Exhibit 2

Management217;s Discussion and
Analysis

Management217;s Discussion and Analysis
(MD&A) of the fiscal 2003 financial results focuses on the core businesses
of CAE Inc. (CAE), Civil Simulation and Training (220;Civil221;), Military Simulation
and Training (220;Military221;) and Marine Controls (220;Marine221;). The growing size of
Marine, which was grouped with Military in the prior year and reported as
Military Simulation and Marine Controls, is now reported separately as a
business segment. The MD&A, which includes a review of the operations of
each segment and the financial condition of CAE, is intended to assist in the
understanding and assessment of significant trends, risks and uncertainties
related to the results of operations for each business segment and should be
read in conjunction with the audited financial statements contained on pages 53
to 97. All dollars amounts referred to herein are Canadian dollars unless
otherwise specified.This MD&A contains forward-looking statements
with respect to CAE and the operations of each business segment based on
assumptions which CAE considers reasonable at the time they were prepared. These
forward-looking statements, by their nature, necessarily involve risks and
uncertainties that could cause actual results to differ materially from those
contemplated by the forward-looking statements. CAE cautions the reader that the
assumptions regarding future events, many of which are beyond the control of
CAE, may ultimately prove to be incorrect. Factors that could cause actual
results or events to differ materially from current expectations are discussed
herein - see the Business Risk and Uncertainties section of this MD&A for
additional information.

Summary of Consolidated
ResultsContinuing OperationsEarningsConsolidated earnings from
continuing operations for the year were $131.0 million, or 60 cents per share
compared to $148.4 million or 68 cents per share reported last year. The
decrease in earnings from continuing operations is attributable to lower
operating margins for the Civil segment, which was partially offset by the
growth in Marine and significantly higher margins in Military. The lower margin
in Civil is attributable in large part to the weak demand for full flight
simulator (FFS) equipment and the accounting impact from sale and leaseback
financing whereby the rental payments (including the interest component) under
operating leases are included in determining operating margins. The growth in
Marine represents organic growth of its naval control business with increasing
contributions from the Company217;s activities on the United Kingdom (UK) Astute
Class Submarine Training Service and the Royal Malaysian Navy Patrol Vessels
programs combined with a full year contribution from commercial activities at
CAE Valmarine. Military continued the positive trend of year over year margin
improvement, as operating margins reached 17% this year compared to 14% in
fiscal 2002, through a combination of productivity and cost containment
initiatives.



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Operating margins overall for the year
were 20% compared to 21% last year. The lower operating margins for Civil
combined with a change in the business mix, more Military and Marine and less
Civil, contributed to the decline.Other factors also impacted the
earnings from continuing operations in fiscal 2003. Beginning this fiscal year,
the amortization period for Civil simulation equipment located in its various
training centres was changed from 20 years to 25 years. This change, which is a
better approximation of the useful life of the simulators, is consistent with
industry practices and with some of the long-term financing arrangements
completed to date for such assets. The change in the estimated useful life
reduced amortization expense by approximately $3.7 million on a year-to-year
basis. This year CAE also changed the estimated return on assets for its defined
benefit pension plan to 6.5% from 9%. The result of this change increased this
year217;s pension expense by $5.4 million as compared to fiscal 2002. Lastly, CAE
absorbed the cost of proposed and subsequently withdrawn cross border equity and
senior convertible notes offerings totalling $3.6 million.Interest
expense for the year at $30.4 million compared to $22.7 million last year. The
higher interest expense is due primarily to the higher debt throughout the year
resulting from the strategic investments made at various points of time during
fiscal 2002 and from higher capital expenditures this year to expand CAE217;s Civil
flight training centres.RevenueConsolidated revenue for fiscal 2003,
at $1.13 billion, was slightly higher than the amount reported for the prior
year. Revenue for Marine of $167.6 million represented a 40% increase over
fiscal 2002. The growth stems from the strong order book including the long-term
training contract for the UK Astute submarines. Military revenue was down 3%
from last year resulting from delays on various contract awards. Civil revenue
declined by 5%, as significant growth in revenue from training services,
representing close to 50% of Civil217;s revenue, was more than offset by the
decline in the sale of equipment and related services.Discontinued
OperationsFor the year CAE reported a loss from discontinued operations of
$13.8 million compared to a gain of $1.1 million in fiscal 2002. The majority of
the amount relates to post-closing adjustments from the divestiture of the Pulp
and Paper division of the Forestry Systems Group and the sale of CAE Ransohoff
and CAE Ultrasonics, which both occurred in the fourth quarter of fiscal
2002.The balance of the loss is based on the divestitures of the
remaining Cleaning Technologies and Forestry Systems businesses. The biggest
factor is the expected lower proceeds from the sale of the remaining Forestry
assets as the performance of the business has been affected by the weaker market
for its capital equipment. During the year CAE completed the sale of its UK
Cleaning Technologies operations (June 28, 2002) and the sale of the sawmill
business (August 16, 2002) within its Forestry Group. Subsequent to year end,
CAE completed the sale of its remaining Forestry Systems business, CAE
Machinery, of Vancouver, British Columbia and the sale of its German cleaning
operations. The Company is also in exclusive negotiations to sell the remaining
Cleaning Technologies business, Alpheus, in Rancho Cucamonga, California. This
transaction is expected to be completed during the first quarter of fiscal
2004.



