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<SEC-DOCUMENT>0001173382-06-000003.txt : 20060215
<SEC-HEADER>0001173382-06-000003.hdr.sgml : 20060215
<ACCEPTANCE-DATETIME>20060215153259
ACCESSION NUMBER:		0001173382-06-000003
CONFORMED SUBMISSION TYPE:	6-K
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20051231
FILED AS OF DATE:		20060215
DATE AS OF CHANGE:		20060215

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			CAE INC
		CENTRAL INDEX KEY:			0001173382
		STANDARD INDUSTRIAL CLASSIFICATION:	MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690]
		IRS NUMBER:				000000000

	FILING VALUES:
		FORM TYPE:		6-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-31402
		FILM NUMBER:		06621731

	BUSINESS ADDRESS:	
		STREET 1:		2025 LOGISTICS DRIVE
		CITY:			MISSISSAUGA
		STATE:			A6
		ZIP:			L5S 1Z9
		BUSINESS PHONE:		514-341-6780

	MAIL ADDRESS:	
		STREET 1:		8585 COTE DE LIESSE, CP 1800
		STREET 2:		DEPT. 04
		CITY:			ST-LAURENT, QUEBEC
		STATE:			A6
		ZIP:			H4L 4X4
</SEC-HEADER>
<DOCUMENT>
<TYPE>6-K
<SEQUENCE>1
<FILENAME>pr3qresults.htm
<DESCRIPTION>PRESS RELEASE AND THIRD QUARTER RESULTS
<TEXT>
<!DOCTYPE HTML PUBLIC "Press Release and Thrd Quarter Results.pdf">


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   <TITLE>Press Release and Thrd Quarter Results.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing</TITLE>
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<BODY bgcolor="#ffffff">
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<P align=center><B><FONT face=serif>SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 </FONT></B></P>
<P align=center>
<TABLE>

  <TR>
    <TD noWrap align=center><B><FONT face=serif>Form
  6-K</FONT></B><BR></TD></TR></TABLE></P>
<P align=center><FONT face=serif>Report of Foreign Issuer </FONT><BR><FONT
face=serif>Pursuant to Rule 13a-16 or 15d-16 of</FONT><BR><FONT face=serif>the
Securities Exchange Act of 1934 </FONT><BR></P>
<P align=left><FONT face=serif>For the month of: February
2006&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Commission File Number: 1-31402</FONT></P>
<P align=center>
<TABLE>

  <TR>
    <TD noWrap align=center><B><FONT face=serif>CAE INC. </FONT></B><BR><FONT
      face=serif>(Name of Registrant)</FONT><BR></TD></TR></TABLE></P>
<P align=center>
<TABLE>

  <TR>
    <TD noWrap align=center><B><FONT face=serif>8585 Cote de Liesse
      </FONT></B><BR><B><FONT face=serif>Saint-Laurent, Quebec
      </FONT></B><BR><B><FONT face=serif>Canada H4T 1G6 </FONT></B><BR><FONT
      face=serif>(Address of Principal Executive
  Offices)</FONT><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif>Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or Form 40-F:
</FONT></P>
<P align=left><FONT
face=serif>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Form
20-F&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Form 40-F X</FONT></P>
<P align=left><FONT face=serif>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 </FONT></P>
<P align=left><FONT face=serif>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: </FONT></P>
<P align=left><FONT
face=serif>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Yes&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
No X</FONT></P>
<P align=left><FONT face=serif>If &#147;Yes&#148; is marked, indicate the file number
assigned to the registrant in connection with Rule 12g3-2(b): N/A </FONT></P>
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<P align=center>
<TABLE>

  <TR>
    <TD noWrap align=center><B><FONT
  face=serif>SIGNATURES</FONT></B><BR></TD></TR></TABLE></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif>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. </FONT></P>
<TABLE style="WIDTH: 977px; HEIGHT: 159px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="35%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="62%"><B><FONT
      face=serif size=4
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      CAE Inc.</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=3>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=3>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="35%"><FONT
      face=serif>Date: February 14, 2006</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=left width="62%"><FONT
      face=serif
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      By:</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><FONT face=serif
     >/s/ Hartland J.
      Paterson</FONT></U>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="35%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=left width="62%"><FONT
      face=serif
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Name:</FONT>&nbsp; <FONT face=serif>Hartland J.
      Paterson</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="35%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=left width="62%"><FONT
      face=serif
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Title:</FONT>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif
     >Vice President Legal, General Counsel</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="35%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=left width="62%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>and Corporate Secretary</FONT>&nbsp;
  </TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
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src="pr3qresultsx3x1.jpg" border=0> <BR>
<P align=right>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=6>Press
  Release</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><B><FONT face=sans-serif>CAE reports third-quarter results for
fiscal year 2006</FONT></B></P>
<UL>
  <LI><B><FONT face=sans-serif size=2>Year-to- date revenue increased by 14%
  over last year to C$822.9 million</FONT></B>
  <LI><B><FONT face=sans-serif size=2>Net earnings for the quarter were C$17.
  million or C$0.07 per share</FONT></B>
  <LI><B><FONT face=sans-serif size=2>Net debt was further reduced by C$41.2
  million to C$208.9 million</FONT></B> </LI></UL>
<P align=left><B><I><FONT face=sans-serif size=2>Montreal, February 14, 2006
&#150;</FONT></I></B><FONT face=sans-serif size=2> (NYSE: CGT; TSX: CAE) &#150; CAE today
reported financial results for the third quarter ended December 31, 2005. Net
earnings for the quarter were $17.6 million, or $0.07 per share, which compares
to a net loss of $347.0 million or $1.40 per share in the same quarter last
year. All financial information is in Canadian dollars. </FONT></P>
<P align=left><FONT face=sans-serif size=2>Earnings from continuing operations,
excluding non-recurring items, were $23.7 million or $0.09 per share in the
third quarter, compared to $11.2 million or $0.04 per share in the third quarter
last year. Year-to-date earnings from continuing operations, excluding
non-recurring items, were $63.6 million, or $0.25 per share, compared to $32.8
million, or $0.13 per share in the same period last year. </FONT></P>
<P align=left><FONT face=sans-serif size=2>Consolidated revenue for the third
quarter was $276.6 million, compared to $257.5 million in the third quarter last
year.</FONT></P>
<P align=left><FONT face=sans-serif size=2>Year -to-date revenue was $822.9
million, an increase of 14% over the $723.5 million recorded for the same period
last year. Year-to-date net earnings amounted to $55.5 million, or $0.22 per
share, compared to a loss of $308.7 million, or $1.25 per share, for the same
period last year.</FONT></P>
<P align=left><FONT face=sans-serif size=2>Third-quarter consolidated earnings
before interest and taxes (EBIT) reached $32.7 million or 11.8% of revenue. EBIT
from continuing operations excluding non-recurring items would have been $37.6
million, or 13.6% of revenue. </FONT></P>
<P align=left><FONT face=sans-serif size=2>&#147;Financial results for the first nine
months improved on the basis of increased revenues and margins,&#148; said Robert E.
Brown, CAE&#146;s President and Chief Executive Officer. &#147;The restructuring plan that
we first announced on February 11, 2005, is on track to deliver our targeted
cost savings. We are still in a transition phase with considerable work ahead,
but we are improving our operating performance and strengthening our financial
position, while continuing to develop leading-edge technologies.&#148; </FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>Business Segment
      Highlights</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=sans-serif size=2>Beginning April 1, 2005, CAE began
reporting financial results on a newly segmented basis &#151;distinguishing between
products and services &#151; to reflect the way that the business is now being
managed. The four segments are Simulation Products/Civil, Training &amp;
Services/Civil, Simulation Products/Military, and Training &amp;
Services/Military. </FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>Simulation
      Products/Civil</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=sans-serif size=2>Revenue in the Simulation
Products/Civil segment amounted to $63.0 million in the third quarter, a 13%
quarter-over-quarter increase and a 20% year-over-year increase, both resulting
from higher order intake commencing early in the year.</FONT></P>
<P align=left><FONT face=sans-serif size=2>Operating income for the third
quarter amounted to $10.4 million, benefiting from better program execution,
increased synergies, and the recently secured Technology Partnerships Canada
program. This compares to an operating loss of $3.0 million for the same quarter
last year.</FONT><I><FONT face=sans-serif size=2> </FONT></I></P>
<P align=left><FONT face=sans-serif size=2>1</FONT></P>
<HR align=center width="100%" noShade SIZE=2>


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<A name="page_4"></A>

<P align="left">
<FONT size=2 face="sans-serif">CAE recently reached a key milestone. By instituting a strict change -control process and standardizing its approach to simulator development, the Company achieved its goal of reducing the time required to manufacture,
deliver and have certified an Airbus A320 civil full-flight simulator from nearly 20 months to 14 months. The Company will apply these new processes to the manufacturing of other civil full-flight simulator platforms. </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">New orders totalled &#36;102.8 million in the third quarter. CAE is pleased to announce that it has been awarded a contract to provide a full-flight simulator to Saudi Arabian Airlines, bringing the total number of
simulator orders won during the third quarter to six. Segment backlog was &#36;312.3 million as of December 31, 2005, and at that date, the Company had booked 17 orders for full-flight simulators. CAE maintains its forecast for 20 simulator orders
in the current fiscal year. </FONT></P>
<P align="left">
<TABLE><TR><TD nowrap>
<B><FONT size=2 face="sans-serif">Training &amp; Services/Civil</FONT></B><BR>
</TD></TR></TABLE>
</P>
<P align="left">
<FONT size=2 face="sans-serif">Revenue in the Training &amp; Services/Civil segment amounted to &#36;78.0 million in the third quarter, in line with the second quarter and a 3% increase year over year. An increased level of activity at CAE&#146;s
training centres was offset by the continued strengthening of the Canadian dollar vis-&agrave;-vis the US dollar and the Euro, the main operating currencies of the segment.  </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">Operating income for the third quarter amounted to &#36;14.3 million, a quarter-over-quarter increase of &#36;2.7 million and an increase of &#36;5.3 million year over year. Third-quarter operating income included a
&#36;1.8 million non-recurring gain following the Company&#146;s exit from the Dornier 328J training business, partially offset by negative foreign exchange impacts.</FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">New orders totalled &#36;56.7 million in the third quarter. Segment backlog was &#36;805.2 million as of December 31, 2005. </FONT></P>
<P align="left">
<TABLE><TR><TD nowrap>
<B><FONT size=2 face="sans-serif">Simulation Products/Military</FONT></B><BR>
</TD></TR></TABLE>
</P>
<P align="left">
<FONT size=2 face="sans-serif">Revenue in the Simulation Products/Military segment amounted to &#36;82.8 million in the third quarter, a decrease of 12% from the second quarter resulting mainly from delays in the award of contracts, specifically in
Europe and Australia, and from negative foreign exchange impacts. These results are in line with revenues in the third quarter last year. Given the unique nature and irregular timing of military contract awards, variations in the level of order
bookings between quarters in both Military segments are normally expected.</FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">Operating income for the third quarter amounted to &#36;6.3 million, compared to &#36;6.4 million last year. </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">New orders totalled &#36;45.4 million in the third quarter, and segment backlog was &#36;453.0 million as of December 31, 2005.</FONT></P>
<P align="left">
<TABLE><TR><TD nowrap>
<B><FONT size=2 face="sans-serif">Training &amp; Services/Military</FONT></B><BR>
</TD></TR></TABLE>
</P>
<P align="left">
<FONT size=2 face="sans-serif">Revenue in the Training &amp; Services/Military segment amounted to &#36;52.8 million in the third quarter, a 4% quarter-over -quarter increase and a 13% year-over-year increase stemming mainly from increased
maintenance and technical logistic support services revenues on various German and American bases. Offsetting this increase were negative foreign exchange impacts. </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">Operating income for the third quarter amounted to &#36;8.4 million, compared with &#36;4.9 million in the same quarter last year. The increase is mainly due to a cost recovery resulting from the annual rate
negotiations with the Canadian Government, a dividend received from a Training &amp; Services/Military investment in the UK and increased revenues from support services on German bases. </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">2</FONT></P>

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<A name=page_5></A>
<P align=left><FONT face=sans-serif size=2>New orders totalled $60.7 million in
the third quarter. Segment backlog was $797.8 million as of December 31,
2005.</FONT></P>
<P align=left><FONT face=sans-serif size=2>In the Military business as a whole,
revenue for the quarter from the combined segments was $135.6 million and
operating income was $14.7 million, for an operating margin of 10.8% .
Normalizing for one -time items, Military&#146;s year-to-date operating margin
is</FONT><B><FONT face=sans-serif size=2></FONT></B> <FONT face=sans-serif
size=2>10.6</FONT><FONT face=sans-serif size=2>%,</FONT> <FONT face=sans-serif
size=2>which is essentially in line with the Company&#146;s objective of a low
double-digit EBIT margin in the Military business.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>Cash flow and financial
      position</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=sans-serif size=2>Free cash flow &#151; defined as net cash
flows provided by continuing operations less capital expenditures (including
capitalized costs) and dividends paid, plus sale and leaseback proceeds &#151; was
$37.2 million for the quarter.</FONT></P>
<P align=left><FONT face=sans-serif size=2>CAE&#146;s net debt &#151; defined as long-term
debt less cash and cash equivalents &#151; was $208.9 million as at December 31,
2005, a decrease of $41.2 million from the second quarter and a decrease of
$76.9 million from the end of fiscal 2005.</FONT></P>
<P align=left><FONT face=sans-serif size=2>CAE will pay a dividend of $0.01 per
share to shareholders of record on March 17, 2006, payable on March 31,
2006.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>Additional consolidated
      financial results</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=sans-serif size=2>The consolidated backlog from
continuing operations at December 31, 2005, was $2.4 billion, compared to $2.5
billion at the beginning of the fiscal year. During the nine-month period, new
orders added to backlog amounted to $886.0 million, which were offset by $823.0
million of revenues generated from backlog and by negative foreign exchange
movements. Since the beginning of fiscal year 2006, the strengthening of the
Canadian dollar has diminished the book value of CAE&#146;s consolidated backlog by
$200.0 million.</FONT></P>
<P align=left><FONT face=sans-serif size=2>On November 29, 2005, CAE launched
Project Phoenix, a $630-million R&amp;D program that will span six years. During
the third quarter, CAE and the Government of Canada signed an agreement for an
investment of approximately 30% &#150; or $189 million &#150; of the value of the program.
This new Technology Partnerships Canada (TPC) agreement replaces two previous
TPC programs.</FONT></P>
<P align=left><FONT face=sans-serif size=2>Capital expenditures for the quarter
amounted to $45.6 million, for a total of $87.8 million for the first nine
months of the fiscal year. Major capital projects in fiscal 2006 include ongoing
investment in the Dassault Falcon 7X program, the ramp-up of the German NH90
program, and various other maintenance expenditures. Capital expenditures are
expected to be in the range of $135 million for the current fiscal
year.</FONT></P>
<P align=left><FONT face=sans-serif size=2>Income taxes for the third quarter
were $9.1 million, representing an effective tax rate of 34% compared to 20%
last year and 25% last quarter. The variations are due to changes in the mix of
income, for tax purposes, from various jurisdictions. Management still expects a
31% effective income tax rate for fiscal year 2006 as a whole, excluding the
effect of potential non-recurring tax items such as the recognition of available
tax losses not previously recognized by the Company.</FONT></P>
<P align=left><FONT face=sans-serif size=2>3</FONT></P>
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<A name="page_6"></A>

