SECURITIES AND EXCHANGE COMMISSION

Form 6-K

Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

CAE INC.

2025 Logistics Drive
Mississauga, Ontario
Canada L5S 1Z9
(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): x

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the SEC pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

If “Yes” is marked, indicate the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX

Exhibit 99.1

PROXY INFORMATION CIRCULAR

NOTICE OF ANNUAL
AND SPECIAL MEETING
OF SHAREHOLDERS
JUNE 22, 2005

Take notice that the Annual and Special Meeting of the Shareholders of CAE Inc. (the “Corporation”) will be held at the International Civil Aviation Organization Conference Centre, Room 3, 999 University Street, Montreal, Quebec, on Wednesday, the 22^nd day of June, 2005, at 10:00 a.m. (Eastern Time) for the following purposes:

The specific details of all matters proposed to be put before the Meeting are set forth in the accompanying Proxy Information Circular.

The Board of Directors has specified that proxies to be used at the Meeting or any adjournment thereof must be deposited in Toronto with the Corporation or Computershare Trust Company of Canada, as agent for the Corporation, not later than 10:00 am. (Eastern Time) on June 21, 2005.

DATED at Montreal, this 12th day of May, 2005.

By Order of the Board,

Hartland J. A. Paterson
Vice President, Legal,
General Counsel and Corporate Secretary

Note: If you are unable to be present personally, kindly sign and return the form of proxy in the enclosed postage-paid envelope.

TABLE OF CONTENTS

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SOLICITATION OF PROXIES

This Proxy Information Circular (the “Information Circular”) is furnished in connection with the solicitation by management of CAE Inc. (“CAE” or the “Corporation”) of proxies to be used at the Annual and Special Meeting of Shareholders of the Corporation (the “Meeting”) to be held at the time and place and for the purposes set forth in the accompanying notice of the Meeting. It is expected that the solicitation will be primarily by mail but proxies may also be solicited personally by the officers and Directors of the Corporation at nominal cost. The cost of solicitation by management will be borne by the Corporation.

APPOINTMENT AND REVOCATION OF PROXIES

The persons named in the enclosed form of proxy are Directors of the Corporation. Shareholders desiring to appoint some other person as their representative at the Meeting may do so either by inserting such other person’s name in the blank space provided or by completing another proper form of proxy and, in either case, delivering the completed proxy to the Corporation at 8585 Côte-de-Liesse, Saint-Laurent, Quebec H4T 1G6 or to Computershare Trust Company of Canada, 100 University Avenue, 8th Floor, Toronto, Ontario, M5J 2Y1, not later than 10:00 a.m. (Eastern Time) on June 21, 2005. Unless otherwise indicated, the information in this Information Circular is given as of May 12, 2005, and all dollar references are in Canadian dollars.

     A proxy given pursuant to this solicitation may be revoked by instrument in writing executed by the shareholder or by his or her attorney authorized in writing, and deposited at the office of the Corporation, 8585 Côte-de-Liesse, Saint-Laurent, Quebec, H4T 1G6, at any time up to and including the last business day preceding the day of the Meeting, or any adjournment thereof, at which the proxy is to be used or with the Chairman of such Meeting on the day of the Meeting, or any adjournment thereof, or in any other manner permitted by law.

VOTING OF PROXIES

The persons named in the accompanying form of proxy will vote or withhold from voting the shares in respect of which they have been appointed on any ballot that may be called for in accordance with the directions of the shareholder as specified in the proxy. In the absence of such direction, such shares will be voted: (a) FOR the election as Directors of the persons designated in this Information Circular as nominees for such office; (b) FOR the appointment of PricewaterhouseCoopers LLP, Chartered Accountants, as auditors of the Corporation and for the authorization of the Directors to fix their remuneration; and (c) FOR the resolution to confirm the change of the registered office of the Corporation.

     The enclosed form of proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the notice of the Meeting, or other matters that may properly come before the Meeting. At the time of printing this Information Circular, the management of the Corporation knows of no such amendments, variations or other matters to come before the Meeting.

     Shareholders who are unable to attend the annual meeting in person may vote by proxy in one of four ways: by telephone, by mail, on the Internet or by appointing another person to attend and vote at the meeting on their behalf. However, certain shareholders must vote their proxy by mail. Refer to the enclosed form of proxy for instructions.

ELECTRONIC ACCESS TO PROXY-RELATED MATERIALS AND ANNUAL AND QUARTERLY REPORTS

We offer our shareholders the opportunity to view proxy information circulars, annual reports and quarterly reports through the Internet instead of receiving paper copies in the mail. If you are a registered shareholder you can choose this option by following the instructions on your form of proxy. If you hold your common shares through an intermediary (such as a bank or broker), please refer to the information provided by the intermediary on how to choose to view our proxy information circulars, annual reports and quarterly reports through the Internet.

VOTING SHARES AND PRINCIPAL HOLDERS THEREOF

As of the date hereof, there are 248,273,728 outstanding common shares of the Corporation. Each shareholder is entitled to one vote for each common share that is registered in his or her name on the list of shareholders which is available for inspection during usual business hours at Computershare Trust Company of Canada, 100 University Avenue, 8th Floor, Toronto, Ontario, M5J 2Y1, and at the Meeting. The list of shareholders will be prepared as of May 16, 2005, the date (the “Record Date”) fixed for determining shareholders entitled to receive notice of the Meeting.

     To the knowledge of the Directors and officers of the Corporation, there are no persons who beneficially own or exercise control or direction over shares carrying more than 10% of the voting rights attached to shares of the Corporation.

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SHAREHOLDERS ENTITLED TO VOTE

Only common shareholders of record at the close of business on the Record Date are entitled to notice of and to attend the Meeting or any adjournment or adjournments thereof and to vote thereat.

ELECTION OF DIRECTORS

Under the articles of the Corporation, the Board of Directors may consist of a minimum of three (3) and a maximum of twenty-one (21) Directors. The Directors are to be elected annually as provided in the Corporation’s by-laws. Each Director will hold office until the next annual meeting or until his successor is duly elected unless his office is earlier vacated in accordance with the by-laws. In accordance with the by-laws, the Board of Directors has fixed the number of Directors to be elected at the Meeting at thirteen (13).

     The following table states the name of each person proposed to be nominated for election as a Director, all other positions and offices with the Corporation now held by him, if any, his principal occupation or employment, the period of service as a Director of the Corporation and the number of common shares and deferred share units of the Corporation beneficially owned by him or over which he exercises control or direction as of the date hereof.

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If any of the above nominees is for any reason unavailable to serve as a Director, proxies in favour of management will be voted for another nominee, in their discretion, unless the shareholder has specified in the proxy that his or her shares are to be voted for another nominee or are to be withheld from voting in the election of Directors.

APPOINTMENT OF AUDITORS

The Board recommends that PricewaterhouseCoopers LLP, Chartered Accountants, Montreal, Quebec (“PwC”) be appointed as auditors of the Corporation to hold office until the close of the next annual meeting of shareholders and that the Directors of the Corporation be authorized to fix their remuneration. PwC was first appointed as auditors of the corporation in 1991.

SPECIAL BUSINESS OF THE MEETING

CHANGE OF REGISTERED OFFICE

The Board and management request that you consider and, if you consider it appropriate, approve the change in the Corporation’s registered head office from the Province of Ontario, Canada to the Province of Quebec, Canada.

     The Corporation moved its registered head office from the Province of Quebec to the Province of Ontario in the late 1970s. The Corporation has concluded the implementation of a strategic plan to sell non-core divisions and focus on its main activities

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of simulation products and related training and other services. The Toronto-based registered office, which has in the past few decades served as a holding company head office, became redundant. CAE’s operating headquarters and its corporate functions have over the past several years become fully consolidated in the main manufacturing and administrative offices of the Corporation located in Saint-Laurent, Quebec. It is appropriate that this fact be recognized through the designation of the Quebec premises as the Corporation’s registered head office.

     The text of the resolution confirming the change in the Corporation’s registered head office is set forth in Appendix A hereto. If a two-thirds majority of the votes cast by holders of common shares present in person or represented by proxy approve the resolution, it shall become effective.

     The Board of Directors of the Corporation recommends the adoption of this special resolution.

STATEMENT OF CORPORATE GOVERNANCE PRACTICES

The Corporation’s Board of Directors and management support the Guidelines for Corporate Governance (the “TSX Guidelines”) adopted by the Toronto Stock Exchange (“TSX”) in 1995 and the Corporation’s approach to corporate governance complies with the TSX Guidelines.

     In October 2004, the Canadian Securities Administrators republished the proposed National Policy 58-201, which details best practices relating to corporate governance standards. It is expected that once the proposed national policy is implemented, the TSX will withdraw its current corporate governance guidelines. The proposed policy is similar to the NYSE rules with which CAE already complies. Although they are not in effect, the Corporation already meets substantially all of the best practices under the proposed policy and will take additional actions as required to meet all of them when they come into force.

     The New York Stock Exchange (“NYSE”) in November 2003 made numerous changes to its standards for companies listed on the NYSE, such as the Corporation. Most of the NYSE corporate governance listing standards are not mandatory for the Corporation as a non-U.S. company, but the Corporation is required to disclose the significant differences between its corporate governance practices and the requirements applicable to United States companies listed on the NYSE. Except as summarized on CAE’s Web site (www.cae.com), the Corporation is in compliance with the NYSE requirements in all significant respects. The Corporation also complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and the rules adopted by the United States Securities and Exchange Commission (“SEC”) pursuant to that Act.

     CAE, throughout its more than 50 years of operations, has maintained high standards of corporate governance. We believe that good corporate governance practices can contribute to the creation and preservation of shareholder value. The Governance Committee of the Board of Directors and CAE management continue to closely monitor all regulatory developments in corporate governance and will take appropriate action in response to any new standards that are established.

     The Board of Directors of the Corporation has determined that it comprises “independent” and “unrelated” Directors, except for the President and Chief Executive Officer, as defined under the listing requirements of the NYSE and the TSX Guidelines, respectively, and taking into account all relevant facts and circumstances. The Board of Directors has a non-executive chairman. With the exception of the Executive Committee of the Board, Mr. R. E. Brown does not sit on Board Committees, and all Committees are composed of only “independent” and “unrelated” Directors (see below).

     Directors are informed of the business of the Corporation through, among other things, regular reports from the President and Chief Executive Officer, and reviewing materials provided to them for their information and review for participation in meetings of the Board of Directors and its Committees. Certain of the Board meetings in fiscal 2005 were held by telephone to enable the Board to receive brief updates on recent developments in the business and to approve more pressing matters between regularly scheduled meetings.

During fiscal 2005, the Board of Directors held 10 meetings (94% aggregate Director attendance).

