Exhibit 2

MANAGEMENT AND AUDITORS' REPORTS

MANAGEMENT'S STATEMENT OF RESPONSIBILITY

The
consolidated financial statements contained in this Annual Report are the responsibility of management, and have been prepared in accordance with Canadian generally accepted accounting principles
and include when necessary some estimates based on management best judgment. Financial information presented elsewhere in the Annual Report is under management responsibilities and consistent with
that contained in the accompanying financial statements.

CAE's
policy is to maintain internal accounting and administrative systems, combined with disclosure control of high quality consistent with reasonable cost. Such systems are designed to
provide reasonable assurance as to the reliability of financial information and the safeguarding of assets.

The
Board of Directors is responsible for ensuring that Management fulfils its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the
consolidated financial statements through its Audit Committee, consisting solely of outside directors, which reviews the consolidated financial statements and reports thereon to the Board. The
Committee meets periodically with the external auditors, internal auditors and management to review their respective activities and to satisfy itself that each party is properly discharging its
responsibilities. Both external auditors and internal auditors have free access to the Committee, with or without management, to discuss the scope of their audits, the adequacy of the system of
internal controls and financial reporting.

The
financial statements have been reviewed by the Audit Committee and, together with the other required information in the Annual Report, approved by the Board of Directors. In
addition, the consolidated financial statements have been audited by PricewaterhouseCoopers LLP, whose report is provided below.

|GRAPHIC                                           | GRAPHIC                                                                    
|------------------------------------------------- | ---------------------------------------------------------------------------
|D.H. BURNEY
President and Chief Executive Officer | P.G. RENAUD
Executive Vice President,
Chief Financial Officer and Secretary

Montreal,
Canada
May 11, 2004

AUDITORS' REPORT

To
the Shareholders of CAE Inc.

We
have audited the Consolidated Balance Sheets of CAE Inc. as at March 31, 2004 and 2003, and the consolidated statements of earnings, retained earnings and cash flows for each of the
years in the three-year period ended March 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2004 and 2003, and the
results of its operations and cash flows for each of the years in the three-year period ended March 31, 2004 in accordance with Canadian generally accepted accounting principles.

GRAPHIC

Chartered
Accountants
Montreal, Canada
May 11, 2004

Comments
by Auditors for US Readers on Canada-US Reporting Difference

In
the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that
has a material effect on the comparability of the company's financial statements, such as the changes described in note 1 to the consolidated financial statements. Our report to the
shareholders dated May 11, 2004 is expressed in accordance with Canadian reporting standards which do not require a reference to such a change in accounting principles in the auditors' report
when the change is properly accounted for and adequately disclosed in the financial statements.

GRAPHIC

Chartered
Accountants
Montreal, Canada
May 11, 2004

1

---





CONSOLIDATED BALANCE SHEETS

|as at March 31 (amounts in millions of Canadian dollars) |                                              | 2004 |         | 2003 
|-------------------------------------------------------- | -------------------------------------------- | ---- | ------- | -----
|Assets                                                   |                                              |      |         |      
|Current assets                                           |                                              |      |         |      
|                                                         | Cash and cash equivalents                    |      | $       | 61.9 
|                                                         | Short-term investments                       |      |         |     
|                                                         | Accounts receivable (note 4)                 |      |         | 390.9
|                                                         | Inventories (note 5)                         |      |         | 154.8
|                                                         | Prepaid expenses                             |      |         | 20.7 
|                                                         | Income taxes recoverable                     |      |         | 52.0 
|                                                         | Future income taxes (note 14)                |      |         | 1.8  
|                                                         |                                              |      |         |      
|                                                         |                                              |      | 682.1   |      
|Restricted cash                                          |                                              |      | 7.0     |      
|Assets of discontinued operations (note 3)               |                                              |      |        |      
|Property, plant and equipment, net (note 6)              |                                              |      | 843.0   |      
|Future income taxes (note 14)                            |                                              |      | 93.8    |      
|Intangible assets (note 7)                               |                                              |      | 155.2   |      
|Goodwill (note 8)                                        |                                              |      | 343.8   |      
|Other assets (note 9)                                    |                                              |      | 168.4   |      
|                                                         |                                              |      |         |      
|                                                         |                                              | $    | 2,293.3 |      
|                                                         |                                              |      |         |      
|Liabilities and shareholders' equity                     |                                              |      |         |      
|Current liabilities                                      |                                              |      |         |      
|                                                         | Accounts payable and accrued liabilities     |      | $       | 350.0
|                                                         | Deposits on contracts                        |      |         | 91.1 
|                                                         | Long-term debt due within one year (note 10) |      |         | 13.5 
|                                                         | Future income taxes (note 14)                |      |         | 51.1 
|                                                         |                                              |      |         |      
|                                                         |                                              |      | 505.7   |      
|Liabilities of discontinued operations (note 3)          |                                              |      |        |      
|Long-term debt (note 10)                                 |                                              |      | 623.4   |      
|Deferred gains and other long-term liabilities (note 15) |                                              |      | 155.6   |      
|Future income taxes (note 14)                            |                                              |      | 89.8    |      
|                                                         |                                              |      |         |      
|                                                         |                                              |      | 1,374.5 |      
|                                                         |                                              |      |         |      
|Shareholders' equity                                     |                                              |      |         |      
|Capital stock (note 11)                                  |                                              |      | 367.5   |      
|Contributed surplus (note 12)                            |                                              |      | 1.3     |      
|Retained earnings                                        |                                              |      | 562.1   |      
|Currency translation adjustment (note 21)                |                                              |      | (12.1   | )    
|                                                         |                                              |      |         |      
|                                                         |                                              |      | 918.8   |      
|                                                         |                                              |      |         |      
|                                                         |                                              | $    | 2,293.3 |      
|                                                         |                                              |      |         |      

Commitments
and contingencies (notes 17 and 19)

|Approved by the Board: |                     
|---------------------- | --------------------
|GRAPHIC                | GRAPHIC             
|D.H BURNEY
Director    | L.R. WILSON
Director

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

2

---



CONSOLIDATED STATEMENTS OF EARNINGS

|years ended March 31 (amounts in millions of Canadian dollars, except per share amounts) |                                  | 2004 |         | 2003  |   | 2002    |      
|---------------------------------------------------------------------------------------- | -------------------------------- | ---- | ------- | ----- | - | ------- | -----
|Revenue                                                                                  |                                  |      |         |       |   |         |      
|                                                                                         | Civil Simulation and Training    |      | $       | 461.8 |   | $       | 517.2
|                                                                                         | Military Simulation and Training |      |         | 472.8 |   |         | 445.7
|                                                                                         | Marine Controls                  |      |         | 158.6 |   |         | 167.6
|                                                                                         |                                  |      |         |       |   |         |      
|                                                                                         |                                  | $    | 1,093.2 |       | $ | 1,130.5 |      
|                                                                                         |                                  |      |         |       |   |         |      
|Earnings before interest, income taxes and discontinued operations                       |                                  |      |         |       |   |         |      
|                                                                                         | Civil Simulation and Training    |      | $       | 39.4  |   | $       | 116.2
|                                                                                         | Military Simulation and Training |      |         | 52.6  |   |         | 73.6 
|                                                                                         | Marine Controls                  |      |         | 29.6  |   |         | 31.8 
|                                                                                         | Restructuring Costs (note 23)    |      |         | (10.0 | ) |         |     
|                                                                                         |                                  |      |         |       |   |         |      
|Earnings before interest, income taxes and discontinued operations                       |                                  |      | 111.6   |       |   | 221.6   |      
|Interest on debt (note 10 (ix))                                                          |                                  |      | 30.0    |       |   | 34.1    |      
|Other interest income, net                                                               |                                  |      | (6.1    | )     |   | (3.7    | )    
|                                                                                         |                                  |      |         |       |   |         |      
|Earnings before income taxes and discontinued operations                                 |                                  |      | 87.7    |       |   | 191.2   |      
|Income taxes (note 14)                                                                   |                                  |      | 20.6    |       |   | 60.2    |      
|                                                                                         |                                  |      |         |       |   |         |      
|Earnings from continuing operations                                                      |                                  | $    | 67.1    |       | $ | 131.0   |      
|Results of discontinued operations (note 3)                                              |                                  |      | (3.1    | )     |   | (13.8   | )    
|                                                                                         |                                  |      |         |       |   |         |      
|Net earnings                                                                             |                                  | $    | 64.0    |       | $ | 117.2   |      
|                                                                                         |                                  |      |         |       |   |         |      
|Basic and diluted earnings per share from continuing operations                          |                                  | $    | 0.29    |       | $ | 0.60    |      
|                                                                                         |                                  |      |         |       |   |         |      
|Basic and diluted net earnings per share                                                 |                                  | $    | 0.27    |       | $ | 0.53    |      
|                                                                                         |                                  |      |         |       |   |         |      
|Weighted average number of common shares outstanding                                     |                                  |      | 233.2   |       |   | 219.4   |      
|                                                                                         |                                  |      |         |       |   |         |      

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

|years ended March 31 (amounts in millions of Canadian dollars) |  | 2004 |       | 2003 |   | 2002  |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Retained earnings at beginning of year                         |  | $    | 531.2 |      | $ | 440.4 |  
|Share issue costs (net of taxes of $2.4 million)               |  |      | (5.1  | )    |   |      |  
|Net earnings                                                   |  |      | 64.0  |      |   | 117.2 |  
|Dividends                                                      |  |      | (28.0 | )    |   | (26.4 | )
|                                                               |  |      |       |      |   |       |  
|Retained earnings at end of year                               |  | $    | 562.1 |      | $ | 531.2 |  
|                                                               |  |      |       |      |   |       |  

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

3

---



CONSOLIDATED STATEMENTS OF CASH FLOW

|years ended March 31 (amounts in millions of Canadian dollars)             |                                                | 2004 |        | 2003   |   | 2002   |      
|-------------------------------------------------------------------------- | ---------------------------------------------- | ---- | ------ | ------ | - | ------ | -----
|Operating activities                                                       |                                                |      |        |        |   |        |      
|Earnings from continuing operations                                        |                                                | $    | 67.1   |        | $ | 131.0  |      
|Adjustments to reconcile earnings to cash flows from operating activities: |                                                |      |        |        |   |        |      
|                                                                           | Amortization                                   |      |        | 75.4   |   |        | 70.6 
|                                                                           | Future income taxes                            |      |        | 2.1    |   |        | 18.8 
|                                                                           | Investment tax credits                         |      |        | (22.8  | ) |        | (18.6
|                                                                           | Stock-based compensation                       |      |        | 1.3    |   |        |     
|                                                                           | Other                                          |      |        | (6.3   | ) |        | (18.1
|                                                                           | Increase in non-cash working capital (note 16) |      |        | (107.2 | ) |        | (41.3
|                                                                           |                                                |      |        |        |   |        |      
|Net cash provided by continuing operating activities                       |                                                |      | 9.6    |        |   | 142.4  |      
|Net cash (used in) provided by discontinued operating activities           |                                                |      | (3.9   | )      |   | 12.5   |      
|                                                                           |                                                |      |        |        |   |        |      
|Net cash provided by operating activities                                  |                                                |      | 5.7    |        |   | 154.9  |      
|                                                                           |                                                |      |        |        |   |        |      
|Investing activities                                                       |                                                |      |        |        |   |        |      
|Purchase of businesses (note 2)                                            |                                                |      |       |        |   |       |      
|Proceeds from disposal of discontinued operations (note 3)                 |                                                |      | 22.3   |        |   | 25.0   |      
|Short-term investments, net                                                |                                                |      | 2.6    |        |   | 18.8   |      
|Capital expenditures                                                       |                                                |      | (94.5  | )      |   | (238.9 | )    
|Proceeds from sale and leaseback of assets                                 |                                                |      | 122.5  |        |   | 127.0  |      
|Deferred development costs                                                 |                                                |      | (12.7  | )      |   | (13.3  | )    
|Deferred pre-operating costs                                               |                                                |      | (10.4  | )      |   | (10.7  | )    
|Other assets                                                               |                                                |      | (5.3   | )      |   | (27.5  | )    
|                                                                           |                                                |      |        |        |   |        |      
|Net cash provided by (used in) continuing investing activities             |                                                |      | 24.5   |        |   | (119.6 | )    
|Net cash used in discontinued investing activities                         |                                                |      |       |        |   | (14.8  | )    
|                                                                           |                                                |      |        |        |   |        |      
|Net cash provided by (used in) investing activities                        |                                                |      | 24.5   |        |   | (134.4 | )    
|                                                                           |                                                |      |        |        |   |        |      
|Financing activities                                                       |                                                |      |        |        |   |        |      
|Proceeds from long-term debt                                               |                                                |      | 525.3  |        |   | 270.0  |      
|Repayments of long-term debt                                               |                                                |      | (650.4 | )      |   | (326.3 | )    
|Dividends paid                                                             |                                                |      | (27.4  | )      |   | (26.2  | )    
|Capital stock issuances (note 11)                                          |                                                |      | 176.4  |        |   | 3.5    |      
|Share issue costs                                                          |                                                |      | (7.5   | )      |   |       |      
|Other                                                                      |                                                |      | 1.4    |        |   | (14.1  | )    
|                                                                           |                                                |      |        |        |   |        |      
|Net cash provided by (used in) continuing financing activities             |                                                |      | 17.8   |        |   | (93.1  | )    
|Net cash used in discontinued financing activities                         |                                                |      |       |        |   | (1.3   | )    
|                                                                           |                                                |      |        |        |   |        |      
|Net cash provided by (used in) financing activities                        |                                                |      | 17.8   |        |   | (94.4  | )    
|                                                                           |                                                |      |        |        |   |        |      
|Effect of foreign exchange rate changes on cash and cash equivalents       |                                                |      | (3.2   | )      |   | 2.2    |      
|                                                                           |                                                |      |        |        |   |        |      
|Net increase (decrease) in cash and cash equivalents                       |                                                |      | 44.8   |        |   | (71.7  | )    
|Cash and cash equivalents at beginning of year                             |                                                |      | 17.1   |        |   | 88.8   |      
|                                                                           |                                                |      |        |        |   |        |      
|Cash and cash equivalents at end of year                                   |                                                | $    | 61.9   |        | $ | 17.1   |      
|                                                                           |                                                |      |        |        |   |        |      

Supplementary
cash flow information (note 16)

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

4

---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

years ended March 31, 2004, 2003 and 2002 (amounts in millions of Canadian dollars)

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The
accounting policies of CAE Inc. and its subsidiaries ("CAE" or "the Company") conform with Canadian generally accepted accounting principles (Canadian GAAP). These accounting principles are
different in some respects from United States generally accepted accounting principles (U.S. GAAP). The significant differences are described in note 24.

NATURE OF OPERATIONS

CAE
designs and provides simulation equipment and services and develops integrated training solutions for the military, commercial airlines, business aircraft operators, aircraft manufacturers and
marine vessel operators.

CAE's
flight simulators replicate aircraft performance in normal and abnormal operations and a comprehensive set of environmental conditions, utilizing visual systems with an extensive
database of airports, other landing areas and flying environments and motion and sound cues to create a fully immersive training environment. The Company offers a full
range of flight training devices based on the same software used in its simulators. CAE operates a global network of training centres in locations around the world.

The
Company also provides simulators and training services for sea- and land-based activities and supplies marine automation systems for military and civil
applications. CAE's marine control systems monitor and control propulsion, electrical steering, ancillary, auxiliary and damage control systems.

CONSOLIDATION

The
consolidated financial statements include the accounts of CAE Inc. and all subsidiaries. All inter-corporate accounts and transactions have been eliminated. Acquisitions are accounted for
using the purchase method and, accordingly, the results of operations of subsidiaries are included from the respective dates of acquisition. Portfolio investments are accounted for using the cost
method.

