
performance through operational improvements and research and development programs. 16




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In fiscal 2005, many FFS orders came from the growing Asian and Middle East markets. Two FFS orders
came from Etihad (A330/340), three from Emirates (A380, A340-600), four from Chinese operators
(A330, A330/340-600, EMB 170) and one business aircraft FFS order from Singapore Flying College
(Learjet 45). CAE signed a contract with Airbus in fiscal 2004 for the development of the worlds first A380 FFS.
The initial A380 FFS was shipped to Airbus in Toulouse in May 2005 to be ready for use at the end
of June 2005. CAE is providing a complete range of training devices for the A380, including two
FFS equipped with the CAE TroposTM visual system and CAE SimfinityTM software
licenses for desktop and laptop trainers for $55 million. In addition, CAE and Airbus have joined
forces to offer Airbus Corporate Jetliner (ACJ) enhanced training courses. ACJ customers have
access to training at 10 sites worldwide, including for the first time ever, four sites in North
America. In fiscal 2005, CAE signed three more orders for A380. CAE and Qantas signed a contract for a suite
of Airbus A380 integrated training solutions, including an FFS and a CAE SimfinityTM
training device. The training equipment package is valued at about $25 million and delivery of the
FFS is slated for summer 2006. CAE was also selected by Emirates to provide two A380 FFS. As part
of this contract, CAE became Emirates exclusive provider of FFS for 10 years. CAEs capabilities in simulation-based interactive learning, including its leading-edge CAE
SimFinity system, also complement its traditional strength in FFS and FTDs. In fiscal year 2005,
CAE sold 18 3d CAE Simfinity devices (Integrated Procedures Trainers (IPT), Maintenance/Flight
Training Devices (M/FTD), FTDs). These orders included Qantas A380 IPT, JetBlue EMB190 FTDs (3
units), Singapore Learjet 45 IPT, FAA 737NG IPT and others. Pilots using CAEs SimFinity training
system are able to practice landing, takeoff and taxiing under different weather conditions in over
250 airports. Combined with a growing network of training centers, this complete suite of
simulation-based equipment and training products permits CAE to offer airlines and business jet
operators a range of training solutions. Fiscal 2005 Asset Impairment and Restructuring Charges The Company performs the annual testing for impairment of its goodwill and intangible assets as at
December 31 of each year using the two-step method prescribed under Canadian GAAP. Based on the
test performed as at December 31, 2004, CAE concluded that an impairment charge was required. During the third quarter of fiscal 2005, CAEs Management initiated a comprehensive review of
current performance and the strategic orientation of its business units. This strategic review
revealed that several factors have emerged and or worsened over the course of the past year that
severely affected the Civil business, including:  
    
    the enduring adverse economic and financial environment of the airline industry creating
a new market reality, including a decreased level of interest in pilot training
outsourcing;
    
    the appreciation of the Canadian dollar ; 17




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
    
    the erosion of the less than 50-seat regional jet market; and
    
    the escalating cost of acquiring data, parts and avionics for the manufacturing of FFS
and other training devices. Most of these elements are outside the direct control of the Company and currently show only modest
signs of abatement. These elements caused Management to recalibrate some key assumptions in Civils
strategic planning. New Market Reality The enduring adverse economic environment of the airline industry, first initiated in 2001 with the
9/11 terrorist attacks, then further impacted by the SARS outbreak in Asia and the Afghanistan and
Iraq wars, was, in 2004, exacerbated by soaring fuel costs and declining yields. These factors
continue to offset the extensive cost-cutting initiatives the airlines have undertaken to such a
point that US airlines lost an estimated US$5 billion in 2004 when less than a year ago, analysts
were forecasting a break-even year. This fourth consecutive year of important losses for US
airlines shows that there are no immediate solutions underway. In addition, the four years of lost
growth will not easily be made up as only in mid-2004 did traffic volume return to pre-9/11 levels.
CAE is now in a new market reality where cost management is at the centre of all decisions. In
addition, interest in training outsourcing, which could be a contributor to improving
cost-effectiveness, is low on the airline industrys priority list, where the focus is mainly on
reducing labour and fleet costs. This new reality has translated into continued price pressures on
Civils equipment and training businesses. Appreciation of the Canadian Dollar The vast majority of Civil equipment revenues are based in US dollars while Civils manufacturing
costs are primarily in Canadian dollars. Therefore, the appreciation of the Canadian dollar to over
US$0.83 (or C$1.20) in calendar 2004 had a material adverse impact on the profitability of Civils
business. Erosion of the Less Than 50-Seat Regional Jet Market The latter part of calendar year 2004 saw a major shift in demand for regional jets from the sub
50-seat segment to newer, larger platforms (70-to-100+ seat range). The value proposition for
smaller regional jets has been severely impacted by the new low-yield market environment. In
addition, legacy airlines are relaxing scope clauses, which previously restricted their use of
70-seat jets. Bombardier and Embraer have both reduced their 20-year market forecast in the less
than 50-seat range and Bombardier has severely reduced its planned production for CRJ200s as
evidenced by significant workforce reductions in 2004. These factors also make it less likely that
production of the Dornier 328JET, for which CAE was the exclusive entitlement training provider,
will be restored. Escalating Cost of Acquiring Data, Parts and Avionics for the Manufacturing of FFS In 2002, CAE launched its next generation FFS design, which was intended to reduce manufacturing
and life cycle costs. However, as the Company experienced reduced throughput in 18




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its manufacturing facilities, the anticipated savings have not materialized, which has prompted
Management to make this issue a key priority to address. Furthermore, CAE has also incurred increased costs for acquiring data, parts and avionics in the
past few years, with these costs representing a major component in its manufacturing of FFS. Based on the preceding factors and the results of the strategic review previously mentioned, CAE
concluded its annual testing for impairment of its goodwill and intangible assets and its
impairment assessment for property, plant and equipment as well as certain other assets and
deferred costs. The Company concluded that the carrying value of some of Civils tangible and
intangible assets (including goodwill) were impaired and, on this basis, recorded in the third
quarter of fiscal 2005 a $443.3 million impairment charge detailed as follows: Detailed Impairment Charge
    
    Impairment(amounts in millions)
    
    AmountGoodwill
    
    $
    205.2Customer relations
    
    
    86.7Trade names and other intangible assets
    
    
    20.4Other assets
    
    
    19.3Property, plant and equipment (simulators)
    
    
    78.4Inventories
    
    
    33.3Total before taxes
    
    $
    443.3Tax recovery
    
    
    89.1Total impairment charge, net of tax
    
    $
    354.2
 The 20% tax recovery rate associated with the impairment charge was a result of the
non-deductibility, for tax purposes, of some of the goodwill and intangibles assets impairment
charge. As indicated in the table above, the after-tax effect of this non-cash charge on CAEs consolidated
net earnings in the third quarter of 2005 was $354.2 million or $1.43 per share. Restructuring Charges On February 11, 2005, CAE announced a comprehensive restructuring plan (the Plan) that will
materially change the manner in which CAE conducts its business, and is aimed at restoring the
Companys profitability, cash flow and return on investment. This Plan, to be executed over the
next 18 months, results from the extensive strategic review of CAEs markets, customers and other
external stakeholders as well as its internal resources and capabilities undertaken by the
Management under the leadership of the new CEO. The Plan, geared towards the elimination of duplication and the achievement of a more competitive
cost structure, includes actions such as:  
    
    the rationalization of its Civil training centres footprint including the consolidation
of training centres where duplication exists and reallocation of a number of FFS to
maximize yield and streamlining of the management structure; and 19




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
    
    the consolidation, into the new Simulation Products division as of April 1, 2005, of all
manufacturing activities including engineering, program management and global procurement.
These functions had previously existed in various business units and regionally, resulting
in duplication. The Company is reducing headcount; 450 employees have already left the Company since the
announcement of the Plan. In addition, in conjunction with the Plan, the Company will be implementing a new enterprise
resource planning system (ERP), a business management system that integrates all aspects of the
business, including planning, manufacturing, and sales and marketing, in order to improve
transparency, accountability and information flow. Finally, CAEs incentive compensation structure
has been reoriented, with a specific emphasis on building shareholder value through focus on
delivery of free cash flows and adequate return on capital invested. During fiscal 2005, the Company has recorded a $24.5 million restructuring charge for workforce
reduction and related expenses. In line with the Plan previously announced, an additional
restructuring cost in the range of up to $30 to $40 million should be incurred by the Company in
fiscal 2006. CAE experienced considerable softening of near-term demand for civil simulators in the last two
years but experienced increases in simulator orders in fiscal 2005 to exceed the prior years
level. The contracting market for civil simulators in fiscal 2003 and 2004 led to pricing pressure
that is reflected in the margins of CAEs backlog. The growth expected from training operations and
a continued focus on productivity savings through cycle time reductions and other cost containment
initiatives should position CAE to benefit from the gradual recovery of the civil airline industry. Military Simulation and Training CAE is a world leader in the design and production of military flight simulation equipment. The
Company develops simulation equipment and training for a variety of military aircraft, including
fighter jets, helicopters and patrol/transport planes. Its military simulators provide full combat
environments that include interactive enemy and friendly players, as well as weapons and military
sensors. These simulators incorporate highly realistic visual scenes covering areas as large as
whole countries that are able to show the effects and characteristics of a variety of battlefield
features, including those seen through Infra Red and Low Light Level TV Sensors. CAE has also
moved beyond the supply of simulation equipment into the provision of military training with the
Companys MSHATF in the UK and its C-130 training facility in Tampa, Florida. In 2006, Rotorsim
will open a helicopter training centre in Sesto Calende, Italy. Rotorsim is owned equally by CAE
and Agusta S.p.A. CAE provides simulation equipment and training to the military forces of more than 30 countries,
including all the US services. CAE has provided simulators for a wide range of aircraft and has
more rotary wing expertise than any other simulator manufacturer. The Company has established a
leading position in Europe in the supply of army command team land-based training systems, by
supplying such systems to the forces of Germany, Austria, Italy, Norway, Finland and Ireland. The
selection of a CAE visual system for the prestigious 20