The Committees of the Board of Directors of the Corporation are:

All directors had a 75% or better attendance ratio at Board and Committee meetings during fiscal 2005 except for Mr. Elliott in respect of the Board (70%) and Mr. Grant in respect of the Compensation Committee (50%; 90% Board and 100% Executive Committee).

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The following states the Corporation’s existing corporate governance practices with specific reference to the TSX Guidelines and applicable provisions of the Sarbanes-Oxley Act of 2002.

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All of the current Directors of the Corporation are either shareholders or holders of deferred share units or both.

This corporate governance report has been reviewed by the Governance Committee and approved by the Board of Directors of the Corporation.

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REPORT ON EXECUTIVE COMPENSATION

COMPENSATION PHILOSOPHY

Much of CAE’s success in developing and growing its worldwide business is attributable to a highly motivated, entrepreneurial executive team. The cornerstone to the executive compensation program is a pay-for-performance philosophy in which executives receive salaries, annual short-term incentive awards contingent upon attaining consolidated, divisional and individual achievements, and long-term incentive awards that motivate executives to create increasing and sustainable value for the shareholders.

The objectives of the executive compensation program are:

1. To attract, retain and motivate qualified executives.

2. To align the interests of executives with those of the shareholders.

3. To foster teamwork and entrepreneurial spirit.

4. To establish an explicit and visible link between all elements of compensation and corporate, subsidiary and individual performance.

5. To integrate compensation with the development and successful execution of strategic and operating plans.

REVIEW AND APPROVAL

The Compensation Committee reviews and approves the design and administration of all compensation and benefit plans and policies for the Corporation other than in respect of the President and Chief Executive Officer, whose compensation arrangements are reviewed and approved by the Board of Directors based on recommendations from the Compensation Committee.

BASE SALARY

The base salaries of the executives of the Corporation are competitive with like positions in other corporations with similar characteristics including the industry, revenues, assets and geographic location of operations. An executive’s salary is generally targeted at a specific range around the median level, as determined by a variety of surveys conducted by independent professional compensation consultants, and supplemented by other sources of information. Such salary, however, will vary depending on the individual’s performance, level of experience and years of service.

ANNUAL SHORT-TERM INCENTIVE AWARDS

The short-term incentive awards for executives of the Corporation are designed to recognize the Corporation’s consolidated financial performance, divisional financial performance and individual achievements. At the beginning of each fiscal year, financial performance targets and individual objectives are established. Short-term incentives are paid in the form of cash bonuses based upon a percentage of the executive’s base salary. The bonus as a percentage of salary varies by the level of the executive with target awards ranging from 10% for the lowest eligible position to 75% of salary for the President and Chief Executive Officer. Actual awards, however, could be up to 2.4 times greater than the target awards depending upon the achievement of the previously noted results and objectives. For fiscal 2005 (“FY2005”) short-term incentive awards were paid to certain executives in the first quarter of fiscal 2006 for meeting financial and individual objectives.

LONG-TERM INCENTIVE AWARDS

The long-term incentive program is designed to reward executives for their contribution to the creation of shareholder value. These awards are considered annually as part of the total compensation review. The value of the long-term incentive award varies by the level of the executive ranging from a low of 20% for the lowest eligible position to a maximum of 350% of base salary for the President and Chief Executive Officer.

     For FY2004, the long-term incentive program was changed to reduce the use of stock options with the introduction of long-term incentive deferred share units (see “Long Term Incentive Deferred Share Unit Plans”). The value of the long-term incentive awards was allocated equally between these two components. In addition, the long-term compensation award includes a three-year growth achievement incentive plan effective from April 1, 2002 to March 31, 2005, which is designed to support the growth initiatives inherent in the Corporation’s three-year strategic plan. This three-year plan will not be renewed for the period following March 31, 2005. The performance targets set for the three-year growth achievement plan were not reached and as a consequence, no incentive award has been earned by the plan participants.

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In FY2005, the Board approved additional changes to the Corporation’s structure of long-term incentive compensation, further reducing the use of stock options. The changes restricted the number of executives entitled to receive stock options to approximately 45 (being the most senior executives) and added a performance-based Restricted Share Unit (RSU) (see description below). The Board also modified the existing long-term incentive deferred share unit plan to create a new version of such units (LTU). For FY2006, the most senior executives will receive long-term compensation awards allocated in value equally between Stock Options, LTUs and RSUs. All other management entitled to long-term incentive awards will be allocated 20% LTUs and 80% RSUs.

STOCK OPTIONS

The number of options issued to each executive varies as a percentage of the executive’s base salary divided by the fair value (determined by application of the Black-Scholes option-pricing methodology) of an option at that time. Under the terms of the Stock Option Plan (ESOP), the exercise price of the stock options is equal to the closing price of the common shares on the TSX on the last trading day immediately preceding the day on which the options are granted. During FY2005, stock options were granted to certain officers of the Corporation and key executives of its subsidiaries. The amount of outstanding options as well as the other elements of the long-term incentive program are taken into account by the Compensation Committee in determining how many new options may be granted in a fiscal year. The Corporation expenses the cost of stock option grants.

     The ESOP provides for the issuance of a maximum of 11,530,046 common shares upon exercise of options granted under it, representing 4.65% of CAE’s outstanding shares as of March 31, 2005. As at March 31, 2005, 2,451,751 common shares were available for future grants of options under the ESOP. Options issued under the ESOP have an expiry term of six years and vest and are exercisable at 25% per year commencing one year after the date of grant.

     Except as set forth below, no CAE options may be exercised unless the optionee is at the time of exercise an employee of the Corporation or one of its subsidiaries and has served continuously in such capacity since the date of the grant of the options. Each option shall, during the optionee’s lifetime, be exercisable only by the optionee. Options are not transferable or assignable otherwise than by will or by operation of estate law.

     If an optionee shall die while an employee of the Corporation or one of its subsidiaries, any option held by the optionee may be exercised, if the optionee was entitled to do so at the time of death, by the person to whom the optionee’s rights under the option shall pass by the optionee’s will or by operation of estate law. Any exercise of such option shall be subject to all terms and conditions of the ESOP.

     If an optionee retires from the Corporation or one of its subsidiaries in accordance with the applicable retirement policies, unvested options held by such optionee shall, subject to the terms of the ESOP, continue to vest following the retiree’s retirement date. Such an optionee shall be entitled to (a) exercise any vested options held as of the retirement date until the termination date for each such option; and (b) exercise any options vesting after the retirement date only during the thirty day period following the vesting date of such options, after which time any such options which remain unexercised shall expire.

     If an optionee ceases to serve the Corporation or a subsidiary as an employee otherwise than by reason of death or retirement, options held by the optionee terminate once he or she leaves such service.

     The Compensation Committee may, with respect to any option, in its discretion, waive, amend or vary the requirements set forth above. Except where required by law or other applicable regulations, shareholder approval is not required for such amendments.

EQUITY COMPENSATION PLAN INFORMATION

The Corporation has no equity compensation plan that is not approved by the shareholders.

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LONG TERM INCENTIVE DEFERRED SHARE UNIT PLANS

FISCAL 2004 PLAN

In FY2004 the Corporation adopted a Long Term Incentive Deferred Share Unit Plan (“FY2004 LTUP”) for executives and managers of the Corporation and its subsidiaries. The FY2004 LTUP partially replaced the grant of options under the Corporation’s ESOP, thereby ensuring that CAE management’s long-term incentive compensation included an element directly based on the market performance of CAE common shares. Determination of the number of Long Term Incentive Deferred Share Units (“FY2004 LTUs”) to be granted to a participant were made by dividing the dollar value of the FY2004 LTU grant by the market price of CAE common shares upon the date of grant approval.

     A FY2004 LTU is equal in value to one common share of the Corporation. FY2004 LTUs accrue dividend equivalents payable in additional units in amounts equal to dividends paid on CAE common shares. The FY2004 LTU grants vest in 25% increments over four years, commencing one year after the date of grant. Upon termination of their employment for reasons of long-term disability, involuntary termination, retirement or death, eligible FY2004 LTUP participants with vested FY2004 LTUs will be entitled to receive the fair market value of the equivalent number of CAE common shares. On voluntary termination, participants forfeit all amounts vested under the FY2004 LTUP.

FISCAL 2005 PLAN

While the grants of FY2004 LTUs remain in effect, the FY2004 LTUP has been replaced for succeeding years by the Long Term Incentive Deferred Share Unit Plan – FY2005 (“FY2005 LTUP”) adopted in May 2004. The Long Term Incentive Deferred Share Units (“FY2005 LTUs”) are granted to a participant on the same basis as the FY2004 LTUs and are valued the same way.

     A 2005 LTU grant will vest in 20% increments over five years, commencing one year after the date of grant. Upon termination of their employment, eligible FY2005 LTUP participants with vested FY2005 LTUs will be entitled to receive the fair market value of the equivalent number of CAE common shares.

RESTRICTED SHARE UNIT PLAN

In May 2004, the Corporation adopted a performance-based Restricted Share Unit Plan (“RSUP”) for executives and managers of the Corporation and its subsidiaries. The RSUP partially replaced the grant of options under the Corporation’s ESOP as well as LTUP grants, thereby ensuring that CAE management’s long-term incentive compensation includes an element directly based on the market performance of CAE common shares. Determination of the number of performance based Restricted Share Units (“RSUs”) to be granted to a participant is made by dividing the dollar value of the RSU grant by the market price of CAE common shares upon the date of grant approval.

A performance-based RSU is equal in value to one common share of the Corporation. RSUs granted pursuant to this Plan vest after three years from the date RSUs are granted as follows:

No RSUs vest if the market value of the Common Shares has appreciated less than 24% during the specified timeframe. No proration in the vesting percentage of RSUs occurs for any appreciation of the market value of CAE shares of between 24% and 33% during the specified timeframe. RSUP participants with vested performance-based RSUs are entitled to receive the fair market value of the equivalent number of CAE common shares after the three-year term of each grant.

THREE-YEAR GROWTH ACHIEVEMENT PLAN

The three-year growth achievement plan focuses on three key performance criteria, which support the Corporation’s growth. These criteria are net earnings, margin increases (resulting from a combination of productivity improvements and cost savings) and revenue growth. The incentive award for an executive who achieves 100% of target will amount to 50% of the executive’s salary at the time of the award. Actual awards may be up to two times greater than the target awards based on actual performance. This plan terminated effective March 31, 2005.