REVENUE RECOGNITION

Revenue
from long-term contracts for building simulators and controls systems is recognized using the percentage-of-completion method where revenue, earnings and
unbilled accounts receivable are recorded as related costs are incurred, on the basis of the percentage of actual costs incurred to date on a contract, relative to the estimated total costs to
complete that contract. Revisions in cost and earnings estimates during the term of the contract are reflected in the period in which the need for revision becomes known. Losses, if any, are
recognized fully when first anticipated. Generally, the terms of long-term contracts provide for progress billings based on completion of certain phases of work. Warranty provisions are
recorded at the time revenue is recognized, based on past experience. No right of return or complimentary upgrades are provided to customers. Post-delivery customer support is billed
separately and revenue is recorded ratably over the support period.

Training
service revenues are recognized in the period such services are provided. All other revenue is recorded and related costs transferred to cost of sales at the time the product is
delivered and the benefits and the risks of ownership associated with the product are transferred to the customer.

CASH AND CASH EQUIVALENTS

Cash
consists of cash and cash equivalents, which are short-term, highly liquid investments with original terms to maturity of 90 days or less.

SHORT-TERM INVESTMENTS

Short-term
investments include money market instruments and commercial paper carried at the lower of cost or market value.

INVENTORIES

Raw
materials are valued at the lower of cost and replacement cost. Work in process is stated at the lower of average cost and net realizable value. The cost of work in process includes material,
labour and an allocation of manufacturing overhead.

RESTRICTED CASH

Under
the terms of subsidiaries external bank financing and some government-related sales contracts, the Company is required to hold a defined amount of cash as collateral.

5

---



PROPERTY, PLANT AND EQUIPMENT

Property,
plant and equipment are stated at amortized cost. The declining balance and straight-line methods are used in computing amortization over the estimated useful lives of the
assets. Useful lives are estimated as follows:

|Building and improvements |  | 20 to 40 years
|------------------------- |  | --------------
|Machinery and equipment   |  | 3 to 10 years 
|Simulators                |  | 12 to 25 years

In
fiscal year 2003, the Company changed the amortization period for Civil simulation equipment from 20 years to 25 years, to reflect the approximated useful life of the
simulators. That change reduced the amortization expense by $3.7 million in fiscal 2003 as compared to fiscal 2002.

LEASES

Leases
entered into by the Company in which substantially all the benefits and risks of ownership are transferred to the Company are recorded as capital leases and classified as property, plant and
equipment and long-term borrowings. All other leases are classified as operating leases under which leasing costs are expensed in the period in which they are incurred. Gains on the sale
and leaseback of simulators are deferred and the gains in excess of the residual value guarantees are amortized over the term of the lease.

The
residual value guarantees are to be recognized in the Company's earnings upon expiry of the related sale and leaseback agreement.

BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS

The
Company accounts for its business acquisitions using the purchase method. Goodwill represents the cost of investments in subsidiaries in excess of the fair value of the net identifiable assets
acquired. Goodwill acquired in a business combination is accounted for under CICA Handbook Section 3062,Goodwill and Other Intangible Assets.
This section requires that goodwill not be amortized. The fair value is to be assessed at least annually and, if necessary, is written down to such fair value for any impairment.

Intangible
assets are recorded at their fair value at the date of acquisition of the related operating companies. Amortization is provided for all intangible assets on a
straight-line basis over their estimated useful lives as follows:

|                                   |  | Amortization Period |  | Weighted Average Amortization Period
|---------------------------------- |  | ------------------- |  | ------------------------------------
|Trade names                        |  | 20 to 25 years      |  | 21                                  
|Backlog and contractual agreements |  | 1 to 20 years       |  | 10                                  
|Customer relationships             |  | 10 to 25 years      |  | 24                                  
|Other                              |  | 12 to 20 years      |  | 16                                  

INTEREST CAPITALIZATION

Interest
costs relating to the construction of simulators and buildings for training centres are capitalized as part of the cost of property, plant and equipment. Capitalization of interest ceases
when the simulator is completed and ready for productive use.

FOREIGN CURRENCY TRANSLATION

The
functional currency of the Company and each of its subsidiaries is the local currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated
at exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional
currency using the exchange rate prevailing at the dates of the respective transactions. Revenue and expense items are translated at average rates of exchange for the year. Translation gains or losses
are included in the determination of earnings, except for gains or losses arising on translation of accounts of foreign subsidiaries considered self-sustaining, exchange gains and losses
on inter-company account balances that form part of the net investment in foreign operations and gains or losses arising from the translation of foreign currency debt that has been designated as a
hedge of the net investment in subsidiaries, which are reflected as a separate component of shareholders' equity.

Earnings
from continuing operations include a net foreign exchange gain of $10.6 million in 2004 or 5 cents per share (2003  net foreign
exchange gain of $6.1 million or 3 cents per share, 2002  net foreign exchange loss of $1.2 million or 1 cent per share).

RESEARCH AND DEVELOPMENT COSTS

Research
costs are charged to earnings in the periods in which they are incurred. Development costs are also charged to earnings in the period incurred unless they meet the criteria for deferral.
Government assistance arising from research and development costs is deducted from the related costs. Amortization of development costs deferred to future periods commences with the commercial
production of the product and is charged to earnings based on anticipated sales of the product, over a period not exceeding five years.

6

---



PRE-OPERATING COSTS

The
Company defers expenditures incurred during the pre-operating period for all new training centres. Expenditures directly related to placing a new training centre into commercial
service are incremental in nature and are considered by management to be recoverable from the future operations of the new training centre. Capitalization ceases at the opening of the training centre.
Amortization of the deferred costs is taken over five years in respect to civil training operations and marine operations and over 20 years for the Medium Support Helicopter project, matching
the term of the contract.

DEFERRED FINANCING COSTS

Costs
incurred relating to the issuance of long-term debt are deferred and amortized over the term of the related debt.

INCOME TAXES

Future
income taxes relate to the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. A valuation allowance is
recognized to the extent that, in the opinion of management, it is more likely than not that the future income tax assets will not be realized. Future income tax assets and liabilities are adjusted
for the effects of subsequent changes in tax laws and rates on the date of enactment or substantive enactment.

Investment
tax credits arising from research and development activities are deducted from the related costs and are accordingly included in the determination of earnings in the same year
as the related costs. Investment tax credits arising from the acquisition of property, plant and equipment and deferred development costs are deducted from the cost of those assets with amortization
calculated on the net amount.

The
Company is subject to examination by taxation authorities in various jurisdictions. The determination of tax liabilities involved certain uncertainties in the interpretation of
complex tax regulations. Therefore, the Company provides for potential tax liabilities based on management's best estimates. Differences between the estimates and the ultimate amounts of taxes and
investment tax credits are recorded in earnings at the time they can be determined.

PENSIONS

The
Company accrues its obligations under employee pension plans and the related costs, net of plan assets. The cost of pensions is actuarially determined using the projected benefits method
calculated based on employee service, salary escalation and retirement age, together with the expected return on plan assets. For the purpose of calculating the expected return on plan assets, those
assets are valued at fair market value.

The
excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the remaining service period of active
employees.

STOCK-BASED COMPENSATION PLANS

The
Company's stock-based compensation plans consist of an Employee Stock Option Plan (ESOP), an Employee Stock Purchase Plan (ESPP), a Deferred Share Unit (DSU) plan for executives and on
April 1, 2003, the Company adopted a Long-Term Incentive Deferred Share Unit Plan (LTI-DSU), both of which (DSU and LTI-DSU) are described in note 12.

In
fiscal 2004, the Company adopted on a prospective basis the CICA recommendations issued in June 2003 and expensed prospectively the cost of stock options granted to employees
using the fair value based method. A compensation expense is recognized for the Company's portion of the contributions made under the ESPP and for amounts due under the DSU and LTI-DSU
plans. In fiscal 2004, compensation cost for CAE's stock options was recognized in net earnings with a corresponding credit of $1.3 million to contributed surplus using the fair value method of
accounting for awards that were granted in May 2003.

In
fiscal 2003, CAE adopted the initial recommendations of CICA Section 3870,Stock-based Compensation and Other Stock-based
Payments. The standard encouraged, but did not require, that the fair value based method for valuing stock options be used for transactions with employees. Under the fair value
method, compensation expense is measured at the grant date and recognized over the service period. In note 12, pro forma net earnings and pro forma basic and diluted net earnings
per share figures are presented as if the fair value based method of accounting had been used to account for stock options granted to employees during fiscal 2003. CAE's practice is to issue options
in May of each fiscal year, whereby these options vest equally over four years. Any consideration paid by plan participants on the exercise of share options or the purchase of shares is credited to
share capital together with any related stock-based compensation expense.

DERIVATIVE FINANCIAL INSTRUMENTS

The
Company enters into forward, swap and option contracts to manage its exposure to fluctuations in interest rates and foreign exchange rates. CAE assesses on an ongoing basis whether the derivatives
that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. The Company does not hold or issue derivative financial instruments for
speculative trading purposes.

The
foreign currency risk associated with certain purchase and sale commitments denominated in a foreign currency is hedged through a combination of forward contracts and options. The
foreign currency realized and unrealized gains or losses associated with derivative instruments, which have been terminated or cease to be effective prior to maturity, are deferred under other
current, or non-current, assets or liabilities on the balance sheet and recognized in income in the period in which the underlying hedged transaction is recognized. In the event a
designated hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is
recognized in income.

7

---



Interest
rate swap contracts are designated as hedges of the interest rate of certain financial instruments. The interest payments relating to swap contracts are recorded in net earnings
over the life of the underlying transaction on an accrual basis as an adjustment to interest income or interest expense.

EARNINGS PER SHARE

The
calculation of basic earnings per share is based on the weighted average number of shares issued and outstanding. Diluted earnings per share is calculated by dividing net earnings available to
common shareholders by the weighted average number of shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of
all dilutive potential common shares outstanding during the year using the treasury stock method.

USE OF ESTIMATES

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

RECENTLY ADOPTED ACCOUNTING STANDARDS

Impairment of long-lived assets

On
April 1, 2003, the Company adopted CICA Handbook Section 3063,Impairment of Long-Lived Assets,which requires the
recognition of an impairment loss for a long-lived asset to be held and used when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows
expected from its use and eventual disposition. An impairment loss, if any, is determined as the excess of the carrying value of the asset over its fair value. It replaces the impairment provision in
Section 3061,Property, Plant and Equipment.

The
adoption of this standard did not have any material effect on consolidated financial statements.

Disposal of long-lived assets and discontinued operations

On
April 1, 2003, the Company adopted CICA Handbook Section 3475,Disposal of Long-Lived Assets and Discontinued Operations,
which provides guidance on recognizing, measuring, presenting and disclosing long-lived assets to be disposed of. It supersedes the former Section 3475, Discontinued Operations.

Under
this section, an asset classified as held for sale is measured at the lower of its carrying amount or fair value less disposal costs, and is not depreciated while classified as
held for sale. The adoption of this standard did not have any material effect on CAE's consolidated financial statements.

Severance, termination benefits and costs associated with exit and disposal activities

On
April 1, 2003, the Company prospectively adopted the new CICA Emerging Issues Committee Abstract 134 (EIC-134),Accounting for Severance and Termination
Benefits,and EIC-135,Accounting for Costs Associated with Exit and Disposal Activities (Including Costs Incurred in a
Restructuring),relating to exit or disposal activities after March 31, 2003. These abstracts provide guidance on the timing of recognition and measurement of
liabilities as well as disclosures for the various types of severance and termination benefits related to the termination of employees' services prior to normal retirement and costs associated with an
exit or disposal activity. Under this new guidance, liabilities for these costs are to be recognized in the period when they are incurred and measured at their fair value.

CAE
applied these guidelines for severance and other costs as described in note 23.

FUTURE CHANGES TO ACCOUNTING STANDARDS

Hedging relationships

The
CICA amended in November 2002 and June 2003 its Accounting Guideline (AcG-13),Hedging Relationships. It provides the views of the
Accounting Standards Board on the identification, designation, documentation and effectiveness of hedging relationships for the purpose of applying hedge accounting, and the discontinuance of hedge
accounting. Under this guideline, complete documentation of the information related to hedging relationships is required and the effectiveness of the hedges must be demonstrated and documented. This
new Section is applicable for the Company on April 1, 2004.

On
April 1, 2004, CAE will continue to apply hedge accounting in accordance with the requirements prescribed by the Guideline.

Consolidation of variable interest entities

In
March 2004, the CICA issued proposed amendments to its Accounting Guideline (AcG-15) titledConsolidation of Variable Interest Entities. The
resulting guideline will be harmonized with the recently issued US guidance (FIN 46R) (see note 24), and is expected to be applicable for interim and annual periods beginning on
or after November 1, 2004. The guideline requires that an enterprise holding other than a voting interest in a Variable Interest Entity (VIE) could, subject to certain conditions, be required
to consolidate the VIE if such enterprise is considered its primary beneficiary whereby it would absorb the majority of the VIE's expected losses and/or receive the majority of its expected residual
returns. The Company is currently evaluating the impact of this draft guideline on its financial statements.

8

---



Employee future benefits

In
December 2003, new disclosure requirements for pensions and other employee future benefits were issued. The new required disclosures include items such as a narrative description of each
type of plan, the measurement date of the plan
asset and liability, the effective date of the last actuarial evaluation, and the detail of the plan asset by major category. This requirement will be applicable for CAE in the first quarter of fiscal
2005.

Generally Accepted Accounting Principles and financial statement presentation

The
CICA issued new Handbook Sections 1100,Generally Accepted Accounting Principles,and 1400,General Standards of
Financial Statement Presentation. Section 1100 describes what constitutes Canadian GAAP and its sources, and provides guidance on sources to consult when selecting
accounting policies and appropriate disclosure when a matter is not dealt with explicitly in the primary sources of GAAP, thereby recodifying the Canadian GAAP hierarchy. Section 1400 clarifies
what is fair presentation in accordance with GAAP and provides general guidance on financial presentation. The Company does not expect any significant impact on its consolidated financial statements
with the adoption on April 1, 2004 of this new Section.

NOTE 2  BUSINESS ACQUISITIONS

On
March 31, 2003, the Company completed a technology investment in the marine navigation business by acquiring all of the issued and outstanding shares of the Norway-based HiTec Marine
Automation AS (HiTec). No consideration was given for the purchase of the shares. The business provides marine navigation products and capabilities for both naval and commercial marine markets. This
technology investment complements the Company's existing marine products and capabilities.

During
fiscal 2002, the Company completed four strategic acquisitions, two of which accelerated the Company's move into aviation training, one which significantly improved the Company's
access to the US defence market and one which provided immediate entry into the commercial marine control systems market. A summary description of each acquisition follows: On April 2, 2001,
the Company acquired all of the issued and outstanding shares of BAE Systems Flight Simulation and Training Inc. (BAE Systems) located in Tampa, Florida, for a total cash consideration of
US$76.0 million. The business has a well-established position in the US defence market for the manufacture of transport and helicopter simulation equipment and has significant
training and support service activities for both civil and military markets.

On
August 1, 2001, the Company acquired all of the issued and outstanding shares of Valmarine AS of Norway (Valmarine), for a cash consideration of NOK238.6 million and a
CAE share issuance of NOK125.4 million (or 1,419,919 common shares), based on the average closing price of CAE's shares for the 10 days prior to August 1. Valmarine is the global
leader for marine control systems for the commercial market.

On
August 24, 2001, the Company acquired all of the issued and outstanding shares of the Netherland-based Schreiner Aviation Training B.V. (Schreiner) for total cash
consideration of €193.4 million. The business provides simulator and ground-school civil aviation training.

On
December 31, 2001, the Company acquired all of the issued and outstanding shares of SimuFlite Training International Inc. (SimuFlite), based in Dallas, Texas, for a
total cash consideration of US$210.9 million. In addition, equipment in the amount of US$54.0 million was sold and leased back. SimuFlite is the world's second largest provider of
business aviation training.

These
acquisitions were accounted for under the purchase method and their operating results have been included from the respective acquisition dates.