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Eurofighter program solidly establishes CAEs Medallion-S visual system as a premier system for
fast jet simulation applications. The Medallion-S visual system is also being used to upgrade the
US Armys Apache combat mission simulators, the German Tornado simulators, and the US Armys
160th Special Operations Aviation Regiments MH-47 and MH-60 combat mission simulators.
CAEs Medallion-S image generator is also being installed on new-build simulators, including the
Canadian Forces CP-140 Patrol Aircraft simulator and the A109 simulator for Rotorsim. Military support services include the provision of contractor logistics support, maintenance
services and simulator instruction at over 60 sites worldwide. CAE provides maintenance support for
most of the Canadian Forces flight simulators at six bases and all but one of the installed flight
simulators of the German Army, Air Force and Navy. In the US, CAE provides a range of services
across a wide number of bases, including the instruction of UAV Predator operators. CAE also
provides a range of support services to facilities in Australia, the UK, the Netherlands and Italy,
as well as mission software support for Canadas CF-18 fighter aircraft. CAE will focus on growing its business with military customers around the world, and particularly
in the US. The Company believes it can capitalize on the experience, expertise and increased
visibility with military customers that it has gained from winning and performing significant
contracts. CAE will continue its commitment to customer service by focusing on anticipating and
meeting the needs of its military clients for highly-customized equipment and training. CAE
believes its ability, through CAE USA Inc., to be a prime contractor in the US, in addition to
strong supplier relationships with leading US defence contractors, will enable it to further
penetrate the US military simulation and training market. CAE intends to continue to foster
partnerships with key original equipment manufacturers such as AgustaWestland (CAEs partner in the
Rotorsim consortium)with whom CAE has entered into a joint venture to deliver training equipment
and services in support of AgustaWestland aircraft sales worldwide, and Lockheed Martin, with whom
CAE is teamed on the C-130J Maintenance and Aircrew Training System program for the USAF. In July 2004, Eurofighter Simulation Systems GmbH awarded a contract to CAE to provide a range of
engineering and on-site support services for the visual systems on the Eurofighter Aircrew
Synthetic Training Aids program. The contract is valued at approximately $30 million over five
years. In June 2004, the United States Navy has awarded CAE USA a contract initially valued at US$38
million ($52 million) to develop two MH-60S tactical operational flight trainers (TOFTs) and two
MH-60S weapons tactics trainers (WTTs). This contract grew significantly in fiscal 2005 as the
US Navy exercised some contract options ahead of schedule for an additional MH-60S TOFT and two
additional MH-60S WTTs, bringing the total value in fiscal 2005 to more than US$60 million. The majority of CAEs contract revenue in its military simulation and training business result from
contracts with militaries or government bodies performed under predominantly fixed-price contracts
with only a small number of cost-plus contracts. 21




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In most instances, under government regulations, certain costs, including certain financial costs,
portions of research and development costs, lobbying expenses, certain types of legal expenses and
certain marketing expenses related to the preparation of bids and proposals, are not allowed for
pricing purposes and calculation of contract reimbursement rates under flexibly-priced contracts.
Governments also routinely regulate the methods under which costs are allocated to government
contracts. CAE is subject to a variety of audits performed by government agencies. These include
pre-award audits that are performed at the submission of a proposal to the government. The purpose
of the pre-award audit is to determine the basis of the bid and provide the information required
for the relevant government to effectively negotiate the contract. During the performance of a
contract the government has the right to request and to examine any labor charges, any material
purchase, and any overhead changes to any contract that is active. Upon a contracts completion,
the government may perform a post award audit of all aspects of contract performance to insure that
the Company has performed in accordance with the terms of the contract. Government contracts are generally, by their terms, subject to termination by the government either
for convenience or default by the contractor. Fixed-price contracts provide for payment upon
termination for items delivered to and accepted by the government and, if the termination is for
convenience, for payment of fair compensation of work performed plus the costs of settling and
paying claims by terminated subcontractors, other settlement expenses and a reasonable profit on
the costs incurred. Cost-plus contracts generally provide that, upon termination, the contractor is
entitled to reimbursement of its allowable costs and, if the termination is for convenience, a
total fee proportionate to the percentage of the work completed under the contract. If a contract
termination is for default, however, typically,  
    
    the contractor may be paid an amount agreed upon for completed and partially
completed products and services accepted by the government;
    
    the government may not be liable for the contractors costs with respect to
unacceptable items, and may be entitled to repayment of advance payments and progress
payments, if any, related to the termination portion of the contract; and
    
    the contractor may be liable for excess costs incurred by the government in
procuring undelivered items from another source. In addition to the right of the government to terminate, government contracts are often conditioned
upon the continuing availability of appropriations. Consequently, at the outset of a major program,
such contracts are usually partially funded and additional monies are normally committed to the
contract by the procuring agency only as appropriations are made for future fiscal years. Failure
to obtain such appropriations normally results in termination of the contract and compensation to
the contractor at less than the full value of the contract. The military simulation and training market is driven in part by the introduction of new aircraft
platforms, upgrades and life extensions to existing aircraft and a shift to greater use of
simulation in pilot training programs due to the high degree of realism and the significantly lower
cost compared to live training. CAE expects to improve its lead-time, cost, quality and reputation
for performance through continued operational improvements and research and development programs.
In particular, CAE launched a research and development program to introduce CAE NeTTS (Networked
Tactical Training Solutions), a new PC-based architecture to address the 22




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requirement for scalable, re-configurable, cost effective training devices. With a leading-edge
technology solution, CAE is well positioned to capitalize on upcoming international military
programs in Canada, the US, Europe, the UK, Asia and Australia, as well as teaming and/or
collaboration arrangements in other countries. Discontinued Operations In fiscal 2004, CAE completed the divestiture plan started in December 2001 of all its non-core
operations. On April 30, 2003, CAE completed the sale of the operations of CAE Beyss GmbH, another
of CAEs Cleaning Technologies businesses, to Bavaria Industriekapital AG. Because the business
had not been profitable for some time, CAE received nominal consideration. Subsequent to
completing the sale, CAE incurred post disposition costs with respect to the transfer of employees,
resulting in additional charges recorded in the results of Discontinued Operations. On May 2,
2003, CAE completed the sale of its remaining wood products business to Carmanah Design &
Manufacturing Inc., a TD Capital company, for proceeds of approximately $20 million, plus certain
rights to further payment if future earning targets are attained by the wood products business. On
July 31, 2003, CAE completed the sale of substantially all the assets of its last remaining
Cleaning Technologies business, Alpheus Inc. to Cold Jet Inc. of Cincinnati, Ohio. The total
consideration was approximately US$2.1 million. In addition, the Company is entitled to receive
further consideration of US$1.0 million based on the future performance of the combined businesses
over the 53-month period from closing. In the second quarter of fiscal 2005, the Board of Directors approved a plan to divest its Marine
business. The plan was consistent with the Companys strategic process of focusing on its core
competency  the development and use of simulation and modeling technology to provide training
solutions. On February 3, 2005, CAE completed with L-3 the sale of substantially all of its Marine
Controls segment for cash consideration of $238.6 million. This amount is subject to completion of
a net working capital audit of the Marine Controls segment. CAE does not believe this provision
will result in a material adjustment to the cash consideration received. In accordance with the
purchase agreement, L-3 will also acquire two other components of the Marine Controls segment,
including the assumption of the CAEs guarantee of $53.0 million (£23.0 million) of project finance
related debt for the UK Astute Class submarine training program. The sale of these components is
subject to regulatory approvals and expected to be completed during fiscal 2006. The expected
proceeds on the sale of these components are nominal. The results of Marine have been reported as discontinued operations and previously reported
statements have been reclassified. This transaction resulted in a gain of $103.9 million, net of
taxes of $25.1 million. Research and Development CAE differentiates itself by providing superior products and services that rely on the latest, most
advanced technology available. As a result, the Company has a long-standing commitment to research
and development (R&D). Each business segment is encouraged to apply R&D across the whole spectrum
of its operations, from product development to production processes and techniques. 23




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An additional part of CAEs R&D development strategy is to participate with several universities
and government agencies in North America and in Europe in specific research projects. While
development is the first priority, applied research is also vitally important to the Companys
future. In addition to the basic internal research and development, R&D may also be carried out
within customer contracts. This involves the development of technology that is necessary to
complete a contract requirement but is also useful and may be reapplied by the Company in a broader
sense. Certain CAE initiatives also receive the support of the Canadian government through
Technology Partnerships Canada. Total R&D expenditures include basic R&D costs as well as program related development costs. Basic
internal R&D expenditures were in excess of $23 million for fiscal 2005, the product portion of
which was largely associated with the development of the CAE NeTTS training system, CAEs
SimFinity training system, and CAEs Medallion-S visual system. In addition to these development
activities, basic internal research and development funds a variety of product enhancement and
process improvement initiatives. Basic research and development expenditure is expected to be
about 20% lower in fiscal 2006 and will be primarily focused on further developing CAE
NeTTsTM and SimFinityTM training systems. 5.1 (b) Production and Services Production CAEs manufacturing facilities are located in Montreal, Canada; Tampa, US; Burgess Hill, UK; and
Stolberg, Germany. The manufacturing process for CAE simulators is complex, involving the coordination of
approximately 250,000 parts and millions of lines of software code. The manufacture of a civil
simulator includes five major stages: design, manufacture and assembly, testing, pack and ship and
final test on site. Military simulators are much more complex and unique than civil simulators, and
therefore take more time to design, manufacture and test. Manufacturing is organized into 12 manufacturing cells comprised of the following three major
disciplines: electronics (printed circuit board assembly), electrical (cables and harnesses,
cabinets and chassis, aircraft instruments and avionics), and mechanical (welding, sheet metal and
machine shop, precision assembly and hydraulics, structural assembly and final assembly). Services CAEs flight training services are provided to customers as described in section 5.1(a), Summary
of Business Segment, of this AIF. CAE provides a range of technical support services to civil and military simulator operators,
including parts replacement and repairs, installations, relocations, upgrades and technical
training. Customers use the Companys technical services to answer questions, trouble-shoot and
receive advice. This extends to service visits by CAEs engineers to assist in customer maintenance
and repair activities. Military and civil upgrade services are not restricted to CAE 24




