Exhibit 1Audited annual
financial statements for the fiscal year ended March 31, 2003

Management ReportManagement is
responsible for the integrity and objectivity of the information contained in
this annual report and for the consistency between the financial statements and
other financial and operating data contained elsewhere in the report. The
accompanying financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada, using policies and
procedures established by management, and reflect the Company’s financial
position, results of operations and cash flow.Management has established
and maintains a system of internal controls which is designed to provide
reasonable assurance that assets are safeguarded from loss or unauthorized use
and that financial information is reliable and accurate. The Company also
maintains an internal audit function that evaluates and formally reports to
management and the Audit Committee on the adequacy and effectiveness of internal
controls.The financial statements have been examined by external
auditors appointed by the shareholders. Their examination provides an
independent view as to management’s discharge of its responsibilities insofar as
they relate to the fairness of reported operating results and financial
condition. They obtain an understanding of the Company’s accounting systems and
procedures and conduct such tests and related procedures as they deem necessary
to arrive at an opinion on the fairness of the financial
statements.Ultimate responsibility to the shareholders for the financial
statements rests with the Board of Directors. An Audit Committee is appointed by
the Board to review the financial statements in detail and to report to the
Directors prior to such statements being approved for publication. The Audit
Committee meets regularly with management, the internal auditors and the
external auditors to discuss their evaluation of internal accounting controls,
audit results and the quality of financial reporting. The external auditors have
free access to the Audit Committee, without management’s presence, to discuss
the results of their audit.

|                                                      
|------------------------------------------------------
|D.H. BurneyPresident
      and Chief Executive Officer



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Auditors’ ReportTo the
Shareholders of CAE Inc.We have audited the Consolidated Balance Sheets of
CAE Inc. as at March 31, 2003 and 2002, and the consolidated statements of
earnings, retained earnings and cash flows for each of the years in the
three-year period ended March 31, 2003. 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, 2003 and 2002,
and the results of its operations and cash flows for each of the years in the
three-year period ended March 31, 2003 in accordance with Canadian generally
accepted accounting principles.

|                                                      
|------------------------------------------------------
|Chartered
      AccountantsMontreal, CanadaMay 6, 2003

Comments by Auditors for US Readers on
Canada-US Reporting DifferenceIn 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 6, 2003 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.

|                                                      
|------------------------------------------------------
|Chartered
      AccountantsMontreal, CanadaMay 6, 2003



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Consolidated Balance Sheets

|as at March 31 (amounts in millions of Canadian
      dollars) | 2003         | 2002        
|-------------------------------------------------------------- | ------------ | ------------
|(Restated) (Note
      1)                                     
|Assets                                                        
|Current assets                                                
|Cash
      and cash equivalents                                | $      17.1  | $      88.8 
|Short-term investments                                         | 2.6          | 21.3        
|Accounts receivable (note 4)                                   | 373.1        | 378.2       
|Inventories (note 5)                                           | 136.3        | 130.9       
|Prepaid expenses                                               | 14.0         | 9.9         
|Income taxes recoverable                                       | 25.7         | 15.8        
|Future income taxes (note
    14)                              | 3.5          | 28.9        
|                                                               | 572.3        | 673.8       
|Restricted Cash                                                | 14.4         | 15.6        
|Assets of discontinued operations
      (note 3)               | 50.0         | 123.8       
|Property, plant and equipment, net
      (note 6)              | 930.4        | 816.2       
|Future income taxes (note
    14)                              | 85.7         | 74.1        
|Intangible assets (note 7)                                     | 171.7        | 163.4       
|Goodwill (note 8)                                              | 366.8        | 375.5       
|Other assets (note 9)                                          | 165.2        | 136.0       
|                                                               | $2,356.5     | $2,378.4    
|Liabilities and
      Shareholders’ Equity                    
|Current
    liabilities                                       
|Accounts payable and accrued liabilities                       | $      413.3 | $      420.5
|Deposits on contracts                                          | 101.2        | 189.1       
|Long-term debt due within one year                             | 13.4         | 37.5        
|Future income taxes (note
    14)                              | 42.4         | 50.4        
|                                                               | 570.3        | 697.5       
|Liabilities of discontinued
      operations (note 3)          | 17.9         | 40.5        
|Long-term debt (note 10)                                       | 798.0        | 889.0       
|Long-term liabilities (note
      15)                          | 139.6        | 73.7        
|Future income taxes (note 14)                                  | 80.5         | 65.6        
|                                                               | 1,606.3      | 1,766.3     
|Shareholders’ Equity                                          
|Capital stock (note 11)                                        | 190.5        | 186.8       
|Retained earnings                                              | 531.2        | 440.4       
|Currency translation adjustment                                | 28.5         | (15.1)      
|                                                               | 750.2        | 612.1       
|                                                               | $2,356.5     | $2,378.4    

Commitments and contingencies (notes 17 and
19)Approved by the Board:

| | D.H. BurneyDirector | L.R.
WilsonDirector
| | ------------------- | -------------------

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



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Consolidated Statements of Earnings

|years ended March 31 (amounts in millions of
      Canadiandollars, except per share amounts) | 2003               | 2002               | 2001              
|--------------------------------------------------------------------------------------------- | ------------------ | ------------------ | ------------------
|(Restated)(Note
      1)                                                                      | (Restated)(Note
1)
|Revenue                                                                                      
|Civil
      Simulation and Training                                                           | $      517.2       | $      545.2       | $      481.5      
|Military Simulation and Training                                                              | 445.7              | 461.8              | 329.3             
|Marine Controls                                                                               | 167.6              | 119.5              | 80.6              
|                                                                                              | $1,130.5           | $1,126.5           | $891.4            
|Operating
    earnings                                                                       
|Civil
      Simulation and Training                                                           | $      116.2       | $      151.8       | $      115.8      
|Military Simulation and Training                                                              | 73.6               | 65.6               | 18.8              
|Marine Controls                                                                               | 31.8               | 23.6               | 15.0              
|Earnings from continuing
      operations                                                    
|before interest and income taxes                                                              | 221.6              | 241.0              | 149.6             
|Interest expense (income), net (note
      10(xi))                                            | 30.4               | 22.7               | (6.3)             
|Earnings from continuing
      operations                                                    
|before income taxes                                                                           | 191.2              | 218.3              | 155.9             
|Income taxes (note 14)                                                                        | 60.2               | 69.9               | 52.2              
|Earnings from continuing
      operations                                                     | $      131.0       | $      148.4       | $      103.7      
|Results of discontinued operations (note
      3)                                             | (13.8)             | 1.1                | 2.4               
|Net
      earnings                                                                            | $     
      117.2 | $     
      149.5 | $     
      106.1
|Basic and diluted
      earnings per share                                                   
|from continuing operations                                                                    | $        0.60      | $        0.68      | $        0.48     
|Basic and diluted earnings per share                                                          | $        0.53      | $        0.69      | $        0.49     
|Weighted average number
      of                                                             
|common shares outstanding                                                                     | 219.4              | 217.6              | 215.7             

Consolidated Statements of Retained
Earnings

|as at March 31 (amounts in millions of Canadian
      dollars) | 2003               | 2002               | 2001              
|-------------------------------------------------------------- | ------------------ | ------------------ | ------------------
|(Restated)(Note
      1)                                       | (Restated)(Note
1)
|Retained earnings at
      beginning of                       
|year as
      previously reported                              | $      446.8       | $      321.2       | $      235.9      
|Adjustment for change in
      accounting                     
|policy (note 1)                                                | $        (6.4)     | $        (5.3)     | $        (3.3)    
|Retained earnings at
      beginning of year                  
|as
      restated                                              | $      440.4       | $      315.9       | $      232.6      
|Excess of common share
      purchase price                   
|over amount
      charged to capital stock                     | -                  | -                  | (1.2)             
|Net earnings                                                   | 117.2              | 149.5              | 106.1             
|Dividends                                                      | (26.4)             | (25.0)             | (21.6)            
|Retained earnings at end of year                               | $     
      531.2 | $     
      440.4 | $     
      315.9

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



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Consolidated Statements of Cash Flow

|as at March 31 (amounts in millions of Canadian
      dollars) | 2003               | 2002              | 2001              
|-------------------------------------------------------------- | ------------------ | ----------------- | ------------------
|(Restated)(Note
      1)                                       | (Restated)(Note
1)
|Operating
      activities                                    
|Earnings from continuing
      operations                      | $      131.0       | $      148.4      | $      103.7      
|Adjustments to reconcile
      earnings to                    
|cash flows from operating
    activities:                     
|Amortization                                                   | 70.6               | 43.1              | 19.1              
|Future income
      taxes                                      | 18.8               | 7.1               | (8.5)             
|Investment tax
      credit                                    | (18.6)             | (19.0)            | (22.5)            
|Other                                                          | (18.1)             | 1.1               | (11.2)            
|Decrease (increase) in
      non-cash                         
|working capital (note 16)                                      | (41.3)             | (7.6)             | 79.1              
|Net cash provided by
      continuing                         
|operating activities                                           | 142.4              | 173.1             | 159.7             
|Investing
      activities                                    
|Purchase of businesses (note
      2)                          | -                  | (757.6)           | -                 
|Proceeds from disposal of businesses
      (note 3)            | 25.0               | 187.1             | 5.7               
|Short-term investments,
net                                    | 18.8               | 101.5             | (51.7)            
|Capital expenditures                                           | (238.9)            | (249.6)           | (76.3)            
|Proceeds from sale and leaseback of
      assets               | 127.0              | 42.6              | -                 
|Deferred development costs                                     | (13.3)             | (31.1)            | (13.7)            
|Deferred pre-operating
    costs                               | (10.7)             | (15.1)            | (4.2)             
|Other assets                                                   | (27.5)             | (33.0)            | (7.8)             
|Net cash used in continuing investing activities:              | (119.6)            | (755.2)           | (148.0)           
|Financing
      activities                                    
|Proceeds from long-term
    debt                               | 270.0              | 755.8             | -                 
|Repayments of long-term
    debt                               | (326.3)            | (195.6)           | (16.2)            
|ividends paid                                                  | (26.2)             | (24.8)            | (21.2)            
|Purchase of capital stock                                      | -                  | -                 | (1.3)             
|Capital stock issuance (note
      11)                         | 3.5                | 6.1               | 6.9               
|Other                                                          | (14.1)             | (2.3)             | (3.0)             
|Net cash provided by
      (used in) continuing               
|financing activities                                           | (93.1)             | 539.2             | (34.8)            
|Net cash (used in)
      provided by                          
|discontinued activities (note 3)                               | (3.6)              | (24.5)            | 10.4              
|Effect of foreign
      exchange rate changes on              
|cash and cash equivalents                                      | 2.2                | (0.6)             | 6.0               
|Net decrease in cash and cash
      equivalents                | (71.7)             | (68.0)            | (6.7)             
|Cash and cash equivalents at beginning of year                 | 88.8               | 156.8             | 163.5             
|Cash and cash equivalents at end of year                       | $     
      17.1  | $     
      88.8 | $     
      156.8

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



E5

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Notes to Consolidated Financial
Statementsyears ended March 31, 2003, 2002 and 2001 (amounts in millions
of Canadian dollars)

Note 01 - Summary of Significant
Accounting PoliciesThe 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 (US
GAAP). The significant differences are described in note 22.Nature of
operationsCAE 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
is developing a global network of training centres in locations around the
world.The Company also provides simulators and training services for sea
and landbased 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.Restated Consolidated Financial StatementsThe figures for
2002 and 2001 have been restated to disclose Marine Controls’ results separately
as a new business segment and apply amendments to the Canadian Institute of
Chartered Accountants (CICA) Handbook described in this
note.ConsolidationThe 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 RecognitionRevenue from
long-term contracts for building simulators and training 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. Postdelivery customer support is billed separately and revenue is
recorded ratably over the support period.



E6

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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 EquivalentsCash
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 InvestmentsShort-term investments include money
market instruments and commercial paper carried at the lower of cost or market
value.InventoriesRaw 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 CashUnder the terms
of a subsidiary’s external bank financing, the Company is required to hold a
defined amount of cash on deposit as collateral.Property, Plant and
EquipmentProperty, plant and equipment are stated at 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 has
changed the amortization period for Civil simulation equipment from 20 years to
25 years, to reflect the approximate useful life of the simulators. This change
reduced the amortization expense by $3.7 million on a year-to-year
basis.LeasesLeases 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 assets are deferred and amortized
over the term of the lease.



