|71  | Managements Statement of Responsibility                                                       
|--- | -----------------------------------------------------------------------------------------------
|   
|71  | Auditors Report                                                                               
|   
|72  | Consolidated Balance Sheets                                                                    
|   
|73  | Consolidated Statements of Earnings                                                            
|   
|73  | Consolidated Statementsof Retained Earnings                                                    
|   
|74  | ConsolidatedStatementsof Cash Flow                                                             
|   
|75  | Notes to the Consolidated Financial Statements                                                 
|   
|75  | Note 1  Nature of Operations and Significant Accounting Policies                              
|   
|81  | Note 2  Business Acquisitions and Combinations                                                
|   
|83  | Note 3  Discontinued Operations and Assets Held for Sale                                      
|   
|85  | Note 4  Impairment of Goodwill, Tangible and Intangible Assets                                
|   
|85  | Note 5  Accounts Receivable                                                                   
|   
|85  | Note 6  Inventories                                                                           
|   
|85  | Note7 Property, Plant and Equipment                                                           
|   
|86  | Note8 Intangible Assets                                                                       
|   
|86  | Note9 Goodwill                                                                                
|   
|87  | Note 10  Other Assets                                                                         
|   
|88  | Note 11  Debt Facilities                                                                      
|   
|90  | Note 12  Capital Stock                                                                        
|   
|91  | Note 13  Stock-Based Compensation Plans                                                       
|   
|93  | Note 14  Financial Instruments                                                                
|   
|96  | Note 15  Income Taxes                                                                         
|   
|97  | Note 16  Deferred Gainsand Other Long-Term Liabilities                                        
|   
|97  | Note 17 Supplementary Cash Flow Information                                                   
|   
|98  | Note 18  Contingencies                                                                        
|   
|98  | Note 19  Government Cost-Sharing                                                              
|   
|98  | Note 20  Commitments                                                                          
|   
|99  | Note 21  Employee Future Benefits                                                             
|   
|102 | Note 22  Cumulative TranslationAdjustment                                                     
|   
|102 | Note 23  Investment Tax Credits                                                               
|   
|103 | Note 24  Restructuring Costs                                                                  
|   
|104 | Note 25  Variable Interest Entities                                                           
|   
|105 | Note 26  Operating Segmentsand Geographic Information                                         
|   
|107 | Note 27  Differences BetweenCanadian and United States GenerallyAccepted Accounting Principles
|   
|114 | Note 28  Comparative Financial Statements                                                     
|   

---

MANAGEMENTS STATEMENT OF
RESPONSIBILITY

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

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

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

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

|R. E.
      Brown                                 | A.
      Raquepas            
|------------------------------------------------- | -----------------------------
|President and
      Chief Executive
      Officer | Vice
      President         
|                                                  | Chief Financial
      Officer
|Montreal,
      Canada                            |                              
|May 17,
      2006                                |                              

AUDITORS REPORT

To the Shareholders of CAE
Inc.

We have
audited the consolidated balance sheets of CAE Inc. as at March 31, 2006 and
2005, and the Consolidated Statements of Earnings, Retained Earnings and Cash
Flows for each of the years in the three-year period ended March 31, 2006. 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, 2006 and 2005,
and the results of its operations and cash flows for each of the years in the
three-year period ended March 31, 2006 in accordance with Canadian generally
accepted accounting principles.

Chartered AccountantsMontreal, CanadaMay 16, 2006

Comments by Auditors for U.S.
Readers on Canada-U.S. Reporting Difference

In the United States, reporting
standards for auditors require the addition of an explanatory paragraph
(following the opinion paragraph) when there is a change in accounting
principles that has a material effect on the comparability of the companys
financial statements, such as the changes described in note 1 to the
consolidated financial statements. Our report to the shareholders dated May 16,
2006 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 16, 2006

CAE ANNUAL REPORT 2006 _71

---

|CONSOLIDATED BALANCE
      SHEETS                                    |   |         |   |   |         |  
|-------------------------------------------------------------------- | - | ------- | - | - | ------- | -
|As at March 31 (amounts in millions of Canadian
      dollars)       |   | 2006    |   |   | 2005    |  
|                                                                    
|Assets                                                               |   |         |   |   |         |  
|Current assets                                                       |   |         |   |   |         |  
|Cash
      and cash equivalents                                      | $ | 81.1    |   | $ | 57.1    |  
|Accounts receivable (Note 5)                                         |   | 260.3   |   |   | 255.7   |  
|Inventories (Note 6)                                                 |   | 93.2    |   |   | 101.0   |  
|Prepaid expenses                                                     |   | 25.2    |   |   | 17.8    |  
|Income taxes recoverable                                             |   | 75.7    |   |   | 58.5    |  
|Future income taxes (Note 15)                                        |   | 5.7     |   |   | 2.5     |  
|Current assets held for sale (Note 3)                                |   |        |   |   | 5.8     |  
|                                                                    
|                                                                     |   | 541.2   |   |   | 498.4   |  
|Property, plant
      and equipment, net (Note 7)                    |   | 839.3   |   |   | 792.2   |  
|Future income
      taxes (Note 15)                                  |   | 78.2    |   |   | 101.0   |  
|Intangible
      assets (Note 8)                                     |   | 23.3    |   |   | 20.2    |  
|Goodwill (Note
      9)                                              |   | 92.0    |   |   | 92.1    |  
|Other assets
      (Note 10)                                         |   | 136.2   |   |   | 138.3   |  
|Long-term assets
      held for sale (Note 3)                        |   | 5.9     |   |   | 57.5    |  
|                                                                    
|                                                                     | $ | 1,716.1 |   | $ | 1,699.7 |  
|                                                                    
|Liabilities and Shareholders' Equity                                 |   |         |   |   |         |  
|Current liabilities                                                  |   |         |   |   |         |  
|Accounts payable and accrued liabilities                             | $ | 373.7   |   | $ | 312.8   |  
|Deposits on contracts                                                |   | 146.4   |   |   | 93.5    |  
|Current portion of long-term debt (Note 11)                          |   | 10.4    |   |   | 35.3    |  
|Future income taxes (Note 15)                                        |   | 14.5    |   |   | 19.6    |  
|Current liabilities related to assets held for sale (Note
      3)   |   |        |   |   | 7.8     |  
|                                                                    
|                                                                     |   | 545.0   |   |   | 469.0   |  
|Long-term debt
      (Note 11)                                       |   | 260.9   |   |   | 307.6   |  
|Deferred gains
      and other long-term liabilities (Note 16)       |   | 206.5   |   |   | 179.8   |  
|Future income
      taxes (Note 15)                                  |   | 28.4    |   |   | 38.3    |  
|Long-term
      liabilities related to assets held for sale (Note 3) |   |        |   |   | 53.4    |  
|                                                                    
|                                                                     |   | 1,040.8 |   |   | 1,048.1 |  
|                                                                    
|Shareholders' Equity                                                 |   |         |   |   |         |  
|Capital stock
      (Note 12)                                        |   | 389.0   |   |   | 373.8   |  
|Contributed
      surplus (Note 12)                                  |   | 5.8     |   |   | 3.3     |  
|Retained
      earnings                                              |   | 395.7   |   |   | 340.8   |  
|Cumulative
      translation adjustment (Note 22)                    |   | (115.2  | ) |   | (66.3   | )
|                                                                    
|                                                                     |   | 675.3   |   |   | 651.6   |  
|                                                                    
|                                                                     | $ | 1,716.1 |   | $ | 1,699.7 |  
|                                                                    

Contingencies and commitments (Notes
18 and 20)

The accompanying notes form an
integral part of these Consolidated Financial Statements.

Approved by the Board:

|R. E.
      Brown | L. R.
      Wilson
|----------------- | ------------------
|Director          | Director          

72_ CAE ANNUAL REPORT 2006

---

|CONSOLIDATED STATEMENTS
      OF EARNINGS                                                            |   |         |   |   |        |   |   |       |  
|---------------------------------------------------------------------------------------------------- | - | ------- | - | - | ------ | - | - | ----- | -
|Years ended March 31                                                                                 |   |         |   |   |        |   |   |       |  
|(amounts in millions of Canadian dollars, except per share
      amounts)                            |   | 2006    |   |   | 2005   |   |   | 2004  |  
|                                                                                                    
|Revenue                                                                                              | $ | 1,107.2 |   | $ | 986.2  |   | $ | 938.4 |  
|                                                                                                    
|Earnings (loss)
      before interest and income taxes (Note 26)                                     | $ | 106.2   |   | $ | (373.0 | ) | $ | 81.3  |  
|Interest
      expense, net (Note 11)                                                                |   | 16.2    |   |   | 32.1   |   |   | 22.4  |  
|                                                                                                    
|Earnings (loss)
      before income taxes                                                            | $ | 90.0    |   | $ | (405.1 | ) | $ | 58.9  |  
|Income tax
      expense (recovery) (Note 15)                                                        |   | 19.1    |   |   | (100.4 | ) |   | 11.5  |  
|                                                                                                    
|Earnings (loss)
      from continuing operations                                                     | $ | 70.9    |   | $ | (304.7 | ) | $ | 47.4  |  
|Results of
      discontinued operations (Note 3)                                                    |   | (6.0    | ) |   | 104.8  |   |   | 16.6  |  
|                                                                                                    
|Net
      earnings (loss)                                                                            | $ | 64.9    |   | $ | (199.9 | ) | $ | 64.0  |  
|                                                                                                    
|Basic earnings (loss) per share from continuing
      operations                                     | $ | 0.28    |   | $ | (1.23  | ) | $ | 0.20  |  
|                                                                                                    
|Diluted earnings
      (loss) per share from continuing operations                                   | $ | 0.28    |   | $ | (1.23  | ) | $ | 0.20  |  
|                                                                                                    
|Basic earnings (loss) per share                                                                      | $ | 0.26    |   | $ | (0.81  | ) | $ | 0.27  |  
|                                                                                                    
|Diluted earnings
      (loss) per share                                                              | $ | 0.26    |   | $ | (0.81  | ) | $ | 0.27  |  
|                                                                                                    
|Weighted average
      number of shares outstanding (Basic)                                          |   | 249.8   |   |   | 247.1  |   |   | 233.2 |  
|                                                                                                    
|The accompanying
      notes form an integral part of these Consolidated Financial
      Statements. |   |         |   |   |        |   |   |       |  
|CONSOLIDATED STATEMENTS OF RETAINED
      EARNINGS                                                   |   |         |   |   |        |   |   |      
|Years ended March 31                                                                                 |   |         |   |   |        |   |   |       |  
|(amounts in millions of Canadian dollars)                                                            |   | 2006    |   |   | 2005   |   |   | 2004  |  
|                                                                                                    
|Retained
      earnings at beginning of year, as previously reported                                 | $ | 340.8   |   | $ | 562.1  |   | $ | 531.2 |  
|Change in
      accounting policy (Note 1)                                                           |   |        |   |   | 3.3    |   |   |      |  
|                                                                                                    
|Retained
      earnings at beginning of year                                                         | $ | 340.8   |   | $ | 565.4  |   | $ | 531.2 |  
|Share issue
      costs (2004  net of taxes of $2.4 million)                                        |   |        |   |   |       |   |   | (5.1  | )
|Net earnings
      (loss)                                                                            |   | 64.9    |   |   | (199.9 | ) |   | 64.0  |  
|Dividends                                                                                            |   | (10.0   | ) |   | (24.7  | ) |   | (28.0 | )
|                                                                                                    
|Retained
      earnings at end of year                                                               | $ | 395.7   |   | $ | 340.8  |   | $ | 562.1 |  
|                                                                                                    
|The accompanying
      notes form an integral part of these Consolidated Financial
      Statements. |   |         |   |   |        |   |   |       |  

CAE ANNUAL REPORT 2006 _73

---

|CONSOLIDATED STATEMENTS OF CASH FLOW                                                                |        |        |   |        |        |   |        |      
|--------------------------------------------------------------------------------------------------- | ------ | ------ | - | ------ | ------ | - | ------ | -----
|Years ended March 31 (amounts in millions of
      Canadian dollars)                                | 2006   |        |   | 2005   |        |   | 2004   |      
|                                                                                                   
|Operating Activities                                                                                |        |        |   |        |        |   |        |      
|Net earnings
      (loss)                                                                           | $      | 64.9   |   | $      | (199.9 | ) | $      | 64.0 
|Results of
      discontinued operations (Note 3)                                                   |        | 6.0    |   |        | (104.8 | ) |        | (16.6
|                                                                                                   
|Earnings (loss)
      from continuing operations                                                    |        | 70.9   |   |        | (304.7 | ) |        | 47.4 
|Adjustments to
      reconcile earnings to cash flows from operating activities:                    |        |        |   |        |        |   |        |      
|Impairment of goodwill, tangible and
      intangible assets (Note 4)                               |       |        |   | 443.3  |        |   |       |      
|Depreciation                                                                                        |        | 52.5   |   |        | 55.1   |   |        | 51.3 
|Amortization of deferred financing costs                                                            |        | 2.2    |   |        | 7.2    |   |        | 2.7  
|Amortization and write down of
      intangible and other assets                                    | 22.9   |        |   | 19.7   |        |   | 17.4   |      
|Future income taxes                                                                                 |        | 6.0    |   |        | (113.9 | ) |        | (2.9 
|Investment tax credits                                                                              |        | (11.8  | ) |        | (29.2  | ) |        | (9.2 
|Stock-based compensation plans (Note
      13)                                                      | 2.5    |        |   | 2.0    |        |   | 1.3    |      
|Other                                                                                               |        | 9.8    |   |        | 20.9   |   |        | (6.3 
|Decrease (increase) in non-cash working
      capital (Note 17)                                     | 81.2   |        |   | 85.6   |        |   | (100.2 | )    
|                                                                                                   
|Net cash
      provided by continuing operating activities                                          | 236.2  |        |   | 186.0  |        |   | 1.5    |      
|Net cash
      provided by discontinued operating activities                                        | 2.1    |        |   | 21.6   |        |   | 4.2    |      
|                                                                                                   
|Net
      cash provided by operating activities                                                     |        | 238.3  |   |        | 207.6  |   |        | 5.7  
|                                                                                                   
|Investing Activities                                                                                |        |        |   |        |        |   |        |      
|Business
      acquisitions (net of cash and cash equivalents acquired) (Note
      2)              | 2.6    |        |   | (13.8  | )      |   |       |      
|Proceeds from
      disposal of discontinued operations                                             |        |        |   |        |        |   |        |      
|(net of cash and cash equivalents
      disposed) (Note 3)                                          | (4.9   | )      |   | 239.4  |        |   | 22.3   |      
|Capital
      expenditures                                                                          |        | (130.1 | ) |        | (118.0 | ) |        | (86.8
|Proceeds from
      sale and leaseback of assets                                                    |        |       |   |        | 43.8   |   |        | 122.5
|Deferred
      development costs                                                                    |        | (1.8   | ) |        | (9.9   | ) |        | (12.7
|Deferred
      pre-operating costs                                                                  |        | (0.7   | ) |        | (1.7   | ) |        | (6.6 
|Other
      assets                                                                                  |        | (20.2  | ) |        | (2.4   | ) |        | (2.2 
|                                                                                                   
|Net cash (used
      in) provided by continuing investing activities                                | (155.1 | )      |   | 137.4  |        |   | 36.5   |      
|Net cash used in
      discontinued investing activities                                            | (2.3   | )      |   | (5.8   | )      |   | (12.0  | )    
|                                                                                                   
|Net cash (used in) provided by investing
      activities                                           | (157.4 | )      |   | 131.6  |        |   | 24.5   |      
|                                                                                                   
|Financing Activities                                                                                |        |        |   |        |        |   |        |      
|Net borrowing
      under revolving unsecured credit facilities (Note 11)                           | (30.7  | )      |   | (273.7 | )      |   | (70.1  | )    
|Proceeds from
      long-term debt                                                                  |        | 32.1   |   |        | 3.4    |   |        | 1.1  
|Reimbursement of
      long-term debt                                                               |        | (65.7  | ) |        | (50.5  | ) |        | (66.5
|Dividends
      paid                                                                                |        | (9.7   | ) |        | (24.0  | ) |        | (27.4
|Common stock
      issuance (Note 12)                                                               |        | 8.0    |   |        | 3.6    |   |        | 176.4
|Share issue
      costs                                                                             |        |       |   |        |       |   |        | (7.5 
|Other                                                                                               |        | 11.6   |   |        | 0.7    |   |        | 1.4  
|                                                                                                   
|Net cash (used
      in) provided by continuing financing activities                                | (54.4  | )      |   | (340.5 | )      |   | 7.4    |      
|Net cash provided by discontinued financing
      activities                                        | 1.2    |        |   | 3.2    |        |   | 10.4   |      
|                                                                                                   
|Net cash (used in) provided by financing
      activities                                           | (53.2  | )      |   | (337.3 | )      |   | 17.8   |      
|                                                                                                   
|Effect of foreign exchange rate changes on cash
      and cash equivalents                          | (8.1   | )      |   | (2.3   | )      |   | (3.2   | )    
|                                                                                                   
|Net increase (decrease) in cash and cash
      equivalents                                          | 19.6   |        |   | (0.4   | )      |   | 44.8   |      
|Cash and cash equivalents at beginning of
      year                                                | 61.5   |        |   | 61.9   |        |   | 17.1   |      
|                                                                                                   
|Cash and cash equivalents at end of year                                                            | $      | 81.1   |   | $      | 61.5   |   | $      | 61.9 
|                                                                                                   
|Cash and cash equivalents related to:                                                               |        |        |   |        |        |   |        |      
|Continuing
      operations                                                                         | $      | 81.1   |   | $      | 57.1   |   | $      | 54.7 
|Discontinued
      operations (Note 3)                                                              |        |       |   |        | 4.4    |   |        | 7.2  
|                                                                                                   
|                                                                                                    | $      | 81.1   |   | $      | 61.5   |   | $      | 61.9 
|                                                                                                   
|Supplementary
      Cash Flow Information (Note 17)                                                 |        |        |   |        |        |   |        |      
|The accompanying
      notes are an integral part of these Consolidated Financial
      Statements. |        |        |   |        |        |   |        |      

74_ CAE ANNUAL REPORT 2006

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended March 31, 2006, 2005 and 2004 (amounts in millions of Canadian dollars)

NOTE 1  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

CAE Inc. (the Company) designs, manufactures and supplies simulation equipment and services and develops integrated training solutions for the military, commercial airlines, business aircraft operators and aircraft
manufacturers. CAE's flight simulators replicate aircraft performance in normal and abnormal operations, as well as a comprehensive set of environmental conditions utilizing visual systems that contain an extensive database of airports, other
landing areas, flying environments, 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 also operates a global
network of training centres in locations around the world.

Effective April 1, 2005, the Company changed its internal organizational structure such that operations are managed through four segments:

|(i)   | Simulation Products/Civil: Designs, manufactures and supplies civil flight simulators, training devices and visual systems;                                                               
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  | Simulation Products/Military: Designs, manufactures and supplies advanced military training products for air, land and sea applications;                                                  
|     
|(iii) | Training & Services/Civil: Provides business and commercial aviation training and related services;                                                                                       
|     
|(iv)  | Training & Services/Military: Supplies military turnkey training and operational solutions, support services, life extensions, systems maintenance and modelling and simulation solutions.
|     
|      | The Company's operations were previously broken down into the following operating segments; Military Simulation & Training (Military), Civil                                              
|     

Simulation & Training (Civil) and Marine Controls (Marine) until the latter's disposal in the fourth quarter of fiscal 2005.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENT PRESENTATION

The accounting policies of CAE Inc. and its subsidiaries conform, in all material respects, to Canadian generally accepted accounting principles (GAAP), as defined by the Canadian Institute of Chartered Accountants
(CICA). In some respects, these accounting principles differ from United States generally accepted accounting principles (US GAAP). The main differences are described in Note 27.

On April 1, 2004, the Company adopted CICA Handbook Sections 1100,Generally Accepted Accounting Principlesand 1400,General Standards of Financial Statement Presentation. Section 1100 describes what constitutes Canadian GAAP and its sources, and provides
guidance on sources to consult when selecting accounting policies and appropriate disclosure when a matter is not dealt with explicitly in the primary sources of GAAP, thereby recodifying GAAP hierarchy. Section 1400 clarifies what are presented
fairly in accordance with GAAP, and provides general guidance on financial presentation. The adoption of these standards did not have a material impact on the Consolidated Financial Statements.

Except where otherwise indicated, all amounts in these financial statements are expressed in Canadian dollars.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires CAE's management (Management) to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the period reported. Management reviews its estimates on an ongoing basis, particularly as they relate to accounting of
long-term contracts, useful lives, employee future benefits, income taxes, impairment of long-lived assets and goodwill, based on Management's best knowledge of current events and actions it may undertake in the future. Actual results could differ
from those estimates, significant changes in estimates and/or assumptions could result in the impairment of certain assets.

BASIS OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of CAE Inc. and of all its majority-owned subsidiaries, and variable interest entities for which it is the primary beneficiary. They also include the Company's
proportionate share of assets, liabilities and earnings of joint ventures in which it has an interest. All significant intercompany accounts and transactions have been eliminated. Investments over which CAE exercises significant influence are
accounted for using the equity method, and portfolio investments are accounted for using the cost method.

As at March 31, 2006, CAE's proportionate share of assets, liabilities, revenue and earnings in joint ventures was the following (in millions of dollars): current assets $36.5; current
liabilities $13.9; long-term assets $42.7; long-term liabilities $27.0; revenue of $42.0 and earnings of $4.0.

On January 1, 2005, the Company adopted CICA Accounting Guideline AcG-15,Consolidation of Variable Interest Entities, on a retroactive basis without restatement of prior periods. AcG-15 provides a framework for identifying variable interest entities (VIEs) and for determining when an entity should include the assets, liabilities and results of
operations of a VIE in its Consolidated Financial Statements.

CAE ANNUAL REPORT 2006 _75

---

NOTE 1  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)

In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that lack the power to make significant decisions about activities, or (3) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns generated by its operations.

AcG-15 requires a VIE to be consolidated if a variable interest holder (a party with an ownership, contractual or other financial interest in the VIE) is exposed to a majority of the risk
of loss from the VIE's activities, is entitled to receive a majority of the VIE's residual returns (if no party is exposed to a majority of the VIE's losses), or both (the primary beneficiary). Upon consolidation, the primary beneficiary generally
must initially record all of the VIE's assets, liabilities and non-controlling interests at fair value at the date the enterprise became the primary beneficiary. However, for variable interest entities created prior to the initial adoption of
AcG-15, the assets, liabilities and non-controlling interests of these entities must be initially consolidated as if the entities were always consolidated based on the majority voting interest. AcG-15 also requires disclosures on VIEs that the
variable interest holder is not required to consolidate, but in which it has a significant variable interest.

The adoption of AcG-15 on January 1, 2005 resulted in an increase in total assets, liabilities, and retained earnings of $46.9 million, $43.7 million, and $3.3 million,
respectively and a decrease in the currency translation adjustment of $0.1 million in the fiscal 2005 Consolidated Financial Statements (refer to Note 25).

FOREIGN CURRENCY TRANSLATION

Self-sustaining foreign operations

The Company's foreign operations are classified as self-sustaining operations and are translated into Canadian dollars using the current rate method. Under this method, assets and liabilities are translated at exchange
rates in effect at the balance sheet date and revenue and expenses are translated at the average exchange rates for the period. Foreign gains or losses translated into Canadian dollars are included in the cumulative translation adjustment account,
which is a separate component of shareholders' equity.

Accumulated amounts in the cumulative translation adjustment account are released to the Statements of Earnings when the Company reduces its net investment in foreign operations by way of
a reduction in capital or through the settlement of long-term intercompany balances, which had been considered part of CAE's net investment.

Foreign currency transactions

Monetary assets and liabilities denominated in currencies other than the functional currency are translated at the prevailing exchange rate at the balance sheet date. Non-monetary assets and liabilities denominated in
currencies other than the functional currency and revenue and expense items are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Translation gains or losses are included in the
determination of earnings, except those related to long-term intercompany account balances, which form part of the net investment in foreign operations, and those arising from the translation of foreign currency debt that has been designated as a
hedge of the net investment in subsidiaries, which are included in the cumulative translation adjustment account, a separate component of shareholders' equity.

REVENUE RECOGNITION

Multiple-element arrangements

The Company sometimes enters into multiple-element revenue arrangements, which may include a combination of design, engineering and manufacturing of flight simulators and maintenance. A multiple-element arrangement is
separated into more than one unit of accounting, and applicable revenue recognition criteria is considered separately for the different units of accounting if all of the following criteria are met:

- The delivered item has value to the customer on a standalone basis.
- There is objective and reliable evidence of the fair value of the undelivered item (or items).
- If the arrangement includes a general right of return related to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the
control of the vendor.

Long-term contracts

Revenue from long-term contracts for the design, engineering and manufacturing of flight simulators is recognized using the percentage-of-completion method when there is persuasive evidence of an arrangement, when the
fee is fixed or determinable and when collection is reasonably certain. Under this method, revenue and earnings are recorded as related costs are incurred, on the basis of the percentage of actual costs incurred to date, related to the estimated
total costs to complete the contract. The cumulative impact of any revisions in cost and earnings estimates are reflected in the period in which the need for a revision becomes known. Losses, if any, are recognized in full when first anticipated.
Warranty provisions are recorded when revenue is recognized, based on past experience. In general, no right of return or complementary upgrade is provided to customers. Post-delivery customer support is billed separately, and revenue is recognized
over the support period.