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products; the Company can upgrade most other manufacturers simulators. CAE services are offered
either in conjunction with a sale of a simulator, through maintenance contracts or individual
purchase orders. CAE believes that its service business provides opportunities to influence the
upgrade of installed FFS while providing valuable insights into customer training needs. 5.1 (c) Specialized Skill and Knowledge CAE employs predominantly engineers and software development staff, as well as flight training
experts. As an industry leader, CAE is able to train its staff in the technology and software
required for simulation software and equipment. Flight trainers are typically recruited from the
ranks of former airline or military pilots. CAE has not experienced material difficulty in
recruiting appropriate staff to carry out its manufacturing, training and development work. 5.1 (d) Competition The markets in which CAE sells its products are highly competitive. Certain competitors are also
the Companys customers, partners and suppliers on specific programs. The extent of competition for
any single project generally varies according to the complexity of the product and the dollar
volume of the anticipated award. CAE believes that it competes on the basis of:  
    
    the performance and flexibility of its products;
    
    reputation for prompt and responsive contract performance;
    
    accumulated technical knowledge, intellectual property and expertise;
    
    strong after sales support;
    
    breadth of product line; and
    
    price. CAEs future success will depend in large part upon its ability to improve existing product lines,
develop new products and technologies in the same or related fields, improve delivery intervals and
reduce the costs it incurs in producing its products and services. CAEs major competitors in the military simulation and training market include Lockheed Martin
Corporation, L-3, Boeing, Rockwell Collins NLX Corporation, Indra Systemas, Alenia Marconi Systems,
Thales Training Simulation, Flight Safety International, Inc. and Rheinmetall Defence Electronics
GmbH. Some of these competitors are predominantly local (one country or region) competitors. CAE
sometimes partners with these and other competitors to cooperate on program contracts. CAEs major competitors in the civil simulation equipment market include Thales Training &
Simulation and Rockwell Collins Simulation division. Evans & Sutherland Computer Corporation also
competes for visual systems. The Companys major competitors in civil pilot training include
FlightSafety International, Inc., Alteon Training L.L.C. (formerly FlightSafety Boeing Training
International), GECAT and PanAm International Flight Academy Inc. 5.1 (e) Components 25




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CAE deals with a variety of goods and services suppliers across its business segments. It is not
dependent on any single supplier for any key manufacturing components or services. Significant
shortages of goods and services are not expected, and have not been encountered in the past.
However, CAEs products contain sophisticated computer systems that run on software and operating
systems supplied to it by third parties. Such computer systems and software may not always be
available to CAE to license or purchase. The production of CAE simulators is often dependent upon receipt by CAE of data, including
confidential or proprietary data, concerning the functions, design and performance characteristics
of a product or system, the performance of which CAEs simulator is intended to simulate. The
Company cannot guarantee that it will be able to obtain such data on reasonable terms, or at all.
Original manufacturers of these products and systems could object to the simulation by CAE of
components of, or the totality of their products or systems, or could request high license fees
that could negatively impact the Companys profit margins. Most of the raw materials used in manufacturing (such as sheet metal, wires, cables and electronic
integrated circuits) are available off the shelf from multiple commercial sources. The unique parts
are the aircraft parts. These are usually available from aircraft manufacturers, the resale market,
as well as through simulated part manufacturers. The availability of most parts in a timely manner facilitates a relatively smooth production flow.
Aircraft parts, in some instances, may be an exception, especially on new aircraft types or those
out of production. The timely delivery of these parts is often the responsibility of CAEs
customers. CAEs contracts normally link these aircraft parts delivery dates to the simulator
delivery schedules. In cases where such aircraft parts cannot be made available, CAEs customers
rely on CAEs ability to make simulated parts. 5.1 (f) Intangible Properties CAE owns certain patents and has filed applications in respect of additional patents. The Company
enters into agreements containing non-disclosure and confidentiality clauses with third parties and
has similar provisions in place with its employees to protect its proprietary information and trade
secrets. CAE also has internal policies concerning both ethics and intellectual property which
guide its employees in their dealings with CAEs intellectual property and that of third parties.
CAEs Intellectual Property Committee is mandated to oversee the protection, management and
exploitation of the Companys inventions, trade secrets and other intellectual property. Given the lengthy delay in obtaining patents (during which some technology may evolve into newer
generations), the required detailed patent application disclosure which may permit competitors to
reverse-engineer an invention, and the cost of maintaining and defending patents, CAE believes that
certain intellectual property is adequately protected by either maintaining it as a trade secret or
selectively disclosing enough of it to forestall anyone else from subsequently claiming it as their
own original innovation. CAEs agreements with Technology Partnerships Canada restrict CAEs ability to license (other than
to customers) or transfer ownership of intellectual property developed with the programs 26




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support until all funding has been repaid or Technology Partnerships Canadas consent has been
obtained. Given CAEs many decades of success in the field of aviation simulation, the Company believes that
the CAE brand and some of its trademarked products have value in the markets it addresses. 5.1 (g) Cycles There is a very limited cyclicality or seasonality to CAEs businesses. The MS&T division sells to
government customers such that there is no evident cycle to the intake of orders. The same largely
applies to the CS&T divisions equipment sales to airlines, though to the extent that the entire
commercial airline industry is affected by cycles of expansion and contraction, the Company will be
affected by such cycles. The CS&T divisions flight training services do experience an element of
seasonality; in times of peak travel (holiday periods, etc.) airline and business jet pilots are
often too busy flying aircraft to attend training sessions. 5.1 (h) Environmental Protection CAE believes its current operations are in compliance in all material respects with environmental
laws and regulations. Environmental protection requirements do not have material financial or
operational effects on the Companys capital expenditures, earnings or competitive position. CAE operations include, and past operations and those of some past operators at some of the
Companys sites have included, the use, generation, storage, handling and disposal of hazardous
materials which are subject to health and safety and environmental laws and regulations in the
various countries in which CAE operates or has operated. Examples of claims in respect of former
CAE operations include two claims against CAE in respect of the former CAE Electronics facility at
the Edmonton International Airport, both of which CAE is contesting. Separately, the New York State Department of Environmental Conservation (DEC) is studying whether
Trichloroethene (TCE), allegedly present in ground water at or near CAE-USAs former Link Hillcrest
New York facility site, could be evaporating and following soil vapors into homes. If it is, the
DEC is trying to determine whether chemical oxidation of the affected land, or an air pump system
installed in affected homes, would be the better remedy; as well as which properties, and parties,
may have contributed to the alleged contamination. CAE is in discussions with the DEC, a
neighbouring company and local officials to examine ways of resolving these concerns; no order has
been issued against CAE in this regard. 5.1 (i) Employees CAE currently employs approximately 4,800 employees of which approximately 750 are unionized and
covered by 12 collective agreements. Three labor contracts were ratified in fiscal 2005. During
fiscal 2006, CAE will enter into negotiations for the renewal of four collective agreements. The
collective agreement for 575 employees in Montreal will remain in force until June 2008. There are
no indications that negotiations on upcoming contract renewals will result in work stoppages. CAE
considers employee relations to be satisfactory. 27




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5.1 (j) Foreign Operations For the fiscal year ended March 31, 2005, sales to customers outside Canada accounted for
approximately 92% of CAEs revenue such that CAE is very dependent upon foreign sales and
operations. The Company expects that sales outside Canada will continue to account for most of its
revenue for the foreseeable future. The Company believes that its physical presence in countries such as the US, Germany and the UK has
enabled it to develop strong relationships and a good reputation with governments and other defence
contractors who are important decision makers regarding defence contracts. In fiscal 2005 Military
was awarded contracts by the Naval Air Systems Command to provide the U.S. Navy a range of MH-60S
training systems and upgrade the U.S. Navys P-3C operational flight trainers. Germanys Bundesamt
fur Wehrtechnik und Beschaffung (BWB  procurement agency for Germanys military forces), Canadas
Department of National Defence (DND), Lockheed Martin, and the U.S. Armys Program Executive Office
 Simulation, Training and Instrumentation (PEO-STRI) also awarded contracts to CAE. Following the
acquisition of BAE SYSTEMS Flight Simulation and Training in Tampa in fiscal 2002 and the
subsequent creation of CAE USA Inc., CAEs ability to win contracts with the US military has been
significantly enhanced with the awarding of prime contractor status under several omnibus
procurement programs. As a result, CAE is also subject to risks of doing business internationally, including:  
    
    changes to regulatory requirements;
    
    changes to domestic and foreign government policies, including requirements to expend a
portion of program funds locally and governmental industrial cooperation requirements;
    
    the complexity and necessity of using foreign representatives and consultants;
    
    imposition of tariffs or embargoes, export controls, including US, Canadian and foreign
arms export controls, currency exchange controls and restrictions, and other trade
restrictions affecting countries in which CAE sells its products or services;
    
    the difficulty of managing and operating an enterprise spread over various
countries;
    
    compliance with a variety of foreign laws; and
    
    general economic and geopolitical conditions, including international hostilities,
inflation, trade relationships and military and political alliances. The impact of these factors is difficult to predict and any one or more of these factors could
adversely affect the Companys operations in the future. 5.1 (2) Reorganization Following Robert E. Browns arrival as Chief Executive Officer in August 2004, an in-depth
strategic review of CAEs markets, customers and other stakeholders as well as the Companys
internal resources and capabilities was conducted. As a result of this review, the Company has
reconfirmed its strategic direction. It adopted a plan intended to protect its technological
leadership while at the same time fostering synergies between its various operating units, and
implementing sound business practices. The plan maintains the existing Civil and Military 28