E7

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Business Combinations, Goodwill and
Intangible AssetsDuring the first quarter of fiscal 2002, the Company
adopted CICA Handbook Section 1581, Business Combinations, which requires all
business combinations to be accounted for using the purchase method. In
addition, any goodwill and intangible assets with indefinite useful lives
acquired in a business combination are to be accounted for under CICA Handbook
Section 3062, Goodwill and Other Intangible Assets. This section requires that
goodwill and intangible assets with indefinite useful lives not be amortized.
Their fair value is to be assessed at least annually and, if necessary, goodwill
and intangible assets with indefinite useful lives are written down to such fair
value for any impairment.Goodwill represents the cost of investments in
subsidiaries in excess of the fair value of the net identifiable assets
acquired. Goodwill for acquisitions made prior to fiscal 2002 was amortized up
to March 31, 2001, using the straight-line method over 40
years.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.
Useful lives are estimated as follows:

|                                         | AmortizationPeriod | Weighted AverageAmortization Period
|---------------------------------------- | ------------------ | -----------------------------------
|Trade names                              | 20 to 25 years     | 20                                 
|Backlog and contractual
      agreements | 1 to 20 years      | 11                                 
|Customer relationships                   | 20 to 25 years     | 24                                 
|Other                                    | 12 to 20 years     | 18                                 

Interest CapitalizationInterest
costs relating to the construction of training centres are capitalized as part
of the cost of property, plant and equipment. Capitalization of interest ceases
when the training centre is completed and ready for productive
use.Foreign Currency TranslationThe functional currency of the
Company and each of its subsidiaries is the local currency. Monetary assets and
liabilities denominated in currencies other than functional currency (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 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 deferred as a separate component of
shareholders’ equity.



E8

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Earnings from continuing operations
include a net foreign exchange gain of $6.1 million in 2003 (2002 - net foreign
exchange loss of $1.2 million, 2001 - net foreign exchange loss of $6.2
million.)On April 1, 2002, CAE retroactively adopted the amendments to
CICA Handbook Section 1650, Foreign Currency Translation. Accordingly, the
Company no longer defers and amortizes the exchange gains or losses arising on
translation of long-term foreign currency denominated items. Exchange gains or
losses arising on translation of such items are now included in earnings as
incurred. Consequently, prior years’ financial statements were restated through
a charge to fiscal 2003 opening retained earnings of $6.4 million, net of $2.8
million of taxes, a charge to fiscal 2002 opening retained earnings of $5.3
million, net of $2.3 million of taxes and a charge to fiscal 2001 opening
retained earnings of $3.3 million, net of $1.3 million of taxes.Foreign
OperationsThe Company’s foreign operations are considered to be
self-sustaining. Accordingly, the accounts of the Company’s foreign operations
are translated into Canadian dollars using the current rate method. Under this
method, assets and liabilities are translated at the exchange rates in effect at
the end of the reporting periods and revenues and expenses are translated at the
average exchange rates for the reporting periods. Gains and losses on
translation of these foreign operations into Canadian dollars are included in
the cumulative translation adjustment in shareholders’ equity. Changes in the
cumulative translation adjustment result solely from the application of this
translation method and gains or losses arising from the translation of foreign
currency denominated debt which has been designated as a hedge of the net
investment in foreign operations.Research and Development
CostsResearch 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
or use of the product, over a period not exceeding five
years.Pre-operating CostsThe 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
5 to 20 years based on the expected period and pattern of benefit of the
deferred expenditures.Deferred Financing CostsCosts incurred
relating to the issuance of long-term debt are deferred and amortized over the
term of the related debt.



E9

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Income TaxesFuture 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.PensionsThe
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 pro rated on service, expected plan investment
performance, salary escalation and retirement ages of employees. 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 PlansThe Company’s stock-based
compensation plans consist of an Employee Stock Option Plan (ESOP), an Employee
Stock Purchase Plan (ESPP) and Deferred Share Unit (DSU) plans for executives,
which are described in note 12. No compensation expense is recognized for the
ESOP when stock options are issued to employees. Consideration paid by employees
on the exercise of stock options is credited to capital stock. A compensation
expense is recognized for the Company’s portion of the contributions made under
the ESPP and for amounts due under the DSU plans.On April 1, 2002, CAE
adopted the new recommendations of CICA Section 3870, Stock-based Compensation
and Other Stock-based Payments. The standard encourages, but does not require,
that the fair value based method for valuing stock options be used for
transactions with employees. 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. CAE’s practice is to issue options in May of each fiscal
year, whereby these options vest equally over four years. Stock-based
compensation arrangements that can be settled in cash will continue to be
recognized as compensation expense. Beginning in fiscal 2004, the Company will
prospectively expense the cost of stock options granted to employees using the
fair value based method.



E10

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Derivative Financial InstrumentsThe
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 noncurrent, 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.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
ShareThe 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 EstimatesThe
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 disclosures 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.Future Changes to Accounting StandardsImpairment of
long-lived assetsThe CICA recently issued a new CICA Handbook Section 3063,
Impairment of Long-Lived Assets. It provides guidance on recognizing, measuring
and disclosing the impairment of long-lived assets.The new section
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.



E11

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This new section is applicable to the
Company commencing in fiscal 2004, however, earlier adoption is encouraged. The
Company does not expect the adoption of this new standard to have any material
effect on its consolidated financial statements. The Company currently regularly
reviews the carrying value of its long-lived assets and, should their carrying
value exceed the amount recoverable, a writedown is charged to earnings equal to
the excess of carrying value over the net recoverable amount.Disposal of
long-lived assets and discontinued operationsThe CICA recently issued a new
CICA Handbook section, Disposal of Long-Lived Assets and Discontinued
Operations. It provides guidance on recognizing, measuring, presenting and
disclosing long-lived assets to be disposed of. It replaces the disposal
provisions in Section 3061, Property, Plant and Equipment, and Section 3475,
Discontinued Operations.The new section provides criteria for
classifying assets as held for sale. It requires an asset classified as held for
sale to be measured at fair value less disposal costs.It also provides
criteria for classifying a disposal as a discontinued operation and specifies
the presentation of and disclosures for discontinued operations and other
disposals of long-lived assets.This new section is applicable to
disposal activities started on or after May 1, 2003, however, earlier adoption
is encouraged by the CICA. The Company is currently evaluating the impact of
this standard on its consolidated financial statements.Consolidation of
variable interest entitiesIn April 2003, the CICA approved a new accounting
guideline titled Consolidation of Variable Interest Entities. The final
guideline, which will be published shortly, is understood to be harmonized, in
all material respects, with the recently issued US guidance (see note 22), and
will be applicable for the quarter beginning on January 1, 2004. The Company is
currently evaluating the impact of this draft guideline on its consolidated
financial statements.Note 02 - Business AcquisitionsOn 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 cash consideration for the
purchase of the shares was needed. NOK13.7 million will be expensed for
acquisition and integration costs. 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.The allocation of the purchase price of Hitec is based on
management’s estimate of the fair value of assets acquired and liabilities
assumed. Allocation of the purchase price involves a number of estimates as well
as gathering of information over a number of months. This estimation process
will be completed in the next six months and, accordingly, there may be changes
to the goodwill and intangible asset values presented below for this
acquisition.



E12

---



During fiscal 2002, the Company
completed four strategic acquisitions, two of which accelerated the Company’s
move into aviation training, one which signifi- cantly 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
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,
based on the average closing price of CAE’s shares for the 10 days prior to
August 1st. Valmarine is the global leader for marine control systems for the
commercial market. The purchase price is subject to adjustment based on the
performance of the business for the three-year period following the acquisition.
Contingent consideration up to a maximum of NOK58 million may be recognized as
an additional cost of the purchase when the contingency is resolved, and would
be accounted for as additional goodwill.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 groundschool 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 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:

|(amounts in millions)             | BAESys-tems       | Val-marine        | Schrei-ner        | Simu-Flite        | Sub-total         | HitechMarineAuto-mation | Total            
|--------------------------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------------- | -----------------
|Current assets                    | $     
      36.2 | $     
      16.3 | $     
      15.3 | $     
      23.0 | $     
      90.8 | $     
      5.6        | $     
      96.4
|Current liabilities               | (65.8)            | (8.7)             | (37.0)            | (8.2)             | (119.7)           | (13.3)                  | (133.0)          
|Property, plant and
    equipment | 59.0              | 0.5               | 167.9             | 262.0             | 489.4             | 0.1                     | 489.5            
|Intangible
    assets            
|Trade names                       | -                 | 3.2               | -                 | 37.1              | 40.3              | -                       | 40.3             
|Customer relations                | -                 | 9.8               | 66.0              | 29.2              | 105.0             | -                       | 105.0            
|Customer
  contractual           
|agreements                        | -                 | 2.3               | 2.2               | 3.6               | 8.1               | -                       | 8.1              
|Other intangibles                 | 2.5               | 3.1               | -                 | 3.6               | 12.6              | 1.2                     | 13.8             
|Goodwill                          | 104.2             | 40.4              | 102.8             | 106.3             | 353.7             | 1.6                     | 355.3            
|Future income taxes               | 36.6              | (3.9)             | (34.2)            | 15.1              | 13.6              | 4.8                     | 18.4             
|Long-term debt                    | (17.3)            | -                 | (23.1)            | (52.4)            | (98.2)            | -                       | (98.2)           
|Long-term liabilities             | (36.1)            | -                 | -                 | -                 | (36.1)            | -                       | (36.1)           
|                                  | 119.3             | 63.0              | 259.9             | 422.7             | 864.9             | -                       | 864.9            
|Less: Sale and
      leaseback   
|of assets                         | -                 | -                 | -                 | (86.2)            | (86.2)            | -                       | (86.2)           
|Shares issued(note 11)            | -                 | (21.1)            | -                 | -                 | (21.1)            | -                       | (21.1)           
|Total cash consideration:         | $    119.3        | $      41.9       | $    259.9        | $    336.5        | $    757.6        | $          -            | $    757.6       



E13 - E14

---



The net assets of Schreiner, SimuFlite
and approximately 10% of the net assets of BAE Systems (including goodwill of
$209.8 million) are included in the Civil Simulation and Training segment. The
balance of the net assets of BAE Systems (including goodwill of $93.8 million)
is included in the Military Simulation and Training segment. Net assets of
Valmarine and Hitec (including goodwill of $38.9 million) 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 three of the
businesses acquired in fiscal 2003. For Valmarine, the adjustment related to the
final evaluation of other intangible assets. With 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 which occurred in 2003.The
adjustments made in 2003 to the purchase price equation are summarized as
follows:

|(amounts in millions)             | Valmarine             | Schreiner             | SimuFlite          | Total             
|--------------------------------- | --------------------- | --------------------- | ------------------ | ------------------
|Current assets                    | $     
      (3.1)    | $            
      - | $     
      (2.7) | $     
      (2.8)
|Current liabilities               | -                     | (0.1)                 | (6.0)              | (6.1)             
|Property, plant and
    equipment | -                     | -                     | 3.2                | 3.2               
|Intangible assets                 | 7.3                   | -                     | -                  | 7.3               
|Goodwill                          | (2.9)                 | (11.6)                | 1.9                | (12.6)            
|Future income taxes               | (4.3)                 | (2.2)                 | -                  | (6.5)             
|Long-term debt                    | -                     | 13.9                  | (3.3)              | 10.6              
|Total cash consideration:         | $            
      - | $            
      - | $      (6.9)       | $      (6.9)      

Note 03 - Discontinued
OperationsOn February 2, 2000, the Board of Directors approved a plan to
divest the Cleaning Technologies and Energy Control Systems businesses. On
December 18, 2001, the Board also approved a plan to divest the Forestry Systems
business segment. As a result, the results of operations and the financial
position of these business segments have been reported separately in the
consolidated statements of earnings and the consolidated balance sheets
(together the “Discontinued Operations”). Previously reported financial
statements have been restated to reclassify the Discontinued Operations, and
interest expense has been allocated to the Discontinued Operations based on
their share of the Company’s net assets. On May 31, 2000, the Company
completed the sale of substantially all the assets of the Energy Control Systems
business to SNC-Lavalin Inc. 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., 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, comprised of 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 a long-term subordinated note receivable. The total consideration
was subject to adjustment based on an audit of the closing statement of
financial position. In fiscal 2003, the audit was completed and certain issues
remain in dispute. Adjustment to reduce the previously recorded consideration by
$US2.2 million with a corresponding reduction in the holdback and a reduction in
the long-term subordinated note has been recorded based on management’s best
estimate.