DEFERRED SHARE UNIT PLAN

The Corporation has a Deferred Share Unit Plan for executives under which an executive may elect to receive any cash incentive compensation in the form of deferred share units. The Plan is intended to enhance the Corporation’s ability to promote a greater

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alignment of interests between such key executives and the shareholders of the Corporation. A deferred share unit is equal in value to one common share of the Corporation. The units are issued on the basis of the average closing board lot sale price per share of CAE common shares on the TSX during the last ten (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 a key executive is entitled to receive the fair market value of the equivalent number of common shares.

EXECUTIVE SHARE OWNERSHIP POLICY

Under the Corporation’s share ownership policy, each key executive is expected to own a minimum number of common shares of the Corporation and/or units under the Deferred Share Unit Plan, the LTUP or the RSUP. The value of the required holding in shares of the Corporation and/or units under the Deferred Share Unit Plan, LTUP or RSUP represents 200% of the CEO’s annual salary and 100% of other executives’ annual salary. The required holding may be acquired over a five year period from the date of hire or promotion into the executive position. This policy encourages all key executives to hold a meaningful ownership interest in the Corporation to further align management and shareholder interests.

DETERMINATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER’S COMPENSATION SALARY

The salary of the President and Chief Executive Officer is determined in accordance with the Corporation’s salary philosophy and policy and is reviewed and approved annually by the Board of Directors.

SHORT-TERM INCENTIVE AWARDS PROGRAM

The short-term incentive program as it pertains to the President and Chief Executive Officer focuses on the attainment of key factors required to ensure the Corporation’s continued success. Factors considered include the achievement of specific earnings, reduction in long-term debt, revenue, return on shareholders’ equity and margin targets, and the attainment from time to time of specific non-monetary objectives. For fiscal 2005, the former President and Chief Executive Officer, Mr. D.H. Burney, received $350,000, being the pro-rated short-term incentive award that he was targeted to earn as described under Annual Short-Term Incentive Awards if the Corporation had met its targets.

     For fiscal 2005, the current President and Chief Executive Officer received a short-term incentive award of $750,000 based on the short-term incentive formula as described under Annual Short-Term Incentive Awards for the Corporation’s achieving its annual plan targets:

The level of achievement was 112% against plan targets.

LONG-TERM INCENTIVE AWARDS PROGRAM

The President and Chief Executive Officer is eligible to be granted stock options and to participate in both the Deferred Share Unit Plan and the Restricted Share Unit Plan, in accordance with the Corporation’s long-term incentive program. For fiscal 2005, the former President and Chief Executive Officer, Mr. D.H. Burney, received $1,100,000, being a lump sum payment in lieu of any long-term incentive award to which he would otherwise have been entitled. The current President and CEO, Mr. R. E. Brown, was granted 1,000,000 options upon joining the Corporation in August, 2004. This grant covers a three year period and vests over that time as follows: 24 months from employment start date, 50%, 36 months from employment start date, 50%. The strike price is indexed upward by 5% for the first vesting and 10.25% for the second vesting. Future grants, issued in accordance with the Long Term Incentive Plan, will take into account the President and CEO’s performance when determining how many new options will be issued.

     In addition, the current President and CEO was granted 135,000 LTUs and 135,000 RSU upon joining the Corporation. He remains eligible for annual grants based on 92.5% of his base salary, with the proviso that beginning with his third year of tenure, RSUs will be replaced by LTUs.

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INDEBTEDNESS OF DIRECTORS AND MANAGEMENT

In accordance with the United States Sarbanes-Oxley Act of 2002 and the past practices of the Corporation, the Corporation does not offer its Directors or executive officers loans. None of the Corporation and its subsidiaries has given any guarantee, support agreement, letter of credit or similar arrangement or understanding to any other entity in connection with indebtedness of the Corporation’s Directors or executive officers.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Corporation’s Compensation Committee was an officer (within the meaning of applicable United States securities rules) or employee of the Corporation or any of its subsidiaries at any time during fiscal 2005.

     The law firm of Stikeman Elliott LLP, of which Mr. Grant is a partner, provided legal services to the Corporation in fiscal 2005 and continues to provide such services to the Corporation. The law firm’s fees to the Corporation are less than 2% of the law firm’s annual consolidated gross revenues.

     No executive officer of the Corporation serves on the Board of Directors or compensation committee of any other entity that has or has had one or more of its executive officers serving as a member of the Corporation’s Board. The composition of the Compensation Committee was altered in the course of the year by Mr. Barents’ joining the Committee in February 2005.

Submitted on behalf of the Compensation Committee:

Lawrence N. Stevenson, Chairman

James A. Grant
E. Randolph Jayne II
Lynton R. Wilson
Brian E. Barents

PERFORMANCE GRAPH

The following graph compares the cumulative shareholder return of the common shares of the Corporation with the cumulative returns of the S&P/TSX Composite Index for a five-year period commencing March 31, 2000.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN CAE INC. VS. S&P/TSX COMPOSITE INDEX

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

Assumes $100 invested in common shares of the Corporation on March 31, 2000. Values are as at March 31 of the specified years and from the S&P/TSX Composite Index, which assumes dividend reinvestment.

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table provides a summary of compensation earned during each of the last three fiscal years by the Chief Executive Officer, the Chief Financial Officer and the three most highly compensated policy-making executives who served as executive officers of the Corporation or its subsidiaries at March 31, 2005 as well as former Officers, Messrs. Burney, Renaud and Macramallah (collectively, “Named Executive Officers”). Specific aspects of this compensation are dealt with in further detail in the following table:

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OPTION AND LTIP GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR

The following table sets forth grants to Named Executive Officers of 2005 LTUs during the financial year ended March 31, 2005.

LTIP-AWARDS IN MOST RECENTLY COMPLETED FINANCIAL YEAR

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The following table sets forth grants to Named Executive Officers of stock options during the financial year ended March 31, 2005.

OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR

The following table sets forth details of any stock options exercised by Named Executive Officers during the financial year ended March 31, 2005, and the value of remaining exercisable and unexercisable options held by such officers.

AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR—END OPTION VALUES

PENSION BENEFITS

The Named Executive Officers (other than U. Aderhold) are members of CAE’s non-contributory defined benefit pension plan and a supplementary executive retirement arrangement. The amounts payable under these arrangements are based on “average annual earnings” where “average annual earnings” is calculated on the basis of the 60 highest paid consecutive months of salary and short-term incentives.

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The Corporation is obligated to fund or provide security to ensure payments under the supplementary executive retirement arrangement upon retirement of the executive. The Corporation has elected to provide security by facilitating the acquisition of letters of credit by a trust fund established for those executives who had retired on or before March 31, 2005.

     The following table shows estimated annual pension benefits upon retirement at age 65 to Named Executive Officers covered by these pension arrangements at specified average earnings.

EXECUTIVE OFFICER PENSION PLAN TABLE

The credited years of pensionable service as at March 31, 2005, for the Named Executive Officers who are members of the executive pension plan and supplementary executive retirement arrangement are:

AGREEMENTS WITH EXECUTIVE OFFICERS

The terms and conditions, including dollar amounts, of any employment contract between CAE or its subsidiaries and a Named Executive Officer are as set out in this section of the Information Circular detailing Executive Compensation.

     The Corporation is a party to agreements with six executive officers, three of whom are Named Executive Officers, pursuant to which such executives are entitled to termination of employment benefits following a change of control of the Corporation where either (i) the executive’s employment is expressly or impliedly terminated without cause within two years following the change of control or (ii) the executive elects to resign employment within a window period of 60 days, one year following the change of control. In such case, the executive is entitled to 24 months (36 months in the case of the President and Chief Executive Officer) of annual compensation (payable as a lump sum), credited service for the purposes of any pension or retirement income plans, vesting of and payment for long-term incentive deferred share units and extension of the exercise period for stock options within parameters consistent with the foregoing.

     A change of control for the above purposes is defined to include any event as a result of or following which any person beneficially owns or exercises control or direction over voting securities carrying 35% or more of the votes attached to all outstanding voting securities of the Corporation; certain events which result in a change in the majority of the Board of Directors; and a sale of assets to an unaffiliated party at a price greater than or equal to 50% of the Corporation’s market capitalization.

> 19

> CAE/PROXY INFORMATION CIRCULAR

COMPENSATION OF DIRECTORS

Directors of the Corporation receive an annual retainer fee of $30,000. In addition, each Committee member, except for the Chairman, receives an annual Committee retainer fee of $10,000. Each member of the Executive Committee is entitled to a fee of $1,000 per meeting, but no annual retainer. The Chairman of the Audit Committee receives an annual retainer of $15,000; the Chairman of each of the Governance and Compensation Committees also receives an additional annual retainer of $5,000. L.R. Wilson receives $175,000 annually for serving as the Chairman of the Board and for service as a Director and Committee member. Directors are reimbursed out-of-pocket expenses incurred in attending meetings.

     The Corporation has taken steps to align more closely the interests of its Directors with those of its shareholders. Under the Deferred Share Unit Plan for Non-Employee Directors, a non-employee Director holding less than 20,000 common shares and/or units under the Deferred Share Unit Plan of the Corporation receives the retainer and attendance fees in the form of deferred share units. A non-employee Director holding at least 20,000 common shares may elect to participate in the plan in respect of part or all of his or her retainer and attendance fees. A deferred share unit is equal in value to one common share of the Corporation and accrues dividend equivalents payable in additional units in an amount equal to dividends paid on outstanding CAE common shares. Deferred share units mature upon the termination of service, whereupon a Director is entitled to receive the fair market value of the equivalent number of common shares, net of withholdings, in cash.

DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE

The Corporation maintains Directors’ and officers’ liability insurance for its Directors and officers, as well as those of its subsidiaries as a group. The yearly coverage limit of such insurance is $50,000,000 for each loss and for the policy period, subject to a corporate deductible of $250,000 per claim ($1,000,000 for security suits brought in the United States; $500,000 for security suits brought in Canada). The Corporation paid an insurance premium for this coverage of $640,000 for the 12 months commencing October 1, 2004.

INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

No informed person (including any Director or executive officer) of the Corporation, any proposed Director of the Corporation, or any associate or affiliate of any informed person or proposed Director, had any material interest, direct or indirect, in any transaction since the commencement of the Corporation’s most recently completed financial year or in any proposed transaction which has materially affected or would materially affect the Corporation or any of its subsidiaries.

MANAGEMENT CONTRACTS

Management functions of the Corporation and of its subsidiaries are performed by the Directors or executive officers of the Corporation or of the subsidiary.

AUDITOR INDEPENDENCE

PricewaterhouseCoopers LLP (“PwC”) is the auditor of the Corporation. PwC provides tax, financial advisory and other audit-related services to the Corporation and its subsidiaries. The Audit Committee of the Corporation’s Board of Directors has considered and concluded that the provision of these services by PwC is compatible with maintaining PwC’s independence. The following chart shows all fees paid to PwC by the Corporation and its subsidiaries in the most recent and prior fiscal years.