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Groups, and adds a third: Simulation Products. The reorganization, which became effective April 1,
2005, is expected to result in significant savings to the Company and to position it well to face
new market realities. The major priorities of the newly formed Civil Training & Services Group (CT&S) are to increase
revenue per simulator in the Companys global network of training centres, and to deliver the most
cost-effective and competitive training service in the marketplace. To this end, CT&S is expected
to consolidate training centres where duplication exists, and to reallocate a number of simulators
to maximize yield. The Military Simulation & Training (MS&T) Groups main goals are to service the defence market
with technological excellence in modeling and simulation; to increase the Companys market share of
the military training market, and to explore opportunities in non-traditional areas of the defence
market, including such areas as analysis and planning. The newly formed Simulation Products Group consolidates all manufacturing activities and includes
engineering, program management, global procurement, and the marketing and sales of civil
equipment. Its immediate focus is to substantially reduce the costs associated with manufacturing
simulation equipment intended both for sale to third parties as well as for installation in the
Companys own global network of training centres. Fiscal year 2006 will be a transitional year for CAE while the Company addresses its business
processes and cost structure, with the goal of ending the year with a restructured and solid
earnings base. 5.2 Risk Factors Execution of Restructuring CAEs future success depends in part on the ability of its current management team to timely deploy
the restructuring plan described in Section 5.1(1) (a) hereof, Restructuring Charges and ensure
that the Company will fully benefit from that plan. CAEs sales cycle is often lengthy and unpredictable, which could result in volatility in its
operating results and the price of its common shares. The sales cycle of CAEs products and services is lengthy and unpredictable, ranging from 6 to 18
months for civil aviation applications and from 6 to 24 months or longer for military applications.
While customers are evaluating CAEs products and services, the Company may incur expenses and
expend management effort. The result of making these expenditures, with no corresponding revenue in
any given quarter, could further exacerbate fluctuations of its quarterly operating results and
share price volatility. CAEs success depends on the reliability of its products, the quality of its services and its
ability to adapt to changing customer needs in a timely manner. The civil aviation and military markets in which CAE operates are characterized by changes in
customer requirements, new aircraft models and evolving industry standards. CAEs failure to 29




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predict accurately the future needs of its customers and prospective customers and to develop
product enhancements that address evolving standards and technologies may result in the loss of
current customers or negatively affect its revenue and its ability to secure new customers. A reduction in defence spending could result in a decrease in CAEs revenue. CAE relies on sales to military customers around the world to generate a significant portion of its
revenue. In fiscal 2005, such sales by Military Simulation and Training accounted for a significant
portion of its revenues. CAE acts as prime contractor or major subcontractor for various US,
European, Canadian and other foreign government programs. The termination of funding for a
government program would result in a loss of anticipated future revenue attributable to that
program which could have a negative impact on CAEs operations. A significant reduction in military
expenditures by countries with which CAE has contracts could materially adversely affect its sales
and earnings. CAE operates in the civil simulation equipment and training services markets, both of which are
heavily dependent on the airline industry. CAE derives a material portion of its revenue from the supply of equipment and services to the
commercial and business airline industry. The continued unprofitability generally of the major
airlines has lead to a reduction or delay of new aircraft purchases which has resulted in reduced
simulator orders and pricing constraints. Intense competition in CAEs target markets could limit its ability to attract and retain
customers. The markets in which CAE sells its simulation and control equipment and training services are
highly competitive. Some of the Companys competitors are larger than CAE and have greater
financial, technical, marketing, manufacturing and distribution resources. In addition, some
competitors have well-established relationships with aircraft manufacturers, airlines and
governments which may give them an advantage over CAE in winning contracts with these
organizations. CAE obtains most of its contracts through competitive bidding processes that subject
the Company to the risk that it will expend substantial time and effort on proposals for contracts
that may not be awarded to the Company. CAE cannot assure that it will continue to win
competitively awarded contracts at the same rate as in the past. CAE is subject to the risks of doing business abroad and currency fluctuations. CAE has operations in numerous countries and sells its products and services to customers around
the world. For the fiscal year ended March 31, 2005, sales to customers outside the US and Canada
accounted for approximately 50% of revenue. CAE expects that sales outside the US and Canada will
continue to account for a significant portion of revenue for the foreseeable future. As a result,
CAE is subject to risks of doing business internationally. The majority of CAEs revenue is not
currently denominated in Canadian dollars, and the Company expects that its revenue will continue
to be generated in currencies other than the Canadian dollar. A substantial portion of operating
expenses are payable in Canadian dollars. Fluctuations in the Canadian dollar exchange rate will
impact results of operations and financial condition from 30




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##### 



period to period. CAE is also subject to the risks of changes to laws and regulations in host
countries; the cost and complexity of using foreign representatives and consultants; the imposition
of tariffs, embargoes, controls and other restrictions impeding the free flow of goods, information
and capital; the difficulties of managing and operating an enterprise and complying with laws in
multiple jurisdictions; and general changes in economic and geopolitical conditions. CAEs currency
hedging activities may not be successful. CAEs use of fixed-price and long-term supply contracts could subject the Company to losses if
there are cost overruns. CAE provides its products and services primarily through fixed-price contracts that require the
absorption of cost overruns, notwithstanding the difficulty of estimating all of the costs incurred
in performing these contracts and in projecting the ultimate level of sales that the Company may
achieve. In addition, a number of CAEs contracts to supply simulators to commercial airlines are
long-term agreements for up to 20 years. These agreements establish the prices for the simulators
to be delivered, subject to adjustments for inflation and cost increases. If these adjustments do
not fully offset inflation or cost increases, CAEs results of operations could be adversely
affected. CAEs business could be harmed if its products do not successfully integrate or
operate with other sophisticated and continually evolving software, computing and communications
systems. If CAE experiences difficulties or does not meet project milestones in a timely manner,
the Company could be obligated to devote more engineering and other resources to a particular
project than originally anticipated. While CAE believes it has recorded adequate provisions for
losses on fixed-price contracts, obligations under fixed-price and long-term supply contracts could
subject the Company to contract losses in excess of provisions. CAEs government-funded military programs are regulated and subject to audit. Like most suppliers of products and services to governments, CAE may be audited and reviewed
periodically on some projects. Adjustments arising from government audits and reviews may have an
adverse effect on results of operations. In addition, some costs may not be reimbursable or allowed
in negotiation of fixed-price contracts. Further, as a government contractor, CAE may be subject to
an increased risk of legal actions and liabilities which purely private sector companies are not
subject to, the results of which could have a material adverse effect on operations. Failure to
comply with applicable government regulations and requirements could lead to suspension or being
barred from government contracting or subcontracting for a period of time, which would have a
negative impact on CAEs operations and could have a negative effect on its reputation and ability
to procure other government contracts in the future. In the future, CAE may not be able to obtain financial support for research and development
activities. Some of CAEs research and development initiatives have been carried out with the financial support
of governmental agencies including amounts from the government of Canada through Technology
Partnerships Canada. If such financial assistance is not available to the Company in the future,
CAE may have to find other financing, which may not be available. CAE may experience contract cancellations within its existing backlog of orders. 31




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At March 31, 2005, CAE had several hundred active contracts representing a total order backlog of
$2.5 billion. Approximately 60% of the backlog is comprised of long-term contracts where revenues
are guaranteed or expected based on current customer requirements. If certain of the Companys
customers become insolvent or experience other financial difficulties, CAEs revenue would be
adversely affected. In addition, contracting customers may terminate these contracts, unilaterally
in some cases, if they desire. CAE cannot assure that its existing backlog will result in sales or
that any such sales will be profitable. CAEs ability to protect its intellectual property is limited, and competitors may use CAEs
technology which could weaken the Companys competitive position. CAE relies in part on trade secrets and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect its proprietary rights. Such reliance may be
insufficient to prevent misappropriation of CAEs technology or deter others from developing
similar technologies. Enforcement of CAEs intellectual property rights or its ability to acquire
them may be unavailable or limited in some countries. Reliance on the intellectual property of others could prevent or delay CAEs performance of
contracts or negatively impact margins. CAEs products contain sophisticated computer systems supplied to the Company by third parties.
Such computer systems and software may not always be available to CAE. The production of CAEs
simulators is often dependent upon receipt of data, including confidential or proprietary data,
concerning the functions, design and performance characteristics of a product or system, the
performance of which the Companys simulator is intended to simulate. CAE cannot assure that it
will be able to obtain such data on reasonable terms, or at all. Claims by other companies that CAEs products infringe their proprietary rights could adversely
affect the Companys ability to sell its products and increase its costs. Infringement claims may be brought against CAE or its customers in the future. CAE may not be
successful in the defence of such claims and may not be able to develop processes that do not
infringe on the rights of third parties or obtain licenses on commercially acceptable terms, if at
all. In addition, any litigation related to CAEs intellectual property rights could be lengthy and
costly and could adversely affect operations or financial results, whether or not CAE is
successful. CAEs union agreements are subject to renewal, and the Company may be unable to retain qualified
personnel which would harm the ability to carry out its business strategy. CAE is party to 12 collective bargaining agreements throughout its business units which are subject
to expiration at various times in the future. If CAE is unable to renew these agreements, or others
as they become subject to renegotiation from time to time, it could result in work stoppages and
other labor disturbances which could have a material adverse effect on CAEs business. CAEs
success depends to a significant degree upon the continued contributions of its qualified technical
personnel and its future ability to attract and retain highly skilled personnel. 32