E15

---



On March 28, 2002, CAE completed the
sale of its fibre screening business to the Advanced Fiber Technologies Income
Fund (AFT) for cash proceeds of $162.0 million. Following the closing of this
transaction, certain issues arose in connection with the income tax planning
with respect to the foreign operations of AFT, and the partial termination of
its defined benefit pension plan for the transferred employees. CAE recorded in
its loss from Discontinued Operations in fiscal 2003 an additional after-tax
cost of $3.2 million (tax amount - $1.1 million) for these
adjustments.On June 28, 2002, CAE sold the shares of CAE Cleaning
Technologies Plc to the management of this operation for a note receivable of
$1.2 million.On August 16, 2002, CAE sold substantially all the assets
of the sawmill division of its Forestry Systems segment for a cash consideration
of $25.0 million and a further estimated payment at $10.0 million based on the
operating performance of the company in the three-year period from
closing.Subsequent to March 31, 2003, CAE completed the sale of its
remaining Forestry Systems business and the sale of its German Cleaning
Technologies operations. In addition, CAE is in exclusive negotiations for the
sale of its one remaining Cleaning Technologies business, which is expected to
close in the first quarter of fiscal 2004. CAE has adjusted the carrying value
of its Discontinued Operations to reflect these agreements.Summarized
financial information for the discontinued operations is as follows:

|(amounts in millions)                                               | 2003                | 2002        | 2001            
|------------------------------------------------------------------- | ------------------- | ----------- | ----------------
|                                                                    |                     | (Restated)  | (Restated)      
|Revenue                                                            
|Cleaning Technologies                                               | $    72.0           | $    86.5   | $  119.5        
|Forestry Systems                                                    | 20.8                | 193.5       | 300.0           
|                                                                    | 92.8                | 280.0       | 419.5           
|Net earnings from Forestry Systems
      prior to measurement date,
|net
      of tax recovery (2002 - $4.0; 2001 - $14.9)               | $          
      - | $       8.5 | $   
  29.0     
|Net gain (loss) from Forestry
      Systems after measurement date,
|net
      of tax (2003 - $3.0; 2002 - $15.2)                        | (7.2)               | 17.7        | -               
|Net loss from Cleaning Technologies
      after measurement date,  
|net of tax recovery (2003 - $7.7;
      2002 - $7.3; 2001 - $18.9)  | (6.6)               | (25.1)      | (26.6)          
|Net
      earnings (loss) from discontinued operations              | $  (13.8)           | $       1.1 | $       2.4     
|                                                                   
|Net cash (used in) provided by
      operating activities           | $    
      12.5    | $  (15.9)   | $    
      23.6
|Net cash used in investing
      activities                         | (14.8)              | (4.7)       | (11.1)          
|Net
      cash used in financing activities                         | (1.3)               | (3.9)       | (2.1)           
|Net
      cash (used in) provided by discontinued operations        | $     (3.6)         | $  (24.5)   | $      10.4     



E16

---



|(amounts in millions)                    |                   | 2003                 |                   | 2002                
|---------------------------------------- | ----------------- | -------------------- | ----------------- | --------------------
|                                         | ForestrySystems   | CleaningTechnologies | ForestrySystems   | CleaningTechnologies
|Current assets                           | $     
      11.5 | $     
      7.9     | $     
      40.8 | $        20.8       
|Property, plant and equipment,
      net | 2.7               | 3.7                  | 15.7              | 5.4                 
|Goodwill                                 | 16.0              | 4.8                  | 30.2              | 9.2                 
|Other assets                             | 0.8               | 2.6                  | 0.6               | 1.1                 
|                                         | 31.0              | 19.0                 | 87.3              | 36.5                
|Assets of discontinued operations        |                   | $      50.0          |                   | $      123.8        
|Current liabilities                      | 12.8              | 0.1                  | 26.4              | 13.7                
|Other liabilities                        | 0.9               | 4.1                  | 0.4               | -                   
|                                         | $      13.7       | $        4.2         | $      26.8       | $        13.7       
|Liabilities of discontinued operations   |                   | $      17.9          |                   | $       
  40.5     

Note 04 - Accounts
Receivable

|(amounts in millions)                 | 2003               | 2002              
|------------------------------------- | ------------------ | ------------------
|Trade                                 | $     
      126.1 | $     
      107.8
|Allowance for doubtful
      accounts | (12.1)             | (6.8)             
|Unbilled receivables                  | 189.7              | 223.8             
|Other receivables                     | 69.4               | 53.4              
|                                      | $      373.1       | $      378.2      

Approximately $6.0 million of the March
2003 unbilled receivables are not expected to be recovered within one year (2002
- $10 million).

Note 05 - Inventories

|(amounts in millions)                                   | 2003               | 2002              
|------------------------------------------------------- | ------------------ | ------------------
|Work-in-progress                                        | $     
      115.3 | $     
      105.9
|Raw
      materials, supplies and manufactured products | 21.0               | 25.0              
|                                                        | $      136.3       | $      130.9      

Note 06 - Property, Plant and
Equipment

|(amounts in millions)       |                   |                          | 2003              |                   |                          | 2002             
|--------------------------- | ----------------- | ------------------------ | ----------------- | ----------------- | ------------------------ | -----------------
|                            | Cost              | AccumulatedAmortiza-tion | Net BookValue     | Cost              | AccumulatedAmortiza-tion | Net BookValue    
|Land                        | $     
      19.2 | $           
      -     | $     
      19.2 | $     
      19.2 | $          
      -      | $     
      19.2
|Buildings and improvements  | 247.9             | 50.6                     | 197.3             | 229.6             | 40.4                     | 189.2            
|Machinery and equipment     | 205.5             | 122.6                    | 82.9              | 229.7             | 105.8                    | 123.9            
|Simulators                  | 497.3             | 32.3                     | 465.1             | 347.2             | 13.8                     | 333.4            
|Assets under
  construction
|Buildings                   | 2.1               | -                        | 2.1               | 4.5               | -                        | 4.5              
|Equipment                   | 163.8             | -                        | 163.8             | 146.0             | -                        | 146.0            
|                            | $
      1,135.8   | $   205.4                | $   930.4         | $    976.2        | $  160.0                 | $    816.2       

Amortization of property, plant and
equipment was $52.1 million in 2003, $37.0 million in 2002 and $18.7 million in
2001.



E17

---



Note 07 - Intangible
Assets

|(amounts in millions)                 |                   |                          | 2003              |                   |                          | 2002             
|------------------------------------- | ----------------- | ------------------------ | ----------------- | ----------------- | ------------------------ | -----------------
|                                      | Cost              | AccumulatedAmortiza-tion | Net BookValue     | Cost              | AccumulatedAmortiza-tion | Net BookValue    
|Trade names                           | $     
      38.5 | $     
      2.3         | $     
      36.2 | $     
      40.5 | $     
      0.5         | $     
      40.0
|Customer relations                    | 111.3             | 6.8                      | 104.5             | 104.9             | 1.8                      | 103.1            
|Customer contractual
      agreements | 14.3              | 1.7                      | 12.6              | 7.9               | 0.1                      | 7.8              
|Other intangible assets               | 20.8              | 2.4                      | 18.4              | 13.1              | 0.6                      | 12.5             
|                                      | $    184.9        | $   13.2                 | $   171.7         | $   166.4         | $      3.0               | $    163.4       

The continuity of intangible assets is
as follows:

|(amounts in millions)                    |                            |                               |                | 2003          |                            |                               |                | 2002          
|---------------------------------------- | -------------------------- | ----------------------------- | -------------- | ------------- | -------------------------- | ----------------------------- | -------------- | --------------
|                                         | CivilSimulationandTraining | MilitarySimulationandTraining | MarineControls | Total         | CivilSimulationandTraining | MilitarySimulationandTraining | MarineControls | Total         
|Beginning balance                        | $ 114.5                    | $ 2.5                         | $ 19.4         | $ 163.4       | $          -               | $    
    -                   | $        -     | $         
  -
|Additions                                | 1.8                        | -                             | 1.2            | 3.0           | 145.1                      | 2.5                           | 18.4           | 166.0         
|Purchase price adjustment (note
      2) | -                          | -                             | 7.3            | 7.3           | -                          | -                             | -              | -             
|Amortization                             | (7.5)                      | (0.2)                         | (2.0)          | (9.7)         | (2.7)                      | -                             | (0.3)          | (3.0)         
|Foreign exchange                         | 4.3                        | (0.2)                         | 3.6            | 7.7           | (0.9)                      | -                             | 1.3            | 0.4           
|Ending balance                           | $
      140.1              | $
      2.1                   | $
      29.5   | $
      171.7 | $
      141.5              | $
      2.5                   | $
      19.4   | $
      163.4 

The yearly estimated amortization
expense for the five following years will be approximately $9.6
million.



E18

---



Note 08 - GoodwillThe
following table summarizes the impact of the adoption in fiscal 2002 of the new
applicable CICA standards:

|(amounts in millions except per share amounts)                 | 2003              | 2002              | 2001             
|-------------------------------------------------------------- | ----------------- | ----------------- | -----------------
|Reported net earnings                                          | $   
117.1        | $   
149.5        | $   
  106.1     
|Add
      back goodwill amortization                           | -                 | -                 | 5.1              
|Adjusted net earnings                                          | $    117.1        | $    149.5        | $    111.2       
|Reported net earnings and diluted
      net earnings per share | $     
      0.53 | $     
      0.69 | $     
      0.49
|Add
      back goodwill amortization                           | -                 | -                 | 0.2              
|Adjusted net earnings and diluted net earnings per share       | $      0.53       | $      0.69       | $      0.51      

The continuity of goodwill by reportable segment is
as follows:

|(amounts in millions)                   |                            |                               |                | 2003       |                            |                               |                | 2002            
|--------------------------------------- | -------------------------- | ----------------------------- | -------------- | ---------- | -------------------------- | ----------------------------- | -------------- | ----------------
|                                        | CivilSimulationandTraining | MilitarySimulationandTraining | MarineControls | Total      | CivilSimulationandTraining | MilitarySimulationandTraining | MarineControls | Total           
|Beginning balance                       | $   
217.8                 | $   114.7                     | $   43.0       | $   
375.5 | $           
      -       | $         18.5                | $          -   | $    
      18.5
|Additions                               | -                          | -                             | 1.6            | 1.6        | 219.0                      | 94.4                          | 40.3           | 353.7           
|Purchase priceadjustment (note
      2) | (9.7)                      | -                             | (2.9)          | (12.6)     | -                          | -                             | -              | -               
|Foreign exchange                        | 4.8                        | (7.1)                         | 4.6            | 2.3        | (1.2)                      | 1.8                           | 2.7            | 3.3             
|Ending balance                          | $    212.9                 | $   107.6                     | $   46.3       | $    366.8 | $   217.8                  | $      114.7                  | $    43.0      | $   375.5       



E19

---



Note 09 - Other Assets

|(amounts in millions)                                              | 2003              | 2002             
|------------------------------------------------------------------ | ----------------- | -----------------
|(Restated)(note 1)                                                
|Investment in and advances to CVS
      Leasing Ltd. (i)           | $     
      43.7 | $     
      24.0
|Deferred
      development costs net of $0.2 million accumulated  
|amortization (2002 - nil) (ii)                                     | 37.6              | 30.1             
|Deferred
      pre-operating costs net of $4.4 million accumulated
|amortization (2002 - $2.2 million)                                 | 27.7              | 26.6             
|Long-term receivables
(iii)                                        | 15.1              | 13.0             
|Deferred
      financing costs net of $2.1 million accumulated    
|amortization (2002 - $1.6 million)                                 | 12.7              | 16.3             
|Other                                                              | 28.4              | 26.0             
|                                                                   | $    165.2        | $     
136.0     

|(i)   | The Company led a consortium
      which was contracted by the UK MoD to design, construct, manage, finance
      and operate an integrated simulator-based aircrew training facility for
      the Medium Support Helicopter fleet of the Royal Air Force. The contract
      covers a 40-year period, which can be terminated by the MoD after 20
      years, in 2018. In connection with the contract, the Company has
      established a subsidiary, CAE Aircrew Training Plc (Aircrew), of which it
      owns 78% (2002 - 74%) with the balance held by the other consortium
      partners. This subsidiary has leased the land from the MoD, has built the
      facility and operates the training centre, and has been consolidated with
      the accounts of the Company. In addition, the Company has a
      minority shareholding of 14% (2002 - 11%) in, and has advanced funds to,
      CVS Leasing Ltd. (CVS), a company established to acquire the simulators
      and other equipment that are leased to Aircrew. CVS obtained project
      financing which amounts to £73 million at March 31, 2003, and expires in
      October 2015. This financing is secured solely by the assets of CVS with
      no recourse to CAE.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  | Research and development
      expenditures aggregated $115.2 million during the year (2002 - $104.7
      million, 2001 - $104.9 million) of which $13.7 million was capitalized.
      The Company has received government assistance of $32.5 million during the
      year (2002 - $15.8 million, 2001 - $3.5 million), of which $2.3 million
      (2002 - $9.5 million, 2001 - nil) was recorded against deferred costs
      incurred to develop new products with the balance being accounted for as a
      reduction of research and development expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(iii) | The Company has established a
      secured subordinated promissory note with the Cleaning Technologies Group
      for the sale of the Ransohoff and Ultrasonic operations. The principal
      amount of the note, $13.2 million, shall be due and payable commencing on
      August 28, 2005, until August 28, 2010, at an interest rate of
      7%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