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Net EarningsConsolidated net
earnings were $117.2 million or $0.53 per share in fiscal 2003 compared with
consolidated net earnings of $149.5 million or $0.69 per share in fiscal
2002.Cash FlowCAE217;s cash, restricted cash and short-term investments
decreased by a combined $91.6 million to $34.1 million and long-term debt
decreased by $115.1 million to $811.4 million of which $13.4 million is
repayable over the next 12 months. Cash flow from continuing operations amounted
to $142.4 million compared with $173.1 million in the prior year. The decrease
results from lower earnings and an increase in non-cash working capital. CAE
incurred capital expenditures of $238.9 million, mainly to support the expansion
of the Civil training network. CAE217;s installed base of FFS delivering training
grew by 50% in the year from 59 simulators to 89. The other significant
expenditures included $20 million for the construction of the UK Astute Class
Submarine training centre for the Marine business. CAE217;s most cost-effective
means of financing its growth in Civil is through long-term sale and leaseback
financing. In fiscal 2003, CAE raised $127 million through the sale and
leaseback of seven simulators. As at March 31, 2003, 27 of its installed base of
89 simulators are financed through these means. See the Sale and Leaseback
Transactions section of this MD&A for additional
information.BacklogOrder backlog as at March 31, 2003, was $2.3
billion, compared with $2.7 billion as at March 31, 2002. The decline stems from
the change in business mix in Civil to more training and less sales of
equipment. The weak market reduced Civil equipment orders this year and the
majority of its training revenue is from short-term contracts which are not
included in backlog. Long-term military contracts included in backlog include
the Medium Support Helicopter program for the UK government for $638.1 million,
which has 15 years remaining under contract, and for Marine, the UK Astute
training contract valued at $370 million for which CAE is in the second year of
a 30-year program.Review of OperationsCivil Simulation and
TrainingCAE217;s Civil Simulation and Training business segment is a world
leader in the design and production of commercial flight simulators and visual
systems as well as the supply of integrated aviation training solutions. As at
March 31, 2003, CAE has an installed base of 89 FFS (59 FFS as at March 31,
2002) at 20 locations globally, making it the second largest independent
training company in the world in each segment - business aircraft, regional jets
and wide-bodied aircraft. CAE also remains the worldwide leader in competed FFS
sales.Financial Results

|(amounts
      in millions of dollars) |   | 2003  | 2002  | 2001  | 2000  | 1999 
|-------------------------------------- | - | ----- | ----- | ----- | ----- | -----
|Revenue                                | $ | 517.2 | 545.2 | 481.5 | 480.2 | 352.8
|Operating earnings                     | $ | 116.2 | 151.8 | 115.8 | 82.9  | 54.4 
|Operating margins                      | % | 22.5  | 27.8  | 24.0  | 17.3  | 15.4 
|Backlog                                | $ | 418.0 | 641.2 | 649.5 | 527.8 | 482.7
|Capital
      expenditures             | $ | 207.6 | 216.7 | 72.9  | 11.7  | 23.2 