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Any inability to attract and retain qualified personnel in the future may seriously harm CAEs
business and results of operations. CAEs debt agreements may restrict its ability to finance future operations and, if the Company is
unable to meet its financial covenants, could cause CAEs debt to be accelerated. Both the indenture governing CAEs senior notes and the terms of CAEs credit facilities contain
restrictive covenants. These restrictions could hurt the Companys ability to finance future
operations or capital needs, or to engage in other business activities that may be in CAEs
interest. In addition, CAE is also required to comply with specified ratios and tests, including
leverage, interest coverage ratios and a consolidated net worth test. A breach of any of these
agreements or inability to comply with the required financial ratios or limits could result in a
default, which would permit CAEs lenders to declare amounts owed to them due and immediately
payable. CAEs level of debt may adversely affect its financial and operating activity, and it may encounter
difficulties in refinancing its debt. CAE incurred indebtedness in connection with fiscal 2002-2003 acquisitions and CAEs capital
expenditures were greater during the last two years than historical levels as the Company executed
its business plan. In the future, CAE may borrow more money, subject to the limitations imposed by
senior notes and credit facilities. CAEs indebtedness may affect the way it conducts business. A
material element of CAEs debt matures in fiscal 2007 and if CAE is not able to refinance that debt
on acceptable terms and conditions CAE may be adversely affected. CAE may be subject to significant environmental liabilities imposed by environmental laws and
regulations or contractual indemnities. CAEs operations include, and its past operations and those of some past operators at some of its
sites have included, the use, generation, storage, handling and disposal of hazardous materials.
New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of
previously unknown contamination, the imposition of new clean-up requirements or claims on
indemnities CAE has been given may require the Company to incur substantial costs in the future
which could have a material adverse effect on its financial condition and results of operations. CAE may be subject to liability claims arising from casualty losses. Due to the nature of CAEs business, the Company may be subject to liability claims arising out of
accidents or disasters involving aircraft for which CAE has provided training equipment or
services, including claims for serious personal injury or death. CAE may also be subject to product
liability claims in connection with past equipment and service sales by businesses comprising CAEs
Discontinued Operations. CAE cannot be certain that its insurance coverage will be sufficient to
cover one or more substantial claims. The products CAE manufactures may be subject to warranty or other claims. The simulators CAE manufactures are highly complex and sophisticated and may contain defects 33




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that are difficult to detect and correct. The occurrence of errors and failures in CAEs products
could result in warranty claims or the loss of customers. Correcting such defects could require
significant capital investment. When defective products are integrated in the customers equipment,
CAE may face product liability claims based on damages to such equipment. Any claims, errors or
failures could have an adverse effect on operating results and business. CAE cannot be certain that
its insurance coverage will be sufficient to cover one or more substantial claims. CAE is subject to compliance with regulatory rules imposed by aviation authorities that may change
without notice, resulting in disruptions to its sales and operations. CAE is subject to compliance with regulatory rules imposed by aviation authorities that may change
without notice, resulting in disruptions to its sales and operations. Any changes imposed by a
regulatory agency, including changes imposed by aviation authorities such as the US Federal
Aviation Administration to safety standards, could require CAE to make unplanned modifications to
its products and services, or may result in delays or cancellations of sales. CAE cannot predict
the future impact of changing law or regulation on its operations and any changes could have a
material adverse effect on its results of operations or financial condition. Sales or licenses of certain CAE products require regulatory approvals. The sale or license of virtually all of CAEs products is subject to regulatory controls, including
the prohibition of sales to certain countries, or of certain technology such as military-related
simulators or other training equipment including military data or parts, without an export license
or other approvals. These regulations change with some frequency. CAE cannot assure that it will be
permitted to sell or license certain products to customers and the Company may lose potential
revenue as a result of the application of such regulations. Failure to comply with any of these
regulations in the countries in which CAE operates could subject the Company to fines and other
material sanctions. CAEs ability to retain and attract key personnel. CAEs continued success will depend in part on the ability to retain and attract key personnel with
the relevant skills, expertise and experience. The Company applies a compensation policy designed
to mitigate this risk. 34




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ITEM 6  DIVIDENDS CAE paid a quarterly dividend of $0.03 per common share during the period of April 1, 2002 to
December 31, 2004. CAE reduced the quarterly dividend to $0.01 per common share with effect as of
February 11, 2005. The Company currently intends to maintain the quarterly dividend of $0.01 per
common share. However, any decision to declare and pay dividends in the future will be made at the
discretion of the Board of Directors, after taking into account the financial results, capital
requirements and other factors the directors may deem relevant. The Companys contracts with
Technology Partnerships Canada prohibit the payment of a dividend if such payment would prevent
payment to Technology Partnerships Canada of a royalty owed under the contract. The Companys Dividend Reinvestment Plan (DRIP) provides that Canadian resident eligible
shareholders can elect to receive common stock dividends in lieu of cash dividends. During fiscal
2003, 2004 and 2005, CAE issued 54,622, 106,002 and 126,901 common shares, respectively, as share
dividends. ITEM 7  DESCRIPTION OF CAPITAL STRUCTURE Our authorized capital consists of an unlimited number of common shares without par value and an
unlimited number of preferred shares without par value, issuable in series. Each common share entitles the holder thereof to dividends if, as and when declared by our
directors, to one vote at all meetings of holders of common shares and to participate, pro rata,
with the holders of common shares, in any distribution of our assets upon liquidation, dissolution
or winding-up, subject to the prior rights of holders of shares ranking in priority to common
shares. As at the close of business on March 31, 2005, 248,070,329 common shares were issued and
outstanding. There are no preferred shares issued and outstanding. ITEM 8  MARKET FOR SECURITIES The outstanding common shares of the Company are listed and posted for trading on The Toronto Stock
Exchange under the symbol CAE and on the New York Stock Exchange under the symbol CGT. 8.1 Trading Price and Volume CAE Inc.
TSX Share Price Information
FY 2005 Month
    
    Max
    
    Min
    
    Total VolumeApril-04
    
    $
    6.24
    
    
    $
    5.56
    
    
    
    19,904,111May-04
    
    $
    5.89
    
    
    $
    5.16
    
    
    
    17,831,500June-04
    
    $
    6.18
    
    
    $
    5.33
    
    
    
    14,989,226July-04
    
    $
    6.39
    
    
    $
    5.74
    
    
    
    13,109,001
 35




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##### 



Month
    
    Max
    
    Min
    
    Total VolumeAugust-04
    
    $
    6.55
    
    
    $
    5.26
    
    
    
    17,045,510September-04
    
    $
    5.85
    
    
    $
    5.48
    
    
    
    12,973,167October-04
    
    $
    5.71
    
    
    $
    4.66
    
    
    
    15,494,401November-04
    
    $
    5.07
    
    
    $
    4.40
    
    
    
    18,164,028December-04
    
    $
    5.10
    
    
    $
    4.41
    
    
    
    14,864,185January-05
    
    $
    5.22
    
    
    $
    4.67
    
    
    
    34,231,351February-05
    
    $
    5.88
    
    
    $
    4.90
    
    
    
    36,854,729March-05
    
    $
    6.04
    
    
    $
    5.22
    
    
    
    17,246,110
 CAE Inc.
NYSE Share Price Information
FY 2005 Month
    
    Max
    
    Min
    
    Total VolumeApril-04
    
    $
    4.77
    
    
    $
    4.08
    
    
    
    572,900May-04
    
    $
    4.29
    
    
    $
    3.72
    
    
    
    376,800June-04
    
    $
    4.59
    
    
    $
    3.87
    
    
    
    464,900July-04
    
    $
    4.82
    
    
    $
    4.34
    
    
    
    326,000August-04
    
    $
    4.99
    
    
    $
    4.00
    
    
    
    394,100September-04
    
    $
    4.51
    
    
    $
    4.22
    
    
    
    524,600October-04
    
    $
    4.51
    
    
    $
    3.85
    
    
    
    334,500November-04
    
    $
    4.13
    
    
    $
    3.77
    
    
    
    697,900December-04
    
    $
    4.25
    
    
    $
    3.59
    
    
    
    2,240,500January-05
    
    $
    4.27
    
    
    $
    3.87
    
    
    
    754,700February-05
    
    $
    4.76
    
    
    $
    3.96
    
    
    
    561,100March-05
    
    $
    4.99
    
    
    $
    4.19
    
    
    
    1,201,400
 ITEM 9  DIRECTORS AND OFFICERS The directors of the Company are elected at each annual meeting of shareholders and hold office
until the next annual meeting of shareholders or until their successors are elected or appointed.
The names and municipalities of residence of the directors and officers of the Company, the
positions and offices held by them in the Company, their respective principal occupations for the
last five years, and the year in which they became a director are set forth below. In addition to
fulfilling all statutory requirements, the Board of Directors oversees and reviews: (i) the
strategic and operating plans and financial budgets and the performance against these objectives;
(ii) the principal risks and the adequacy of the systems and procedures to manage these risks;
(iii) the compensation and benefit policies; (iv) management development and succession planning;
(v) business development initiatives; (vi) the communications policies and activities, including
shareholder communications; (vii) the integrity of internal controls and management information
systems; (viii) the monitoring of the corporate governance system; and (ix) the performance of the
President and Chief Executive Officer. The Committees of the Board of Directors are the Audit Committee, the Governance Committee, the
Compensation Committee and the Executive Committee. 36




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9.1 Name and Occupation DIRECTORS Name and Municipality ofResidence andYear first became a director
    
    Principal OccupationBrian
E. Barents
Andover, Kansas, USA
(2005)
    