<P align="left">
<TABLE><TR><TD nowrap>
<B><FONT size=2 face="sans-serif">Non-recurring items</FONT></B><BR>
</TD></TR></TABLE>
</P>
<P align="left">
<FONT size=2 face="sans-serif">Earnings per share from continuing operations for the third quarter, excluding non-recurring items, were &#36;0.09, compared to &#36;0.04 in the third quarter last year and &#36;0.08 in the second quarter. Reported
third-quarter results included the following after-tax charges: costs related to the Company&#146;s restructuring plan of &#36;4.2 million; costs related to the early settlement of debt of &#36;2.0 million; and a foreign exchange loss on the
reduction of investment in certain self-sustaining subsidiaries in the amount of &#36;1.0 million. In addition, reported results benefited from a &#36;1.0 million after-tax gain on the Company&#146;s exit from the Dornier 328J training
business.</FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">As of December 31, 2005, the Company had incurred approximately &#36;41 million before tax of restructuring and other related costs, remaining within its initial projection of &#36;55 -&#36;65 million. The remaining
cash- and non-cash expenses related to the restructuring program can only be recognized as they are incurred. The original estimate of cash cost savings expected from restructuring remains unchanged. </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">A more detailed discussion of business segment highlights can be found in the Management Discussion &amp; Analysis posted on CAE&#146;s website at </FONT><U><FONT color="#800080" size=2
face="sans-serif">http://www.cae.com /financialsQ3FY06</FONT></U><FONT size=2 face="sans-serif">.</FONT><B><FONT size=2 face="sans-serif"> </FONT></B></P>
<P align="left">
<TABLE><TR><TD nowrap>
<B><FONT size=2 face="sans-serif">Conference Call</FONT></B><BR>
</TD></TR></TABLE>
</P>
<P align="left">
<FONT size=2 face="sans-serif">CAE will host a conference call today at 1:00 p.m. EST for analysts, institutional investors and the media. North American participants can listen to the conference by dialling 1-866-898-9626 or (514) 868-1042.
Overseas participants can dial +800-8989-6323 or 1(514) 868-1042. The conference call will also be audio Webcast live for the public at </FONT><U><FONT color="#0000ff" size=2 face="sans-serif">www.cae.com</FONT></U><FONT size=2 face="sans-serif">.
</FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">CAE is a world-leading provider of simulation and modelling technologies for civil aviation and military customers. With annual revenues of approximately C&#36;1 billion, the company operates in 18 countries around the
world. CAE has sold nearly 700 simulators and training devices to airlines, aircraft manufacturers, training centres and defence forces for air and ground purposes in more than 40 countries. With over 100 full-flight simulators in more than 20
aviation training centres serving approximately 3,500 airlines, aircraft operators and manufacturers across the globe, CAE is a world leader in aviation, maintenance and crew training services. CAE licences its simulation software to various market
segments and has a professional services division assisting customers with wide-ranging simulation -based needs. </FONT></P>
<P align="left">
<FONT size=2 face="sans-serif">Certain statements made in this news release, including, but not limited to, statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results
or events predicted in these forward- looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or of any dispositions, monetizations,
mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. For a description of risks that could cause actual results or events to differ materially from current
expectations, please refer to the section entitled "Risk Factors" in CAE Inc.'s Annual Information Form for the year ended March 31, 2005 filed with the Canadian securities commissions (available at www.cae.com or on SEDAR at </FONT><U><FONT
color="#0000ff" size=2 face="sans-serif">www.sedar.com) </FONT></U><FONT size=2 face="sans-serif">and with the U.S. Securities and Exchange Commission under Form 40-F (available on EDGAR at </FONT><U><FONT color="#0000ff" size=2
face="sans-serif">www.sec.gov)</FONT></U><FONT size=2 face="sans-serif">, as updated in CAE's fiscal 2006 Third Quarter MD&amp;A dated February 14, 2006, under the section entitled "Business Risks And Uncertainties". The forward-looking statements
contained in this news release represent our expectations as of February 14, 2006 and, accordingly, are subject to change after such date. However, we disclaim any intention or obligation to update any forward-looking statements, whether as a result
of new information or otherwise. </FONT></P>
<P align="center">
<TABLE><TR><TD align="center" nowrap>
<FONT size=2 face="sans-serif">&#150; 30 &#150;</FONT><BR>
</TD></TR></TABLE>
</P>
<P align="left">
<FONT size=2 face="sans-serif">4</FONT></P>

<HR noshade align="center" width="100%" size=2>

<!--$$/page=--><A name=page_7></A>
<P align=left><FONT face=sans-serif size=2>On the Web: </FONT><U><FONT
face=sans-serif color=#0000ff size=2>www.cae.com</FONT></U><FONT face=sans-serif
size=2> </FONT></P>
<P align=left><B><FONT face=sans-serif size=2>Media contacts: </FONT></B></P>
<P align=left><FONT face=sans-serif size=2>Nathalie Bourque, Vice President,
Global Communications, (514) 734-5788,<BR></FONT><U><FONT face=sans-serif
color=#0000ff size=2>
nathalie.bourque@cae.com</A></FONT></U><FONT
face=sans-serif size=2> </FONT></P>
<P align=left><FONT face=sans-serif size=2>Anne von Finckenstein, Manager,
Public Relations, (514) 340-5370,<BR></FONT><U><FONT face=sans-serif
color=#0000ff size=2>
anne.vonfinckenstein@cae.com</A></FONT></U><FONT
face=sans-serif size=2> </FONT></P>
<P align=left><B><FONT face=sans-serif size=2>Investor relations</FONT></B><FONT
face=sans-serif size=2>: </FONT></P>
<P align=left><FONT face=sans-serif size=2>Andrew Arnovitz, Director, Investor
Relations, (514) 734-5760, </FONT><U><FONT face=sans-serif color=#0000ff
size=2>andrew.arnovitz@cae.com</FONT></U></P>
<P align=right><FONT face=sans-serif size=2>5</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_8></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif>Consolidated Balance
      Sheets</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="16%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1
     >(Unaudited)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="29%" colSpan=3><B><FONT
      face=sans-serif size=1>as
      at December 31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>as at March 31</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>(amounts in
      millions of Canadian dollars)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>2005</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1
     >Assets</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="16%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><I><FONT
      face=sans-serif size=1
     >Current assets</FONT></I>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="16%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Cash and cash equivalents</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;66.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>$ 57.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Accounts receivable</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >255.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>255.7</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Inventories</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >92.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>101.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Prepaid expenses</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >15.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>17.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Income taxes recoverable</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >71.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>58.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Future income taxes</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >6.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>2.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Current assets held for sale</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>5.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >507.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>498.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Property, plant
      and equipment, net</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >793.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>792.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Future income
      taxes</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >96.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>101.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Intangible
      assets</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >20.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>20.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1
     >Goodwill</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >91.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>92.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Other
      assets</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >134.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>138.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Long -term
      assets held for sale</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >5.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>57.5</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >$1,650.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>$ 1,699.7</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Liabilities and
      Shareholders&#146; Equity</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="16%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><I><FONT
      face=sans-serif size=1
     >Current liabilities</FONT></I>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="16%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Accounts payable and accrued liabilities</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >$&nbsp;&nbsp; 324.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>$ 312.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Deposits on contracts</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >140.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>93.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Long-term debt due within one year</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >11.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>35.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Future income taxes</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >22.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>19.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Current liabilities related to assets held for
      sale</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>7.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >498.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>469.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Long -term
      debt</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >264.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>307.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Deferred gains
      and other long-term liabilities</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >198.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>179.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Future income
      taxes</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >30.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>38.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Long -term
      liabilities related to assets held for sale</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>53.4</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >991.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>1,048.1</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Shareholders&#146;
      Equity</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="16%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Capital
      stock</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >386.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>373.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Contributed
      surplus</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >5.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>3.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Retained
      earnings</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >388.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>340.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1>Currency
      translation adjustment</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >(121.3)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>(66.3)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >659.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>651.6</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="14%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT
      face=sans-serif size=1
     >$1,650.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%"><FONT face=sans-serif
      size=1>$ 1,699.7</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=2>6</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_9></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif>Consolidated Statements of
      Earnings</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >nine months</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=7><B><FONT
      face=sans-serif size=1
     >three months ended</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1
     >(Unaudited)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="16%" colSpan=5><B><FONT
      face=sans-serif size=1
     >December 31</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >December 31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>((amounts in
      millions of Canadian dollars, except per share amounts)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>2004</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1
     >Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3
     ><B><FONT face=sans-serif size=1
     >$276.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp; 257.5</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="8%" colSpan=3><B><FONT
      face=sans-serif size=1
     >$822.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp; 723.5</FONT>&nbsp;
</TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Earnings (loss)
      before interests and income taxes</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 32.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$ (426.0)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 96.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp;(372.3)</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Interest
      expense, net</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >6.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>5.4</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >15.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>16.0</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Earnings (loss)
      before income taxes</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 26.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$ (431.4)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 81.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$ (388.3)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Income tax
      expense (recovery)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >9.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(85.7)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >25.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(74.3)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Earnings (loss)
      from continuing operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 17.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$ (345.7)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 56.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$ (314.0)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Results of
      discontinued operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >0.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(1.3)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >(0.6)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>5.3</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Net earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 17.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$ (347.0)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 55.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$ (308.7)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Basic and
      diluted earnings (loss) per share from continuing operations</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 0.07</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp;&nbsp;
      (1.40)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 0.22</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp;&nbsp;
      (1.27)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Basic and
      diluted earnings (loss) per share</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 0.07</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp;&nbsp;
      (1.40)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 0.22</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp;&nbsp;
      (1.25)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Weighted average
      number of shares outstanding</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >250.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>247.0</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >249.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>246.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif>Consolidated Statements of Retained
      Earnings</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=7><B><FONT
      face=sans-serif size=1
     >three months ended</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >nine months</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="16%" colSpan=5><B><FONT
      face=sans-serif size=1
     >December 31</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1
     >(Unaudited)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >December 31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>(amounts in
      millions of Canadian dollars)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>2004</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="54%">
      <HR noShade SIZE=1>
    </TD>
    <TD width="2%"></TD>
    <TD width="44%" colSpan=15>
      <HR noShade SIZE=2>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Retained
      earnings at beginning of period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><B><FONT
      face=sans-serif size=1>$
      373.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp; 585.6</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="8%" colSpan=3><B><FONT
      face=sans-serif size=1>$
      340.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp; 562.1</FONT>&nbsp;
</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Net earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >17.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(347.0)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >55.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(308.7)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1
     >Dividends</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >(2.5)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(7.4)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT
      face=sans-serif size=1
     >(7.5)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(22.2)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><FONT
      face=sans-serif size=1>Retained
      earnings at end of period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><B><FONT
      face=sans-serif size=1>$
      388.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp; 231.2</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="8%" colSpan=3><B><FONT
      face=sans-serif size=1>$
      388.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp; 231.2</FONT>&nbsp;
</TD></TR>
  <TR>
    <TD width="100%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=2>7</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_10></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif>Consolidated Statements of Cash
      Flows</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="24%" colSpan=5><B><FONT
      face=sans-serif size=1
     >three months ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=sans-serif size=1
     >nine months ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1
     >(Unaudited)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="24%" colSpan=5
     >&nbsp; &nbsp; &nbsp;<B><FONT face=sans-serif size=1
     >December
      31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=5
     >&nbsp; &nbsp; &nbsp; &nbsp;<B><FONT face=sans-serif size=1
     >December
      31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>(amounts in
      millions of Canadian dollars)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Operating activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Net earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1>$
      17.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp; (347.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 55.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$ (308.7)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Results of
      discontinued operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(0.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>1.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >0.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(5.3)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Earnings (loss)
      from continuing operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >17.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(345.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >56.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(314.0)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Adjustments to
      reconcile earnings to</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >cash flows from operating activities:</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Impairment of goodwill, tangible and intangible
      assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>443.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>443.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Depreciation</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >13.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>13.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >39.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>40.9</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Amortization of deferred financing costs</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >0.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>0.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >1.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>1.9</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Amortization of intangible and other assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >4.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>6.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >15.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>15.7</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Future income taxes</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >3.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(81.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(1.7)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(68.9)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Investment tax credits</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(3.0)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(4.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(5.7)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(24.1)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Stock-based compensation</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >0.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>0.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >1.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>1.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Other</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(1.8)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>1.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >3.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>4.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=sans-serif size=1
     >Decrease in non-cash working capital</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >55.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>57.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >55.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>18.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1>Net
      cash provided by continuing operating activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >90.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>92.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >166.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>119.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Net cash (used
      in) provided by discontinued operating activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(5.6)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >2.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>15.0</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1>Net
      cash provided by operating activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >90.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>87.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >168.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>134.1</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Investing activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Purchase of business (net of cash and cash equivalents
      acquired)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>-</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >2.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(6.6)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Proceeds from disposal of discontinued
      operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>-</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(4.9)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>0.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Capital expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(45.6)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(37.3)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(87.8)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(103.5)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Proceeds from sale and leaseback of assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>28.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>28.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Deferred development costs</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(0.4)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(2.5)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(0.4)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(9.4)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Deferred pre-operating costs</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(0.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>-</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(0.4)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(1.3)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Other assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(5.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(1.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(17.2)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(5.1)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Net cash used in
      continuing investing activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(51.2)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(12.8)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(108.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(97.1)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Net cash used in
      discontinued investing activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(2.1)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(2.3)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(6.2)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1>Net
      cash used in investing activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(51.2)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(14.9)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(110.4)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(103.3)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Financing activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Net borrowing under revolving unsecured credit
      facilities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(13.3)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(16.4)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(9.7)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>10.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Proceeds from long-term debt</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >4.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>0.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >25.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>3.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Repayments of long-term debt</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(33.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(14.8)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(61.9)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(22.4)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Dividends paid</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(2.4)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(7.2)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(7.2)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(21.6)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Common stock issuances</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >1.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>0.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >6.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>1.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=sans-serif size=1
     >Other</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >2.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(0.6)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >1.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>2.5</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Net cash used in
      continuing financing activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(40.6)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(38.4)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(45.0)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(27.0)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Net cash
      provided by discontinued financing activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>0.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >1.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>2.5</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1>Net
      cash used in financing activities</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(40.6)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>(37.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(43.8)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(24.5)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Effect of foreign exchange rate changes</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<B><FONT face=sans-serif size=1
     >on cash and cash equivalents</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(2.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>0.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >(9.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>(1.0)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1>Net
      (decrease) increase in cash and cash equivalents</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >(3.1)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>35.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >5.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>5.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Cash and cash equivalents at beginning of
      period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><B><FONT
      face=sans-serif size=1
     >69.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>32.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >61.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>61.9</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Cash and cash equivalents at end of period</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%"><FONT face=sans-serif
      size=1>$ </FONT><B><FONT
      face=sans-serif size=1
     >66.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=sans-serif
      size=1>$&nbsp; 67.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 66.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp; 67.2</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><B><FONT
      face=sans-serif size=1
     >Cash and cash equivalents related to:</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Continuing
      operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 66.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp; 63.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=sans-serif size=1>Discontinued
      operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >-</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>4.0</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT
      face=sans-serif size=1
     >$&nbsp; 66.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=sans-serif
      size=1>$&nbsp; 67.2</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=2>8</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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<P align=right><IMG
src="x11x1.jpg"
border=0></P> <BR>
<P align=left><FONT face=serif size=7>&#147; </FONT><FONT face=serif size=7>Empowered
to perform and compete more effectively.</FONT><FONT face=serif
size=7>&#148;</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=1>&gt; INTERIM THIRD QUARTER
      REPORT</FONT></B><BR><B><FONT face=sans-serif size=1>FOR THE NINE MONTHS
      ENDED DECEMBER 31, 2005</FONT></B><BR><B><FONT face=sans-serif
      size=5>THIRD QUARTER REPORT</FONT></B><BR></TD></TR></TABLE></P>
<HR align=center width="100%" noShade SIZE=2>


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<A name="page_12"></A>

<TABLE border=0 cellspacing=0 cellpadding=0>
<TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">01</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Report to Shareholders</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">04</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Management&#146;s Discussion and Analysis</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">04</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Highlights of the Third Quarter of Fiscal 2006</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">05</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Introduction</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">05</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Cautionary Statements Regarding Forward-Looking Information</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">06</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Non-GAAP Financial Measures</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">08</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Consolidated Results</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">16</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Segmented Results</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">26</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Acquisitions, Business Combinations and Divestitures</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">27</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Liquidity</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">28</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Off-Balance Sheet Arrangements</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">29</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Financial Instruments</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">29</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Business Risks and Uncertainties</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">29</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Financial Statements Disclosure</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">29</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Systems, Procedures and Controls</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">29</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Additional Information</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR></TABLE>
<P align="right">
<TABLE><TR><TD align="right" nowrap>
<B><FONT size=1 face="sans-serif"> CAE THIRD QUARTER REPORT 2006</FONT></B><BR>
</TD></TR></TABLE>
</P>
<TABLE border=0 cellspacing=0 cellpadding=0>
<TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">30</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Consolidated Balance Sheets</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">31</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Consolidated Statements of Earnings</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">31</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Consolidated Statements of Retained Earnings</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">32</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Consolidated Statements of Cash Flows</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">33</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100% colspan=2>
<FONT size=1 face="serif">Notes to Consolidated Financial Statements</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">33</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 1: Nature of Operations and Significant Accounting Policies</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">34</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 2: Business Acquisitions and Combinations</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">35</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 3: Discontinued Operations and Assets Held for Sale</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">37</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 4: Long-Term Debt</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">38</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 5: Letters of Credit and Guarantees</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">38</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 6: Interest Expense, Net</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">39</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 7: Capital Stock</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">39</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 8: Employee Future Benefits</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">40</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 9: Supplementary Information</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">40</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 10: Operating Segments and Geographic Information</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">44</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 11: Impairment of Goodwill, Tangible and Intangible Assets</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">45</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 12: Restructuring Charge</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">45</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 13: Goodwill</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR><TR>
<TD>&nbsp;</TD>	<TD nowrap valign=top>
<B><FONT size=1 face="sans-serif">46</FONT></B>&nbsp; &nbsp; &nbsp; 	</TD>
	<TD width=100%>
<FONT size=1 face="serif">Note 14: Government Cost Sharing</FONT>	</TD>
</TR>
<TR><TD colspan=3>&nbsp;</TD></TR></TABLE>
<P align="left">
<FONT size=1 face="sans-serif">&gt; 2</FONT></P>