Audit-related fees include fees relating to the issuance of a prospectus and due diligence in connection with the Corporation’s acquisitions and divestitures.

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> CAE/PROXY INFORMATION CIRCULAR

OTHER MATTERS

The management of the Corporation is aware of no business to be presented for action by the shareholders at the Meeting other than that mentioned herein or in the Notice of Meeting.

SHAREHOLDER PROPOSALS

To propose any matter for a vote by the shareholders at an annual meeting of the Corporation, a shareholder must send a proposal to the Vice President, Legal, General Counsel and Corporate Secretary at the Corporation’s office at 8585 Côte-de-Liesse, Saint-Laurent, Quebec H4T 1G6 at least 90 days before the anniversary date of the notice for the previous year’s annual meeting. Proposals for the Corporation’s 2006 annual meeting must be received no later than February 12, 2006. The Corporation may omit any proposal from its proxy circular and annual meeting for a number of reasons under applicable Canadian corporate law, including receipt of the proposal by the Corporation subsequent to the deadline noted above.

GENERAL INFORMATION

The Corporation shall provide to any person or company, upon request to the Vice President, Legal, General Counsel and Corporate Secretary of the Corporation:

All such documents may also be accessed on CAE’s Web site (www.cae.com). Additional financial information is provided in the Corporation’s comparative financial statements and Management’s Discussion and Analysis for the most recently completed financial year.

The contents and the sending of this Information Circular have been approved by the Directors of the Corporation.
DATED at Montreal, this 12th day of May, 2005.

Hartland J. A. Paterson
Vice President, Legal,
General Counsel and Corporate Secretary

APPENDIX A

SPECIAL RESOLUTION OF THE SHAREHOLDERS OF CAE INC. (THE “CORPORATION”)

RESOLVED:

     That the Directors of the Corporation be and are hereby authorized to file articles of amendment with the Director responsible for the application of the Canada Business Corporations Act in order to obtain a certificate of amendment to amend the articles of the Corporation to change the Corporation’s registered head office from the Province of Ontario, Canada to the Province of Quebec, Canada.

     That any Director or officer of the Corporation be and is hereby authorized to sign the articles of amendment in connection therewith.

> 21

Exhibit 99.2

“Doing the right thing.”

> CAE ANNUAL REPORT
    FOR THE YEAR ENDED MARCH 31, 2005

CORPORATE PROFILE

CAE is a leading provider of simulation and modelling technologies as well as integrated training services for commercial and business aviation and defence customers worldwide. The Company has annual revenues of approximately C$1 billion, with operations and training facilities in 17 countries on five continents.

CAE’S NETWORK

CORPORATE

Montreal, Canada

SIMULATION PRODUCTS

Montreal, Canada
Tampa, U.S.A.
Stolberg, Germany
Burgess Hill, U.K.
Sydney, Australia
Bangalore, India

MILITARY SIMULATION AND TRAINING

Montreal, Canada
Ottawa, Canada
Tampa, U.S.A.
Stolberg, Germany
Buckeburg, Germany*
Fassberg, Germany*
Holzdorf, Germany*
Burgess Hill, U.K.
RAF Benson, U.K.
Sydney, Australia
Sesto Calende, Italy^*

CIVIL TRAINING AND SERVICES

Charlotte, U.S.A.
Dallas, U.S.A.
Denver, U.S.A.
Miami, U.S.A.
Morris County, U.S.A.^*
Phoenix, U.S.A.
Seattle, U.S.A.
Washington, U.S.A.
Montreal, Canada
Toronto, Canada
Vancouver, Canada
Sao Paul, Brazil
Santiago, Chile
Kuala Lumpur, Malaysia^*
Singapore
Zhuhai, China
Dubai, United Arab Emirates
Amsterdam, The Netherlands
Brussels, Belgium
Madrid, Spain
Rome, Italy
Burgess Hill, U.K.
Moscow, Russia

> CAE ANNUAL REPORT 2005

2005
FINANCIAL HIGHLIGHTS

01 >

> CAE ANNUAL REPORT 2005

CHAIRMAN’S MESSAGE

During the past year, CAE has undergone a substantial transformation. We not only appointed a new Chief Executive Officer, Robert E. Brown, and, under his leadership, sold our Marine Controls business in order to focus resources on simulation and training within the aerospace and defence sectors, but we also undertook a reorganization of the Company, all in the interest of improving shareholder value.

     Your directors were deeply saddened by the passing of our esteemed colleague and friend, Fraser Elliott, in January 2005. He played a very important role in CAE’s history and development for more than 50 years. Mr. Elliott became a director soon after CAE was founded and served as our Chairman for more than three decades. In 2002, we honoured Mr. Elliott’s remarkable contribution through the inauguration of the CAE–R. Fraser Elliott Modelling and Simulation Lab in partnership with two Montreal-based educational institutions. His death is an immense loss not only to his friends within the CAE family, but to Canadian business generally.

     In October 2004, Derek Burney, who had been CAE’s Chief Executive Officer for almost five years, retired from the Board of Directors. We wish to thank Mr. Burney for his outstanding leadership during his tenure, leaving CAE with a more focused product portfolio, leading-edge technology, and a solid reputation in the market.

     To fill these vacancies, Mr. Brian Barents, who served most recently as the President, CEO and Managing Partner of Galaxy Aerospace and previously as President and CEO of Learjet, and Mr. Paul Gagné, formerly Chief Executive Officer of Avenor, a major Canadian forest products company, were appointed to the Board in February 2005. We welcome Messrs. Barents and Gagné to the Board. Their extensive experience will serve the Company well.

     Along with other firms in the aerospace industry, CAE continues to operate in difficult market conditions. However, under Bob Brown’s leadership, CAE is well positioned to benefit from a recovery in civil aviation, and new opportunities in the military market. The Board remains confident of the Company’s prospects for continued growth.

(Signed)
l. r. wilson
chairman of the board
//

> 02

> CAE ANNUAL REPORT 2005

“Moving ahead with plans that will restore shareholder value.”

03 >

> CAE ANNUAL REPORT 2005

PRESIDENT AND CEO’S MESSAGE

In fiscal 2005, CAE took a number of steps that will fundamentally change the way we do business.

     Faced with the challenges of a civil aviation industry that continues to record significant losses coupled with the increased strength of the Canadian dollar and its effect on our competitive position worldwide, we made some tough choices. We believe we can sum up our actions in one underlying theme: doing the right thing to restore shareholder value and to ensure CAE’s long-term growth and stability.

     Immediately following my arrival as President and Chief Executive Officer in August 2004,1 initiated an extensive strategic review of CAE’s markets, customers and other external stakeholders as well as its internal resources and capabilities. Following this review, senior management and I adopted a plan to protect CAE’s technological leadership while at the same time fostering synergies between our various operating units and implementing sound business practices. This plan involved a number of steps.

A STRONGER FINANCIAL POSITION

First we strengthened our balance sheet. In February 2005, we completed the sale of our Marine Controls business unit, for which we recorded an after-tax gain of $ 104 million. The proceeds were used to reduce CAE’s debt, giving us greater flexibility to fund the growth of our other businesses. We also took a non-cash write-down of $443 million ($354 million net after tax) on the value of goodwill, intangible and tangible assets, thereby ensuring that our balance sheet reflects the reality of the civil aviation market. After careful consideration and to allow us greater flexibility going forward, we made the decision to reduce our dividend from $0.12 to $0.04, which our businesses. These moves are all designed to generate free cash flow and to improve our return on invested capital.

BUILDING SYNERGIES

We have accompanied these important measures to improve our financial position by a number of organizational changes. The goal of these changes is to foster synergies between our operating units and to enhance our technological leadership. Our aim is to improve significantly our competitive position in the marketplace and to increase our profitability.

     How have we gone about this? Essentially, we have broken down the silos that tended to exist between our business units by eliminating duplication and putting in place a new structure to encourage the sharing of expertise between units. We now have three business units: the Simulation Products Group, the Civil Training and Services Group, and the Military Simulation and Training Group.

     The Simulation Products Group consolidates all manufacturing activities as well as engineering, program management, global procurement, and the marketing and sales of civil simulation equipment. The Civil Training and Services Group will continue to deliver a highly cost-effective and competitive training services through more than 100 full-flight simulators in service at over 20 training centres worldwide. The Military Group will continue to service our military customers in more than 30 countries with technological excellence in simulation and modelling solutions. The presidents of each of these groups will be fully accountable for their operations, and will have profit and loss responsibility.

     As part of our program to reduce duplication and improve our cost structure, we took the difficult decision to reduce our headcount by some 450 people. This was the hardest part of our plan, but one that was essential for the continued stability of CAE. I would like to thank all of the employees who have left the Company for their many years of dedicated service.

A STRONG SENIOR MANAGEMENT TEAM

We are fortunate to have the senior management team to make this new structure work and to motivate our 5,000 employees around the world. Together, they are well qualified to ensure the long-term stability and profitability of CAE.

     Jeff Roberts continues to lead the Civil Training and Services Group. A seasoned pilot and training officer with more than two decades’ experience in the aerospace industry, Jeff joined CAE in 2002 following the acquisition of Dallas-based SimuFlite Training International (now CAE SimuFlite), where he had served as Chief Executive Officer.

     The Military Simulation and Training Group continues under the leadership of Don Campbell, who joined CAE in September 2000 after many years of distinguished service with Canada’s Department of Foreign Affairs and International Trade, where he served both as Deputy Minister of Foreign Affairs and of International Trade.

     The new Simulation Products Group is led by Marc Parent, who recently joined CAE with over 20 years’ experience in the aerospace industry. Marc was formerly Vice President and General Manager, Bombardier Aerospace.

     Another recent appointment to our senior management team is our Chief Financial Officer, Alain Raquepas. A chartered accountant who also holds a law degree, Alain knows CAE and the aerospace industry very well, having served as Vice President, Finance, of our military business and most recently, as acting Chief Financial Officer of CAE.

> 04

> CAE ANNUAL REPORT 2005

“Building on our strengths and new synergies.”

05 >

BOARD OF DIRECTORS

There have been a number of changes to the Board of Directors over the past year. Sadly, Fraser Elliott, who served on CAE’s Board for 51 years, passed away in January 2005. He will be greatly missed. To the two new Board members who are joining us, Brian Barents and Paul Gagnè. I would like to extend a sincere welcome.

MOVING FORWARD: DOING THE RIGHT THING

Since CAE’s inception in 1947, we have been a recognized world leader for our technical expertise and the quality of our simulators. Our leading-edge technology will remain our trademark and a major priority as we move forward.