The
net assets acquired are summarized as follows:

|                                   |                                 | 2003                    |       | 2002 |  
|---------------------------------- | ------------------------------- | ----------------------- | ----- | ---- | -
|
|Current assets                     |                                 | $                       | 5.6   |      | $
|Current liabilities                |                                 |                         | (13.3 | )    |  
|Property, plant and equipment      |                                 |                         | 0.1   |      |  
|Intangible assets                  |                                 |                         |       |      |  
|                                   | Trade names                     |                         |       |     |  
|                                   | Customer relations              |                         |       |     |  
|                                   | Customer contractual agreements |                         |       |     |  
|                                   | Other intangibles               |                         |       | 1.2  |  
|Goodwill                           |                                 |                         | 1.6   |      |  
|Future income taxes                |                                 |                         | 4.8   |      |  
|Long-term debt                     |                                 |                         |      |      |  
|Long-term liabilities              |                                 |                         |      |      |  
|                                   |                                 |                         |       |      |  
|                                   |                                 |                         |      |      |  
|                                   |                                 |                         |       |      |  
|Less: Sale and leaseback of assets |                                 |                         |      |      |  
|                                   |                                 | Shares issued (note 11) |       |      | 
|                                   |                                 |                         |       |      |  
|Total cash consideration:          |                                 | $                       |      |      | $
|                                   |                                 |                         |       |      |  

9

---



The
net assets of Schreiner, SimuFlite and approximately 10% of the net assets of BAE Systems are included in the Civil Simulation and Training segment. The balance of the net assets of
BAE Systems is included in the Military Simulation and Training segment. Net assets of Valmarine and HiTec are included in the Marine Controls segment.

The
goodwill on the SimuFlite acquisition is the sole deductible goodwill for tax purposes.

There
were certain adjustments to the assets and liabilities recorded in fiscal 2003 for certain of the businesses acquired. For Valmarine, the adjustment related to the final evaluation
of other intangible assets. For Schreiner, the adjustment pertained to the accounting for simulators that were being built at the time the acquisition was completed. For SimuFlite, the adjustment
resulted from a purchase price arbitration settlement. HiTec Marine Automation was adjusted in fiscal 2004, with the final evaluation of the tax liabilities and integration costs.

The
adjustments to the purchase price equation are summarized as follows:

|                              |  | 2004 |      | 2003 |  
|----------------------------- |  | ---- | ---- | ---- | -
|
|Current assets                |  | $    |     |      | $
|Current liabilities           |  |      | 0.7  |      |  
|Property, plant and equipment |  |      |     |      |  
|Intangible assets             |  |      |     |      |  
|Goodwill                      |  |      | (0.7 | )    |  
|Future income taxes           |  |      |     |      |  
|Long-term debt                |  |      |     |      |  
|                              |  |      |      |      |  
|Total cash consideration:     |  | $    |     |      | $
|                              |  |      |      |      |  

NOTE 3  DISCONTINUED OPERATIONS

CLEANING TECHNOLOGIES

On
February 28, 2002, the Company completed the sale of two of CAE's five Cleaning Technologies operations. The Company sold the shares of CAE Ransohoff Inc., ("Ransohoff") of
Cincinnati, Ohio and CAE Ultrasonics Inc., of Jamestown, New York to the management of these operations. The total consideration was initially US$21.4 million, comprising
US$9.2 million cash and a holdback of US$1.6 million payable 120 days from closing with the balance in the form of long-term subordinated notes receivable. In fiscal
2003, the total consideration was reduced by US$2.2 million based on an audit of the closing statement of financial position.

On
June 28, 2002, CAE sold the shares of CAE Cleaning Technologies Plc to the management of Ransohoff for a note receivable of $1.2 million
(£0.5 million).

On
April 30, 2003, CAE completed the sale of certain assets of its German Cleaning Technologies operations for a cash consideration of €25,000, approximating book
value. Subsequent to completing the sale, CAE incurred post-disposition costs with respect to the transfer of employees, resulting in a charge recorded in its results of Discontinued
Operations of $2.6 million, net of income taxes  $1.7 million.

On
July 31, 2003, CAE completed the sale of substantially all the assets of its last remaining Cleaning Technology business, Alpheus Inc. to Cold Jet Inc. of
Cincinnati, Ohio. The total consideration, after completion of the closing date audit of assets being sold was US$2.1 million. Of this amount, US$1.5 million has been received and the
balance, US$0.6 million is due on the first anniversary from closing, July 31, 2004. 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. No value has been ascribed in these financial statements to this additional consideration.

FORESTRY SYSTEMS

On
March 28, 2002, CAE completed the sale of its fibre screening business to the Advanced Fiber Income Fund (AFT) for cash proceeds of $162.0 million. Following the closing of this
transaction, certain additional costs were incurred over the amounts estimated when the transaction was completed. As a result, CAE recorded in its loss from Discontinued Operations in fiscal 2003, an
additional after tax cost of $3.2 million (income taxes  $1.1 million) for these adjustments.

On
August 16, 2002, CAE sold substantially all the assets of the sawmill division of its Forestry Systems segment for cash consideration of $25.0 million and a further
estimated payment at $10.0 million, included in other assets, based on the operating performance of the company in the three-year period following the closing date.

On
May 2, 2003, CAE completed the sale of its remaining Forestry Systems business to Carmanah Design and Manufacturing Inc. for a total cash consideration of
$20.3 million. The Company is entitled to receive further consideration based on the performance of the business over the 30-month period following the closing. No value has been
ascribed to this additional consideration in these financial statements.

10

---



Summarized
financial information for the discontinued operations is as follows:

|(amounts in millions of Canadian dollars)                                                                           |                       | 2004 |      | 2003 |   | 2002  |     
|------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ---- | ---- | - | ----- | ----
|Revenue                                                                                                             |                       |      |      |      |   |       |     
|                                                                                                                    | Cleaning Technologies |      | $    | 1.7  |   | $     | 72.0
|                                                                                                                    | Forestry Systems      |      |      | 3.1  |   |       | 20.8
|                                                                                                                    |                       |      |      |      |   |       |     
|                                                                                                                    |                       | $    | 4.8  |      | $ | 92.8  |     
|                                                                                                                    |                       |      |      |      |   |       |     
|Net earnings from Forestry Systems prior to measurement date, net of taxes (2002  $4.0)                            |                       | $    |     |      | $ |      |     
|Net (loss) gain from Forestry Systems after measurement date, net of taxes (2004  $0.2; 2003  $3.0; 2002  $15.2) |                       |      | (0.5 | )    |   | (7.2  | )   
|Net loss from Cleaning Technologies after measurement date, net of taxes (2004  $1.7; 2003  $7.7; 2002  $7.3)    |                       |      | (2.6 | )    |   | (6.6  | )   
|                                                                                                                    |                       |      |      |      |   |       |     
|Net (loss) earnings from discontinued operations                                                                    |                       | $    | (3.1 | )    | $ | (13.8 | )   
|                                                                                                                    |                       |      |      |      |   |       |     

|                                       |  |   |   | 2004 |   |   |  | 2003
|-------------------------------------- |  | - | - | ---- | - | - |  | ----
|
|Current assets                         |  | $ |  |      | $ |  |  | $   
|Property, plant and equipment, net     |  |   |  |      |   |  |  |     
|Goodwill                               |  |   |  |      |   |  |  |     
|Other assets                           |  |   |  |      |   |  |  |     
|                                       |  |   |   |      |   |   |  |     
|                                       |  | $ |  |      | $ |  |  | $   
|                                       |  |   |   |      |   |   |  |     
|Assets of discontinued operations      |  |   |   |      | $ |  |  |     
|                                       |  |   |   |      |   |   |  |     
|Current liabilities                    |  | $ |  |      | $ |  |  | $   
|Other liabilities                      |  |   |  |      |   |  |  |     
|                                       |  |   |   |      |   |   |  |     
|                                       |  | $ |  |      | $ |  |  | $   
|                                       |  |   |   |      |   |   |  |     
|Liabilities of discontinued operations |  |   |   |      | $ |  |  |     
|                                       |  |   |   |      |   |   |  |     

NOTE 4  ACCOUNTS RECEIVABLE

|(amounts in millions of Canadian dollars) |  | 2004 |       | 2003 |  
|----------------------------------------- |  | ---- | ----- | ---- | -
|Trade                                     |  | $    | 146.1 |      | $
|Allowance for doubtful accounts           |  |      | (8.1  | )    |  
|Unbilled receivables                      |  |      | 206.4 |      |  
|Other receivables                         |  |      | 46.5  |      |  
|                                          |  |      |       |      |  
|                                          |  | $    | 390.9 |      | $
|                                          |  |      |       |      |  

Approximately
$5.9 million of the March 2004 unbilled receivables are not expected to be recovered within one year
(2003  $6.0 million).

NOTE 5  INVENTORIES

|(amounts in millions of Canadian dollars)         |  | 2004 |       | 2003
|------------------------------------------------- |  | ---- | ----- | ----
|Work-in-progress                                  |  | $    | 114.8 |     
|Raw materials, supplies and manufactured products |  |      | 40.0  |     
|                                                  |  |      |       |     
|                                                  |  | $    | 154.8 |     
|                                                  |  |      |       |     

11

---



NOTE 6  PROPERTY, PLANT AND EQUIPMENT

|                           |           |   |         |       |   | 2004  |   |   |       |       |   | 2003   
|-------------------------- | --------- | - | ------- | ----- | - | ----- | - | - | ----- | ----- | - | -------
|
|Land                       |           | $ | 19.7    |       | $ |      |   | $ | 19.7  |       | $ | 19.2   
|Buildings and improvements |           |   | 254.7   |       |   | 60.6  |   |   | 194.1 |       |   | 247.9  
|Machinery and equipment    |           |   | 169.0   |       |   | 127.8 |   |   | 41.2  |       |   | 175.4  
|Simulators                 |           |   | 493.0   |       |   | 39.8  |   |   | 453.2 |       |   | 527.4  
|Assets under construction  |           |   |         |       |   |       |   |   |       |       |   |        
|                           | Buildings |   |         | 4.6   |   |       |  |   |       | 4.6   |   |        
|                           | Equipment |   |         | 130.2 |   |       |  |   |       | 130.2 |   |        
|                           |           |   |         |       |   |       |   |   |       |       |   |        
|                           |           | $ | 1,071.2 |       | $ | 228.2 |   | $ | 843.0 |       | $ | 1,135.8
|                           |           |   |         |       |   |       |   |   |       |       |   |        

Amortization
of property, plant and equipment was $53.5 million in 2004 (2003  $52.1 million,
2002  $37.0 million).

NOTE 7  INTANGIBLE ASSETS

|                                |  |   |       |  |   | 2004 |  |   |       |  |   | 2003 
|------------------------------- |  | - | ----- |  | - | ---- |  | - | ----- |  | - | -----
|
|Trade names                     |  | $ | 34.6  |  | $ | 3.6  |  | $ | 31.0  |  | $ | 38.5 
|Customer relations              |  |   | 108.5 |  |   | 11.0 |  |   | 97.5  |  |   | 111.3
|Customer contractual agreements |  |   | 11.5  |  |   | 2.3  |  |   | 9.2   |  |   | 14.3 
|Other intangible assets         |  |   | 21.7  |  |   | 4.2  |  |   | 17.5  |  |   | 20.8 
|                                |  |   |       |  |   |      |  |   |       |  |   |      
|                                |  | $ | 176.3 |  | $ | 21.1 |  | $ | 155.2 |  | $ | 184.9
|                                |  |   |       |  |   |      |  |   |       |  |   |      

The
continuity of intangible assets is as follows:

|                                   |  |   |       |   |   |      |   | 2004 |      |   |   |       |   |   |       | 2003 |  
|---------------------------------- |  | - | ----- | - | - | ---- | - | ---- | ---- | - | - | ----- | - | - | ----- | ---- | -
|
|
|Beginning balance                  |  | $ | 140.1 |   | $ | 2.1  |   | $    | 29.5 |   | $ | 171.7 |   | $ | 141.5 |      | $
|Additions                          |  |   | 0.6   |   |   |     |   |      |     |   |   | 0.6   |   |   | 1.8   |      |  
|Purchase price adjustment (note 2) |  |   |      |   |   |     |   |      |     |   |   |      |   |   |      |      |  
|Amortization                       |  |   | (6.8  | ) |   | (0.1 | ) |      | (1.9 | ) |   | (8.8  | ) |   | (7.5  | )    |  
|Foreign exchange                   |  |   | (6.6  | ) |   | (0.2 | ) |      | (1.5 | ) |   | (8.3  | ) |   | 4.3   |      |  
|                                   |  |   |       |   |   |      |   |      |      |   |   |       |   |   |       |      |  
|Ending balance                     |  | $ | 127.3 |   | $ | 1.8  |   | $    | 26.1 |   | $ | 155.2 |   | $ | 140.1 |      | $
|                                   |  |   |       |   |   |      |   |      |      |   |   |       |   |   |       |      |  

The
yearly amortization expense for the five following years will be approximately $8.8 million.

12

---



NOTE 8  GOODWILL

The
continuity of goodwill by reportable segment is as follows:

|                                   |  |   |       |   |   |       |   | 2004 |      |   |   |       |   |   |       |   |  
|---------------------------------- |  | - | ----- | - | - | ----- | - | ---- | ---- | - | - | ----- | - | - | ----- | - | -
|
|
|
|Beginning balance                  |  | $ | 212.9 |   | $ | 107.6 |   | $    | 46.3 |   | $ | 366.8 |   | $ | 217.8 |   | $
|Additions                          |  |   |      |   |   |      |   |      |     |   |   |      |   |   |      |   |  
|Purchase price adjustment (note 2) |  |   |      |   |   |      |   |      | (0.7 | ) |   | (0.7  | ) |   | (9.7  | ) |  
|Foreign exchange                   |  |   | (12.5 | ) |   | (7.4  | ) |      | (2.4 | ) |   | (22.3 | ) |   | 4.8   |   |  
|                                   |  |   |       |   |   |       |   |      |      |   |   |       |   |   |       |   |  
|Ending balance                     |  | $ | 200.4 |   | $ | 100.2 |   | $    | 43.2 |   | $ | 343.8 |   | $ | 212.9 |   | $
|                                   |  |   |       |   |   |       |   |      |      |   |   |       |   |   |       |   |  

NOTE 9  OTHER ASSETS

|(amounts in millions of Canadian dollars)          |                                                                                                    | 2004 |       | 2003
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---- | ----- | ----
|Investment in and advances to CVS Leasing Ltd. (i) |                                                                                                    | $    | 49.1  |     
|                                                   | Deferred development costs net of $5.6 million accumulated amortization (2003  $0.2 million) (ii) |      |       | 41.3
|                                                   | Deferred pre-operating costs net of $8.5 million accumulated amortization (2003  $4.4 million)    |      |       | 27.7
|Long-term receivables (iii)                        |                                                                                                    |      | 18.4  |     
|                                                   | Deferred financing costs net of $5.7 million accumulated amortization (2003  $2.1 million)        |      |       | 11.7
|Other                                              |                                                                                                    |      | 20.2  |     
|                                                   |                                                                                                    |      |       |     
|                                                   |                                                                                                    | $    | 168.4 |     
|                                                   |                                                                                                    |      |       |     