<HR noshade align="center" width="100%" size=2>

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<P align=right>
<TABLE>

  <TR>
    <TD noWrap align=right><B><FONT face=sans-serif size=1>&gt; CAE THIRD
      QUARTER REPORT 2006</FONT></B><BR></TD></TR></TABLE></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=4>REPORT TO
      SHAREHOLDERS</FONT></B><BR><B><FONT face=sans-serif size=2>THIRD-QUARTER
      RESULTS</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>CAE reported financial results for the
third quarter ended December 31, 2005. Net earnings for the quarter were $17.6
million, or $0.07 per share, which compares to a net loss of $347.0 million or
$1.40 per share in the same quarter last year. All financial information is in
Canadian dollars.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Earnings
from continuing operations, excluding non-recurring items, were $23.7 million or
$0.09 per share in the third quarter, compared to $11.2 million or $0.04 per
share in the third quarter last year. Year-to-date earnings from continuing
operations, excluding non-recurring items, were $63.6 million, or $0.25 per
share, compared to $32.8 million, or $0.13 per share in the same period last
year.</FONT></P>
<P align=left><FONT face=serif size=2>Consolidated revenue for the third quarter
was $276.6 million, compared to $257.5 million in the third quarter last year.
</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Year-to-date
revenue was $822.9 million, an increase of 14% over the $723.5 million recorded
for the same period last year. Year-to-date net earnings amounted to $55.5
million, or $0.22 per share, compared to a loss of $308.7 million, or $1.25 per
share, for the same period last year. Third-quarter consolidated earnings before
interest and taxes (EBIT) reached $32.7 million or 11.8% of revenue. EBIT from
continuing operations excluding non-recurring items would have been $37.6
million, or 13.6% of revenue.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>&#147;Financial
results for the first nine months improved on the basis of increased revenues
and margins,&#148; said Robert E. Brown, CAE&#146;s President and Chief Executive Officer.
&#147;The restructuring plan that we first announced on February 11, 2005, is on
track to deliver our targeted cost savings. We are still in a transition phase
with considerable work ahead, but we are improving our operating performance and
strengthening our financial position, while continuing to develop leading-edge
technologies.&#148;</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>BUSINESS SEGMENT
HIGHLIGHTS</FONT></B></P>
<P align=left><FONT face=serif size=2>Beginning April 1, 2005, CAE began
reporting financial results on a newly segmented basis &#150; distinguishing between
products and services &#150; to reflect the way that the business is now being
managed. The four segments are Simulation Products/Civil, Training &amp;
Services/Civil, Simulation Products/Military, and Training &amp;
Services/Military.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>SIMULATION PRODUCTS/CIVIL
</FONT></B></P>
<P align=left><FONT face=serif size=2>Revenue in the Simulation Products/Civil
segment amounted to $63.0 million in the third quarter, a 13%
quarter-over-quarter increase and a 20% year-over-year increase, both resulting
from higher order intake commencing early in the year. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Operating
income for the third quarter amounted to $10.4 million, benefiting from better
program execution, increased synergies, and the recently secured Technology
Partnerships Canada program. This compares to an operating loss of $3.0 million
for the same quarter last year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE recently
reached a key milestone. By instituting a strict change-control process and
standardizing its approach to simulator development, the Company achieved its
goal of reducing the time required to manufacture, deliver and have certified an
Airbus A320 civil full-flight simulator from nearly 20 months to 14 months. The
Company will apply these new processes to the manufacturing of other civil
full-flight simulator platforms.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>New orders
totalled $102.8 million in the third quarter. CAE is pleased to announce that it
has been awarded a contract to provide a full-flight simulator to Saudi Arabian
Airlines, bringing the total number of simulator orders won during the third
quarter to six. Segment backlog was $312.3 million as of December 31, 2005, and
at that date, the Company had booked 17 orders for full-flight simulators. CAE
maintains its forecast for 20 simulator orders in the current fiscal
year.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>TRAINING &amp;
SERVICES/CIVIL</FONT></B></P>
<P align=left><FONT face=serif size=2>Revenue in the Training &amp;
Services/Civil segment amounted to $78.0 million in the third quarter, in line
with the second quarter and a 3% increase year over year. An increased level of
activity at CAE&#146;s training centres was offset by the continued strengthening of
the Canadian dollar vis-&#224;-vis the US dollar and the Euro, the main operating
currencies of the segment. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Operating
income for the third quarter amounted to $14.3 million, a quarter-over-quarter
increase of $2.7 million and an increase of $5.3 million year over year.
Third-quarter operating income included a $1.8 million non-recurring gain
following the Company&#146;s exit from the Dornier 328J training business, partially
offset by negative foreign exchange impacts. </FONT></P>
<P align=left><FONT face=serif size=2>New orders totalled $56.7 million in the
third quarter. Segment backlog was $805.2 million as of December 31,
2005.</FONT></P>
<P align=right><FONT face=sans-serif size=1>01 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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<TABLE style="WIDTH: 947px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><B><FONT
      face=sans-serif size=1
     >REPORT TO SHAREHOLDERS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="47%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>SIMULATION PRODUCTS/MILITARY
</FONT></B></P>
<P align=left><FONT face=serif size=2>Revenue in the Simulation
Products/Military segment amounted to $82.8 million in the third quarter, a
decrease of 12% from the second quarter resulting mainly from delays in the
award of contracts, specifically in Europe and Australia, and from negative
foreign exchange impacts. These results are in line with revenues in the third
quarter last year. Given the unique nature and irregular timing of military
contract awards, variations in the level of order bookings between quarters in
both Military segments are normally expected. </FONT></P>
<P align=left><FONT face=serif size=2>Operating income for the third quarter
amounted to $6.3 million, compared to $6.4 million last year.</FONT></P>
<P align=left><FONT face=serif size=2>New orders totalled $45.4 million in the
third quarter, and segment backlog was $453.0 million as of December 31, 2005.
</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>TRAINING &amp;
SERVICES/MILITARY</FONT></B></P>
<P align=left><FONT face=serif size=2>Revenue in the Training &amp;
Services/Military segment amounted to $52.8 million in the third quarter, a 4%
quarter-over-quarter increase and a 13% year-over-year increase stemming mainly
from increased maintenance and technical logistic support services revenues on
various German and American bases. Offsetting this increase were negative
foreign exchange impacts.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Operating
income for the third quarter amounted to $8.4 million, compared with $4.9
million in the same quarter last year. The increase is mainly due to a cost
recovery resulting from the annual rate negotiations with the Canadian
Government, a dividend received from a Training</FONT></P>
<UL>
  <LI><FONT face=serif size=2>Services/Military investment in the UK and
  increased revenues from support services on German bases.</FONT><BR><FONT
  face=serif size=2>New orders totalled $60.7 million in the third quarter.
  Segment backlog was $797.8 million as of December 31, 2005.</FONT><BR><FONT
  face=serif size=2>In the Military business as a whole, revenue for the quarter
  from the combined segments was $135.6 million and operating income was</FONT>
  </LI></UL>
<P align=left><FONT face=serif size=2>$14.7 million, for an operating margin of
10.8% . Normalizing for one-time items, Military&#146;s year-to-date operating margin
is 10.6%, which is essentially in line with the Company&#146;s objective of a low
double-digit EBIT margin in the Military business. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>CASH FLOW AND FINANCIAL
POSITION</FONT></B></P>
<P align=left><FONT face=serif size=2>Free cash flow &#150; defined as net cash flows
provided by continuing operations less capital expenditures (including
capitalized costs) and dividends paid, plus sale and leaseback proceeds &#150; was
$37.2 million for the quarter. CAE&#146;s net debt &#150; defined as long-term debt less
cash and cash equivalents &#150; was $208.9 million as at December 31, 2005, a
decrease of $41.2 million from the second quarter and a decrease of $76.9
million from the end of fiscal 2005.</FONT></P>
<P align=left><FONT face=serif size=2>CAE will pay a dividend of $0.01 per share
to shareholders of record on March 17, 2006, payable on March 31,
2006.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>ADDITIONAL CONSOLIDATED FINANCIAL
RESULTS</FONT></B></P>
<P align=left><FONT face=serif size=2>The consolidated backlog from continuing
operations at December 31, 2005, was $2.4 billion, compared to $2.5 billion at
the beginning of the fiscal year. During the nine-month period, new orders added
to backlog amounted to $886.0 million, which were offset by $823.0 million of
revenues generated from backlog and by negative foreign exchange movements.
Since the beginning of fiscal year 2006, the strengthening of the Canadian
dollar has diminished the book value of CAE&#146;s consolidated backlog by $200.0
million. On November 29, 2005, CAE launched Project Phoenix, a $630-million
R&amp;D program that will span six years. During the third quarter, CAE and the
Government of Canada signed an agreement for an investment of approximately 30%
&#150; or $189 million &#150; of the value of the program. This new Technology
Partnerships Canada (TPC) agreement replaces two previous TPC
programs.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Capital
expenditures for the quarter amounted to $45.6 million, for a total of $87.8
million for the first nine months of the fiscal year. Major capital projects in
fiscal 2006 include ongoing investment in the Dassault Falcon 7X program, the
ramp-up of the German NH90 program, and various other maintenance expenditures.
Capital expenditures are expected to be in the range of $135 million for the
current fiscal year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Income taxes
for the third quarter were $9.1 million, representing an effective tax rate of
34% compared to 20% last year and 25% last quarter. The variations are due to
changes in the mix of income, for tax purposes, from various jurisdictions.
Management still expects a 31% effective income tax rate for fiscal year 2006 as
a whole, excluding the effect of potential non-recurring tax items such as the
recognition of available tax losses not previously recognized by the
Company.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 02</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_15></A>
<TABLE style="WIDTH: 963px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><B><FONT
      face=sans-serif size=1
     >REPORT TO SHAREHOLDERS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="47%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>NON-RECURRING ITEMS</FONT></B>
<FONT face=sans-serif></FONT></P>
<P align=left><FONT face=serif size=2>Earnings per share from continuing
operations for the third quarter, excluding non-recurring items, were $0.09,
compared to $0.04 in the third quarter last year and $0.08 in the second
quarter. Reported third-quarter results included the following after-tax
charges: costs related to the Company&#146;s restructuring plan of $4.2 million;
costs related to the early settlement of debt of $2.0 million; and a foreign
exchange loss on the reduction of investment in certain self-sustaining
subsidiaries in the amount of $1.0 million. In addition, reported results
benefited from a $1.0 million after-tax gain on the Company&#146;s exit from the
Dornier 328J training business. As of December 31, 2005, the Company had
incurred approximately $41 million before tax of restructuring and other related
costs, remaining within its initial projection of $55-$65 million. The remaining
cash- and non-cash expenses related to the restructuring program can only be
recognized as they are incurred. The original estimate of cash cost savings
expected from restructuring remains unchanged.</FONT></P>
<P align=left><I><FONT face=serif size=2>This report includes forward-looking
statements that are based on certain assumptions and reflects CAE&#146;s current
expectations. These forward-looking statements are subject to a number of risks
and uncertainties that could cause actual results or events to differ materially
from current expectations. Additional factors are discussed in CAE&#146;s materials
filed with the securities regulatory authorities in Canada and the United States
from time to time. CAE disclaims any intention or obligation to update or revise
any forward-looking statements.</FONT></I></P>
<P align=right><FONT face=sans-serif size=1>03 <B>&gt;</B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_16></A>
<P align=right>
<TABLE>