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Revenue for the year reached $517.2
million, 5% below the amount reported last year. Significant growth was achieved
in revenue from training, reflecting the benefits of acquisitions made in fiscal
2002 - Schreiner in August 2001 and SimuFlite in December 2001 - and the 50%
increase throughout the year of the installed base of FFS. The growth in
training however, was more than offset by the decline in equipment and support
services activities. CAE received 11 of 17 competed FFS orders in fiscal 2003
compared to 22 of 26 competed FFS orders in fiscal 2002. The lower sales reflect
the current state of the commercial aviation equipment market, which has been
affected dramatically by world events beginning with the terrorist attacks in
September 2001, followed by the more recent events of the war in Iraq and the
SARS epidemic. For fiscal 2003, approximately one-half of Civil217;s revenue was
from training compared to one-quarter in the prior year.Operating
earnings for the year amounted to $116.2 million, 22.5% of revenue, compared
with $151.8 million, 27.8% of revenue for fiscal 2002. The lower results and
operating margins result from the weaker demand for FFS sales, the accounting
effect of sale and leaseback financing whereby the annual lease payments include
an element of interest, and the lower overall utilization rate for the installed
base of simulators for training due to the significant number of new simulators
added during the year.Backlog was $418.0 million as at March 31, 2003.
The lower backlog level, compared to prior periods, reflects the fact that much
of the training activities are not covered by long-term contracts, and thus have
no associated backlog amount.Capital expenditures of $207.6 million were
down slightly from last year. The majority of the expenditures were in
connection with the expansion of Civil217;s global training
network.Operational HighlightsDuring the first half of the fiscal
year, CAE217;s strategy to expand and grow through pilot training gained
significant momentum as the installed base of FFS climbed by 50% to 89 compared
with 59. New centres opening in fiscal 2003 included: Denver, with Frontier
Airlines and Air Wisconsin as anchor tenants with long-term contracts; Phoenix,
with Mesa Airlines as an anchor tenant signing a 10-year training contract;
Dubai, where CAE and United Emirates have teamed to offer training in the Middle
East; and Zhuhai, China, in a joint venture with China Southern Airlines. CAE
also added simulators at two centres in Dallas, as well as in Toronto, Rome and
Spain. Most notably at CAE SimuFlite in Dallas, which is dedicated to the
business aircraft market and is the world217;s largest independent training centre,
the installed base was increased to 26 FFS, which will soon grow to 28 (from 22
in fiscal 2002) increasing its addressable market from 55% to over
80%.CAE216;s growth in training is supported by investments in the next
generation technology for FFS: CAE SIM XXI͐2;, a new modular design to produce a
high quality simulator at a lower cost; CAE Tropos͐2;, a new scalable PC-based
image generator to improve the realism of the visual system at a lower cost; and
CAE Simfinity͐2; products, high-fidelity simulation-based software allowing for
advanced training on procedure trainers in groundschool and over the Web. This
was supported by a recent contract award from Airbus to acquire 20 CAE
Simfinity͐2; Maintenance Flight Training Devices which will be integrated in the
Airbus aviation training centres. This award came shortly after CAE received its
first CAE Simfinity͐2; Level 4 FAA certification on a Flight Training Device for a
CRJ200 for Atlantic Coast Airlines. Air Canada Jazz is also adopting CAE
Simfinity͐2;in their pilot training curriculum.



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CAE217;s strategy to grow its training
businesses is further supported by a ten-year cooperation agreement with Airbus.
Under the agreement, CAE will provide equipment, facilities and advanced
training technologies while Airbus will provide its courseware and training
expertise. The result will be a worldwide global network of training centres
combining the North American Miami Airbus facilities with those of CAE. This
will allow Airbus customers and operators to benefit from top-quality training
at more convenient locations offering a whole range of integrated training
solutions.In addition to the launch of the new training centres with key
anchor tenants, CAE was successful in obtaining significant long-term training
contracts from Jet Blue Airways, the US Air Force Air Education and Training
Centre, South African Express and Spannair.Of the 11 FFS ordered this
year, first time customers included South African Airways for an A320, two A320s
for China Eastern, an A320 to Air France as well as the first ever Embraer 170
FFS for GE Capital Aviation Training. CAE also captured 9 of 17 competed visual
systems. Of the visual systems awarded, seven will feature CAE217;s new image
generator, CAE Tropos͐2;.OutlookCAE expects significant growth in its
Civil training business, having increased its installed base by 50% during
fiscal 2003 from 59 FFS to 89 FFS. Revenue from training in fiscal 2003
represented approximately 50% of Civil217;s total revenue. Today CAE is the only
integrated provider of the complete training solution including the most
sophisticated FFS, lower level training devices, courseware and curriculum, and
Web-based training solutions.CAE expects to maintain its commanding
leadership position for competed sales of civil simulation and visual systems
due to its focus on customer relationships, its commitment to innovation and
technology, product quality, reliability and efficiency, and its continuing
efforts to shorten delivery cycles through process improvements. CAE expects to
increase its advantage in lead-time, cost, quality and reputation for
performance through operational improvements and research and development
(R&D) programs.The biggest challenge facing CAE is the market
uncertainty. The events of September 11, 2001, the war in Iraq and now SARS have
had an extremely negative impact on commercial airlines, on aircraft
manufacturers and, by extension, on CAE, which to some degree is dependent on
the health and success of those industries. The sale of equipment has been
impacted the most as customers delay delivery of new aircraft and thus
simulators. Equipment orders in 2003 were one-half of what they were in fiscal
2002 which was already well below the prior year. We expect the total equipment
sales in fiscal 2004 to be similar to fiscal 2003.



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Military Simulation and
TrainingCAE217;s Military business segment is a premier designer and
manufacturer of military flight and land-based simulation and training systems.
Simulation equipment and training is developed for a variety of military
aircraft, including helicopters, transport planes and fighter jets. CAE has an
extensive product range covering many American and European weapon systems.
Having made sales to over 30 countries globally, CAE has established an
extensive customer base as well.Financial Results

|(amounts
      in millions of dollars) |   | 2003    | 2002    | 2001  | 2000    | 1999   
|-------------------------------------- | - | ------- | ------- | ----- | ------- | -------
|Revenue                                | $ | 445.7   | 461.8   | 329.3 | 309.6   | 291.9  
|Operating earnings                     | $ | 73.6    | 65.6    | 18.8  | 2.2     | 13.3   
|Operating margins                      | % | 16.5    | 14.2    | 5.7   | 0.7     | 4.6    
|Backlog                                | $ | 1,235.3 | 1,378.3 | 971.9 | 1,048.4 | 1,164.6
|Capital
      expenditures             | $ | 12.1    | 14.1    | 1.8   | 9.6     | 34.8   