     For fiscal 2006, we have set three priorities that we believe are vital to the Company’s success. First, we need to ensure that the new plan is executed fully, without putting the Company at risk. By that, I mean that we intend to protect our technological leadership. Second, we will implement sound business processes throughout the organization. Third, we intend to improve the overall financial position of the Company by a) rebuilding the balance sheet to generate recurring and growing free cash flow; b) the judicious use of capital expenditure; and c) instituting more financial discipline across the board. Our intention is to end fiscal 2006 with a restructured and solid earnings base, one that can serve as a springboard to meaningful earnings growth and return on investment in the coming years.

     We believe that with our senior management team and a new organizational structure in place, the business strategy we have developed positions us well to improve our revenues and our net income in the medium term. Having said this, our near-term profitability will continue to be negatively affected by the completion of contracts awarded in a difficult pricing environment related to a slow down in the market.

     In concluding, I wish to offer my sincere thanks to the members of the Board for their support in the difficult decisions we made this year. I also want to express my appreciation to all of our employees for their hard work and dedication. Their talents and expertise have established CAE’s reputation for quality and will largely determine its success in the future.

     Finally, I would like to thank you, our shareholders, for your ongoing support of CAE. We are a world leader in the field of modelling and simulation, and we are making every effort to translate that reputation into value for your investment.

(Signed)
robert e. brown
president and
chief executive officer
//

> 06

> CAE ANNUAL REPORT 2005

“Charting our success in challenging times.”

07 >

> CAE ANNUAL REPORT 2005

SIMULATION PRODUCTS

marc parent
group president
simulation products

TALKING TO MARC PARENT

“Within the Simulation Products Group, our most important priorities are lowering costs across board and shortening our cycle times -particularly in Civil but also in Military-so that we can compete more effectively. CAE is known for its unparalleled technology, and protecting our technological leadership is naturally of the utmost importance to us. But at the same time, we need to balance that level of the innovation by bringing additional discipline and rigour into how we work. There are some processes we can put in place that will really help us to make CAE a stronger, leaner and more efficient company. By consolidating functions like global strategic sourcing in one group, we’ll be able to gain some real synergies and economies-of-scale in the way that we procure goods and services. Bringing Engineering and Project Management together within Simulation Products is another move to help leverage resources, technology and best practices across the Company.

“Flawless execution on contracts in a way that produces an acceptable return on investment is also an important priority for us. It can be a differentiator, especially on the Military side, which is an industry where cost overruns and program delays often occur. If we maintain our technological edge While managing to do things faster, with the quality and reliability that CAE is recognized for, that’s how we’ll continue to compete despite being a relatively small player in a world market dominated by large companies.

“Many of these improvements will be achieved by unleashing the power of our people. We have an incredibly talented workforce here who love the Company and who truly want to contribute. Getting people aligned in one direction and really harnessing their power could yield huge results. I think we have a unique opportunity right now. We have great people, leading-edge technology a good reputation and a market that is showing improvement. We have won numerous contracts and we have some extremely prestigious clients. At this point, we need to double our efforts to make sure that we have the best customer service in the industry, bar none.

“In terms of other ways to grow our business, we want to be more involved in making our customers successful throughout the entire life cycle of the aircraft. Technology such as advanced development tools and CAE Simfinity-based platforms will help us integrate into our customers’ value chains earlier. At the same time, high-fidelity troubleshooting tools based on the same software as our full-flight simulators will help lower the cost of operating the aircraft throughout its life. That, coupled with our experience of having developed simulators for almost every aircraft program in the world–including some high-profile prototype simulators like the Dassault Falcon 7X and the Embraer 170–will allow us to provide a significant value-add to aircraft manufacturers. We will also continue to invest in R&D, focussing on perfecting the technologies that already exist–CAE STRIVE, CAE NeTTS and Medallion-S visuals being among the most well-known–and on developing new ones that will keep us at the forefront of modelling and simulation in both traditional and emerging market spaces. Doing the right thing means we don’t develop technology for technology’s sake but that we develop technology that adds value for our customers, leads to growth opportunities, and results in strong cash flows–real money–for CAE.”

A380

> 08

> CAE ANNUAL REPORT 2005

“Empowered to perform and compete more effectively.”

09 >

> CAE ANNUAL REPORT 2005

MILITARY SIMULATION AND TRAINING

don campbell
group president
military simulation
and training
//

IN CONVERSATION WITH DON CAMPBELL

“Being at the leading-edge of technology is of fundamental importance to the Military Group. We have embarked on a technological revolution through our CAE STRIVE and NeTTS technologies which, along with our Medallion-S visual system, has launched us into a new generation of simulation and training. As a result, we’re in a world-leading position. The challenge that we have is to take this technological revolution and build on it. The nature of war has changed. War used to mean that you had two armies lined up against each other along a front, and they would fight it out. Today, there is no front. You often have a number of different forces that have to work together: air, sea, land, unmanned aerial vehicles, and Special Operations. And more and more, the forces are part of a multi-national coalition. It is through communication networks and interoperability that all of these forces can be trained to work together as a cohesive team and CAE technology is critical to all of that.

“The requirements of today’s war fighters are also different from what they once were. War fighters need simulation packages that can be deployed almost instantly and that allow them to communicate seamlessly with their allies. Full-mission rehearsal has become the order of the day. CAE has kept pace with these market changes and is now a leader in the field. With our technology, we teach people not only how to fly safely but also how to perform the functions of a mission safely. What that means is that if a Special Ops group is going in to rescue a hostage or to secure a building, we can give them the ability to rehearse that task over and over again, in advance. Simulation is the only way to do this safely.

“Going forward, the Military Group must leverage the technology that we’ve developed in modelling and simulation for training into non-traditional areas. One of the ways that we’re going to do that is to come in earlier in the life cycle of defence projects, helping our customers define the nature of the threat, analyze their needs in terms of equipment and other resources, and conduct pre-acquisition modelling and simulation. We have had some success in this to date, and we intend to move further on that. We are also expanding our professional services offering. We are achieving strong margins on our contracts and we fully intend to maintain those. At the same time, the military customer is a very demanding customer with very specific needs. We’re not in a commodity business. Most contracts that we work on require new development and often, we’re called upon to design something that doesn’t even exist yet. So it’s a matter of achieving the level of customization that our customers demand, while making a profit. To me, doing the right thing means getting all the basics right, getting our costs right, and marrying engineering excellence with operational efficiency to get the right products to the right customer. I’d say we are well on the way.”

$150M OVER THE PAST THREE YEARS, CAE HAS WON MORE THAN $150 MILLION IN BUSINESS FROM THE “NIGHT STALKERS,” THE U.S. ARMY’S MOST ELITE SPECIAL FORCES. //

> 10

> CAE ANNUAL REPORT 2005

“Leveraging our strength in non-traditional areas.”

11 >

> CAE ANNUAL REPORT 2005

CIVIL TRAINING AND SERVICES

jeff roberts
group president
civil training and services
//

A DIALOGUE WITH JEFF ROBERTS

“At CAE, our job is to help aircraft operators enhance the safety of their operations and gain efficiencies, with the ultimate goal of making both the operators and CAE more successful. We do that by ingraining ourselves into our customers’ operations and being focussed on adding value. These are long-term relationships, whose success depends on what I call ‘an intimacy of customer’. Traditionally, CAE has operated in a volatile product environment with short cycles. In Civil Training and Services, however, we have continual interaction and involvement with the customer, playing a day-in-day-out role, staying very closely and directly tied to the client’s ongoing operations. The long-term relationships that we foster bring CAE a consistent revenue stream. To be successful, we must continually identify and distinguish ourselves as a service organization. We must differentiate ourselves by adding value in incremental, continual ways, constantly building on the culture of customer centricity that we’ve developed. Customer centricity is a catchy phrase, but what people often fail to grasp is that customer centricity has to be understood from the customer’s point of view.

“Our success lies in the many different types of relationships that we have with our customers. CAE’s “greenfield” training centres provide value to our customers in a traditional way, whereby CAE owns and operates the centre, and our customers rely on us to support their training needs. In our joint ventures and partnerships, we share the investment and find additional ways to contribute value, be it by adding CAE Simfinity-powered integrated training solutions to the airlines’ baseline training, or providing operational management, or by providing scheduling, maintenance and engineering support. Each of our customers and partners is different, and so is our relationship with them. The common element is our willingness to seek out, adapt and apply a solution that best brings value to the customer. There isn’t one solution that fits everybody. With every customer, it’s a partnership.

“Looking ahead, we will formalize and expand our services capability by working with our customers to analyze how we best bring value to them and to CAE. Examples of our increased capability are the new services we will offer in scheduling, administration, simulator maintenance, courseware development and general operating subjects, as well as training centre and program management. Based on CAE’s expertise in managing its own global network of training centres, these services will help our customers drive efficiency by keeping their manpower, spare parts, development and project costs to a minimum. In addition to expanding our service capability, we also intend to continue to broaden our customer base this year, offering more and more “wet” training solutions that leverage our current infrastructure. Beyond this, we would certainly consider additional opportunities to expand our global network of training centres, as long as they are accompanied by appropriate levels of benefit.

“Internally, we’re implementing a continuous improvement program to achieve our efficiency and productivity targets, and further reduce our costs. We have and will continue to review our global footprint and organization, making sure that we are positioned to compete effectively and to create value for the shareholders of CAE. Doing the right thing means coupling our culture of willingness and customer centricity with our leading-edge technology to create solutions that meet our customers’ two fundamental demands: “Enhance our safety and make us more efficient.” By helping our customers be more successful, we ultimately bring value to all of the stakeholders of CAE.”

100 +

> 12

> CAE ANNUAL REPORT 2005

“With every customer, it’s a partnership.”

13 >

> CAE ANNUAL REPORT 2005

FOCUS ON TECHNOLOGY AND SERVICES

A380 SIMULATOR

CAE designed and built the world’s first Airbus A380 full-flight simulator, delivering it to Airbus nearly a year before the super jumbo’s planned entry into service. One of CAE’s most complex full-flight simulators, the A380 can simulate 400 malfunctions. It features the CAE Tropos™ visual system, which uses satellite imagery of the entire planet to create realistic training scenarios for pilots.

     Along with the prototype simulator, CAE will deliver to Airbus a whole suite of CAE Simfinity™ training devices specific to the A380, including 3D Maintenance/Flight Training Devices (MFTDs), as well as desktop devices and briefing/debriefing stations. As a result, Airbus pilots will be able to immerse themselves in a virtual A380 cockpit environment while still in the classroom, before continuing their training on the full-flight simulator.