  <TR>
    <TD noWrap align=right><B><FONT face=sans-serif size=1>&gt; CAE THIRD
      QUARTER REPORT 2006</FONT></B><BR></TD></TR></TABLE></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=5>MANAGEMENT&#146;S
      DISCUSSION</FONT></B><BR><B><FONT face=sans-serif size=5>AND
      ANALYSIS</FONT></B><BR><I><FONT face=serif size=1>February 14,
      2006</FONT></I><BR><I><FONT face=serif size=1>For the three and nine-month
      periods ended December 31, 2005</FONT></I> <BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>For purposes of this discussion, &#147;CAE&#148; or
the &#147;Company&#148; refers to CAE Inc. and its subsidiaries. This Management&#146;s
Discussion and Analysis (MD&amp;A) for the three and nine-month periods ended
December 31, 2005 (third quarter of fiscal 2006), current as of February 14,
2006, focuses on the core business segments of CAE: Simulation Products/Civil
(SP/C); Simulation Products/Military (SP/M); Training &amp; Services/Civil
(TS/C); and Training &amp; Services/Military (TS/M). 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.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=1>1 HIGHLIGHTS OF THE THIRD
      QUARTER 0F FISCAL 2006</FONT></B><BR></TD></TR></TABLE></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif
  size=1>FINANCIAL</FONT></B><BR></TD></TR></TABLE></P>
<UL>
  <LI><FONT face=serif size=2>Consolidated revenue for the third quarter of 2006
  reached $276.6 million, $19.1 million higher than for the same quarter last
  year. After three</FONT> <FONT face=serif size=2>quarters in fiscal 2006,
  consolidated revenue reached $822.9 million, $99.4 million higher than for the
  same period last year.</FONT>
  <LI><FONT face=serif size=2>Earnings from continuing operations for the
  quarter were $17.5 million. Excluding the effect of non-recurring items, they
  reached $23.7 million,</FONT> <FONT face=serif size=2>a $3.7 million increase
  over the previous quarter and a $12.5 million increase over the same quarter
  last year.</FONT>
  <LI><FONT face=serif size=2>Earnings per share (EPS) reached 7 cents and 22
  cents for the third quarter and the nine-month period ending December 31, 2005
  respectively.</FONT> <FONT face=serif size=2>Excluding non-recurring items,
  EPS reached 9 cents for the quarter and 25 cents on a year-to-date
  basis.</FONT>
  <LI><FONT face=serif size=2>Cash from continuing operations for the quarter
  reached $90.8 million, and $166.4 million for the first three quarters in
  fiscal 2006 or</FONT> <FONT face=serif size=2>$47.3 million more than for the
  same nine-month period last year.</FONT>
  <LI><FONT face=serif size=2>Capital employed was at $868.0 million as at
  December 31, 2005 or $27.7 million lower than at the end of the previous
  quarter and $69.4 million</FONT> <FONT face=serif size=2>lower than at the
  beginning of this fiscal year.</FONT>
  <LI><FONT face=serif size=2>Net debt was $208.9 million as at December 31,
  2005; $76.9 million lower than at the beginning of the fiscal year.</FONT>
  <LI><FONT face=serif size=2>Non cash working capital was negative $46.3
  million or $51.2 million lower than at the end of the previous quarter and
  $55.9 million lower than</FONT> <FONT face=serif size=2>at the beginning of
  the fiscal year.</FONT></LI></UL>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif
  size=1>ORDERS</FONT></B><BR></TD></TR></TABLE></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>During the third
      quarter, CAE sold six civilian full-flight simulators bringing the total
      number of simulators sold in the first nine months of fiscal 2006 to
      17.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>The Civil training
      business continued to build momentum in the rapidly growing Asian and
      Middle East markets with new training agreements:</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Expansion of the CAE/China
      Southern Airlines joint venture facility in Zhuhai by six simulator
      bays;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Multi-year agreement with Qatar
      Airways, one of the fastest growing airlines in the world, for Airbus A330
      and A340 pilot training;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Extension of Oman Air&#146;s Boeing
      737 NG aircraft pilot training program;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Five-year agreement for pilot
      training on Airbus A320 aircraft by new Indian carrier Kingfisher
      Airlines; and</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Boeing 737 NG pilot training for
      the new Indian low-cost carrier SpiceJet.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Military orders for the
      third quarter include:</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Contract with the German Navy and
      German Armed Forces for logistic support;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Upgrade for the German P-3C OFT
      (Operational Flight Trainer);</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Tactical Training Capability
      Upgrade (TTCU) for the Royal Australian Air Force C-130J and C-130M
      simulators; and</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Upgrade to C-5 Galaxy weapons
      systems trainers (WST) for the US Air Force.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=sans-serif size=1>&gt;<FONT face=sans-serif
size=1></FONT>0</FONT><FONT face=sans-serif size=1>4</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif
  size=1>OTHER</FONT></B><BR></TD></TR></TABLE></P>
<UL>
  <LI><FONT face=serif size=2>Announcement of a $630 million research and
  R&amp;D program (&#147;Project Phoenix&#148;) that will span over the next six years.
  The Government of</FONT> <FONT face=serif size=2>Canada has agreed to invest
  up to 30% of this amount (reducing the amount of R&amp;D tax credit otherwise
  available).</FONT>
  <LI><FONT face=serif size=2>Launch of CAE Medallion-6000</FONT><SUP><FONT
  face=serif size=2>TM </FONT></SUP><FONT face=serif size=2>series, the latest
  addition to its family of image generators.</FONT>
  <LI><FONT face=serif size=2>Restructuring plan is progressing, $8.9 million
  incurred year-to-date, to aggregate $41 million since inception.</FONT>
</LI></UL>
<P align=left><B><FONT face=sans-serif size=1>2 INTRODUCTION</FONT></B></P>
<P align=left><FONT face=serif size=2>CAE Inc. (or the Company) designs,
manufactures and supplies simulation equipment and services and develops
integrated training solutions for military organizations, commercial airlines,
business aircraft operators and aircraft manufacturers. CAE&#146;s flight simulators
replicate aircraft performance in normal and abnormal operations as well as in a
comprehensive set of environmental conditions utilizing visual systems that
contain an extensive database of airports, other landing areas and flying
environments, motion and sound cues to create a fully immersive training
environment. The Company offers a full range of flight training devices based on
the same software used in its simulators. CAE also operates a global network of
aviation training centres in locations around the world.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE&#146;s fiscal
year-end is March 31 and, unless otherwise indicated, all references to the
current year or 2006 are for the fiscal year ending March 31, 2006, and all
references to last year, prior year, or a year ago are for the fiscal year ended
March 31, 2005.</FONT></P>
<P align=left><FONT face=serif size=2>Effective April 1</FONT><SUP><FONT
face=serif size=2>st</FONT></SUP><FONT face=serif size=2>, 2005, the Company
changed its internal organization structure such that operations are managed
through four segments: </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(i)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Civil (SP/C)
      &#150; Designs, manufactures and supplies civil flight simulation training
      devices and visual systems;</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(ii)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Military
      (SP/M) &#150; Designs, manufactures and supplies advanced military training
      products for air, land and sea applications;</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iii)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Civil
      (TS/C) &#150; Provides business and commercial aviation training and related
      services; and</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iv)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Military
      (TS/M) &#150; Supplies military turn key training and operational solutions,
      support services, life extensions, systems maintenance and modelling and
      simulation solutions.</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Previously, the Company&#146;s operations were
broken down and reported into three operating segments: Military Simulation
&amp; Training (Military), Civil Simulation &amp; Training (Civil) and Marine
Controls (Marine) until the disposal of the latter in the fourth quarter of
fiscal 2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
MD&amp;A, which includes a review of the operations of each business segment and
the financial condition of CAE, is intended to assist the readers 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 unaudited consolidated financial statements and
accompanying notes of the third quarter of fiscal 2006.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Unless
otherwise indicated in this MD&amp;A, the Company&#146;s outlook, business profile
and strategy as well as the accounting policies and estimates provided in the
Company&#146;s most recent annual MD&amp;A (included in the Company&#146;s annual report
for the year ended March 31, 2005) remain unchanged.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>This
MD&amp;A contains statements from CAE management (Management) regarding CAE&#146;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.</FONT></P>
<P align=left><FONT face=serif size=2>CAE&#146;s common shares are listed on the
Toronto and New York stock exchanges under the symbols CAE and CGT
respectively.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>3 CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING INFORMATION </FONT></B></P>
<P align=left><FONT face=serif size=2>This MD&amp;A contains forward-looking
statements with respect to CAE and the operations of each business segment based
on assumptions which Management considered reasonable at the time they were
prepared and may include information concerning the Company&#146;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 words
&#147;believe&#148;, &#147;expect&#148;, &#147;anticipate&#148;, &#147;intend&#148;, &#147;continue&#148;, &#147;estimate&#148;, &#147;may&#148;,
&#147;will&#148;, &#147;should&#148; and/or similar expressions are forward-looking statements. CAE
cautions the readers that the assumptions regarding future events, many of which
are beyond the control of Management, 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 (for additional
information refer to the &#147;</FONT><I><FONT face=serif size=2>Business Risks and
Uncertainties</FONT></I><FONT face=serif size=2>&#148; section of this MD&amp;A). 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.</FONT></P>
<P align=right><FONT face=sans-serif size=1>05 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"
   ><B><FONT face=sans-serif
      size=1>MANAGEMENT&#146;S
      DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
   ><B><FONT face=sans-serif
      size=1>&gt; CAE THIRD
      QUARTER REPORT 2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>4 NON-GAAP FINANCIAL
MEASURES</FONT></B></P>
<P align=left><FONT face=serif size=2>This MD&amp;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. Management 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. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.1</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif
size=1>EBIT</FONT></B></P>
<P align=left><FONT face=serif size=2>Earnings before interest and income tax
expenses (EBIT) is a financial term used to report a company&#146;s earnings as they
would be without interest and taxes. Management considers EBIT to be useful
supplemental information since, by eliminating the effects of some financing
decisions and tax structures, performance can be analyzed between different
periods, different companies and different industries with dissimilar capital
structures.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.2</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>SEGMENT
OPERATING INCOME</FONT></B></P>
<P align=left><FONT face=serif size=2>Segment Operating Income (SOI) is the key
indicator used internally to measure the financial performance of each segment.
This measure gives a good indication of the profitability of each segment,
without the impact of any items not specifically related to the segment&#146;s
performance (which items are presented in the reconciliation between total
Segment Operating Income and EBIT &#150; refer to Note 10 in the interim consolidated
financial statements).</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.3</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>FOREIGN
EXCHANGE</FONT></B></P>
<P align=left><FONT face=serif size=2>The Company&#146;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
(FX) as required by GAAP. CAE considers disclosing the impact of foreign
exchange movement on its results to be useful supplemental information as it
provides an indication of performance comparable between periods, excluding the
impact of currency fluctuation which can significantly affect the Company&#146;s
operations and financial results.</FONT></P>
<P align=left><FONT face=serif size=2>CAE&#146;s exposure to the fluctuation of
exchange rates between its main operating currencies (Canadian dollar, US
dollar, Euro and British pound) is as follows:</FONT></P>
<UL>
  <LI><FONT face=serif size=2>For each of the Company&#146;s network of civilian and
  military training centres, most of the revenue and costs are generated and
  incurred in</FONT> <FONT face=serif size=2>the same currency, leaving the net
  profitability and the net investment in these training centres exposed to
  foreign currency fluctuation.</FONT><BR><FONT face=serif size=2>Under GAAP,
  gains or losses resulting from the translation of the net investment in a
  self-sustaining subsidiary is deferred in the Currency</FONT> <FONT face=serif
  size=2>Translation Adjustment (CTA) account which is part of the shareholder&#146;s
  equity section of the balance sheet. Any effect of the fluctuation</FONT>
  <FONT face=serif size=2>between currencies on the net profitability will
  impact the earnings statement immediately and affect year-to-year and
  quarter-to-quarter</FONT> <FONT face=serif size=2>comparisons.</FONT>
  <LI><FONT face=serif size=2>For the Company&#146;s manufacturing operations outside
  of Canada (Germany, US, UK and Australia), most of the revenue and costs
  are</FONT> <FONT face=serif size=2>generated and incurred in the local
  currency with the exception of some data and equipment that could be bought,
  from time to time, in</FONT> <FONT face=serif size=2>different currencies.
  This leaves, once again, the net profitability of the period and the net
  investment in these locations exposed to foreign</FONT> <FONT face=serif
  size=2>currency fluctuation.</FONT>
  <LI><FONT face=serif size=2>For the Company&#146;s manufacturing operations in
  Canada, although the net assets are not exposed to fluctuations of foreign
  currencies against</FONT> <FONT face=serif size=2>the Canadian dollar (except
  for receivables and payables in foreign currencies), more than 85% of its
  revenues are generated in foreign</FONT> <FONT face=serif size=2>currencies
  (mostly US dollar and Euro) and a significant level of its expenses are
  incurred in Canadian dollars leaving this operation exposed</FONT> <FONT
  face=serif size=2>to fluctuations in foreign currencies. As a general policy,
  contracts denominated in foreign currencies are hedged when signed, which
  allows</FONT> <FONT face=serif size=2>the Company to protect itself against a
  portion of this foreign exchange exposure. However it is impossible to offset
  all of the impacts of the</FONT> <FONT face=serif size=2>movement in foreign
  currencies with these measures, leaving some residual exposures impacting the
  statement of earnings.</FONT>
  <LI><FONT face=serif size=2>From a long-term perspective, the Company is
  exposed to fluctuations of the Canadian dollar as it does not hedge future
  revenues. It is</FONT> <FONT face=serif size=2>therefore exposed to potential
  gains or losses in its foreign currency revenues for its future
  business.</FONT> </LI></UL>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="78%" colSpan=7
     ><FONT face=serif size=2>The
      exchange rates used to translate assets, liabilities and backlog were as
      follows for the quarter ended:</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>december
      31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>september 30</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>march 31</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>(decrease)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>(decrease)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>US dollar (US$ or
      USD)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>1.1659</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>1.1611</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.2096</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(4%)</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Euro (</FONT><FONT
      face=sans-serif size=1>&euro;</FONT><FONT
      face=serif size=1>)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>1.3805</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>1.4003</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>(1%</FONT></I><FONT
      face=serif size=1>)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.5689</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(12%)</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>British pound (&#163; or
      GBP)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>2.0036</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2.0546</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>(2%)</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2.2848</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(12%)</FONT></I>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=sans-serif size=1>&gt; 06</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_19></A>
<TABLE style="WIDTH: 950px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>The average exchange rates used to
translate revenues and expenses were as follows for the quarter
ended:</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>december
      31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>september 30</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>december 31</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(decrease)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>(decrease)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>US dollar (US$ or
      USD)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>1.1742</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>1.2030</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>(2%)</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.2215</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(4%)</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Euro (</FONT><FONT
      face=sans-serif size=1>&euro;</FONT><FONT
      face=serif size=1>)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>1.3962</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>1.4671</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>(5%)</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.5804</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(12%)</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>British pound (&#163; or
      GBP)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>2.0532</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2.1493</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>(4%)</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2.2755</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(10%)</FONT></I>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>4.4</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>FREE CASH
FLOW</FONT></B></P>
<P align=left><FONT face=serif size=2>Free cash flow is defined by Management as
net cash flows provided by continuing operating activities less capital
expenditures (including capitalized costs) and dividends paid, plus proceeds
from sales and leaseback and other asset-specific financing. 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 generated to grow the business, repay debt
and meet its ongoing obligations.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=1>4.5</FONT></B><B><FONT
      face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>CAPITAL
      EMPLOYED </FONT></B><BR><FONT face=serif size=2>Capital employed is a
      measure of net investment:</FONT><BR></TD></TR></TABLE></P>
<UL>
  <LI><FONT face=serif size=2>From the perspective of how capital is used,
  capital employed is defined as total assets excluding cash and cash
  equivalents, minus total</FONT> <FONT face=serif size=2>liabilities excluding
  long-term debt (together with its current portion). At the segment level,
  capital employed is defined as a segment&#146;s total</FONT> <FONT face=serif
  size=2>assets excluding cash and cash equivalents, tax accounts and other
  non-operating assets, minus the segment&#146;s total liabilities, excluding
  tax</FONT> <FONT face=serif size=2>accounts, long-term debt (together with its
  current portion) and other non-operating liabilities.</FONT>
  <LI><FONT face=serif size=2>From the perspective of the sources of capital,
  capital employed includes net debt as defined below, and shareholders&#146;
  equity.</FONT> </LI></UL>
<P align=left><B><FONT face=sans-serif size=1>4.6</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>NET
DEBT</FONT></B></P>
<P align=left><FONT face=serif size=2>Net debt is defined as long-term debt
(funding debt), including its current portion, minus cash and cash equivalents.
The Company considers net debt to be an indicator of its overall financial
position.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.7</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>NON-CASH
WORKING CAPITAL</FONT></B></P>
<P align=left><FONT face=serif size=2>Non-cash working capital is defined as
consolidated current assets minus current liabilities as they appear on the
balance sheet, excluding the following items: cash and cash equivalents, current
portion of long-term debt and current portion of assets and liabilities held for
sale.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.8</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>NON-RECURRING
ITEMS</FONT></B></P>
<P align=left><FONT face=serif size=2>Non-recurring items are items identified
by their nature as outside of the normal course of business because they are
infrequent, unusual and/or do not represent a normal trend of the business.
Management considers that highlighting significant non-recurring items and
providing operating results excluding these items is useful supplemental
information that allows for analysis of CAE&#146;s underlying operating
performance.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.9</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif
size=1>BACKLOG</FONT></B></P>
<P align=left><FONT face=serif size=2>Backlog is defined as unfilled customer
orders for products and services. For the SP/C, SP/M and TS/M segments, an item
is considered part of the backlog when a legally binding commercial agreement
providing sufficient details on the party&#146;s respective obligations (forming the
basis for a contract and/or an order) is in place between the Company and its
client. For the TS/C segment, backlog includes revenues from customers under
both long-term and short-term contractual arrangements where training revenues
are guaranteed or reasonably expected from current customers. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.10</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>REVENUE
SIMULATOR EQUIVALENT UNIT</FONT></B></P>
<P align=left><FONT face=serif size=2>Revenue Simulator Equivalent Unit (RSEU)
is defined as the sum of the simulators that were available to generate revenue
during the period. For example, in the case of a 50/50 flight training joint
venture, CAE will report only 50% of the simulators deployed by this joint
venture as RSEU. If a simulator is being powered down and relocated, it will be
excluded from this computation until the simulator is re-installed and available
for revenue generation as an RSEU.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>4.11</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>REVENUE PER
SIMULATOR</FONT></B></P>
<P align=left><FONT face=serif size=2>Revenue per simulator is calculated by
dividing the revenue of TS/C for the period (on an annualized basis) by the
related RSEU.</FONT></P>
<P align=right><FONT face=sans-serif size=1>07 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_20></A>
<TABLE style="WIDTH: 987px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>5</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>CONSOLIDATED
      RESULTS</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>5.1</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>RESULTS FROM
      OPERATIONS</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>For the nine-month period ended December
31, 2005, the Company, while achieving operational improvements, was impacted by
the strengthening of the Canadian dollar as indicated in Section 4. From the
beginning to the end of the period, the Canadian dollar gained 4%, 12% and 12%
respectively against the US dollar, the Euro and the British pound, the three
main operating currencies of the Company. </FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=sans-serif size=1
     >SUMMARY OF CONSOLIDATED RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="19%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="33%" colSpan=5><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="33%" colSpan=5><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions, except per share amounts)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>$ 276.6</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      257.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 822.9</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      723.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>EBIT</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>32.7</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(426.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>96.7</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(372.3)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=center width="41%"><I><FONT face=serif
      size=1>As % of
      revenue</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><I><FONT
      face=serif size=1
     >11.8%</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><I><FONT face=serif
      size=1>&#150;</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><I><FONT face=serif
      size=1
     >11.8%</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><I><FONT face=serif
      size=1>&#150;</FONT></I>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Interest expense,
      net</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>6.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>5.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>15.3</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>16.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Income tax expense
      (recovery)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>9.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(85.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>25.3</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(74.3)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="19%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>From
      continuing operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>$ 17.5</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$ (345.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 56.1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$ (314.0)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>From
      discontinued operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>0.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(1.3)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(0.6)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>5.3</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Net earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>$ 17.6</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$ (347.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 55.5</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$ (308.7)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Basic and diluted EPS from
      continuing operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>0.07</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(1.40)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>0.22</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(1.27)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Basic and diluted
      EPS</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%"><B><FONT face=serif
      size=1>0.07</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(1.40)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>0.22</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(1.25)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.1</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
size=1>CONSOLIDATED REVENUE</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Revenue for the third quarter of fiscal
2006 reached $276.6 million compared with $280.3 million for the second quarter
of fiscal 2006 and $257.5 million for the third quarter last year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
quarter-over-quarter decrease of $3.7 million results mainly from a lower
performance of the SP/M segment posting a $11.6 million decrease combined with a
minor decrease of $1.4 million for TS/C, partially offset by the increases in
SP/C and TS/M of $7.2 million and $2.1 million respectively. The
quarter-over-quarter fluctuation is mainly explained by delays in awarding
various military contracts as well as the negative impact of the translation of
Euro and British pound denominated revenue into Canadian dollars.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
year-over-year increase of $19.1 million results mainly from $10.6 million
increase in SP/C revenue (higher level of activity) together with increases of
$6.2 million for the TS/M segment (growth and acquisition) and $2.2 million for
the TS/C segment (year-over-year growth). Year-over-year revenue growth has been
muted in all segments by the continued strengthening of the Canadian
dollar.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>After three
quarters in fiscal 2006, the Company&#146;s revenues reached $822.9 million, a $99.4
million increase over the same period last year. This increase results from
growth in every business segment; particularly in the SP/M segment, where the
year-over-year increase reached $51.5 million mainly attributable to the NH90
contract. Offsetting the year-over-year growth in revenue was the negative
impact on all segments from the strengthening of the Canadian dollar.</FONT></P>
<P align=left><FONT face=serif size=2>Further analysis of each segment&#146;s results
is provided in the </FONT><I><FONT face=serif size=2>Segmented
Results</FONT></I><FONT face=serif size=2> section.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.2</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
size=1>CONSOLIDATED EBIT</FONT></I></B></P>
<P align=left><FONT face=serif size=2>EBIT for the third quarter of fiscal 2006
reached $32.7 million (11.8% of revenue) compared with $28.1 million (10.0% of
revenue) for the second quarter of fiscal 2006 and a loss of $426.0 million
(including an impairment charge of $443.3 million) for the third quarter last
year.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><FONT face=serif size=2>The quarter-over-quarter increase of
      $4.6 million results mainly from:</FONT><BR></TD></TR></TABLE></P>
<UL>
  <LI><FONT face=serif size=2>A stronger performance in program execution for
  the SP/C segment;</FONT>
  <LI><FONT face=serif size=2>The net impact of the contribution of the Canadian
  government on some research and development programs; and</FONT>
  <LI><FONT face=serif size=2>A non-recurring gain on the disposal of the
  Company&#146;s training assets in TS/C segment related to the Dornier 328 Jet
  (Do328J) aircraft.</FONT> </LI></UL>
<P align=left><FONT face=serif size=2>The increase was partially offset by the
SP/M segment as explained in the consolidated revenue section, foreign exchange
loss on the reduction of the Company&#146;s investment in some of its self-sustaining
subsidiaries and higher levels of costs associated with the Company&#146;s
restructuring program incurred during the third quarter.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Excluding
the effect of the non-recurring items incurred in the third quarter of fiscal
year 2005 (mainly the impairment charge), the year-over-year EBIT increase would
have been $16.5 million and is a result of higher Segment Operating Income (SOI)
in SP/C, TS/C and TS/M offset by a slightly lower SOI level for SP/M.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 08</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_21></A>
<TABLE style="WIDTH: 969px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The $96.7
million EBIT reported for the first nine months was impacted by various
non-recurring items including a $5.3 million foreign exchange net gain on the
reduction of the investment in certain self-sustaining subsidiaries combined
with a gain of $1.8 million related to exiting the Do328J platform, offset by a
write-down of $5.9 million of deferred bid costs (incurred post-selection) on
certain projects and by restructuring costs of $5.1 million and other
restructuring plan related charges of $3.8 million. Excluding non-recurring
items, EBIT after nine months this year would have been $104.4 million (12.7% of
revenue).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Last year&#146;s
reported EBIT of negative $372.3 million included the effect of the $443.3
million impairment charge together with $3.8 million of non-recurring
restructuring plan related charges incurred during the initial phase of the
Company&#146;s restructuring effort. These were offset by $14.2 million of additional
investment tax credits (ITCs) related to fiscal 2000 to fiscal 2004. Excluding
these items, last year&#146;s EBIT after nine months would have reached $60.6 million
(8.4% of revenue).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Excluding
the non-recurring items described above, EBIT after three quarters in fiscal
2006 is $43.8 million (or 72%) higher than for the same period last year.
</FONT></P>
<P align=left><FONT face=serif size=2>Further analysis of non-recurring items is
provided in the </FONT><I><FONT face=serif size=2>Reconciliation of
Non-Recurring Items</FONT></I><FONT face=serif size=2> section. Further analysis
of each segment&#146;s results is provided in the </FONT><I><FONT face=serif
size=2>Segmented Results </FONT></I><FONT face=serif size=2>section.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.3</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>INTEREST
EXPENSE (NET)</FONT></I></B></P>
<P align=left><FONT face=serif size=2>The net interest expense for the third
quarter of fiscal 2006 amounted to $6.1 million compared with $4.4 million for
the second quarter and $5.4 million for the third quarter of fiscal 2005. After
nine months, the net interest expense amounted to $15.3 million compared to
$16.0 million for the same period last year. The variations between the periods
are explained below. </FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=3><FONT
      face=serif size=1
     >quarter-over-quarter</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><FONT
      face=serif size=1
     >year-over-year</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%" colSpan=3><FONT
      face=serif size=1>ytd-over-ytd</FONT>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Net interest, prior
      period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 4.4</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=center width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;
      5.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 16.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Increase/(decrease) in
      interest on long-term debt</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>3.4</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>(4.3)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>(Increase)/decrease in
      interest income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(0.5)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(0.2)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>1.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>(Increase)/decrease in
      capitalized interest</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(0.5)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>1.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>3.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Increase/(decrease) in
      amortization of deferred financing charges</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(1.3)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(0.9)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>(0.5)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Other</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.6</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>(0.7)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Net interest,
      current period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      6.1</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=center width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp; 6.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1>$&nbsp;