Revenue of $445.7 million for the year
was 3% below last year. The decline resulted from delays in the awarding of
several programs in which CAE anticipated participating. Despite the decline in
revenue, operating earnings rose 12% to $73.6 million. These exceptional results
stemmed from better program execution particularly towards the later stages of
contract completion. An improved discipline on bid to delivery introduced two
years ago and further integration of the Tampa operations acquired at the
beginning of fiscal 2002 also contributed to improved margins. CAE reduced the
costs to complete certain programs from the initial estimates made at the time
of the Tampa acquisition by approximately $12.0 million, which favourably
impacted margins this year.Backlog, at $1.2 billion, is lower than last
year due to program award delays, and reflects new orders this year of $284.6
million. Close to half of the backlog is comprised of long-term contracts to
provide training for the UK Ministry of Defence (MoD) under the Medium Support
Helicopter program and for the design and manufacture of visual systems for the
Eurofighter 2000.Operational HighlightsProgram execution was
stellar, leading to the highest operating margins ever recorded for Military.
However, the pace of new orders was impacted by geopolitical events leading to
several delays on major programs in which CAE anticipates participating. Earlier
in the year, the Company and Boeing teamed to bid jointly on the Flight School
XXI program. This program for the US Army is to develop, maintain, operate,
upgrade and support virtual flight simulation training at the Army Aviation
Training Center in Fort Rucker, Alabama. Flight School XXI is expected to
support the Army217;s transformation efforts with an objective to increase aviator
experience in their war fighting aircraft prior to their first combat
assignment. The decision on the program has been delayed, however, a request for
proposal was issued in June 2003 and selection of the successful bidder is
expected in the fall of 2003.



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During the year, the Company was
selected on a number of programs including a contract to design and manufacture
two Super Lynx 300 helicopter mission simulators for the Royal Air Force of
Oman, and a contract to build a CP-140 Aurora flight deck simulator and to
perform an upgrade on a CP-140 cockpit procedures trainer for the Canadian
Forces. Military sustained its leading position in the design and manufacture of
simulation equipment for the C-130 Hercules. This was endorsed by receiving
contracts valued at more than $30 million, under a long-term agreement with
Lockheed Martin, to provide additional C-130J training devices and to provide
training support for the US Air Force.CAE has also continued to expand
its training services with contracts in Germany to maintain and support a number
of simulators on NATO bases and in the US at various Air Force
bases.OutlookThe military simulation and training market is driven
by the introduction of new aircraft platforms, upgrades and life extensions to
existing aircraft and a shift to greater use of simulation in pilot training
programs due to the high degree of realism and the significantly lower cost
compared to live training. CAE expects to increase its advantage in lead-time,
cost, quality and reputation for performance through continued operational
improvements and R&D programs.Growth will be dependent on the
Company217;s success in bidding on major programs ­ Flight School XXI
(multi-year program potentially valued in excess of $885 million), the Canadian
CF-18 Advanced Distributed Combat Training System ($200 million), UK Armoured
Vehicles Training Services (AVTS) program ($1.5 billion over 30 years) and
involvement with the NH90 helicopter program in Europe.In addition to
these major programs, Military will continue to expand its training services
business, as evidenced by its signature of a $70 million, 10-year agreement to
provide flight training support services for all three armed services of the
Australian Defence Force and to capitalize on the increase in defence and
security spending, particularly in the US.Marine ControlsCAE217;s
Marine Controls business segment is a world leader in the supply of automation
and controls systems for the naval and commercial market having been selected
for the provision of controls for more than 130 warships in 18 navies. The
system monitors and controls the propulsion, electrical steering, ancillary,
auxiliary and damage control machinery and systems. The business has moved
beyond the supply of marine controls into the provision of naval training
services through participation in the 30-year UK Royal Navy Astute Class
Submarine Training Service program awarded in fiscal 2002. The business also
designs and manufactures power plant training simulators.Financial
Results

|(amounts
      in millions of dollars) |   | 2003  | 2002  | 2001  | 2000  | 1999
|-------------------------------------- | - | ----- | ----- | ----- | ----- | ----
|Revenue                                | $ | 167.6 | 119.5 | 80.6  | 75.3  | 63.8
|Operating earnings                     | $ | 31.8  | 23.6  | 15.0  | 13.6  | 10.1
|Operating margins                      | % | 19.0  | 19.7  | 18.6  | 18.1  | 15.8
|Backlog                                | $ | 628.5 | 676.4 | 131.4 | 170.9 | 78.0
|Capital
      expenditures             | $ | 19.8  | 18.8  | 1.6   | 0.5   | 10.9