    Director of Kaman
Corporation, Eclipse
Aviation Corporation, the
Nordam Group and Aerion
Corporation, as well as a
board member of the Flight
Safety Foundation and a
member of the Board of
Trustees of Embry-Riddle
Aeronautical University. A
former Air National Guard
Brigadier General and still
an active pilot, Mr. Barents
was the President, CEO and
co-founder of Galaxy
Aerospace Company, LP from
1997-2001 and before that
Chairman, President and CEO
of Learjet, Inc. from
1989-1996. Mr. Barents is a
member of the Compensation
Committee.Robert
E. Brown
Westmount, Quebec, Canada
(2004)
    
    President and Chief
Executive Officer of the
Company and a member of the
Executive Committee. Mr.
Brown was Chairman of the
Board of Air Canada from
May, 2003 to October, 2004,
and before this, Mr. Brown
was President and Chief
Executive Officer of
Bombardier Inc. from
February 1999 to December
2002. Mr. Brown is a
Director of Nortel Networks
Corporation, Allen-Vanguard
Corporation, ACE Aviation
Holdings Inc. and several
listed venture capital
companies.John A. (Ian) Craig
Ottawa, Ontario, Canada
(2000)
    
    Business consultant. Mr.
Craig is also a director of
Bell Canada International
Inc., Arris International,
XPU Capital and the Ottawa
Heart Institute. Mr. Craig
is a member of the Audit
Committee.Richard
J. Currie, O.C.
Toronto, Ontario, Canada
(2001)
    
    Non-executive Chairman of
Bell Canada Enterprises Inc.
and of Telesat. He is a
Director of Staples, Inc.
and Petro-Canada and
Chancellor of the University
of New Brunswick. Mr. Currie
is a member of the Audit
Committee.
 37




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##### 



Name and Municipality ofResidence andYear first became a director
    
    Principal OccupationH.
Garfield Emerson, Q.C.
Toronto, Ontario, Canada
(1992)
    
    National Chairman and a
senior partner of the
national law firm of Fasken
Martineau DuMoulin LLP. Mr.
Emerson is also the Chairman
of the Board of Rogers
Communications Inc. and the
Vice-Chairman of the Board
of Rogers Wireless
Communications Inc. He is
also a Director of Canada
Deposit Insurance
Corporation, Rogers Cable
Inc., Rogers Media Inc.,
Wittington Investments,
Limited and Sunnybrook &
Womens Health Sciences
Centre. Mr. Emerson is a
member of the Governance
Committee.Anthony
S. Fell, O.C.
Toronto, Ontario, Canada
(2000)
    
    Chairman of RBC Dominion
Securities Inc. Mr. Fell is
also Chairman of Munich
Reinsurance Company of
Canada, a Director of BCE
Inc., Bell Canada, Loblaw
Companies Limited and
Telesat, and Chairman of the
Board of Trustees of
University Health Network.
Mr. Fell is the Chairman of
the Governance Committee.Paul Gagné, CA,
Montreal, Quebec, Canada
(2005)
    
    Director of Textron Inc.,
Inmet Mining Corporation,
Wajax Limited, Fraser Papers
Inc. and several private
companies. Between 1998 and
2002, Mr. Gagné served as a
consultant to Kruger Inc.
and a Director of its UK
Tissues Group. Prior to
that, he was sequentially
the Vice President Finance,
Chief Operating Officer,
Chief Executive Officer and
Chairman of Canadian Pacific
Forest Products Limited and
Avenor Inc. Mr. Gagné is a
member of the Audit
Committee.The
Honourable James A. Grant, P.C.,
C.M., Q.C.
Montreal, Quebec, Canada
(1991)
    
    Partner in the legal firm of
Stikeman Elliott LLP
(Montreal). Mr. Grant is a
Director of Canadian
Imperial Bank of Commerce,
Shire Pharmaceuticals Group
plc and various charitable
and social organizations.
Mr. Grant is a member of the
Compensation and Executive
Committees.
 38




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##### 



Name and Municipality ofResidence andYear first became a director
    
    Principal OccupationJames
F. Hankinson
Toronto, Ontario, Canada
(1995)
    
    President and Chief
Executive Officer of Ontario
Power Generation Inc. He is
also a Director of Maple
Leaf Foods Inc., Ontario
Power Generation Inc. and
Chair of the Board of
Trustees of ROW
Entertainment Income Fund.
Mr. Hankinson is the
Chairman of the Audit
Committee and a member of
the Governance Committee.E.
Randolph (Randy) Jayne II
Tysons Corner, Virginia
(2001)
    
    Senior Partner in Heidrick &
Struggles International,
Inc., an executive search
firm (1996present) and is
currently the Office
Managing Partner of the
firms Tysons Corner, VA
office. Mr. Jayne is a
member of the Compensation
Committee.James
W. McCutcheon, Q.C.
Toronto, Ontario, Canada
(1979)
    
    Counsel to the law firm of
McCarthy Tétrault LLP. Mr.
McCutcheon is a Director of
Dominion of Canada General
Insurance Company, Empire
Life Insurance Company
(Chairman 19911997),
Guardian Capital Group
Limited and Noranda Inc. Mr.
McCutcheon is a member of
the Audit Committee.Lawrence
N. Stevenson
Philadelphia, Pennsylvania, USA
(1998)
    
    Chief Executive Officer of
Pep Boys, a NYSE-listed U.S.
automotive services company.
Mr. Stevenson is also a
Director of SNC-Lavalin
Group Inc. Mr. Stevenson is
Chairman of the Compensation
Committee.Lynton
R. Wilson, O.C.
Oakville, Ontario, Canada
(1997)
    
    Chairman of the Board of the
Company. Mr. Wilson is the
Chairman of Nortel Networks
Corporation and of Allergen
NCE Inc., and is also a
Director of DaimlerChrysler
AG, Mercedes-Benz Canada
Inc., and DaimlerChrysler
Canada Inc. He is the
Chairman of the Executive
Committee and is a member of
the Compensation and
Governance Committees.
 OFFICERS WHO ARE NOT DIRECTORS Name and Municipality of
    
    Office held with CAE and PrincipalResidence
    
    Occupation(1)
 39




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##### 



Name and Municipality of
    
    Office held with CAE and PrincipalResidence
    
    Occupation(1)Donald
W. Campbell
Ottawa, Ontario, Canada
    
    Group President, Military
Simulation and Training;
formerly Executive Vice
President, Military Simulation
and Training 2000 to 2002;
Deputy Minister of Foreign
Affairs (Canada) and Prime
Ministers Personal
Representative for Economic
Summits, 1997 to 2000;
Canadian Ambassador to Japan,
1993-1997.Marc
Parent
Blainville, Quebec, Canada
    
    Group President, CAE
Simulation Products: formerly
Vice President and General
Manager, Challenger Programs
and Dorval Plants at
Bombardier Aerospace 2004 to
2005; Vice President and
General Manager at Bombardier
Aerospace US operations, from
2003 to 2004; Vice President
and General Manager, at
Bombardier Aerospace, Toronto
Site (former deHavilland) from
2001 to 2003.Jeffrey
G. Roberts
Hudson, Quebec, Canada
    
    Group President, Civil
Training and Services of CAE
Inc. appointed in February
2004 prior to this nomination
he had joined CAE team in
2001, formerly Chief Executive
Officer SimuFlite Training
International Inc. 1999 to
2001.Alain
Raquepas, CA, BCC
St. Lambert, Quebec, Canada
    
    Chief Financial Officer;
formerly Vice President
Finance, Military Simulation
and Training, 2000 to 2005.Hartland
J.A. Paterson
Westmount, Quebec, Canada
    
    Vice President, Legal, General
Counsel and Corporate
Secretary, 2001 to present;
formerly Vice President, Legal
and Regulatory of Cable &
Wireless PLC (Japan), 1999 to
2001.Eric Gemme, CA, CPA,
CBV
St. Hubert, Quebec, Canada
    
    Vice President and Corporate Controller,
2005; formerly Director Finance, Civil
Simulation and Training. From 2001 to
2003 he occupied the function of
Director, Mergers & Acquisitions and
subsequently Vice President, Finance and
Treasurer of Cognicase Inc. Prior to
2001, he was with PricewaterhouseCoopers
LLP where he held various positions in
their audit and corporate finance
services.
 40




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##### 



Name and Municipality of
    
    Office held with CAE and PrincipalResidence
    
    Occupation(1)Guy Blanchette, CA, CMA
St-Bruno, Quebec, Canada
    
    Vice President, and Treasurer, 2004 to
present; formerly Chief Financial Officer
Alstom Canada Inc.; Vice President
Finance and Strategic Planning with SNC
Industrial Technologies Inc. before he
became Vice President, Treasurer and
General Manager with SNC-Equity.
 