E20

---



Note 10 - Debt FacilitiesA. Long-Term
Debt

|(amounts in millions)                          | 2003                                                              | 2002              
|---------------------------------------------- | ----------------------------------------------------------------- | ------------------
|(i)                                            | Senior notes                                                      | $     
      178.7
|                                               | Revolving unsecured term credit
      facilities,                
|                                               | (ii)    5 years maturing
      April 2006, US$350.0 and €100.0   
|                                               | (outstanding March
      31, 2003 - $114.0 and US$195.0,         
|                                               | March 31, 2002 -
      $25.0 and US$139.0)                        | 400.5             
|                                               | (iii)    18
      months, maturing June 2003, (US$135.0)         
|                                               | (outstanding March
      31, 2003 - US$35.0,                     
|                                               | March 31, 2002 -
      US$174.0)                                  | 51.4              
|(iv)                                           | Term loan of US$32.5, secured,
      maturing in April 2009       | 47.8              
|(v)                                            | Term loan of £12.7,
      secured, maturing in October 2015      
|                                               | (outstanding March 31, 2003 -
      £10.1)                        | 23.5              
|(vi)                                           | Grapevine Industrial Development
      Corporation bonds, secured | 39.7              
|(vii)                                          | Secured loans, (US$5.8 and
      RMB29.0)                         | -                 
|(viii)                                         | Term loan of £31.8,
      secured, maturing September 2029       
|                                               | (outstanding March 31, 2003 -
      £17.5)                        | 40.7              
|(ix)                                           | Obligations under capital lease commitments                       | 29.1              
|Less: Long-term debt due
      within one year | 811.4                                                             | 926.5             
|                                               | 13.4                                                              | 37.5              
|                                               | $      798.0                                                      | $     
889.0      

|(i)  | Pursuant to a private placement,
      the Company borrowed US$108.0 million and $20.0 million. These unsecured
      senior notes rank equally with term bank financings with fixed repayment
      amounts of $20.0 million in 2005, US$15.0 million in 2007, US$60.0 million
      in 2009 and US$33.0 million in 2012. Fixed interest is payable
      semi-annually in June and December at an average rate of 7.6% on the US
      amounts and 7.2% on the Canadian amount. The Company has entered into
      interest rate swap agreements converting the initial fixed interest rate
      into the equivalent of a three-month LIBOR borrowing plus 1.8% on US$33.0
      million of the senior notes.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii) | These facilities (US$350.0
      million and 100.0 million) are unsecured and the interest rate payable is
      based on LIBOR, BAs or EURIBOR plus 0.50%. As at the end of both fiscal
      years, an amount of $35.0 million has been fixed through a swap agreement
      until April 2006 at a rate of 5.0%. Also, as at March 31, 2002, an amount
      of $205.0 million was fixed until February 2003 at an average rate of
      2.72%. The facility of 100.0 million was not used as of March 31, 2002 and
      2003. The average interest rate at March 31, 2003 is 2.4% (2002 -
      2.5%).                                                                                                      



E21

---



|(iii) | The revolving credit facility of
      US$200.0 million which expires in June 2003 was reduced to US$135.0
      million in October 2002 and again in April 2003 to US$35.0 million. The
      facility is unsecured and the interest rate payable is based on LIBOR plus
      0.50%. This facility will be refinanced by drawing under the existing
      credit facilities (US$350.0 million and 100.0 million) that mature in
      April 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(iv)  | The Company arranged project
      financing for its training centre in S~o Paulo, Brazil. This term loan is
      secured by the assets of the training centre and is repayable
      semi-annually until April 30, 2009. Interest on the loan is charged at
      arate of approximately 7.72%. The net book value of the assets securing
      the loan is US$50.0 million as at March 31, 2003 (2002 - US$52.5
      million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(v)   | The Company arranged project
      financing for one of its subsidiaries to finance the Company’s Medium
      Support Helicopter program for the MoD in the United Kingdom. The credit
      facility includes a term loan that is secured by the project assets of the
      subsidiary and a bi-annual repayment is required until 2015. The facility
      also includes a standby loan of £4.0 million and a working capital loan of
      £1.0 million, both maturing in October 2015. Interest on the loans is
      charged at a rate approximating LIBOR plus 1%. The Company has entered
      into interest rate swaps totalling £10.3 million fixing the interest rate
      at approximately 6.82%. The value of the assets pledged as collateral for
      the credit facility as at March 31, 2003, is £25.8 million (2002 - £25.3
      million) (note 9 (i)).                                                                                                                         
|(vi)  | Airport Improvement Revenue Bonds
      were issued by the Grapevine Industrial Development Corporation,
      Grapevine, Texas, for amounts of US$8.0 million and US$19.0 million and
      maturing respectively in 2010 and 2013. Real property improvements,
      fixtures and specified simulation equipment secure the bonds. The rates
      are set periodically by the remarketing agent based on market conditions.
      For the bonds maturing in 2010, the rate is set weekly and, for the 2013
      series, yearly. The rates are subject to a maximum rate of 10% permissible
      under current applicable laws. As at March 31, 2003, the combined rate for
      both series was approximately 1.8%. The security is limited to an amount
      not exceeding the outstanding balance of the loans which represents
      US$27.0 million as at March 31, 2003. Also, a letter of credit has been
      issued to support the bonds for the outstanding amount of the
      loans.
|(vii) | Secured loans consisted of a
      US$5.8 million loan secured by equipment expiring in June 2002 with
      interest payable based on US commercial paper plus 1% and a loan of RMB29
      million expiring in December 2011 with interest at 6.83%. The values of
      the equipment securing the two loans are respectively US$8.2 million and
      RMB117.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



E22

---



|(viii) | The Company, in association with
      two other partners, arranged project financing for the delivery of
      training services on the Astute Class Submarine for the MoD in the United
      Kingdom. The Company’s participation is 50%. The secured loans consist of
      a loan of £31.8 million split into three sections, a term loan expiring
      September 2029, an Equity Bridge loan expiring September 2029 and a Ramp
      Up Facility expiring August 2004. Interest payable amounts are based on
      LIBOR plus 0.60% for the term loan and the Equity Bridge loan and LIBOR
      plus 1.75% for the Ramp Up Facility. The loans are secured by fixed and
      floating charges over property and assets of the Company. The value, at
      CAE’s participation of 50%, of the assets pledged is £17.2 million as at
      March 31, 2003 (2002 - £8.4 million).
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ix)   | These capital leases are related
      to the leasing of various simulators in CAE’s subsidiaries. The cost
      associated with these simulators is $41.1 million and the accumulated
      amortization as at March 31, 2003, is $19.5 million (2002 - $16.4 million)
      for a net book value of $21.6 million (2002 - $24.7 million). The
      effective interest rate on obligations under capital leases, which mature
      from June 2003 to March 2024, was approximately 5.1% (2002 -
      5.3%).                                                                                                                                                                                                                                                                                                                                                                         
|(x)    | Payments required in each of the
      next five years to meet the retirement provisions of the long-term debt
      are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|(amounts in millions)
|---------------------
|2004                 
|2005                 
|2006                 
|2007                 
|2008                 
|Thereafter           
|$    811.4           

|(xi) | Details of net interest expense
      (income) are as follows:
|---- | --------------------------------------------------------------

|(amounts in millions)                                           | 2003              | 2002              | 2001             
|--------------------------------------------------------------- | ----------------- | ----------------- | -----------------
|Long-term debt interest
      expense                           | $     
      37.1 | $     
      30.3 | $     
      17.6
|Short-term debt interest
      expense                          | 0.2               | 1.9               | 0.1              
|Interest income                                                 | (3.7)             | (3.4)             | (20.1)           
|Other financing charges                                         | 3.1               | 1.4               | 0.1              
|Allocation of interest expense to
      discontinued operations | (0.1)             | (3.6)             | (4.0)            
|Interest capitalized                                            | (6.2)             | (3.9)             | -                
|Net
      interest expense (income)                             | $      30.4       | $      22.7       | $      (6.3)     

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, 2003, the Company is in compliance with its debt covenants.B.
Short-Term DebtThe Company has unsecured bank lines of credit available in
various currencies totalling $89.0 million, of which $41.3 million was used as
at March 31, 2003. The effective rate on the short-term borrowings was 4.8%
(2002 - 5.6%, 2001 - 8.4%).



E23

---



Note 11 - Capital Stock

|(i)  | The Company’s articles of
      incorporation authorize the issuance of an unlimited number of preferred
      shares, issuable in series, and an unlimited number of common shares. To
      date, the Company has not issued any preferred shares.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii) | A reconciliation of the issued
      and outstanding common shares of the Company is as
  follows:                                                                                                                                                  

|                                  |                 | 2003        |                     | 2002        |                     | 2001       
|--------------------------------- | --------------- | ----------- | ------------------- | ----------- | ------------------- | -----------
|                                  | Numberof Shares | StatedValue | Numberof Shares (c) | StatedValue | Numberof Shares (c) | StatedValue
|Balance at beginning of
    year  | 218,955,780     | $   186.8   | 216,399,856         | $   159.4   | 215,158,370         | $   152.3  
|Stock options exercised           | 650,776         | 3.5         | 1,118,400           | 6.1         | 1,413,076           | 6.9        
|Stock dividends (a)               | 54,622          | 0.2         | 17,605              | 0.2         | 34,410              | 0.3        
|Purchase of capital stock
    (b) | -               | -           | -                   | -           | (206,000)           | (0.1)      
|Treasury issue (note 2)           | -               | -           | 1,419,919           | 21.1        | -                   | -          
|Balance at end of year            | 219,661,178     | $   190.5   | 218,955,780         | $   186.8   | 216,399,856         | $   159.4  

|(a) | The Company provides that its
      shareholders may elect to receive common stock dividends in lieu of cash
      dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | During the first quarter of
      fiscal 2001 the Company purchased 206,000 common shares on the Toronto
      Stock Exchange under its normal course issuer bid. The Company has
      purchased 8,877,000 common shares since the inception of the program on
      June 21, 1999. Shares purchased by the Company were cancelled. The bid
      expired on June 20, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(c) | The Company has an amended and
      restated shareholder protection rights plan agreement whereby one right
      has been issued for each outstanding common share of the Company. The
      rights remain attached to the shares and are not exercisable until the
      occurrence of certain designated events. Upon the occurrence of such an
      event, the right entitles a shareholder of the Company to acquire
      additional common shares from treasury at half their market value. The
      rights expire on the date immediately after the Company’s Annual Meeting
      of Shareholders to be held in August 2003, unless terminated at an earlier
      date by the Board of Directors.                                                                                                                           
|(d) | On June 20, 2001, the Board of
      Directors declared a 100% stock dividend in respect of the common shares
      in the capital of the Company, effectively achieving a two-for-one split
      of CAE’s outstanding common shares. The stock dividend was payable to
      shareholders of record at the close of business on July 9, 2001, on the
      basis of one additional share for each common share held as of the Record
      Date. CAE’s common shares commenced trading on a split basis on July 5,
      2001, on the Toronto Stock Exchange. The Company ascribed no monetary
      value to the stock dividend. The number of shares and options, the option
      exercise prices and the basic and diluted net earnings per share figures
      have been restated retroactively to reflect the stock
    dividend.
|(e) | The following is a reconciliation
      of the denominators for the basic and diluted earnings per share
      computations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                                     | 2003        | 2002        | 2001       
|-------------------------------------------------------------------- | ----------- | ----------- | -----------
|Weighted average number of common
      shares outstanding - Basic   | 219,427,513 | 217,592,039 | 215,666,346
|Effect of dilutive stock options                                     | 897,806     | 2,544,722   | 2,570,454  
|Weighted average number of common shares outstanding -
      Diluted | 220,325,319 | 220,136,761 | 218,236,800

Options to acquire 3,198,000 common
shares (2002 - 1,474,628, 2001 - nil) have been excluded from the above
calculation since their inclusion would have an antidilutive effect.