13

---





NOTE 10  DEBT FACILITIES
A. LONG-TERM DEBT

|(amounts in millions of Canadian dollars unless otherwise indicated) |  | 2004                                                                                                                                              |      | 2003
|-------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ----
|(i)                                                                  |  | Senior notes                                                                                                                                      |      | $   
|                                                                     |  | Revolving unsecured term credit facilities,                                                                                                       |      |     
|(ii)                                                                 |  | 5 years maturing April 2006, US $350.0 and €100.0 (outstanding March 31, 2004  $181.4, US$70.0 and €20.0, March 31, 2003  $114.0 and US $195.0) |      |     
|(iii)                                                                |  | 18 months, matured June 2003, US$135.0 (outstanding March 31, 2004  nil, March 31, 2003   US$35.0)                                              |      |     
|(iv)                                                                 |  | Term loan, maturing in April 2009 (outstanding March 31, 2004  US$28.2, March 31, 2003  US$32.5)                                                |      |     
|(v)                                                                  |  | Term loan of £12.7, secured, maturing in October 2015 (outstanding March 31, 2004  £8.9, March 31, 2003  £10.1)                                 |      |     
|(vi)                                                                 |  | Grapevine Industrial Development Corporation bonds, secured (US$27.0)                                                                             |      |     
|(vii)                                                                |  | Term loan of £31.8, secured, maturing September 2029 (outstanding March 31, 2004  £21.8, March 31, 2003  £17.5)                                 |      |     
|(viii)                                                               |  | Obligations under capital lease commitments                                                                                                       |      |     
|                                                                     |  |                                                                                                                                                   |      |     
|                                                                     |  |                                                                                                                                                   |      |     
|Less: Long-term debt due within one year                             |  |                                                                                                                                                   | 13.5 |     
|                                                                     |  |                                                                                                                                                   |      |     
|                                                                     |  |                                                                                                                                                   |      | $   
|                                                                     |  |                                                                                                                                                   |      |     



14

---





|(amounts in millions of Canadian dollars) |  |  
|----------------------------------------- |  | -
|2005                                      |  | $
|2006                                      |  |  
|2007                                      |  |  
|2008                                      |  |  
|2009                                      |  |  
|Thereafter                                |  |  
|                                          |  |  
|                                          |  | $
|                                          |  |  

Details
of interest on debt are as follows:

|(amounts in millions of Canadian dollars)                 |  | 2004 |      | 2003 |   | 2002 |  
|--------------------------------------------------------- |  | ---- | ---- | ---- | - | ---- | -
|Long-term debt interest expense                           |  | $    | 32.8 |      | $ | 37.1 |  
|Short-term debt interest expense                          |  |      | 0.5  |      |   | 0.2  |  
|Other financing charges                                   |  |      | 3.1  |      |   | 3.1  |  
|Allocation of interest expense to discontinued operations |  |      |     |      |   | (0.1 | )
|Interest capitalized                                      |  |      | (6.4 | )    |   | (6.2 | )
|                                                          |  |      |      |      |   |      |  
|Interest on debt                                          |  | $    | 30.0 |      | $ | 34.1 |  
|                                                          |  |      |      |      |   |      |  

Certain
of the Company's debt instruments include customary positive and negative covenants, including interest coverage, leverage ratios, and restrictions on the sale of assets. At
March 31, 2004, the Company is in compliance with its debt covenants.

B. SHORT-TERM DEBT

The
Company has unsecured bank lines of credit available in various currencies totalling $28.2 million, of which $6.4 million was used as at March 31, 2004. The effective rate on
the short-term borrowings was 4.0% (2003  4.8%, 2002  5.6%).

NOTE 11  CAPITAL STOCK



|                             |  |             |  | 2004 |       |  |             | 2003 |   |       |  | 2002       
|---------------------------- |  | ----------- |  | ---- | ----- |  | ----------- | ---- | - | ----- |  | -----------
|
|Balance at beginning of year |  | 219,661,178 |  | $    | 190.5 |  | 218,955,780 |      | $ | 186.8 |  | 216,399,856
|Stock options exercised      |  | 282,000     |  |      | 1.4   |  | 650,776     |      |   | 3.5   |  | 1,118,400  
|Stock dividends (a)          |  | 106,002     |  |      | 0.6   |  | 54,622      |      |   | 0.2   |  | 17,605     
|Shares issued (b)            |  | 26,600,000  |  |      | 175.0 |  |            |      |   |      |  | 1,419,919  
|                             |  |             |  |      |       |  |             |      |   |       |  |            
|Balance at end of year       |  | 246,649,180 |  | $    | 367.5 |  | 219,661,178 |      | $ | 190.5 |  | 218,955,780
|                             |  |             |  |      |       |  |             |      |   |       |  |            



15

---





|                                                               |  | 2004        |  | 2003        |  | 2002       
|-------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|Weighted average number of common shares outstanding  Basic   |  | 233,167,858 |  | 219,427,513 |  | 217,592,039
|Effect of dilutive stock options                               |  | 849,912     |  | 897,806     |  | 2,544,722  
|                                                               |  |             |  |             |  |            
|Weighted average number of common shares outstanding  Diluted |  | 234,017,770 |  | 220,325,319 |  | 220,136,761
|                                                               |  |             |  |             |  |            

Options
to acquire 4,195,400 common shares (2003  3,198,000, 2002  1,474,628) have been excluded from the
above calculation since their inclusion would have an anti-dilutive effect.

NOTE 12  STOCK-BASED COMPENSATION PLANS

EMPLOYEE STOCK OPTION PLAN

Under
the long-term incentive program of the Company, options may be granted to officers and other key employees of the Company and its subsidiaries to purchase common shares of the
Company at a subscription price of 100% of market value. Market value is determined as the closing price of the common shares on the Toronto Stock Exchange on the last day of trading prior to the
effective date of the grant.

At
March 31, 2004, a total of 11,530,046 common shares remained authorized for issuance under the Plan. The options are exercisable during a period not to exceed six years and are
not exercisable during the first 12 months after the date of the grant. The right to exercise all of the options accrues over a period of four years of continuous employment. However, if there
is a change of control of the Company, the options become immediately exercisable. Options are adjusted proportionately for any stock dividends or stock splits attributed to the common shares of the
Company.

A
reconciliation of the outstanding options is as follows:

|                                         |  | 2004      |   | 2003 |      | 2002
|---------------------------------------- |  | --------- | - | ---- | ---- | ----
|
|
|Options outstanding at beginning of year |  | 5,692,750 |   | $    | 9.37 |     
|Granted                                  |  | 3,536,320 |   | $    | 4.14 |     
|Exercised                                |  | (282,000  | ) | $    | 4.88 |     
|Forfeited                                |  | (718,400  | ) | $    | 6.98 |     
|Expired                                  |  | (100,300  | ) | $    | 5.70 |     
|                                         |  |           |   |      |      |     
|Options outstanding at end of year       |  | 8,128,370 |   | $    | 7.51 |     
|                                         |  |           |   |      |      |     
|Options exercisable at end of year       |  | 2,887,000 |   | $    | 8.07 |     
|                                         |  |           |   |      |      |     

The
following table summarizes information about the Company's Employee Stock Option Plan as at March 31, 2004:

|                 |  |           |  | Options Outstanding |  | Options Exercisable
|---------------- |  | --------- |  | ------------------- |  | -------------------
|
|$4.08 to $5.07   |  | 3,932,970 |  | 4.39                |  | $                  
|$6.03 to $9.20   |  | 1,379,650 |  | 1.79                |  | $                  
|$12.25 to $14.60 |  | 2,815,750 |  | 3.73                |  | $                  
|                 |  |           |  |                     |  |                    
|Total            |  | 8,128,370 |  | 3.72                |  | $                  
|                 |  |           |  |                     |  |                    

16

---



The assumptions used for purposes of the option calculations outlined in this note are presented below:

|                                                         |                                                | 2004 |   | 2003  
|-------------------------------------------------------- | ---------------------------------------------- | ---- | - | ------
|Assumptions used in Black-Scholes options pricing model: |                                                |      |   |       
|                                                         | Dividend yield                                 |      |   | 1.290%
|                                                         | Expected volatility                            |      |   | 41.5% 
|                                                         | Risk-free interest rate                        |      |   | 5.75% 
|                                                         | Expected life (years)                          |      |   | 6     
|                                                         | Weighted average fair value of options granted |      | $ | 1.65  
|                                                         |                                                |      |   |       

DISCLOSURE OF PRO FORMA INFORMATION REQUIRED UNDER CICA HANDBOOK SECTION 3870

During
the year ended March 31, 2003, the Company granted 1,767,000 options to purchase common shares. The weighted average grant date fair value of options granted during this period amounted
to $5.84 per option. To compute the
pro forma compensation cost, the Black-Scholes valuation model was used to determine the fair value of the options granted. Pro forma net earnings and pro forma basic and diluted
net earnings per share are presented below:

|(amounts in millions of Canadian dollars, except per share amounts) |                                                    | 2004 |      | 2003 |  
|------------------------------------------------------------------- | -------------------------------------------------- | ---- | ---- | ---- | -
|Net earnings, as reported                                           |                                                    | $    | 64.0 |      | $
|Pro forma impact                                                    |                                                    | $    | (2.5 | )    | $
|                                                                    |                                                    |      |      |      |  
|                                                                    | Pro forma net earnings                             |      | $    | 61.5 |  
|                                                                    |                                                    |      |      |      |  
|                                                                    | Pro forma basic and diluted net earnings per share |      | $    | 0.26 |  
|                                                                    |                                                    |      |      |      |  

EMPLOYEE STOCK PURCHASE PLAN

The
Company maintains an Employee Stock Purchase Plan (ESPP) to enable employees of the Company and its participating subsidiaries to acquire CAE common shares through regular payroll deductions plus
employer contributions. The Plan allows employees to contribute up to 10% of their annual base salary. The Company and its participating subsidiaries match the first $500 employee contribution and
contribute $1 for every $3 on additional employee contributions, to a maximum of 2% of the employee's base salary. Matching contributions vest at the beginning of the third year following the year
during which the employee contributions were made, provided employment has been continuous during that period. Common shares of the Company are purchased by the ESPP trustee on behalf of the
participants on the open market, through the facilities of the Toronto Stock Exchange. The Company recorded compensation expense in the amount of $1.6 million
(2003  $1.9 million, 2002  $1.9 million) in respect of employer contributions under the Plan.

DEFERRED SHARE UNIT PLAN

Effective
May 1, 2000, the Company adopted a Deferred Share Unit (DSU) Plan for executives whereby an executive may elect to receive any cash incentive compensation in the form of deferred
share units. The Plan is intended to enhance the Company's ability to promote a greater alignment of interests between executives and the shareholders of the Company. A deferred share unit is equal in
value to one common share of the Company. The units are issued on the basis of the average closing board lot sale price per share of CAE common shares on the Toronto Stock Exchange during the last
10 days on which such shares traded prior to the date of issue. The units also accrue dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares.
Deferred share units mature upon termination of employment, whereupon an executive is entitled to receive the fair market value of the equivalent number of common shares, net of withholdings, in cash.

In
fiscal 2000, the Company adopted a DSU Plan for non-employee directors. A non-employee director holding less than 10,000 common shares of the Company receives
the Board retainer and attendance fees in the form of deferred share units. A non-employee director holding at least 10,000 common shares may elect to participate in the Plan in respect of
part or all of his or her retainer and attendance fees. The terms of the Plan are essentially identical to the key executive DSU Plan except that the share price used to value the deferred share unit
is based on the closing price per share of CAE common shares on the Toronto Stock Exchange on the day preceding the last business day of March, June, September and December.

The
Company records the cost of the DSU plan as compensation expense. As at March 31, 2004, 403,071 units were outstanding at a value of $2.3 million
(2003  362,498 units at a value of $1.0 million; 2002  194,581 units at a value of $2.3 million). A total
number of 36,978 units were redeemed during the fiscal year ended March 31, 2004 under both DSU plans in accordance with their respective plan text, for a total of $0.2 million. As at
March 31, 2004 no DSU were cancelled.

LONG-TERM INCENTIVE  DEFERRED SHARE UNIT PLAN

During
the year ended March 31, 2004, the Company adopted, as an element of its long-term incentive compensation plan, long-term deferred share units
(LTI-DSU). This LTI-DSU partially replaced the grant of options under the Company's Stock Option Plan. LTI-DSUs have been granted to executives and managers of the
Company. An LTI-DSU is equal in value to one common share of the Company based on quoted market value of the enterprise shares at a specific date, and subject to the Company plan. The
LTI-DSU also accrued dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares. The LTI-DSU vest equally over four years and
can be redeemed for value upon retirement, death, disability or involuntary termination. The value is equal to the fair market value of the equivalent number of common shares of the Company, net of
withholdings, in cash. In May 2003, the Company issued 1,441,011 LTI-DSU units. The expense recorded in fiscal 2004 with respect to these units was $1.4 million. On
March 15, 2004, the Company entered into a hedging contract to reduce its earnings exposure to the fluctuations in the Company's share price (see note 13).

17

---



NOTE 13  FINANCIAL INSTRUMENTS

FOREIGN CURRENCY RISK

The
Company entered into forward foreign exchange contracts totalling $210.9 million (buy contracts $13.8 million and sell contracts $197.1 million). The total unrealized gain as
of March 31, 2004, is $1.6 million (on buy contracts $0.7 million and on sell contracts $0.9 million).

CONSOLIDATED FOREIGN EXCHANGE DEALS OUTSTANDING

|(amounts in millions of Canadian dollars) |                       | 2004  |      | 2003
|----------------------------------------- | --------------------- | ----- | ---- | ----
|
|US/CA                                     |                       |       |      |     
|                                          | Less than 1 year      |       | 96.5 |     
|                                          | Between 1 and 3 years |       | 18.5 |     
|CA/US                                     |                       |       |      |     
|                                          | Less than 1 year      |       | 11.8 |     
|US/EUR                                    |                       |       |      |     
|                                          | Less than 1 year      |       | 1.9  |     
|                                          | Between 1 and 3 years |       |     |     
|CA/EUR                                    |                       |       |      |     
|                                          | Less than 1 year      |       |     |     
|EUR/CA                                    |                       |       |      |     
|                                          | Less than 1 year      |       | 5.6  |     
|                                          | Between 1 and 3 years |       | 11.3 |     
|                                          | Between 3 and 5 years |       |     |     
|GBP/CA                                    |                       |       |      |     
|                                          | Less than 1 year      |       | 9.3  |     
|                                          | Between 1 and 3 years |       | 4.3  |     
|GBP/US                                    |                       |       |      |     
|                                          | Less than 1 year      |       | 51.7 |     
|                                          |                       |       |      |     
|                                          |                       | 210.9 |      |     
|                                          |                       |       |      |     

---

CREDIT RISK

The
Company is exposed to credit risk on billed and unbilled accounts receivable. However, its customers are primarily established companies with publicly available credit ratings or government
agencies, factors that facilitate the monitoring of the risks. In addition, the Company typically receives substantial non-refundable deposits on contracts. The Company closely monitors
its exposure to major airlines in order to curtail it to the extent possible.

The
Company is exposed to credit risk in the event of non-performance by counterparties to its derivative financial instruments. The Company minimizes this exposure by
entering into contracts with counterparties that are of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit
standing of counterparties is regularly monitored.

INTEREST RATE EXPOSURE

The
Company bears some interest rate fluctuation risk on its variable rate long-term debt and some fair value risk on its fixed rate long-term debt. As at March 31,
2004, the Company has entered into five interest rate swap agreements with three different financial institutions to mitigate these risks for a total notional value of $114.6 million. One
agreement, with a notional value of $43.2 million (US$33.0 million), has converted fixed interest rate debt into floating whereby the Company pays the equivalent of a three-month LIBOR
borrowing rate plus 3.6% and receives a fixed interest rate of 7.8% up to June 2012. The remaining four contracts are converting floating interest rate debt into fixed for a notional value of
$71.3 million whereby the Company will receive quarterly LIBOR and pay fixed interest payments as follows:



After
considering these swap agreements, as at March 31, 2004, 45% of the long-term debt bears fixed interest rates.