      15.3</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><I><FONT face=serif size=2>Increase/(decrease) in interest on
long-term debt</FONT></I></P>
<P align=left><FONT face=serif size=2>On a quarter-over-quarter basis, the
increase in interest on long-term debt arose primarily from the prepayment of
high-cost asset-backed financing resulting in one-time swap unwind and early
prepayment charges totalling $2.8 million, together with higher debt levels
during the third quarter compared with the second quarter ($0.6 million). On a
year-over-year and YTD basis, excluding the effect of the above-mentioned $2.8
million, the reduction results from the marked decrease in overall debt levels,
to approximately half of the previous period&#146;s levels. </FONT></P>
<P align=left><I><FONT face=serif size=2>(Increase)/decrease in interest
income</FONT></I></P>
<P align=left><FONT face=serif size=2>On a quarter-over-quarter basis, the
increase in interest income results from a higher level of cash on hand
throughout the quarter compared to the second quarter. While the impact on a
year-over-year basis is relatively flat, the YTD is lower due to the refinancing
of CAE&#146;s Medium Support Helicopter Aircrew Training Facility (MSHATF) project
during the third quarter of fiscal 2005 resulting in a lower investment
balance.</FONT></P>
<P align=left><I><FONT face=serif size=2>(Increase)/decrease in capitalized
interest</FONT></I></P>
<P align=left><FONT face=serif size=2>On a quarter-over-quarter basis, the
capitalized interest has increased as a result of a higher level of assets under
construction, while on a year-over-year basis both for the third quarter and
YTD, the assets under construction are approximately half as much as last year,
resulting in a lower level of capitalized interest.</FONT></P>
<P align=left><I><FONT face=serif size=2>Increase/(decrease) in amortization of
deferred financing charges</FONT></I></P>
<P align=left><FONT face=serif size=2>On a quarter-over-quarter basis, the
deferred financing charge is lower as a result of the second quarter write-off
of deferred financing charges related to the previous revolving term credit
facility, which was replaced by a new facility on July 7, 2005. On a
year-over-year basis, both for the quarter and YTD, the lower charge resulted
from the amortization of lower upfront costs for the new revolving term credit
facility as well as lower amortization of deferred financing charges related to
the Brazil financing that was repaid at the end of fiscal 2005.</FONT></P>
<P align=right><FONT face=sans-serif size=1>09 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_22></A>
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  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.4</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>INCOME
TAXES</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Income taxes for the quarter were $9.1
million, representing an effective income tax rate of 34% compared to 25% for
the second quarter of fiscal 2006 and 29% for the third quarter last year
excluding the impairment charge (or 20% recovery rate including impairment
charge). The quarter-over-quarter variation is due to changes in the mix of
income, for tax purposes, from various jurisdictions. The year-over-year
increase is due to higher income in jurisdictions with higher tax rates.
</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Income taxes
for the first nine months were $25.3 million, representing an effective tax rate
of 31% compared to 27% for the first nine months of last year, excluding the
impairment charge (19% recovery rate including impairment charge). Management
still expects a 31% effective income tax rate for fiscal 2006 taken as a whole.
The above rate excludes the effect of potential non-recurring tax items such as
the recognition of available tax losses not previously recognized by the
Company.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.5</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>RESULTS
FROM DISCONTINUED OPERATIONS</FONT></I></B></P>
<P align=left><FONT face=serif size=2>During the third quarter of fiscal 2006,
the Company recorded a $0.1 million net gain from discontinued operations
resulting from the finalization of earn-out of the Cleaning Technologies
business partially offset by fees incurred to date in connection with the
evaluation and litigation exercice related to the Forestry Systems. After nine
months in fiscal 2005, discontinued operations accounted for $5.3 million of
earnings, compared with a loss of $0.6 million this year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>For a more
complete discussion on the sale of Marine or the Forestry Systems litigation,
refer to the </FONT><I><FONT face=serif size=2>Acquisitions, Business
Combinations and Divestitures </FONT></I><FONT face=serif
size=2>section.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.6</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>NET
EARNINGS</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Net earnings for the third quarter of
fiscal 2006 reached $17.6 million (6.4% of revenue) compared to $17.1 million
(6.1% of revenue) for the second quarter and compared to a loss of $347.0
million (including impairment of goodwill, intangible and tangible assets of
$354.2 million) for the third quarter last year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>After nine
months in fiscal 2006, net earnings amounted to $55.5 million compared to a loss
of $308.7 million for the same period last year. Excluding non-recurring items
and discontinued operations, net earnings would have been $63.6 million and
$32.8 million respectively.</FONT></P>
<P align=left><FONT face=serif size=2>Further analysis of non-recurring items is
provided in the </FONT><I><FONT face=serif size=2>Reconciliation of
Non-Recurring</FONT></I><FONT face=serif size=2> </FONT><I><FONT face=serif
size=2>Items </FONT></I><FONT face=serif size=2>section.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.7</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>BASIC AND
DILUTED EARNINGS PER SHARE</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Earnings per share (EPS) for the third
quarter of fiscal 2006 reached $0.07, compared with $0.07 for the second quarter
of fiscal 2006 and to a loss of $1.40 for the third quarter of fiscal 2005.
Excluding the effect of non-recurring items and discontinued operations, EPS
would have amounted to $0.09, $0.08 and $0.04 respectively.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>EPS after
three quarters in fiscal 2006 reached $0.22 or $0.25 excluding non-recurring
items and discontinued operations. For the same period in 2005, EPS had reached
a loss of $1.27 or a gain of $0.13 excluding non-recurring items and
discontinued operations.</FONT></P>
<P align=left><FONT face=serif size=2>Further analysis of non-recurring items is
provided in the </FONT><I><FONT face=serif size=2>Reconciliation of
Non-Recurring</FONT></I><FONT face=serif size=2> </FONT><I><FONT face=serif
size=2>Items</FONT></I><FONT face=serif size=2> section.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.1.8</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>ORDERS AND
BACKLOG</FONT></I></B></P>
<P align=left><FONT face=serif size=2>The Company&#146;s backlog as at December 31,
2005 stood at $2.4 billion compared to $2.5 billion at the beginning of fiscal
2006. During the nine-month period, new orders added to backlog amounted to
$886.0 million, which were offset by $823.0 million of revenues generated from
backlog and by negative foreign exchange movements. The strengthening of the
Canadian dollar relative to the Euro, US dollar and British pound over the
period has, as at December 31, 2005, and subject to future currency fluctuations
before contract completion, diminished the Canadian dollar value of CAE&#146;s
consolidated backlog by $200.0 million (refer to Section 4 for further details).
The following table provides a continuity of the Company&#146;s backlog since
September 30, 2005 and March 31, 2005.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=sans-serif size=1
     >CONSOLIDATED BACKLOG CONTINUITY
      SCHEDULE</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="28%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="28%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Backlog,
      beginning of period</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=center width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
      2,434</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      2,505</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ Orders for
      the period</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>266</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>886</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>- Revenue for
      the period</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(277)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(823)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ /-
      Adjustments (mainly FX)</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(55)</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(200)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Backlog, end
      of period</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=center width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
      2,368</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      2,368</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=2>Further details are
      provided in the </FONT><I><FONT face=serif size=2
     >Segmented Results </FONT></I><FONT
      face=serif size=2>section.</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="20%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp;
</TD></TR></TABLE><BR>
<P align=left><FONT face=sans-serif size=1>&gt; 10</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><I><FONT face=sans-serif size=1>5.2. RESTRUCTURING PLAN
</FONT></I></B></P>
<P align=left><FONT face=serif size=2>On February 11, 2005, CAE announced a
comprehensive restructuring plan (Plan) aimed at restoring its profitability,
cash flows and return on capital. This Plan, undertaken by Management under the
leadership of the new CEO, resulted from an extensive strategic review of CAE&#146;s
markets, customers and other external stakeholders as well as its internal
resources and capabilities.</FONT></P>
<P align=left><FONT face=serif size=2>Geared towards the elimination of
duplication and the achievement of a more competitive cost structure, the Plan
includes actions such as:</FONT></P>
<UL>
  <LI><FONT face=serif size=2>Review of the Company strategy;</FONT>
  <LI><FONT face=serif size=2>Consolidation of manufacturing activities
  including engineering, program management and global procurement. These
  functions had</FONT> <FONT face=serif size=2>previously existed in various
  business units, resulting in duplication;</FONT>
  <LI><FONT face=serif size=2>Rationalization of the civil training centre
  footprint, including consolidation of training centres where duplication
  exists and relocation of a</FONT> <FONT face=serif size=2>number of
  full-flight simulators to maximize yield;</FONT>
  <LI><FONT face=serif size=2>Improvement initiatives geared towards
  standardizing processes and &#147;productizing&#148; the manufacturing process;</FONT>
  <LI><FONT face=serif size=2>Optimization of the work force, streamlining of
  the management structure and re-engaging the employees;</FONT>
  <LI><FONT face=serif size=2>Implementing an Enterprise Resource Planning (ERP)
  system to improve transparency, accountability and information flow;
  and</FONT>
  <LI><FONT face=serif size=2>Various other elements that affect the nature and
  focus of operations.</FONT> </LI></UL>
<P align=left><FONT face=serif size=2>Finally, CAE&#146;s compensation structure has
been reoriented, with a specific emphasis on building shareholder value through
focus on delivery of free cash flow and an adequate return on capital
employed.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of
December 31, 2005, approximately $41 million of the expected $55 million to $65
million of incremental charges associated with the above Plan was incurred by
the Company.</FONT></P>
<P align=left><FONT face=serif size=2>A considerable level of activity is still
ongoing with regards to the execution of the Company&#146;s restructuring plan,
including: </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Further standardization
      and modularization of the development and manufacturing processes, leading
      to the production of lower-cost simulators, and further manufacturing
      footprint rationalization;</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>The rationalization of
      the civil training centre footprint, including the redeployment of a
      number of full-f light simulators, more specifically:</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>In the Benelux region (Belgium
      and Netherlands) CAE currently operates three training centres (Amsterdam,
      Brussels and Maastricht) located in a radius of less than 100km. Of a
      total of 20 simulator bays available in these three centres, only 15 are
      occupied. In view of this large concentration of training capacity in the
      area, the decision was made to close the Maastricht training centre.
      Approval from the authorities and the employees&#146; work council was received
      at the end of calendar year;</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>CAE, in conjunction with its
      partner Iberia, will consolidate its Spanish operations from three to one
      location (Barajas Airport). The Company expects the Barajas training
      centre to be fully operational by end of fiscal year 2007;</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Overall, as part of its yield
      maximization strategy and to better meet market and/or customers&#146; demand,
      CAE currently estimates that more than 25 simulators will have to be
      relocated between the third quarter of fiscal 2006 and during fiscal 2007.
      Also, the Company estimates that four full-flight simulators will be taken
      out of service in the coming months since they will have reached their
      maximum economical useful life;</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Shortly after some of the above
      relocations, the secondary Dallas training centre will be closed;
      and</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%"><FONT face=serif size=2>Finally, CAE initiated the
      expansion and the conversion of CAE&#146;s Burgess Hill, UK military facility
      to accommodate civil training as well. The extension is expected to be
      completed by October 2006.</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap>
      <LI></LI></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>The Company is also
      incurring and will continue to incur costs associated with the
      re-engineering of its business processes as it relates to the
      implementation of an ERP system.</FONT> </TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR></TABLE>
<P align=right><FONT face=sans-serif size=1>011 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_24></A>
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  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>5.3</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif
size=1>RECONCILIATION OF NON-RECURRING ITEMS</FONT></B></P>
<P align=left><FONT face=serif size=2>The table below shows how certain
non-recurring items (as defined in Section 4) have affected the Company&#146;s
results in the respective reporting periods. Management believes that this
supplemental information is useful as it provides an indication of the Company&#146;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 determined in accordance with GAAP as an
indicator of performance.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="42%" colSpan=3
     ><B><FONT face=sans-serif size=1
     >CONSOLIDATED RECONCILIATION OF NON-RECURRING
      ITEMS</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=23>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><B><FONT
      face=sans-serif size=1>FOR
      THE THREE-MONTH PERIOD ENDED</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="22%" colSpan=7><FONT
      face=serif size=1>december </FONT><FONT
      face=serif size=2>31, 2005</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="20%" colSpan=7><FONT
      face=serif size=1>september </FONT><FONT
      face=serif size=2>30, 2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="20%" colSpan=5><FONT
      face=serif size=1>december </FONT><FONT
      face=serif size=2>31, 2004</FONT>&nbsp;
  </TD></TR>
  <TR>
    <TD width="100%" colSpan=23>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>amount</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%" colSpan=3><B><FONT
      face=serif size=1
     >amount</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>per</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>amount</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%" colSpan=3><FONT
      face=serif size=1>amount</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>per</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>amount</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>amount</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>per</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><I><FONT
      face=serif size=1>(amounts in
      millions, except per share amounts)</FONT></I>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>pre-tax</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%" colSpan=3><B><FONT
      face=serif size=1>after
      tax</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>share</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>pre-tax</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%" colSpan=3><FONT
      face=serif size=1>after tax</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>share</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>pre-tax</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>after tax</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>share</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=23>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><B><FONT
      face=serif size=1>Earnings from
      continuing operations</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$ 26.6</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"
     >&nbsp;<B><FONT face=serif size=1
     >$</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1>17.5</FONT></B>&nbsp;
</TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 0.07</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$ 23.7</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"
     >&nbsp;<B><FONT face=serif size=1
     >$</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1>17.8</FONT></B>&nbsp;
</TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 0.07</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%" colSpan=3><B><FONT
      face=serif size=1>$ (431.4) $
      (345.7)</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$
      (1.40)</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Restructuring
      plan</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%">&nbsp;
      &nbsp;<FONT face=serif size=1>-
      Restructuring charge</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>2.6</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>1.9</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.01</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>1.6</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>1.2</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>0.01</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%">&nbsp;
      &nbsp;<FONT face=serif size=1>- Other costs
      associated with the restructuring plan</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>3.4</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2.3</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.01</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>0.4</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>0.3</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>3.8</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>2.7</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.01</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Early repayment of
      higher-cost asset-backed financing</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>2.8</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2.0</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.01</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Write-down of unamortized
      deferred financing costs</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>1.1</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>0.7</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Foreign exchange
      loss</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>0.7</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>1.0</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Exit of the Dornier 328J
      platform</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=center width="7%"><FONT face=serif
      size=1>(1.8)</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><FONT face=serif
      size=1>(1.0)</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(0.01)</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Impairment
      charge</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>443.3</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>354.2</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>1.43</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=23>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><B><FONT
      face=serif size=1>Earnings from
      continuing operations,</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%">&nbsp;
      &nbsp;<B><FONT face=serif size=1
     >excluding non-recurring items</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%">&nbsp;
      &nbsp;<FONT face=serif size=1>(not in
      accordance with GAAP)</FONT>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$ 34.3</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"
     >&nbsp;<B><FONT face=serif size=1
     >$</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1>23.7</FONT></B>&nbsp;
</TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 0.09</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$ 26.8</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"
     >&nbsp;<B><FONT face=serif size=1
     >$</FONT></B>&nbsp; </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1>20.0</FONT></B>&nbsp;
</TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 0.08</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 15.7</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 11.2</FONT></B>&nbsp;
    </TD>
    <TD width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 0.04</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="100%" colSpan=23>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><FONT face=serif size=2>Each item highlighted in the above
      table is further discussed below.</FONT><BR></TD></TR></TABLE></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.3.1.</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
size=1>RESTRUCTURING PLAN</FONT></I></B></P>
<P align=left><FONT face=serif size=2>The Company accounts for the restructuring
charges in accordance with the Canadian Institute of Chartered Accountants
(CICA), Emerging Issues Committee (EIC) abstract number 134 &#150; EIC 134,
</FONT><I><FONT face=serif size=2>Accounting for Severance and Termination
Benefits</FONT></I><FONT face=serif size=2>, and EIC-135, </FONT><I><FONT
face=serif size=2>Accounting for Costs Associated with Exit and Disposal
Activities (Including Costs Incurred in a Restructuring)</FONT></I><FONT
face=serif size=2>, as described in Note 12 of the interim consolidated
financial statements. These 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. For the exit costs, a commitment to an exit plan or a plan of disposal
only expresses management&#146;s intended future actions and, therefore, does not
meet the requirement for recognizing a liability and the related
expense.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The Company
intends to provide information on all costs associated with the above Plan,
including the closure of business activities, the relocation of business
activities from one location to another, the changes in management&#146;s structure
and all other costs related to the restructuring as it affects the nature and
focus of the operations. However, the above accounting guidances may limit the
type of expense than can be separately classified as restructuring expenses in
the consolidated statement of earnings. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As a result,
the Company&#146;s financial statements provide a reconciliation of the sum of its
SOIs with the earnings before interests and taxes (Note 10). As part of this
reconciliation, Management has highlighted all the costs associated with its
Restructuring Plan in two separate lines. The first line entitled &#147;Restructuring
charge&#148; provides the information on restructuring costs that meet the definition
of EIC-134 and EIC-135. The second line, entitled &#147;other costs associated with
the restructuring plan&#148; provides information on incremental costs that are
incurred as a result of the restructuring plan which are included in EBIT,
according to GAAP, but do not necessarily qualify as &#147;restructuring charges&#148; for
GAAP purposes. CAE&#146;s management has decided to isolate these costs from SOI to
disclose all costs of the restructuring plan.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 12</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_25></A>
<TABLE style="WIDTH: 970px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During the
third quarter of fiscal 2006, the Company incurred $6.0 million of costs related
to its restructuring of which $2.6 million was recorded as a restructuring
charge for workforce reduction and related expenses, and $3.4 million associated
with its Plan (as described in Section 5.2) which did not meet the criteria to
be classified as restructuring charges according to GAAP. A significant portion
of these costs relates to the re-engineering of the Company&#146;s business processes
from which a portion is associated with the deployment of the ERP system
(excluding the portion capitalized). The Company also incurred costs related to
the review of its strategy and other costs associated with its restructuring
activities.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><I><FONT face=sans-serif size=1>5.3.2</FONT></I></B><B><FONT
      face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
      size=1>EARLY REPAYMENT OF A HIGHER-COST ASSET-BACKED
      FINANCING</FONT></I></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>During the third quarter of fiscal 2006,
the Company took advantage of available liquidity and the strength of the
Canadian dollar and proceeded with the prepayment of a higher-cost asset-backed
financing which was in place at the date of the acquisition of Schreiner
Aviation Training, amounting to </FONT><FONT face=sans-serif
size=1>&euro;</FONT><FONT face=serif size=2>22.7 million (the Amsterdam asset-backed
financing). This prepayment resulted in one-time pre-tax charges totalling $2.8
million (refer to Section 8.1 for more details).</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.3.3</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>WRITE-DOWN
OF UNAMORTIZED DEFERRED FINANCING COSTS</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Following the closing of the new credit
facility on July 7, 2005, the Company, in the second quarter of fiscal 2006,
wrote down unamortized deferred financing costs of $1.1 million that were
associated with its previous credit facility.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.3.4</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>FOREIGN
EXCHANGE LOSS/GAIN</FONT></I></B></P>
<P align=left><FONT face=serif size=2>During the third quarter of fiscal 2006,
the Company reduced the capitalization of certain of its self-sustaining
subsidiaries. Accordingly, the corresponding amount of foreign exchange loss
accumulated in the currency translation adjustment account was transferred to
the statement of earnings, resulting in a non-recurring pre-tax loss of $0.7
million. This $0.7 million loss partly offset on a year-to-date basis the $6.0
million gain realized when performing the same kind of operations in the first
quarter of fiscal 2006.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.3.5</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>EXIT OF
THE DORNIER 328J PLATFORM</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Of the approximately 110 Fairchild-Dornier
328 Jets aircraft in existence globally, only some 70 aircraft are in service.
Accordingly, this volume is insufficient for CAE to support with ongoing
training solutions and, therefore as part of its restructuring plan and
redeployment strategy, CAE elected to completely exit the provision of training
services on the Do328J platform allowing Management to redirect its focus and
free up simulator bays that will be used more efficiently. </FONT></P>
<P align=left><FONT face=serif size=2>During the third quarter, CAE formalized
its exit from this aircraft platform through two transactions:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>1)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>The sale of a Do328J full-flight
      simulator to Hainan Aviation Training Education Company Ltd, a subsidiary
      of Hainan Airlines in China.</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>2)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>The conclusion of an agreement
      with PANAM International Flight Academy (PAIFA), under which CAE sold one
      Do328J full-flight simulator and agreed to assign all its remaining Do328J
      clients to PAIFA.</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>CAE has two additional Do328J full-flight
simulators in its network, which as part of its agreement with PAIFA, will be
powered down in the fourth quarter. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The above
transactions, together with the write-down of the two Do328J full-flight
simulators (and related spare parts) resulted in a net gain of $1.8
million.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>5.3.6</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>IMPAIRMENT
CHARGE</FONT></I></B></P>
<P align=left><FONT face=serif size=2>During the third quarter of fiscal 2005,
the Company initiated a comprehensive review of the current performance and
strategic orientation of its business units. This strategic review revealed that
several factors had severely and persistently affected mainly its then Civil
segment (now SP/C and TS/C). Therefore, based on this review, the Company
recorded as at December 31, 2004 a $443.3 million impairment charge (refer to
the Company&#146;s financial statements for fiscal 2005 for further
details).</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>5.4</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>GOVERNMENT
COST SHARING</FONT></B></P>
<P align=left><FONT face=serif size=2>During the third quarter, the Company
announced its plan to invest $630 million in Project Phoenix, a research and
development (R&amp;D) program that will span the next six years with the goal of
improving current leading-edge technologies and developing additional ones in
order to build on CAE&#146;s position as a world leader in simulation, modelling and
services. The Government of Canada has agreed, through Technology Partnerships
Canada (TPC), to invest approximately 30% ($189 million) of the value of CAE&#146;s
R&amp;D program. In the past few years the Company has also been involved with
various other TPC projects on R&amp;D programs involving visual systems and
advanced flight simulation technology for civil applications and networked
simulation for military applications. These investments are repayable through
royalties based on revenue. </FONT></P>
<P align=right><FONT face=sans-serif size=1>13 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_26></A>
<TABLE style="WIDTH: 972px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The Company
has recorded in its third quarter results an account receivable of $7.3 million,
based on costs incurred starting in June 2005 on Project Phoenix, of which $5.6
million was recorded as a reduction of expenses and $1.7 million against fixed
assets or other capitalized costs. During the same period, the Company has
recorded royalty expenses amounting to $1.7 million on various other TPC
projects. It should also be noted that the Company estimates that every $100 of
net contribution it receives under various TPC programs reduces by approximately
$25 to $30 the amount of income tax credits otherwise available. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>5.5</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>CAPITAL
EMPLOYED</FONT></B></P>
<P align=left><FONT face=serif size=2>The Company&#146;s capital employed as at
December 31, 2005 amounted to $868.0 million, decreasing by $27.7 million
compared to $895.7 million as at September 30, 2005.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=5
     ><FONT face=serif size=2>The
      following table describes the significant elements of the Company&#146;s
      capital employed:</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><B><FONT
      face=sans-serif size=1
     >CONSOLIDATED CAPITAL EMPLOYED</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="25%" colSpan=3><B><FONT
      face=serif size=1>as at
      december </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="18%" colSpan=3><FONT
      face=serif size=1>as at september
      </FONT><FONT face=serif size=2
     >30</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%" colSpan=3><FONT
      face=serif size=1>as at march </FONT><FONT
      face=serif size=2>31</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=2>2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=2>2005</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><B><FONT
      face=serif size=1>Use of
      capital:</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Non-cash working
      capital</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      (46.3)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      4.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      9.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Property, plant and
      equipment, net</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>793.7</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>754.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>792.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Other long-term
      assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>343.2</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>336.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>351.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Net assets held for sale
      (current and long-term)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>5.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>4.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Other long-term
      liabilities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(228.5)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(203.6)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>(218.1)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Total capital
      employed</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      868.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      895.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 937.4</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><B><FONT
      face=serif size=1>Source of
      capital:</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Net debt</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      208.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      250.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 285.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><FONT
      face=serif size=1>Shareholders&#146;
      equity</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>659.1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>645.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>651.6</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><B><FONT
      face=serif size=1>Source of
      capital</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      868.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&nbsp;$&nbsp;&nbsp;&nbsp;
      895.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 937.4</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Non-cash working capital decreased by
$51.2 million during the third quarter as a result of lower levels
of:</FONT></P>
<UL>
  <LI><FONT face=serif size=2>Inventory ($28.5 million) mainly following the
  assignment of full-flight simulators in inventory at the end of the second
  quarter to contracts</FONT> <FONT face=serif size=2>awarded during this
  quarter;</FONT>
  <LI><FONT face=serif size=2>Payables and accruals ($10.8 million); and</FONT>
  <LI><FONT face=serif size=2>Prepaid expenses ($7.6 million).</FONT> </LI></UL>
<P align=left><FONT face=serif size=2>This is combined with a higher level of
deposits on contracts ($2.6 million) resulting from the timing of milestone
payments.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Property,
plant and equipment were up $39.5 million compared to September 30, 2005 as a
result of new capital expenditures ($45.6 million) which are offset by normal
depreciation for the quarter and the effect of foreign exchange rates between
September and December 2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The net debt
reduction of $41.2 million during the third quarter comes from the net cash
generation for the period (Refer to the </FONT><I><FONT face=serif size=2>Cash
Movements</FONT></I><FONT face=serif size=2> section) together with the impact
of fluctuation, between September and December 2005, of exchange rates applied
on foreign-denominated debts.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The $13.5