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Fiscal 2003 was another year of
significant growth with revenue reaching $167.6 million, a 40% improvement over
last year. The growth resulted from the award of several significant naval
contracts including both the control system and training program for the UK
Astute Submarine and a solid contribution from the commercial business.
Commensurate with the revenue growth, operating earnings climbed 35% to $31.8
million. Both the revenue and operating earnings of the Marine business have
more than doubled in the last three years. Operating margins are down slightly
due to the mix of contracts but additional productivity gains continue to be
realized as the Company has expanded its operation in India to support its
software development.Backlog was $628.5 million as at March 31, 2003, as
compared with $676.4 million at the end of fiscal 2002. Approximately 50% of the
backlog is represented by the long-term training service contract for the Astute
Submarine program.Operational HighlightsOne of the keys to the
success of the business is the participation on multi-year ship programs,
including additional ship orders resulting from the exercise of options, to
increase production rates. Examples this year included CAE216;s selection to
provide control systems for an additional four new MEKO 100 patrol vessels for
the Royal Malaysian Navy (contract value was $37 million which followed an
initial contract for the first two ships of $21 million) and the selection
earlier this year to provide a control system for a fourth KDX-II class
destroyer for the South Korean Navy. Another benefit to being associated with a
shipbuilding program is the opportunity to participate in upgrades. CAE was
selected this year to provide display replacements and perform an obsolescence
study to determine upgrade requirements under the Canadian Navy Life Extension
program for the Canadian Patrol Frigates. CAE provided the control system for
these Frigates almost 15 years ago.The Marine business has also
established long-term relationships with its customers, as well as shipbuilders.
This led to a recent contract award to provide Integrated Monitoring and Control
Systems for the German Navy217;s new K130 Corvette program. This program award was
shortly after the successful implementation of one of the world217;s most advanced
automation systems on the German Navy217;s F-124 Frigates. The contract value at
$23 million is for the first batch of five Corvettes in a planned total of 15
ships.CAE also maintained its leading position in the supply of control
systems for cruiseships, having been selected on all three new ship builds
announced in the last 18 months. Since CAE217;s entry into the commercial marine
market in August 2001 with the acquisition of Valmarine, the business has been
successful in strengthening its product offering through sharing of innovative
technology. In addition, cross selling in the global markets has created new
opportunities in the Naval markets leading to significant contracts with the
Finnish, French and Hellenic navies. CAE217;s power simulation group, representing
about 10% of the Marine Controls business in fiscal 2003, has focused its
efforts as well on the upgrade market. In recent months upgrade contracts were
received from Southern California Edison and Romania. In addition, the business
sold its first ever desktop trainer to Florida Power & Light.



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OutlookWith its significant
installed base, the long-term training contract for the UK Astute Submarine and
the possibilities of further options to build additional ships on several of its
programs, the Marine business is well positioned to continue its growth in both
the Naval and Commercial markets. CAE is still waiting the final outcome with
respect to the building of two 50,000-ton aircraft carriers for the UK Navy. CAE
is partnered with the team led by Thales CVF. In January 2003 it was announced
that the two competing teams (BAE Systems leads the other team) had formed an
alliance for the delivery of the two ships using the Thales design. The impact
of this decision on CAE is not yet clear.Liquidity and Capital
ResourcesThe Company217;s financing needs are met through internally generated
cash flow, available funds under credit facilities and direct access to capital
markets for additional long-term capital resources. The Company considers that
its present and expected capital resources and current credit facilities will
enable it to meet all its current and expected financial requirements for the
foreseeable future.CAE maintains committed bank lines at floating rates,
each provided by a syndicate of lenders. These credit facilities permit CAE and
certain designated subsidiaries to borrow funds directly for operating and
general corporate purposes. The total available amount is $872.8 million of
which 52% ($451.9 million) was utilized at the end of the year. This amount
includes $51.4 million owing under a revolving credit facility maturing in June
2003. The Company is in full compliance with all bank covenants at the end of
the year and has the ability to draw under non-committed operating lines in
various currencies for up to $89.0 million, of which $41.3 million was drawn as
at March 31, 2003.As at March 31, 2003, CAE had long-term debt totalling
$811.4 million. This compares to long-term debt of $926.5 million in the prior
year. At March 31, 2003, the short-term portion of the long-term debt was $13.4
million compared to $37.5 million last year. CAE accounts for its credit
facility maturing in June 2003 as long-term debt, together with the other
maturing credit facilities in fiscal 2007, as it has sufficient availability
under these facilities to retire the outstanding borrowings maturing in June
2003.CAE employs foreign exchange forward contracts to manage exposures
created when sales are made in foreign currencies. The amount and timing of
forward contracts varies based on a number of project related factors, including
milestone billings and the use of foreign materials and/or subcontractors. As at
March 31, 2003, CAE had $102.9 million Canadian equivalent in forward contracts.
The total unrealized gain as of March 31, 2003, is $3.0 million. These would be
equally offset by future losses of foreign denominated cash flows over the
balance of the contracts.