E24

---



Note 12 - Stock-Based Compensation
PlansEmployee Stock Option PlanUnder 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, 2003, a total of 11,812,046 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:

|                                               |                  | 2003                         |                  | 2002                         |                  | 2001                        
|---------------------------------------------- | ---------------- | ---------------------------- | ---------------- | ---------------------------- | ---------------- | ----------------------------
|for the years ended March 31                   | Numberof Options | WeightedAverageExercisePrice | Numberof Options | WeightedAverageExercisePrice | Numberof Options | WeightedAverageExercisePrice
|Options outstanding at beginning of
      year | 4,999,078        | $    
      7.70             | 5,114,350        | $    
      5.70             | 5,479,326        | $    
      4.96            
|Granted                                        | 1,767,000        | $   12.71                    | 1,698,012        | $   12.19                    | 2,018,400        | $    
      6.84            
|Exercised                                      | (650,776)        | $    
      5.62             | (1,118,400)      | $    
      5.41             | (1,413,076)      | $    
      4.90            
|Forfeited                                      | (325,400)        | $    
      9.38             | (692,884)        | $    
      7.71             | (970,300)        | $    
      5.06            
|Expired                                        | (97,152)         | $     9.10                   | (2,000)          | $   12.23                    | -                | -                           
|Options outstanding at end of year             | 5,692,750        | $     9.37                   | 4,999,078        | $     7.70                   | 5,114,350        | $     5.70                  
|Options exercisable at end of year             | 2,000,975        | $     6.78                   | 1,417,878        | $     5.70                   | 1,268,500        | $     5.34                  



E25

---



The following table summarizes information about the
Company’s Employee Stock Option Plan as at March 31, 2003:

|                        |                   | Options Outstanding                                   | Options Exercisable         
|----------------------- | ----------------- | ----------------------------------------------------- | ----------------------------
|Range ofExercise Prices | NumberOutstanding | WeightedAverageRemainingContractualLife
      (years) | WeightedAverageExercisePrice
|$4.10 to $5.70          | 1,175,550         | 2.00                                                  | $    
      4.48            
|$6.425 to $9.60         | 1,502,200         | 2.84                                                  | $    
      6.90            
|$11.90 to $14.60        | 3,015,000         | 4.75                                                  | $   12.51                   
|Total                   | 5,692,750         | 3.67                                                  | $     9.37                  

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 and
the assumptions used in the calculation are presented below:

|(amounts in millions except per share amounts and assumptions
      data) | 2003        
|------------------------------------------------------------------------- | ------------
|Net earnings, as reported                                                 | $   
  117.2
|Pro
      forma impact                                                    | $      (2.5)
|Pro forma net earnings                                                    | $    114.7  
|Pro forma basic and diluted net earnings
      per share                  | $      0.52 
|Assumptions used in
      Black-Scholes options pricing model:           
|Dividend
      yield                                                      | 1.058%      
|Expected
      volatility                                                 | 46.5%       
|Risk-free
      interest rate                                             | 5.26%       
|Expected life (years)                                                     | 6           

Employee Stock Purchase PlanThe
Company maintains an Employee Stock Purchase Plan (ESPP or “the Plan”) 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 $1.9 million (2002 - $1.9 million; 2001 - $2.1 million)
in respect of employer contributions under the Plan.



E26

---



Deferred Share Unit PlanEffective
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 DSUs. The DSU 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 DSU 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. DSUs 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 DSUs. A nonemployee director
holding at least 10,000 common shares may elect to participate in the DSU Plan
in respect of part or all of his or her retainer and attendance fees. The terms
of the DSU Plan are essentially identical to the key executive DSU Plan except
that the share price used to value the DSU 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 Plans as compensation expense. As at March 31, 2003,
362,498 units were outstanding at a value of $1.0 million (2002 - 194,581 units
at a value of $2.3 million; 2001 - 53,220 units at a value of $1.3
million).



E27

---



Note 13 - Financial
InstrumentsForeign Currency RiskThe Company entered into forward
foreign exchange contracts totalling $102.9 million (buy contracts $51.3 million
and sell contracts $51.6 million). The total unrealized gain as of March 31,
2003, is $3.0 million (on buy contracts $1.1 million and on sell contracts $1.9
million).Consolidated Foreign Exchange Deals Outstanding

|(amounts in millions of Canadian dollars) |                 | 2003        |                 | 2002       
|----------------------------------------- | --------------- | ----------- | --------------- | -----------
|Currencies (Sold/Bought)                  | NotionalAmount1 | AverageRate | NotionalAmount1 | AverageRate
|US/CA                                    
|Less than 1
    year                      | 20.6            | 0.6222      | 55.0            | 0.6334     
|CA/US                                    
|Less than 1
    year                      | 4.4             | 1.4842      | 10.4            | 1.5961     
|US/EUR                                   
|Less than 1
    year                      | 21.1            | 1.0376      | 24.2            | 0.8801     
|Between 1 and 3
      years               | 1.9             | 0.8785      | 2.2             | 0.8785     
|CA/EUR                                   
|Less than 1
    year                      | 20.8            | 1.6168      | 0.8             | 1.3063     
|EUR/CA                                   
|Less than 1
    year                      | 7.8             | 0.6168      | -               | -          
|Between 1 and 3
      years               | 7.8             | 0.6028      | -               | -          
|Between 3 and 5
      years               | 6.7             | 0.5891      | -               | -          
|GBP/CA                                   
|Less than 1
    year                      | 10.5            | 0.4404      | 36.3            | 0.4411     
|Between 1 and 3
      years               | 1.1             | 0.4606      | 8.7             | 0.4435     
|CA/GBP                                   
|Less than 1
    year                      | -               | -           | 1.0             | 2.3795     
|GBP/EUR                                  
|Less than 1
    year                      | -               | -           | 3.5             | 0.6354     
|EUR/GBP                                  
|Less than 1 year                          | -               | -           | 2.1             | 1.6453     
|                                          | 102.9           |             | 144.5           |            

1 Exchange rates as at the end of the
respective fiscal year were used to translate amounts in foreign
currencies.Credit RiskThe 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 minimize the risk. 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.



E28

---



Interest Rate ExposureThe Company
is exposed to the volatility of interest rates on its long-term debt. As at
March 31, 2003, 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 $123.6 million. One agreement, with a notional value of $48.5
million (US$33 million), has converted fixed interest rate debt into floating
whereby the Company pays the equivalent of a three-month LIBOR borrowing rate
plus 1.8% and receives a fixed interest rate of 7.76% up to June 2012. The
remaining four contracts are converting floating interest rate debt into fixed
for a notional value of $75.1 million whereby the Company will receive quarterly
LIBOR and pay fixed interest payments as follows:• until February 2003
on two contracts totalling $205.6 million (US$129.0 million), the Company paid
annually a fixed interest rate of 2.72%;• until April 2006 on $35.0 million,
the Company will pay quarterly a fixed interest rate of 4.97%;• until
September 2005 on $16.1 million (US$11.0 million), the Company will pay monthly
at a fixed annual interest rate of 4.95%;• until October 2011 on two
contracts totalling $24.0 million (£10.3 million), the Company will pay
quarterly at a fixed annual  interest rate of 6.82%.After
taking into consideration these swap agreements, as at March 31, 2003, 38% of
the long-term debt bears fixed interest rates. Fair Value of Financial
InstrumentsThe following methods and assumptions have been used to estimate
the fair value of the financial instruments:• cash and short-term
investments, accounts receivable, accounts payable and accrued liabilities are
valued at their carrying  amounts on the balance sheet, which
represent an appropriate estimate of their fair values due to their near-term
maturities;• capital leases are valued using the discounted cash flow
method;• long-term debt value is estimated based on discounted cash flows
using current interest rates for debt with similar terms
and  remaining maturities;• interest rate and currency swap
contracts reflect the present value of the potential gain or loss if settlement
were to take place at  the balance sheet date;• the forward
foreign exchange contracts are represented by the estimated amounts that the
Company would receive or pay to  settle the contracts at the
balance sheet date.The fair value and the carrying amount of the
financial instruments as at March 31 is as follows:

|(amounts in millions)                        |            | 2003           |            | 2002          
|-------------------------------------------- | ---------- | -------------- | ---------- | --------------
|                                             | Fair Value | CarryingAmount | Fair Value | CarryingAmount
|Long-tem debt                                | $   837.8  | $   811.4      | $   935.6  | $   926.5     
|Net forward foreign exchange
      contracts | 2.7        | -              | (0.9)      | -             
|Interest rate swap
    contracts             | (10.3)     | -              | (2.2)      | -             
|Currency swap contracts                      | -          | -              | 3.9        | -             



E29

---



Letters of Credit and GuaranteesAs
at March 31, 2003, CAE had outstanding letters of credit and performance
guarantees in the amount of $195.1 million (2002 - $188.1 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.

|(amounts in millions) | 2003            | 2002      
|--------------------- | --------------- | ----------
|Advance payment       | $  
      159.9 | $     95.6
|Contract performance  | 32.4            | 90.2      
|Others                | 2.8             | 2.3       
|Total                 | $   195.1       | $   188.1 

Residual Value Guarantees - Sale and
Leaseback TransactionsFollowing 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 $29.7 million of which $12.2 million matures in 2008, $8.3 million
in 2020 and $9.2 million in 2023. Of this amount, as at March 31, 2003, $22.6
million is recorded as deferred gain (2002 - $17.5
million).IndemnificationsIn 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 exisiting, 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, to 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 indemnities 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 defenses, which are
not estimable.



E30

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Note 14 - Income TaxesA
reconciliation of income taxes at Canadian statutory rates with the reported
income taxes is as follows:

|(amounts in millions)                                       | 2003             | 2002(Restated)   | 2001(Restated)  
|----------------------------------------------------------- | ---------------- | ---------------- | ----------------
|Earnings from continuing operations before income taxes     | $   191.2        | $   218.3        | $   155.9       
|Statutory income tax rates in
      Canada                  | 34.7%            | 37.4%            | 44.6%           
|Income taxes at Canadian statutory
      rates              | $    
      66.3 | $    
      81.6 | $    
      69.5
|Difference between
      Canadian statutory rates and those
|applicable to foreign
      subsidiaries                    | 0.7              | 5.3              | (10.7)          
|Manufacturing and processing
      allowance                | (3.5)            | (13.1)           | (8.3)           
|Losses not tax effected                                     | 1.0              | 11.0             | 3.6             
|Tax benefit of losses not previously
      recognized       | (1.1)            | (6.7)            | (0.2)           
|Research and development investment
      tax credits       | (0.5)            | (3.0)            | (1.1)           
|Other                                                       | (2.7)            | (5.2)            | (0.6)           
|Total income tax expense                                    | $     60.2       | $     69.9       | $     52.2      

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

|(amounts in millions)                 | 2003     | 2002(Restated) | 2001(Restated)
|------------------------------------- | -------- | -------------- | --------------
|Current income taxe expense           | $   41.4 | $   62.8       | $   60.7      
|Change in temporary
      differences | 20.7     | 9.0            | (10.3)        
|Tax rate changes                      | (1.6)    | 0.4            | (0.6)         
|Other                                 | (0.3)    | (2.3)          | 2.4           
|Future income tax expense (benefit)   | 18.8     | 7.1            | (8.5)         
|Total income tax expense              | $   60.2 | $   69.9       | $   52.2      

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

|(amounts in millions)                                    | 2003(Restated)   | 2002(Restated) | 2001(Restated)
|-------------------------------------------------------- | ---------------- | -------------- | --------------
|Non-capital loss
    carryforwards                       | $    
      91.1 | $   101.3      | $   120.0     
|Capital loss carryforwards                               | -                | 4.8            | 5.3           
|Investment tax credits                                   | (18.9)           | (22.6)         | (31.5)        
|Property, plant and
    equipment                        | (56.0)           | (40.8)         | (12.8)        
|Employee pension plans                                   | (2.0)            | 3.2            | (3.1)         
|Amounts not currently
      deductible                   | 21.1             | 20.5           | 20.9          
|Percentage-of-completion versus
      completed contract | (35.2)           | (30.0)         | (18.6)        
|Other                                                    | (2.8)            | (2.8)          | 5.1           
|                                                         | $     (2.7)      | $     33.6     | $     85.3    
|Valuation allowance                                      | (31.0)           | (46.6)         | (76.2)        
|Net
      future income tax assets (liabilities)         | $   (33.7)       | $   (13.0)     | $      
9.1   

As of March 31, 2003, the Company has
accumulated non-capital losses carried forward relating to operations in the
United States for approximately US$133.9 million. For financial reporting
purposes, a net future income tax asset of US$32.5 million has been recognized
in respect of these loss carryforwards.



E31

---



The Company has accumulated non-capital
tax losses carried forward relating to its operations in other countries of
approximately $74.0 million. For financial reporting purposes, a net future
income tax asset of $12.3 million has been recognized.The losses for
income tax purposes expire as follows:

|Year of
      expiration (amounts in millions) | United States (US$) | Other Countries (CA$)
|---------------------------------------------- | ------------------- | ---------------------
|2004                                           | -                   | -                    
|2005                                           | -                   | -                    
|2006                                           | 19.8                | -                    
|2007                                           | 44.5                | -                    
|2008                                           | 27.2                | -                    
|2009-2021                                      | 42.4                | 17.7                 
|No
      expiration                            | -                   | 56.3                 
|                                               | 133.9               | 74.0                 

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 2003, $21.1 million (2002 - $21.8
million) of the valuation allowance balance was reversed when it became more
likely than not that benefits would be realized.