million increase in equity results mainly from the earnings for the third
quarter ($17.6 million) plus the proceeds from share issuance and contributed
surplus ($2.2 million) net of dividends ($2.5 million) and the change in the
currency translation adjustment account ($3.8 million) resulting from the
strengthening of the Canadian dollar during the period as indicated in section
4.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 14</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_27></A>
<TABLE style="WIDTH: 962px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>5.6 </FONT></B><FONT
face=sans-serif></FONT><B><FONT face=sans-serif size=1></FONT></B><B><FONT
face=sans-serif size=1>CASH MOVEMENTS</FONT></B></P>
<P align=left><FONT face=serif size=2>Free cash flow for the third quarter of
fiscal 2006 was $37.2 million, a decrease of $35.6 million compared with the
third quarter of fiscal 2005. The following table provides information on the
free cash flow generated by the Company: </FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=sans-serif size=1
     >CONSOLIDATED CASH MOVEMENTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="27%" colSpan=5><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="27%" colSpan=5><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Net cash provided by
      continuing operating activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="13%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>(before
      changes in non-cash working capital)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>$ 34.9</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 35.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 111.3</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 100.3</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Changes in non-cash
      working capital</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>55.9</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>57.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>55.1</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>18.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Cash provided by
      continuing operating activities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>$ 90.8</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 92.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 166.4</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 119.1</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><FONT face=serif
      size=1>(</FONT><B><FONT face=serif size=1
     >45.6)</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(37.3)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(87.8)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(103.5)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Other capitalized
      costs</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>(5.6)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(3.5)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(18.0)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(15.8)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Cash
      dividends</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>(2.4)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(7.2)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(7.2)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(21.6)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Sale and leaseback
      financing</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>28.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>28.0</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=serif size=1>Free cash
      flow</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>$ 37.2</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 72.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 53.4</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      6.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Other cash
      movements, net</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>4.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>10.6</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Effect of
      foreign exchange rate changes on cash and cash equivalents</FONT>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>(2.1)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(8.6)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=serif size=1>Net increase
      in cash before proceeds and repayments of long-term debt</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="13%"><B><FONT face=serif
      size=1>$ 39.1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 55.4</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Cash provided by continuing activities
(including the effect of change in non-cash working capital) reached $90.8
million for the third quarter of fiscal 2006, in line with the $92.8 million
provided during the same period last year. After nine months in fiscal 2006,
cash provided by continuing activities, before the effect of changes in non-cash
working capital, was $11.0 million higher than for the same period in fiscal
2005. Including the effect of change in non-cash working capital (further
described in Section 5.4), cash provided by continuing activities reached $166.4
million for the current fiscal year reprersenting a $47.3 million increase over
last year. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Capital
expenditures (CapEx) and other capitalized costs for the quarter amounted to
$51.2 million, $10.4 million higher than for the same quarter last year. After
nine months in fiscal 2006, capital investments amounted to $105.8 million,
$13.5 million less than at the end of the same period last year. Major capital
projects in fiscal 2006 include the ongoing investment in the Dassault Falcon 7X
program, the ramp-up of CapEx related to the German NH90 program, the buy-back
of an operating lease on a simulator deployed in our network, and various other
maintenance and growth expenditures. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During the
third quarter of fiscal 2005, the Company raised $28.0 million through a sale
leaseback transaction whereas there were no proceeds from sale leaseback
transactions in fiscal 2006.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Taking in
consideration the elements described above, free cash flow reached $37.2 million
and $53.4 million for the three and nine-month periods ending December 31, 2005
respectively. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>5.7</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>NET
DEBT</FONT></B></P>
<P align=left><FONT face=serif size=2>The Company&#146;s net debt as at December 31,
2005 amounted to $208.9 million, a decrease of $76.9 million compared to $285.8
million at the end of fiscal 2005. The following table summarizes the major
elements of the cash movements: </FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><B><FONT
      face=sans-serif size=1
     >RECONCILIATION OF CONSOLIDATED NET DEBT
      MOVEMENT</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="26%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="26%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B><FONT face=serif size=2
     >, </FONT><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><B><FONT
      face=serif size=1>Net debt,
      beginning of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 250,1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 285.8</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><FONT
      face=serif size=1>Impact of cash movements
      on net debt (see above table in section 5.5)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(39.1)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(55,4)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><FONT
      face=serif size=1>Effect of foreign exchange
      rate changes on long-term debt</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(2.1)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(21.5)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><FONT
      face=serif size=1>Decrease in net debt
      during the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(41.2)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(76.9)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><B><FONT
      face=serif size=1>Net debt, end
      of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 208.9</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 208.9</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=1>15 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_28></A>
<TABLE style="WIDTH: 983px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>6</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>SEGMENTED
      RESULTS</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>6.1</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>NEW REPORTING
      SEGMENTS</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Effective April 1, 2005, following the
reorganization, CAE began reporting financial results on a newly segmented basis
&#150; distinguishing between products and services sold to military and civilian
markets &#150; to reflect the way that the business is now being managed. </FONT></P>
<P align=left><FONT face=serif size=2>The Company changed its internal
organization structure such that operations are now reported in four
segments:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(i)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Civil (SP/C)
      &#150; Designs, manufactures and supplies civil flight simulation training
      devices and visual systems;</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(ii)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Military
      (SP/M) &#150; Designs, manufactures and supplies advanced military training
      products for air, land and sea applications;</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iii)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Civil
      (TS/C) &#150; Provides business and commercial aviation training and related
      services; and</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iv)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Military
      (TS/M) &#150; Supplies military turn key training and operational solutions,
      support services, life extensions, systems maintenance and modelling and
      simulation solutions.</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Due to this change, the corresponding
items of segment information from earlier periods have been presented to conform
to the new internal organization. The accounting policies of each segment are
the same as those described in the Company&#146;s annual consolidated financial
statements for the year ended March 31, 2005 (Note 1 to the consolidated
financial statements).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
profitability measure employed by Management for making decisions about
allocating resources to segments and assessing segment performance is &#147;Segment
Operating Income&#148; (refer to Section 4.2 for more details). The SP/C and the SP/M
segments operate under an integrated organization sharing substantially all
engineering, development, global procurement, program management and
manufacturing functions. Transactions between operating segments are mainly
simulator transfers from the SP/C segment to the TS/C segment which are recorded
at cost. The method used for the allocation of assets jointly used by operating
segments and costs and liabilities jointly incurred (mostly corporate costs)
between operating segments is based on the level of utilization when
determinable and measurable; otherwise the allocation is made on a proportion of
each segment&#146;s cost of sales.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>SIMULATION PRODUCTS</FONT></B></P>
<P align=left><FONT face=serif size=2>The Simulation Products&#146; segments consist
of the businesses related to the design, manufacturing and supply of synthetic
training equipment for both civil and military applications, including the
visual component (e.g., CAE Tropos&#153; and CAE Medallion-S&#153;), the provision of
post-sales support services and updates for civil market customers, the
development and commercialization of the CAE Simfinity&#153; suite of flight training
devices, and the development of such software packages as CAE NeTTS&#153; (Networked
Tactical Training Solutions), CAE STRIVE&#153;, Terra Vista</FONT><SUP><FONT
face=serif size=2>TM</FONT></SUP><FONT face=serif size=2>, etc.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Simulation
Products&#146; objective carried out through its two segments is to consolidate its
development and manufacturing activities, including engineering, manufacturing,
program management and global procurement. Its immediate focus is to
substantially reduce the costs associated with manufacturing simulation
equipment intended both for sale to third parties and for installation in the
Company&#146;s global network of training centres. CAE expects to improve its lead
time, cost, quality and reputation for performance through continued operational
improvements and research and development programs. In particular, CAE is
progressing research and development programs to introduce CAE NeTTS&#153; and CAE
STRIVE&#153; for military applications, as well as PC-based architectures that
address the requirement for scalable, reconfigurable, cost-effective training
devices for both the civil and military markets.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>6.2</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>SIMULATION PRODUCTS /
      CIVIL</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><I><FONT face=sans-serif
      size=1>6.2.1</FONT></I></B>&nbsp; &nbsp; &nbsp; </TD>
    <TD width="100%"><B><I><FONT face=sans-serif size=1>NATURE OF
      OPERATIONS</FONT></I></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>The SP/C segment designs, manufactures and
supplies flight simulators, visual systems and associated services (such as
support and updates) to the civilian aviation industry. This segment also
encompasses the development of CAE&#146;s capabilities in simulation-based
interactive learning, including its leading-edge CAE Simfinity&#153; system. Pilots
using CAE&#146;s Simfinity&#153; training system are able to practice landing, takeoff and
taxiing under different weather conditions in over 250 airports. SP/C&#146;s
manufacturing facility is located in Montreal, Canada.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The Company
builds civil simulators for all categories of aircraft including those built by
Airbus, Boeing, Bombardier, Cessna, Dassault, Embraer, Gulfstream and Raytheon.
CAE also builds simulators for civil helicopters, including models by
Agusta-Westland, Bell Helicopter and Sikorsky. The equipment demand is driven
mainly by the introduction of new aircraft platform types and in-production
aircraft deliveries. Since its inception, CAE has taken orders for more than 500
full-flight simulators and flight training devices from over 110 commercial
airlines, aircraft manufacturers and external training centres in 38 countries.
With half a century of experience in designing and manufacturing full-flight
simulators, CAE has established long-standing relationships with leading
commercial airlines throughout the world. According to the annually published
</FONT><I><FONT face=serif size=2>Flight International</FONT></I><FONT
face=serif size=2> Civil Simulator Census (last published in April 2005) and its
more current version found at www.flightinternational.com, CAE has supplied 45%
of the installed base of civil full-flight simulators since 1990.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 16</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="20%" colSpan=3><B><FONT
      face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
     ><B><I><FONT face=sans-serif size=1
     >6.2.2 FINANCIAL RESULTS &#150;
      HISTORICAL PERSPECTIVE</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=sans-serif size=1
     >SP/C FINANCIAL RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=sans-serif size=1
     >FISCAL YEARS ENDED MARCH 31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><I><FONT
      face=serif size=1>(amounts in
      millions, except operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=2>2003</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
     >$&nbsp;213.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>193.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>270.9</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp; 7.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>10.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>85.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Operating
      margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><I><FONT face=serif
      size=1
     >%&nbsp;&nbsp;&nbsp;&nbsp; 3.7</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>5.5</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>31.5</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      12.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>13.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>12.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      10.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>13.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>10.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="17%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;
      273.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>197.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>225.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Fiscal 2003 witnessed the decline in civil
equipment and support services activities, reflecting the then state of the
commercial aviation market affected by world events such as the terrorist
attacks in September 2001, the war in Iraq and the SARS epidemic. With $270.9
million in revenue, fiscal 2003 saw a decline of approximately 40% from the
previous two fiscal years when the aerospace market had reached its peak and
revenue was over $440 million. Strong backlog with higher profitability due
mainly to high volume orders from North American legacy carriers and a weaker
Canadian dollar in fiscal years 2001 to 2003 led to operating margins in the
range of 30%.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SP/C
continued to suffer in fiscal 2004 from continuing difficulties in the civil
aerospace market, which resulted in severe competition and downward pricing
pressure. In addition, a large number of airlines were in financial difficulty,
resulting in a reduction of size of the addressable market. Operating margins
decreased significantly as a result of the appreciation of the Canadian dollar
and the decrease in the then higher margin North American revenues. The revenue
mix shifted towards the Asian market where margins were much tighter. In
addition, the number of full-flight simulators delivered in fiscal 2004 fell
from 36 in fiscal 2003 (20 internal and 16 external) to 19 (5 internal and 14
external), resulting in higher unit production costs.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although it
has been able to replenish its backlog in fiscal 2005, SP/C witnessed continued
competitive pressure in the market, which adversely impacted its operating
margins. In addition, negative foreign exchange impacts combined with higher
manufacturing costs resulted in a further decline of operating margins with only
11 (3 internal and 8 external) full-flight simulators deliveries in the fiscal
year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The increase
in capital expenditures in fiscal 2004 was mainly due to CAE&#146;s Simfinity&#153;
product development costs being capitalized and amortized over a period of five
years starting in fiscal 2005 when the product was deployed. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Backlog
steadily decreased to reach a low of $197.8 million in fiscal 2004 from nearly
$500 million in fiscal 2002, with order intake reaching a low of 11 full-flight
simulators in fiscal 2003. Thereafter, the number of full-flight simulators
awarded to SP/C increased to 16 full-flight simulators ordered in fiscal 2004
and 17 in fiscal 2005.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
     ><B><I><FONT face=sans-serif size=1
     >6.2.3 FINANCIAL RESULTS &#150;
      CURRENT</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><B><FONT
      face=sans-serif size=1
     >SP/C FINANCIAL RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><B><FONT
      face=sans-serif size=1
     >LAST 15 MONTHS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><I><FONT
      face=serif size=1>(amounts in
      millions, except operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="19%" colSpan=3
     ><B><FONT face=serif size=1
     >q3-</FONT></B><B><FONT face=serif size=2
     >2006</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>q2</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>q1</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>q4</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>q3</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      63.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>55.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>60.2</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>54.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>52.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      &nbsp;10.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>3.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>7.1</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>(2.5)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>(3.0)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><FONT
      face=serif size=1>Operating
      margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="12%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><I><FONT face=serif
      size=1
     >%&nbsp;&nbsp; 16.5</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>6.1</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>11.8</FONT></I>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>(4.6)</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><I><FONT face=serif
      size=1>(5.7)</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      &nbsp;&nbsp;1.7</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>5.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2.1</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>4.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>3.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ &nbsp; &nbsp;
      2.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.2</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>3.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>2.1</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"><FONT
      face=serif size=1>Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="12%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 312.3</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>280.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>276.7</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>273.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>262.6</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>For the three-month period ended December
31, 2005, SP/C revenues amounted to $63.0 million, a quarter-over-quarter
increase of 13% ($7.2 million). On a year-over-year basis, revenue increased by
20% ($10.6 million). The quarter-over-quarter and year-over-year increases both
result from increases in order intake commencing early in the year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>After three
quarters, revenue reached $179.0 million, increasing 12% over the same period
last year as a result of an improved business environment.</FONT></P>
<P align=right><FONT face=sans-serif size=1>17 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_30></A>
<TABLE style="WIDTH: 973px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Segment
Operating Income for the three months ended December 31, 2005 amounted to $10.4
million, a quarter-over-quarter increase of $7.0 million. On a year-over-year
basis, Segment Operating Income increased by $13.4 million from a $3.0 million
loss in the same quarter last year. Both quarter-over-quarter and year-over-year
increases are mainly attributable to improved program execution, increased
synergies together with the net impact of the contribution of Project Phoenix,
as described earlier (refer to section 5.4) . Also, the second quarter of fiscal
2006 was affected by the revised amortization of certain deferred development
costs resulting in a non-cash expense. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On a
year-to-date basis, Segment Operating Income reached $20.9 million (12% of
revenue) compared with $10.3 million (6% of revenue) for the same period last
year, a $10.6 million year-over-year increase resulting from the effect of the
improved business environment combined with the benefits of the restructuring
plan. The year-over-year increase would have been even higher without the
recognition of $9.8 million of additional investment tax credits (ITC) related
to fiscal 2000 to fiscal 2004 in the first quarter of fiscal 2005. The capital
employed for SP/C as at December 31, 2005 was negative $16.8 million compared to
negative $6.4 million as at September 30, 2005. The decrease is mainly due to a
decrease in inventory following the assignment of full-flight simulators in
inventory to contracts awarded during the quarter, combined with an increase in
trade accounts payable and accruals.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"
     ><B><I><FONT face=sans-serif size=1
     >6.2.4
      BACKLOG</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=sans-serif size=1
     >SP/C BACKLOG CONTINUITY SCHEDULE</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="37%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="37%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B><FONT face=serif size=2
     >, </FONT><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Backlog,
      beginning of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
      280.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      273.5</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ Orders for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>102.8</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>232.3</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>- Revenue for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(63.0)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(179.0)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ /-
      Adjustments (mainly FX)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(7.8)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(14.5)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Backlog, end
      of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
      312.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      312.3</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Backlog as at December 31, 2005, stood at
$312.3 million, which represents an increase of $32.0 million from September 30,
2005 and $49.7 million from the same period last year, achieved while absorbing
the negative impact of a stronger Canadian dollar over the period.</FONT></P>
<P align=left><FONT face=serif size=2>During the quarter, SP/C was awarded the
following contracts:</FONT></P>
<UL>
  <LI><FONT face=serif size=2>One E190 FFS to JetBlue Airways;</FONT>
  <LI><FONT face=serif size=2>One A320 FFS to Shanghai Eastern Flight Training
  Co.;</FONT>
  <LI><FONT face=serif size=2>One B737 FFS to India&#146;s Jet Airways;</FONT>
  <LI><FONT face=serif size=2>One maintenance trainer simulator to Japan
  Airlines International;</FONT>
  <LI><FONT face=serif size=2>One full-flight simulator to an undisclosed
  airline; and</FONT>
  <LI><FONT face=serif size=2>One E170 FFS to Saudi Arabian
  Airlines.</FONT><BR><B><I><FONT face=sans-serif size=1>6.2.5
  OUTLOOK</FONT></I></B> </LI></UL>
<P align=left><FONT face=serif size=2>Management recognized positive signs in
the civil aviation market during the later part of calendar 2005, as traffic
levels and aircraft deliveries maintained their growth trend. However, some
segments continued to struggle, notably the US legacy airlines which continued
to lose money and the 50-seat regional jet market which experienced lower
demand.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In calendar
2006, the emerging Asia-Pacific and Middle Eastern markets are expected to
continue driving the majority of demand for full-flight simulators as these
regions continue to experience robust air traffic growth due to above average
Gross Domestic Product (GDP) growth and increased liberalization of air
policy.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
mature North American and European markets, airlines are being affected by high
fuel costs and intense domestic competition, which Management expects will
continue to limit their capital spending in calendar 2006. The equipment demand
in these markets will mainly be driven by the introduction of new platform types
(e.g., Airbus A380, Embraer 170/190, Boeing 787) into airline fleets as part of
their fleet renewal programs.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SP/C sees
continuing price pressure on the market with customers being extremely cost
conscious and new players trying to penetrate the market with aggressive pricing
strategies.</FONT></P>
<P align=left><FONT face=serif size=2>The SP/C order forecast for fiscal 2006
remains at 20 full-flight simulators.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>&gt;</FONT></B><FONT
face=sans-serif size=1> 18</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_31></A>
<TABLE style="WIDTH: 983px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>6.3</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>SIMULATION PRODUCTS /
      MILITARY</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><I><FONT face=sans-serif
      size=1>6.3.1</FONT></I></B>&nbsp; &nbsp; &nbsp; </TD>
    <TD width="100%"><B><I><FONT face=sans-serif size=1>NATURE OF
      OPERATIONS</FONT></I></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>The SP/M segment is a world leader in the
design, manufacture and supply of advanced military training and mission
rehearsal equipment for flight, ground, and sea applications. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In step with
the need for increased global security, the military simulation market is driven
by several factors. Most importantly, the changing nature of warfare from
symmetric to asymmetric has been driving the increased cooperation between
allies. This has led to the deployment of joint and coalition forces, creating
the need for more interoperability and joint-training capabilities, such as
distributed mission training. The introduction of new weapon system platforms as
well as the upgrade and life extension of existing weapon system platforms also
has a direct impact on the military simulation marketplace. Finally, more
militaries and governments are shifting to a greater use of simulation in
training programs due to improved realism, significantly lower costs, and less
risk compared to operating the actual weapon system platform. All these factors
lead to a military simulation marketplace that offers significant opportunities
and growth.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>With CAE&#146;s
breadth and depth of technology solutions and training systems integration
capabilities, SP/M is well positioned to capitalize on international military
programs in North America, Europe, the UK, Australia, Asia and the Middle East.
By continuing to strategically team and collaborate with key original equipment
manufacturers (OEMs) and lead systems integrators both locally and abroad, SP/M
will continue to develop its strong position in the global military simulation
equipment market.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>It should be
noted that a strong connectivity exists between the Company&#146;s military segments,
SP/M and TS/M, where the training equipments&#146; sales and related services are
part of the same program and should be looked at in an integrated
way.</FONT></P>
<P align=left><FONT face=serif size=2>SP/M&#146;s facilities are located in Montreal,
Canada; Tampa, US; Burgess Hill, UK; Stolberg, Germany and Silverwater,
Australia.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"
     ><B><I><FONT face=sans-serif size=1
     >6.3.2 FINANCIAL RESULTS
      &#150; HISTORICAL PERSPECTIVE</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><B><FONT
      face=sans-serif size=1
     >SP/M FINANCIAL RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><B><FONT
      face=sans-serif size=1
     >FISCAL YEARS ENDED MARCH 31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><I><FONT
      face=serif size=1>(amounts in
      millions, except operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=2>2003</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;
      278.9</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>291.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>290.9</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp; &nbsp;
      26.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>28.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>59.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Operating
      margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><I><FONT face=serif
      size=1
     >%&nbsp;&nbsp;&nbsp; &nbsp; 9.5</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>9.8</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><I><FONT face=serif
      size=1>20.4</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 9.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>8.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>8.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>3.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>9.7</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;
      511.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>471.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>516.9</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Fiscal 2003 was an unusual year for SP/M,
resulting from efficient program execution, particularly towards the later stage
of completion of several repeat simulators, engineering upgrades, as well as the
achievement of two early delivery bonuses earned on some US programs.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In fiscal
2004, program margins returned to a more normalized level. The appreciation of
the Canadian dollar adversely impacted the revenue and operating margins, while
operating margins were further impacted by low margins on some specific programs
in Europe where CAE, albeit acting as the prime contractor, had sub-contracted a
large portion of its work share to meet industrial requirements (local content).
In addition, SP/M incurred significant bid costs on major programs, both in
Europe and North America.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In fiscal
2005, revenue and operating margins were further adversely impacted by foreign
exchange movements, while a significant portion of the decrease in revenue
resulted from delays in meeting specific milestones on the German Night Time
Flying (NTF) program, which had made a major contribution to revenue in fiscal
2004. SP/M also reduced its selling and marketing expenses and was able to
recognize $4.4 million of additional ITCs.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A strong
order intake of $328 million in fiscal 2005 saw SP/M backlog return to previous
levels after experiencing a slight decrease in fiscal 2004.</FONT></P>
<P align=right><FONT face=sans-serif size=1>19 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_32></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><B><FONT face=sans-serif
      size=1>MANAGEMENT&#146;S
      DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="20%" colSpan=3
   ><B><FONT face=sans-serif
      size=1>&gt; CAE THIRD
      QUARTER REPORT 2006</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     >&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     >&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     >&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><B><I><FONT face=sans-serif
      size=1
     >6.3.3 FINANCIAL RESULTS &#150; CURRENT</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><B><FONT face=sans-serif
      size=1>SP/M FINANCIAL
      RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     ><HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><B><FONT face=sans-serif
      size=1>LAST 15
      MONTHS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><I><FONT face=serif size=1
     >(amounts in millions, except
      operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%" colSpan=3
   ><B><FONT face=serif size=1
     >q3-</FONT></B><B><FONT
      face=serif size=2
     >2006</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >q2</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >q1</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >q4</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >q3</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     ><HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><FONT face=serif size=1
     >Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"
   ><B><FONT face=serif size=1
     >$&nbsp; 82.8</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >94.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >72.7</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >80.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >82.7</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><FONT face=serif size=1
     >Segment Operating Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"
   ><B><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp;
      6.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >9.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >4.8</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >8.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >6.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><FONT face=serif size=1
     >Operating margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"
   ><B><I><FONT face=serif size=1