18

---



STOCK BASED COMPENSATION COST

In
March 2004, the Company entered into an equity swap agreement with a major Canadian institution to reduce its cash and earnings exposure to fluctuation in the Company's share price relating
to the DSU and LTI-DSU programs. Pursuant to the agreement, the Company receives on a monthly basis the economic benefit of dividends and share price appreciation while providing payments
to the financial institution for the institution's cost of funds and any share price depreciation. The net effect of the equity swap partially offsets movements in the Company's share price impacting
the cost of the DSU and LTI-DSU programs. As at March 31, 2004, the equity swap agreement covered 700,000 shares of the Company.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The
following methods and assumptions have been used to estimate the fair value of the financial instruments:



The
fair value and the carrying amount of the financial instruments as at March 31 is as follows:

|                                       |  | 2004 |       | 2003
|-------------------------------------- |  | ---- | ----- | ----
|
|Long-term debt                         |  | $    | 664.6 |     
|Net forward foreign exchange contracts |  |      | 1.6   |     
|Interest rate swap contracts           |  |      | (2.6  | )   
|                                       |  |      |       |     

LETTERS OF CREDIT AND GUARANTEES

As
at March 31, 2004, CAE had outstanding letters of credit and performance guarantees in the amount of $207.7 million
(2003  $195.1 million) issued in the normal course of business. These guarantees are issued under standby facilities available to the Company through
various financial institutions.

The
advance payment guarantees are related to progress/milestone payments made by our customers and are reduced or eliminated upon delivery of the product. The contract performance
guarantees are linked to the completion of the intended product or service rendered by CAE and at the satisfaction of the customer. It represents 10% to 20% of the overall contract amount. The
customer releases the Company from these guarantees at the signature of a certificate of completion. The operating lease obligation provides credit support for the benefit of the owner participant in
the September 30, 2003 sale and leaseback transaction.

|(amounts in millions of Canadian dollars) |  | 2004 |       | 2003
|----------------------------------------- |  | ---- | ----- | ----
|Advance payment                           |  | $    | 146.4 |     
|Contract performance                      |  |      | 22.5  |     
|Operating lease obligation                |  |      | 31.1  |     
|Others                                    |  |      | 7.7   |     
|                                          |  |      |       |     
|Total                                     |  | $    | 207.7 |     
|                                          |  |      |       |     

RESIDUAL VALUE GUARANTEES  SALE AND LEASEBACK TRANSACTIONS

Following
certain sale and leaseback transactions, the Company has agreed to guarantee the residual value of the underlying equipment in the event that the equipment is returned to the lessor and the
net proceeds of any eventual sale do not cover the guaranteed amount. The maximum amount of exposure is $52.3 million of which $22.6 million matures in 2007, $12.3 million matures
in 2008, $8.2 million in 2020 and $9.2 million in 2023. Of this amount, as at March 31, 2004, $33.1 million is recorded as deferred gain
(2003  $22.6 million).

INDEMNIFICATIONS

In
certain instances when CAE sells businesses, the Company may retain certain liabilities for known exposures and provide indemnification to the buyer with respect to future claims for certain
unknown liabilities existing, or arising from events occurring, prior to the sale date, including liabilities for taxes, legal matters, environmental exposures, product liability, and other
obligations. The terms of the indemnifications vary in duration, from one to two years for certain types of indemnities, terms for tax indemnifications that are generally aligned to the applicable
statute of limitations for the jurisdiction in which the divestiture occurred, and terms for environmental liabilities that typically do not expire. The maximum potential future payments that the
Company could be required to make under these indemnifications are either contractually limited to a specified amount or unlimited. The Company believes that the maximum potential future payments that
the Company could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all
available defences, which are not estimable. However, costs incurred to settle claims related to these indemnifications have not been material to the Company's financial position, results of
operations or cash flows.

19

---



NOTE 14  INCOME TAXES

A
reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:

|(amounts in millions of Canadian dollars)                                                |  | 2004 |       | 2003 |   | 2002  |  
|---------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Earnings before income taxes and discontinued operations                                 |  | $    | 87.7  |      | $ | 191.2 |  
|                                                                                         |  |      |       |      |   |       |  
|Statutory income tax rates in Canada                                                     |  |      | 32.8% |      |   | 34.7% |  
|Income taxes at Canadian statutory rates                                                 |  | $    | 28.7  |      | $ | 66.3  |  
|Difference between Canadian statutory rates and those applicable to foreign subsidiaries |  |      | (2.7  | )    |   | 0.7   |  
|Manufacturing and processing allowance                                                   |  |      | (0.5  | )    |   | (3.5  | )
|Losses not tax effected                                                                  |  |      | 0.2   |      |   | 1.0   |  
|Tax benefit of losses not previously recognized                                          |  |      | (5.6  | )    |   | (1.1  | )
|Non-taxable capital gain                                                                 |  |      | (0.2  | )    |   | (0.7  | )
|Non-deductible items                                                                     |  |      | 3.3   |      |   | (0.4  | )
|Prior years' tax adjustments and assessments                                             |  |      | (3.6  | )    |   | (0.9  | )
|Impact of change in income tax rates on future income taxes                              |  |      | 0.7   |      |   | (1.7  | )
|Non-taxable research and development tax credits                                         |  |      | (0.6  | )    |   | (0.5  | )
|Other                                                                                    |  |      | 0.9   |      |   | 1.0   |  
|                                                                                         |  |      |       |      |   |       |  
|Total income tax expense                                                                 |  | $    | 20.6  |      | $ | 60.2  |  
|                                                                                         |  |      |       |      |   |       |  

Significant
components of the provision for income tax expense attributable to continuing operations are as follows:

|(amounts in millions of Canadian dollars) |  | 2004 |      | 2003 |   | 2002
|----------------------------------------- |  | ---- | ---- | ---- | - | ----
|Current income tax expense                |  | $    | 17.0 |      | $ | 41.4
|Future income tax expense                 |  |      | 3.6  |      |   | 18.8
|                                          |  |      |      |      |   |     
|Total income tax expense                  |  | $    | 20.6 |      | $ | 60.2
|                                          |  |      |      |      |   |     

The
tax effects of temporary differences that gave rise to future tax liabilities and assets are as follows:

|(amounts in millions of Canadian dollars)          |  | 2004 |       | 2003 |  
|-------------------------------------------------- |  | ---- | ----- | ---- | -
|Non-capital loss carryforwards                     |  | $    | 76.9  |      | $
|Capital loss carryforwards                         |  |      | 0.9   |      |  
|Investment tax credits                             |  |      | (14.3 | )    |  
|Property, plant and equipment                      |  |      | (62.2 | )    |  
|Employee pension plans                             |  |      |      |      |  
|Amounts not currently deductible                   |  |      | 13.7  |      |  
|Percentage of completion versus completed contract |  |      | (45.3 | )    |  
|Other                                              |  |      | 11.6  |      |  
|                                                   |  |      |       |      |  
|                                                   |  | $    | (18.7 | )    | $
|                                                   |  |      |       |      |  
|Valuation allowance                                |  |      | (26.6 | )    |  
|                                                   |  |      |       |      |  
|Net future income tax liabilities                  |  | $    | (45.3 | )    | $
|                                                   |  |      |       |      |  

As
of March 31, 2004, the Company has accumulated non-capital losses carried forward relating to operations in the United States for approximately $171.3 million
(US$130.7 million). For financial reporting purposes, a net future tax income asset of $38.6 million (US$29.5 million) has been recognized in respect of these loss carryforwards.

The
Company has accumulated non-capital tax losses carried forward relating to its operations in other countries of approximately $57.4 million. For financial
reporting purposes, a net future income tax asset of $11.7 million has been recognized.

20

---



The
losses for income tax purposes expire as follows:

|(amounts in millions of Canadian dollars)
|-----------------------------------------
|
|2005                                     
|2006                                     
|2007                                     
|2008                                     
|2009                                     
|2010-2021                                
|No expiration                            
|                                         
|                                         
|                                         

The
valuation allowance relates principally to loss carryforward benefits where realization is not likely due to a history of loss carryforwards and to the uncertainty of sufficient taxable earnings
in the future, together with time limitations in the tax legislation giving rise to the potential benefit. In 2004, $5.7 million
(2003  $21.1 million) of the valuation allowance balance was reversed when it became more likely than not that benefits would be realized.

NOTE 15  DEFERRED GAINS AND OTHER LONG-TERM LIABILITIES

|(amounts in millions of Canadian dollars)         |  | 2004 |       | 2003
|------------------------------------------------- |  | ---- | ----- | ----
|Deferred gains on sale and leasebacks (i)         |  | $    | 90.5  |     
|Deferred revenue and gains                        |  |      | 33.9  |     
|Long-term portion of employee benefits obligation |  |      | 10.9  |     
|Government cost sharing (note 18)                 |  |      | 7.2   |     
|Other                                             |  |      | 13.1  |     
|                                                  |  |      |       |     
|                                                  |  | $    | 155.6 |     
|                                                  |  |      |       |     

---

NOTE 16  SUPPLEMENTARY CASH FLOW INFORMATION

Cash
provided by (used in) non-cash working capital is as follows:

|(amounts in millions of Canadian dollars) |  | 2004 |        | 2003 |   | 2002  |  
|----------------------------------------- |  | ---- | ------ | ---- | - | ----- | -
|Accounts receivable                       |  | $    | (21.3  | )    | $ | 22.3  |  
|Inventories                               |  |      | (19.0  | )    |   | (3.1  | )
|Prepaid expenses                          |  |      | (6.6   | )    |   | (6.0  | )
|Income taxes recoverable                  |  |      | 4.8    |      |   | 23.1  |  
|Accounts payable and accrued liabilities  |  |      | (56.4  | )    |   | 13.7  |  
|Deposits on contracts                     |  |      | (8.7   | )    |   | (91.3 | )
|                                          |  |      |        |      |   |       |  
|                                          |  | $    | (107.2 | )    | $ | (41.3 | )
|                                          |  |      |        |      |   |       |  
|Interest paid                             |  | $    | 41.0   |      | $ | 38.8  |  
|Income taxes paid                         |  | $    | 8.3    |      | $ | 3.5   |  
|Amortization of other assets              |  | $    | 13.1   |      | $ | 8.8   |  
|                                          |  |      |        |      |   |       |  

NOTE 17  CONTINGENCIES

Through
the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities will be incurred
and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company has no reason to believe
that the ultimate outcome of these matters will have a material impact on its financial position.

21

---



NOTE 18  GOVERNMENT COST SHARING

The
Company has signed agreements with the Government of Canada whereby the latter shares in the cost, based on expenditures incurred by the Company, of certain research and development programs for
visual systems and advanced flight simulation technology for civil applications and networked simulation for military applications. Funding in the amount of $31.2 million related to the visual
research and development programs was completed in 2001. Royalty payments for this program are estimated at $0.4 million in fiscal 2004
(2003  $1.6 million). In fiscal 2002, funding of $41.4 million was approved for advanced civil flight simulation. In fiscal 2003, funding of
$39.0 million was also approved to develop a military network simulation. The Company provided for $10.2 million of future repayments on these two
programs in fiscal 2004. Funding for these programs is based on expenditures incurred by the Company. The amount of funding received in fiscal 2004 was $5.4 million
(2003  $20.2 million, 2002  $15.8 million) and is now complete for the civil program and $8.5 million
(2003  $12.3 million, 2002  nil) for the military program.

These
programs are repayable in the form of royalties to March 2013 based on future sales. The maximum amount of royalties payable under the visual program is
$41.4 million. The maximum payment under the civil or military simulation programs, based on future sales, is $66.0 million and $53.6 million respectively.

NOTE 19  OPERATING LEASE COMMITMENTS

Future
minimum lease payments under operating leases are as follows:

|(amounts in millions of Canadian dollars) |            | Civil
Simulation
and Training |       | Military
Simulation
and Training |   | Marine
Controls |       | Total
|----------------------------------------- | ---------- | ----------------------------- | ----- | -------------------------------- | - | --------------- | ----- | -----
|Years ending March 31,                    |            |                               |       |                                  |   |                 |       |      
|                                          | 2005       |                               | $     | 53.0                             |   | $               | 37.8  |      
|                                          | 2006       |                               |       | 50.6                             |   |                 | 32.9  |      
|                                          | 2007       |                               |       | 65.2                             |   |                 | 24.1  |      
|                                          | 2008       |                               |       | 52.7                             |   |                 | 23.6  |      
|                                          | 2009       |                               |       | 35.5                             |   |                 | 22.8  |      
|                                          | Thereafter |                               |       | 313.5                            |   |                 | 100.1 |      
|                                          |            |                               |       |                                  |   |                 |       |      
|                                          |            | $                             | 570.5 |                                  | $ | 241.3           |       | $    
|                                          |            |                               |       |                                  |   |                 |       |      

NOTE 20  PENSIONS

The
Company has two registered defined benefit plans in Canada (one for employees and one for designated executives) that provide benefits based on length of service and final average earnings. In
addition, the Company maintains a supplemental arrangement to provide defined benefits for designated executives. This supplemental arrangement is solely the obligation of the Company and there is no
requirement to fund it. The Company, however, is obligated to pay the benefits when they become due. Once the designated executive retires from the Company, the Company is required to secure the
obligation for that executive. As at March 31, 2004, the Company has issued letters of credit totalling $11.9 million to secure the obligations under the Supplementary Plan.

Contributions
reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. Plan assets are represented primarily by Canadian and
foreign equities and government and corporate bonds.

22

---



The
changes in the registered pension obligations and in the fair value of assets and the funded status of the registered defined benefit plans were as follows:

|(amounts in millions of Canadian dollars) |                                              | 2004 |       | 2003  |  
|----------------------------------------- | -------------------------------------------- | ---- | ----- | ----- | -
|Change in pension obligations             |                                              |      |       |       |  
|                                          | Pension obligation, beginning of year        |      | $     | 133.5 |  
|                                          | Current service cost                         |      |       | 3.4   |  
|                                          | Interest cost                                |      |       | 8.6   |  
|                                          | Settlement of discontinued operations        |      |       | (1.5  | )
|                                          | Employee contributions                       |      |       | 2.7   |  
|                                          | Loss on plan amendments                      |      |       | 1.2   |  
|                                          | Pension benefits paid                        |      |       | (8.4  | )
|                                          | Actuarial loss                               |      |       |      |  
|                                          |                                              |      |       |       |  
|Pension obligation, end of year           |                                              | $    | 139.5 |       | $
|                                          |                                              |      |       |       |  
|Change in fair value of plan assets       |                                              |      |       |       |  
|                                          | Fair value of plan assets, beginning of year |      | $     | 105.6 |  
|                                          | Actual return on plan assets                 |      |       | 14.4  |  
|                                          | Pension benefits paid                        |      |       | (8.4  | )
|                                          | Settlement of discontinued operations        |      |       | (1.3  | )
|                                          | Plan expenses                                |      |       | (0.3  | )
|                                          | Employee contributions                       |      |       | 2.7   |  
|                                          | Employer contributions                       |      |       | 6.2   |  
|                                          |                                              |      |       |       |  
|Fair value of plan assets, end of year    |                                              | $    | 118.9 |       | $
|                                          |                                              |      |       |       |  
|                                          | Funded status-plan deficit                   |      | $     | (20.6 | )
|                                          | Unrecognized net actuarial loss              |      |       | 34.4  |  
|                                          | Unamortized past service cost                |      |       | 5.8   |  
|                                          |                                              |      |       |       |  
|Accrued net pension asset, end of year    |                                              | $    | 19.6  |       | $
|                                          |                                              |      |       |       |  

The
actuarial present value of accrued pension benefits has been estimated taking into consideration economic and demographic factors over an extended future period. Significant assumptions used in
the calculation are as follows:

|                                              |  | 2004           |  | 2003           |  
|--------------------------------------------- |  | -------------- |  | -------------- | -
|Return on plan assets                         |  | 6.5%           |  | 6.5%           | 1
|Discount rate for pension benefit obligations |  | 6.5%           |  | 6.5%           |  
|Compensation rate increase                    |  | 2.75% to 5.25% |  | 2.75% to 5.25% |  
|                                              |  |                |  |                |  

---

The Company measures its benefit obligations and fair value of plan assets for accounting purposes as at December 31 of each year. The most recent
actuarial valuation of the pension plans for funding purposes was as of December 31, 2001 for the employee registered plan, and March 28, 2002 for the designated executive registered
plan. As at those dates, the combined pension plans have an excess of pension obligations over plan assets. The next required valuation will be as of December 31, 2004 for the employee
registered plan and March 28, 2005 for the designated executive registered plan.