Product maintenance

Revenue from maintenance contracts is recognized in earnings on a straight-line basis over the contract period. In situations when it is clear that costs will be incurred by using a basis other than a straight-line
method, revenue is recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract.

76_ CAE ANNUAL REPORT 2006

---

Software arrangements

The Company also enters into software arrangements to sell, independently or in multiple-element arrangements, standalone software, services, maintenance and software customization. Revenue from software arrangements
is recognized in accordance with the guidance set out in the Statement of Position (SOP) 97-2,Software Revenue Recognitionissued by the American Institute of
Certified Public Accountants and is described in more detail as follows:

|(i)   | Standalone products                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|      | Revenue from software license arrangements that do not require significant production, changes, or customization of software, is recognized when there is persuasive evidence of an arrangement, delivery has occurred,
the fee is fixed or determinable and collection is reasonably assured.                                                                                                                                                                                                                                                                                                                                               
|     
|(ii)  | Consulting services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     
|      | Revenues arising from direct consulting or training services that are provided to customers are recognized as the services are rendered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     
|(iii) | Maintenance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     
|      | Maintenance and support revenues are recognized ratably over the term of the related agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     
|(iv)  | Multiple-element arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     
|      | The Company sometimes enters into multiple-element revenue software arrangements, which may include any combination of software, services or training, customization and maintenance. In such instances, the fee is
allocated to the various elements based on vendor-specific objective evidence of fair value, which is limited to the price charged when the same element is sold separately, regardless of any individual prices stated within the contract for each
element. Applicable revenue recognition criteria are considered separately for each portion of fee allocated to the respective separate elements as described above.
|     
|(v)   | Long term software arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     
|      | Revenues from fixed-price software arrangements and software customization contracts are also recognized under the percentage-of- completion method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     

Training services

Training services are recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, recovery is reasonably certain and, when applicable, products have been delivered or services have
been rendered.

INCOME TAXES AND INVESTMENT TAX CREDITS

The Company uses the tax liability method to account for income taxes. Under this method, future income tax assets and liabilities are determined according to differences between the carrying value and the tax bases of
assets and liabilities.

This method also requires the recognition of future tax benefits, such as net operating loss carry forwards, to the extent that the realization of such benefits is more likely than not. 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. (refer to Note 15).

Future tax assets and liabilities are measured by applying enacted or substantively enacted rates and laws at the date of the financial statements for the years in which the temporary
differences are expected to reverse.

CAE does not provide for income taxes on undistributed earnings of foreign subsidiaries that are not expected to be repatriated in the foreseeable future.

Investment tax credits (ITCs) arising from research and development (R&D) activities are deducted from the related costs and are accordingly included in the determination of earnings
when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or development of property, plant and equipment and deferred development costs are deducted from the cost of those assets with amortization
calculated on the net amount.

The Company is subject to examination by taxation authorities in various jurisdictions. The determination of tax liabilities and ITCs recoverable involve certain uncertainties in the
interpretation of complex tax regulations. Therefore, the Company provides for potential tax liabilities and ITCs recoverable based on Management's best estimates. Differences between the estimates and the ultimate amounts of taxes and ITCs are
recorded in earnings at the time they can be determined (refer to Note 23).

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of highly-liquid investments with original terms to maturity of 90 days or less.

ACCOUNTS RECEIVABLE

Receivables are recorded at cost, net of a provision for doubtful accounts, based on expected recoverability. The Company is involved in a program under which it sells certain of its accounts receivable to a third
party for a cash consideration without recourse to the Company. These transactions are accounted for when the Company is considered to have surrendered control over the transferred accounts receivable. Losses and gains on these transactions are
recognized in net earnings (loss) (refer to Note 5).

INVENTORIES

Raw materials are valued at the lower of cost and replacement cost. Work in process is stated at the lower of average cost and net realizable value. The cost of work in process includes material, labour and an
allocation of manufacturing overhead (refer to Note 6).

CAE ANNUAL REPORT 2006 _77

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NOTE 1  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)

GOVERNMENT ASSISTANCE

Funding from Industry Canada under the Technology Partnerships Canada program (TPC) for costs incurred in research and development (R&D) programs, is recorded as a reduction of costs or as a reduction of cost
capitalized as part of long-term assets.

A liability to repay the government assistance is recognized when stipulated conditions are met. The repayment thereof is reflected in the statement of earnings when royalties become
due.

LONG-LIVED ASSETS

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation, net of any impairment charges. The declining balance and straight-line methods are used to calculate amortization over the estimated
useful lives of the assets as follows:

|                          | Method                       | Rates/Years            |  
|------------------------- | ---------------------------- | ---------------------- | -
|                         
|Building and improvements | Declining balance            | 5                      | %
|Simulators                | Straight-line (10% residual) | Not exceeding 25 years |  
|Machinery and equipment   | Declining balance            | 20                     | %
|                         

Leases

The Company enters into leases in which substantially all the benefits and risks of ownership 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, net of transaction costs, related to the sale and leaseback of simulators are deferred and the
net gains or losses in excess of the residual value guarantees are amortized over the term of the lease. The residual value of guarantees are ultimately recognized in the Company's earnings upon expiry of the related sale and leaseback
agreement.

Interest capitalization

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

Spare parts

Spare parts to be used in the normal course of business are valued at the lower of cost and replacement cost.

Intangible assets with definite useful lives

Intangible assets with definite useful lives are recorded at their fair value at the acquisition date. Amortization is calculated using the straight-

|line method for all intangible assets over their estimated useful lives as follows:                              |               |             
|---------------------------------------------------------------------------------------------------------------- | ------------- | ------------
|                                                                                                                 |               | Weighted    
|                                                                                                                 |               | Average     
|                                                                                                                 | Amortization  | Amortization
|                                                                                                                 | Period        | Period      
|                                                                                                                
|Trade names                                                                                                      | 5 to 17 years | 16          
|Customer relations                                                                                               | 10 years      | 10          
|Customer contractual agreements                                                                                  | 2 to 20 years | 13          
|Enterprise resource planning  software(1)                                                                       |              |            
|Other intangible assets                                                                                          | 5 to 12 years | 10          
|                                                                                                                
|(1)Enterprise Resource Planning software is in the building phase; no amortization was taken during
fiscal 2006. |               |             

Impairment of long-lived assets

The Company recognizes impairment losses for a long-lived asset or asset group to be held and used when events or changes in circumstances indicating that its carrying value may not be recoverable, as measured by
comparing its carrying amount to the estimated undiscounted future cash flows generated by its use and eventual disposal. An impairment, if any, is measured as the excess of the carrying amount of the asset or asset group over its fair
value.

BUSINESS COMBINATIONS AND GOODWILL

Acquisitions are accounted for using the purchase method and, accordingly, the results of operations of the acquired business are included in the Consolidated Statements of Earnings effective on their respective dates
of acquisition.

Goodwill represents the excess of the cost of acquired businesses over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. Goodwill is tested for
impairment annually, or more frequently if events or changes in circumstances indicate a potential impairment in value.

78_ CAE ANNUAL REPORT 2006

---

The impairment test consists of a comparison of the fair value of the Company's reporting units with their carrying amount. When the carrying amount of the reporting unit exceeds its fair
value, the Company compares, in a second phase, the fair value of goodwill related to the reporting unit to its carrying value and recognizes, if required, an impairment loss equal to the excess. The fair value of a reporting unit is calculated
based on one or more fair value measures, including present value techniques of estimated future cash flows and estimated amounts at which the unit, as a whole, could be purchased or sold in a current transaction between willing unrelated parties.
If the carrying amount of the reporting unit exceeds its fair value, the second phase requires the fair value of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value
of goodwill. If the carrying amount of that reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss) (refer to Note 9).

OTHER ASSETS

Research and development costs

Research costs are charged to earnings in the period in which they are incurred. Development costs are also charged to earnings in the period incurred unless they meet all the criteria for deferral, as per CICA
Handbook Section 3450,Research and Development Costs, and their recovery is reasonably assured. Government assistance arising from research and development
activities is deducted from the related costs or assets, if deferred. Amortization of development costs deferred to future periods commences with the commercial production of the product and is charged to earnings based on anticipated sales of the
product, when possible, over a period not exceeding five years using the straight-line method.

Pre-operating costs

The Company defers costs incurred during the pre-operating period for all new operations. Pre-operating costs 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. Deferred pre-operating costs are amortized over a five-year period using the straight-line method.

Deferred financing costs

Costs incurred with the issuance of long-term debt are deferred and amortized on a straight-line basis over the term of the related debt. Costs related to sale and leaseback agreements are amortized on a straight-line
basis over the term of the lease (refer to Note 10).

Restricted cash

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

EMPLOYEE FUTURE BENEFITS

The Company maintains defined benefit pension plans that provide benefits based on length of service and final average earnings. The service costs and the pension obligations are actuarially determined using the
projected benefit method prorated on employee service and Management's best estimate of 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 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. Past service
costs, arising from plan amendments, are deferred and amortized on a straight-line basis over the average remaining service live of active employees at the date of amendment.

When a curtailment arises, any unamortized past service costs associated with the reduction of future services is recognized immediately. Also, the increase or decrease in benefit
obligations is recognized as a loss or gain, net of unrecognized actuarial gains or losses. Finally, when the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to
the settlement (refer to Note 21).

STOCK-BASED COMPENSATION PLANS

The Company's stock-based compensation plans consist of five individual plans: an Employee Stock Option Plan (ESOP), an Employee Stock Purchase Plan (ESPP), a Deferred Share Unit (DSU) plan for executives, a Long-Term
Incentive Deferred Share Unit (LTI-DSU) plan and a Long-Term Incentive Restricted Share Unit (LTI-RSU) plan. All plans are described in Note 13.

Since fiscal 2004, net (loss) earnings include compensation costs for CAE's stock options. Using the fair value method, compensation expense is measured at the grant date and recognized
over the service period with a corresponding increase to contributed surplus in shareholders' equity. The Company estimates the fair value of options using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed
for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, valuation models generally require the input of highly-subjective assumptions including expected stock price
volatility.

In Note 13, pro forma net (loss) earnings and pro forma basic and diluted net (loss) earnings per share figures are presented as if the fair value based method of accounting had been used
to account for stock options granted to employees during fiscal 2003.

A compensation expense is also recognized for the Company's portion of the contributions made under the ESPP and for the grant date amount of vested units at their respective valuations
for the DSU, LTI-DSU and LTI-RSU plans. Any subsequent changes in CAE's stock price affect the compensation expense. In fiscal 2004, the Company entered into an equity swap agreement with a major Canadian institution in order to reduce its cash and
earnings exposure related to the fluctuation in the Company's share price relating to the DSU, LTI-DSU and LTI-RSU programs.

CAE ANNUAL REPORT 2006 _79

---

NOTE 1  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTD)

CAE's practice is to issue options in May of each fiscal year or at the time of hiring of new employees or new appointments. In both instances these options vest equally over four years.
Any consideration paid by plan participants on the exercise of share options or the purchase of shares is credited to share capital together with any related stock-based compensation expense.

HEDGING RELATIONSHIPS AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into forward, swap and option contracts to reduce the financial risk related to its exposure to fluctuations in interest rates and foreign exchange rates. The interest rate risk associated with
certain long-term debt is hedged through interest rate swaps. The foreign currency risk associated with certain purchase and sales commitments denominated in a foreign currency is hedged through a combination of forward contracts and options. The
Company does not use any derivative financial instruments for trading or speculative purposes.

Effective April 1, 2004, the Company prospectively adopted CICA Accounting Guideline (AcG) AcG-13,Hedging Relationshipsand CICA Emerging Issues Committee Abstract 128 (EIC-128),Accounting for Trading,Speculative or
Non-Hedging Derivative Financial Instruments. AcG-13 addresses the identification, designation, documentation and effectiveness of hedging relationships for the purpose of applying hedge accounting, and the
discontinuance of hedge accounting. Under this Guideline, complete documentation of the information related to hedging relationships is required, and the effectiveness of the hedges must be demonstrated and documented. EIC-128 deals with the issue
of how to account for a freestanding derivative financial instrument that gives rise to a financial asset or liability and does not qualify for hedge accounting. The adoption of this Guideline and abstract did not have a material impact on the
Company's Consolidated Financial Statements.

Gains and losses on foreign currency contracts designated as effective as hedges are recognized in the Consolidated Statements of Earnings during the same period as the underlying revenues
and expenses. For interest rate swaps, the difference between the swap rate and the actual rate is reflected against the related interest expense. 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.

Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or cease to be effective prior to maturity, are deferred under other current, or
non-current, assets or liabilities on the Consolidated Balance Sheets and recognized in earnings (loss) in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matured
prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in earnings (loss). Interest payments relating to swap contracts are recorded in net earnings (loss)
over the life of the underlying transaction using the accrual method as an adjustment to interest income or interest expense (refer to Note 14).

DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS

Long-lived assets to be disposed of by sale must be measured at the lower of their carrying amounts or fair value less selling costs and should not be amortized as long as they are classified as assets to be disposed
of by sale.

Operating results of a company's components disposed of by sale or being classified as held-for-sale are reported as discontinued operations if the operations and cash flows of those
components have been, or will be, eliminated from the Company's current operations pursuant to the disposal and if the Company does not have significant continuing involvement in the operations of the component after the disposal transaction. A
component of an enterprise includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company's operations and cash flows (refer to Note 3).

SEVERANCE, TERMINATION BENEFITS AND COSTS ASSOCIATED WITH EXIT AND DISPOSAL ACTIVITIES

In accordance with EIC-134,Accounting for Severance and Termination Benefitsand EIC-135,Accounting for Costs Associated with Exit and Disposal Activities (Including Costs Incurred in a Restructuring), the Company recognizes severance benefits that do not vest when the decision
is made to terminate the employee. Special termination benefits are accounted for when Management commits to a plan that specifically identifies all significant actions to be taken and commits the entity to the event that obligates it under the
terms of the contract with its employees to pay such termination benefits. Such termination benefits and the benefit arrangement are communicated to the employees in sufficient detail to enable them to determine the type and amount of benefits they
will receive when their employment is terminated. All other costs associated with restructuring, exit and disposal activities are recognized in the period in which they are incurred and measured at their fair value. CAE has applied these guidelines
for severance termination benefits and other restructuring costs as described in Note 24.

DISCLOSURE OF GUARANTEES

The Company discloses all information concerning certain types of guarantees that may require payments, contingent on specified types of future events. In the normal course of business, CAE issues letters of credit and
performance guarantees (refer to Note 14).

EARNINGS PER SHARE

Earnings per share are calculated by dividing net earnings (loss) available for common shareholders by the weighted average number of common shares outstanding during the year. The diluted weighted average number of
common shares outstanding is calculated by taking into account the dilution that would occur if the securities or other agreements for the issuance of common shares were exercised or converted into common shares at the later of the beginning of the
period or the issuance date unless it is anti-dilutive. The treasury stock method is used to determine the dilutive effect of the stock options. The treasury stock method is a method of recognizing the use of proceeds that could be obtained upon the
exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common shares at the average market price during the period.

80_ CAE ANNUAL REPORT 2006

---

FUTURE CHANGES TO ACCOUNTING STANDARDS

Financial instruments  recognition and measurement, hedges and comprehensive income

In January 2005, the Accounting Standards Board (AcSB) issued three new standards dealing with financial instruments: (i) Financial Instruments  Recognition and Measurement; (ii) Hedges; and (iii) Comprehensive
Income. The new standards are based on the US FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, Statement No. 130, Reporting Comprehensive Income, Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, and on the International Accounting Standards Board's (IASB) standard, IAS 39, Financial Instruments  Recognition and Measurement.

CICA Handbook Section 3855, Financial Instruments  Recognition and Measurement prescribes when a financial instrument should be recognized on the balance sheet and the measurement
method, using fair value or using cost-based measures. It also specifies how financial instrument gains and losses should be presented.

New CICA Handbook Section 3865, Hedges allows optional treatment providing that hedges be designated as either fair value hedges, cash flow hedges or hedges of a net investment in a
self-sustaining foreign operation. For a fair value hedge, the gain or loss attributable to the hedged risk is recognized in net income in the period of change together with the offsetting loss or gain on the hedged item attributable to the hedged
risk. The carrying amount of the hedged item is adjusted for the hedged risk. For a cash flow hedge or for a hedge of a net investment in a self-sustaining foreign operation, the effective portion of the hedging item's gain or loss is initially
reported in Other Comprehensive Income and subsequently reclassified to net income when the hedged item affects net income.

The AcSB has issued new CICA Handbook Section 1530, Comprehensive Income, and has amended Section 3250, Surplus, by renaming it Section 3251, Equity. These standards require enterprises to
present comprehensive income and its components as well as net income in its financial statements and to separately present changes in equity during the period as well as components of equity at the end of the period, including comprehensive
income.

These requirements will be applicable for CAE in the first quarter of fiscal 2008. The Company is currently evaluating how these new Handbook Sections will impact its Consolidated
Financial Statements.

NOTE 2  BUSINESS ACQUISITIONS AND COMBINATIONS

TERRAIN EXPERTS INC.

On May 20, 2005, the Company acquired all the issued and outstanding shares of Terrain Experts Inc. (Terrex), which develops software tools for terrain database generation and visualization. Total consideration for
this acquisition amounted to US$11.1 million ($14.0 million) payable in common shares issued by CAE and a nominal cash portion in three instalments as follows:

|(i)   | 1,000,000 shares representing US$4.8 million (approximately $6.1 million issued at a price of $6.13 per share, the closing price of the common shares on the Toronto Stock Exchange (TSX) on May 20, 2005),
and US$0.2 million ($0.3 million) in cash together representing US$5.0 million ($6.4 million) at the closing date     
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  | US$3.6 million through the issuance of CAE shares in fiscal 2007 (twelve months following the closing of the acquisition) to be calculated at the TSX stock price on the date of issuance                                                                                                                                         
|     
|(iii) | US$2.5 million through the issuance of CAE shares in fiscal 2008 (twenty four months following the closing of the transaction) to be calculated at the TSX stock price on the date of issuance The purchase price is
still subject to an adjustment based on performance of the business for the twelve-month period following the
|     

acquisition. Any changes in the total consideration will be accounted for as a change in goodwill.

GREENLEY & ASSOCIATES INC.

On November 30, 2004, the Company acquired all the issued and outstanding shares of Greenley & Associates Inc. (G&A), which provides services in the areas of project management, human factors, modelling and
simulation. Total consideration for this acquisition amounted to $4.4 million payable in equivalent common shares issued by CAE in four instalments as follows: 424,628 shares (representing $2.0 million) at the closing date; $0.8 million
on November 30, 2005; $0.8 million on November 30, 2006; and 169,851 shares (representing $0.8 million at the transaction date) to be issued on November 30, 2007. The number of shares issued (to be issued) to satisfy the first and the fourth
payments was calculated based on the average closing share price ($4.71 per share) of CAE common shares on the TSX for the 20-day period ending two days prior to November 30, 2004. The 91,564 shares issued to satisfy the second payment was based
on the average closing share price of CAE common shares on the TSX for the 20-day period ending two days before the date of issuance ($8.07 per share). The number of shares to be issued to satisfy the third payment will be based on the average
closing share price of CAE common shares on the TSX for the 20-day period ending two days before the date of issuance. During the second quarter of fiscal 2006, the Company completed the purchase price allocation for this acquisition, and no
adjustments were required.

CAE ANNUAL REPORT 2006 _81

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NOTE 2  BUSINESS ACQUISITIONS AND
COMBINATIONS (CONTD)

SERVICIOS DE INSTRUCCION DE VUELO,
S.L

In February 2004, CAE and Iberia
Lineas Aereas de España, SA (Iberia) agreed to combine their aviation training
operations in Spain after receiving regulatory clearance from Spanish
authorities to commence operations under an agreement entered into in October
2003.

On May
27, 2004, in connection with the financing of the combined operations, CAE
Servicios Globales de Instruccion de Vuelo (España), S.L. (SGIV), a wholly owned
subsidiary of CAE, and Iberia contributed the net assets of their respective
training centre facilities to Servicios de Instruccion de Vuelo, S.L. (SIV),
with SGIV obtaining ownership of 80% of SIV. SIV financed the acquisition of the
assets from SGIV and Iberia through an asset-backed financing transaction (refer
to Note 11).

As part
of this transaction, should the October 2003 agreement be terminated, SGIV and
Iberia will be obliged to repurchase the assets they contributed, in proportion
to the fair market value of the assets, for a total amount equal to the
outstanding balance under the financing transaction.

As part
of the May 27, 2004 agreement (the Agreement), Iberia was to subsequently
transfer a simulator that it was leasing from a third party to SIV in exchange
for a cash consideration of $5.7 million (y3.5 million). This transaction was
accounted for as an increased contribution of property, plant and equipment and
in long-term debt with a cash consideration equal to the net asset
value.

In
addition, as part of the Agreement, SIV has agreed to fund an amount up to a
maximum of $2.4 million (y1.5 million) to cover any payments made by Iberia to
former employees in order to indemnify Iberia for potential costs to be incurred
due to certain employment matters. Based on Management's best estimate of SIV's
potential liability, an amount of $2.4 million (y1.5 million) has been accrued as
part of the purchase price and accounted for as goodwill.

FLIGHT TRAINING CENTRE CHILE
S.A.

On April 22, 2004, the Company
acquired all the issued and outstanding shares of Flight Training Centre Chile
S.A. (FTC Chile, located in Santiago, Chile) from LAN Chile S.A. for a total
cash consideration of $0.9 million (US$0.7 million). This acquisition expanded
the Company's pilot-training operations into the South American
market.

For the year ended March 31, 2004,
there were no acquisitions for continuing operations.

The net assets contributed by Iberia
to SIV and net assets acquired from Terrex, G&A and FTC Chile are summarized
as follows:

|                                             |   | 2006   |   |   |      |   |   |       |   |   |           |   |   | 2005  |  
|-------------------------------------------- | - | ------ | - | - | ---- | - | - | ----- | - | - | --------- | - | - | ----- | -
|(amounts in millions)                        |   | Terrex |   |   | G&A  |   |   | SIV   |   |   | FTC Chile |   |   | Total |  
|                                            
|Current assets(1)                            | $ | 1.9    |   | $ | 2.1  |   | $ | 4.6   |   | $ | 0.2       |   | $ | 6.9   |  
|Current
      liabilities                    |   | (2.1   | ) |   | (1.2 | ) |   | (0.1  | ) |   | (0.1      | ) |   | (1.4  | )
|Property, plant
      and equipment, net     |   | 0.3    |   |   | 0.3  |   |   | 73.1  |   |   | 2.2       |   |   | 75.6  |  
|Other
      assets                           |   | 3.3    |   |   | 0.5  |   |   |      |   |   |          |   |   | 0.5   |  
|Intangible
      assets                      |   |        |   |   |      |   |   |       |   |   |           |   |   |       |  
|Trade names                                  |   | 0.3    |   |   | 0.3  |   |   |      |   |   |          |   |   | 0.3   |  
|Technology                                   |   | 1.6    |   |   |     |   |   |      |   |   |          |   |   |      |  
|Customer relations                           |   | 0.8    |   |   | 0.5  |   |   | 7.2   |   |   |          |   |   | 7.7   |  
|Other intangibles                            |   |       |   |   | 0.1  |   |   |      |   |   |          |   |   | 0.1   |  
|Goodwill(2)                                  |   | 4.5    |   |   | 2.5  |   |   | 6.9   |   |   |          |   |   | 9.4   |  
|Future income
      taxes                    |   | 0.5    |   |   | (0.5 | ) |   |      |   |   | 0.4       |   |   | (0.1  | )
|Long-term
      debt                         |   |       |   |   | (0.2 | ) |   | (61.8 | ) |   |          |   |   | (62.0 | )
|Long-term
      liabilities                  |   |       |   |   |     |   |   | (2.4  | ) |   | (0.3      | ) |   | (2.7  | )
|                                            
|Fair value of net assets acquired, excluding |   |        |   |   |      |   |   |       |   |   |           |   |   |       |  
|cash position at acquisition                 |   | 11.1   |   |   | 4.4  |   |   | 27.5  |   |   | 2.4       |   |   | 34.3  |  
|Cash position at acquisition                 |   | 2.9    |   |   |     |   |   |      |   |   |          |   |   |      |  
|                                            
|Fair value of net assets acquired            |   | 14.0   |   |   | 4.4  |   |   | 27.5  |   |   | 2.4       |   |   | 34.3  |  
|Less: Balance of
      purchase price        |   |       |   |   |     |   |   |      |   |   | (1.5      | ) |   | (1.5  | )
|Issuance of 1,000,000 shares (Note
      12) |   | (6.1   | ) |   |      |   |   |       |   |   |           |   |   |       |  
|Issuance of 424,628 shares (Note
      12)   |   |       |   |   | (2.0 | ) |   |      |   |   |          |   |   | (2.0  | )
|Shares to be issued(3)                       |   | (7.6   | ) |   | (2.4 | ) |   |      |   |   |          |   |   | (2.4  | )
|Non-controlling interest                     |   |       |   |   |     |   |   | (14.6 | ) |   |          |   |   | (14.6 | )
|                                            
|Total cash consideration:                    | $ | 0.3    |   | $ |     |   | $ | 12.9  |   | $ | 0.9       |   | $ | 13.8  |  
|                                            

|(1) | Excluding cash on
      hand                                
|--- | ------------------------------------------------------------
|   
|(2) | This goodwill is not
      deductible for tax purposes      
|   
|(3) | Has been accounted for as a
      liability pending issuance
|   

The net
assets of Terrex are included in the Simulation Products/Military segment. The
net assets of G&A are included in the Training & Services/Military
segment. The net assets of SIV and FTC are included in Training &
Services/Civil segment.