     >%&nbsp;&nbsp;&nbsp; 7.6</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><I><FONT face=serif size=1
     >10.3</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><I><FONT face=serif size=1
     >6.6</FONT></I>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><I><FONT face=serif size=1
     >10.9</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><I><FONT face=serif size=1
     >7.7</FONT></I>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><FONT face=serif size=1
     >Depreciation and amortization</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"
   ><B><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp;
      3.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >3.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >1.8</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >2.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >2.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><FONT face=serif size=1
     >Capital expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"
   ><B><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp;
      1.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >1.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >0.3</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >0.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >1.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
   ><FONT face=serif size=1
     >Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"
   ><B><FONT face=serif size=1
     >$453.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >493.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >535.1</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >511.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >487.5</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13
     ><HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>For the three months ended December 31,
2005, SP/M revenues amounted to $82.8 million, a quarter-over-quarter decrease
of 12% ($11.6 million) and stable on a year-over-year basis. The
quarter-over-quarter decrease is attributable mainly to delays in the award of
contracts, specifically in Europe and Australia, as well as to downward foreign
exchange pressures on translation of foreign denominated revenues, particularly
from the Euro and British pound.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenue for
the first nine months of the year amounted to $249.9 million, a year-over-year
increase of $51.5 million (or 26%). The increase is primarily due to the new
NH90 program in Europe which commenced in the current fiscal year together with
the impact of the integration of Terrain Experts, Inc. There has also been an
increase in volume due to a higher amount of orders near the end of last fiscal
year in addition to a more favourable mix of programs currently in
production.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Segment
Operating Income for the three months ended December 31, 2005 amounted to $6.3
million, a quarter-over-quarter decrease of $3.4 million and stable on a
year-over-year basis. The quarter-over-quarter decrease is attributable mainly
to lower volume of business related to contract delays, as stated above, as well
as negative foreign exchange impacts.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Year-to-date
segment operating income was $20.8 million, a year-over-year increase of 18% (or
$3.2 million). The increase is due to higher revenue on a year-to-date basis
which is a result of the factors mentioned above. The year-over-year increase
would have been even higher without the recognition of $4.4 million of
additional ITC related to fiscal 2000 to fiscal 2004 in the first quarter of
fiscal 2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The capital
employed for SP/M as at December 31, 2005 was $61.7 million compared to $98.0
million as at September 30, 2005. The decrease is primarily a result of lower
non-cash working capital in the quarter due to lower accounts receivable and
inventory levels at the end of December.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"
     ><B><I><FONT face=sans-serif size=1
     >6.3.4
      BACKLOG</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><B><FONT
      face=sans-serif size=1
     >SP/M BACKLOG CONTINUITY SCHEDULE</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="36%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="36%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><B><FONT
      face=serif size=1>Backlog,
      beginning of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
      493.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      511.3</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ Orders for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>45.4</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>210.8</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%">&nbsp;
      &nbsp;<FONT face=serif size=1>- Revenue for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(82.8)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(249.9)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ /-
      Adjustments (mainly FX)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(2.7)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(19.2)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><B><FONT
      face=serif size=1>Backlog, end
      of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="28%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
      453.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      453.0</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Backlog as at December 31, 2005, stood at
$453.0 million, which represents a decrease of $40.1 million from September 30,
2005. Orders in the third quarter of fiscal 2006 include the upgrade of a P-3C
Orion operational flight trainer (OFT) for the German Navy, Tactical Training
Capability Upgrades to the Royal Australian Air Force C-130J and C-130H
simulators, and upgrades to C-5 Galaxy weapon systems trainers (WST) for the US
Air Force as part of the C-5 Avionics Modernization Program (AMP).</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 20</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_33></A>
<TABLE style="WIDTH: 978px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><I><FONT face=sans-serif size=1>6.3.5</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
size=1>OUTLOOK</FONT></I></B></P>
<P align=left><FONT face=serif size=2>The most recent quarter included orders
from defence organizations across the globe and represented a mix of new
business as well as continued business from long-time customers. Demand for
CAE&#146;s state-of-the-art simulation technology offerings is consistent with the
desire for militaries to increasingly use simulation for training and mission
rehearsal activities. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>At the turn
of the fourth quarter, SP/M&#146;s ongoing initiative to seek partnerships with key
industry suppliers continues to progress, and discussions are ongoing with
various original equipment manufacturers (OEMs) to establish relationships for
the provision of training equipment for key platforms. One example is CAE&#146;s
recent agreement with Israel Aircraft Industries (IAI) to develop solutions for
embedded training as well as for live and integrated virtual training. Another
example is CAE&#146;s selection by EADS North America as the training systems
provider for their bid to supply the US Army with the UH-145 Light Utility
Helicopter.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A strategic
priority for CAE is to continue to bring innovative products and
simulation-based solutions to market. The introduction of new platforms such as
the European NH90 combined with SP/M&#146;s customers&#146; need to integrate new
technology into training result in SP/M&#146;s currently conducting various prototype
contracts, as well as projects requiring the insertion of new technology into
its simulation products with EBIT margins lower than on repeat
business.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE expects
revenues from the launch of two new products &#150; the CAE Medallion-6000
high-fidelity visual system and the latest release of Terrex&#146;s flagship database
generation software called Terra Vista 5.0. In addition, Project Phoenix will
help ensure the ongoing enhancement of current leading-edge technologies and the
development of new simulation-based technologies. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>TRAINING &amp; SERVICES
</FONT></B></P>
<P align=left><FONT face=serif size=2>In the general category of Training &amp;
Services, CAE offers a wide range of services to its customers. These range from
pilot, maintenance technician and crew member training to technical services,
support training in engineering and maintenance, consulting in modelling and
simulation and training centre design and operation.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>6.4</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>TRAINING &amp; SERVICES /
      CIVIL</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><I><FONT face=sans-serif
      size=1>6.4.1</FONT></I></B>&nbsp; &nbsp; &nbsp; </TD>
    <TD width="100%"><B><I><FONT face=sans-serif size=1>NATURE OF
      OPERATIONS</FONT></I></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>The TS/C segment provides business,
regional and commercial aviation training for pilots, services to airlines,
maintenance technicians and crew members in civil aviation. CAE is the world&#146;s
second largest independent provider of training services, and operates training
centres on four continents and has an installed base of 109 full-flight
simulators for an equivalent of 100 RSEU as of December 31, 2005. CAE intends to
selectively continue to expand its global network in strategic locations with
high-growth potential.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The TS/C
segment provides tailored training services ranging from fully integrated
programs with courses given by CAE training instructors and simulation hours
(wet training), to solutions where CAE is leasing the simulators (by the hour)
and the customer provides the instructor (dry training). The training services
are offered to each of the three sectors: business, regional and
commercial.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The TS/C
segment activities are affected by the seasonality of the industry &#150; in times of
peak travel (such as holidays), airline pilots are generally occupied flying
aircraft rather than attending training sessions. The converse also holds true &#150;
slower travel periods tend to be more active training periods for pilots.
Therefore, the Company has historically experienced greater demand for training
services in the first and fourth quarters of the fiscal year and lower demand
during the second and third quarters.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company&#146;s practice is to endeavour to secure numerous long-term training
agreements with commercial, regional and business aircraft operators prior to
establishing a new training centre. CAE&#146;s customers at the commercial aviation
training centres include major, low-cost and regional airlines that elect to
outsource some of the training of their pilots and other crew members using
either the Company&#146;s training instructors or their own. The business aviation
training centres are used by more than 3,000 customers who tend to use
third-party training centres as their primary source for simulation training.
CAE will continue to execute its pilot training strategy, with the focus on
ramping up utilization and increasing yield (through enhanced service offerings)
in its training centres. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During
fiscal 2005, CAE and Dassault Aviation signed a contract making CAE the
exclusive provider of entitlement training for the new Falcon 7X aircraft.
Entitlement training is the initial training provided by the aircraft
manufacturer with the purchase of the aircraft. The agreement covers pilot,
maintenance and cabin crew training. As part of this agreement, CAE is
developing two Falcon 7X full-flight simulators and a comprehensive training
program that will incorporate CAE Simfinity&#153; training technology. The Falcon
full-flight simulators will be deployed in North America and Europe. The North
American location will be CAE&#146;s new training centre being developed in Morris
County, New Jersey (US), while the European location will be in CAE&#146;s existing
facilities in Burgess Hill, UK.</FONT></P>
<P align=right><FONT face=sans-serif size=1>21 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_34></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><B><FONT face=sans-serif
      size=1>MANAGEMENT&#146;S
      DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="20%" colSpan=3
   ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER
      REPORT 2006</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9
     >&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9
     >&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9
     >&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9
     >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><B><I><FONT face=sans-serif
      size=1
     >6.4.2 FINANCIAL RESULTS &#150; HISTORICAL
      PERSPECTIVE</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%"
   >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><B><FONT face=sans-serif
      size=1>TS/C FINANCIAL
      RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%"
   >&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><B><FONT face=sans-serif
      size=1>FISCAL YEARS ENDED
      MARCH 31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%"
   >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><I><FONT face=serif size=1
     >(amounts in millions, except
      operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=2
     >2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><FONT face=serif size=2
     >2003</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><FONT face=serif size=1
     >Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 306.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >268.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><FONT face=serif size=1
     >246.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><FONT face=serif size=1
     >Segment Operating Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp; 39.8</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >28.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><FONT face=serif size=1
     >30.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><FONT face=serif size=1
     >Operating margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><I><FONT face=serif size=1