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CAE also uses financial instruments to
manage its exposure to changing interest rates and to adjust its mix of fixed
and floating interest rate debt. In order to benefit from a favourable interest
rate environment the mix of fixed rate versus floating rate debt was 38%-62%
respectively as at March 31, 2003. CAE had interest rate swaps converting mostly
floating rate long-term debt into fixed rate term debt totalling $123.6 million,
which if marked to market at that date would result in a loss of $10.3 million.
CAE deals only with sound counterparties in executing any of its derivative
financial instruments.In the normal course of business, CAE issued
letters of credit and performance guarantees for a total amount of $195.1
million compared to $188.1 million at the end of fiscal year 2002.As at
March 31, 2003, CAE had approximately US$133.9 million of accumulated
non-capital tax losses carried forward that can be used to offset tax payable on
future earnings from US operations. CAE also has accumulated non-capital tax
losses carried forward relating to its operations in other countries of
approximately $74.0 million.Sale and Leaseback TransactionsA key
element of CAE217;s finance strategy to support the investment in its Civil
training business is the sale and leaseback of certain of the FFS installed in
the Company217;s global network of training centres. This provides CAE with a
cost-effective long-term source of fixed-cost financing. A sale and leaseback
transaction can only be executed after the FFS has achieved certification by
regulatory authorities (i.e. the FFS is installed and is available to customers
for training). Prior to completing a sale and leaseback transaction, CAE records
the cost to manufacture the FFS as a capital expenditure which is included as a
fixed asset on the Company217;s balance sheet. On the execution of a sale and
leaseback transaction CAE records the transaction as a disposal of a fixed
asset. The cash proceeds received on the disposal approximate the fair market
value of the FFS. The difference between the proceeds received and CAE217;s cost to
manufacture, approximately the margin CAE would record if it had a competed FFS
sale to a third party, is recorded under long-term liabilities and recognized
into earnings as applicable. This amount, after deducting the guaranteed
residual value where appropriate, is then amortized over the term of the sale
and leaseback transaction as a reduction of rental expense. At the end of the
term of the sale and leaseback transaction the guaranteed residual value will be
taken into income should no reduction occur in the value of the underlying
simulator.The following is a summary of the existing sale and leaseback
transactions for simulators currently in service in Civil217;s training locations,
accounted for as operating leases on the Company217;s financial statements,
completed as at March 31, 2003:



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|                                                                                       
|---------------------------------------------------------------------------------------
|                                                                                       
|SimuFlite                                                                              
|Toronto Training
      Centre                                                          
|Air Canada                                                                             
|Training
    Centre                                                                    
|Denver/Dallas                                                                          
|Training
    Centres                                                                   
|Amsterdam                                                                              
|Training
    Centre                                                                    
|China Southern
    JV1                                                                 
|Others                                                                                 
|27                                                                                     
|Annual Sale and Leaseback
      Lease                                                  
|Payments (FY04)                                                                        
|1 Joint venture in which CAE has a
      49% participation level.2 Floating Rate Basis.
|                                                                                       

Future minimum lease payments for such
arrangements, amounting to approximately $461.1 million as at March 31, 2003,
are included in note 19 221;Operating Lease Commitments221; to the consolidated
financial statements.Non-recourse Project FinancingDuring 1997, the
Company arranged project financing for the Medium Support Helicopter (MSH)
program it entered into with to the UK Ministry of Defence. The contract was
awarded to a consortium, CAE Aircrew Training Plc (Aircrew). The capital value
of the assets required to be supplied by Aircrew is in excess of $200 million.
The entity that owns the assets operated by the training centre is CVS Leasing
Ltd. (in which CAE has a 14% interest). CAE manufactured and sold the simulators
to CVS Leasing Ltd., and CVS Leasing Ltd. then leased this equipment to Aircrew
for the full term of the MSH contract. As Aircrew is majority-controlled by CAE,
its financial statements are consolidated in the Company217;s results. Future
minimum lease payments associated with the simulators leased to Aircrew amount
to approximately $250 million as at March 31, 2003, and are included in the
amount disclosed in note 19 220;Operating Lease Commitments221; to the consolidated
financial statements.Under the new accounting pronouncements regarding
variable interest entities in the US and Canada there is no change to the
accounting for this project financing.