82_ CAE ANNUAL REPORT 2006

---

NOTE 3  DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

DISCONTINUED OPERATIONS

Marine Controls

On February 3, 2005, CAE completed, with L-3 Communications Corporation (L-3), the sale of the substantial components of its Marine Controls segment for a cash consideration of $238.6 million. This amount is
subject to the approval by L-3 of the net working capital of the Marine Controls segment. The parties are currently discussing the appropriate final net working capital amount. CAE does not believe that the final payment to L-3 will result in a
material adjustment to the gain on disposal already recorded. During the second and third quarters of fiscal 2006, in accordance with the purchase agreement, L-3 acquired the two components of the Marine Controls segment that were subject to
regulatory approvals, resulting in the assumption by L-3 of CAE's guarantee of $53.0 million (£23 million) of project-financed related debt for the UK Astute Class submarine training program.

The results of the Marine Controls segment have been reported as discontinued operations since the second quarter of fiscal 2005 and previously reported statements have been reclassified.
Interest expense relating to debt not directly attributable to the continuing operations and paid with the proceeds of the sale of the Marine Controls business has been allocated to discontinued operations based on its share of net
assets.

Cleaning technologies and other discontinued operations

In fiscal 2004, CAE completed the sale of its last Cleaning Technologies business, Alpheus Inc., to Cold Jet Inc. The Company was entitled to receive further consideration based on the performance of the business until
2007 and also had certain obligations to Cold Jet Inc. During the third quarter of fiscal 2006, an agreement was reached to settle the further consideration and cancel the outstanding obligations of the Company. Cold Jet paid CAE an amount of
$0.2 million.

In fiscal 2006, CAE incurred additional costs of $3.4 million related to its former Cleaning Technologies business mostly in connection with the revaluation of a pension liability and
reversal of unrecognized tax asset, and recorded $0.9 million for other discontinued operations.

Forestry Systems

On August 16, 2002, CAE sold substantially all the assets of the sawmill division of its Forestry Systems. The Company was entitled to receive further cash consideration from the sale based on operating performance of
the disposed business for the three-year period from August 2002 to August 2005. In November 2005, the Company was notified by the buyers that, in their view, the targeted level of operating performance which would trigger further payment had not
been achieved. CAE has completed a review of the buyers' books and records and has, in January 2006, launched legal proceedings to collect the payment that it believes is owed to the Company. The Company has an expense of $0.2 million in fees to
date in connection with the evaluation and litigation.

ASSETS HELD FOR SALE

As part of its global expansion, CAE announced in its third quarter of fiscal 2005 that it would be opening a new business aviation-training centre in Morris County, New Jersey. The new training centre is expected to
be operational in fiscal 2007. As a result, the valuation of two redundant training centre buildings, one located in Dallas, Texas and a second located in Marietta, Georgia, were adjusted to their fair value in fiscal 2005 and reclassified as assets
held for sale, and previously reported amounts have been reclassified.

As part of a review of its performance and strategic orientation, CAE decided to close its training centre located in Maastricht, Netherlands during the third quarter of fiscal 2006. As a
result, a building was reclassified as an asset held for sale.

CAE ANNUAL REPORT 2006 _83

---

NOTE 3  DISCONTINUED OPERATIONS
AND ASSETS HELD FOR SALE (CONTD)

Summarized financial information for
the discontinued operations is as follows:

|OPERATION SUMMARY OF DISCONTINUED OPERATIONS                            |   |      |   |       |   |      
|----------------------------------------------------------------------- | - | ---- | - | ----- | - | -----
|(amounts in millions except per share
      amounts)                    |   | 2006 |   | 2005  |   | 2004 
|                                                                       
|Revenue                                                                 |   |      |   |       |   |      
|Cleaning Technologies                                                   | $ |     |   | $    | $ | 1.7  
|Forestry Systems                                                        |   |     |   |      |   | 3.1  
|Marine Controls                                                         |   |     |   | 109.6 |   | 154.8
|                                                                       
|                                                                        | $ |     | $ | 109.6 | $ | 159.6
|                                                                       
|Gain on sale of
      Marine Controls, net of $25.1 million tax expense | $ |     | $ | 103.9 | $ |     

|Net (loss)
      earnings from Marine Controls,                              |   |                            |      |       |                            |      |          |   |      |       |  
|---------------------------------------------------------------------------- | - | -------------------------- | ---- | ----- | -------------------------- | ---- | -------- | - | ---- | ----- | -
|net
      of tax expense (2006  $0.7; 2005  $3.8; 2004  $9.2)             |   |                            |      | (1.7  | )                          |      | 5.5      |   |      | 20.0  |  
|Net loss from
      Cleaning Technologies and other discontinued operations, |   |                            |      |       |                            |      |          |   |      |       |  
|net of tax expense (recovery) (2006 
      $1.0; 2005  Nil; 2004  ($1.7)) |   |                            | (4.1 | )     |                            | (4.4 | )        |   | (2.6 | )    
|Net loss from
      Forestry Systems,                                        |   |                            |      |       |                            |      |          |   |      |       |  
|net
      of tax recovery (2006  $0.1; 2005  Nil; 2004  $0.2)             |   |                            |      | (0.2  | )                          |      |         |   |      | (0.5  | )
|Net loss from
      Training & Services/Civil,                               |   |                            |      |       |                            |      |          |   |      |       |  
|net
      of tax recovery (2006  Nil; 2005  $0.1; 2004  $0.2)             |   |                            |      |      |                            |      | (0.2     | ) |      | (0.3  | )
|                                                                            
|Net (loss)
      earnings from discontinued operations                       |   |                            | $    | (6.0  | )                          | $    | 104.8    |   | $    | 16.6  |  
|                                                                            
|Basic net (loss)
      earnings per share from discontinued operations       |   |                            | $    | (0.02 | )                          | $    | 0.42     |   | $    | 0.07  |  
|                                                                            
|Diluted net
      (loss) earnings per share from discontinued operations     |   |                            | $    | (0.02 | )                          | $    | 0.42     |   | $    | 0.07  |  
|                                                                            
|NET
      ASSETS OF DISCONTINUED OPERATIONS AND ASSETS HELD FOR
      SALE   |   |                            |      |       |                            |      |          |   |     
|(amounts in millions)                                                        |   | As
      at March 31, 2006 |      |       | As at March 31,
      2005 |     
|                                                                            
|                                                                             |   | Marine                     |      |       |                            |      | Marine   |   |      |       |  
|                                                                             |   | Controls                   |      | Other |                            |      | Controls |   |      | Other |  
|                                                                            
|Current assets
      held for sale                                           |   |                            |      |       |                            |      |          |   |      |       |  
|Cash
      and cash equivalents                                              | $ |                           | $    |      |                            | $    | 4.4      |   | $    |      |  
|Accounts receivable                                                          |   |                           |      |      |                            |      | 1.2      |   |      |      |  
|Prepaid expenses                                                             |   |                           |      |      |                            |      | 0.2      |   |      |      |  
|                                                                            
|                                                                             | $ |                           | $    |      |                            | $    | 5.8      |   | $    |      |  
|                                                                            
|Long-term assets
      held for sale                                         |   |                            |      |       |                            |      |          |   |      |       |  
|Property, plant and equipment, net                                           | $ |                           | $    | 5.9   |                            | $    | 50.8     |   | $    | 4.2   |  
|Other assets                                                                 |   |                           |      |      |                            |      | 2.5      |   |      |      |  
|                                                                            
|                                                                             | $ |                           | $    | 5.9   |                            | $    | 53.3     |   | $    | 4.2   |  
|                                                                            
|Current
      liabilities related to assets held for sale                    |   |                            |      |       |                            |      |          |   |      |       |  
|Accounts payable and accrued liabilities                                     | $ |                           | $    |      |                            | $    | 7.8      |   | $    |      |  
|                                                                            
|                                                                             | $ |                           | $    |      |                            | $    | 7.8      |   | $    |      |  
|                                                                            
|Long-term
      liabilities related to assets held for sale                  |   |                            |      |       |                            |      |          |   |      |       |  
|Long-term debt                                                               | $ |                           | $    |      |                            | $    | 53.0     |   | $    |      |  
|Future income taxes                                                          |   |                           |      |      |                            |      | 0.4      |   |      |      |  
|                                                                            
|                                                                             | $ |                           | $    |      |                            | $    | 53.4     |   | $    |      |  
|                                                                            

Other
property, plant and equipment held for sale consist of land and buildings
related to the Training & Services/Civil segment, as previously
described.

84_ CAE ANNUAL REPORT 2006

---

NOTE 4  IMPAIRMENT OF GOODWILL,
TANGIBLE AND INTANGIBLE ASSETS

During fiscal 2005, CAE's management
performed a comprehensive review of the current performance and strategic
orientation of its reporting units. This strategic review revealed that several
factors had severely and persistently affected mainly the Civil business,
including the enduring adverse economic environment of the airline industry.
This created a new market reality, slower than anticipated training outsourcing
opportunities (due to pilot-related restructuring efforts at some major
airlines), escalating cost of manufacturing full-flight simulators, the erosion
of the 30 to 50-seat regional jet market and the appreciation of the Canadian
dollar. These elements had caused the recalibration of some key assumptions in
Civil's strategic planning, which led to the review of the carrying amount of
certain assets, including goodwill, intangible assets acquired in previous
acquisitions, inventory levels for the regional jet market, non-performing
training equipment and certain other assets.

Therefore, based on this review, as at March 31, 2005, the Company
recorded a $443.3 million impairment charge, all of which is virtually related
to its Civil segments, as follows:

|(amounts in millions)                            |   |       |   |   | 2005  |  
|------------------------------------------------ | - | ----- | - | - | ----- | -
|                                                
|Goodwill                                         |   |       |   | $ | 205.2 |  
|Customer
      relations                         |   |       |   |   | 86.7  |  
|Trade names and
      other intangible assets    |   |       |   |   | 20.4  |  
|Property, plant
      and equipment (simulators) |   |       |   |   | 78.4  |  
|Inventories                                      |   |       |   |   | 33.3  |  
|Other
      assets                               |   |       |   |   | 19.3  |  
|                                                
|                                                 |   |       |   | $ | 443.3 |  
|                                                
|NOTE 5  ACCOUNTS RECEIVABLE                     |   |       |   |   |       |  
|(amounts in millions)                            |   | 2006  |   |   | 2005  |  
|                                                
|Trade                                            | $ | 107.2 |   | $ | 99.9  |  
|Allowance for
      doubtful accounts            |   | (4.8  | ) |   | (3.5  | )
|Unbilled
      receivables                       |   | 122.8 |   |   | 122.0 |  
|Other
      receivables                          |   | 35.1  |   |   | 37.3  |  
|                                                
|                                                 | $ | 260.3 |   | $ | 255.7 |  
|                                                

The
Company has an agreement to sell third-party receivables to a financial
institution for an amount of up to $25.0 million. Under the terms and conditions
of the agreement, the Company continues to act as a collection agent. The
selected accounts receivable are sold to a third party for a cash consideration
on a non-recourse basis to the Company. As at March 31, 2006, $6.7 million (2005
 $16.5 million) of specific accounts receivable were sold to the financial
institution pursuant to this agreement. Proceeds (net of $0.5 million in fees,
2005  Nil) of the sale were used to repay borrowings under the Company's credit
facilities.

|NOTE 6  INVENTORIES                                    |   |         |   |              |   |                |   |         |   |              |  
|------------------------------------------------------- | - | ------- | - | ------------ | - | -------------- | - | ------- | - | ------------ | -
|(amounts in millions)                                   |   |         |   |              |   |                |   |         |   | 2006         |  
|                                                       
|Work in
      progress                                  |   |         |   |              |   |                |   |         | $ | 66.6         | $
|Raw materials,
      supplies and manufactured products |   |         |   |              |   |                |   | 26.6    |   | 39.4        
|                                                       
|                                                        |   |         |   |              |   |                |   |         | $ | 93.2         | $
|                                                       
|NOTE 7  PROPERTY, PLANT AND
      EQUIPMENT            |   |         |   |              |   |                |   |        
|(amounts in millions)                                   |   |         |   |              |   | 2006           |   |         |   |              |  
|                                                       
|                                                        |   |         |   | Accumulated  |   | Net
      Book |   |         |   | Accumulated  |  
|                                                        |   | Cost    |   | Depreciation |   | Value          |   | Cost    |   | Depreciation |  
|                                                       
|Land                                                    | $ | 20.2    |   | $
          | $ | 20.2           | $ | 18.8    | $ |             | $
|Buildings and
      improvements                        |   | 220.6   |   | 65.8         |   | 154.8          |   | 233.9   |   | 66.9         |  
|Simulators                                              |   | 528.5   |   | 77.9         |   | 450.6          |   | 509.3   |   | 48.6         |  
|Machinery and
      equipment                           |   | 177.7   |   | 104.9        |   | 72.8           |   | 185.3   |   | 100.3        |  
|Assets under
      capital lease(1)                     |   | 32.2    |   | 20.3         |   | 11.9           |   | 24.0    |   | 22.2         |  
|Assets under
      construction(2)                      |   | 129.0   |   |             |   | 129.0          |   | 58.9    |   |             |  
|                                                       
|                                                        | $ | 1,108.2 | $ | 268.9        | $ | 839.3          | $ | 1,030.2 | $ | 238.0        | $
|                                                       

|(1) | Includes simulators and
      machinery and equipment.                                                                       
|--- | -----------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Simulators and buildings are
      included as at March 31, 2006 and only simulators are included as at March
      31, 2005.
|   

CAE ANNUAL REPORT 2006 _85

---

|NOTE 8  INTANGIBLE ASSETS                                                                        |     |      |                |                |          |                   |   |      |                   |   |              |          |   |         
|------------------------------------------------------------------------------------------------- | --- | ---- | -------------- | -------------- | -------- | ----------------- | - | ---- | ----------------- | - | ------------ | -------- | - | --------
|(amounts in millions)                                                                             |     |      |                |                |          | 2006              |   |      |                   |   |              |          |   |         
|                                                                                                 
|                                                                                                  |     |      | Accumulated    |                | Net Book |                   |   |      |                   |   | Accumulated  |          |   | Net Book
|                                                                                                  |     | Cost | Amortization   |                | Value    |                   |   | Cost |                   |   | Amortization |          |   | Value   
|                                                                                                 
|Trade
      names                                                                                 | $   | 12.2 | $              | 0.9            | $        | 11.3              |   | $    | 12.3              |   | $            | 0.2      |   | $       
|Customer
      relations                                                                          |     | 1.2  |                | 0.2            |          | 1.0               |   |      | 0.5               |   |              |         |   |         
|Customer
      contractual agreements                                                             | 7.7 |      | 3.0            |                | 4.7      |                   |   | 8.5  |                   |   | 2.5          |          |   | 6.0     
|Enterprise
      resources                                                                        |     |      |                |                |          |                   |   |      |                   |   |              |          |   |         
|planning software (ERP)                                                                          |     | 3.3  |                |               |          | 3.3               |   |      |                  |   |              |         |   |         
|Other intangible
      assets                                                                     |     | 4.0  |                | 1.0            |          | 3.0               |   |      | 2.1               |   |              | 0.5      |   |         
|                                                                                                 
|                                                                                                  | $   | 28.4 | $              | 5.1            | $        | 23.3              |   | $    | 23.4              |   | $            | 3.2      |   | $       
|                                                                                                 
|The continuity of intangible
      assets is as follows:                                          |     |      |                |                |          |                   |   |      |                   |   |              |          |  
|(amounts in millions)                                                                             |     |      |                |                |          |                   |   |      |                   |   |              |          |   |         
|                                                                                                 
|                                                                                                  |     |      |                | Simulation     |          | Training          |   |      | Simulation        |   |              | Training |   |         
|                                                                                                  |     |      | Products/Civil | Services/Civil |          | Products/Military |   |      | Services/Military |   |              | Total    |  
|                                                                                                 
|Opening balance                                                                                   |     |      | $              |               | $        | 17.7              |   | $    | 1.6               |   | $            | 0.9      |   | $       
|Acquisitions
      (Note 2)                                                                       |     |      |                |               |          |                  |   |      | 2.7               |   |              |         |   |         
|ERP software
      additions                                                                      |     |      |                | 1.6            |          | 0.6               |   |      | 0.9               |   |              | 0.2      |   |         
|Amortization                                                                                      |     |      |                |               |          | (1.5              | ) |      | (0.3              | ) |              | (0.3     | ) |         
|Foreign
      exchange                                                                            |     |      |                |               |          | (0.6              | ) |      | (0.1              | ) |              | (0.1     | ) |         
|                                                                                                 
|Closing balance                                                                                   |     |      | $              | 1.6            | $        | 16.2              |   | $    | 4.8               |   | $            | 0.7      |   | $       
|                                                                                                 
|(amounts in millions)                                                                             |     |      |                |                |          |                   |   |      |                   |   |              |          |   |         
|                                                                                                 
|                                                                                                  |     |      |                | Simulation     |          | Training          |   |      | Simulation        |   |              | Training |   |         
|                                                                                                  |     |      | Products/Civil | Services/Civil |          | Products/Military |   |      | Services/Military |   |              | Total    |  
|                                                                                                 
|Opening balance                                                                                   |     |      | $              |               | $        | 127.4             |   | $    | 1.8               |   | $            |         |   | $       
|Acquisitions
      (Note 2)                                                                       |     |      |                |               |          | 7.2               |   |      |                  |   |              | 0.9      |   |         
|Amortization                                                                                      |     |      |                |               |          | (6.3              | ) |      | (0.1              | ) |              |         |   |         
|Impairment(1)                                                                                     |     |      |                |               |          | (107.1            | ) |      |                  |   |              |         |   |         
|Foreign
      exchange                                                                            |     |      |                |               |          | (3.5              | ) |      | (0.1              | ) |              |         |   |         
|                                                                                                 
|Closing balance                                                                                   |     |      | $              |               | $        | 17.7              |   | $    | 1.6               |   | $            | 0.9      |   | $       
|                                                                                                 
|(1)As indicated in Note 4, the Company
      recognized an impairment charge during fiscal 2005.  |     |      |                |                |          |                   |   |      |                   |   |              |         
|The annual amortization expense
      for the next five years will be approximately $1.9 million. |     |      |                |                |          |                   |  

NOTE 9  GOODWILL

As at April 1, 2005, following the
changes in its internal organizational structure related to the operating
segments of the Company, goodwill has been reassigned to the reporting segment
using a related fair value allocation approach and is divided as follows between
Simulation Products/Military and Training & Services/Military:

|(amounts in millions)       |   |                |   |                |   |                   |   |   |                   |   |   | 2006  |  
|--------------------------- | - | -------------- | - | -------------- | - | ----------------- | - | - | ----------------- | - | - | ----- | -
|                           
|                            |   | Simulation     |   | Training       |   | Simulation        |   |   | Training          |   |   |       |  
|                            |   | Products/Civil |   | Services/Civil |   | Products/Military |   |   | Services/Military |   |   | Total |  
|                           
|Opening balance             | $ |               | $ |               | $ | 52.5              |   | $ | 39.6              |   | $ | 92.1  |  
|Acquisitions
      (Note 2) |   |               |   |               |   | 4.5               |   |   |                  |   |   | 4.5   |  
|Foreign
      exchange      |   |               |   |               |   | (2.8              | ) |   | (1.8              | ) |   | (4.6  | )
|                           
|Closing balance             | $ |               | $ |               | $ | 54.2              |   | $ | 37.8              |   | $ | 92.0  |  
|                           

86_ CAE ANNUAL REPORT 2006

---

|(amounts in millions)                                                                                   |                |            |                |      |                   |      |      |                   |      |   |          |      |   | 2005   |  
|------------------------------------------------------------------------------------------------------- | -------------- | ---------- | -------------- | ---- | ----------------- | ---- | ---- | ----------------- | ---- | - | -------- | ---- | - | ------ | -
|                                                                                                       
|                                                                                                        |                | Simulation |                |      | Training          |      |      | Simulation        |      |   | Training |      |   |        |  
|                                                                                                        | Products/Civil |            | Services/Civil |      | Products/Military |      |      | Services/Military |      |   | Total    |     
|                                                                                                       
|Opening balance                                                                                         | $              | 55.1       |                | $    | 149.0             |      | $    | 55.1              |      | $ | 41.5     |      | $ | 300.7  |  
|Acquisitions
      (Note 2)                                                                             |                | 1.9        |                |      | 5.0               |      |      | 1.4               |      |   | 1.1      |      |   | 9.4    |  
|Impairment(1)                                                                                           |                | (55.4      | )              |      | (149.8            | )    |      |                  |      |   |         |      |   | (205.2 | )
|Foreign
      exchange                                                                                  |                | (1.6       | )              |      | (4.2              | )    |      | (4.0              | )    |   | (3.0     | )    |   | (12.8  | )
|                                                                                                       
|Closing balance                                                                                         | $              |           |                | $    |                  |      | $    | 52.5              |      | $ | 39.6     |      | $ | 92.1   |  
|                                                                                                       
|(1)As indicated in Note 4, a goodwill
      impairment charge was recorded in fiscal 2005.              |                |            |                |      |                   |      |      |                   |      |   |          |      |  
|NOTE 10  OTHER ASSETS                                                                                  |                |            |                |      |                   |      |      |                   |      |   |          |      |   |        |  
|(amounts in millions)                                                                                   |                |            |                |      |                   |      |      |                   |      |   | 2006     |      |   | 2005   |  
|                                                                                                       
|Restricted
      Cash                                                                                   |                |            |                |      |                   |      |      |                   |      | $ | 1.5      |      | $ | 0.9    |  
|Investment in
      and advances to CVS Leasing Ltd. (i)                                                |                |            |                |      |                   |      |      |                   |      |   | 39.0     |      |   | 41.2   |  
|Deferred
      development costs, net of accumulated amortization of $22.6 (2005  $9.5)
      (ii)     |                |            |                | 26.1 |                   |      | 33.7 |                  
|Deferred
      pre-operating costs, net of accumulated amortization of $18.6 (2005 
      $14.6) (iii) |                |            | 9.2            |      |                   | 13.5 |     
|Deferred
      financing costs, net of accumulated amortization of $14.5 (2005 
      $12.1)           |                |            |                |      |                   | 7.4  |      |                   | 5.6  |  
|Long-term
      receivables (iv)                                                                        |                |            |                |      |                   |      |      |                   |      |   | 11.7     |      |   | 10.6   |  
|Accrued benefit
      asset (Note 21)                                                                   |                |            |                |      |                   |      |      |                   |      |   | 20.8     |      |   | 18.0   |  
|Other, net of
      accumulated amortization of $3.6 million (2005  $1.5)                              |                |            |                |      |                   |      |      |                   | 20.5 |   |          | 14.8 |  
|                                                                                                       
|                                                                                                        |                |            |                |      |                   |      |      |                   |      | $ | 136.2    |      | $ | 138.3  |  
|                                                                                                       

|(i) | The Company leads a
      consortium, which was contracted by the United Kingdom (UK) Ministry of
      Defense (MoD) to design, construct, manage, finance and operate an
      integrated simulator-based aircrew training facility for the Medium
      Support Helicopter (MSH) 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% with the balance held by
the other consortium partners. This subsidiary has leased the land from the MoD,
built the facility and operates the training centre. Aircrew has been
consolidated with the accounts of the Company since its inception.