The
registered net pension expense for the years ended March 31 included the following components:

|(amounts in millions of Canadian dollars)               |  | 2004 |      | 2003 |   | 2002 |  
|------------------------------------------------------- |  | ---- | ---- | ---- | - | ---- | -
|Current service cost                                    |  | $    | 3.4  |      | $ | 3.8  |  
|Plan expenses                                           |  |      | 0.3  |      |   | 0.3  |  
|Interest cost on projected pension obligations          |  |      | 8.5  |      |   | 7.6  |  
|Expected return on plan assets                          |  |      | (6.7 | )    |   | (7.2 | )
|Amortization of net actuarial loss                      |  |      | 2.2  |      |   | 0.8  |  
|Amortization of past service costs                      |  |      | 0.4  |      |   | 0.2  |  
|                                                        |  |      |      |      |   |      |  
|Net pension expense                                     |  | $    | 8.1  |      | $ | 5.5  |  
|                                                        |  |      |      |      |   |      |  
|Net pension expense                                     |  | $    | 8.1  |      | $ | 5.5  |  
|Settlement and other loss                               |  |      | 0.8  |      |   |     |  
|                                                        |  |      |      |      |   |      |  
|Net pension expense including settlement and other loss |  | $    | 8.9  |      | $ | 5.5  |  
|                                                        |  |      |      |      |   |      |  

23

---



With
respect to the supplemental arrangement, the net pension expense for 2004 was $1.7 million (2003  $1.7 million;
2002  $1.6 million). The net pension expense for 2004 is made up of $0.8 million of current service cost
(2003  $0.8 million; 2002  $0.7 million) and $0.9 million of interest cost on projected obligations
(2003  $0.9 million; 2002  $0.9 million).

The
pension obligations relative to the supplemental arrangement were $14.6 million as at March 31, 2004
(2003   $13.7 million; 2002  $14.3 million). In fiscal 2003, the current service cost was
$0.8 million, the interest cost on projected pension obligations was $0.9 million and the benefits paid were $0.9 million. In fiscal 2002, the current service cost was
$0.8 million, the interest cost on projected pension obligations was $0.9 million and the benefits paid were $0.6 million. The total obligation for the Company, included in
Long-Term Liabilities, as at March 31, 2004 was $15.4 million (2003  $14.6 million). The difference between this obligation
recognized by the Company and the pension obligation is the amount of unamortized actuarial gains of $0.8 million (2003  $0.9 million).

NOTE 21  CURRENCY TRANSLATION ADJUSTMENT

The
change in the currency translation adjustment account included in shareholders' equity resulted from the translation to Canadian dollars of assets and liabilities of the Company's
self-sustaining foreign operations, exchange gains or losses on inter-company account balances that form part of the net investments and foreign exchange gains or losses on
long-term debt designated as hedges of the net investment in self-sustaining foreign operations.

The
net change in this account is as follows:

|(amounts in millions of Canadian dollars)            |                                                                                                                                              | 2004 |       | 2003  |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ----- | ----- | -
|Balance at beginning of year                         |                                                                                                                                              | $    | 28.5  |       | $
|Effect of changes in exchange rates during the year: |                                                                                                                                              |      |       |       |  
|                                                     | On net investment in self-sustaining subsidiaries                                                                                            |      |       | (62.2 | )
|                                                     | On certain long-term debt denominated in foreign currencies designated as a hedge of net investments in self-sustaining foreign subsidiaries |      |       | 21.6  |  
|                                                     |                                                                                                                                              |      |       |       |  
|Balance at end of year                               |                                                                                                                                              | $    | (12.1 | )     | $
|                                                     |                                                                                                                                              |      |       |       |  

NOTE 22  OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION

The
Company's significant operating segments include:

Each
operating segment is led by a senior executive and offers different products and uses different technology and marketing strategies. The Company evaluates performance based on earnings before
interest, income taxes and discontinued operations and uses capital employed to assess resources allocated to each segment. Capital employed includes accounts receivable, inventories, prepaid
expenses, restricted cash, property, plant and equipment, goodwill, intangible assets and other assets less accounts payable and accrued liabilities, deposits on contracts and deferred gains and other
long-term liabilities.

Prior
to fiscal 2003, the Marine Controls segment was aggregated and presented with the Military Simulation and Training segment. In 2003, these segments were presented separately and
accordingly comparative figures for fiscal 2002 have been restated in order to be consistent with the new basis of presentation.

24

---



Financial
information on the Company's operating segments is shown in the following table:

OPERATING SEGMENTS

|(amounts in millions of Canadian dollars)      |                                                | 2004 |         | 2003    |   | 2002   
|---------------------------------------------- | ---------------------------------------------- | ---- | ------- | ------- | - | -------
|Capital employed                               |                                                |      |         |         |   |        
|                                               | Civil Simulation and Training                  |      | $       | 1,041.8 |   | $      
|                                               | Military Simulation and Training               |      |         | 301.8   |   |        
|                                               | Marine Controls                                |      |         | 160.0   |   |        
|                                               | Other                                          |      |         | (23.5   | ) |        
|                                               |                                                |      |         |         |   |        
|Total capital employed                         |                                                | $    | 1,480.1 |         | $ | 1,517.8
|                                               | Cash and cash equivalents                      |      |         | 61.9    |   |        
|                                               | Restricted cash                                |      |         | 7.0     |   |        
|                                               | Short-term investments                         |      |         |        |   |        
|                                               | Income taxes recoverable                       |      |         | 52.0    |   |        
|                                               | Accounts payable and accrued liabilities       |      |         | 350.0   |   |        
|                                               | Deposits on contracts                          |      |         | 91.1    |   |        
|                                               | Future income taxes  short-term               |      |         | 1.8     |   |        
|                                               | Future income taxes  long-term                |      |         | 93.8    |   |        
|                                               | Deferred gains and other long-term liabilities |      |         | 155.6   |   |        
|                                               | Assets of discontinued operations              |      |         |        |   |        
|                                               |                                                |      |         |         |   |        
|Total assets                                   |                                                | $    | 2,293.3 |         | $ | 2,356.5
|                                               |                                                |      |         |         |   |        
|Total assets by segment                        |                                                |      |         |         |   |        
|                                               | Civil Simulation and Training                  |      | $       | 1,327.3 |   | $      
|                                               | Military Simulation and Training               |      |         | 503.6   |   |        
|                                               | Marine Controls                                |      |         | 219.4   |   |        
|                                               | Assets of discontinued operations              |      |         |        |   |        
|                                               | Other                                          |      |         | 243.0   |   |        
|                                               |                                                |      |         |         |   |        
|                                               |                                                | $    | 2,293.3 |         | $ | 2,356.5
|                                               |                                                |      |         |         |   |        
|Additions and adjustments to goodwill          |                                                |      |         |         |   |        
|                                               | Civil Simulation and Training                  |      | $       | (12.5   | ) | $      
|                                               | Military Simulation and Training               |      |         | (7.4    | ) |        
|                                               | Marine Controls                                |      |         | (3.1    | ) |        
|                                               |                                                |      |         |         |   |        
|                                               |                                                | $    | (23.0   | )       | $ | (8.7   
|                                               |                                                |      |         |         |   |        
|Additions and adjustments to intangible assets |                                                |      |         |         |   |        
|                                               | Civil Simulation and Training                  |      | $       | (6.0    | ) | $      
|                                               | Military Simulation and Training               |      |         | (0.2    | ) |        
|                                               | Marine Controls                                |      |         | (1.5    | ) |        
|                                               |                                                |      |         |         |   |        
|                                               |                                                | $    | (7.7    | )       | $ | 18.0   
|                                               |                                                |      |         |         |   |        
|Capital expenditures                           |                                                |      |         |         |   |        
|                                               | Civil Simulation and Training                  |      | $       | 83.5    |   | $      
|                                               | Military Simulation and Training               |      |         | 5.1     |   |        
|                                               | Marine Controls                                |      |         | 5.9     |   |        
|                                               |                                                |      |         |         |   |        
|                                               |                                                | $    | 94.5    |         | $ | 238.9  
|                                               |                                                |      |         |         |   |        
|Amortization of property, plant and equipment  |                                                |      |         |         |   |        
|                                               | Civil Simulation and Training                  |      | $       | 38.3    |   | $      
|                                               | Military Simulation and Training               |      |         | 12.7    |   |        
|                                               | Marine Controls                                |      |         | 1.6     |   |        
|                                               | Other                                          |      |         | 0.9     |   |        
|                                               |                                                |      |         |         |   |        
|                                               |                                                | $    | 53.5    |         | $ | 52.1   
|                                               |                                                |      |         |         |   |        

25

---



OPERATING SEGMENTS

|(amounts in millions of Canadian dollars) |                                  | 2004 |      | 2003 |   | 2002
|----------------------------------------- | -------------------------------- | ---- | ---- | ---- | - | ----
|Amortization of intangible assets         |                                  |      |      |      |   |     
|                                          | Civil Simulation and Training    |      | $    | 6.8  |   | $   
|                                          | Military Simulation and Training |      |      | 0.1  |   |     
|                                          | Marine Controls                  |      |      | 1.9  |   |     
|                                          |                                  |      |      |      |   |     
|                                          |                                  | $    | 8.8  |      | $ | 9.7 
|                                          |                                  |      |      |      |   |     
|Amortization of other assets              |                                  |      |      |      |   |     
|                                          | Civil Simulation and Training    |      | $    | 10.1 |   | $   
|                                          | Military Simulation and Training |      |      | 1.4  |   |     
|                                          | Other                            |      |      | 1.6  |   |     
|                                          |                                  |      |      |      |   |     
|                                          |                                  | $    | 13.1 |      | $ | 8.8 
|                                          |                                  |      |      |      |   |     

GEOGRAPHIC INFORMATION

|(amounts in millions of Canadian dollars)                     |                          | 2004 |         | 2003  |   | 2002   
|------------------------------------------------------------- | ------------------------ | ---- | ------- | ----- | - | -------
|Revenue from external customers based on their location       |                          |      |         |       |   |        
|                                                              | Canada                   |      | $       | 128.5 |   | $      
|                                                              | United States            |      |         | 338.2 |   |        
|                                                              | United Kingdom           |      |         | 110.6 |   |        
|                                                              | Germany                  |      |         | 137.5 |   |        
|                                                              | Other European countries |      |         | 177.6 |   |        
|                                                              | Other countries          |      |         | 200.8 |   |        
|                                                              |                          |      |         |       |   |        
|                                                              |                          | $    | 1,093.2 |       | $ | 1,130.5
|                                                              |                          |      |         |       |   |        
|Property, plant and equipment, goodwill and intangible assets |                          |      |         |       |   |        
|                                                              | Canada                   |      | $       | 224.8 |   | $      
|                                                              | United States            |      |         | 443.1 |   |        
|                                                              | Europe                   |      |         | 619.8 |   |        
|                                                              | Other countries          |      |         | 54.3  |   |        
|                                                              |                          |      |         |       |   |        
|                                                              |                          | $    | 1,342.0 |       | $ | 1,468.9
|                                                              |                          |      |         |       |   |        

NOTE 23  RESTRUCTURING COSTS

On
April 5, 2004, the Company announced employee layoffs, of which 85% were based in Montreal. A restructuring charge of $8.2 million, related to these employees, to cover severance and
other costs has been recorded in the results of the fourth quarter of fiscal year 2004, in accordance with the CICA's EIC-134,Accounting for Severance and
Termination Benefits.

The $8.2 million
liability is included in the Company's balance sheet under the accounts payable and accrued liabilities line. This liability is expected to be fully used
during the first quarter of fiscal year 2005. Earlier during the fourth quarter of fiscal year 2004, the Company incurred $1.8 million in severance costs for Montreal-based employees. The total
restructuring costs incurred during the fourth quarter of fiscal year 2004 amount to $10.0 million.

NOTE 24  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The
consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), which differ in certain respects from those principles
that the Company would have followed had its financial statements been prepared in accordance with accounting principles generally accepted in the United States (US GAAP).

Additional
disclosures required under US GAAP have been provided in the accompanying financial statements and notes.

26

---



The
reconciliation of net earnings in accordance with Canadian GAAP to conform to US GAAP is as follows:

|Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts)                          |  | 2004 |       | 2003 |   | 2002  |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Earnings from continuing operations for the year in accordance with Canadian GAAP                                 |  | $    | 67.1  |      | $ | 131.0 |  
|Deferred development costs, net of tax recovery of $1.2 (2003  $2.7), (2002  $5.0) (A)                          |  |      | (2.5  | )    |   | (5.8  | )
|Deferred pre-operating costs, net of tax expense of $0.3 (2003  $0.4), (2002  $4.1) (B)                         |  |      | (0.2  | )    |   | (0.8  | )
|Derivative instruments, net of tax recovery of $4.3 (2003  $7.7) (2002  $0.2) (D)                               |  |      | (9.1  | )    |   | (16.7 | )
|Leases net of tax expense of $2.5 (2003  $0.9), (2002  tax recovery $0.8) (H)                                   |  |      | 5.3   |      |   | 2.0   |  
|Foreign exchange gain on purchase of subsidiary in 2002, net of tax of $3.7 (F)                                   |  |      |      |      |   |      |  
|                                                                                                                  |  |      |       |      |   |       |  
|Earnings from continuing operations before cumulative effect of accounting change  US GAAP                       |  |      | 60.6  |      |   | 109.7 |  
|Discontinued operations                                                                                           |  |      | (3.1  | )    |   | (13.8 | )
|                                                                                                                  |  |      |       |      |   |       |  
|Net earnings before cumulative effect of accounting change  US GAAP                                              |  |      | 57.5  |      |   | 95.9  |  
|Cumulative effect on prior years of accounting change (D) (E)                                                     |  |      |      |      |   |      |  
|                                                                                                                  |  |      |       |      |   |       |  
|Net earnings for the year in accordance with US GAAP                                                              |  | $    | 57.5  |      | $ | 95.9  |  
|                                                                                                                  |  |      |       |      |   |       |  
|Basic and diluted earnings per share from continuing operations in accordance with US GAAP                        |  |      | 0.26  |      |   | 0.50  |  
|                                                                                                                  |  |      |       |      |   |       |  
|Basic and diluted results per share from discontinued operations in accordance with US GAAP                       |  |      | (0.02 | )    |   | (0.07 | )
|                                                                                                                  |  |      |       |      |   |       |  
|Basic and diluted net earnings per share before cumulative effect of accounting change in accordance with US GAAP |  |      | 0.24  |      |   | 0.43  |  
|                                                                                                                  |  |      |       |      |   |       |  
|Basic and diluted net earnings per share in accordance with US GAAP                                               |  |      | 0.24  |      |   | 0.43  |  
|                                                                                                                  |  |      |       |      |   |       |  
|Dividends per common share                                                                                        |  |      | 0.12  |      |   | 0.12  |  
|                                                                                                                  |  |      |       |      |   |       |  
|Weighted average number of common shares outstanding                                                              |  |      | 233.2 |      |   | 219.4 |  
|                                                                                                                  |  |      |       |      |   |       |  

Comprehensive income

|(amounts in millions of Canadian dollars)                                  |  | 2004 |       | 2003 |   | 2002  |  
|-------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Net earnings in accordance with US GAAP                                    |  | $    | 57.5  |      | $ | 95.9  |  
|Accumulated minimum pension liability, net of taxes of $4.2 (2003  $10.8) |  |      | 9.1   |      |   | (23.5 | )
|Foreign currency translation adjustments                                   |  |      | (40.1 | )    |   | 36.8  |  
|                                                                           |  |      |       |      |   |       |  
|Comprehensive income                                                       |  | $    | 26.5  |      | $ | 109.2 |  
|                                                                           |  |      |       |      |   |       |  