Note 15 - Long-Term
Liabilities

|(amounts in millions)                                | 2003      | 2002    
|---------------------------------------------------- | --------- | --------
|Deferred revenue and gains
    (i)                   | $   108.7 | $   52.9
|Long-term portion employee benefits
      obligation | 11.2      | 4.2     
|Government cost sharing (note
      18)              | 4.6       | -       
|Other                                                | 15.1      | 16.6    
|                                                     | $   139.6 | $   73.7

|(i) | Deferred revenue and gains result from the
      Company’s deferred gains on sale and leaseback arrangements of $75.6
      million at March 31, 2003 (2002 - $27.0 million). The remaining deferred
      revenue balance relates to the Company’s training service
      activities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 16 - Supplementary Cash Flow
InformationCash provided by (used in) non-cash working capital is as
follows:

|(amounts in millions)                          | 2003             | 2002              | 2001            
|---------------------------------------------- | ---------------- | ----------------- | ----------------
|Accounts receivable                            | $    
      22.3 | $   (50.4)        | $   21.8        
|Inventories                                    | (3.1)            | (23.8)            | (45.7)          
|Prepaid expenses                               | (6.0)            | 1.9               | 5.9             
|Income taxes recoverable                       | 23.1             | 36.9              | 49.7            
|Accounts payable and accrued
      liabilities | 13.7             | 27.9              | 71.0            
|Deposits on contracts                          | (91.3)           | (0.1)             | (23.6)          
|                                               | $   (41.3)       | $     (7.6)       | $   79.1        
|Interest paid                                  | $      38.8      | $     
      25.3 | $   20.6        
|Income taxes paid                              | $        3.5     | $        8.2      | $     
      8.8
|Amortization of other assets                   | $        8.8     | $        3.2      | $         
  -  



E32

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Note 17 - ContingenciesThrough 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.

Note 18 - Government Cost SharingThe 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 $1.6 million in fiscal 2003 (2002 - $2.6
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 $4.6
million of future repayments on these two programs in fiscal 2003. Funding for
these programs is based on expenditures incurred by the Company. The amount of
funding received in fiscal 2003 was $20.2 million (2002 - $15.8 million, 2001 -
$3.5 million) for the civil program and $12.3 million (2002 - nil, 2001 - 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
CommitmentsFuture minimum lease payments under operating leases are as
follows:

|(amounts in millions)        | Civil Simulationand Training | Military Simulationand Training | MarineControls  | Total        
|---------------------------- | ---------------------------- | ------------------------------- | --------------- | -------------
|Years
      ending March 31,
|2004                         | $   44.5                     | $   37.5                        | $    
      1.3 | $   83.3     
|2005                         | 42.0                         | 36.6                            | 1.1             | 79.7         
|2006                         | 38.8                         | 32.1                            | 0.8             | 71.7         
|2007                         | 35.7                         | 22.2                            | 0.1             | 58.0         
|2008                         | 33.1                         | 21.6                            | 0.1             | 54.8         
|Thereafter                   | 300.1                        | 117.7                           | 0.1             | 417.9        
|                             | $
      494.2                | $
      267.7                   | $     3.5       | $
      765.4



E33

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Note 20 - PensionsThe
Company has defined benefit plans that provide benefits based on length of
service and final average earnings. The Company has an obligation to ensure that
there are sufficient funds in the plans to pay the benefits
earned.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.For fiscal 2003, the Company amended the actuarial
assumption for return on plan assets to 6.5% (2002 - 9.0%). The changes
in the pension obligations and in the fair value of assets and the funded status
of the defined benefit plans were as follows:

|(amounts in millions)                              | 2003         | 2002         | 2001             
|-------------------------------------------------- | ------------ | ------------ | -----------------
|Change in pension
    obligations                 
|Pension
      obligation, beginning of year        | $   131.4    | $   126.0    | $   111.5        
|Current
      service cost                         | 4.6          | 4.2          | 3.3              
|Interest
      cost                                | 8.5          | 8.1          | 7.8              
|Settlement
      gain on discontinued operations   | -            | (2.5)        | -                
|Employee
      contributions                       | 2.7          | 2.2          | 2.3              
|Loss on
      plan amendments                      | 2.8          | 1.1          | 1.6              
|Pension
      benefits paid                        | (8.4)        | (8.8)        | (8.4)            
|Actuarial loss                                     | 5.6          | 1.1          | 7.9              
|Pension obligation, end of year                    | $   147.2    | $   131.4    | $   126.0        
|Change in fair value of plan assets               
|Fair value
      of plan assets, beginning of year | $   111.7    | $   121.5    | $   120.5        
|Expected
      return on plan assets               | 7.2          | 10.6         | 10.7             
|Pension
      benefits paid                        | (8.4)        | (8.8)        | (8.4)            
|Settlement
      loss on discontinued operations   | -            | (2.5)        | -                
|Disbursements                                      | (0.3)        | -            | -                
|Employee
      contributions                       | 2.7          | 2.2          | 2.3              
|Employer
      contributions                       | 7.2          | 0.6          | 0.7              
|Actuarial loss                                     | (14.5)       | (11.9)       | (4.6)            
|Fair value of plan assets, end of year             | $   105.6    | $   111.7    | $   121.5        
|Funded
      status-plan deficit                   | $   (41.6)   | $   (19.7)   | $    
      (4.5)
|Unrecognized net actuarial loss                    | 44.1         | 24.9         | 12.5             
|Unamortized past service cost                      | 5.2          | 2.6          | 1.6              
|Accrued net pension asset, end of year             | $        7.7 | $        7.8 | $        9.6     
|                                                  

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:

|                                                    | 2003           | 2002           | 2001          
|--------------------------------------------------- | -------------- | -------------- | --------------
|Return on plan assets                               | 6.5%           | 9.0%           | 9.0%          
|Discount rate for pension benefit
      obligations | 6.5%           | 6.5%           | 6.5%          
|Compensation rate increases                         | 2.75% to 5.25% | 2.75% to 5.25% | 2.75% to 5.25%

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

|(amounts in millions)                                | 2003    | 2002    | 2001   
|---------------------------------------------------- | ------- | ------- | -------
|Current service cost                                 | $   4.9 | $   4.2 | $   3.3
|Interest cost on projected pension
      obligations | 8.5     | 8.1     | 7.8    
|Expected return on plan
    assets                   | (7.2)   | (10.6)  | (10.7) 
|Amortization of net actuarial
      loss             | 0.8     | -       | -      
|Amortization of past service
      costs             | 0.2     | 0.1     | -      
|Net
      pension expense                            | $   7.2 | $   1.8 | $   0.4



E34

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Note 21 - Business
SegmentsThe Company’s significant business segments include:

|(i)   | Civil Simulation and Training -
      a world-leading supplier of civil flight simulators and visual systems,
      and a provider of business and civil aviation training.                                                                                               
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  | Military Simulation and Training
      - a premier supplier of military flight and landbased simulators, visual
      and training systems.                                                                                                                               
|(iii) | Marine Controls - a world leader
      in the supply of automation and control systems for the naval and
      commercial markets. The business also provides naval training systems and
      designs and manufactures power plant training simulators and
      systems.

Each operating segment is led by a
senior executive, offers different products and uses different technology and
marketing strategies. The Company evaluates performance based on operating
earnings before interest and income taxes and uses capital employed to assess
resources allocated to each segment. Capital employed includes accounts
receivable, inventories, prepaid expenses, property, plant and equipment,
goodwill, intangible assets and other assets less accounts payable and accrued
liabilities, deposits on contracts and contingent consideration due to
acquisitions included in 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 are now presented
separately and accordingly comparative figures have been restated in order to be
consistent with the new basis of presentation.



E35

---



Financial information on the Company’s
operating segments is shown in the following table:Business
Segments

|(amounts in millions)                               | 2003           | 2002                     | 2001                    
|--------------------------------------------------- | -------------- | ------------------------ | ------------------------
|                                                    |                | (Restated)(note
      1) | (Restated)(note
      1)
|Capital employed                                   
|Civil
      Simulation and Training                 | $   1,156.9    | $   1,057.3              | $          
      74.5  
|Military
      Simulation and Training              | 247.7          | 187.3                    | 60.0                    
|Marine
      Controls                               | 122.9          | 86.0                     | 19.0                    
|Other                                               | (9.7)          | 11.8                     | 9.4                     
|Total capital employed                              | $   1,517.8    | $   1,342.4              | $        
162.9         
|Cash                                                | 17.1           | 88.8                     | 156.8                   
|Short-term
      investments                        | 2.6            | 21.3                     | 122.8                   
|Income
      taxes recoverable                      | 25.7           | 15.8                     | 8.2                     
|Accounts
      payable and accrued liabilities      | 413.3          | 420.5                    | 315.0                   
|Deposits on
      contracts                         | 101.2          | 189.1                    | 175.9                   
|Future
      income taxes - short-term              | 3.5            | 28.9                     | 15.4                    
|Future
      income taxes - long-term               | 85.7           | 74.1                     | 18.2                    
|Long-term
      liabilities                         | 139.6          | 73.7                     | 20.7                    
|Assets of discontinued
operations                   | 50.0           | 123.8                    | 370.9                   
|Total assets                                        | $   2,356.5    | $   2,378.4              | $     1,366.8           
|Total assets by segment                            
|Civil
      Simulation and Training                 | $   1,474.3    | $   1,380.9              | $        348.5          
|Military
      Simulation and Training              | 442.6          | 444.6                    | 260.6                   
|Marine
      Controls                               | 214.8          | 165.1                    | 58.4                    
|Assets of
      discontinued operations             | 50.0           | 123.8                    | 370.9                   
|Other                                               | 174.8          | 264.0                    | 328.4                   
|                                                    | $   2,356.5    | $   2,378.4              | $   1,366.8             
|Capital expenditures                               
|Civil
      Simulation and Training                 | $       207.0  | $       216.7            | $         72.9          
|Military
      Simulation and Training              | 12.1           | 14.1                     | 1.8                     
|Marine Controls                                     | 19.8           | 18.8                     | 1.6                     
|                                                    | $       238.9  | $       249.6            | $         76.3          
|Amortization of property, plant and
      equipment
|Civil
      Simulation and Training                 | $         37.8 | $         24.4           | $          
      9.3   
|Military
      Simulation and Training              | 11.0           | 10.9                     | 7.9                     
|Marine
      Controls                               | 3.0            | 1.6                      | 1.3                     
|Other                                               | 0.3            | 0.1                      | 0.2                     
|                                                    | $         52.1 | $         37.0           | $        
  18.7        

Geographic Information

|(amounts in millions)                                               | 2003             | 2002            | 2001            
|------------------------------------------------------------------- | ---------------- | --------------- | ----------------
|Revenue from external customers
      based on their location      
|Canada                                                              | $    
      89.0 | $   102.7       | $   109.8       
|US                                                                  | 329.5            | 347.0           | 268.7           
|UK                                                                  | 149.7            | 127.4           | 141.9           
|Germany                                                             | 119.1            | 91.2            | 101.2           
|Other
      European countries                                      | 156.2            | 173.8           | 128.1           
|Other countries                                                     | 287.0            | 284.4           | 141.7           
|                                                                    | $
      1,130.5  | $
      1,126.5 | $   891.4       
|Property, plant and equipment,
      goodwill and intangible assets
|Canada                                                              | $   226.1        | $   126.6       | $    
      95.7
|US                                                                  | 577.6            | 579.0           | 6.2             
|Europe                                                              | 582.0            | 520.6           | 79.6            
|Other countries                                                     | 83.2             | 151.2           | 64.2            
|                                                                    | $
      1,468.9  | $
      1,377.4 | $   245.7       



E36

---



Note 22 - Differences between
Canadian and United States Generally Accepted Accounting Principles and
PracticesThe consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles and practices
(Canadian GAAP), which differ in certain respects from those principles and
practices that the Company would have followed had its financial statements been
prepared in accordance with accounting principles and practices generally
accepted in the United States (US GAAP).Additional disclosures required
under US GAAP have been provided in the accompanying financial statements and
notes.