In
addition, the Company has a 14% minority interest and has advanced funds to CVS
Leasing Ltd. (CVS), the entity that owns the simulators and other equipment
leased to Aircrew. In March 2005, CVS refinanced its operations through an
amount of £70.6 million of financing, which expires in October 2016.

|(ii) | R&D expenditures
      aggregated to $95.8 million during the year (2005  $93.5 million; 2004 
      $81.0 million), of which $1.8 million represents development costs that
      qualify for a deferral pursuant to CICA requirements (2005  $9.9 million;
      2004  $12.7 million). The Company has recorded government assistance
      against these amounts (refer to Note 19).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    

An amount of $13.1 million in
deferred development costs was amortized during the year (2005  $3.9 million,
2004  $5.4 million).

|(iii) | The Company defers costs
      incurred during the pre-operating period for all new operations.
      Capitalization ceases and amortization begins when operations commence. In
      fiscal 2006, $0.7 million was capitalized (2005  $1.7 million) and an
      amortization of $4.0 million was taken (2005  $6.1 million; 2004  $4.1
      million).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(iv)  | Long term receivables
      include secured subordinated promissory notes in connection with the sale
      of its various Cleaning Technologies businesses totalling $8.5 million.
      The notes bear interest at rates ranging from 3% to 7%.                                                                                                           
|     

CAE ANNUAL REPORT 2006 _87

---

|NOTE 11  DEBT FACILITIES         |                                                                                            |       |       |      
|--------------------------------- | ------------------------------------------------------------------------------------------ | ----- | ----- | -----
|A.                                | LONG-TERM DEBT                                                                             |       |       |      
|(amounts in millions)             |                                                                                            | 2006  |       | 2005 
|                                 
|Recourse debt                     |                                                                                            |       |       |      
|(i)Senior notes                   | $                                                                                          | 126.1 | $     | 150.6
|(ii)                              | Revolving unsecured term credit facilities,                                                |       |       |      
|                                  | 5 years, maturing in July 2010; US$400.0                                                   |       |       |      
|                                  | (outstanding as at March 31, 2006  Nil and USNil, as at March 31, 2005  Nil)             |       |      |      
|                                  | 5 years, maturing April 2006; US$350.0                                                     |       |       |      
|                                  | (outstanding as at March 31, 2006  Nil and USNil, as at March 31, 2005  $30.4 and USNil) |       |      |      
|                                  | 5 years, maturing July 2010,y100.0                                                         |       |       |      
|                                  | (outstanding as at March 31, 2006 yNil, as at March 31, 2005 yNil)                       |       |      |      
|(iii)                             | Term loans, maturing in May and June 2011                                                  |       |       |      
|                                  | (outstanding as at March 31, 2006 y26.9 andy5.3, as at March 31, 2005 y30.5 andy6.0)     |       | 45.6  |      
|(iv)                              | Grapevine Industrial Development Corporation bonds,                                        |       |       |      
|                                  | secured, maturing in January 2010 and 2013 (US$27.0)                                       |       | 31.5  |      
|(v)                               | Miami Dade County Bonds, maturing in March 2024 (US$11.0)                                  |       | 12.8  |      
|(vi)                              | Other debt, maturing in December 2012                                                      |       | 4.9   |      
|(vii)                             | Obligations under capital lease commitments                                                |       | 13.5  |      
|(viii)                            | Amsterdam asset-backed financing maturing in December 2007 and August 2008                 |       |       |      
|                                  | (outstanding as at March 31, 2006 yNil, as at March 31, 2005 y24.7)                      |       |      |      
|                                  |                                                                                            |       |       |      
|Non-recourse debt                 |                                                                                            |       |       |      
|(ix)                              | Term loan of £12.7 secured, maturing in October 2016                                       |       |       |      
|                                  | (outstanding March 31, 2006  £5.3, March 31, 2005  £6.0)                                 |       | 10.7  |      
|(x)                               | Term Loan maturing in June 2021                                                            |       |       |      
|                                  | (outstanding as at March 31, 2006 y13.9, as at March 31, 2005 yNil)                      |       | 19.7  |      
|(xi)                              | Term Loan maturing in January 2008                                                         |       |       |      
|                                  | (outstanding as at March 31, 2006  US$5.6, as at March 31, 2005  USNil)                  |       | 6.5   |      
|                                 
|                                  |                                                                                            |       | 271.3 |      
|Less:                             |                                                                                            |       |       |      
|Current portion of long-term debt |                                                                                            | 8.0   |       | 32.7 
|Current portion of capital lease  |                                                                                            | 2.4   |       | 2.6  
|                                 
|                                  |                                                                                            | $     | 260.9 | $    
|                                 

|(i)  | Pursuant to a private placement, the Company borrowed US$108.0 million and C$20.0 million. These unsecured senior notes rank equally with term bank financings with fixed repayment amounts of US$15.0 million
in 2007, US$60.0 million in 2009 and US$33.0 million in 2012. During the first quarter of fiscal 2006, CAE repaid the $20.0 million Canadian dollar tranche, which matured in June 2005. Fixed interest is payable semi-annually in June and
December at an average rate of 7.6%. The Company has entered into an interest rate swap agreement converting the fixed interest rate into the equivalent of a three-month LIBOR borrowing rate plus 3.6% on US$33.0 million of the senior
notes.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) | On July 7, 2005, the Company entered into a new revolving credit agreement. This revolving unsecured term credit facility (US$400.0 million andy100.0 million) has a committed term of five years maturing in July 2010. The facility has covenants covering minimum shareholders' equity, interest coverage and debt coverage ratios. The applicable interest rate on this revolving
term credit facility is at the option of the Company, based on the bank's prime rate, bankers' acceptances or LIBOR plus a spread, which depends on the credit rating assigned by Standard & Poor's Rating Services.                                                                                                  
|    

88_ CAE ANNUAL REPORT 2006

---

(iii)The Company, in association with Iberia Lineas de España, combined their aviation training operations in Spain.  The operators financed the acquisition of the simulators from CAE and Iberia through
asset-backed  financing maturing in May and June 2011.  As part of the lease  agreements, should the October 2003 agreement be terminated, CAE and Iberia will be obliged to repurchase the simulators they contributed, in proportion to the fair value
of the simulators, for a total amount equal to the outstanding balance under the financing agreement.  Quarterly capital repayments are made for the term of the financing.  The implicit interest rate is 4.60%.  The net book value of  the simulators
being financed, as at March 31, 2006, is equal to approximately $76.8  million (y54.2   million)  [(2005  $90.2  million (y57.5   million)]. (iv) 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
mature in 2010 and 2013, respectively.  Real property, improvements, fixtures and specified simulation equipment secure the bonds.  The rates are set periodically by the remarketing agent based on market conditions.  The rate for bonds maturing in
2010 is set on a weekly basis.  The rate for bonds maturing in 2013 is set on an annual basis and is subject to a maximum rate of 10% permissible under current applicable laws.  As at March 31, 2006, the combined rate for both series was
approximately 3.92% (2005  4.10%) . 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, 2006.  Also, a letter of credit has been issued to support the
bonds for the outstanding amount of the loans.

(v) The Miami Dade County Bonds, maturing in March 2024 (US$11.0   million), are secured by a simulator.  As at March 31, 2006, the applicable floating rate, which is reset weekly was 4.3%.  Also, a letter of
credit has been issued to support the bonds for the outstanding  amount of the loans.

(vi) An unsecured $35.0  million facility to secure financing for the cost of the establishment of Enterprise Resource Planning (ERP) system.  A drawdown under the facility can be made only once the costs are
incurred, on a quarterly basis, with monthly repayments over a term of seven years beginning at the end of the first month following each quarterly disbursement.  The interest rate on the first drawdown is approximately 5.6%.

(vii) These capital leases are related to the leasing of various equipment and simulators.  The effective interest rate on obligations under capital leases, which have staggered maturities until June 2010 was
approximately 5.92%  as at March 31, 2006 (2005  5.0%) . As well, an additional capital lease results from a conversion in the fourth quarter of fiscal 2006 of an operating lease recorded on its balance ($10.2   million) for a simulator
that CAE will relocate in the first quarter of fiscal 2007 from Tampa to its Brazil training centre.  The lease has an initial four-year  term with a buyout option and possibility of extension thereafter with an implicit lease rate of approximately
7.3%.  (viii) Asset-backed  financing in the Company's Amsterdam Training centre represents financing for three different simulators with original maturity  dates of December 2007 and August 2008.  The financing was repaid at the end of the third
quarter of fiscal 2006.  The average cost of the financing was equal to approximately 8.0%.

(ix) The Company arranged project financing, which was refinanced during December 2004 for one of its subsidiaries to finance its MSH program for the MoD in the UK.  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 2016.  The financing is non-recourse  to CAE.  Interest on the loans is charged at a rate approximating LIBOR  plus 0.85%.  The Company has entered into an
interest rate swap totalling £4.8 million, fixing the interest rate at 6.31%.   The value of the assets pledged as collateral for the credit facility as at March 31, 2006, is £26.9 million (2005  £26.1 million).

(x) Term loan, maturing in June 2021, representing CAE's proportionate share (25%) of the NH90 project.  The total amount available to NH90 under the facility isy175. 5  million.  The debt is non-recourse  to CAE.  The borrowings bear interest at a EURIBOR rate and are currently  swapped to fixed at a rate of 3.8%.

(xi) The other debt is the result of CAE's proportionate share (49%) of term debt for the acquisition of simulators on a non-recourse  basis, for  its joint venture in the Zhuhai Training Centre and maturing in January
and October 2008.  The borrowings bear interest on a floating rate basis of US Libor plus a spread.

(xii) Payments required in each of the next five fiscal years to meet the retirement provisions of the long-term   debt and capital leases are as follows:

|                                                                              |   | Long-term |   |               |   |      
|----------------------------------------------------------------------------- | - | --------- | - | ------------- | - | -----
|(amounts in millions)                                                         |   | Debt      |   | Capital Lease |   | Total
|                                                                             
|2007                                                                          | $ | 8.0       | $ | 2.4           | $ | 10.4 
|2008                                                                          |   | 30.1      |   | 1.8           |   | 31.9 
|2009                                                                          |   | 12.0      |   | 0.8           |   | 12.8 
|2010                                                                          |   | 81.1      |   | 0.7           |   | 81.8 
|2011                                                                          |   | 21.3      |   | 7.7           |   | 29.0 
|Thereafter                                                                    |   | 105.3     |   | 0.1           |   | 105.4
|                                                                             
|                                                                              | $ | 257.8     | $ | 13.5          | $ | 271.3
|                                                                             
|As at March 31, 2006, CAE is in full compliance with its financial covenants. |   |           |   |               |   |      

B. SHORT-TERM DEBT

The Company has unsecured and uncommitted bank lines of credit available in various currencies totalling $41.2 million (2005  $31.0 million; 2004  $28.2 million), none of which were used as at
March 31, 2006 (2005  $11.2 million; 2004  $6.4 million). The various lines of credit bear interest at different rates based on the respective country's prime commercial lending rate.

CAE ANNUAL REPORT 2006 _89

---

|NOTE 11  DEBT FACILITIES (CONTD)                              |   |      |   |   |      |   |   |      |  
|--------------------------------------------------------------- | - | ---- | - | - | ---- | - | - | ---- | -
|C. INTEREST
      EXPENSE, NET                                  |   |      |   |   |      |   |   |      |  
|Details of
      interest expense (income) are as follows:      |   |      |   |   |      |   |   |      |  
|(amounts in millions)                                           |   | 2006 |   |   | 2005 |   |   | 2004 |  
|                                                               
|Long-term debt
      interest expense                           | $ | 21.6 |   | $ | 35.3 |   | $ | 30.2 |  
|Amortization of
      deferred financing costs and other        |   | 4.0  |   |   | 9.7  |   |   | 5.7  |  
|Allocation of
      interest expense to discontinued operations |   |     |   |   | (1.4 | ) |   | (1.5 | )
|Interest
      capitalized                                      |   | (2.8 | ) |   | (5.8 | ) |   | (6.4 | )
|                                                               
|Interest on
      long-term debt                                |   | 22.8 |   |   | 37.8 |   |   | 28.0 |  
|                                                               
|Interest
      income                                           |   | (6.9 | ) |   | (5.7 | ) |   | (6.1 | )
|Other interest
      expense (income), net                      |   | 0.3  |   |   |     |   |   | 0.5  |  
|                                                               
|Interest expense
      (income), net                            |   | (6.6 | ) |   | (5.7 | ) |   | (5.6 | )
|                                                               
|Interest
      expense, net                                     | $ | 16.2 |   | $ | 32.1 |   | $ | 22.4 |  
|                                                               

NOTE 12  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:                                                                                                                                                    
|    

|                                       |                 |   | 2006   |             |   | 2005   |             |   | 2004  
|-------------------------------------- | --------------- | - | ------ | ----------- | - | ------ | ----------- | - | ------
|                                      
|(amounts in millions,                  | Number          |   | Stated | Number      |   | Stated | Number      |   | Stated
|except number of shares)               | of
      Shares |   | Value  | of Shares   |   | Value  | of Shares   |   | Value 
|                                      
|Balance at
      beginning of year     | 248,070,329     | $ | 373.8  | 246,649,180 | $ | 367.5  | 219,661,178 | $ | 190.5 
|Shares issued
      (Note 2)(a)(b) (c) | 1,091,564       |   | 6.9    | 424,628     |   | 2.0    | 26,600,000  |   | 175.0 
|Stock options
      exercised          | 1,497,540       |   | 8.0    | 869,620     |   | 3.6    | 282,000     |   | 1.4   
|Stock dividends(d)                     | 42,997          |   | 0.3    | 126,901     |   | 0.7    | 106,002     |   | 0.6   
|                                      
|Balance at end
      of year           | 250,702,430     | $ | 389.0  | 248,070,329 | $ | 373.8  | 246,649,180 | $ | 367.5 
|                                      

|(a)   | On May 20, 2005, the Company
      issued 1,000,000 common shares at a price of $6.13 per share for the
      acquisition of Terrain Experts Inc. On November 30, 2005, the Company
      issued 91,564 common shares at a price of $8.07 per share for the second
      tranche payment of Greenley & Associates Inc.                                                                    
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(b)   | On November 30, 2004, the
      Company issued 424,628 common shares at a price of $4.71 per share for the
      first tranche payment of Greenley & Associates.                                                                                                                                                                                                                          
|     
|(c)   | On September 30, 2003, the
      Company issued 26,600,000 common shares at a price of $6.58 per share for
      cash proceeds of $175.0 million.                                                                                                                                                                                                                                         
|     
|(d)   | Until February 29, 2004, the
      Company's Dividend Reinvestment Plan (DRIP) provided that eligible
      shareholders (which covered all shareholders living wherever the shares
      were distributed) could elect to receive common stock dividends in lieu of
      cash dividends. As of March 1, 2004, eligibility has been limited to
      Canadian resident shareholders only.
|     
|(iii) | The following is a
      reconciliation of the denominators for the basic and diluted earnings
      (loss) per share computations:                                                                                                                                                                                                                                                       
|     

|                                                           |                 | 2006        | 2005        |    |   | 2004       
|---------------------------------------------------------- | --------------- | ----------- | ----------- | -- | - | -----------
|                                                          
|Weighted average
      number of common shares outstanding | 
      Basic   | 249,806,204 | 247,060,580 |    |   | 233,167,858
|Effect of
      dilutive stock options                     |                 | 2,325,422   | 812,273     |    |   | 849,912    
|                                                          
|Weighted average
      number of common shares outstanding | 
      Diluted | 252,131,626 | 247,872,853 | (1 | ) | 234,017,770
|                                                           |                 |            

(1)For fiscal 2005, the effect of stock options potentially
exercisable on pro forma net loss per share was anti-dilutive; therefore, basic
and diluted pro forma net loss per share are the same.

Options
to acquire 2,269,150 common shares (2005  4,635,100; 2004  4,195,400) have
been excluded from the above calculation since their inclusion would have an
anti-dilutive effect.

|(iv) A
      reconciliation of contributed surplus is as follows: |   |      |   |      |   |     
|----------------------------------------------------------------- | - | ---- | - | ---- | - | ----
|(amounts in millions)                                             |   | 2006 |   | 2005 |   | 2004
|                                                                 
|Balance at
      beginning of year                                | $ | 3.3  | $ | 1.3  | $ |    
|Stock-based
      compensation (Note 13)                          |   | 2.5  |   | 2.0  |   | 1.3 
|                                                                 
|Balance at end
      of year                                      | $ | 5.8  | $ | 3.3  | $ | 1.3 
|                                                                 

90_ CAE ANNUAL REPORT 2006

---

NOTE 13  STOCK-BASED COMPENSATION
PLANS

EMPLOYEE STOCK OPTION PLAN

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

As at
March 31, 2006, a total of 9,162,886 common shares remained authorized for
issuance under the Employee Stock Option Plan (ESOP). 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 outstanding
become immediately exercisable by option holders. 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:

|For the years ended March 31                                                                    |                  |   |             | 2006               |                     |                     |       | 2005        |            |   |       | 2004    
|----------------------------------------------------------------------------------------------- | ---------------- | - | ----------- | ------------------ | ------------------- | ------------------- | ----- | ----------- | ---------- | - | ----- | --------
|                                                                                               
|                                                                                                |                  |   |             | Weighted           |                     |                     |       | Weighted    |            |   |       | Weighted
|                                                                                                |                  |   |             | Average            |                     |                     |       | Average     |            |   |       | Average 
|                                                                                                | Number           |   |             | Exercise           | Number              |                     |       | Exercise    | Number     |   |       | Exercise
|                                                                                                | of
      Options |   |             | Price              | of Options          |                     |       | Price       | of Options |   |       | Price   
|                                                                                               
|Options
      outstanding at                                                                    |                  |   |             |                    |                     |                     |       |             |            |   |       |         
|beginning of year                                                                               | 8,208,675        |   | $           | 7.52               | 8,128,370           |                     | $     | 7.51        | 5,692,750  |   | $     | 9.37    
|Granted                                                                                         | 568,200          |   | $           | 5.96               | 2,046,650           |                     | $     | 5.68        | 3,536,320  |   | $     | 4.14    
|Exercised                                                                                       | (1,497,540       | ) | $           | 5.29               | (869,620            | )                   | $     | 4.15        | (282,000   | ) | $     | 4.88    
|Forfeited                                                                                       | (932,100         | ) | $           | 9.21               | (809,725            | )                   | $     | 6.77        | (718,400   | ) | $     | 6.98    
|Expired                                                                                         |                 |   |             |                   | (287,000            | )                   | $     | 6.43        | (100,300   | ) | $     | 5.70    
|                                                                                               
|Options
      outstanding                                                                       |                  |   |             |                    |                     |                     |       |             |            |   |       |         
|at end of year                                                                                  | 6,347,235        |   | $           | 7.66               | 8,208,675           |                     | $     | 7.52        | 8,128,370  |   | $     | 7.51    
|                                                                                               
|Options
      exercisable                                                                       |                  |   |             |                    |                     |                     |       |             |            |   |       |         
|at end of year                                                                                  | 2,775,850        |   | $           | 9.90               | 3,731,085           |                     | $     | 8.76        | 2,887,000  |   | $     | 8.07    
|                                                                                               
|The following table summarizes
      information about the Company's ESOP as at March 31, 2006: |                  |   |             |                   
|                                                                                                |                  |   |             |                    | Options Outstanding | Options Exercisable
|                                                                                               
|                                                                                                |                  |   |             |                    | Weighted            |                     |       |             |            |   |       |         
|                                                                                                |                  |   |             |                    | Average             |                     |       | Weighted    |            |   |       | Weighted
|                                                                                                |                  |   |             |                    | Remaining           |                     |       | Average     |            |   |       | Average 
|Range
      of                                                                                  |                  |   |             | Number             | Contractual         |                     |       | Exercise    | Number     |   |       | Exercise
|Exercise
      Prices                                                                           |                  |   | Outstanding | Life
      (Years) |                     |                     | Price | Exercisable |            |   | Price
|                                                                                               
|$4.08 to
      $6.03                                                                            |                  |   | 3,468,935   | 3.88               |                     | $                   | 4.91  | 749,200     |            | $ | 4.39 
|$6.19 to
      $9.20                                                                            |                  |   |             | 792,550            | 3.06                |                     | $     | 6.85        | 254,150    |   | $     | 7.99    
|$12.225 to
      $14.60                                                                         |                  |   | 2,085,750   | 1.74               |                     | $                   | 12.54 | 1,772,500   |            | $ | 12.50
|                                                                                               
|Total                                                                                           |                  |   | 6,347,235   | 4.51               |                     | $                   | 7.66  | 2,775,850   |            | $ | 9.90 
|                                                                                               

For the
year ended March 31, 2006, compensation cost for CAE's stock options was
recognized in net earnings (loss) with a corresponding credit of $2.5 million
(fiscal 2005  $2.0 million, fiscal 2004  $1.3 millions) to contributed surplus
using the fair value method of accounting

|for awards that
      were granted in fiscal 2005 and 2006.                                                         |   |      |   |   |      |   |   |      |  
|------------------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | - | - | ---- | -
|The assumptions used for
      purposes of the option calculations outlined in this note are presented
      below: |   |      |   |   |      |   |  
|                                                                                                                    |   | 2006 |   |   | 2005 |   |   | 2004 |  
|                                                                                                                   
|Assumptions used
      in the Black-Scholes options pricing model:                                                  |   |      |   |   |      |   |   |      |  
|Dividend yield                                                                                                      |   | 0.67 | % |   | 1.26 | % |   | 1.29 | %
|Expected volatility                                                                                                 |   | 47.0 | % |   | 40.0 | % |   | 41.5 | %
|Risk-free interest rate                                                                                             |   | 4.0  | % |   | 5.75 | % |   | 5.75 | %
|Option term                                                                                                         |   | 6    |   |   | 6    |   |   | 6    |  
|Weighted average fair value of options granted                                                                      | $ | 2.84 |   | $ | 2.27 |   | $ | 1.65 |  
|                                                                                                                   

CAE ANNUAL REPORT 2006 _91

---

NOTE 13  STOCK-BASED COMPENSATION
PLANS (CONTD)

DISCLOSURE OF PRO FORMA
INFORMATION REQUIRED UNDER CICA HANDBOOK SECTION 3870

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

|(amounts in millions, except per share
      amounts)              |   | 2006 |   |   | 2005   |   |   | 2004 |  
|------------------------------------------------------------------ | - | ---- | - | - | ------ | - | - | ---- | -
|                                                                  
|Net earnings
      (loss), as reported                             | $ | 64.9 |   | $ | (199.9 | ) | $ | 64.0 |  
|Pro forma
      impact                                             |   | (1.7 | ) |   | (2.1   | ) |   | (2.5 | )
|                                                                  
|Pro
      forma net earnings (loss)                                | $ | 63.2 |   | $ | (202.0 | ) | $ | 61.5 |  
|                                                                  
|Pro
      forma basic and diluted net earnings (loss) per share(1) | $ | 0.25 |   | $ | (0.82  | ) |   | 0.26 |  
|                                                                  

(1)For fiscal 2005, the effect of stock options potentially
exercisable on pro forma net loss per share was anti-dilutive; therefore, the
basic and diluted pro forma net loss per share are the same.

EMPLOYEE STOCK PURCHASE
PLAN

The Company maintains an Employee
Stock Purchase Plan (ESPP) to enable employees of the Company and its
participating subsidiaries to acquire CAE common shares through regular payroll
deductions plus employer contributions. The Plan allows employees to contribute
up to 18% of their annual base salary. The Company and its participating
subsidiaries match the first $500 employee contribution and contribute $1 for
every $2 on additional employee contributions, up to a maximum of 3% of the
employee's base salary. Employees may contribute to the plan through payroll
deductions or a lump-sum contribution. The employee and employer contribution
may be invested in the employee Register Retirement Saving Plan (RRSP) or
Deferred Profit Sharing Plan (DPSP). 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 TSX. The Company recorded compensation expense in the
amount of $2.1 million (2005  $1.4 million; 2004  $1.6 million) in respect of
employer contributions under the Plan.

DEFERRED SHARE UNIT
PLAN

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

In
fiscal 2000, the Company adopted a DSU Plan for non-employee directors. A
non-employee director holding less than 5,000 common shares of the Company
receives the Board retainer and attendance fees in the form of deferred share
units. A non-employee director holding at least 5,000 common shares may elect to
participate in the Plan in respect of part or all of his or her retainer and
attendance fees. The terms of the Plan are essentially identical to the key
executive DSU Plan except that units are issued on the basis of the closing
board lot sale price per share of CAE common shares on the Toronto Stock
Exchange during the last day on which the common share traded prior to the date
of issue.

The
Company records the cost of the DSU Plan as compensation expense. As at March
31, 2006, 388,972 units were outstanding at a value of $3.6 million (2005 
343,116 units at a value of $1.9 million; 2004  403,071 units at a value of
$2.3 million). A total number of 18,705 units were redeemed during the fiscal
year ended March 31, 2006 under both DSU Plans in accordance with their
respective plan text, for a total of $0.1 million. As at March 31, 2006, March
31, 2005 and March 31, 2004 no DSUs were cancelled.

LONG-TERM INCENTIVE (LTI) 
DEFERRED SHARE UNIT PLAN

Both Long-Term Incentive Deferred
Share Unit Plans (LTI-DSU) are intended to enhance the Company's ability to
promote a greater alignment of interests between executives and shareholders of
the Company. LTI-DSUs are granted to executives and managers of the Company. A
LTI-DSU is equal in value to one common share net of withholding tax at a
specific date. The LTI-DSU also accrued dividend equivalents payable in
additional units in an amount equal to dividends paid on CAE common
shares.

April 2003 Plan

The April 2003 LTI-DSU Plan
stipulates that granted units vest equally over four years and can be redeemed
for cash. Upon termination of employment for reasons of long-term disability,
involuntary termination, retirement or death, eligible participants with vested
LTI-DSU units will be entitled to receive the fair market value of the
equivalent number of CAE common shares. As at March 31, 2006, 657,036 LTI-DSU
units were outstanding (March 31, 2005  853,438 units). The expense recorded in
fiscal 2006 was $0.6 million (2005  $1.2 million; 2004 -$1.4
million).

92_ CAE ANNUAL REPORT 2006

---

May 2004 Plan

The May 2004 LTI-DSU Plan has
replaced the April 2003 LTI-DSU Plan for succeeding years. The May 2004 LTI-DSU
Plan stipulates that granted units vest equally over five years and can be
redeemed for cash. Upon termination of employment, eligible participants with
vested DSU units will be entitled to receive the fait market value of the
equivalent number of CAE common shares. In fiscal 2006, the Company issued
430,503 LTI-DSU units (2005  582,431 units) and as at March 31, 2006, 916,722
LTI-DSU units were outstanding (2005  599,252 units outstanding). The expense
recorded in fiscal 2006 was $0.9 million (2005  $0.6 million).