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Critical Accounting PoliciesThe
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of the
contingent assets and liabilities at the date of the financial statements and
revenue and expenses for the period reported. Estimates are based upon
historical experience and various other assumptions that are believed to be
reasonable under the circumstances. These estimates are evaluated periodically
and form the basis for making judgements regarding the carrying values of assets
and liabilities and the reported amount of revenue and expenses. Actual results
may differ from these estimates under different assumptions.CAE217;s
critical accounting policies are those that it believes are the most important
in determining its financial condition and results, and require significant
subjective judgement by management. A summary of the Company217;s significant
accounting policies, including the critical accounting policies discussed below,
is set out in the notes to the consolidated financial statements.Revenue
RecognitionCAE generates a significant portion of its revenue from long-term
contracts in all of its three business segments. With the focus of the business
on training, the number and amount of long-term contracts is down considerably
from the prior year. The payment terms under CAE217;s Civil equipment FFS contracts
are spread over the build cycle of 14 to 16 months. The cost of a FFS is very
predictable particularly for repeat or common simulator types such as an A320 or
B737. No revenue is recorded for FFSs built for CAE217;s own training centres. The
cost is reflected as a capital expenditure. Revenue derived from training is
recorded when the training event occurs. For Military, full flight
mission simulators are more complex and the time to design and manufacture is at
least two years. There are fewer repeat orders and the level of non-recurring
cost in each simulator could be significant, making the predictability of total
costs more difficult when compared to a Civil FFS.Marine contracts are
also longer term in nature, usually multi-year, as the majority of the contracts
are for real-time control systems requiring installation during the shipbuilding
period. Most naval contracts involve supply of control systems for multiple
ships of the same design with non-recurring effort for software engineering for
first of class ship. The repeat ships are largely hardware with little
software.Revenue from long-term contracts is recognized using the
percentage-ofcompletion method, where revenue, earnings and unbilled accounts
receivable are recorded as related costs are incurred, on the basis of
percentage costs incurred to date on a contract, relative to the estimated total
costs. Significant judgement is involved in estimating the total costs to
complete a project. 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 billing based on
completion of certain phases of work. Warranty provisions are recorded at the
time revenue is recognized, based on past experience.



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Credit risk also exists but is
considered minimal because CAE217;s customers are primarily established companies
with publicly available credit ratings, or government agencies. Before accepting
an order, CAE makes a credit evaluation in order to properly assess the credit
risk. When CAE identifies a collection risk, a provision for doubtful accounts
is recorded.Valuation of Intangible Assets and GoodwillCAE accounts
for its business combinations under the purchase method of accounting. The total
cost of an acquisition is allocated to the underlying net assets based on their
respective estimated fair values. Part of this allocation process requires that
CAE identify and attribute values and estimated lives to the intangible assets
acquired. CAE may engage experts to assist it in these matters, however, these
determinations involve considerable judgement. They often involve the use of
significant estimates and assumptions, including those with respect to future
cash flows, discount rates and asset lives. These determinations will affect the
amount of amortization expense to be recognized in future
periods.Effective April 1, 2002, CAE adopted the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3062, Goodwill and Other
Intangible Assets. This section requires that goodwill and intangible assets
with indefinite useful lives not be amortized. Other intangible assets are
amortized over their estimated useful lives. Their fair value is to be assessed
annually and, if necessary, written down 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.Deferred Development CostsWhere CAE intends to produce or
market a product under development that is clearly defined, has identifiable
costs, is technically feasible, and has a clearly defined market or use, and CAE
expects to have the financial resources to complete the project, the costs
associated with the project are deferred to the extent their recovery through
future sales or use of the product is reasonably assured. This requires CAE to
make judgements about the likelihood of recovery of the costs. If CAE determines
that recovery of the costs through future sales or use is no longer likely, any
deferred costs not likely to be recovered are charged against earnings in the
period. Once the project is complete, CAE amortizes the deferred costs by
reference to 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 managementto 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.



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New Accounting StandardsDuring the
period covered by its financial statements, CAE implemented certain changes to
its accounting policies in order to conform to CICA accounting
standards.Business Combinations, Goodwill and Other Intangible
AssetsOn April 1, 2001, the Company adopted the new recommendations of the
CICA Section 1581, Business Combinations and Section 3062, Goodwill and Other
Intangible Assets. Accordingly, all business acquisitions performed during the
fiscal year were accounted for using the purchase method. In addition, CAE
ceased amortizing goodwill from April 1, 2001, as it adopted the goodwill
impairment model introduced by the new accounting rules. Goodwill amortization
amounted to $5.1 million for the year ended March 31, 2001. In addition, no
write-down of goodwill arose from the application of the impairment model upon
adoption of these new recommendations.Foreign Currency
TranslationEffective April 1, 2002, the Company adopted retroactively the
new recommendations of the CICA Section 1650, Foreign Currency Translation.
Under the provisions of Section 1650 the Company no longer amortizes the
exchange gains or losses arising on the translation of long-term foreign
currency debt. Exchange gains or losses arising on translation are included in
earnings as incurred. At March 31, 2002, the unamortized exchange loss relating
to the existing long-term foreign currency denominated items amounted to $6.4
million net of income taxes of $2.8 million. Consequently, prior years217;
financial statements have been restated through a charge to fiscal 2002 opening
retained earnings of $5.3 million, net of taxes of $2.3 million (2001 - $3.3
million, net of taxes of $1.3 million).Stock-Based
CompensationEffective 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 method of valuing
stock options be used for transactions with employees. The Company has not
changed the method previously used to account for stock options granted to
employees, but is providing the required pro forma disclosures on the impact of
the fair value method, which produces estimated compensation charges. For the
fiscal year beginning on April 1, 2003, the Company will commence expensing its
stock-based compensation using the fair value method.Disclosure of
GuaranteesAs at March 31, 2003, the Company has adopted the CICA Accounting
Guideline, Disclosure of Guarantees, which requires that each guarantor disclose
information about each guarantee even when the likelihood of the guarantor
having to make payment under the guarantee is slight.Business Risks and
UncertaintiesCAE operates in different industry segments that involve
various risk factors and uncertainties, which are carefully considered in the
Company217;s management policies.CAE217;s success in civil aviation, military
and marine markets depends fundamentally on the reliability of its products, the
quality of its services and its ability to adapt, in a timely manner, to
changing customer needs and industry standards. The Company operates in
different industry segments and global markets that involve various risk factors
and uncertainties, including worldwide economic and political trends and
developments.