Accumulated Other Comprehensive Loss in accordance with US GAAP

|(amounts in millions of Canadian dollars) |  | 2004 |       | 2003 |   | 20021 |  
|----------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Beginning balance                         |  | $    | (1.8  | )    | $ | (15.1 | )
|Currency translation adjustments          |  |      | (40.1 | )    |   | 36.8  |  
|Change in minimum pension liability       |  |      | 9.1   |      |   | (23.5 | )
|                                          |  |      |       |      |   |       |  
|Ending balance                            |  | $    | (32.8 | )    | $ | (1.8  | )
|                                          |  |      |       |      |   |       |  

---

The cumulative effect of these adjustments on the shareholders' equity of the Company is as follows:

|(amounts in millions of Canadian dollars)                                                                    |  | 2004 |       | 2003 |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- | -
|Shareholders' equity in accordance with Canadian GAAP                                                        |  | $    | 918.8 |      | $
|Deferred development costs, net of tax of $13.4 (2003  $12.2), (2002  $9.5) (A)                            |  |      | (27.9 | )    |  
|Deferred pre-operating costs, net of tax of $8.8 (2003  $9.1), (2002  $8.7) (B)                            |  |      | (18.9 | )    |  
|Derivative instruments, net of tax expense of $9.8 (2003  tax expense $5.5), (2002  tax recovery $2.2) (D) |  |      | (21.0 | )    |  
|Foreign currency translation adjustments (I)                                                                 |  |      | (6.6  | )    |  
|Leases, net of tax recovery of $3.0 (2003  tax recovery $0.5), (2002  tax expense $0.4) (H)                |  |      | 6.0   |      |  
|Foreign exchange gain on purchase of subsidiary, net of tax of $3.7 (2003  $3.7), (2002  $3.7) (F)         |  |      | 7.9   |      |  
|Minimum pension liability, net of tax of $6.6 (2003  $10.8), (2002  nil) (J)                               |  |      | (14.4 | )    |  
|                                                                                                             |  |      |       |      |  
|Shareholders' equity in accordance with US GAAP                                                              |  | $    | 843.9 |      | $
|                                                                                                             |  |      |       |      |  

27

---



The balance sheets in accordance with US GAAP as at March 31, 2004 and March 31, 2003 are as follows:

|                                               |  |                 |  | March 31, 2004 |         | March 31, 2003 |  
|---------------------------------------------- |  | --------------- |  | -------------- | ------- | -------------- | -
|
|Assets                                         |  |                 |  |                |         |                |  
|Cash and cash equivalents                      |  |                 |  | $              | 61.9    |                | $
|Short-term investments                         |  | C               |  |                |        |                |  
|Accounts receivable                            |  |                 |  |                | 390.9   |                |  
|Derivative instruments                         |  | D               |  |                |        |                |  
|Inventories                                    |  |                 |  |                | 154.8   |                |  
|Prepaid expenses                               |  | H               |  |                | 20.7    |                |  
|Income taxes recoverable                       |  |                 |  |                | 52.0    |                |  
|Future income taxes                            |  |                 |  |                | 1.8     |                |  
|                                               |  |                 |  |                |         |                |  
|                                               |  |                 |  | $              | 682.1   |                | $
|                                               |  |                 |  |                |         |                |  
|Restricted cash                                |  |                 |  |                | 7.0     |                |  
|Assets of discontinued operations              |  |                 |  |                |        |                |  
|Property, plant and equipment, net             |  | H               |  |                | 843.0   |                |  
|Future income taxes                            |  | A,B,D,F,H,J     |  |                | 93.8    |                |  
|Intangible assets                              |  | J               |  |                | 155.2   |                |  
|Goodwill                                       |  | F               |  |                | 343.8   |                |  
|Other assets                                   |  | A,B             |  |                | 168.4   |                |  
|                                               |  |                 |  |                |         |                |  
|                                               |  |                 |  | $              | 2,293.3 |                | $
|                                               |  |                 |  |                |         |                |  
|Liabilities and shareholders' equity           |  |                 |  |                |         |                |  
|Current liabilities                            |  |                 |  |                |         |                |  
|Accounts payable and accrued liabilities       |  | H               |  | $              | 350.0   |                | $
|Deposits on contracts                          |  |                 |  |                | 91.1    |                |  
|Derivative instruments                         |  | D               |  |                |        |                |  
|Long-term debt due within one year             |  | H               |  |                | 13.5    |                |  
|Future income taxes                            |  |                 |  |                | 51.1    |                |  
|                                               |  |                 |  |                |         |                |  
|                                               |  |                 |  | $              | 505.7   |                | $
|Liabilities of discontinued operations         |  |                 |  | $              |        |                | $
|Long-term debt                                 |  | H               |  |                | 623.4   |                |  
|Deferred gains and other long-term liabilities |  | H,J             |  |                | 155.6   |                |  
|Future income taxes                            |  |                 |  |                | 89.8    |                |  
|                                               |  |                 |  |                |         |                |  
|                                               |  |                 |  | $              | 1,374.5 |                | $
|                                               |  |                 |  |                |         |                |  
|Shareholders' equity                           |  |                 |  |                |         |                |  
|Capital stock                                  |  | G,K             |  | $              | 367.5   |                | $
|Contributed surplus                            |  |                 |  |                | 1.3     |                |  
|Retained earnings                              |  | A,B,D,E,F,G,H,K |  |                | 562.1   |                |  
|Currency translation adjustment                |  |                 |  |                | (12.1   | )              |  
|Accumulated other comprehensive loss           |  | C,H,J           |  |                |        |                |  
|                                               |  |                 |  |                |         |                |  
|                                               |  |                 |  | $              | 918.8   |                | $
|                                               |  |                 |  |                |         |                |  
|                                               |  |                 |  | $              | 2,293.3 |                | $
|                                               |  |                 |  |                |         |                |  

RECONCILIATION ITEMS

A)    Deferred development costs

Under
US GAAP, development costs are charged to expense in the period incurred. Under Canadian GAAP, certain development costs are capitalized and amortized over their estimated useful lives if they
meet the criteria for deferral. The difference between US GAAP and Canadian GAAP represents the gross development costs capitalized in the respective year, net of the reversal of amortization expense
recorded for Canadian GAAP relating to amounts previously capitalized.

B)    Deferred pre-operating costs

Under
US GAAP, pre-operating costs are charged to expense in the period incurred. Under Canadian GAAP, the amounts are deferred and amortized over five to 20 years based on the
expected period and pattern of benefit of the deferred expenditures. The difference between US GAAP and Canadian GAAP represents the gross pre-operating costs capitalized in the respective
year, net of the reversal of amortization expense recorded for Canadian GAAP relating to amounts previously capitalized.

28

---



C)    Portfolio investments

Under
Canadian GAAP, portfolio investments (short-term investments) are accounted for at the least of cost and market value. Under US GAAP, portfolio investments are classified as held to
maturity and thus are recorded at amortized cost. There is no material difference for US GAAP purposes. The investments held at March 31, 2003 had maturity dates of within one month of
March 31, 2003.

D)    Derivative financial instruments

Under
Canadian GAAP, the nature and fair values of derivative financial instruments, all of which are entered into for hedging purposes, are disclosed. The Company recognizes the gains and losses on
forward contracts in income concurrently with the recognition of the transactions being hedged. The interest payments relating to swap contracts are recorded in net earnings over the life of the
underlying transaction on an accrual basis as an adjustment to interest income or interest expense. Under US GAAP, all derivatives are recorded on the balance sheet at fair value. Realized and
unrealized gains and losses resulting from the valuation of derivatives (including embedded derivatives in purchase and sale contracts) at market value are recognized (against interest expense for
interest rate swap and against revenues or cost of goods sold for the foreign exchange contracts) as the gains and losses arise and not concurrently with the recognition of the transactions being
hedged, as the Company does not apply the optional hedge accounting provisions of SFAS 133 and 138.

Upon
the initial adoption of SFAS 133 and 138 on April 1, 2001, the cumulative effect of the accounting change resulted in an increase in net earnings of
$5.3 million net of taxes of $2.4 million.

E)    Adjustments for changes in accounting policies

Under
US GAAP, the cumulative effect of certain accounting changes must be included in earnings in the year of the change. Under Canadian GAAP, the impact is reflected through retained earnings.

F)    Foreign exchange gain on purchase of subsidiary

Under
Canadian GAAP, upon the purchase of Schreiner, a foreign exchange gain was recorded in fiscal 2002 as a reduction of goodwill on the forward contract hedge of the foreign currency denominated
purchase price. Under US GAAP, this gain was recorded in earnings.

G)   Reduction in stated capital

On
July 7, 1994, the Company applied a portion of its deficit as a reduction of its stated capital in the amount of $249.3 million. Under US GAAP, the reduction of stated capital would
not be permitted.

H)   Leases

Under
Canadian GAAP, certain of the Company's leases of simulators, with aggregate minimum future lease payments of $133.5 million are accounted for as operating leases.

Under
these agreements, the lessors hold the simulators under lease and have arranged financing through Special Purposes Entities (SPEs). Under US GAAP, since the legal stated capital of
these (SPEs) represent less than 3% of the assets of those (SPEs), the assets, liabilities, results of operations and cash flows of the SPE must be consolidated into those of the Company. Amortization
expense related to these leases amounts to $3.8 million in 2004 (2003  $4.4 million,
2002  $2.0 million) and interest expense related to the financing arrangement amounts to $7.6 million in 2004
(2003  $8.3 million, 2002  $6.0 million). Currency translation adjustments resulting from the consolidation
of a foreign SPE considered self-sustaining amount to $0.5 million in 2004 (2003  $6.6 million).

I)     Comprehensive income

US
GAAP requires disclosure of comprehensive income, which comprises income and other components of comprehensive income. Other comprehensive income includes items that cause changes in shareholders'
equity but are not related to share capital or net earnings which, for the Company, comprises currency translation adjustments and change in minimum pension liability. Under Canadian GAAP, there is no
requirement to report comprehensive income.

J)    Minimum pension liability

Under
US GAAP, if the accumulated benefit obligation exceeds the market value of plan assets, a minimum pension liability for the excess is recognized to the extent that the liability recorded in the
balance sheet is less than the minimum liability. Any portion of the additional liability that relates to unrecognized past service costs is recognized as an intangible asset while the remainder is
charged to comprehensive income. The concept of additional minimum liability does not exist under Canadian GAAP.

K)   Share issue costs

Under
Canadian GAAP, costs related to share issuance can be presented in retained earnings, net of taxes. Under US GAAP, these costs were recorded as a reduction of capital stock.

CONSOLIDATED STATEMENT OF CASH FLOWS

Under
US GAAP reporting, separate subtotals within operating, financing and investment activities would not be presented.

29

---



The
reconciliation of cash flows under Canadian GAAP to conform to US GAAP is as follows:

|Years ended March 31 (amounts in millions of Canadian dollars)        |  | Note |  | 2004 |       | 2003 |   | 2002   |  
|--------------------------------------------------------------------- |  | ---- |  | ---- | ----- | ---- | - | ------ | -
|Cash flows from operating activities in accordance with Canadian GAAP |  |      |  | $    | 5.7   |      | $ | 154.9  |  
|Deferred development costs                                            |  | A    |  |      | (12.7 | )    |   | (13.3  | )
|Deferred pre-operating costs                                          |  | B    |  |      | (10.4 | )    |   | (10.7  | )
|Foreign exchange gain on purchase of a subsidiary                     |  | F    |  |      |      |      |   |       |  
|Leases                                                                |  | H    |  |      | 13.7  |      |   | 10.9   |  
|                                                                      |  |      |  |      |       |      |   |        |  
|Cash flows from operating activities in accordance with US GAAP       |  |      |  | $    | (3.7  | )    | $ | 141.8  |  
|Cash flows from investing activities in accordance with Canadian GAAP |  |      |  | $    | 24.5  |      | $ | (134.4 | )
|Deferred development costs                                            |  | A    |  |      | 12.7  |      |   | 13.3   |  
|Deferred pre-operating costs                                          |  | B    |  |      | 10.4  |      |   | 10.7   |  
|Foreign exchange gain on purchase of a subsidiary                     |  | F    |  |      |      |      |   |       |  
|                                                                      |  |      |  |      |       |      |   |        |  
|Cash flows from investing activities in accordance with US GAAP       |  |      |  | $    | 47.6  |      | $ | (110.4 | )
|Cash flows from financing activities in accordance with Canadian GAAP |  |      |  | $    | 17.8  |      | $ | (94.4  | )
|Leases                                                                |  | H    |  |      | (13.7 | )    |   | (10.9  | )
|                                                                      |  |      |  |      |       |      |   |        |  
|Cash flows from financing activities in accordance with US GAAP       |  |      |  | $    | 4.1   |      | $ | (105.3 | )
|                                                                      |  |      |  |      |       |      |   |        |  

RECENTLY ADOPTED ACCOUNTING STANDARDS

Accounting for stock-based compensation

In
fiscal 2004, compensation costs of $1.3 million were recorded in net earnings with a corresponding credit to contributed surplus using the fair value method of accounting for awards that
were granted in May 2003.

Prior
to April 1, 2003, CAE had elected to measure stock-based compensation using the intrinsic value base method of accounting. In that instance, however, under SFAS 123,
the Company is required to make pro forma disclosures of net earnings, basic earnings per share and diluted earnings per share using the fair value method of accounting for stock-based
compensation granted prior to April 1, 2003.

Accordingly,
CAE's net earnings, basic earnings per share and diluted earnings per share for the year ended March 31, 2004 would have been reduced on a pro forma basis by
$4.7 million, or $0.02 per common share for basic and diluted earnings respectively (for the year ended March 31, 2003  $5.6 million, or
$0.03 per common share for basic and diluted earnings respectively; for the year ended March 31, 2002  $3.7 million, or $0.02 per common share for
basic and diluted earnings respectively) for stock-based compensation granted prior to April 1, 2003.

Pro forma
net earnings and pro forma basic and diluted net earnings per share are presented below:

|(amounts in millions of Canadian dollars, except per share amounts) |                                                    | 2004 |      | 2003 |   | 2002 |     
|------------------------------------------------------------------- | -------------------------------------------------- | ---- | ---- | ---- | - | ---- | ----
|Net earnings, as reported per US GAAP                               |                                                    | $    | 57.5 |      | $ | 95.9 |     
|Pro forma impact                                                    |                                                    |      | (4.7 | )    |   | (5.6 | )   
|                                                                    |                                                    |      |      |      |   |      |     
|                                                                    | Pro forma net earnings                             |      |      | 52.8 |   |      | 90.3
|                                                                    |                                                    |      |      |      |   |      |     
|                                                                    | Pro forma basic and diluted net earnings per share |      |      | 0.23 |   |      | 0.41
|                                                                    |                                                    |      |      |      |   |      |     

The
fair value of the options granted during the years ended March 31, 2004, 2003 and 2002 are estimated at $1.65 per share, $5.84 per share and $4.87 per share respectively.

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

|Years ended March 31         |  | 2004   |  | 2003   |  | 2002  
|---------------------------- |  | ------ |  | ------ |  | ------
|Expected option life (years) |  | 6      |  | 6      |  | 6     
|Expected volatility          |  | 41.5%  |  | 46.5%  |  | 36.3% 
|Risk-free interest rate      |  | 5.75%  |  | 5.26%  |  | 5.17% 
|Dividend Yield               |  | 1.290% |  | 1.058% |  | 1.040%
|                             |  |        |  |        |  |       

Disclosure of guarantees

In
fiscal 2002, the Company adopted the FASB issued interpretation (FIN) No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which requires companies that act as guarantors to disclose more information in their financial statements about their obligations under
certain guarantees. It defines a guarantee and also requires guarantors to recognize a liability for the fair value, for guarantees given on or after January 1, 2003, of their obligation when
they enter into these guarantees. The disclosure requirements of FIN No. 45 apply to financial statements issued after December 15, 2002. Similar accounting recommendations in
Canada require disclosure of guarantees but do not require liability recognition.