On
March 15, 2004, the Company entered into a contract to reduce its earnings
exposure to the fluctuations in its share price (refer to Note 14).

LONG-TERM INCENTIVE  RESTRICTED
SHARE UNIT PLAN

In May 2004, the Company adopted a
Long-term Incentive Performance Based Restricted Shares Unit Plan (LTI-RSU) for
its executives and managers. The LTI-RSU plan is intended to enhance the
Company's ability to attract and retain talented individuals, and also to
promote a greater alignment of interest between eligible participants and the
Company's shareholders. The LTI-RSU Plan is set up as a stock-based performance
plan.

LTI-RSUs granted pursuant to this
Plan vest after three years from their grant date LTI-RSUs are granted as
follows:

|(i)  | 100% of the units, if CAE
      shares have appreciated at least 33% (10% annual compounded growth) during
      the timeframe                                                                                                                                                                      
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) | 50% of the units, if CAE
      shares have appreciated at least 24% (7.5% annual compounded growth) but
      less than 33% during the timeframe No LTI-RSUs vest if the market value of
      the common shares has appreciated less than 24% during the specified
      timeframe. In addition, no
|    

proportional vesting is to occur for
any appreciation resulting between 24% and 33% during the specified timeframe.
Participants subject to loss of employment, other than voluntarily or for cause,
are entitled to conditional pro-rata vesting. In fiscal 2006, the Company issued
637,561 LTI-RSU units (2005  788,167 units) and as at March 31, 2006, 1,224,918
LTI-RSU units were outstanding (2005  623,083 units outstanding). The expense
recorded in fiscal 2006 was $3.1 million (2005  $1.0 million).

NOTE 14  FINANCIAL
INSTRUMENTS

FOREIGN CURRENCY
RISK

The Company entered into forward
foreign exchange contracts totalling $322.3 million (buy contracts $34.4 million
and sell contracts totalling $287.9 million). The total net unrealized gain as
of March 31, 2006, is $5.4 million (unrealized gain on buy contracts of $0.1
million and unrealized gain on sell contracts of $5.3 million).

|Consolidated foreign exchange transactions
      outstanding                                                              |              |          |           |        |          |          
|------------------------------------------------------------------------------------------------------------------------- | ------------ | -------- | --------- | ------ | -------- | ---------
|                                                                                                                          |              |          |           | 2006   |          |          
|                                                                                                                         
|Currencies
      (Sold/Bought)                                                                                            |              | Notional | Average   |        | Notional | Average  
|                                                                                                                          |              |          | Amount(1) | Rate   |          | Amount(1)
|                                                                                                                         
|USD/CDN                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year | $        | 184.6     | 0.8448 | $        | 169.3    
|Between 1 and 3 years                                                                                                     |              | 71.2     | 0.8600    |        | 48.6     | 0.7989   
|Between 3 to 5 years                                                                                                      |              | 2.9      | 0.8783    |        | 0.4      | 0.8263   
|USD/EUR                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year |          | 5.7       | 1.2590 |          |         
|Between 1 and 3 years                                                                                                     |              | 9.1      | 1.2852    |        |         |         
|CDN/EUR                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year |          | 2.1       | 1.4003 |          | 7.9      
|EUR/CDN                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year |          | 10.5      | 0.6758 |          | 22.2     
|Between 1 and 3 years                                                                                                     |              | 13.3     | 0.6387    |        | 8.9      | 0.6271   
|Between 3 and 5 years                                                                                                     |              | 3.5      | 0.6118    |        | 7.8      | 0.6147   
|GBP/CDN                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year |          | 1.9       | 0.4476 |          | 5.0      
|CDN/USD                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year |          | 17.5      | 1.1616 |          | 34.4     
|CDN/GBP                                                                                                                   |              |          |           |        |          |          
|Less
      than                                                                                                           | 1
      year |          |          |       |          | 0.5      
|                                                                                                                         
|                                                                                                                          |              | $        | 322.3     |        | $        | 305.0    
|                                                                                                                         
|(1)Exchange rates as at the end of the respective fiscal year
      were used to translate amounts in foreign currencies. |              |          |           |       

CAE ANNUAL REPORT 2006 _93

---

NOTE 14  FINANCIAL INSTRUMENTS
(CONTD)

CREDIT RISK

The Company is exposed to credit risk
on billed and unbilled accounts receivable. However, its customers are primarily
established companies with publicly available credit ratings or government
agencies, factors that facilitate monitoring of 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 mitigate its
risk 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. As well, the Company's credit exposure is
further reduced by the sale of third-party receivables (see Note 5) to a
financial institution on a non-recourse basis.

INTEREST RATE
EXPOSURE

The Company bears some interest rate
fluctuation risk on its variable long-term debt (including rates) and some fair
value risk on its fixed interest long-term debt. As at March 31, 2006, the
Company has entered into three interest rate swap agreements with three
different financial institutions to mitigate these risks for a total notional
value of $63.2 million. One agreement, with a notional value of $38.5 million
(US$33.0 million), has converted fixed interest rate debt into a floating rate
whereby the Company pays the equivalent of a three-month LIBOR borrowing rate,
plus 3.6%, and receives a fixed interest rate of 7.76% up to June 2012. The
remaining contracts convert a floating interest rate debt into a fixed rate for
a notional value of $24.7 million, whereby the Company will receive quarterly
LIBOR and pay fixed interest payments as follows:

- Amortizing based on a repayment schedule of
  the debt until October 2016 on $9.6 million (£4.7 million), the Company will pay quarterly fixed annual interest
  rates of 6.31%
- Accreting swap based on a borrowing schedule
  until December 2019 on $15.1 million (y10.6 million), the Company will pay a semi-annual fixed annual interest
  rate of 3.78%

After considering these swap
agreements, as at March 31, 2006, 62% of the long-term debt bears fixed interest
rates.

STOCK-BASED COMPENSATION
COST

In March 2004, the Company entered
into an equity swap agreement with a major Canadian financial institution to
reduce its cash and earnings exposure to fluctuations in its share price
relating to the DSU and LTI-DSU programs. Pursuant to the agreement, the Company
receives the economic benefit of dividends and a share price appreciation while
providing payments to the financial institution for the institution's cost of
funds and any share price depreciation. The net effect of the equity swap partly
offsets movements in the Company's share price impacting the cost of the DSU and
LTI-DSU programs. As at March 31, 2006, the equity swap agreement covered
600,000 shares of the Company.

FAIR VALUE OF FINANCIAL
INSTRUMENTS

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

- Cash and cash equivalents, accounts
  receivable, accounts payable and accrued liabilities are valued at their
  carrying amounts on the Consolidated
  Balance Sheets, which represent an appropriate estimate of their fair values
  due to their short-term maturities.
- Capital leases are valued using the
  discounted cash flow method.
- The value of long-term debt 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 Consolidated Balance
  Sheet date.
- Forward foreign exchange contracts are
  represented by the estimated amounts that the Company would receive or pay to
  settle the contracts at the Consolidated
  Balance Sheet date.

|The fair value
      and the carrying amount of the financial instruments as at March 31 are as
      follows: |   |       |   |   |         
|-------------------------------------------------------------------------------------------------------------- | - | ----- | - | - | --------
|(amounts in millions)                                                                                          |   |       |   |   | 2006    
|                                                                                                              
|                                                                                                               |   | Fair  |   |   | Carrying
|                                                                                                               |   | Value |   |   | Amount  
|                                                                                                              
|Long-term
      debt                                                                                           | $ | 277.9 |   | $ | 271.3   
|Net forward
      foreign exchange contracts                                                                   |   | 5.4   |   |   |        
|Interest rate
      swap contracts                                                                             |   | (1.5  | ) |   |        
|                                                                                                              

94_ CAE ANNUAL REPORT 2006

---

LETTERS OF CREDIT AND
GUARANTEES

As at March 31, 2006, CAE had
outstanding letters of credit and performance guarantees in the amount of $98.6
million (2005  $73.3 million) issued in the normal course of business. These
guarantees are issued under mainly the Revolving Term Credit Facility as well as
the Performance Securities Guarantee (PSG) account provided by Export
Development Corporation (EDC) and under other standby facilities available to
the company through various financial institutions.

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

|(amounts in millions)                                                                                              |   | 2006 |   | 2005
|------------------------------------------------------------------------------------------------------------------ | - | ---- | - | ----
|                                                                                                                  
|Advance
      payment                                                                                              | $ | 34.0 | $ | 25.3
|Contract
      performance                                                                                         |   | 13.0 |   | 7.8 
|Operating lease
      obligation                                                                                   |   | 27.3 |   | 37.6
|Relocation
      obligation                                                                                        |   | 19.6 |   |    
|Other                                                                                                              |   | 4.7  |   | 2.6 
|                                                                                                                  
|Total                                                                                                              | $ | 98.6 | $ | 73.3
|                                                                                                                  
|Of the $34.0 million of advance
      payment guarantees, $26.0 million are issue under the EDC PSG
      account. |   |      |  

RESIDUAL VALUE GUARANTEES  SALE
AND LEASEBACK TRANSACTIONS

Following certain sale and leaseback
transactions, the Company has agreed to guarantee the residual value of the
underlying equipment in the event that the equipment is returned to the lessor
and the net proceeds of any eventual sale do not cover the guaranteed amount.
The maximum amount of exposure is $52.4 million (2005  $52.3 million), of which
$35.0 million matures in 2008, $8.2 million in 2020 and $9.2 million in 2023. Of
this amount, as at March 31, 2006, $33.1 million is recorded as a deferred gain
(2005  $33.1 million).

INDEMNIFICATIONS

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

CAE ANNUAL REPORT 2006 _95

---

|NOTE 15  INCOME TAXES                                                                                                               |   |       |   |   |        |   |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------ | - | ----- | - | - | ------ | - | - | ----- | -
|A reconciliation
      of income taxes at Canadian statutory rates with the reported income taxes
      is as follows:               |   |       |   |   |        |   |  
|(amounts in millions)                                                                                                                |   | 2006  |   |   | 2005   |   |   | 2004  |  
|                                                                                                                                    
|Earnings (loss)
      before income taxes and discontinued operations $                                                              |   | 90.0  |   | $ | (405.1 | ) | $ | 58.9  |  
|Canadian
      statutory income tax rates                                                                                            |   | 31.41 | % |   | 31.27  | % |   | 32.78 | %
|                                                                                                                                    
|Income taxes at
      Canadian statutory rates                                                                                       | $ | 28.3  |   | $ | (126.7 | ) | $ | 19.3  |  
|Difference
      between Canadian statutory rates and those                                                                          |   |       |   |   |        |   |   |       |  
|applicable to foreign
      subsidiaries                                                                                             |   | 0.3   |   |   | (12.2  | ) |   | (2.9  | )
|Goodwill
      impairment                                                                                                            |   |      |   |   | 61.7   |   |   |      |  
|Losses not tax
      effected                                                                                                        |   | 2.8   |   |   | 2.7    |   |   | 0.2   |  
|Tax benefit of
      operating losses not previously recognized                                                                      |   | (9.1  | ) |   | (12.2  | ) |   | (5.2  | )
|Tax benefit of
      capital losses not previously recognized                                                                        |   | (0.8  | ) |   | (11.3  | ) |   |      |  
|Non-taxable
      capital gain                                                                                                       |   | (0.3  | ) |   | (0.1   | ) |   | (0.2  | )
|Non-deductible
      items                                                                                                           |   | 1.6   |   |   | 4.5    |   |   | 3.3   |  
|Prior years' tax
      adjustments and assessments                                                                                   |   | (0.9  | ) |   | (3.6   | ) |   | (3.6  | )
|Impact of change
      in income tax rates on future income taxes                                                                    |   | 1.9   |   |   | (1.0   | ) |   | 0.7   |  
|Non-taxable
      research and development tax credits                                                                               |   | (0.9  | ) |   | (1.5   | ) |   | (0.5  | )
|Large
      corporation tax                                                                                                          |   | 0.7   |   |   |       |   |   |      |  
|Other tax
      benefit not previously recognized                                                                                    |   | (2.9  | ) |   |       |   |   |      |  
|Exchange
      translation items                                                                                                     |   | (0.7  | ) |   |       |   |   |      |  
|Other                                                                                                                                |   | (0.9  | ) |   | (0.7   | ) |   | 0.4   |  
|                                                                                                                                    
|Total income tax
      expense (recovery)                                                                                            | $ | 19.1  |   | $ | (100.4 | ) | $ | 11.5  |  
|                                                                                                                                    
|Significant components of the
      provision for the income tax expense attributable to continuing operations
      are as follows: |   |       |   |  
|(amounts in millions)                                                                                                                |   | 2006  |   |   | 2005   |   |   | 2004  |  
|                                                                                                                                    
|Current income
      tax expense                                                                                                     | $ | 13.1  |   | $ | 13.5   |   | $ | 14.4  |  
|Future income
      tax expense (recovery)                                                                                           |   | 6.0   |   |   | (113.9 | ) |   | (2.9  | )
|                                                                                                                                    
|Total income tax
      expense (recovery)                                                                                            | $ | 19.1  |   | $ | (100.4 | ) | $ | 11.5  |  
|                                                                                                                                    
|The tax effects of temporary
      differences that give rise to future tax liabilities and assets are as
      follows:             |   |       |   |   |        |   |  
|(amounts in millions)                                                                                                                |   |       |   |   | 2006   |   |   | 2005  |  
|                                                                                                                                    
|Non-capital loss
      carryforwards                                                                                                 |   |       |   | $ | 55.7   |   | $ | 71.4  |  
|Capital loss
      carryforwards                                                                                                     |   |       |   |   | 6.5    |   |   | 4.6   |  
|Investment tax
      credits                                                                                                         |   |       |   |   | (22.6  | ) |   | (20.9 | )
|Property, plant
      and equipment                                                                                                  |   |       |   |   | (28.5  | ) |   | (21.0 | )
|Intangible
      assets                                                                                                              |   |       |   |   | 31.5   |   |   | 35.1  |  
|Amounts not
      currently deductible                                                                                               |   |       |   |   | 18.6   |   |   | 19.1  |  
|Deferred
      revenues                                                                                                              |   |       |   |   | 13.5   |   |   | 12.4  |  
|Percentage-of-completion versus completed
      contract                                                                             |   |       |   |   | (15.8  | ) |   | (6.9  | )
|Deferred
      research & development expenses                                                                                       |   |       |   |   | 7.0    |   |   |      |  
|Tax benefit
      carryover                                                                                                          |   |       |   |   | 10.1   |   |   | 9.6   |  
|Other                                                                                                                                |   |       |   |   | 2.5    |   |   | (3.4  | )
|                                                                                                                                    
|                                                                                                                                     |   |       |   |   | 78.5   |   |   | 100.0 |  
|                                                                                                                                    
|Valuation
      allowance                                                                                                            |   |       |   |   | (37.5  | ) |   | (54.4 | )
|                                                                                                                                    
|Net future
      income tax assets (liabilities)                                                                                     |   |       |   | $ | 41.0   |   | $ | 45.6  |  
|                                                                                                                                    

As at
March 31, 2006, the Company has accumulated non-capital losses carried forward
relating to operations in the United States for approximately $89.3 million
(US$76.5 million). For financial reporting purposes, a net future income tax
asset of $31.3 million (US$26.8 million) has been recognized in respect of these
loss carry forwards.

The
Company has accumulated non-capital tax losses carried forward relating to its
operations in other countries of approximately $89.3 million. For financial
reporting purposes, a net future income tax asset of $9.7 million has been
recognized.

The
Company also has accumulated capital losses carried forward relating to
operations in the United States for approximately $17.0 million (US$14.6
million). For financial reporting purposes, no future income tax asset was
recognized, as a full valuation allowance was taken.

96_ CAE ANNUAL REPORT 2006

---

|The non-capital losses for income tax purposes
      expire as follows: |   |               |                       |     
|----------------------------------------------------------------------- | - | ------------- | --------------------- | ----
|(amounts in millions)                                                   |   |               |                       |     
|                                                                       
|                                                                        |   | United States | Other
      countries
|Expiry
      date                                                       |   | (US$)(CA$)    |                      
|                                                                       
|2007                                                                    | $ | 6.7           | $                     |    
|2008                                                                    |   | 27.2          |                       |    
|2009                                                                    |   | 6.0           |                       |    
|2010                                                                    |   |              |                       |    
|2011                                                                    |   | 10.7          |                       |    
|2012 
      2023                                                       |   | 25.9          |                       | 8.8 
|No expiry
      date                                                    |   |              |                       | 80.5
|                                                                       
|                                                                        | $ | 76.5          | $                     | 89.3
|                                                                       

The
valuation allowance principally relates 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
2006, $16.7 million (2005  $22.3 million) of the valuation allowance balance
was reversed when it became more likely than not that benefits would be
realized.

|NOTE 16  DEFERRED GAINS AND OTHER LONG-TERM
      LIABILITIES |   |       |   |      
|-------------------------------------------------------------- | - | ----- | - | -----
|(amounts in millions)                                          |   | 2006  |   | 2005 
|                                                              
|Deferred gains
      on sale and leasebacks(i)                 | $ | 87.5  | $ | 90.7 
|Deferred
      revenue                                         |   | 31.3  |   | 21.1 
|Deferred
      gains                                           |   | 6.6   |   | 7.8  
|Employee
      benefits obligation (Note 21)                   |   | 23.9  |   | 24.9 
|Government
      cost-sharing (Note 19)                        |   | 12.2  |   | 7.6  
|Non-controlling
      interest(ii)                             |   | 17.6  |   | 16.9 
|Long-term
      portion of purchase agreement(iii)             |   | 8.1   |   |     
|Long-term
      payable to Investissement Québec               |   | 2.1   |   | 2.7  
|LTI RSU/DSU
      compensation obligation                      |   | 9.8   |   | 1.3  
|Other                                                          |   | 7.4   |   | 6.8  
|                                                              
|                                                               | $ | 206.5 | $ | 179.8
|                                                              

|(i)   | The related amortization for
      the year amounts to $3.9 million (2005  $3.5 million; 2004  $3.2
      million).                                                                                                                   
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  | Non-controlling interest
      (20%) of the Civil training centres in Madrid combined with 22% in
      Military CAE Aircrew Training Centre.                                                                                           
|     
|(iii) | Long term portion of
      purchase agreement for data and parts delivered to CAE Inc. by Dassault
      Aviation on specific sales orders. The annual payments arey4.5 million in
      December 2007 andy1.2 million in December 2008.
|     

NOTE 17  SUPPLEMENTARY CASH FLOW
INFORMATION

|Cash provided by
      (used in) non-cash working capital is as follows: |   |       |   |   |       |   |   |        |  
|------------------------------------------------------------------------ | - | ----- | - | - | ----- | - | - | ------ | -
|(amounts in millions)                                                    |   | 2006  |   |   | 2005  |   |   | 2004   |  
|                                                                        
|Accounts
      receivable                                                | $ | (13.1 | ) | $ | 53.9  |   | $ | (16.1  | )
|Inventories                                                              |   | (5.0  | ) |   | 18.7  |   |   | (21.6  | )
|Prepaid
      expenses                                                   |   | (7.9  | ) |   | 0.5   |   |   | (6.3   | )
|Income taxes
      recoverable                                           |   | (7.5  | ) |   | 28.5  |   |   | (8.8   | )
|Accounts payable
      and accrued liabilities                           |   | 61.0  |   |   | (42.3 | ) |   | (49.7  | )
|Deposits on
      contracts                                              |   | 53.7  |   |   | 26.3  |   |   | 2.3    |  
|                                                                        
|Decrease
      (increase) in non-cash working capital                    | $ | 81.2  |   | $ | 85.6  |   | $ | (100.2 | )
|                                                                        
|Interest
      paid                                                      | $ | 21.9  |   | $ | 38.2  |   | $ | 41.1   |  
|Income taxes
      paid, net                                             | $ | 13.7  |   | $ |      |   | $ | 8.2    |  
|                                                                        

Earnings (loss) from continuing operations include a net foreign exchange
gain of $8.4 million in 2006 or $0.03 per share (2005  net foreign exchange
gain of $5.2 million or $0.02 per share; 2004  net foreign exchange gain of
$10.2 million or $0.04 per share).

CAE ANNUAL REPORT 2006 _97

---

NOTE 18 
CONTINGENCIES

In 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 consolidated financial position.

NOTE 19  GOVERNMENT
COST-SHARING

The Company has signed agreements
with the Government of Canada whereby the latter shares in the cost, based on
expenditures incurred by the Company, of certain R&D programs for modelling
and services, visual systems and advanced flight simulation technology for civil
applications and networked simulation for military applications.

PROJECT PHOENIX

The Company announced a plan to
invest $630 million in Project Phoenix, an R&D program that will span the
next six years. During fiscal 2006, the Government of Canada and the Company
signed an agreement for an investment of approximately 30% ($189 million) of the
value of CAE's R&D program (reducing by approximately 25% the amount of
income tax credit otherwise available). This agreement is included in the
Technology Partnerships Canada (TPC) program created by Industry Canada to
invest strategically in research and development, to encourage private sector
investment, and to increase technological capabilities in the Canadian industry.
The funding will be repayable, based on consolidated revenues, starting in
fiscal 2012 and ending in fiscal 2030, or earlier, should a predetermined
royalty level, which exceeds the amount of maximum contributions, be
reached.

The
aggregate amount of funding received or receivable in fiscal 2006 is $17.3
million, of which $13.5 million was recorded as a reduction of expenses and $3.8
million against fixed assets or other capitalized costs. There were no royalty
payments for this program in fiscal 2006.

PREVIOUS PROGRAMS

The Company had also signed R&D
agreements with the Government of Canada in order to share in a portion of
specific costs incurred by the Company on previous R&D programs. The
initiative is intended to broaden CAE's technological capabilities in flight
simulations systems by developing components that will lower the cost and weight
of flight simulators and technologies to reduce the cost of initial training.
These programs are repayable in the form of royalties to March 2011 and March
2013 based on future sales for civil and military programs
respectively.

The following table provides
information on funding and royalty expenditures for previous
programs:

|(amounts in
      millions)                        |   | 2006 |   | 2005 |   | 2004
|-------------------------------------------------- | - | ---- | - | ---- | - | ----
|                                                  
|Previous
      programs                            |   |      |   |      |   |     
|TPC
      Funding  amounts credited to income     | $ | 7.5  | $ | 9.9  | $ | 9.5 
|TPC
      Funding  reduction of capitalized costs |   |     |   | 0.9  |   | 4.4 
|                                                  
|Total TPC Funding                                  | $ | 7.5  | $ | 10.8 | $ | 13.9
|Royalties expenses                                 | $ | 6.6  | $ | 5.9  | $ | 3.6 
|                                                  

As at
March 31, 2006, the Company recorded a liability of $18.9 million (2005  $12.9
million; 2004  $10.3 million) of future repayments in respect of the aggregate
R&D programs.

|NOTE 20  COMMITMENTS                                                                                                    |   |      
|------------------------------------------------------------------------------------------------------------------------ | - | -----
|Significant
      contractual obligations and future minimum lease payments under operating
      leases are as follows: |   |      
|(amounts in millions)                                                                                                    |   | Total
|                                                                                                                        
|Years ending
      March 31,                                                                                             |   |      
|2007                                                                                                                     | $ | 62.8 
|2008                                                                                                                     |   | 80.3 
|2009                                                                                                                     |   | 57.8 
|2010                                                                                                                     |   | 53.9 
|2011                                                                                                                     |   | 54.9 
|Thereafter                                                                                                               |   | 280.5
|                                                                                                                        
|                                                                                                                         | $ | 590.2
|                                                                                                                        

98_ CAE ANNUAL REPORT 2006

---

NOTE 21  EMPLOYEE FUTURE BENEFITS

The Company has two registered funded defined-benefit pension plans in Canada (one for employees and one for designated executives) that provide benefits based on length of service and final average earnings. The
Company also maintains a pension plan for employees in the Netherlands that provides benefits based on similar provisions.

In addition, the Company maintains a supplemental arrangement plan in Canada and in Germany to provide defined benefits. These supplemental arrangements are the sole obligation of the
Company, and there is no requirement to fund it. However, the Company is obligated to pay the benefits when they become due. Under the Canadian supplemental arrangement, once the designated employee retires from the Company, the Company is required
to secure the obligation for that employee. As at March 31, 2006, the Company has issued letters of credit totalling $20.0 million to secure these obligations under the Canadian supplemental arrangement.

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

In fiscal 2005, the Company approved certain pension plan improvements to the Canadian registered pension plans resulting in increased pension obligations of $0.9 million. No such
improvements were approved for fiscal 2006.