CAE STRIVE™

CAE developed the CAE STRIVE software suite to allow users to create a wide range of different types of simulation, from aircraft simulators to human body models. The software helps significantly shorten development cycles by allowing developers to focus on building models without the concern for how the models communicate, interact, and perform in real time. CAE will sell CAE STRIVE as a commercial off-the-shelf product, and has used it internally to design and develop a whole suite of training systems, from basic desktop trainers to full-mission simulators.

LITTLE BIRD SIMULATOR

CAE designed and manufactured the world’s first AH/MH-6 “Little Bird” combat mission simulator for use in missions involving up-close, airfire support, re-supply operations in hostile areas and personnel recovery.

     The simulator features a 24-foot dome display–the largest dome display ever placed on a motion-based flight simulator–to provide pilots with an extreme field-of-view during training. It also incorporates a six-degree-of-freedom vibration platform that works together with aural and visual cues to deliver a highly realistic cockpit environment for the aircrew.

PROFESSIONAL SERVICES

Late in 2004, CAE acquired Greenley & Associates, an Ottawa-based consulting company. Now named CAE Professional Services, this new segment of the business will spearhead CAE’s initiatives to support defence, government and security agencies throughout the life cycle of their projects, from initial research and concept development to design and production.

     CAE Professional Services will deliver independent consulting services in project management, systems and capability engineering, human factors engineering, emergency management, and modelling and simulation solutions, helping clients to analyze and evaluate a range of scenarios and enabling them to ‘see the finish before they start’.

     Over the course of fiscal 2006, CAE intends to establish CAE Professional Services offices at each of its primary Military locations: Tampa, U.S.A.; Burgess Hill, U.K.; Stolberg, Germany; and Sydney, Australia.

> 14

> CAE ANNUAL REPORT 2005

“Doing what CAE does best.”

15 >

> CAE ANNUAL REPORT 2005

REVIEW OF OPERATIONS

CIVIL

Civil Simulation and Training won a total of 17 full-flight simulator orders in fiscal 2005, for a competed market share of 77 percent. Although margins were lower than expected, the year was marked by a number of encouraging “firsts” for CAE.

     Completion of the world’s first A380 simulator for Airbus was a strategic milestone for the Company. By the time Airbus unveiled its super jumbo jetliner in January 2005, CAE engineers were already flying the A380 simulator, one of the most complex that CAE has ever produced. It was delivered to Airbus a few months later, nearly a year before the aircraft’s planned entry into service. By the end of 2005, CAE will have delivered a second simulator to Airbus’s Toulouse centre.

     In the same vein, this fiscal year saw the signing of a contract between CAE and Australia’s Qantas airlines for a suite of Airbus A380 integrated training solutions, including a full-flight simulator and a CAE Simfinity™ training device. CAE was also awarded a contract for two A380 simulators by Dubai’s Emirates airlines, bringing to five CAE’s total number of A380 simulator orders to date.

     In another “first” for the Company and for the world, CAE was selected to provide a full-flight simulator for the new ARJ21 regional jet being developed by aircraft manufacturer China Aviation Industry Corporation. With entry into service planned for 2008, the ARJ21 is the first aircraft entirely designed and built in China. The project adds to CAE’s already extensive experience in designing prototype simulators for new aircraft.

     A further “first” was CAE’s selection as Dassault Aviation’s exclusive provider of entitlement training for the all-new Falcon 7X, the first fly-by-wire business jet. This agreement marks the first time that CAE has won a contract for entitlement training, the initial training that is included with the purchase of an aircraft.

And finally, when CAE was chosen as the exclusive training provider for pilots of European low-cost carrier easyJet on the Airbus A320 family of aircraft, the selection marked the first time CAE had entered the U.K. training services market, having historically been solely a training equipment provider to many U.K.-based airlines. This demonstrated the continued success of CAE in the outsourced training market and the low-cost carrier market’s increasing confidence in CAE’s training solutions.

MILITARY

Revenues for CAE’s Military business unit remained stable during fiscal 2005 as compared to 2004. The Company’s recognized leadership in the areas of military simulation and training helped it win more than C$681 million in new defence-related business during fiscal 2005.

     Of this, a large portion is attributable to CAE’s being part of a major private finance initiative (PFI) program to provide NH90 helicopter training for the German Armed Forces. Along with three consortium partners, CAE will design, develop and manufacture four NH90 full-mission simulators, build three training centres in Germany, and provide 15 years of training services.

     Another milestone achieved by the Military business unit during the year was the selection of CAE-led Landmark Training Ltd. by the U.K. Ministry of Defence as the intended preferred bidder for the British Army’s Armoured Vehicles Training Service (AVTS) program. Valued at approximately £1 billion (C$2.4 billion) over 30 years, the AVTS program is a PFI designed to provide turnkey driver, gunnery and command information systems training to crews of armoured fighting vehicles. Landmark Training Ltd., which is 65% owned by CAE, expects that if negociations are successful, an agreement with the U.K. Defence Procurement Agency may be signed in late 2005.

Smaller but no less significant military arders awarded to CAE during the year included a number of contracts from the U.S. Navy and the U.S. Army’s 160^th Special Operations Aviation Regiment (Airborne). These orders call for the provision of an MH-60 Black Hawk combat mission simulator, the upgrading of two P-3C flight simulators, the development of an MH-60S tactical operational flight trainer an two MH-60S weapons tactics trainers, and the provision of a CAE Medallion-S™ visual system for two simulator upgrades. These contracts build on the already solid relationship that CAE and the U.S. Armed Forces share, positioning the Company well for further business with the U.S. and allied forces.

MARINE

Before its divestiture in February 2005, the Marine Controls unit was able to garner a number of important contracts for CAE, the most significant of which was an increase of C$222 million to a long-term contract from the U.K. Ministry of Defence to provide training services for three Astute Class nuclear submarines.

     In another high-profile contract award, CAE Valmarine was chosen to supply a complete machinery automation system and a heating, ventilation and air conditioning system for the first ship in the Ultra Voyager class, the world’s largest passenger ship.

     Proceeds of the sale of Marine Controls were used to reduce the Company’s long-term debt.

> 16

> CAE ANNUAL REPORT 2005

2005
FINANCIAL REVIEW

> CAE ANNUAL REPORT 2005

MANAGEMENT’S DISCUSSION
AND ANALYSIS

For the year ended March 31, 2005 as of May 10, 2005

For purposes of this discussion, “CAE” or the “Company” refers to CAE Inc. and its subsidiaries. This Management’s Discussion and Analysis (“MD&A”) for the year ended March 31, 2005, current as of May 10, 2005, focuses on the core businesses of CAE: Military Simulation and Training (“Military”) and Civil Simulation and Training (“Civil”).

HIGHLIGHTS OF FISCAL 2005

ORGANIZATION

OPERATIONS

FINANCING

ORDERS / INVESTMENT

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INTRODUCTION

Founded in 1947 and headquartered in Montreal, Canada, CAE is a leading provider of simulation and modelling technologies and integrated training services for civil aviation and defence customers worldwide. CAE employs more than 5,000 people in manufacturing operations and training facilities in 17 countries on five continents. More than 90% of CAE’s annual revenues are derived from worldwide exports and international activities.

     Prior to the sale of its Marine Controls division (“Marine”) in the fourth quarter of fiscal 2005 the Company also provided simulators and training services for sea-based activities and supplied marine automation systems for military and civil applications.

     For a further description of the Company’s core businesses please refer to Business Profile and Strategy of this MD&A.

     The MD&A, which includes a review of the operations of each business segment and the financial condition of CAE, is intended to assist in the understanding and assessment of significant trends, risks and uncertainties related to the results of operations for each business segment and should be read in conjunction with the audited consolidated financial statements and accompanying notes contained on pages 44 to 86.

     This MD&A contains statements from CAE management (“Management”) regarding CAE’s strategy, operating results and financial condition. Management is responsible for its accuracy, integrity and objectivity, and has developed, maintains and supports the necessary systems and controls to provide reasonable assurance as to the validity and completeness of the disclosures contained herein.

     CAE’s common shares are listed on the Toronto and New York stock exchanges under the symbols CAE and CGT respectively.

     CAE’s fiscal year end is March 31, and unless otherwise indicated, all references to the current year or 2005 are for the year ended March 31, 2005, and all references to last year, prior year, or a year ago are for the year ended March 31, 2004.

     Except as otherwise indicated, all financial information related herein is determined in accordance with Canadian generally accepted accounting principles (“GAAP”) and all dollar amounts referred to herein are in Canadian dollars.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This MD&A contains forward-looking statements with respect to CAE and the operations of each business segment based on assumptions that CAE considered reasonable at the time they were prepared and may include information concerning the Company’s future financial performance, business strategy, plans, goals and objectives. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Statements preceded by the word “believe”, “expect”, “anticipate”, “intend”, “continue”, “estimate”, “may”, “will”, “should” and similar expressions are forward-looking statements. CAE cautions the reader that the assumptions regarding future events, many of which are beyond the control of CAE, may affect the extent to which a particular projection materializes and/or could ultimately prove to be incorrect. Factors that could cause actual results or events to differ materially from current expectations are discussed herein. (Refer to Business Risks and Uncertainties of this MD&A for additional information.) The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In particular, forward-looking statements do not reflect the potential impact of any merger, acquisition or other business combinations or divestitures that may be announced or completed after such statements are made.

NON-GAAP FINANCIAL MEASURES

This MD&A provides comments on non-GAAP financial measures. Readers should be cautioned that this information should not be confused with or used as an alternative for performance measures determined in accordance with GAAP. CAE believes that these measures provide useful supplemental information to GAAP financial measures. However, these non-GAAP financial measures have no standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies.

EBIT

EBIT is a financial term used to report a company’s earnings as they would be without specific deductions including non-operating expenses (such as interest, taxes and other non-core expenses).

     CAE considers EBIT to be useful supplemental information since by eliminating the effects of some financing and accounting decisions, performance can be analyzed between different periods, different companies and different industries with dissimilar capital structure.

FOREIGN EXCHANGE

The Company’s reporting currency is the Canadian dollar and assets, liabilities and transactions measured in foreign currencies need to be translated to Canadian dollars at various exchange rates as required by GAAP. For the purposes of this MD&A, foreign exchange (current financial information restated at the rates in use for the same period a year ago) is presented on a consistent basis from period to period. CAE considers foreign exchange exclusion to be useful supplemental information as it provides an indication of performance comparable to a year ago excluding the impact of currency fluctuation, which can significantly affect the Company’s operations and financial results.

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The year-end exchange rates used to translate assets and liabilities were as follows as at March 31:

The average exchange rates used to translate revenues and expenses were as follows for the fiscal years ended March 31:

FREE CASH FLOW

Free cash flow is defined by Management as net cash flows provided by continuing operating activities less capital expenditures and dividends paid, plus proceeds from sales and leaseback of simulators. CAE considers free cash flow to be an indicator of the financial strength and liquidity of its business as it shows how much cash is available to repay debt and to meet its ongoing obligations.