Derivative instruments and hedging activities

In
fiscal 2004, the Company adopted SFAS 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends
and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133.
SFAS 149 had no impact on CAE's financial position as at March 31, 2004.

30

---



Consolidation of variable interest entities

In
January 2003, the FASB issued FIN No. 46,Consolidation of Variable Interest Entities. This interpretation clarified how to
apply Accounting Research Bulletin No. 51,Consolidated Financial Statements to those entities defined as "Variable Interest Entities",when
equity investors are not considered to have a controlling financial interest or they have not invested enough equity to allow the entity to finance its activities without additional subordinated
financial support from other parties.

This
interpretation requires that existing unconsolidated variable interest entities be consolidated by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. An entity that holds a significant variable interest but is not the primary beneficiary is subject to specific disclosure requirements.

In
December 2003, the FASB issued FIN No. 46R, which modifies the scope exceptions provided in FIN No. 46. The Company is required to replace
FIN No. 46 provisions with FIN No. 46R provisions to all newly created post-January 31, 2003 entities as of the end of the first period ending after
March 15, 2005. As a foreign private issuer, the company will apply the provisions of FIN 46R to entities created before February 1, 2003, starting April 1, 2004.

Costs relating to exits and disposals

On
April 1, 2003, the Company adopted SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities,which requires that a
liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when a liability is incurred. Similar accounting recommendations under
Canadian GAAP have been adopted for exit and disposal activities after April 1, 2003 (note 1).

Pension and other retirement benefits

During
2003, the Financial Accounting Standards Board revised SFAS 132,Employers' Disclosures about Pensions and Other Postretirement Benefits.
The revised SFAS 132 retains and revises the disclosure requirements contained in the original SFAS 132. It also requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans.

CAE
adopted revised SFAS 132, as it is required for fiscal year ending after December 15, 2003.

ADDITIONAL DISCLOSURES

Additional
disclosures required under US GAAP are as follows:

i)     Statements of earnings

|                                                       |  | 2004 |       | 2003 |   | 2002 
|------------------------------------------------------ |  | ---- | ----- | ---- | - | -----
|
|Revenues from sales of simulators and controls systems |  | $    | 610.9 |      | $ | 588.5
|Revenues from sales of services                        |  | $    | 482.3 |      | $ | 482.3
|Cost of sales from simulators and controls systems     |  | $    | 386.2 |      | $ | 385.0
|Cost of sales from services                            |  | $    | 277.6 |      | $ | 269.1
|Research and development expenses                      |  | $    | 81.0  |      | $ | 84.6 
|Rental expenses                                        |  | $    | 92.5  |      | $ | 79.7 
|Selling, general and administrative expenses           |  | $    | 134.4 |      | $ | 134.4
|Restructuring costs                                    |  | $    | 10.0  |      | $ | 10.0 
|Interest expense                                       |  | $    | 23.9  |      | $ | 23.6 
|                                                       |  |      |       |      |   |      

ii)    Balance sheet

Accounts payable and accrued liabilities as per Canadian GAAP are presented below:

|As at March 31
(amounts in millions of Canadian dollars) |  | 2004 |       | 2003
|-------------------------------------------------------- |  | ---- | ----- | ----
|Accounts payable trade                                   |  | $    | 103.8 |     
|Contract liabilities                                     |  | $    | 101.9 |     
|Income tax payable                                       |  | $    | 23.9  |     
|Other accrued liabilities                                |  | $    | 120.4 |     
|                                                         |  |      |       |     
|Accounts payable and accrued liabilities                 |  | $    | 350.0 |     
|                                                         |  |      |       |     

Accounts
receivable from government amounted to $34.9 million as of March 31, 2004 (2003  $35.4 million).

31

---



iii)   Income taxes

The
components of earnings from continuing operations and income taxes on a Canadian GAAP basis are as follows:

|For the years ended March 31
(amounts in millions of Canadian dollars) |  | 2004 |      | 2003 |   | 2002  |  
|---------------------------------------------------------------------- |  | ---- | ---- | ---- | - | ----- | -
|Earnings before income taxes and other items                           |  |      |      |      |   |       |  
|Canada                                                                 |  | $    | 6.3  |      | $ | 114.0 |  
|Other countries                                                        |  |      | 81.4 |      |   | 77.2  |  
|                                                                       |  |      |      |      |   |       |  
|                                                                       |  | $    | 87.7 |      | $ | 191.2 |  
|                                                                       |  |      |      |      |   |       |  
|Current income taxes                                                   |  |      |      |      |   |       |  
|Canada                                                                 |  | $    | 4.5  |      | $ | 43.0  |  
|Other countries                                                        |  |      | 12.6 |      |   | (1.6  | )
|                                                                       |  |      |      |      |   |       |  
|                                                                       |  | $    | 17.1 |      | $ | 41.4  |  
|                                                                       |  |      |      |      |   |       |  
|Future income taxes                                                    |  |      |      |      |   |       |  
|Canada                                                                 |  | $    | (3.3 | )    | $ | (1.1  | )
|Other countries                                                        |  |      | 6.8  |      |   | 19.9  |  
|                                                                       |  |      |      |      |   |       |  
|                                                                       |  | $    | 3.5  |      | $ | 18.8  |  
|                                                                       |  |      |      |      |   |       |  
|Income tax provision                                                   |  | $    | 20.6 |      | $ | 60.2  |  
|                                                                       |  |      |      |      |   |       |  

iv)   Business combinations

The
following unaudited pro forma information for the fiscal years ended March 31, 2003 and 2002 presents a summary of the pro forma consolidated statement of earnings for the
Company as if business acquisitions performed during their respective fiscal year referred to in note 2 had occurred on April 1 of the preceding fiscal year. This pro forma
information is based on available information and includes certain assumptions and adjustments, which the management of CAE believes to be reasonable. The pro forma information does not give
effect to any cost savings or synergies that CAE may enjoy as a result of these acquisitions. Accordingly, the pro forma information is not necessarily indicative of the results that might have
been achieved, if the transactions reflected therein had been effective as at the beginning of the period presented, or of the results which may be obtained in the future. This pro forma
financial information has been prepared for comparative purposes only and is measured in accordance with Canadian GAAP.

Pro forma

|Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts) |                                  | 2003 |         | 2002 
|---------------------------------------------------------------------------------------- | -------------------------------- | ---- | ------- | -----
|
|Revenue                                                                                  |                                  |      |         |      
|                                                                                         | Civil Simulation and Training    |      | $       | 517.2
|                                                                                         | Military Simulation and Training |      |         | 445.7
|                                                                                         | Marine Controls                  |      |         | 175.8
|                                                                                         |                                  |      |         |      
|                                                                                         |                                  | $    | 1,138.7 |      
|                                                                                         |                                  |      |         |      
|Earnings before interest, income taxes and discontinued operations                       |                                  |      |         |      
|                                                                                         | Civil Simulation and Training    |      | $       | 116.2
|                                                                                         | Military Simulation and Training |      |         | 73.6 
|                                                                                         | Marine Controls                  |      |         | 31.9 
|                                                                                         |                                  |      |         |      
|Earnings before interest, income taxes and discontinued operations                       |                                  |      | 221.7   |      
|Interest expense, net                                                                    |                                  |      | 31.4    |      
|                                                                                         |                                  |      |         |      
|Earnings before income taxes and discontinued operations                                 |                                  |      | 190.3   |      
|Income taxes                                                                             |                                  |      | 60.2    |      
|                                                                                         |                                  |      |         |      
|Earnings from continuing operations                                                      |                                  | $    | 130.1   |      
|Results of discontinued operations (note 3)                                              |                                  |      | (13.8   | )    
|                                                                                         |                                  |      |         |      
|Net earnings                                                                             |                                  | $    | 116.3   |      
|                                                                                         |                                  |      |         |      
|Earnings and diluted earnings per share from continuing operations                       |                                  | $    | 0.59    |      
|                                                                                         |                                  |      |         |      
|Net earnings and diluted net earnings per share                                          |                                  | $    | 0.53    |      
|                                                                                         |                                  |      |         |      
|Average number of shares outstanding                                                     |                                  |      | 219.4   |      
|                                                                                         |                                  |      |         |      

v)     Product warranty costs

The
Company has warranty obligations in connection to the sale of its civil and military simulators and marine systems. The original warranty period is usually for a two-year period. The
cost incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time revenue is recognized. The Company estimates its warranty cost for a given
product based on past experience. The changes in the Company's accrued warranty liability as at March 31 are as follows:

|(amounts in millions of Canadian dollars)           |  | 2004 |      | 2003 |  
|--------------------------------------------------- |  | ---- | ---- | ---- | -
|Accrued warranty liability at beginning of year     |  | $    | 11.5 |      | $
|Warranty settlements during the year                |  |      | (8.6 | )    |  
|Warranty provisions                                 |  |      | 4.4  |      |  
|Adjustments for changes in estimates                |  |      | 0.4  |      |  
|                                                    |  |      |      |      |  
|Accrued warranty obligations at the end of the year |  | $    | 7.7  |      | $
|                                                    |  |      |      |      |  

32

---



vi)   Variable interest entity

In
the second quarter of Fiscal 2003, CAE entered into an agreement with a Trust company which was funded by other arms-length third parties to conclude a sale and leaseback transaction of
five simulators. This Trust constitutes a Variable Interest Entity.

The
net value of this transaction was approximately US$70.0 million. The activities of this Trust company are to lease the five simulators to CAE and collect on a quarterly basis
the lease payments for remittance to the owner participant and the lenders.

CAE's
maximum exposure of loss as a result of its involvement with the Trust company is limited to US$14.0 million.

vii)  Pension

Obligations
and funded status:

The
accumulated benefit obligation (ABO) for all defined benefit pension plans was $139.8 million for March 31, 2004 and $133.5 million for March 31, 2003. At these dates,
all plans had accumulated benefit obligation in excess of plan assets.

Assumptions:

Weighted-average
assumptions used to determine net periodic benefit cost for years ended March 31 are described below:

|                               |  | 2004 |  | 2003
|------------------------------ |  | ---- |  | ----
|Expected return on plan assets |  | 6.5% |  | 6.5%
|Discount rate                  |  | 6.5% |  | 6.5%
|Compensation rate increase     |  | 4.5% |  | 4.5%
|                               |  |      |  |     

For
the purpose of calculating the expected return on plan assets, historical and expected future returns were considered separately for each class of asset based on the asset allocation. Also, in
light of the investment policies and strategies, an additional percentage was added to the expected return of equities to reflect the added value of the investment manager.

Plan
assets:

CAE
pension plan weighted-average asset allocations by asset category are as follows:

|                  |  | Plan Assets at
Measurement Dates
|----------------- |  | --------------------------------
|
|Equity securities |  | 64%                             
|Debt securities   |  | 36%                             
|Real estate       |  |  %                             
|Other             |  |  %                             
|                  |  |                                 
|Total             |  | 100%                            
|                  |  |                                 

There
is a target allocation percentage for equity securities of 64%, which includes a mix of Canadian, US and international equities, and for the debt securities of 36%, which must be rated BBB or
higher. Individual asset classes are allowed to fluctuate slightly, and are rebalanced regularly to the target mix. Fund managers are responsible for investing the assets so as to achieve return
appropriate to its mandate.

Contributions:

In
the next fiscal year, CAE expects to contribute $6.4 million to its registered pension plans and an additional $0.8 million to the Supplementary Plan.

NOTE 25  COMPARATIVE FINANCIAL STATEMENTS

Certain
comparative figures for 2003 and before have been reclassified to conform to the presentation adopted in 2004.

33

---



FIVE-YEAR REVIEW

|(unaudited)
(amounts in millions of dollars except where indicated by *) |                     | 2004 |       | 2003    |       | 2002    |       | 2001    |       | 2000 
|------------------------------------------------------------------------ | ------------------- | ---- | ----- | ------- | ----- | ------- | ----- | ------- | ----- | -----
|Continuing operations                                                    |                     |      |       |         |       |         |       |         |       |      
|                                                                         | Revenue             |      | $     | 1,093.2 |       | 1,130.5 |       | 1,126.5 |       | 891.4
|                                                                         | Amortization        |      | $     | 75.4    |       | 70.6    |       | 43.1    |       | 19.1 
|                                                                         | Earnings            |      | $     | 67.1    |       | 131.0   |       | 148.4   |       | 103.7
|                                                                         | Earnings per share* |      | $     | 0.29    |       | 0.60    |       | 0.68    |       | 0.48 
|Net earnings                                                             |                     | $    | 64.0  |         | 117.2 |         | 149.5 |         | 106.1 |      
|Basic and diluted net earnings per share*                                |                     | $    | 0.27  |         | 0.53  |         | 0.69  |         | 0.49  |      
|Ratio of current assets to current liabilities*                          |                     |      | 1.3   |         | 1.1   |         | 1.0   |         | 1.3   |      
|Number of registered shareholders*                                       |                     |      | 2,297 |         | 2,308 |         | 2,114 |         | 2,130 |      
|Cash dividends paid per common share*                                    |                     | $    | 0.12  |         | 0.12  |         | 0.11  |         | 0.10  |      
|                                                                         |                     |      |       |         |       |         |       |         |       |      

QUARTERLY FINANCIAL INFORMATION

|(unaudited)
(amounts in millions of dollars except per share amounts) |                    | First Quarter |      | Second Quarter |      | Third Quarter |      | Fourth Quarter
|--------------------------------------------------------------------- | ------------------ | ------------- | ---- | -------------- | ---- | ------------- | ---- | --------------
|2004                                                                  |                    |               |      |                |      |               |      |               
|Continuing operations                                                 |                    |               |      |                |      |               |      |               
|                                                                      | Revenue            |               | $    | 242.9          |      | 246.1         |      | 304.9         
|                                                                      | Earnings           |               | $    | 15.1           |      | 15.1          |      | 21.4          
|                                                                      | Earnings per share |               | $    | 0.07           |      | 0.07          |      | 0.09          
|Net earnings                                                          |                    | $             | 13.2 |                | 15.1 |               | 21.4 |               
|Basic and diluted net earnings per share                              |                    | $             | 0.06 |                | 0.07 |               | 0.09 |               
|Common share trading range:                                           |                    |               |      |                |      |               |      |               
|                                                                      | High               |               | $    | 5.81           |      | 6.79          |      | 6.07          
|                                                                      | Low                |               | $    | 3.09           |      | 5.01          |      | 5.05          
|                                                                      |                    |               |      |                |      |               |      |               

|(unaudited)
(amounts in millions of dollars except per share amounts) |                    | First Quarter |      | Second Quarter |      | Third Quarter |      | Fourth Quarter
|--------------------------------------------------------------------- | ------------------ | ------------- | ---- | -------------- | ---- | ------------- | ---- | --------------
|2003                                                                  |                    |               |      |                |      |               |      |               
|Continuing operations                                                 |                    |               |      |                |      |               |      |               
|                                                                      | Revenue            |               | $    | 275.8          |      | 252.3         |      | 290.3         
|                                                                      | Earnings           |               | $    | 37.4           |      | 23.3          |      | 31.5          
|                                                                      | Earnings per share |               | $    | 0.17           |      | 0.11          |      | 0.14          
|Net earnings                                                          |                    | $             | 37.4 |                | 23.3 |               | 31.5 |               
|Basic and diluted net earnings per share                              |                    | $             | 0.17 |                | 0.11 |               | 0.14 |               
|Common share trading range:                                           |                    |               |      |                |      |               |      |               
|                                                                      | High               |               | $    | 14.63          |      | 12.60         |      | 6.05          
|                                                                      | Low                |               | $    | 11.28          |      | 4.17          |      | 3.25          
|                                                                      |                    |               |      |                |      |               |      |               

34

---



QuickLinks