The changes in pension obligations, in fair value of assets and the financial position of the funded pension plans are as follows:

|                                         |          |       |   |         |      |   |       | 2006  |   |          |       |   |         |      |   |       | 2005  |  
|---------------------------------------- | -------- | ----- | - | ------- | ---- | - | ----- | ----- | - | -------- | ----- | - | ------- | ---- | - | ----- | ----- | -
|                                        
|(amounts in millions)                    | Canadian |       |   | Foreign |      |   | Total |       |   | Canadian |       |   | Foreign |      |   | Total |      
|                                        
|Change in pension obligations            |          |       |   |         |      |   |       |       |   |          |       |   |         |      |   |       |       |  
|Pension obligation at                    |          |       |   |         |      |   |       |       |   |          |       |   |         |      |   |       |       |  
|beginning of year                        | $        | 158.7 |   | $       | 15.3 |   | $     | 174.0 |   | $        | 139.5 |   | $       | 14.1 |   | $     | 153.6 |  
|Current service cost                     |          | 4.2   |   |         | 0.5  |   |       | 4.7   |   |          | 3.6   |   |         | 0.6  |   |       | 4.2   |  
|Interest cost                            |          | 9.5   |   |         | 0.6  |   |       | 10.1  |   |          | 9.0   |   |         | 0.6  |   |       | 9.6   |  
|Discontinued operations                  |          |      |   |         |     |   |       |      |   |          | (4.2  | ) |         |     |   |       | (4.2  | )
|Employee contributions                   |          | 2.5   |   |         | 0.4  |   |       | 2.9   |   |          | 2.6   |   |         | 0.5  |   |       | 3.1   |  
|Plan amendments                          |          |      |   |         |     |   |       |      |   |          | 0.9   |   |         |     |   |       | 0.9   |  
|Pension benefits paid                    |          | (8.2  | ) |         | (0.1 | ) |       | (8.3  | ) |          | (8.1  | ) |         | (0.1 | ) |       | (8.2  | )
|Actuarial loss                           |          | 8.7   |   |         | 0.3  |   |       | 9.0   |   |          | 15.4  |   |         |     |   |       | 15.4  |  
|Foreign exchange variation               |          |      |   |         | (1.4 | ) |       | (1.4  | ) |          |      |   |         | (0.4 | ) |       | (0.4  | )
|                                        
|Pension obligation at end of year        |          | 175.4 |   |         | 15.6 |   |       | 191.0 |   |          | 158.7 |   |         | 15.3 |   |       | 174.0 |  
|                                        
|Change in fair value of plan asset       |          |       |   |         |      |   |       |       |   |          |       |   |         |      |   |       |       |  
|Fair value of plan assets at             |          |       |   |         |      |   |       |       |   |          |       |   |         |      |   |       |       |  
|beginning of year                        |          | 128.2 |   |         | 14.8 |   |       | 143.0 |   |          | 118.9 |   |         | 12.6 |   |       | 131.5 |  
|Actual return on plan assets             |          | 11.9  |   |         | 1.4  |   |       | 13.3  |   |          | 12.6  |   |         | 1.4  |   |       | 14.0  |  
|Pension benefits paid                    |          | (8.2  | ) |         | (0.1 | ) |       | (8.3  | ) |          | (8.1  | ) |         | (0.1 | ) |       | (8.2  | )
|Discontinued operations                  |          |      |   |         |     |   |       |      |   |          | (4.2  | ) |         |     |   |       | (4.2  | )
|Plan expenses                            |          | (0.3  | ) |         |     |   |       | (0.3  | ) |          | (0.3  | ) |         |     |   |       | (0.3  | )
|Employee contributions                   |          | 2.5   |   |         | 0.4  |   |       | 2.9   |   |          | 2.6   |   |         | 0.5  |   |       | 3.1   |  
|Employer contributions                   |          | 10.6  |   |         | 0.9  |   |       | 11.5  |   |          | 6.7   |   |         | 1.0  |   |       | 7.7   |  
|Foreign exchange variation               |          |      |   |         | (1.5 | ) |       | (1.5  | ) |          |      |   |         | (0.6 | ) |       | (0.6  | )
|                                        
|Fair value of plan assets at end of year | 144.7    |       |   | 15.9    |      |   | 160.6 |       |   | 128.2    |       |   | 14.8    |      |   | 143.0 |      
|                                        
|Financial position  plan                |          |       |   |         |      |   |       |       |   |          |       |   |         |      |   |       |       |  
|(deficit)/surplus                        |          | (30.7 | ) |         | 0.3  |   |       | (30.4 | ) |          | (30.5 | ) |         | (0.5 | ) |       | (31.0 | )
|Unrecognized net actuarial loss          |          | 45.9  |   |         | (0.4 | ) |       | 45.5  |   |          | 42.4  |   |         | 0.5  |   |       | 42.9  |  
|Unamortized past service cost            |          | 5.6   |   |         |     |   |       | 5.6   |   |          | 6.1   |   |         |     |   |       | 6.1   |  
|                                        
|Amount recognized as an asset            |          |       |   |         |      |   |       |       |   |          |       |   |         |      |   |       |       |  
|at end of year                           | $        | 20.8  |   | $       | (0.1 | ) | $     | 20.7  |   | $        | 18.0  |   |         | $   |   | $     | 18.0  |  
|                                        

As at March 31, 2006 and 2005, the two Canadian funded plans had pension obligations in excess of plan assets.

CAE ANNUAL REPORT 2006 _99

---

|NOTE 21  EMPLOYEE FUTURE BENEFITS (CONTD)                                                                   |          |       |   |         |      |      |       |       |          |       |      
|------------------------------------------------------------------------------------------------------------- | -------- | ----- | - | ------- | ---- | ---- | ----- | ----- | -------- | ----- | -----
|Pension obligations related to the supplemental arrangements are as follows:                                  |          |       |   |         |      |      |       |       |          |      
|                                                                                                              |          |       |   |         |      |      |       | 2006  |          |       |      
|                                                                                                             
|(amounts in millions)                                                                                         | Canadian |       |   | Foreign |      |      | Total |       | Canadian |       |      
|                                                                                                             
|Change in pension obligations                                                                                 |          |       |   |         |      |      |       |       |          |       |      
|Pension obligation at                                                                                         |          |       |   |         |      |      |       |       |          |       |      
|beginning of year                                                                                             | $        | 16.1  |   | $       | 6.4  |      | $     | 22.5  |          | $     | 14.6 
|Current service cost                                                                                          |          | 0.9   |   |         | 0.2  |      |       | 1.1   |          |       | 0.8  
|Interest cost                                                                                                 |          | 1.0   |   |         | 0.2  |      |       | 1.2   |          |       | 0.9  
|Pension benefits paid                                                                                         |          | (1.4  | ) |         | (0.3 | )    |       | (1.7  | )        |       | (0.8 
|Actuarial loss                                                                                                |          | 5.1   |   |         |     |      |       | 5.1   |          |       | 1.0  
|Special/contractual                                                                                           |          |       |   |         |      |      |       |       |          |       |      
|termination benefits                                                                                          |          |      |   |         |     |      |       |      |          |       | 0.2  
|Settlement of discontinued operations                                                                         |         |       |   |        |      |      |      |       |          | (0.6  | )    
|Foreign exchange variation                                                                                    |          |      |   |         | (0.6 | )    |       | (0.6  | )        |       |     
|                                                                                                             
|Pension obligation at end of year                                                                             |          | 21.7  |   |         | 5.9  |      |       | 27.6  |          |       | 16.1 
|                                                                                                             
|Financial position  plan deficit                                                                             | (21.7    | )     |   | (5.9    | )    |      | (27.6 | )     |          | (16.1 | )    
|Unrecognized net actuarial loss                                                                               |          | 5.2   |   |         | 1.5  |      |       | 6.7   |          |       | 0.1  
|                                                                                                             
|Amount recognized as a                                                                                        |          |       |   |         |      |      |       |       |          |       |      
|liability at end of year                                                                                      | $        | (16.5 | ) | $       | (4.4 | )    | $     | (20.9 | )        | $     | (16.0
|                                                                                                             
|The net pension cost for funded pension plans for the years ended March 31 included the following components: |          |       |   |        
|(amounts in millions)                                                                                         |          |       |   |         |      |      |       |       |          |       | 2006 
|                                                                                                             
|Current service cost                                                                                          |          |       |   |         |      |      |       |       |          | $     | 4.7  
|Plan expenses                                                                                                 |          |       |   |         |      |      |       |       |          |       | 0.3  
|Interest cost on pension obligations                                                                          |          |       |   |         |      |      |       |       |          | 10.1  |      
|Actual return on plan assets                                                                                  |          |       |   |         |      |      |       |       |          |       | (13.3
|Net actuarial loss on benefit obligation                                                                      |          |       |   |         |      |      |       |       |          | 9.0   |      
|Past service cost arising from plan amendments in the period                                                  |          |       |   |         |      |     |       |       | 0.9      |       |      
|                                                                                                             
|Pension cost before adjustments to recognize the long-term nature of plans                                    |          |       |   | 10.8    |      |      | 16.6  |       |          | (1.0  | )    
|                                                                                                             
|Adjustments to recognize long-term nature of plans:                                                           |          |       |   |         |      |      |       |       |          |       |      
|Difference between expected return and actual return on plan assets                                           |          |       |   |         |      | 4.2  |       |       | 4.8      |       |      
|Difference between actuarial loss recognized for the year and                                                 |          |       |   |         |      |      |       |       |          |       |      
|actual actuarial loss on benefit obligations for the year                                                     |          |       |   |         |      | (6.7 | )     |       | (14.0    | )     |      
|Difference between amortization of past service cost for the                                                  |          |       |   |         |      |      |       |       |          |       |      
|year and actual plan amendments for the year                                                                  |          |       |   |         |      |      |       |       | 0.5      |       |      
|                                                                                                             
|Total adjustment                                                                                              |          |       |   |         |      |      |       |       |          |       | (2.0 
|                                                                                                             
|Net pension cost                                                                                              |          |       |   |         |      |      |       |       |          |       | 8.8  
|Curtailment/settlement of discontinued operations                                                             |          |       |   |         |      |      |       |       |         |       |      
|                                                                                                             
|Net pension cost including curtailment/settlement of discontinued operations                                  |          |       | $ | 8.8     |      | $    | 8.3   |       | $        | 8.9   |      
|                                                                                                             
|The following components are combinations of the items presented above:                                       |          |       |   |         |      |      |       |       |          |      
|(amounts in millions)                                                                                         |          |       |   |         |      |      |       |       |          |       | 2006 
|                                                                                                             
|Expected return on plan assets                                                                                |          |       |   |         |      |      |       |       |          | $     | (9.1 
|Amortization of net actuarial loss                                                                            |          |       |   |         |      |      |       |       |          |       | 2.3  
|Amortization of past service costs                                                                            |          |       |   |         |      |      |       |       |          |       | 0.5  
|                                                                                                             

100_ CAE ANNUAL REPORT 2006

---

|With respect to the supplemental arrangements, the net
      pension cost is as follows: |   |      |   |   |      |   |   |      |  
|---------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | - | - | ---- | -
|(amounts in millions)                                                                    |   | 2006 |   |   | 2005 |   |   | 2004 |  
|                                                                                        
|Current service
      cost                                                               | $ | 1.1  |   | $ | 0.8  |   | $ | 0.8  |  
|Interest cost on
      pension obligations                                               |   | 1.2  |   |   | 1.0  |   |   | 0.9  |  
|Net actuarial
      loss on benefit obligation                                           |   | 5.1  |   |   | 1.0  |   |   | 0.1  |  
|                                                                                        
|Pension cost
      before adjustments to recognize the long-term nature of plans         |   | 7.4  |   |   | 2.8  |   |   | 1.8  |  
|                                                                                        
|Adjustments to
      recognize the long-term nature of plans:                            |   |      |   |   |      |   |   |      |  
|Difference between actuarial loss recognized for the year
      and                      |   |      |   |   |      |   |   |      |  
|actual actuarial loss on benefit obligation for the
      year                           |   | (5.0 | ) |   | (1.0 | ) |   | (0.1 | )
|                                                                                        
|Net pension
      cost                                                                   |   | 2.4  |   |   | 1.8  |   |   | 1.7  |  
|                                                                                        
|Curtailment/settlement of discontinued
      operations                                  |   |     |   |   | (0.4 | ) |   |     |  
|                                                                                        
|Net pension cost
      including curtailment/settlement of discontinued operations       | $ | 2.4  |   | $ | 1.4  |   | $ | 1.7  |  
|                                                                                        
|The following components are combinations of the items
      presented above:            |   |      |   |   |      |   |   |      |  
|(amounts in millions)                                                                    |   | 2006 |   |   | 2005 |   |   | 2004 |  
|                                                                                        
|Amortization of
      net actuarial loss                                                 | $ | 0.1  |   | $ |     |   | $ |     |  
|                                                                                        

Additional information on Canadian
funded pension plan assets  weighted average asset allocations by asset
category are as follows:

|                              | Allocation of
      Plan Assets at |  
|----------------------------- | ---------------------------------- | -
|                              | Measurement
      Dates            |  
|                             
|Asset
      Category          | December 31,                       |  
|                              | 2005                               |  
|                             
|Equity
      securities       | 63                                 | %
|Fixed income
      securities | 37                                 | %
|                             
|Total                         | 100                                | %
|                             

The
target allocation percentage for equity securities is 63%, which includes a mix
of Canadian, US and international equities, and for the fixed-income securities
is 37%, which must be rated BBB or higher. Individual asset classes are allowed
to fluctuate slightly and are rebalanced regularly. CAE, through its fund
managers, is responsible for investing the assets so as to achieve return in
line with underlying market indexes. The investment policy has been modified at
the end of December 2005 to allow active management of Canadian equities, which
represents approximately 33% of the fund.

Netherlands Pension Plan assets are invested through an insurance
company, and the asset allocation is approximately 75% in fixed income and 25%
in equities.

Additional information on employer
contributions:

|                                                                                         |   |          |   | Funded Plan  |   | Supplemental
      Arrangements
|---------------------------------------------------------------------------------------- | - | -------- | - | ------------ | - | -------------------------------
|                                                                                        
|(amounts in millions)                                                                    |   | Canadian |   | Foreign      |   | Canadian                       
|                                                                                        
|Actual
      contribution  fiscal 2005                                                  | $ | 6.7      | $ | 1.0          | $ | 0.8                            
|Actual
      contribution  fiscal 2006                                                  |   | 10.6     |   | 0.9          |   | 1.4                            
|Expected
      contribution  fiscal 2007 (unaudited)                                    |   | 9.7      |   | 0.8          |   | 1.1                            
|                                                                                        
|Additional information about
      benefit payments expected to be paid in future years: |   |          |   |              |   |                                
|Year                                                                                     |   |          |   | Funded Plans |   | Supplemental
      Arrangements
|                                                                                        
|(amounts in millions  unaudited)                                                        |   | Canadian |   | Foreign      |   | Canadian                       
|                                                                                        
|2007                                                                                     | $ | 10.1     | $ | 0.1          | $ | 1.1                            
|2008                                                                                     |   | 10.6     |   | 0.2          |   | 1.1                            
|2009                                                                                     |   | 11.3     |   | 0.3          |   | 1.1                            
|2010                                                                                     |   | 12.0     |   | 0.3          |   | 1.1                            
|2011                                                                                     |   | 12.9     |   | 0.5          |   | 1.2                            
|2012 
      2016                                                                        |   | 78.8     |   | 4.0          |   | 7.4                            
|                                                                                        

CAE ANNUAL REPORT 2006 _101

---

NOTE 21  EMPLOYEE FUTURE BENEFITS (CONTD)

Significant assumptions (weighted average):

|                                    |          |   | 2006    |   |          |   | 2005    |  
|----------------------------------- | -------- | - | ------- | - | -------- | - | ------- | -
|                                   
|                                    | Canadian |   | Foreign |   | Canadian |   | Foreign |  
|                                   
|Pension obligations as of March 31: |          |   |         |   |          |   |         |  
|Discount rate                       | 5.25     | % | 4.15    | % | 6.00     | % | 4.15    | %
|Compensation rate increases         | 3.50     | % | 1.80    | % | 4.50     | % | 1.80    | %
|Net pension cost:                   |          |   |         |   |          |   |         |  
|Expected return on plan assets      | 6.50     | % | 5.00    | % | 6.50     | % | N/A     |  
|Discount rate                       | 6.00     | % | 4.15    | % | 6.50     | % | N/A     |  
|Compensation rate increases         | 4.50     | % | 1.80    | % | 4.50     | % | N/A     |  
|                                   

For the purpose of calculating the expected return on plan assets, historical and expected future returns were considered separately for each class of assets based on the asset allocation
and the investment policy.

The Company measures its benefit obligations and fair value of plan assets for accounting purposes on December 31 of each year.

The most recent actuarial valuation of the pension plans for funding purposes was on December 31, 2004 for the Canadian employee funded plans. The next required valuation will be on
December 31, 2007 for both funded plans.

The funded plan in the Netherlands and both supplemental arrangements are valued annually on December 31.

NOTE 22  CUMULATIVE TRANSLATION ADJUSTMENT

|The net change in the currency translation adjustment account is as follows:                         |   |        |   |   |       |  
|---------------------------------------------------------------------------------------------------- | - | ------ | - | - | ----- | -
|(amounts in millions)                                                                                |   | 2006   |   |   | 2005  |  
|                                                                                                    
|Balance at beginning of year                                                                         | $ | (66.3  | ) | $ | (12.1 | )
|Effect of changes in exchange rates during the year:                                                 |   |        |   |   |       |  
|On net investment in self-sustaining subsidiaries, net of taxes of $2.2, (2005  ($2.3))             |   | (47.0  | ) |   | (57.1 | )
|On certain long-term debt denominated in foreign currencies designated as a hedge of net investments |   |        |   |   |       |  
|in self-sustaining foreign subsidiaries, net of taxes of $0.9 (2005  $2.3)                          |   | 3.7    |   |   | 9.9   |  
|Portion included in income as a result of reductions in net investments                              |   |        |   |   |       |  
|in self-sustaining foreign operations, net of taxes of ($0.3) (2005  $4.9)                          |   | (5.6   | ) |   | (7.0  | )
|                                                                                                    
|Balance at end of year                                                                               | $ | (115.2 | ) | $ | (66.3 | )
|                                                                                                    

NOTE 23  INVESTMENT TAX CREDITS

The Company is subject to a review by the taxation authorities in various jurisdictions. The determination of tax liabilities and investment tax credits (ITCs) recoverable involve certain uncertainties in the
interpretation of complex tax regulations. Therefore, the Company provides for potential tax liabilities and ITCs recoverable based on Management's best estimates. Differences between the estimates and the ultimate amounts of taxes and ITCs are
recorded in earnings at the time they can be determined. In the first quarter of fiscal 2005, an amount of $11.4 million, net of tax of $4.7 million, of ITCs was recognized in net earnings and $0.4 million was recorded against deferred
development costs. These amounts related to the results of reviews by the taxation authorities for fiscal years 2000 to 2002 and to Management's reassessment of its best estimate of potential tax liabilities for the subsequent fiscal years. On a per
segment basis, gross ITCs were recognized as follows: Simulation Products/Civil at $9.8 million, Simulation Products/Military at $4.4 million and discontinued operations at $1.9 million.

The following table for fiscal 2005 provides the earnings from continuing operations before interest and income taxes amounts by segment, including and excluding ITC provisions reversed
based on recent tax reviews:

|                             |   | Including      |   | Excluding      |  
|---------------------------- | - | -------------- | - | -------------- | -
|                             |   | ITC Provisions |   | ITC Provisions |  
|(amounts in millions)        |   | Reversed       |   | Reversed       |  
|                            
|Simulation Products/Civil    | $ | 7.8            | $ | (2.0           | )
|Simulation Products/Military |   | 26.4           |   | 22.0           |  
|                            
|                             | $ | 34.2           | $ | 20.0           |  
|                            

102_ CAE ANNUAL REPORT 2006

---

NOTE 24  RESTRUCTURING
COSTS

In fiscals 2004 and 2005, the Company
proceeded with three measures intended to restore its profitability, cash flows
and return on investment. The first two initiatives were announced at the end of
the fourth quarter of fiscal 2004 and were carried out during the first and
second quarters of fiscal 2005.

The
first initiative resulted in a restructuring charge of $8.2 million that was
recorded in the results of the fourth quarter of fiscal 2004. An amount of $0.7
million related to the sale of its Marine Controls segment has been allocated to
discontinued operations. The charge included severance and other involuntary
termination costs that related mainly to the workforce reduction of
approximately 250 employees in the Montreal plant, following the loss of a major
simulation equipment contract to a competitor. The complete amount was disbursed
during the first and second quarters of fiscal 2005.

The
second initiative was designed to integrate a number of functions at certain
European training centres. A restructuring charge of $1.8 million, mainly for
severance and other costs, was also recorded in the results of the fourth
quarter of fiscal 2004. During fiscal 2005, an amount of $1.2 million was
disbursed, leaving a provision of $0.6 million, mostly paid during the second
quarter of fiscal 2006.

During
the fourth quarter of 2005, following a comprehensive review of current
performance and the strategic orientation of its operations, the Company
announced a broad Restructuring Plan (third initiative) aimed at the elimination
of existing duplications between the Civil and Military segments and the
achievement of a more competitive cost structure. The plan, which includes a
workforce reduction of approximately 450 employees and the closing of redundant
facilities, has a significant effect on the Company's operations in Montreal and
around the world, including some European and US training centres, and will be
executed over 18 months. A restructuring charge of $24.5 million, consisting
mainly of severance and other related costs, was recorded in the results of the
fourth quarter of fiscal 2005. During the fourth quarter of fiscal 2005, $13.9
million was paid, resulting in a balance of $10.6 million as at March 31, 2005.
During fiscal 2006, $16.3 million was disbursed and additional expenses of $18.9
million were incurred resulting from, among other things, progress achieved in
the Restructuring Plan in European Civil training centres.

The following table provides the
restructuring charge for each reportable segment:

|(amounts in millions)                                              |   | 2006        |   |   | 2005  |   |   | 2004  |  
|------------------------------------------------------------------ | - | ----------- | - | - | ----- | - | - | ----- | -
|                                                                  
|Simulation
      Products/Civil                                    | $ | 2.8         |   | $ | 7.6   |   | $ |      |  
|Simulation
      Products/Military                                 |   | 4.3         |   |   | 10.8  |   |   | 7.5   |  
|Training &
      Services/Civil                                    |   | 11.6        |   |   | 4.9   |   |   | 1.2   |  
|Training &
      Services/Military                                 |   | 0.2         |   |   | 1.2   |   |   | 0.6   |  
|                                                                  
|                                                                   | $ | 18.9        |   | $ | 24.5  |   | $ | 9.3   |  
|                                                                  
|The continuity of the restructuring provision is as
      follows: |   |             |   |   |       |   |   |       |  
|                                                                   |   | Employee    |   |   |       |   |   |       |  
|                                                                   |   | Termination |   |   | Other |   |   |       |  
|(amounts in
      millions)                                        |   | Costs       |   |   | Costs |   |   | Total |  
|                                                                  
|Costs charged to
      expenses                                    | $ | 8.7         |   | $ | 0.6   |   | $ | 9.3   |  
|Payments
      made                                                |   | (8.2        | ) |   | (0.5  | ) |   | (8.7  | )
|                                                                  
|Balance of
      provision as at March 31, 2004                    | $ | 0.5         |   | $ | 0.1   |   | $ | 0.6   |  
|Costs charged to
      expenses                                    |   | 20.8        |   |   | 3.7   |   |   | 24.5  |  
|Payments
      made                                                |   | (12.1       | ) |   | (1.8  | ) |   | (13.9 | )
|                                                                  
|Balance of
      provision as at March 31, 2005                    | $ | 9.2         |   | $ | 2.0   |   | $ | 11.2  |  
|Costs charged to
      expenses                                    |   | 12.6        |   |   | 6.3   |   |   | 18.9  |  
|Payments
      made                                                |   | (9.3        | ) |   | (7.6  | ) |   | (16.9 | )
|Foreign
      exchange                                             |   | (0.5        | ) |   | (0.1  | ) |   | (0.6  | )
|                                                                  
|Balance of provision as at March 31, 2006                          | $ | 12.0        |   | $ | 0.6   |   | $ | 12.6  |  
|                                                                  

CAE ANNUAL REPORT 2006 _103

---

NOTE 25  VARIABLE INTEREST
ENTITIES

The following table summarizes, by
segment, the total assets and total liabilities of the significant variable
interest entities (VIEs) in which the Company has a variable interest as at
March 31:

|                                                                            |   |        |   | 2006        |   |        |   | 2005       
|--------------------------------------------------------------------------- | - | ------ | - | ----------- | - | ------ | - | -----------
|                                                                           
|(amounts in millions)                                                       |   | Assets |   | Liabilities |   | Assets |   | Liabilities
|                                                                           
|Training and Services/Civil:                                                |   |        |   |             |   |        |   |            
|Sale and
      leaseback structures                                         |   |        |   |             |   |        |   |            
|Air
      Canada Training Centre  Fiscal 2000                              | $ | 14.7   | $ | 14.7        | $ | 15.4   | $ | 15.4       
|Toronto Training Centre  Fiscal 2002                                       |   | 25.5   |   | 25.5        |   | 26.6   |   | 26.6       
|Denver/Dallas  Fiscal 2003                                                 |   | 56.4   |   | 56.4        |   | 58.7   |   | 58.7       
|SimuFlite  Fiscal 2004                                                     |   | 80.0   |   | 80.0        |   | 83.1   |   | 83.1       
|Amsterdam Training Centre  Fiscal 2002                                     |   |       |   |            |   | 44.1   |   | 40.8       
|North East Training Center  Fiscal 2006                                    |   | 28.4   |   | 28.4        |   |       |   |           
|                                                                           
|                                                                            | $ | 205.0  | $ | 205.0       | $ | 227.9  | $ | 224.6      
|Less assets and
      liabilities:                                          |   |        |   |             |   |        |   |            
|Newly consolidated under AcG-15                                             |   |       |   |            |   | 44.1   |   | 40.8       
|                                                                           
|Assets and
      liabilities of non-consolidated VIEs subject to disclosure | $ | 205.0  | $ | 205.0       | $ | 183.8  | $ | 183.8      
|                                                                           
|Training and Services/Military:                                             |   |        |   |             |   |        |   |            
|Sale and
      leaseback structures                                         |   |        |   |             |   |        |   |            
|Aircrew Training Centre  Fiscal 1998                                       | $ | 56.3   | $ | 45.9        | $ | 61.5   | $ | 53.1       
|                                                                           
|Less assets and
      liabilities:                                          |   |        |   |             |   |        |   |            
|Newly consolidated under AcG-15                                             |   |       |   |            |   |       |   |           
|                                                                           
|Consolidated
      assets and liabilities before allowing                   |   |        |   |             |   |        |   |            
|for
      its classification as a VIE and the Company                       |   |        |   |             |   |        |   |            
|being the primary beneficiary                                               | $ | 56.3   | $ | 45.9        | $ | 61.5   | $ | 53.1       
|                                                                           
|Simulation Products/Military:                                               |   |        |   |             |   |        |   |            
|Partnership
      arrangements                                              |   |        |   |             |   |        |   |            
|Eurofighter Simulation Systems  Fiscal 1999                                | $ | 221.5  | $ | 218.2       | $ | 245.3  | $ | 241.6      
|                                                                           
|Less assets and
      liabilities:                                          |   |        |   |             |   |        |   |            
|Newly consolidated under AcG-15                                             |   |       |   |            |   |       |   |           
|                                                                           
|Assets and
      liabilities of non-consolidated VIEs subject to disclosure | $ | 221.5  | $ | 218.2       | $ | 245.3  | $ | 241.6      
|                                                                           

Pursuant to the adoption of AcG-15 on
January 1, 2005, the consolidation of the VIE resulted in an increase in total
assets, total liabilities,

|and
      shareholders' equity of $46.9 million, $43.7 million, and $3.2 million,
      respectively. |   |                             |  
|----------------------------------------------------------------------------------------------------- | - | --------------------------- | -
|The detailed impact per balance
      sheet item is as follows as of January 1, 2005:                 |   |                             |  
|(amounts in millions)                                                                                 |   | Consolidated in Fiscal 2005 |  
|                                                                                                     
|Assets                                                                                                |   |                             |  
|Property, plant
      and equipment                                                                   | $ | 46.9                        |  
|                                                                                                     
|                                                                                                      | $ | 46.9                        |  
|Liabilities                                                                                           |   |                             |  
|Accounts payable
      and accrued liabilities                                                        | $ | 0.6                         |  
|Long-term debt
      (including current portion )                                                     |   | 41.3                        |  
|Future income
      tax liabilities                                                                   |   | 1.8                         |  
|                                                                                                     
|                                                                                                      | $ | 43.7                        |  
|Shareholders' Equity                                                                                  |   |                             |  
|Retained
      earnings                                                                               | $ | 3.3                         |  
|Currency
      translation adjustment                                                                 |   | (0.1                        | )
|                                                                                                     
|                                                                                                      | $ | 46.9                        |  
|                                                                                                     

The
liabilities recognized as a result of consolidating this VIE do not represent
additional claims on the Company's general assets; rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating this VIE do not represent additional
assets that could be used to satisfy claims against the Company's general
assets. Additionally, the consolidation of this VIE did not result in any change
in the underlying tax, legal or credit exposure of the Company.