NET DEBT

Net debt (total debt including amounts due within one year less cash and cash equivalents) is presented on a consistent basis from period to period. CAE considers net debt to be an indicator of the Company’s overall financial position.

NON-RECURRING ITEMS

Non-recurring items are items identified by their nature as outside of the normal course of business because they are infrequent and/or unusual. Management considers that highlighting non-recurring items and providing operating results excluding these items is useful supplemental information that allows for analysis of CAE’s underlying operating performance.

BUSINESS PROFILE AND STRATEGY

CAE provides a wide range of simulation and training products and services including full-flight simulators (“FFS”), full-mission simulators, visual systems, training devices and systems, flight training centres, and support services. The Company operates in two core markets: Civil and Military.

     CAE’s Civil business is the world leader in the design and manufacture of civil flight simulators and visual systems used to train airline and business jet pilots. In addition, CAE is the second largest independent civil aviation training provider, with a global network of 22 training centres equipped with 105 FFS.

     CAE’s Military business is also a global leader in the design of advanced military training systems for air, land and sea applications, having supplied the defence forces of more than 30 nations with military training systems and services. In addition to its comprehensive training services, the Company offers a range of simulation equipment and modelling and simulation software. CAE has designed one of the widest ranges of military helicopter simulators in the world and more training systems for the C-130 Hercules than any other company.

     Over the past five years, the Company transformed itself, evolving from a supplier of equipment to a provider of integrated training solutions. CAE’s strategy going forward revolves around taking the necessary steps to restore shareholder value.

     Following Robert E. Brown’s arrival as Chief Executive Officer in August 2004, an in-depth strategic review of CAE’s markets, customers and other stakeholders as well as the Company’s internal resources and capabilities was conducted. As a result of this review, the Company has reconfirmed its strategic direction. It adopted a plan intended to protect its technological leadership while at the same time fostering synergies between its various operating units, and implementing sound business practices. The plan maintains the existing Civil and Military Groups, and adds a third: Simulation Products. The reorganization, which became effective April 1, 2005, is expected to result in significant savings to the Company and to position it well to face new market realities.

     The major priorities of the newly formed Civil Training & Services (“CT&S”) Group are to increase revenue per simulator in the Company’s global network of training centres, and to deliver the most cost-effective and competitive training service in the marketplace. To this end, the CT&S Group is expected to consolidate training centres where duplication exists, and to reallocate a number of simulators to maximize yield.

     The Military Simulation & Training (“MS&T”) Group’s main goals are to service the defence market with technological excellence in modelling and simulation; to increase the Company’s market share of the military training market, and to explore opportunities in non-traditional areas of the defence market, including such areas as analysis and planning.

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The newly formed Simulation Products Group consolidates all manufacturing activities and includes engineering, program management, global procurement, and the marketing and sales of Civil equipment. Its immediate focus is to substantially reduce the costs associated with manufacturing simulation equipment intended both for sale to third parties as well as for installation in the Company’s own global network of training centres.

     Fiscal year 2006 will be a transitional year for CAE while the Company addresses its business processes and cost structure, with the goal of ending the year with a restructured and solid earnings base.

     CAE’s strategy is to leverage its extensive experience in modelling and simulation to expand both vertically into other products and services within the aerospace and defence industry, as well as horizontally to pursue opportunities presented by emerging markets such as homeland defence and urban simulation. In order to be able to respond to growth opportunities, CAE must continue to invest in new and innovative technologies.

CONSOLIDATED RESULTS

STATEMENT OF EARNINGS

SUMMARY OF CONSOLIDATED RESULTS

CONSOLIDATED REVENUE FROM CONTINUING OPERATIONS

For the twelve-month period ended March 31, 2005, consolidated revenue from continuing operations reached $986.2 million, representing an increase of $47.8 million, or 5% over the $938.4 million reported for the previous year. This net increase in consolidated revenue is due to a $58.4 million, or 13% increase in Civil revenues, partially offset by a $10.6 million, or 2% decreased contribution from Military.

     Consolidated revenue from continuing operations, excluding the impact of foreign currency fluctuations (mainly the decrease of the USD), would have been slightly over $1 billion, an increase of 8% over last year.

     Further analysis on each segment is provided in Segmented Results.

CONSOLIDATED EBIT FROM CONTINUING OPERATIONS

Consolidated EBIT amounted to a loss of $373.0 million, compared to earnings of $81.3 million last year. The loss is mainly due to non-recurring items, such as impairment and restructuring charges together with other unusual items that are further discussed in a separate section hereunder. Excluding the impact of these non-recurring items, consolidated EBIT would have amounted to $88.3 million, compared to $90.6 million a year ago on the same basis. On a segmented basis, Civil’s EBIT would have been $41.2 million, a marginal increase of $2.2 million from the previous year, and Military’s EBIT would have declined by 9% to $47.1 million, from $51.6 million a year ago.

Further analysis of non-recurring items is provided in Reconciliation of Non-Recurring Items.

Further analysis on each segment is provided in Segmented Results.

INTEREST

Interest expense amounted to $32.1 million compared to $22.4 million a year ago, an increase of $9.7 million. The increase results mainly from one-time costs arising from repayments of various debts with the proceeds generated from the sale of Marine. The main increase in interest expense is due to the early settlement of a long-term debt facility with a Brazilian financial institution, which resulted in the write-off of $4.7 million (non-cash) of financing costs that were deferred in the balance sheet and amortized over the term of the facility (53 months were remaining). In addition, CAE incurred a $2.5 million charge in the form of an early repayment premium which also contributed to the non-recurring increase. Both amounts are included in the interest expense line in the statement of earnings. In addition, there was a total of $2.0 million of costs associated with the unwind of one interest rate swap ($0.9 million) which converted the floating rate debt under the revolving credit facility to fixed rate debt, and the restructuring of another interest rate swap ($1.1 million) converting a floating rate debt to fixed rate debt, related to the non-recourse project financing for the MSH project. Excluding the impact of these early settlements and interest rate swaps, interest expense would have been $22.9 million for the current fiscal year, slightly above last year as a result of higher interest rates prevailing during fiscal 2005 and a lower level of interest capitalized. (Refer to Non-recourse Project Financing).

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INCOME TAXES

Income taxes amounted to a net recovery of $100.4 million for the year compared to $11.5 million tax expense last year. This year’s tax recovery results from the various elements including non-recurring charges taken during fiscal 2005, together with the recognition of $23.5 million of tax assets. Of the $23.5 million, $12.2 million is related to the reduction in the valuation allowance on CAE’s net operating losses in the United States. The remaining amount relates to the materialization of the net capital losses in the United States as a result of the sale of Marine. The later recognition of the net capital losses was not included in the gain on disposition of Marine.

     Excluding the non-recurring items, the income tax expense would have been $18.5 million, representing a tax rate of 28% for the year, which is in line with the prior year.

     As at March 31, 2005, the Company had approximately US$101.3 million of accumulated non-capital tax losses carried forward that can be used to offset tax payable on future earnings from U.S. operations. CAE also had accumulated non-capital tax losses carried forward relating to its operations in other countries of approximately $66.8 million.

RESULTS FROM DISCONTINUED OPERATIONS

On February 3, 2005, CAE completed the divestiture of substantially all of its Marine business to L-3 Communications Corporation (“L-3”). The results of Marine have been reported as discontinued operations since the second quarter, in line with applicable GAAP requirements, and previously reported statements have been reclassified accordingly. The net earnings of these discontinued operations for the year amounted to $104.8 million and includes the recognition of a gain of $103.9 million (net of taxes of $25.1 million) on the sale of Marine. This gain includes $7.0 million of release of cumulative translation adjustments associated with the Company’s foreign investments in Marine. Excluding this gain, earnings from discontinued operations would have amounted to $0.9 million compared to $16.6 million last year. In addition, a $4.4 million charge was recorded during the current year in relation to CAE’s former Cleaning Technologies.

     For a complete discussion on the sale of the Marine segment refer to Acquisitions, Business Combinations and Divestitures.

NET (LOSS) EARNINGS

CAE reported a consolidated net loss for the year of $199.9 million compared to earnings of $64.0 million a year ago. The loss resulted mainly from an impairment, the restructuring measures announced in February 2005, and other non-recurring charges incurred during the third and the fourth quarter. These elements are partially offset by the one-time investment tax credits (“ITC”) recognition in the first quarter, the gain on the sale of Marine, and the various tax recoveries in the fourth quarter previously discussed. Excluding the impact of these non-recurring items, net earnings would have amounted to $46.9 million for the year.

EPS

Basic EPS amounted to a loss of $1.23, compared to earnings of $0.20 last year. Net of non-recurring items, basic EPS would have amounted to $0.19 and $0.21, respectively.

RECONCILIATION OF NON-RECURRING ITEMS

The table below shows how certain non-recurring items have affected the Company’s results in the respective reporting periods. The Company believes that this supplemental information is useful as it provides an indication of the Company’s underlying performance excluding these non-recurring items. Readers should be cautioned, however, that this information should not be confused with or used as an alternative for net earnings (loss) determined in accordance with GAAP as an indicator of performance.

RECONCILIATION OF NON-RECURRING ITEMS

Each specific item highlighted in the above table is further discussed below.

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IMPAIRMENT OF GOODWILL, INTANGIBLE AND TANGIBLE ASSETS

The Company performs the annual testing for impairment of its long-lived assets as at December 31 of each year using the two-step method prescribed under GAAP. Based on the test performed as at December 31, 2004, CAE concluded that an impairment charge was required.

     As part of the first step, the total fair value of each reporting unit (Military and Civil) was compared with its respective carrying amount (net book value), including goodwill, in order to identify a potential impairment. The fair values of the reporting units were estimated using generally accepted valuation techniques including discounted cash flow and comparable analysis. The process of determining fair values requires Management to exercise judgment in making assumptions about future results, including revenue and cash flow projections and discount rates.

     If the fair value of a reporting unit is lower than its carrying amount, the goodwill of this reporting unit may be impaired and the reporting unit must proceed with a second step in order to quantify the amount of impairment, if any. Under a second step, the fair value of goodwill is determined in the same manner as the value of goodwill would be determined in a business combination context. If, after performing the second step, it is determined that the goodwill recorded is higher than the implied fair value of goodwill, an impairment charge is recorded in the period.

     During the third quarter of fiscal 2005, CAE’s Management initiated a comprehensive review of current performance and the strategic orientation of its Civil and Military business units. This strategic review revealed that several factors have emerged and/or worsened over the course of the past year that severely affect the Civil business, including:

Most of these elements are outside the direct control of the Company and currently show only modest signs of abatement. These elements caused Management to recalibrate some key assumptions in Civil’s strategic planning.