 (1)
    Where the date 2000 appears, it signifies the beginning of the last five years and
not necessarily the date upon which the individual commenced the relevant position or
occupation. The directors and senior officers of the Company as a group as at the date hereof beneficially own,
directly or indirectly, or exercise control or direction over common shares, which represent 1.5 %
of the Companys outstanding common shares. 9.2 Cease, Trade Orders, Bankruptcies, Penalties or Sanctions None of the proposed directors of CAE is, or within ten years prior hereto has been, subject to a
cease trade or similar order except that Messrs. Wilson and Brown were subject to cease trade
orders of the Ontario Securities Commission and two other Canadian securities regulators
prohibiting them, as directors of Nortel Networks Corporation and Nortel Networks Limited
(collectively, Nortel), from trading in securities of Nortel. The orders were lifted after the
receipt by the regulators of filings Nortel was required to make. Mr. Brown joined the board of Air Canada two weeks before it filed for protection under the
Companies Creditors Arrangement Act on April 1, 2003 to help manage the financial crisis in which
that company found itself. 9.3 Conflicts of Interest The law firm Stikeman Elliott LLP, of which Mr. Grant is a partner, provided legal services to the
Company in fiscal 2005 and continues to provide such services to the Company. The law firms fees
to the Company are less than 2% of the law firms annual consolidated gross revenues. ITEM 10  TRANSFER AGENTS AND REGISTRARS The Company only has common shares issued. The Companys transfer agent is Computershare Trust
Company of Canada located at 100 University Avenue, Toronto, Ontario, M5J 2Y1. ITEM 11  MATERIAL CONTRACTS In fiscal 2005, CAE entered into one non-ordinary course material contract, being the sale
agreement in respect of the divestiture by the Company of its Marine Controls division. For
further particulars of this contract, please refer to section 5.1(a) Discontinued Operations of
this AIF. 41




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##### 



ITEM 12  AUDIT COMMITTEE 12.1 Mandate The mandate of CAEs Audit Committee is as follows: ROLE AND MEMBERSHIP The Audit Committee (the Committee) shall be a committee to the Board of Directors. The Committee shall consist of not fewer than four (4) such directors, one of whom shall be the
Chairman of the Committee. All members of the Committee shall be independent directors, as
determined by the Board taking into consideration applicable laws, regulations and other
requirements applicable to such determination. Each member shall annually certify to CAE as to his
or her independence, in form compliant with the standards of independence set out by regulatory
authorities, stock exchanges and other applicable laws, regulations and requirements. Each member
shall be able to read and understand financial statements (balance sheet, income statement, cash
flow statement) that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of the issues that can reasonably be expected to
be raised by CAEs financial statements, or shall become able to do so within a reasonable period
of time after joining the audit committee. One member shall have past employment in finance,
accounting or any other comparable experience or background providing financial expertise. The
Committee composition, including the qualifications of its members, shall comply with the
requirements of regulatory authorities, stock exchanges and other applicable laws, regulations and
requirements, as such requirements may be amended from time to time. The Chairman of the Committee and its members shall be elected annually by the Board of Directors
following recommendation of the Governance Committee and the Chairman of the Board. If the
designated Chairman of the Committee is unable to attend a Committee meeting, the other Committee
members present may elect a replacement Chairman for that meeting. A majority of members of the Committee shall constitute a quorum. RESPONSIBILITIES Work closely and cooperatively with such officers and employees of CAE, its auditors, and/or other
appropriate advisors and with access to such information as the Committee considers to be necessary
or advisable in order to perform its duties and responsibilities, as assigned by the Board of
Directors, in the following areas: REVIEW OF AUDITED FINANCIAL STATEMENTS  1.
    
    Review the annual audited consolidated financial statements and make specific recommendations
to the Board of Directors. As part of this process the Committee should: 42




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##### 




    
    Review the appropriateness of and any changes to the underlying accounting principles
and practices.
    
    Review the appropriateness of estimates, judgments of choice and level of conservatism
of accounting alternatives.
    
    Review financial risks, uncertainties, commitments and contingent liabilities and
discuss policies with respect to financial risk assessment and risk management. ENGAGEMENT OF EXTERNAL AUDITORS  2.
    
    Recommend to the Board of Directors the appointment of the external auditor, which shall be
accountable to the Board and the audit committee as representatives of the shareholders.  3.
    
    Review and approval of engagement letter. As part of this review the committee reviews and
recommends to the Board of Directors for their approval the auditors fees for the annual
audit. The Committee is responsible for the oversight of the work of the companys auditor for
the purpose of preparing or issuing an audit report or related work, and the auditor shall
report directly to the Committee. The Committee shall approve the engagement of the external
auditors for the audit, any audit-related services, advice with respect to taxation matters
and other permitted services and fees for such services, including approval processes for any
such service that comply with the requirements of regulatory authorities, stock exchanges and
other applicable laws, regulations and requirements, as such requirements may be amended from
time to time in accordance with the policy and procedures attached hereto.  4.
    
    Receipt of a written statement not less than annually from the external auditor describing in
detail all relationships between the auditor and CAE that may impact the objectivity and
independence of the auditor. Review annually with the Board of Directors the independence of
the external auditors and either confirm to the Board of Directors that the external auditors
are independent in accordance with applicable listing requirements, laws, regulations and
other rules, or recommend that the Board of Directors take appropriate action to satisfy
itself of the external auditors independence. Review and approve CAEs hiring policies
regarding partners, employees and former partners and employees of the present and former
external auditor of CAE. REVIEW AND DISCUSSION WITH EXTERNAL AUDITORS  5.
    
    Review with the external auditors and management the annual external audit plans which would
include objectives, scope, timing, materiality level and fee estimate.  6.
    
    Request and review an annual report prepared by the external auditors of any significant
recommendations to improve internal control and corresponding management responses. Request
and review an annual report prepared by the external auditors regarding the auditors internal
quality-control procedures, material issues raised by the most recent internal quality-control
review of the auditors, or by any inquiry or investigation by 43




---



##### 



governmental or professional authorities, within the preceding 5 years, respecting one or
more audits carried out by the auditors, and any steps taken to deal with any such issues.
Meet separately, periodically, with external auditors.  7.
    
    Make specific and direct inquiry of the external auditors relating to:  
    
    Performance of management involved in the preparation of financial statements.
    
    Any restrictions on the scope of audit work.
    
    The level of cooperation received in the performance of the audit.
    
    The effectiveness of the work of internal audit.
    
    Any unresolved material differences of opinion or disputes between management and the
external auditors.
    
    Any transactions or activities which may be illegal or unethical.
    
    Independence of the external auditor including the nature and fees of non-audit services
performed by external audit firm and its affiliates.
    
    Any other matter so desired. REVIEW AND DISCUSSION WITH INTERNAL AUDITORS  8.
    
    Review the annual internal audit plan including assessment of audit risk, planned activities,
level and nature of reporting, audit organization and annual budget. Meet separately,
periodically, with internal auditors.  9.
    
    Make specific and direct inquiry of the internal auditors relating to:  
    
    Any significant recommendations to improve internal control and corresponding management
responses.
    
    The level of independence of internal audit.
    
    Any material disagreement with management.
    
    Any other matter so desired. REVIEW AND DISCUSSION WITH MANAGEMENT  10.
    
    Review and assess the adequacy and quality of organization and staffing for accounting and
financial responsibilities as well as discuss with management the annual audited financial
statements and quarterly financial statements and the independent auditor, 44




---



##### 



including CAEs disclosures under Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A).  11.
    
    Review with management the annual performance of external and internal audit. REVIEW OF OTHER PUBLIC DOCUMENTS  12.
    
    Ensure the Committee reviews all material public documents relating to CAEs financial
performance, financial position or analyses thereon, including financial statements, MD&A,
annual and interim earnings press releases and the Annual Information Form (AIF). In certain
cases which involve severe timing considerations, the Committee may designate the
responsibility for review to any two members of the Committee. Review and monitor practices
and procedures adopted by the company to assure compliance with applicable listing
requirements, laws, regulations and other rules, and where appropriate, make recommendations
or reports thereon to the Board of Directors. Discuss CAEs financial information and earnings
guidance, if any, provided to analysts and rating agencies.  13.
    
    Review significant changes in the accounting principles to be observed in the preparation of
the accounts of the company and its subsidiaries, or in their application, and in financial
disclosure presentation.  14.
    
    Prepare such reports of the Committee as may be required by any applicable securities
regulatory authority to be included in the companys information circular or any other
disclosure document of the company.  15.
    
    The Committee shall review and approve the procedures set out in the companys Corporate
Communications & Disclosure Policy and will annually verify that adequate procedures exist
within the company for the review of its disclosure of financial information derived from its
financial statements. OTHER RESPONSIBILITIES  16.
    
    The Board may refer from time to time such matters relating to the financial affairs of the
company as the Board may deem appropriate. MEETINGS  17.
    
    The Committee shall meet at such times as deemed necessary by the Board or the Committee and
shall report regularly to the Board. ENGAGEMENT OF PROFESSIONAL SERVICES  18.
    
    The Committee is authorized to engage independent counsel, and other advisers, as it
determines necessary to carry out its duties. The company shall provide for appropriate
funding, as determined by the Committee, for such services. 45




---



##### 



HANDLING OF COMPLAINTS  19.
    
    The Committee shall maintain procedures for the receipt, retention and treatment of
complaints received by the company regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by employees of the company of
concerns regarding questionable accounting or auditing matters. ANNUAL REVIEW  20.
    