104_ CAE ANNUAL REPORT 2006

---

SALE AND LEASEBACK STRUCTURES

A key element of CAE's finance strategy to support the investment in its Civil and Military training and services business is the sale and leaseback of certain FFSs installed in the Company's global network of training
centres. This provides CAE with a cost-effective long-term source of fixed-cost financing. A sale and leaseback structure arrangement can be executed only after the FFS has achieved certification by regulatory authorities (i.e. the simulator is
installed and is available to customers for training). The sale and leaseback structures are typically structured as leveraged leases with an owner-participant.

The Company has entered into sale and leaseback arrangements with special purpose entities (SPEs). These arrangements relate to simulators used in the Company's training centers for the
military and civil aviation segments. These leases expire at various dates up to 2023, with the exception of one in 2037. Typically, the Company has the option to purchase the equipment at a specific time during the lease terms at a specific
purchase price. Some leases include renewal options at the end of the term. In some cases, the Company has provided guarantees for the residual value of the equipment at the expiry date of the leases or at the date the Company exercises its purchase
option. These SPEs are financed by secured long-term debt and third-party equity investors who, in certain cases, benefit from tax incentives. The equipment serves as collateral for the long-term debt of the SPEs.

The Company's variable interests in these SPEs are solely through fixed purchase price options and residual value guarantees, except for two cases where, in the first instance, it is in
the form of equity and subordinated loan and in the second instance, it is in the form of a cost-sharing construction agreement. In another case, the Company also provides administrative services to the SPE in return for a market fee.

Some of these SPEs are VIEs, and the Company was the primary beneficiary for only one of them as at March 31, 2006. With respect to the year ended March 31, 2005, the Company also
concluded that it was the primary beneficiary for two SPEs, of which, one was fully consolidated into the Company's Consolidated Financial Statements at March 31, 2005, even before allowing for its classification as a VIE and the Company being the
primary beneficiary.

The second entity was consolidated effective January 1, 2005. During fiscal 2006, the Company proceeded with the purchase of the assets from this VIE and repaid any related liability.
Total payment made to settle the Amsterdam asset-backed financing lease amounted toy22.7 million previously recorded as the VIE's liability. As a result, as at March 31, 2006,
the Company no longer has a variable interest in this second entity.

For all of the other SPEs that are VIEs, the Company is not the primary beneficiary and consolidation is not appropriate under AcG-15. As at March 31, 2006, the Company's maximum potential
exposure to losses relating to these non-consolidated SPEs was $47.7 million ($49.4 million in 2005).

PARTNERSHIP ARRANGEMENTS

The Company entered into partnership arrangements to provide manufactured military simulation products as well as training and services for both the Military and Civil segments.

The Company's involvement with entities, in connection with these partnership arrangements, is mainly through investments in their equity and/or in subordinated loans and through
manufacturing and long-term training service contracts. The Company concluded that certain of these entities are VIEs, but the Company is not the primary beneficiary. Accordingly, these entities have not been consolidated. The Company continues to
account for these investments under the equity method, recording its share of the net earnings or loss based on the terms of the partnership arrangements. As at March 31, 2006 and 2005, the Company's maximum off-balance sheet exposure to losses
related to these non-consolidated VIEs, other than from its contractual obligations, was not material.

NOTE 26  OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION

The Company elected to organize its businesses based principally on products and services. Effective April 1, 2005, the Company changed its internal organizational structure such that operations are managed through
four segments:

|(i)   | Simulation Products/Civil: Designs, manufactures and supplies civil flight simulators, training devices and visual systems                                                                                                                                                                                                            
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  | Simulation Products/Military: Designs, manufactures and supplies advanced military training products for air, land and sea applications                                                                                                                                                                                               
|     
|(iii) | Training & Services/Civil: Provides business and commercial aviation training and related services                                                                                                                                                                                                                                    
|     
|(iv)  | Training & Services/Military: Supplies military turnkey training and operational solutions, support services, life extensions, systems maintenance and modelling and simulation solutions Due to this change, the
corresponding items of segment information for earlier periods have been reclassified to conform to the new internal
|     

organization. The accounting policies of each segment are the same as those described in Note 1.

The Company's operations were previously broken down into the following operating segments: Military Simulation & Training (Military), Civil Simulation & Training (Civil) and
Marine Controls (Marine) until the disposal of the latter segment in the fourth quarter of fiscal 2005.

CAE ANNUAL REPORT 2006 _105

---

NOTE 26  OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION (CONTD)

RESULTS BY SEGMENT

The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing segment performance is earnings (loss) before other income (expense) net, interest, income
taxes and discontinued operations (hereinafter referred to as Segment Operating Income). The Simulation Products/Civil and the Simulation Products/Military segments operate under an integrated organization sharing substantially all engineering,
development, global procurement, program management and manufacturing functions. The accounting principles used to prepare the information by operating segments are the same as those used to prepare the Company's Consolidated Financial Statements.
Transactions between operating segments are mainly simulator transfers from the Simulation Products/Civil segment to the Training & Services/Civil segment, which are recorded at cost. The method used for the allocation of assets jointly used by
operating segments and costs and liabilities jointly incurred (mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the allocation is made based on a proportion of each
segment's cost of sales.

|(amounts in millions)           |   |       |   | Simulation Products |   |       |   | Training & Services |   |       |   |       |   | Total  
|------------------------------- | - | ----- | - | ------------------- | - | ----- | - | ------------------- | - | ----- | - | ----- | - | -------
|                               
|                                |   | 2006  |   | 2005                |   | 2004  |   | 2006                |   | 2005  |   | 2004  |   | 2006   
|                               
|Civil                           |   |       |   |                     |   |       |   |                     |   |       |   |       |   |        
|External revenue                | $ | 257.0 | $ | 213.4               | $ | 193.0 | $ | 322.3               | $ | 306.8 | $ | 268.8 | $ | 579.3  
|Segment Operating Income        |   | 30.2  |   | 7.8                 |   | 10.7  |   | 57.9                |   | 39.8  |   | 28.3  |   | 88.1   
|Depreciation and amortization   |   |       |   |                     |   |       |   |                     |   |       |   |       |   |        
| Property, plant and equipment |   | 5.5   |   | 7.5                 |   | 8.2   |   | 36.6                |   | 34.9  |   | 29.9  |   | 42.1   
| Intangible and other assets   |   | 5.8   |   | 4.6                 |   | 5.5   |   | 6.7                 |   | 10.4  |   | 10.4  |   | 12.5   
|Capital expenditures            |   | 5.7   |   | 10.9                |   | 13.4  |   | 87.5                |   | 100.6 |   | 68.3  |   | 93.2   
|                               
|Military                        |   |       |   |                     |   |       |   |                     |   |       |   |       |   |        
|External revenue                | $ | 327.4 | $ | 278.9               | $ | 291.8 | $ | 200.5               | $ | 187.1 | $ | 184.8 | $ | 527.9  
|Segment Operating Income        |   | 27.7  |   | 26.4                |   | 28.5  |   | 19.1                |   | 20.8  |   | 23.1  |   | 46.8   
|Depreciation and amortization   |   |       |   |                     |   |       |   |                     |   |       |   |       |   |        
| Property, plant and equipment |   | 6.1   |   | 8.7                 |   | 8.7   |   | 4.3                 |   | 4.0   |   | 4.5   |   | 10.4   
| Intangible and other assets   |   | 7.7   |   | 0.7                 |   | 0.1   |   | 2.7                 |   | 4.0   |   | 1.4   |   | 10.4   
|Capital expenditures            |   | 6.0   |   | 4.4                 |   | 3.5   |   | 30.9                |   | 2.1   |   | 1.6   |   | 36.9   
|                               
|Total                           |   |       |   |                     |   |       |   |                     |   |       |   |       |   |        
|External revenue                | $ | 584.4 | $ | 492.3               | $ | 484.8 | $ | 522.8               | $ | 493.9 | $ | 453.6 | $ | 1,107.2
|Segment Operating Income        |   | 57.9  |   | 34.2                |   | 39.2  |   | 77.0                |   | 60.6  |   | 51.4  |   | 134.9  
|Depreciation and amortization   |   |       |   |                     |   |       |   |                     |   |       |   |       |   |        
| Property, plant and equipment |   | 11.6  |   | 16.2                |   | 16.9  |   | 40.9                |   | 38.9  |   | 34.4  |   | 52.5   
| Intangible and other assets   |   | 13.5  |   | 5.3                 |   | 5.6   |   | 9.4                 |   | 14.4  |   | 11.8  |   | 22.9   
|Capital expenditures            |   | 11.7  |   | 15.3                |   | 16.9  |   | 118.4               |   | 102.7 |   | 69.9  |   | 130.1  
|                               

CONSOLIDATED EARNINGS (LOSS) BEFORE INTEREST AND INCOME TAXES

The following table provides a reconciliation between total Segment Operating Income and earnings (loss) before interest and income taxes:

|(amounts in millions)                                           |   | 2006  |   |   | 2005   |   |   | 2004 |  
|--------------------------------------------------------------- | - | ----- | - | - | ------ | - | - | ---- | -
|                                                               
|Total Segment Operating Income                                  | $ | 134.9 |   | $ | 94.8   |   | $ | 90.6 |  
|Foreign exchange gain on the reduction of the investment        |   |       |   |   |        |   |   |      |  
|in certain self-sustaining subsidiaries(a)                      |   | 5.3   |   |   |       |   |   |     |  
|Impairment of goodwill, tangible and intangible assets (Note 4) |   |      |   |   | (443.3 | ) |   |     |  
|Restructuring charge (Note 24)                                  |   | (18.9 | ) |   | (24.5  | ) |   | (9.3 | )
|Other costs associated with the Restructuring Plan(b)           |   | (15.1 | ) |   |       |   |   |     |  
|                                                               
|Earnings (loss) before interest and income taxes                | $ | 106.2 |   | $ | (373.0 | ) | $ | 81.3 |  
|                                                               

|(a) | The Company reduced the capitalization of its certain self-sustaining subsidiaries. Accordingly, the corresponding amount of foreign exchange accumulated in the cumulative translation adjustment account was transferred
to the Consolidated Statements of Earnings.                                                                                                                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) | Since the beginning of fiscal year 2006, the Company has also incurred incremental costs related to its Restructuring Plan which are included in earnings (loss) according to GAAP. These costs are not included in the
Segment Operating Income. A significant portion relates to the re-engineering of the Company's business processes from which a portion is associated with the deployment of the ERP system (excluding the portion capitalized). The Company also incurred
costs related to the review of its strategy and other costs associated with its restructuring activities.
|   

106_ CAE ANNUAL REPORT 2006

---

ASSETS EMPLOYED BY
SEGMENT

CAE uses assets employed to assess
resources allocated to each segment. Assets employed include accounts
receivable, inventories, prepaid expenses, property, plant and equipment,
goodwill, intangible assets and other assets. Assets employed exclude cash,
income tax accounts, assets held for sale and assets of certain non-operating
subsidiaries.

|                                             |   | As at March
      31, |   | As at March 31,
|-------------------------------------------- | - | --------------------- | - | ---------------
|(amounts in millions)                        |   | 2006                  |   | 2005           
|                                            
|Simulation
      Products/Civil              | $ | 163.5                 | $ | 167.1          
|Simulation
      Products/Military           |   | 225.2                 |   | 280.7          
|Training &
      Services/Civil              |   | 833.8                 |   | 762.6          
|Training &
      Services/Military           |   | 166.7                 |   | 138.7          
|                                            
|Total assets employed                        |   | 1,389.2               |   | 1,349.1        
|                                            
|Assets not
      included in assets employed |   | 326.9                 |   | 350.6          
|                                            
|Total assets                                 | $ | 1,716.1               | $ | 1,699.7        
|                                            

GEOGRAPHIC
INFORMATION

The Company markets its products and
services in over 19 countries. Sales are attributed to countries based on the
location of customers.

|(amounts in millions)                                               |   | 2006    |   | 2005                  |   | 2004           
|------------------------------------------------------------------- | - | ------- | - | --------------------- | - | ---------------
|                                                                   
|Revenue from
      external customers                               |   |         |   |                       |   |                
|Canada                                                              | $ | 100.1   | $ | 81.4                  | $ | 109.8          
|United States                                                       |   | 393.5   |   | 413.5                 |   | 302.2          
|United Kingdom                                                      |   | 80.2    |   | 85.3                  |   | 86.5           
|Germany                                                             |   | 143.4   |   | 110.2                 |   | 129.8          
|Netherlands                                                         |   | 104.6   |   | 56.8                  |   | 51.2           
|Other European countries                                            |   | 51.2    |   | 81.1                  |   | 102.0          
|Asia
      and Middle Eastern countries                             |   | 173.0   |   | 69.5                  |   | 79.1           
|Other countries                                                     |   | 61.2    |   | 88.4                  |   | 77.8           
|                                                                   
|                                                                    | $ | 1,107.2 | $ | 986.2                 | $ | 938.4          
|                                                                   
|                                                                    |   |         |   | As at March
      31, |   | As at March 31,
|(amounts in millions)                                               |   |         |   | 2006                  |   | 2005           
|                                                                   
|Property, plant
      and equipment, goodwill and intangible assets |   |         |   |                       |   |                
|Canada                                                              |   |         | $ | 250.6                 | $ | 195.7          
|United States                                                       |   |         |   | 300.9                 |   | 277.4          
|United Kingdom                                                      |   |         |   | 77.3                  |   | 81.7           
|Spain                                                               |   |         |   | 84.2                  |   | 98.3           
|Germany                                                             |   |         |   | 30.1                  |   | 12.5           
|Netherlands                                                         |   |         |   | 113.1                 |   | 135.4          
|Other European countries                                            |   |         |   | 66.2                  |   | 74.2           
|Asia
      and Middle Eastern countries                             |   |         |   | 24.3                  |   | 19.8           
|Other countries                                                     |   |         |   | 7.9                   |   | 9.5            
|                                                                   
|                                                                    |   |         | $ | 954.6                 | $ | 904.5          
|                                                                   

NOTE 27  DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES

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

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

CAE ANNUAL REPORT 2006 _107

---

NOTE 27  DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD)

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

|Years ended March
      31                                                        |  |                        |             |   |                   |           |   |       |        |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ----------- | - | ----------------- | --------- | - | ----- | ------ | -
|(amounts in
      millions, except per share amounts)                             |  |                        | 2006        |   |                   | 2005      |   |       | 2004   |  
|                                                                                 
|Net earnings
      (loss) in accordance with Canadian GAAP                        |  | $                      | 64.9        |   | $                 | (199.9    | ) | $     | 64.0   |  
|Deferred
      development costs, net of tax expense (recovery) of $2.3           |  |                        |             |   |                   |           |   |       |       
|(2005  ($2.2)), (2004  ($1.2)) (A)                                              |  | 5.4                    |             |   | 9.5               |           |   | (2.5  | )     
|Deferred
      pre-operating costs, net of tax expense of $1.8                    |  |                        |             |   |                   |           |   |       |        |  
|(2005  $3.6), (2004  $0.4)
      (B)                                            |  |                        | 4.2         |   |                   | 8.1       |   |       | (0.1   | )
|Derivative instruments, net of tax
      expense (recovery) of $2.6               |  |                        |             |   |                   |           |   |       |        |  
|(2005  ($0.8)) (2004  ($4.0)) (C)                                               |  | 5.3                    |             |   | (4.0              | )         |   | (8.5  | )     
|Variable interest entities net of tax
      expense of $nil                       |  |                        |             |   |                   |           |   |       |        |  
|(2005  $0.5), (2004  $2.5)
      (G)                                            |  |                        |            |   |                   | 0.6       |   |       | 5.3    |  
|Reduction of the net investment in
      self-sustaining operations (H)           |  |                        | (5.3        | ) |                   |          |   |       |       |  
|Goodwill
      impairment on purchase of subsidiary in 2002,                      |  |                        |             |   |                   |           |   |       |        |  
|net of tax recovery of $ 3.7
      million (E)                                    |  |                        |            |   |                   | (7.9      | ) |       |       |  
|                                                                                 
|Earnings (Loss) from continuing
      operations before cumulative                |  |                        |             |   |                   |           |   |       |        |  
|effect of accounting change  US
      GAAP                                       |  | $                      | 74.5        |   | $                 | (193.6    | ) | $     | 58.2   |  
|Adjustment of discontinued operations
      in accordance with US GAAP (A,B,C,H)  |  |                        |            |   |                   | (5.9      | ) |       | (0.7   | )
|                                                                                 
|Net earnings (loss) before cumulative
      effect of accounting change  US GAAP |  |                        | 74.5        |   |                   | (199.5    | ) |       | 57.5   |  
|Cumulative effect on prior years of
      accounting change (D) (G)               |  |                        |            |   |                   | (0.6      | ) |       |       |  
|                                                                                 
|Net earnings (loss) for the year in
      accordance with US GAAP                 |  | $                      | 74.5        |   | $                 | (200.1    | ) | $     | 57.5   |  
|                                                                                 
|Basic and diluted (loss) earnings per
      share from continuing operations      |  |                        |             |   |                   |           |   |       |        |  
|in accordance with US
      GAAP                                                  |  |                        | 0.30        |   |                   | (1.21     | ) |       | 0.18   |  
|                                                                                 
|Basic and diluted results per share
      from discontinued operations            |  |                        |             |   |                   |           |   |       |        |  
|in accordance with US
      GAAP                                                  |  |                        | 0.02        |   |                   | 0.40      |   |       | 0.07   |  
|                                                                                 
|Basic and diluted net earnings(loss)
      per share before cumulative effect     |  |                        |             |   |                   |           |   |       |        |  
|of
      accounting change in accordance with US GAAP                             |  |                        | 0.30        |   |                   | (0.81     | ) |       | 0.25   |  
|                                                                                 
|Basic and diluted net earnings (loss)
      per share in accordance with US GAAP  |  |                        | 0.30        |   |                   | (0.81     | ) |       | 0.25   |  
|                                                                                 
|Dividends per common share                                                        |  |                        | 0.04        |   |                   | 0.10      |   |       | 0.12   |  
|                                                                                 
|Weighted average
      number of common shares outstanding                        |  |                        | 249.8       |   |                   | 247.1     |   |       | 233.2  |  
|                                                                                 
|(amounts in
      millions)                                                       |  |                        | 2006        |   |                   | 2005      |   |       | 2004   |  
|                                                                                 
|Comprehensive
      income                                                        |  |                        |             |   |                   |           |   |       |        |  
|Net earnings(loss) in accordance with
      US GAAP                               |  | $                      | 74.5        |   | $                 | (200.1    | ) | $     | 57.5   |  
|Change in accumulated minimum pension
      liability, net of taxes of $0.1       |  |                        |             |   |                   |           |   |       |        |  
|(2005  $1.7) (2004  $4.2)
      (J)                                             |  |                        | (0.1        | ) |                   | (4.2      | ) |       | 9.1    |  
|Change in foreign currency translation
      adjustments                          |  |                        | (43.6       | ) |                   | (41.3     | ) |       | (40.1  | )
|                                                                                 
|Comprehensive income                                                              |  | $                      | 30.8        |   | $                 | (245.6    | ) | $     | 26.5   |  
|                                                                                 
|ACCUMULATED OTHER COMPREHENSIVE LOSS IN
      ACCORDANCE WITH US GAAP             |  |                        |             |   |                   |           |   |      
|                                                                                  |  |                        |             |   |                   | Change in |   |       |        |  
|                                                                                  |  | Foreign
      Currency |             |   | accumulated       |           |   |       |       
|                                                                                  |  |                        | translation |   |                   | minimum   |   |       |        |  
|(amounts in
      millions)                                                       |  | adjustments            |             |   | pension liability |           |   | Total |       
|                                                                                 
|Closing balance  2004                                                            |  | $                      | (18.4       | ) | $                 | (14.4     | ) | $     | (32.8  | )
|Changes for the year  2005                                                       |  |                        | (41.3       | ) |                   | (4.2      | ) |       | (45.5  | )
|                                                                                 
|Closing balance  2005                                                            |  |                        | (59.7       | ) |                   | (18.6     | ) |       | (78.3  | )
|Changes for the year  2006                                                       |  |                        | (43.6       | ) |                   | (0.1      | ) |       | (43.7  | )
|                                                                                 
|Ending balance  2006                                                             |  | $                      | (103.3      | ) | $                 | (18.7     | ) | $     | (122.0 | )
|                                                                                 