New Market Reality

The enduring adverse economic environment of the airline industry, first initiated in 2001 with the 9/11 terrorist attacks, and was further impacted by the SARS outbreak in Asia and by the Iraq war, was, in 2004, exacerbated by soaring fuel costs and declining yields. These factors continue to offset the extensive cost-cutting initiatives the airlines have undertaken to such a point that U.S. airlines lost an estimated US$5 billion in 2004 when less than a year ago, analysts were forecasting a break-even year. This fourth consecutive year of important losses for U.S. airlines shows that there are no immediate solutions underway. In addition, the four years of lost growth will not easily be made up as only in mid-2004 did traffic volume return to pre-9/11 levels. CAE is now in a new market reality where cost management is at the centre of all decisions. In addition, interest in training outsourcing, which could contribute to improving cost-effectiveness, is low on the airline industry’s priority list, where the focus is mainly on reducing labour and fleet costs. This new reality has translated into continued price pressures on Civil’s equipment and training businesses.

Appreciation of the Canadian Dollar

The vast majority of Civil equipment revenues are based in U.S. dollars while Civil’s manufacturing costs are primarily in Canadian dollars. Therefore, the appreciation of the Canadian dollar to over US$0.83 (or C$1.20) in calendar 2004 had a material adverse impact on the profitability of Civil’s business.

Erosion of the Less Than 50-Seat Regional Jet Market

The latter part of calendar year 2004 saw a major shift in demand for regional jets from the sub 50-seat segment to newer, larger platforms (70-to-100+ seat range). The value proposition for smaller regional jets has been severely impacted by the new low-yield market environment. In addition, legacy airlines are relaxing scope clauses, which previously restricted their use of 70-seat jets. Bombardier and Embraer have both reduced their 20-year market forecast in the less than 50-seat range and Bombardier has severely reduced its planned production for CRJ200s as evidenced by significant workforce reductions in 2004. These factors also make it less likely that production of the Dornier 328JET, for which CAE was the exclusive entitlement training provider, will be restored.

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Escalating Cost of Acquiring Data, Parts and Avionics for the Manufacturing of Full-Flight Simulators

In 2002, CAE launched its next generation FFS design, which was intended to reduce manufacturing and life cycle costs. However, as the Company experienced reduced throughput in its manufacturing facilities, the anticipated savings have not materialized, which has prompted Management to make this issue a key priority to address.

     Furthermore, CAE has also incurred increased costs for acquiring data, parts and avionics in the past few years, with these costs representing a major component in its manufacturing of FFS.

     Therefore, based on the preceding factors and the results of the strategic review previously mentioned, CAE concluded its annual testing for impairment of its long-lived assets, including goodwill, intangibles and property, plant and equipment as well as certain other assets and deferred costs. The Company concluded that the carrying value of some of Civil’s tangible and intangible assets (including goodwill) were impaired and, on this basis, recorded in the third quarter of fiscal 2005 a $443.3 million impairment charge detailed as follows:

DETAILED IMPAIRMENT CHARGE

The 20% tax recovery rate associated with the impairment charge was a result of the non-deductibility, for tax purposes, of some of the goodwill and intangibles assets impairment charge.

     As indicated in the table above, the after-tax effect of this non-cash charge on CAE’s consolidated net earnings in the third quarter of 2005 was $354.2 million or $1.43 per share.

RESTRUCTURING CHARGES

On February 10, 2005, CAE announced a comprehensive restructuring plan (the “Plan”), that will materially change the manner in which CAE conducts its business, and is aimed at restoring the Company’s profitability, cash flow and return on investment. This Plan, to be executed over the next 18 months, results from the extensive strategic review of CAE’s markets, customers and other external stakeholders as well as its internal resources and capabilities undertaken by the Management under the leadership of the new CEO.

     The Plan, geared towards the elimination of duplication and the achievement of a more competitive cost structure, includes actions such as:

The Company is reducing headcount; as of May 10, 2005, 400 of the 450 employees have already left the Company since the announcement of the Plan.

     In addition, as part of the Plan, the Company will be implementing an enterprise resource planning system (“ERP”), a business management system that integrates all aspects of the business, including planning, manufacturing, and sales and marketing, in order to improve transparency, accountability and information flow. Finally, CAE’s compensation structure has been reoriented, with a specific emphasis on building shareholder value through focus on delivery of free cash flows and adequate return on capital invested.

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The Company accounts for the restructuring charges in accordance with GIGA EIC-134 Accounting for Severance and Termination Benefits and EIC-135 Accounting for Costs Associated with Exit and Disposal Activities (Including Costs Incurred in a Restructuring) as described in Note 24 of the consolidated financial statements. These CICA abstracts provide guidance on the timing of recognition and measurement of liabilities as well as disclosures for the various types of costs associated with an exit or disposal activity, including restructuring. Under EIC-135, a liability for a cost associated with a restructuring can only be recorded when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the Company to transfer or use assets, or more explicitly, when an event leaves the Company little or no discretion to avoid transferring or using the assets in the future. Under these rules, commitment to an exit plan or a plan of disposal expresses only Management’s intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense.

     The Company intends to report as restructuring costs, all costs associated with the closure of business activities, the relocation of business activities from one location to another, the changes in management structure, and all other costs related to the restructuring as it affects the nature and focus of the operations.

     In order to comply with accounting requirements, all restructuring costs incurred by the Company prior to establishment of its “formal restructuring plan” were not included in the restructuring charge line of the financial statements and were expensed as part of the normal operations. Please refer to Other non-recurring items for further information.

     During fiscal 2005, the Company has recorded a $24.5 million restructuring charge for workforce reduction and related expenses. In line with the Plan previously announced, an additional restructuring cost in the range of $30 to $40 million should be incurred by the Company in fiscal 2006.

RECOGNITION OF ADDITIONAL ITC FOR FY00 TO FY04

While investment tax credits (“ITC”) are a normal, recurring part of CAE’s business, fiscal 2005 results from continuing operations were positively affected by the recognition, in the first quarter, of additional ITC totalling $14.2 million ($10.1 million, net of tax) for continuing operations. During the year tax authorities completed their audit of R&D expenses thereby enabling CAE to release provisions for tax expenses. Hence CAE reviewed its methodology to provide for tax expenses for fiscal 2004 and 2005.

     The additional ITC included in the fiscal 2005 EBIT of Civil and Military were, respectively, $9.8 million and $4.4 million.

EARLY SETTLEMENT OF LONG-TERM DEBT

At the end of the fourth quarter, as part of the restructuring of its balance sheet and the reduction of its debt level, CAE fully repaid the term loan related to the project financing for its training centre in São Paulo, Brazil. The one-time cost associated with these elements is further described in Interest. In addition the Company settled two swaps.

TAX RECOVERIES

Non-recurring items include the recognition of a $23.5 million tax asset from a reduction in the valuation allowance for net operating losses and for capital losses for income tax purposes in the United States. During fiscal 2004 the Company had recognized a $4.4 million tax benefit related to prior years’ tax losses in Australia.

     Refer to Income Taxes for further details.

OTHER NON-RECURRING ITEMS

The amount includes a variety of items that were not classified under restructuring charges in the statement of earnings or that are not part of the day-to-day operations of the Company, including:

BALANCE SHEET

The Company’s shareholders’ equity excluding currency translation adjustment (“CTA”) at the end of fiscal 2005 amounted to $717.9 million, a decrease of $213.0 million compared to $930.9 million at the end of fiscal 2004. The decrease reflects the net loss of $304.7 million from continued operations, distribution of $24.7 million in dividends offset by the $104.8 million contribution from discontinued operations (including a gain of $103.9 million net of tax), a $3.3 million adjustment resulting in the adoption of a new accounting standard and an increase of $6.3 million and $2.0 million in capital stock and contributed surplus, respectively. The following table describes the significant variances in the consolidated balance sheet from March 31, 2004 to March 31, 2005.

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     > CAE ANNUAL REPORT 2005

MANAGEMENT’S DISCUSSION AND ANALYSIS

SIGNIFICANT BALANCE SHEET VARIANCES

VARIABLE INTEREST ENTITIES

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

     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 are unable to make significant decisions about its 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 party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is exposed to a majority of the risk of loss from the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party is exposed to a majority of the VIEs losses), or both (the primary beneficiary). Upon consolidation, the primary beneficiary generally must initially record all of the VIEs 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 interest of these entities must be initially consolidated as if the entities were always consolidated. AcG-15 also requires disclosures about VIEs in which the variable interest holder is not required to consolidate, but it has a significant variable interest.

     A key element of CAE’s finance strategy to support the investment in its Civil training business is the sale and leaseback of certain FFS 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 transaction can only be executed 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.

     Typically, the Company has the option to purchase the equipment at a specific period 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 Special Purpose Entities (“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 SPEs’ long-term debt. The Company’s variable interests in these SPEs are solely through residual value guarantees and fixed purchase price purchase options. These leases expire in different periods up to 2023.

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The following table summarizes total assets and total liabilities of the SPEs that the Company has identified as VIEs as at March 31, 2005:

CIVIL SIMULATION AND TRAINING

The Company is the primary beneficiary for only one of the above VIEs. The Company’s participation in this VIE results from the acquisition of Schreiner Aviation Training B.V. in August 2001. As part of this acquisition, CAE assumed a sale leaseback transaction, for simulators in the Company’s Amsterdam Training Centre, arranged by Fortis Bank. The deal was structured through a SPE with MeesPierson XXX as owner trustee and owner participant.

     Pursuant to the adoption of AcG-15 on January 1, 2005, the consolidation of the SPE, resulted in an increase in total assets, total liability, and shareholders’ equity of $46.4 million, $43.2 million, and $3.2 million.

     Detailed impact by balance sheet element is as follows as of January 1, 2005:

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.

     For all of the other SPEs that are VIEs, the Company is not the primary beneficiary and consolidation is not appropriate under AcG-15. For additional information on the Company’s VIEs, see Note 25 of the consolidated financial statements.

STATEMENT OF CASH FLOW

The Company’s cash and cash equivalents at the end of fiscal 2005 amounted to $57.1 million, an increase of $2.4 million compared to $54.7 million at the end of fiscal 2004. In 2005, CAE generated $186.0 million of cash from continuing operating activities and $137.4 million of cash from investing activities of continuing operations, while it used $340.5 million of cash for financing activities of continuing operations. The major cash contribution during 2005 came from the divestiture of Marine.

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The following table summarizes the major elements of the statements of cash flow for the fiscal year ending March 31, 2005, with prior year comparatives:

STATEMENTS OF CASH FLOW