E37

---



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) | 2003       | 2002                     | 2001                    
|--------------------------------------------------------------------------------------------- | ---------- | ------------------------ | ------------------------
|                                                                                              |            | (Restated)(note
      1) | (Restated)(note
      1)
|Earnings from continuing operations
      for the year in accordance                         
|with
      Canadian GAAP                                                                      | $   131.0  | $   148.4                | $   103.7               
|Deferred development costs, net of
      tax of $2.7                                         
|(2002 -
      $5.0), (2001 - $4.5) (A)                                                        | (5.8)      | (10.6)                   | (9.0)                   
|Deferred pre-operating costs, net of
      tax of $0.4                                       
|(2002 -
      $4.1), (2001 - $1.0) (B)                                                        | (0.8)      | (8.8)                    | (2.1)                   
|Derivative instruments, net of tax
      of $7.7 (2002 - $0.2) (D)                            | (16.7)     | (0.5)                    | -                       
|Leases net of tax expense of $0.9
      (2002 - tax recovery $0.8),                          
|(2001 - tax
      recovery $0.8) (H)                                                          | 2.0        | (1.8)                    | (1.9)                   
|Foreign exchange gain on purchase of
      subsidiary in 2002,                               
|net of tax of $3.7 (F)                                                                        | -          | 7.9                      | -                       
|Earnings from continuing operations
      before cumulative effect of                        
|accounting
      change - US GAAP                                                             | 109.7      | 134.6                    | 90.7                    
|Discontinued operations                                                                       | (13.8)     | 1.1                      | 2.4                     
|Net earnings before cumulative
      effect of accounting change - US GAAP                    | 95.9       | 135.7                    | 93.1                    
|Cumulative effect on prior years of accounting change (D)
    (E)                             | -          | 5.3                      | -                       
|Net
      earnings for the year in accordance with US GAAP                                    | $     95.9 | $   141.0                | $     93.1              
|Basic and diluted earnings per share
      from continuing operations                        
|in accordance with US GAAP                                                                    | 0.50       | 0.62                     | 0.42                    
|Basic and diluted results per share
      from discontinued operations                       
|in accordance with US GAAP                                                                    | (0.07)     | 0.01                     | 0.01                    
|Basic and diluted net earnings per
      share before cumulative effect                      
|of accounting change in accordance with US
      GAAP                                         | 0.43       | 0.63                     | 0.43                    
|Basic and diluted net earnings per share in accordance with US
      GAAP                     | 0.43       | 0.65                     | 0.43                    
|Basic and diluted net earnings per
      share adjusted for                                  
|goodwill amortization                                                                         | 0.43       | 0.65                     | 0.45                    
|Dividends per common share                                                                    | 0.12       | 0.11                     | 0.10                    
|Basic and diluted net earnings per
      share adjusted for                                  
|goodwill amortization                                                                         | 0.43       | 0.62                     | 0.43                    



E38

---



|(amounts in millions of Canadian dollars)                          | 2003             | 2002       | 2001            
|------------------------------------------------------------------ | ---------------- | ---------- | ----------------
|                                                                   |                  | (Restated) | (Restated)      
|Comprehensive income                                              
|Net earnings in accordance with US
      GAAP                      | $    
      95.9 | $   141.0  | $    
      93.1
|Accumulated minimum pension
      liability, net of taxes of $10.8 | (23.5)           | -          | -               
|Foreign currency translation adjustments                           | 36.8             | (1.5)      | 1.0             
|Comprehensive income                                               | $   109.2        | $   139.5  | $     94.1      
|                                                                  
|Accumulated other comprehensive
      loss                        
|Beginning balance                                                  | $   (15.1)       | $   (13.6) | $   (14.6)      
|Currency translation
      adjustments                             | 36.8             | (1.5)      | 1.0             
|Change in minimum pension liability                                | (23.5)           | -          | -               
|Ending balance                                                     | $     (1.8)      | $   (15.1) | $   (13.6)      

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

|(amounts in millions of Canadian dollars)                            | 2003      | 2002       | 2001      
|-------------------------------------------------------------------- | --------- | ---------- | ----------
|                                                                     |           | (Restated) | (Restated)
|Shareholders’ equity in accordance
      with Canadian GAAP          | $   750.2 | $   612.1  | $   458.8 
|Deferred development costs, net of
      tax of $12.2               
|(2002 - $9.5), (2001 -
      $4.5) (A)                               | (25.4)    | (19.6)     | (9.0)     
|Deferred pre-operating costs, net of
      tax of $9.1              
|(2002 - $8.7), (2001 -
      $4.6) (B)                               | (18.7)    | (17.9)     | (9.1)     
|Derivative instruments, net of tax
      expense of $5.5            
|(2002 - tax recovery
      $2.2) (D)                                 | (11.9)    | 4.8        | -         
|Foreign currency translation
      adjustments (I)                   | (6.6)     | 0.6        | -         
|Leases, net of tax recovery of $0.5
      (2002 - tax expense $0.4),
|(2001 - tax recovery
      $0.4) (H)                                 | 0.7       | (1.3)      | 0.5       
|Foreign exchange gain on purchase of
      subsidiary,              
|net of tax of $3.7
      (2002 - ($3.7)) (F)                         | 7.9       | 7.9        | -         
|Change in minimum pension liability, net of tax of $10.8
    (J)     | (23.5)    | -          | -         
|Shareholders’ equity in accordance with US GAAP                      | $   672.2 | $   586.6  | $   441.2 



E39

---



The balance sheets in accordance with US GAAP as at
March 31, 2003 and March 31, 2002 are as follows:

|(amounts in millions of Canadian dollars)                     | Notes         |                  | March 31, 2003   |                  | March 31, 2002  
|------------------------------------------------------------- | ------------- | ---------------- | ---------------- | ---------------- | ----------------
|                                                              |               | CanadianGAAP     | USGAAP           | CanadianGAAP     | USGAAP          
|                                                              | (Restated)    | (Restated)      
|Assets                                                       
|Cash                                                          |               | $    
      17.1 | $    
      17.1 | $    
      88.8 | $    
      88.8
|Short-term investments                                        | C             | 2.6              | 2.6              | 21.3             | 21.3            
|Accounts receivable                                           |               | 373.1            | 373.1            | 378.2            | 378.2           
|Derivative instruments                                        | D             | -                | 2.7              | -                | 6.9             
|Inventories                                                   |               | 136.3            | 136.3            | 130.9            | 130.9           
|Prepaid expenses                                              | H             | 14.0             | 9.6              | 9.9              | 9.9             
|Income taxes recoverable                                      |               | 25.7             | 25.7             | 15.8             | 15.8            
|Future income taxes                                           |               | 3.5              | 3.5              | 28.9             | 28.9            
|                                                              |               | $   572.3        | $   570.6        | $   673.8        | $   680.7       
|Restricted cash                                               |               | 14.4             | 14.4             | 15.6             | 15.6            
|Assets of discontinued
      operations                       |               | 50.0             | 50.0             | 123.8            | 123.8           
|Property, plant and equipment,
      net                      | H             | 930.4            | 1,018.9          | 816.2            | 909.1           
|Future income taxes                                           | A,B,D,F,H,J   | 85.7             | 119.1            | 74.1             | 87.2            
|Intangible assets                                             | J             | 171.7            | 176.9            | 163.4            | 163.4           
|Goodwill                                                      | F             | 366.8            | 378.4            | 375.5            | 387.1           
|Other assets                                                  | A,B           | 165.2            | 99.9             | 136.0            | 80.2            
|                                                              |               | $
      2,356.5  | $
      2,428.2  | $
      2,378.4  | $
      2,447.1 
|Liabilities and shareholders’
      equityCurrent liabilities
|Accounts payable and accrued
      liabilities                | H             | $   413.3        | $   411.0        | $   420.5        | $   420.5       
|Deposits on contracts                                         |               | 101.2            | 101.2            | 189.1            | 189.1           
|Derivative instruments                                        | D             | -                | 20.4             | -                | -               
|Long-term debt due within one
      year                      | H             | 13.4             | 30.0             | 37.5             | 50.6            
|Future income taxes                                           |               | 42.4             | 42.4             | 50.4             | 50.4            
|                                                              |               | $   570.3        | $   605.0        | $   697.5        | $   710.6       
|Liabilities of discontinued
      operations                  |               | $    
      17.9 | $    
      17.9 | $    
      40.5 | $    
      40.5
|Long-term debt                                                | H             | 798.0            | 900.6            | 889.0            | 997.0           
|Long-term liabilities                                         | H,J           | 139.6            | 151.5            | 73.7             | 46.8            
|Future income taxes                                           |               | 80.5             | 80.5             | 65.6             | 65.6            
|                                                              |               | $
      1,606.3  | $
      1,755.5  | $
      1,766.3  | $
      1,860.5 
|Shareholders’ equity                                         
|Capital stock                                                 | G             | $   190.5        | $   439.8        | $   186.8        | $   436.1       
|Retained earnings                                             | A,B,D,E,F,G,H | 531.2            | 234.7            | 440.4            | 165.6           
|Currency translation
      adjustment                         |               | 28.5             | -                | (15.1)           | -               
|Accumulated other comprehensive loss                          | C,H,J         | -                | (1.8)            | -                | (15.1)          
|                                                              |               | $   750.2        | $   672.7        | $   612.1        | $   586.6       
|                                                              |               | $
      2,356.5  | $
      2,428.2  | $
      2,378.4  | $
      2,447.1 



E40

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Reconciliation ItemsA) Deferred
development costsUnder 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 costsUnder
US GAAP, pre-operating costs are charged to expense in the period incurred.
Under Canadian GAAP, the amounts are deferred and amortized over 5 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 preoperating costs capitalized in the respective year, net of the reversal
of amortization expense recorded for Canadian GAAP relating to amounts
previously capitalized.C) Portfolio investmentsUnder Canadian GAAP,
portfolio investments (short-term investments) are accounted for at the least of
cost and market value and gains or losses are recognized in the period in which
the investment is sold. 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 and
2002, had maturity dates of within one month of March 31, 2003 and 2002,
respectively.D) Derivative financial instrumentsUnder 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. Effective April 1, 2001, under US GAAP, all derivatives are recorded on
the balance sheet at fair value. Accordingly, for US GAAP reporting purposes
only, effective April 1, 2001, unrealized gains and losses resulting from the
valuation of derivatives (including embedded derivatives in purchase and sale
contracts) at market value are recognized in net earnings 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.



E41

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E) Adjustments for changes in
accounting policiesUnder 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 subsidiaryUnder Canadian GAAP, upon the
purchase of Schreiner, a foreign exchange gain was recorded 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 capitalOn 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) LeasesUnder Canadian GAAP, certain of the Company’s
leases of simulators, with aggregate minimum future lease payments of $133.0
million are accounted for as operating leases.Under these agreements,
the lessors hold the simulators under lease and the related liabilities through
Special Purpose Entities (SPEs). Under US GAAP, since the legal stated capital
of these SPEs represents less than 3% of the assets of the 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 $4.4 million in 2003 (2002 - $2.0 million, 2001 - $0.6
million) and interest expense related to these leases amounts to $8.3 million in
2003 (2002 - $6.0 million, 2001 - $2.1 million). Currency translation
adjustments resulting from the consolidation of a foreign SPE considered
self-sustaining amount to $6.6 million in 2003.I) Comprehensive
incomeUS 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 liabilityUnder 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.
Canadian GAAP has no such requirement to record a minimum liability.



E42

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Consolidated Statement of Cash
FlowsUnder US GAAP reporting, separate subtotals within operating, financing
and investment activities would not be presented.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       | 2003            | 2002      | 2001      
|-------------------------------------------------------------------- | ---------- | --------------- | --------- | ----------
|                                                                     | (Restated) | (Restated)     
|Cash flows from operating
      activities in accordance            
|with Canadian
      GAAP                                             |            | $   142.4       | $   173.1 | $   159.7 
|Deferred development costs                                           | A          | (13.3)          | (30.1)    | (13.5)    
|Deferred pre-operating
    costs                                     | B          | (10.7)          | (13.4)    | (4.0)     
|Discontinued operations                                              |            | 12.5            | (15.9)    | 23.6      
|Foreign exchange gain on purchase of
      a subsidiary              | F          | -               | 11.6      | -         
|Leases                                                               | H          | 10.9            | 3.8       | 0.7       
|Cash flows from operating activities
      in accordance            
|with US GAAP                                                         |            | $   141.8       | $   129.1 | $   166.5 
|Cash flows from investing activities
      in accordance            
|with Canadian
      GAAP                                             |            | (119.6)         | (755.2)   | (148.0)   
|Deferred development costs                                           | A          | 13.3            | 30.1      | 13.5      
|Deferred pre-operating
    costs                                     | B          | 10.7            | 13.4      | 4.0       
|Discontinued operations                                              |            | (14.8)          | (4.7)     | (11.1)    
|Foreign exchange gain on purchase of a subsidiary                    | F          | -               | (11.6)    | -         
|Cash flows from investing activities
      in accordance            
|with US GAAP                                                         |            | $ (110.4)       | $ (728.0) | $ (141.6) 
|Cash flows from financing activities
      in accordance            
|with Canadian
      GAAP                                             |            | $   (93.1)      | $   539.2 | $   (34.8)
|Discontinued operations                                              |            | (1.3)           | (3.9)     | (2.1)     
|Leases                                                               | H          | (10.9)          | (3.8)     | (0.7)     
|Cash flows from financing activities
      in accordance            
|with US GAAP                                                         |            | $
      (105.3) | $   531.5 | $   (37.6)

Stock-Based Compensation CostUnder
Canadian GAAP, no compensation expense is recognized at the time of issuance of
employee stock options. For US GAAP reporting, the Company follows the
provisions of Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-based Compensation (FAS 123) which allows companies to
either expense the estimated fair value of stock options, or to continue to
follow the intrinsic value method set forth in APB Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) but disclose the pro forma effects on the
net earnings had the fair value of the options been expensed. CAE has elected to
continue to apply APB 25 in accounting for its stock incentive plans. At March
31, 2003, no compensation cost has been recorded in the accounts. Had
compensation cost for the Company’s stock option plans been determined based
upon the fair value method as prescribed in FAS 123, in accordance with US GAAP,
the Company’s net earnings in the years ended March 31, 2003, 2002 and 2001,
would have been approximately $90.3 million, $137.3 million and $90.6 million,
or $0.41 per share, $0.62 per share and $0.42 per share respectively, on a
diluted basis. The fair value of the options granted during the years ended
March 31, 2003, 2002 and 2001 are estimated at $5.84 per share, $4.87 per share
and $2.46 per share respectively.