108_ CAE ANNUAL REPORT 2006

---

|The cumulative effect of these
      adjustments on the shareholders' equity of the Company is as
      follows:               |                    |             |               |         |       |                |        
|------------------------------------------------------------------------------------------------------------------------------ | ------------------ | ----------- | ------------- | ------- | ----- | -------------- | -------
|(amounts in millions)                                                                                                          |                    |             |               |         |       |                |        
|                                                                                                                              
|Shareholders'
      equity in accordance with Canadian GAAP                                                                    |                    |             |               |         |       |                | $      
|Deferred
      development costs, net of tax expense of $13.3 (2005  $15.6) (A)                                               |                    |             |               |         |       | (13.0          | )      
|Deferred
      pre-operating costs, net of tax expense of $3.4 (2005  $5.2)
      (B)                                         |                    |             |               |         |       |                | (6.6   
|Derivative
      instruments, net of tax expense of $7.7 (2005  $10.3) (C)                                                    |                    |             |               |         |       |                | (17.2  
|Minimum pension
      liability, net of tax expense of $8.4 (2005  $8.3) (J)                                                  |                    |             |               |         |       |                | (18.7  
|                                                                                                                              
|Shareholders'
      equity in accordance with US GAAP                                                                          |                    |             |               |         |       |                |        
|                                                                                                                              
|The consolidated balance sheets
      in accordance with US GAAP as at March 31, 2006 and March 31, 2005 are as
      follows: |                    |            
|(amounts in millions)                                                                                                          |                    | Notes       |               |         |       | March 31, 2006 |        
|                                                                                                                              
|                                                                                                                               |                    |             | Canadian GAAP |         |       | US GAAP        |        
|                                                                                                                              
|Assets                                                                                                                         |                    |             |               |         |       |                |        
|Cash and cash
      equivalents                                                                                                |                    |             | $             | 81.1    |       | $              | 81.1   
|Accounts
      receivable                                                                                                      |                    |             |               | 260.3   |       |                | 260.3  
|Derivative
      instruments                                                                                                   |                    | C           |               |        |       |                | 5.5    
|Inventories                                                                                                                    |                    |             |               | 93.2    |       |                | 93.2   
|Prepaid
      expenses                                                                                                         |                    |             |               | 25.2    |       |                | 25.2   
|Income taxes
      recoverable                                                                                                 |                    |             |               | 75.7    |       |                | 75.7   
|Future income
      taxes                                                                                                      |                    |             |               | 5.7     |       |                | 5.7    
|Current assets
      held for sale                                                                                             |                    |             |               |        |       |                |       
|                                                                                                                              
|                                                                                                                               |                    |             | $             | 541.2   |       | $              | 546.7  
|                                                                                                                              
|Property, plant
      and equipment, net                                                                                       |                    |             |               | 839.3   |       |                | 839.3  
|Future income
      taxes                                                                                                      |                    | A,B,C,E,G,J |               | 78.2    |       |                | 110.6  
|Intangible
      assets                                                                                                        |                    | J           |               | 23.3    |       |                | 28.9   
|Goodwill                                                                                                                       |                    |             |               | 92.0    |       |                | 92.0   
|Other
      assets                                                                                                             |                    | A,B         |               | 136.2   |       |                | 100.8  
|Long-term assets
      held for sale                                                                                           |                    |             |               | 5.9     |       |                | 5.9    
|                                                                                                                              
|                                                                                                                               |                    |             | $             | 1,716.1 |       | $              | 1,724.2
|                                                                                                                              
|Liabilities and Shareholders Equity                                                                                           |                    |             |               |         |       |                |        
|Current liabilities                                                                                                            |                    |             |               |         |       |                |        
|Accounts payable
      and accrued liabilities                                                                                 |                    |             | $             | 373.7   |       | $              | 373.7  
|Deposits on
      contracts                                                                                                    |                    |             |               | 146.4   |       |                | 146.4  
|Derivative
      instruments                                                                                                   |                    | C           |               |        |       |                | 30.9   
|Current portion
      of long-term debt due within one year                                                                    |                    |             | 10.4          |         |       | 10.4           |        
|Future income
      taxes                                                                                                      |                    |             |               | 14.5    |       |                | 14.5   
|Current
      liabilities related to assets held for sale                                                                      | J                  |             |              |         |       |               |        
|                                                                                                                              
|                                                                                                                               |                    |             | $             | 545.0   |       | $              | 575.9  
|                                                                                                                              
|Long-term
      debt                                                                                                           |                    |             |               | 260.9   |       |                | 260.9  
|Deferred gains
      and other long-term liabilities                                                                           | J                  |             | 206.5         |         |       | 239.2          |        
|Future income
      taxes                                                                                                      |                    |             |               | 28.4    |       |                | 28.4   
|Long-term
      liabilities related to assets held for sale                                                                    |                    |             |              |         |       |               |        
|                                                                                                                              
|                                                                                                                               |                    |             | $             | 1,040.8 |       | $              | 1,104.4
|                                                                                                                              
|Shareholders Equity                                                                                                           |                    |             |               |         |       |                |        
|Capital
      stock                                                                                                            |                    | F,K         | $             | 389.0   |       | $              | 633.2  
|Contributed
      surplus                                                                                                      |                    |             |               | 5.8     |       |                | 5.8    
|Retained
      earnings                                                                                                        | A,B,C,D,E,F,G,H,K, | 395.7       |               |         | 102.8 |                |        
|Currency
      translation adjustment                                                                                          |                    | H,I         |               | (115.2  | )     |                |       
|Accumulated
      other comprehensive loss                                                                                     |                    | H,J         |               |        |       |                | (122.0 
|                                                                                                                              
|                                                                                                                               |                    |             | $             | 675.3   |       | $              | 619.8  
|                                                                                                                              
|                                                                                                                               |                    |             | $             | 1,716.1 |       | $              | 1,724.2
|                                                                                                                              

CAE ANNUAL REPORT 2006 _109

---

NOTE 27  DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD)

CONSOLIDATED STATEMENT OF CASH
FLOWS

Under 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)                                  | Note |   | 2006   |   |   | 2005   |   |   | 2004  |  
|--------------------------------------------------------------------------- | ---- | - | ------ | - | - | ------ | - | - | ----- | -
|                                                                           
|Cash flows from
      operating activities in accordance with Canadian GAAP |      | $ | 238.3  |   | $ | 207.6  |   | $ | 5.7   |  
|Deferred
      development costs                                            | A    |   | (1.8   | ) |   | (9.9   | ) |   | (12.7 | )
|Deferred
      pre-operating costs                                          | B    |   | (0.7   | ) |   | (1.7   | ) |   | (6.6  | )
|Variable
      interest entities                                            | G    |   |       |   |   | 5.6    |   |   | 13.7  |  
|Deferred
      pre-operating costs related to discontinued operations       |      |   |       |   |   | (0.4   | ) |   | (3.8  | )
|                                                                           
|Cash flows from
      operating activities in accordance with US GAAP       |      | $ | 235.8  |   | $ | 201.2  |   | $ | (3.7  | )
|                                                                           
|Cash flows from
      investing activities in accordance with Canadian GAAP |      | $ | (157.4 | ) | $ | 131.6  |   | $ | 24.5  |  
|Deferred
      development costs                                            | A    |   | 1.8    |   |   | 9.9    |   |   | 12.7  |  
|Deferred
      pre-operating costs                                          | B    |   | 0.7    |   |   | 1.7    |   |   | 6.6   |  
|Deferred
      pre-operating costs related to discontinued operations       |      |   |       |   |   | 0.4    |   |   | 3.8   |  
|                                                                           
|Cash flows from
      investing activities in accordance with US GAAP       |      | $ | (154.9 | ) | $ | 143.6  |   | $ | 47.6  |  
|                                                                           
|Cash flows from
      financing activities in accordance with Canadian GAAP |      | $ | (53.2  | ) | $ | (337.3 | ) | $ | 17.8  |  
|Variable
      interest entities                                            | G    |   |       |   |   | (5.6   | ) |   | (13.7 | )
|                                                                           
|Cash flows from
      financing activities in accordance with US GAAP       |      | $ | (53.2  | ) | $ | (342.9 | ) | $ | 4.1   |  
|                                                                           

RECONCILIATION
ITEMS

|A) | Deferred development
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | Under US GAAP, development
      costs are charged to expense in the period incurred. Under Canadian GAAP,
      certain development costs are capitalized and amortized over their
      estimated useful lives if they meet the criteria for deferral. The
      difference between US GAAP and Canadian GAAP represents the gross
      development costs capitalized in the respective year, net of the reversal
      of amortization expense recorded for Canadian GAAP relating to amounts
      previously capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|B) | Deferred pre-operating
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   | Under US GAAP, pre-operating
      costs are charged to expense in the period incurred. Under Canadian GAAP,
      the amounts are deferred and amortized over 5 years based on the expected
      period and pattern of benefit of the deferred expenditures. The difference
      between US GAAP and Canadian GAAP represents the gross pre-operating costs
      capitalized in the respective year, net of the reversal of amortization
      expense recorded for Canadian GAAP relating to amounts previously
      capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|C) | Derivative financial
      instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   | Under Canadian GAAP, the
      Company recognizes the gains and losses on forward contracts entered into
      for hedging purposes in income concurrently with the recognition of the
      transactions being hedged. The interest payments relating to swap
      contracts are recorded in net earnings (loss) over the life of the
      underlying transaction on an accrual basis as an adjustment to interest
      income or interest expense. Under US GAAP, all derivatives (including
      embedded derivatives in purchase and sale contracts) are recorded on the
      consolidated balance sheet at fair value. Realized and unrealized gains
      and losses resulting from the valuation of derivatives at market value are
      recognized in net (loss) 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, 138 and 149.
|  
|D) | Adjustments for changes
      in accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   | Under US GAAP, the
      cumulative effect of certain accounting changes had to be included in
      earnings (loss) in the year of the change. Under Canadian GAAP, the impact
      is reflected through retained earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|E) | Goodwill impairment on
      purchase of subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   | Under Canadian GAAP, upon
      the purchase of Schreiner, a foreign exchange gain was recorded in fiscal
      2002 as a reduction of goodwill on the forward contract hedge of the
      foreign currency denominated purchase price. Under US GAAP, this gain was
      recorded in earnings. In fiscal 2005, Management performed a comprehensive
      review of current performance and strategic orientation of its business
      units, which led to the review of the carrying amount of certain assets
      such as the goodwill of Schreiner (Note 4). Accordingly an additional
      impairment charge of $7.9 million (net of tax of $3.7 million) was
      recorded in earnings as per US GAAP.                                                                                                                                                                                                                                                                                                   
|  
|F) | Reduction in stated
      capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   | On July 7, 1994, the Company
      applied a portion of its deficit as a reduction of its stated capital in
      the amount of $249.3 million. Under US GAAP, the reduction of stated
      capital would not be permitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|G) | Variable interest
      entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   | The Company enters into sale
      and leaseback arrangements with special purposes entities (SPEs) relating
      to simulation equipment used in the Company's training centre. Prior to
      the adoption of FASB Interpretation (FIN) No. 46 ''Consolidation of
      Variable Interest Entities'', the Company was consolidating SPEs for which
      legal stated capital represented less than 3% of their assets. Under those
      rules, three SPEs were consolidated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  

110_ CAE ANNUAL REPORT 2006

---

In
January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
Consolidation of Variable Interest Entities. This interpretation clarifies how
to apply Accounting Research Bulletin ('ARB No. 51) Consolidated Financial
Statements to those entities defined as Variable Interest Entities, when equity
investors are not considered to have a controlling financial interest or they
have not invested enough equity to allow the entity to finance its activities
without additional subordinated financial support from other parties. This
interpretation requires that existing unconsolidated variable interest entities
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. An entity that holds a
significant variable interest but is not the primary beneficiary is subject to
specific disclosure requirements.

In
December 2003, the FASB revised FIN No.46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN No.46R provides a
new framework for identifying Variable Interest Entities (VIEs) and determining
when a company should include the assets, liabilities, non-controlling interests
and results of activities of a VIE in its consolidated financial statements. The
Company was required to replace FIN No. 46 provisions with FIN No. 46R
provisions to all newly created post-January 31, 2003 entities as of the end of
the first period ending after March 15, 2005. As a foreign private issuer, the
company applied the provisions of FIN 46R to entities created before February 1,
2003, starting April 1, 2004. The Company adopted FIN No. 46R on April 1, 2004.

Upon
adoption, by the Company, of FIN No. 46R, the Company concluded that two out of
the three SPEs that were consolidated under the old rules were no longer
required to be consolidated. The impact on CAE's net earnings of the
deconsolidation was $0.6 million.

A
similar accounting standard under Canadian GAAP, AcG 15  Consolidation of
Variable Interest Entities, has been adopted by the Company on January 1, 2005.
Due to a different application date between Canadian and US GAAP, the Company
had to record in fiscal 2005 a decrease of $0.6 million (net of taxes of $0.5
million) in its net earnings as per US GAAP.

In
fiscal 2006, CAE decided to repurchase the asset (simulator) included in the
consolidated VIE therefore no need for consolidation anymore in CAE's
Consolidated Financial Statements. Variable interest entities will not be a
difference anymore between Canadian and US GAAP on a going forward
basis.

|H) | Foreign currency
      translation adjustment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | Under US GAAP, foreign
      currency translation adjustment is included as a component of
      ''Comprehensive income''. Under Canadian GAAP, the concept of
      comprehensive income is not yet applicable for the Company, and the
      currency translation adjustment is included as a component of
      ''Shareholders' Equity''. In fiscal 2006, the Company transferred to
      consolidated earnings (loss) an amount of $5.3 million (2005  $6.6
      million, included in discontinued operations) as a result of reductions in
      net investments in self-sustaining foreign operations. Under US GAAP the
      reduction in currency translation adjustment account would not be
      permitted.
|  
|I) | Comprehensive
      income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   | US GAAP requires disclosure
      of comprehensive income, which comprises income and other components of
      comprehensive income. Other comprehensive income includes items that cause
      changes in shareholders' equity but are not related to share capital or
      net earnings, which, for the Company, comprises currency translation
      adjustments and change in minimum pension liability. Under Canadian GAAP,
      the requirement to report comprehensive income will be applicable for the
      Company only in fiscal 2008 with the adoption of section 1530
      ''Comprehensive Income''.                                                                                                   
|  
|J) | Minimum pension
      liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   | Under US GAAP, if the
      accumulated benefit obligation exceeds the market value of plan assets, a
      minimum pension liability for the excess is recognized to the extent that
      the liability recorded in the Consolidated Balance Sheet is less than the
      minimum liability. Any portion of the additional liability that relates to
      unrecognized past service costs is recognized as an intangible asset while
      the remainder is charged to comprehensive income. The concept of
      additional minimum liability does not currently exist under Canadian
      GAAP.                                                                                                                     
|  
|K) | Share issue
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   | Under Canadian GAAP, costs
      related to share issuance can be presented in retained earnings, net of
      taxes. Under US GAAP, these costs were recorded as a reduction of capital
      stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  

ACCOUNTING
CHANGES

Accounting for stock-based
compensation

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

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

|(amounts in millions, except per share
      amounts)                   |   | 2006 |   |   | 2005   |   |   | 2004 |  
|----------------------------------------------------------------------- | - | ---- | - | - | ------ | - | - | ---- | -
|                                                                       
|Net (loss)
      earnings, as reported per US GAAP                      | $ | 74.5 |   | $ | (200.1 | ) | $ | 57.5 |  
|Additional
      compensation expense recorded                          |   | 2.5  |   |   | 2.0    |   |   | 1.3  |  
|                                                                       
|Net earnings
      (loss) before the effect of Stock-based compensation |   | 77.0 |   |   | (198.1 | ) |   | 58.8 |  
|                                                                       
|Pro forma
      impact                                                  |   | (4.2 | ) |   | (6.4   | ) |   | (6.0 | )
|                                                                       
|Pro
      forma net earnings (loss)                                     |   | 72.8 |   |   | (204.5 | ) |   | 52.8 |  
|                                                                       
|Pro
      forma basic and diluted net earnings (loss) per share         |   | 0.29 |   |   | (0.83  | ) |   | 0.23 |  
|                                                                       

CAE ANNUAL REPORT 2006 _111

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NOTE 27  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTD)

Exchanges for Non-Monetary Assets

In 2004, the Financial Accounting Standards Board issued FAS 153, Exchanged of Non-Monetary Assets. FAS 153 amends APB Opinion No. 29, Accounting for Non-Monetary Transactions, and requires that all non-monetary
exchanges be accounted for at fair value except for the exchanges of non-monetary assets that do not have commercial substance. The Company is required to apply FAS 153 to all non-monetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. However, this standard is similar to related Canadian standard regarding non-monetary transactions which was adopted by the Company for all non-monetary transactions initiated in periods beginning on or after January 1, 2006. As a
consequence, FAS 153 was adopted early, as permitted by the guideline, and had no material impact on the Company's consolidated financial statements.

Accounting for Changes and Error

In 2005, the Financial Accounting Standards Board issued FAS 154,Accounting Changes and Error,FAS 154 replace APB Opinion No. 20,Accounting Changes,This statement requires, unless impracticable, retrospective application to prior periods financial statements of changes in accounting
principle in the absence of explicit transition requirements specific to a newly adopted accounting principle, FAS 154 was adopted and had no material impact on the Companys consolidated financial statements.

Conditional Asset Retirement Obligations

In 2005, FASB also issued FASB Interpretations (FIN) 47 which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations. The
term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within control of the entity. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. The Company adopted this interpretation for the year ending March 31, 2006. The adoption of this interpretation had no material impact on the Company's consolidated financial statements.

Derivative Instruments and Hedging Activities

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

RECENT ACCOUNTING DEVELOPMENTS

Stock- based compensation

FASB has issued a revision to FAS 123 Accounting for Stock-Based Compensation, which supersedes APB 25 and the related implementation guideline. The principal amendments require companies to recognize the costs of
providing stock options to employees based on the fair value of the options at the grant date. The obligations to pay cash to employees based on the Company's share price must be recorded at fair value using an option pricing model. The Company is
still evaluating the impact of this new standard on its consolidated financial statements as the effective date for public companies has been deferred to annual, rather than interim, periods that begin after June 15, 2005.

|ADDITIONAL DISCLOSURES                                        |          |       |    |       |          |       |    |       |          |       |    |      
|------------------------------------------------------------- | -------- | ----- | -- | ----- | -------- | ----- | -- | ----- | -------- | ----- | -- | -----
|Additional disclosures required under US GAAP are as follows: |          |       |    |       |          |       |    |      
|i) Statements of earnings                                     |          |       |    |       |          |       |    |       |          |       |    |      
|For the years ended March 31                                  |          |       |    |       |          |       |    |       |          |       |    |      
|(amounts in millions)                                         |          |       |    | 2006  |          |       |    | 2005  |          |       |    | 2004 
|                                                             
|                                                              | Canadian |       | US |       | Canadian |       | US |       | Canadian |       | US
|                                                              |          | GAAP  |    | GAAP  |          | GAAP  |    | GAAP  |          | GAAP  |    | GAAP 
|                                                             
|Revenues from sales of simulators                             | $        | 584.4 | $  | 584.4 | $        | 492.3 | $  | 489.4 | $        | 484.8 | $  | 463.0
|Revenues from sales of training                               |          |       |    |       |          |       |    |       |          |       |    |      
|and services                                                  | $        | 522.8 | $  | 522.8 | $        | 493.9 | $  | 493.9 | $        | 453.6 | $  | 453.6
|Cost of sales from simulators                                 | $        | 318.6 | $  | 308.6 | $        | 305.9 | $  | 306.8 | $        | 310.4 | $  | 309.4
|Cost of sales from training                                   |          |       |    |       |          |       |    |       |          |       |    |      
|and services                                                  | $        | 346.1 | $  | 342.4 | $        | 292.7 | $  | 277.4 | $        | 249.3 | $  | 246.2
|Research and development                                      |          |       |    |       |          |       |    |       |          |       |    |      
|expenses                                                      | $        | 95.8  | $  | 87.9  | $        | 93.5  | $  | 100.8 | $        | 81.0  | $  | 84.6 
|Rental expenses                                               | $        | 80.5  | $  | 80.5  | $        | 94.0  | $  | 94.0  | $        | 91.9  | $  | 79.0 
|Selling, general and                                          |          |       |    |       |          |       |    |       |          |       |    |      
|administrative expenses                                       | $        | 131.3 | $  | 131.3 | $        | 105.2 | $  | 105.2 | $        | 115.3 | $  | 115.3
|Impairment charges                                            | $        |      |    |      | $        | 443.3 | $  | 440.4 |          | $    |    | $   
|Interest expense                                              | $        | 16.2  | $  | 15.9  | $        | 32.1  | $  | 33.9  | $        | 22.4  | $  | 22.2 
|                                                             

112_ CAE ANNUAL REPORT 2006

---

|ii)
      Balance sheet                                                                                                     |   |       |   |   |        |   |   |       |  
|--------------------------------------------------------------------------------------------------------------------------- | - | ----- | - | - | ------ | - | - | ----- | -
|Accounts payable
      and accrued liabilities on a Canadian GAAP basis are presented
      below:                          |   |       |   |   |        |   |   |       |  
|As at March 31                                                                                                              |   |       |   |   |        |   |   |       |  
|(amounts in millions)                                                                                                       |   |       |   |   | 2006   |   |   | 2005  |  
|                                                                                                                           
|Accounts payable
      trade                                                                                                |   |       |   | $ | 133.6  |   | $ | 93.0  |  
|Contract
      liabilities                                                                                                  |   |       |   |   | 88.7   |   |   | 90.1  |  
|Income tax
      payable                                                                                                    |   |       |   |   | 2.5    |   |   | 7.7   |  
|Other accrued
      liabilities                                                                                             |   |       |   |   | 148.9  |   |   | 122.0 |  
|                                                                                                                           
|Accounts payable
      and accrued liabilities                                                                              |   |       |   | $ | 373.7  |   | $ | 312.8 |  
|                                                                                                                           
|Accounts receivable from
      government amounted to $68.9 million as of March 31, 2006 (2005  $52.4
      million).      |   |       |   |  
|iii) Income taxes                                                                                                           |   |       |   |   |        |   |   |       |  
|The components
      of earnings from continuing operations and income taxes on a Canadian GAAP
      basis are as follows: |   |       |   |  
|For the years ended March 31                                                                                                |   |       |   |   |        |   |   |       |  
|(amounts in millions)                                                                                                       |   | 2006  |   |   | 2005   |   |   | 2004  |  
|                                                                                                                           
|Earnings before income taxes and other items                                                                                |   |       |   |   |        |   |   |       |  
|Canada                                                                                                                      | $ | (16.8 | ) | $ | (87.0  | ) | $ | (13.8 | )
|Other
      countries                                                                                                       |   | 106.8 |   |   | (318.1 | ) |   | 72.7  |  
|                                                                                                                           
|                                                                                                                            | $ | 90.0  |   | $ | (405.1 | ) | $ | 58.9  |  
|                                                                                                                           
|Current income taxes                                                                                                        |   |       |   |   |        |   |   |       |  
|Canada                                                                                                                      | $ | 4.2   |   | $ | (1.8   | ) | $ | 1.8   |  
|Other
      countries                                                                                                       |   | 8.9   |   |   | 15.3   |   |   | 12.6  |  
|                                                                                                                           
|                                                                                                                            | $ | 13.1  |   | $ | 13.5   |   | $ | 14.4  |  
|                                                                                                                           
|Future income taxes                                                                                                         |   |       |   |   |        |   |   |       |  
|Canada                                                                                                                      | $ | (6.1  | ) | $ | (25.8  | ) | $ | (6.9  | )
|Other
      countries                                                                                                       |   | 12.1  |   |   | (88.1  | ) |   | 4.0   |  
|                                                                                                                           
|                                                                                                                            | $ | 6.0   |   | $ | (113.9 | ) | $ | (2.9  | )
|                                                                                                                           
|Income tax
      provision                                                                                                  | $ | 19.1  |   | $ | (100.4 | ) | $ | 11.5  |  
|                                                                                                                           

vi) Product Warranty
Costs

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

|(amounts in millions)                                     |   | 2006 |   |   | 2005 |  
|--------------------------------------------------------- | - | ---- | - | - | ---- | -
|                                                         
|Accrued warranty
      liability at beginning of year     | $ | 5.3  |   | $ | 6.6  |  
|Warranty
      settlements during the year                |   | (4.1 | ) |   | (5.5 | )
|Warranty
      provisions                                 |   | 6.9  |   |   | 3.9  |  
|Adjustments for
      changes in estimates                |   | 2.7  |   |   | 0.3  |  
|                                                         
|Accrued warranty
      obligations at the end of the year | $ | 10.8 |   | $ | 5.3  |  
|                                                         

CAE ANNUAL REPORT 2006 _113

---

NOTE 27  DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTD)

v) Pension

Obligations and funded
status:

The
accumulated benefit obligation (ABO) for all pension plans was $177.4million for
March 31, 2006 and $158.5 million for March 31, 2005. At these dates, all plans
had accumulated benefit obligation in excess of plan assets.

|As at March 31                                       |   |      |   |      |  
|---------------------------------------------------- | - | ---- | - | ---- | -
|Before taxes (amounts in millions)                   |   | 2006 |   | 2005 |  
|                                                    
|Minimum
      Liability                              | $ | 32.8 |   | 30.4 |  
|Balance  fiscal
      year end:                     |   |      |   |      |  
|Additional
      liability                           | $ | 32.6 |   | 33.2 |  
|Intangible
      Assets                              | $ | (5.6 | ) | (6.1 | )
|                                                    
|Accumulated Net
      Additional Liability           | $ | 27.0 |   | 27.1 |  
|                                                    
|Change in
      Accumulated Net Additional Liability | $ | (0.1 | ) | 6.1  |  
|                                                    

vi) Impairment of goodwill,
tangible and intangible assets

During fiscal 2005, the Company
recorded an impairment charge of $443.3 million. For US GAAP purposes the
impairment will be different has the company expenses development and
pre-operating costs when incurred and because the carrying amount of goodwill is
different for Canadian and US GAAP (Refer to E).

Accordingly, the Company recorded a $440.4 million impairment charge for
US GAAP purposes, virtually all related to its Civil business, detailed as
follows:

|(amounts in millions)                            |   | 2005 
|------------------------------------------------ | - | -----
|                                                
|Goodwill                                         | $ | 216.8
|Customer
      relations                         |   | 86.7 
|Trades
      names                               |   | 20.4 
|Property, plant
      and equipment (simulators) |   | 78.4 
|Inventories                                      |   | 33.3 
|Other
      assets                               |   | 4.8  
|                                                
|                                                 | $ | 440.4
|                                                

NOTE 28  COMPARATIVE FINANCIAL
STATEMENTS

The comparative Consolidated
Financial Statements have been reclassified from statements previously presented
to conform to the presentation adopted in the current year.

114_ CAE ANNUAL REPORT 2006

---