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CAE operates in the civil simulation
equipment and training services markets, both of which are heavily dependent on
demand for air transportation and the financial condition of commercial
airlines. The recent trend of major airline bankruptcies in Europe, the US,
Canada and other CAE markets poses risks to CAE as an customers. Demand for
simulation equipment tends to follow the trend established in the commercial
airline industry, particularly the delivery of new aircraft. The utilization of
CAE217;s installed base of simulators in its training network depends on the extent
to which simulated aircraft types match the configuration of in-use
aircraft.CAE must comply with rules imposed by regulatory authorities
that may change without notice, resulting in potential disruptions to sales and
operations. The sale or license of virtually all of CAE217;s products is subject to
various regulatory controls that change with some frequency.CAE217;s
Military and Marine businesses depend heavily on government programs and
contracts that ultimately reflect the level of government expenditures directed
towards national defence budgets (particularly capital equipment programs), the
priority of various programs within defence budgets and in certain instances,
the maintenance of government programs supporting research and development.
Programs may be only partially funded pending future appropriations and may
contain provisions permitting termination at the government217;s convenience, in
whole or in part, without prior notice, upon payment of limited compensation.
Government-funded military programs are also heavily regulated, with certain
government purchasing regulations limiting the range of reimbursable costs in
fixed-price contracts, including most financing costs and the amortization of
various intangible assets.CAE operates in intensely competitive markets.
Some of its competitors, particularly in military markets, possess substantially
greater resources, well-established relationships with various procuring
organizations and a greater in-country presence that may give them an advantage
in winning contracts.CAE217;s often lengthy and unpredictable sales cycle
could result in volatility in our operating results. The Company must invest
significant amounts of time and resources educating and informing potential
customers about the benefits of products and services (particularly government
agencies with lengthy internal budgeting approval and competitive evaluation
processes), with no guarantee of compensatory revenue.CAE217;s business
could be harmed if its products do not successfully integrate or operate with
other sophisticated and continually evolving software, computing and
communications systems. If CAE experiences difficulties or does not meet project
milestones in a timely manner, the Company could be obligated to devote more
engineering and other resources to a particular project than originally
anticipated. While CAE believes it has recorded adequate provisions for losses
on fixed-price contracts, obligations under fixed-price and long-term supply
contracts could subject the Company to contract losses in excess of
provisions.



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CAE217;s ability to complete contracted
sales included in its order backlog is dependent on the long-term financial
condition of the contracting customers. In addition, approximately 70% of the
backlog is comprised of long-term military contracts that may be terminated
unilaterally by the contracting government agency.CAE217;s ability to
protect its intellectual property is limited; and unauthorized parties may be
able to use CAE217;s technology or products in ways that weaken CAE217;s competitive
position. Reliance on the intellectual property of others, including data
concerning the functions, design and performance characteristics of a product or
system in the process of being simulated, could prevent or delay performance.
Future litigation related to the defence of CAE217;s intellectual property rights
or involving infringement claims brought against CAE or a customer could be
lengthy and costly, with no assurance of success.CAE is subject to the
risks of doing business in foreign countries, including: changes to laws and
regulations in host countries; the cost and complexity of using foreign
representatives and consultants; the imposition of tariffs, embargoes, controls
and other restrictions impeding the free flow of goods, information and capital;
the difficulties of managing and operating an enterprise and complying with laws
in multiple jurisdictions; and general changes in economic and geopolitical
conditions. Fluctuations in the value of the Canadian dollar relative to foreign
currencies could result in currency exchange gains and losses. Current hedging
activities may not be successful.Covenants in CAE217;s debt agreements as
well as the level of debt could restrict CAE217;s ability to finance its future
operations or capital needs or to engage in other business activities that may
be of interest. In addition, an inability to meet financial covenants regarding
compliance with specified ratios and tests could cause the repayment of debt to
be accelerated.CAE may be subject to significant liabilities imposed by
new environmental laws and regulations or contractual indemnities; product
liability and warranty claims; or liabilities arising out of accidents or
disasters involving aircraft, marine vessels or power plants for which CAE has
provided training products or services or control systems. CAE cannot be certain
that existing insurance coverage will be sufficient to cover one or more
substantial claims.Some of CAE217;s 13 collective bargaining agreements are
subject to renewal in fiscal 2004. Unsuccessful negotiations could result in
work stoppages and other labour disturbances that could have a material adverse
effect on the business.CAE217;s continued success will depend in part on
the ability to retain and attract key personnel with the relevant skills,
expertise and experience. The Company applies a compensation policy designed to
mitigate this risk.



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