    The Committee shall review and assess the adequacy of its mandate annually, report to the
Board of Directors thereon and recommend any proposed changes to the Board of Directors for
approval. The Committee shall also perform an annual evaluation of the performance of the
Committee and shall report to the Chairman of the Governance Committee of the CAE Board of
Directors thereon. 12.2 Membership The members of CAEs Board of Director Audit Committee are: Mr. James F. Hankinson (chair)
Mr. James W. McCutcheon, Q.C.
Mr. John A. (Ian) Craig
Mr. Richard J. Currie
Mr. Paul Gagné Each of these members is independent and financially literate. Mr. Hankinson is a chartered accountant and has a Master of Business Administration from McMaster
University. He served as President and Chief Executive Officer of New Brunswick Power Corporation
from 1996 to 2002. In 1973, he joined Canadian Pacific Limited, and served as chief operating
officer from 1990 to 1995. Mr. Hankinson is also a member of the Audit Committee of the board of
directors of Maple Leaf Foods Inc. Mr. McCutcheon has extensive board experience. He is also member of the Audit Committees of the
boards of directors of Noranda Inc. and of The Empire Life Insurance Company. Mr. Craig has extensive board experience. He is also member of the Audit Committees of the boards
of directors of Bell Canada International Inc. and ARRIS Group Inc. Mr. Currie has extensive board experience and is a graduate of the Harvard Business School. In 2001
Mr. Currie was elected CANADAS OUTSTANDING CEO OF THE YEAR. In 2003 he was elected to the
Canadian Business Hall of Fame. In February, 2004 he was the recipient of the McGill Management
Achievement Award, and in May, 2004 he was inducted as a Fellow of the Institute of Corporate
Directors. Mr. Gagné is a chartered accountant. He was sequentially the Vice-President Finance, Chief
Operating Officer, Chief Executive Officer and Chairman of Canadian Pacific Forest Products 46




---



##### 



Limited and Avenor Inc. Mr. Gagné is chairman of the Audit Committees of the boards of directors of
Fraser Papers Inc., Textron Inc. and Inmet Mining Corporation 12.3 Approval of Services The Audit Committee is responsible for the appointment, compensation, retention and oversight of
the work of its independent auditor. The Audit Committee must pre-approve any audit and non-audit
services performed by PricewaterhouseCoopers LLP (PwC), the auditor of the Company, or such
services must be entered into pursuant to the policies and procedures established by the Committee.
Pursuant to such policies the Audit Committee annually authorizes CAE and its affiliates to engage
the auditor for specified permitted tax, financial advisory and other audit-related services up to
specified fee levels. The Audit Committee has considered and concluded that the provision of these
services by PwC is compatible with maintaining PwCs independence. The Audit Committees policy
also identifies prohibited services that PwC is not to provide the Company. The following chart shows all fees paid to PwC by the Company and its subsidiaries in the most
recent and prior fiscal years for the various categories of services (generic description only). Fiscal 2005
    
    Fiscal 2004Fee Type
    
    (Millions $)
    
    (Millions $)Audit Services: Annual audit of the
consolidated financial statements,
including quarterly reviews, statutory
audits or financial audits for subsidiaries
and affiliates of the Company; services
associated with documents filed with
regulatory authorities.
    
    
    2.3
    
    
    
    2.0Audit-related Services*: Translation
service for financial results; due
diligence services pertaining to potential
acquisitions/dispositions; audit procedures
related to accounting and/or billing
records; consultations as to the accounting
or disclosure treatment of transactions or
events and/or the actual or potential
impact of final or proposed rules,
standards or interpretations by any
regulatory or standard setting bodies;
audit of closing balance sheet, working
capital statement and/or any similar
statements pertaining to business
dispositions; and assistance re
implementation of the requirements of laws,
regulations or listing standards including
assistance with the implementation of
Section 404 of the Sarbanes-Oxley Act of
2002.
    
    
    0.7
    
    
    
    0.8
 47




---



##### 



Fiscal 2005
    
    Fiscal 2004Fee Type
    
    (Millions $)
    
    (Millions $)Tax Services: Federal, provincial, state
and local tax compliance and advice;
assistance with tax audits and appeals
before governmental agencies; tax-related
valuation services, including transfer
pricing and cost segregation studies.
    
    
    0.3
    
    
    
    0.7Other Services: Software and news services.
    
    
    
    
    
    
    0.1Total:
    
    
    3.3
    
    
    
    3.6
 
 *
    Audit-related fees include fees relating to the issuance of a prospectus and due diligence in
connection with the Companys acquisitions and divestitures. ITEM 13  ADDITIONAL INFORMATION Additional information, including directors and officers remuneration and indebtedness, principal
holders of the Companys securities, options to purchase securities and interests of insiders in
material transactions, where applicable, is contained in the Proxy Information Circular dated May
12, 2005, in connection with the Companys Annual and Special Meeting of Shareholders held on June
22, 2005. Additional financial information, including comparative consolidated audited financial
statements and MD&A, are provided in the Companys Annual Report to the shareholders for the
financial year ended March 31, 2005. A copy of such documents may be obtained from the Vice
President, Global Communications or the Secretary of the Company upon request, or available online
at www.sedar.com, as well as the Companys website at www.cae.com. In addition, the Company will provide to any person or company, upon request to the Vice President,
Global Communications or the Secretary of the Company, the documents specified below:  (a)
    
    When the securities of the Company are in the course of a distribution under a preliminary
short form prospectus or a short form prospectus:  (i)
    
    one copy of the annual information form of the Company together with one copy of any
document, or the pertinent pages of any document, incorporated by reference in such annual
information form;(ii)
    
    one copy of the comparative financial statements of the Company for its most recently
completed financial year together with the accompanying report of the auditors and one 48




---



##### 



copy of the most recent interim financial statements of the Company for any period after
the end of its most recently completed financial year;(iii)
    
    one copy of the information circular in respect of its most recent annual meeting of
shareholders that involved the election of directors; and(iv)
    
    one copy of any other documents which are incorporated by reference into the
preliminary short form prospectus or the short form prospectus and are not required to be
provided under (i) to (iii) above; or  (b)
    
    At any other time, one copy of any other document referred to in clauses (i), (ii) and (iii)
of paragraph (a) above, provided that the Company may require the payment of a reasonable
charge if the request is made by a person or company who is not a security holder of the
Company. 49




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##### 



SCHEDULE A  SUBSIDIARIES Set forth below are the names of all the direct and indirect subsidiaries of the Company. All
companies are wholly owned except as noted. Jurisdiction ofName of Subsidiary
    
    IncorporationCanada3985954 Canada Inc.
    
    Canada4025164 Canada Inc.
    
    CanadaCAE International Holdings Limited
    
    CanadaCAE Railway Ltd.
    
    CanadaCAE Machinery Ltd.
    
    British ColumbiaCAE Simulator Services Inc.
    
    QuebecGreenley & Associates Incorporated
    
    CanadaUnited StatesCAE (US) Inc.
    
    DelawareCAE (US) LLC
    
    DelawareCAE Railway Inc.
    
    DelawareCAE USA Inc.
    
    DelawareCivil Aviation Training Solutions Inc.
    
    FloridaCAE SimuFlite Inc.
    
    TexasEuropeCAE Center Brussels N.V
    
    BelgiumSimubel N.V. (a CAE Aviation Training Company).
    
    BelgiumCAE Beyss Grundstücksgesellschaft GmbH
    
    GermanyCAE Elektronik GmbH
    
    GermanyCAE Verwaltungsgesellschaft mbH.
    
    GermanyCityLine Canadair Simulator und Training GmbH (15%)
    
    GermanyHelicopter Training Media International GmbH
    
    GermanyHFTS Helicopter Flight Training Services GmbH
    
    GermanySAGO Grünstucks-Verwaltungsgesellschaft mbH (51%)
    
    GermanySAGO Grünstucks-Verwaltungsgesellschaft mbH & Co. KG (95%)
    
    GermanyZFB Zentrum für Flugsimulation Berlin GmbH (17%)
    
    GermanyCAE International Capital Management Hungary LLC
    
    HungaryCAE Visual Software Private
Limited
    
    IndiaRotorsim (Consortium) (50%)1
    
    ItalyCAE Investments S.à r.l.
    
    LuxembourgB.V. Nationale Luchtvaartschool
    
    NetherlandsCAE Aviation Training B.V.
    
    Netherlands
 
 1
    
    Partnership 50




---



##### 



Jurisdiction ofName of Subsidiary
    
    IncorporationCAE Center Amsterdam B.V.
    
    NetherlandsCAE Center Maastricht B.V.
    
    NetherlandsCAE Flight Crew Training B.V.
    
    NetherlandsCAE Holdings BV
    
    NetherlandsCAE Investments BV
    
    NetherlandsCAE Training Aircraft B.V.
    
    NetherlandsCAE Training B.V.
    
    NetherlandsNLS Amsterdam B.V.
    
    NetherlandsAcademia Aeronautica De Evora S.A.(56%)
    
    PortugalCAE Euroco S.à.r.l.
    
    PortugalCAE Servicios Globales de Instrucción de Vuelo (España),
S.L.
    
    SpainServicios de Instrucción de Vuelo, S.L. (80%)
    
    SpainCAE Holdings Limited
    
    United KingdomInvertron Simulators plc
    
    United KingdomCAE (UK) plc
    
    United KingdomCAE Aircrew Training Services plc (78%)
    
    United KingdomCVS Leasing Limited (13.39%)
    
    United KingdomFast Holdings Limited (47.5%)
    
    United KingdomFast Training Services Limited
    
    United KingdomLandmark Operations Limited
    
    United KingdomLandmark Training Limited
    
    United KingdomOtherCAE Australia Pty Ltd
    
    AustraliaCAE South America Flight Training do Brasil Ltda
    
    BrazilCAE Aviation Training Chile Limitada2
    
    ChileQindao Fei Sheng International Aviation Training Technology
Development Co. Ltd. (33%)
    
    ChinaZhuhai Xiang Yi Aviation Technology Company Limited (49%)
    
    ChinaCAE Dubai LLC (49%)
    
    DubaiCAE Electronics Private Ltd
    
    IndiaCAE Electronics SDN BHD
    
    MalaysiaCAE Labuan Inc
    
    MalaysiaCAE Aviation Training International Ltd
    
    MauritiusFlight Training Device (Mauritius) Limited
    
    Mauritius
 
 2
    
    Partnership 51




---



##### 



DISCONTINUED OR INACTIVE Jurisdiction ofName of Subsidiary
    
    IncorporationCanadaCAE Pederson Ltd. (49%)
    
    British ColumbiaUnited StatesCAE CT Inc.
    
    CaliforniaEuropeCAE Screenplates SA
    
    FranceCAE Beteiligungsgesellschaft
mbH
    
    GermanyCAE Screenplates AB
    
    SwedenOtherCAE Simco (Barbados) Ltd.
    
    BarbadosCAE MRAD Pty Ltd.
    
    AustraliaISDAT Simulation SDN BHD (20%)
    
    Malaysia
 52