E43

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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             | 2003   | 2002   | 2001  
|-------------------------------- | ------ | ------ | ------
|Expected option life
    (years) | 6      | 6      | 6     
|Expected volatility              | 46.5%  | 36.3%  | 31.7% 
|Risk-free interest rate          | 5.26%  | 5.17%  | 6.15% 
|Dividend yield                   | 1.058% | 1.040% | 1.691%

Newly Adopted Accounting
StandardsBusiness combinations and goodwill and other intangible
assetsIn fiscal 2002, the Company adopted SFAS 141, Business Combinations,
and SFAS 142, Goodwill and Other Intangible Assets. These standards are
essentially the same as the recently issued Canadian accounting standards. See
note 1 for a description of the impact on the Company.Impairment of
disposal of long-lived assetsOn April 1, 2002, the Company adopted SFAS 144,
Accounting for Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS 121 and the provisions of APB 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, with regard to
reporting the effects of a disposal of a segment of a business. SFAS 144 retains
many of the provisions of SFAS 121, but significantly changes the criteria that
would have to be met to classify an asset as held for disposal such that
long-lived assets to be disposed of other than by sale are considered held and
used until disposed of. In addition, SFAS 144 retains the basic provisions of
APB 30 for presentation of discontinued operations in the statement of earnings
but broadens that presentation to a component of an entity. The application of
SFAS 144 did not have a significant impact on our financial position or results
of operations.Costs relating to exits and disposalsThe FASB recently
issued new Standard No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Effective January 1, 2003, the standard requires costs
relating to exits or disposal activities started after December 31, 2002, to be
recorded at their fair values when a liability has been incurred. Under the
previous guidance of Emerging Issues Task Force Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (Including Certain Costs Incurred in a Restructuring), certain exit
costs were recorded when management committed to an exit plan. The application
of Standard No. 146 did not have a significant effect on our financial position
or results of operations.Consolidation of variable interest
entitiesIn January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities. This interpretation clarifies 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.



E44

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FIN No. 46 applies immediately to all
variable interest entities created after January 31, 2003, and by the beginning
of the first interim or annual reporting period beginning after June 15, 2003,
for variable interest entities created before February 1, 2003. The results of
this assessment are not expected to be material on the financial position or
results of operations of the Company.The Company currently conducts
certain transactions through special purpose entities and is assessing the
structure of these transactions against the criteria set out in FIN No.
46.Disclosure of guaranteesIn 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.Future Accounting StandardsAccounting for asset retirement
obligationsOn June 15, 2001, the Financial Accounting Standards Board issued
SFAS 143, Accounting for Asset Retirement Obligations, which is effective for
the Company’s fiscal years beginning April 1, 2004. This standard requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The Company is studying the new standard but has not yet determined its
impact.Accounting for stock-based compensation - Transition and
disclosureOn December 2002, the Financial Accounting Standards Board issued
SFAS 148, an amendment to FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. Beginning in fiscal 2004, the Company will expense the
cost of stock options granted to employees using the fair value based method.
The Company is studying the new standard and has yet to determine the method of
transition under SFAS 148.Additional DisclosuresAdditional
disclosures required under US GAAP are as follows:



E45

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i) Statements of
earnings

|for the years ended March 31(amounts in millions
      ofCanadian dollars) |                  | 2003             |                  | 2002             |                  | 2001            
|-------------------------------------------------------------------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ----------------
|                                                                           | CanadianGAAP     | USGAAP           | CanadianGAAP     | USGAAP           | CanadianGAAP     | USGAAP          
|                                                                           | (Restated)       | (Restated)       | (Restated)       | (Restated)      
|Revenues from sales of
      simulators                                   
|and controls
      systems                                                 | $   684.3        | $   668.1        | $   842.5        | $   846.6        | $   772.1        | $   772.1       
|Revenues from sales of
      services                                      | $   446.2        | $   446.2        | $   284.0        | $   284.0        | $   119.3        | $   119.3       
|Cost of sales from
    simulators                                         
|and controls
      systems                                                 | $   338.2        | $   338.2        | $   465.3        | $   470.3        | $   466.0        | $   466.0       
|Cost of sales from
services                                                | $   240.1        | $   244.2        | $   167.9        | $   169.5        | $    
      60.6 | $    
      67.1
|Research and
development                                                  
|expenses                                                                   | $   108.3        | $   116.8        | $    
      74.6 | $    
      90.2 | $    
      87.8 | $   101.3       
|Rental expenses                                                            | $    
      88.1 | $    
      73.9 | $    
      52.0 | $    
      43.6 | $    
      38.4 | $    
      35.6
|Selling, general and                                                      
|administrative
      expenses                                              | $   134.2        | $   134.2        | $   125.6        | $   125.9        | $    
      89.1 | $    
      89.0
|Interest expense (income)                                                  | $     30.4       | $     46.8       | $     22.8       | $     33.5       | $     (6.3)      | $     (4.2)     

ii) Balance sheet

|as at March 31(amounts in millions of Canadian
      dollars) | 2003      | 2002            
|------------------------------------------------------------- | --------- | ----------------
|Accounts payable trade                                        | $   141.9 | $    
      97.6
|Contract liabilities                                          | $   102.7 | $   188.6       
|Other accrued liabilities                                     | $   168.7 | $   134.3       
|Accounts payable and accrued liabilities                      | $   413.3 | $   420.5       

Accounts receivable from government
amounted to $35.4 million as of March 31, 2003 (2002 - $56.0
million).iii) Property, plant and equipment impairmentFor US GAAP
purposes, property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to undiscounted future net
cash flows (before interest expense) expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets available for sale are reported at the lower of
the carrying amount or fair value less costs to sell.



E46

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iv) Income taxesThe 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) | 2003              | 2002              | 2001             
|--------------------------------------------------------------------------- | ----------------- | ----------------- | -----------------
|                                                                            | (Restated)        | (Restated)       
|Earnings before income taxes and
      other items                         
|Canada                                                                      | $   114.0         | $   179.0         | $   154.0        
|Other countries                                                             | 77.2              | 39.3              | 1.9              
|                                                                            | $   191.2         | $   218.3         | $   155.9        
|Current income taxes                                                       
|Canada                                                                      | $    
      43.0  | $    
      59.3  | $    
      54.7 
|Other countries                                                             | (1.6)             | 3.5               | 6.0              
|                                                                            | $     41.4        | $     62.8        | $     60.7       
|Future income taxes                                                        
|Canada                                                                      | $    
      (1.1) | $    
      (2.0) | $    
      (3.0)
|Other countries                                                             | 19.9              | 9.1               | (5.5)            
|                                                                            | $     18.8        | $       7.1       | $     (8.5)      
|Income tax provision                                                        | $     60.2        | $     69.9        | $     52.2       

v) Business combinationsThe
following unaudited pro forma information for the fiscal years ended March 31,
2003, 2002 and 2001, 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 that 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.

|years ended March 31(amounts in millions of Canadian
      dollars, except per share amounts) | 2003            | 2002                  | 2001                 
|--------------------------------------------------------------------------------------------- | --------------- | --------------------- | ---------------------
|                                                                                              | (Unaudited)     | (Restated)(Unaudited) | (Restated)(Unaudited)
|Revenue                                                                                      
|Civil
      Simulation and Training                                                           | $   517.2       | $   618.6             | $   570.2            
|Military
      Simulation and Training                                                        | 445.7           | 461.8                 | 455.9                
|Marine Controls                                                                               | 175.8           | 132.0                 | 120.5                
|                                                                                              | $
      1,138.7 | $
      1,212.4       | $
      1,146.6      
|Operating earnings                                                                           
|Civil
      Simulation and Training                                                           | $   116.2       | $   148.3             | $   134.8            
|Military
      Simulation and Training                                                        | 73.6            | 65.6                  | 23.3                 
|Marine Controls                                                                               | 31.9            | 25.4                  | 21.6                 
|Earnings from continuing operations
      before interest                                    
|and income
      taxes                                                                        | 221.7           | 239.3                 | 179.7                
|Interest expense (income), net                                                                | 31.4            | 44.6                  | 29.1                 
|Earnings from continuing operations
      before income taxes                                 | 190.3           | 194.7                 | 150.6                
|Income taxes                                                                                  | 60.2            | 61.0                  | 51.0                 
|Earnings from continuing
      operations                                                     | 130.1           | 133.7                 | 99.6                 
|Results of discontinued operations (note 3)                                                   | (13.8)          | 1.1                   | 2.4                  
|Net
      earnings                                                                            | $   116.3       | $   134.8             | $   102.0            
|Earnings and diluted earnings per
      share from                                           
|continuing operations                                                                         | $     0.59      | $     0.61            | $     0.46           
|Net
      earnings and diluted net earnings per share                                         | $     0.53      | $     0.62            | $     0.47           
|Average number of shares outstanding                                                          | 219.4           | 218.2                 | 217.1                



E47

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vi) Product warranty costsThe
Company has warranty obligations in connection with 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 is 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 change in the Company’s accrued warranty
liability from March 31, 2002, to March 31, 2003, was as follows:

|(amounts in millions of Canadian dollars)          | 2003    
|-------------------------------------------------- | --------
|Accrued warranty liability at March
      31, 2002 | $   12.4
|Warranty settlements during
      2003             | (7.2)   
|2003 warranty provisions                           | 2.5     
|Adjustments for changes in estimates               | 3.8     
|Accrued warranty obligations at March 31, 2003     | $   11.5

Note 23 - Comparative Financial
StatementsCertain comparative figures for 2002 and 2001 have been
reclassified to conform to the presentation adopted in 2003.Five Year
Review

|(amounts in millions of dollarsexcept where indicated by
      *) | 2003              | 2002       | 2001       | 2000       | 1999      
|----------------------------------------------------------------- | ----------------- | ---------- | ---------- | ---------- | ----------
|                                                                  |                   | (Restated) | (Restated) | (Restated) | (Restated)
|Continuing operations                                            
|Revenue                                                           | $ 1,130.5         | 1,126.5    | 891.4      | 865.1      | 708.5     
|Amortization                                                      | $       70.6      | 43.1       | 19.1       | 22.3       | 18.5      
|Earnings                                                          | $    
      131.0 | 148.4      | 103.7      | 63.0       | 49.7      
|Earnings
      per share*                                         | $       0.60      | 0.68       | 0.48       | 0.29       | 0.22      
|Net earnings                                                      | $    
      117.2 | 149.5      | 106.1      | 99.5       | 74.3      
|Basic and diluted net earnings per
      share*                   | $       0.53      | 0.69       | 0.49       | 0.45       | 0.33      
|Ratio of current assets to current
      liabilities*             | 1.1               | 1.0        | 1.3        | 1.4        | 1.2       
|Number of registered
      shareholders*                          | 2,308             | 2,114      | 2,130      | 2,392      | 2,600     
|Cash dividends paid per common share*                             | $       0.12      | 0.11       | 0.10       | 0.10       | 0.08      



E48

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Quarterly Financial Information

|(unaudited)(amounts in millions of dollars except where
      indicated by *) | FirstQuarter  | SecondQuarter | ThirdQuarter | FourthQuarter
|----------------------------------------------------------------------------- | ------------- | ------------- | ------------ | -------------
|2003                                                                         
|Continuing operations                                                        
|Revenue                                                                       | $ 275.8       | 252.3         | 290.3        | 312.1        
|Earnings                                                                      | $   37.4      | 23.3          | 31.5         | 38.8         
|Earnings
      per share*                                                     | $   0.17      | 0.11          | 0.14         | 0.18         
|Net earnings                                                                  | $   37.4      | 23.3          | 31.5         | 25.0         
|Basic and diluted net earnings per
      share                                | $   0.17      | 0.11          | 0.14         | 0.11         
|Common share trading
range:                                                  
|High                                                                          | $ 14.63       | 12.60         | 6.05         | 6.40         
|Low                                                                           | $
      11.28 | 4.17          | 3.25         | 2.76         
|(unaudited)(amounts in millions of dollars except where
      indicated by *) | FirstQuarter  | SecondQuarter | ThirdQuarter | FourthQuarter
|2002                                                                         
|(restated)                                                                   
|Continuing operations                                                        
|Revenue                                                                       | $ 242.3       | 255.1         | 279.9        | 349.2        
|Earnings                                                                      | $   33.0      | 34.3          | 39.9         | 41.2         
|Earnings
      per share*                                                     | $   0.15      | 0.16          | 0.18         | 0.19         
|Net earnings                                                                  | $   34.4      | 37.6          | 40.2         | 37.3         
|Basic and diluted net earnings per
      share                                | $   0.16      | 0.17          | 0.18         | 0.17         
|Common share trading
range:                                                  
|High                                                                          | $ 15.30       | 15.45         | 11.85        | 12.10        
|Low                                                                           | $
      11.70 | 7.80          | 7.35         | 9.30         

The restatement reflects the amendments to CICA
Handbook Section 1650, Foreign Currency Translation.



E49

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