     >%&nbsp;&nbsp;&nbsp; 13.0</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><I><FONT face=serif size=1
     >10.5</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><I><FONT face=serif size=1
     >12.3</FONT></I>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><FONT face=serif size=1
     >Depreciation and amortization</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;
      45.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >40.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><FONT face=serif size=1
     >39.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><FONT face=serif size=1
     >Capital expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%"
   ></TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 100.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >68.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><FONT face=serif size=1
     >201.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"
   ><FONT face=serif size=1
     >Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%"
   ></TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 829.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >823.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"
   ><FONT face=serif size=1
     >651.3</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>In fiscal 2003, CAE achieved a significant
growth in revenue from training operations, reflecting the benefits of
acquisitions made in fiscal 2002 (Schreiner in August 2001 and SimuFlite in
December 2001). The network of installed base simulators grew by 50% from the
prior year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In fiscal
2004, revenue growth was attributable to an increase in the number of simulators
deployed in the Company&#146;s network and an increase in capacity utilization in the
latter part of the year. Operating margins, when compared to fiscal 2003 and
fiscal 2005, were negatively impacted by the financial difficulties and ongoing
restructuring of some of the North American airline operators, the SARS epidemic
and the movement in exchange rates. Capital expenditures were constrained in
2004 following the significant expansion and addition to CAE&#146;s network between
2001 and 2003. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although
fiscal 2005 remained a challenging year for the aeronautical industry,
Management saw some encouraging signs for TS/C business. Fiscal 2005 Segment
Operating Income growth outpaced revenues despite higher operating lease
expenses associated with the Company&#146;s ongoing full-flight simulator sale and
leaseback program, offset by growth in training from the addition of the
CAE-Iberia training centre in Madrid, Spain, and additional simulators in the
Dubai training facility. The TS/C network grew from an installed base of 102
simulators at the end of fiscal 2004 to 106 at the end of 2005 and
revenue/simulator equivalent from 87 to 98 for the same periods. Capital
expenditures increased in fiscal 2005 primarily due to the award of the A380 and
Dassault 7X programs.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><B><I><FONT face=sans-serif
      size=1
     >6.4.3 FINANCIAL RESULTS &#150; CURRENT</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><B><FONT face=sans-serif
      size=1>TS/C FINANCIAL
      RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><B><FONT face=sans-serif
      size=1>LAST 15
      MONTHS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%"
   >&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><I><FONT face=serif size=1
     >(amounts in millions, except
      operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="20%" colSpan=3
   ><B><FONT face=serif size=1
     >q3-</FONT></B><B><FONT
      face=serif size=2
     >2006</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >q2</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >q1</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >q4</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >q3</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><FONT face=serif size=1
     >Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 78.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >79.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >83.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >79.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >75.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><FONT face=serif size=1
     >Segment Operating Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 14.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >11.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >16.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >13.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >9.0</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><FONT face=serif size=1
     >Operating margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"
   ></TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><I><FONT face=serif size=1
     >%&nbsp;
      18.3</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><I><FONT face=serif size=1
     >14.6</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><I><FONT face=serif size=1
     >20.2</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><I><FONT face=serif size=1
     >16.8</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><I><FONT face=serif size=1
     >11.9</FONT></I>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><FONT face=serif size=1
     >Depreciation and amortization</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"
   ></TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 11.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >10.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >10.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >10.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >11.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><FONT face=serif size=1
     >Capital expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"
   ></TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$&nbsp; 41.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >14.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >10.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >10.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >32.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="33%"
   ><FONT face=serif size=1
     >Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"
   >&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><B><FONT face=serif size=1
     >$805.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >830.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >831.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >829.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >838.5</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>For the three-month period ended December
31, 2005, TS/C revenue amounted to $78.0 million, a 2% quarter-over-quarter
decrease resulting mainly from the appreciation of the Canadian dollar over the
US dollar, the Pound and the Euro as the volume of business increased and its
pricing in original currency remained stable. The TS/C segment generates over
95% of its revenue and operating income in currencies other than the Canadian
dollar (approximately 66% in US dollars and 27% in Euro). Most of the operating
costs are incurred in the same currency that the revenue is earned mitigating a
significant portion of the foreign exchange impact on the operating margin.
Accordingly, the net revenue and operating income when converted into Canadian
dollars are subject to fluctuation but the operating margin remains
stable.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On a
year-over-year basis, actual revenue increased by 3%. RSEU for the quarter was
100 simulators compared to 101 simulators for the same period last year. The
loss of one RSEU is mainly attributable to the relocation of assets during the
quarter (refer to Section 5.2 for further information). Notwithstanding the
strong Canadian dollar and the fact that TS/C had one less RSEU, the
year-over-year improvement reflects the increase in training conducted by
clients in the Company&#146;s training network fuelled by the robust business
aviation market.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>After three
quarters in fiscal 2006, revenues reached 241.2 million, an increase of 6% over
the same period last year ($227.4 million). Segment Operating Income for the
third quarter amounted to $14.3 million, a quarter-over-quarter increase of $2.7
million. This quarter-over-quarter improvement resulted from an increased level
of activity at our training centres together with the impact of the $1.8 million
non-recurring gain following the exit of the Do328J business (refer to section
5.3 for further details).</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>&gt;</FONT></B><FONT
face=sans-serif size=1> 22</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_35></A>
<TABLE style="WIDTH: 985px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="41%"><B><FONT
      face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Compared to
the same period last year, the Segment Operating Income increased by $5.3
million. The year-over-year improvement results from various elements including
the above-mentioned increased level of activity and the non-recurring gain
together with a favourable impact of approximately $2.0 million resulting from
the reduction of the amortization expense following the impairment charge
recorded in the third quarter last year. Net of this $2.0 million savings and
the $1.8 million non-recurring gain, the year-over-year growth would be
approximately $1.5 million higher (or 17%). The above-discussed benefits were
partially offset by the strengthening of the Canadian dollar vis-&#224;-vis the US
dollar and the Euro. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On a
year-to-date basis, Segment Operating Income reached $42.8 million (18% of
revenue) compared with $26.5 million (12% of revenue) for the same period last
year.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Capital
expenditures for the quarter amounted to $41.0 million ($66.2 million after nine
months this year) and are related to the ongoing investment required for the
Dassault Falcon 7X training program, the buy-back of an operating lease on a
simulator deployed in our network and a number of upgrades being conducted in
the network.</FONT></P>
<P align=left><FONT face=serif size=2>The capital employed for TS/C as at
December 31, 2005 was $610.3 million compared to $559.8 million as of September
30, 2005.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"
     ><B><I><FONT face=sans-serif size=1
     >6.4.4
      BACKLOG</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=sans-serif size=1
     >TS/C BACKLOG CONTINUITY SCHEDULE</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="37%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="37%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Backlog,
      beginning of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      830.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      829.6</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ Orders for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>56.7</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>268.5</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>- Revenue for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(78.0)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(241.2)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ /-
      Adjustments (mainly FX)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(3.9)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(51.7)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Backlog, end
      of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      805.2</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
      805.2</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>The order intake for the third quarter of
fiscal 2006 amounted to $56.7 million. On a year-to-date basis, the backlog was
also negatively affected mainly by exchange rate fluctuations of $51.7
million.</FONT></P>
<P align=left><FONT face=serif size=2>During the third quarter of fiscal 2006,
CAE announced and was awarded a number of contracts, increasing its training
presence in the Asia/ Middle East market:</FONT></P>
<UL>
  <LI><FONT face=serif size=2>Expansion of CAE-China Southern Airlines joint
  venture facility in Zhuhai by six simulator bays;</FONT>
  <LI><FONT face=serif size=2>A multi-year agreement with Qatar Airways, one of
  the fastest growing airlines in the world for Airbus A330 and A340 pilot
  training;</FONT>
  <LI><FONT face=serif size=2>The extension of Oman Air&#146;s Boeing 737 NG aircraft
  pilot training program;</FONT>
  <LI><FONT face=serif size=2>A five-year contract for pilot training on Airbus
  A320 aircraft by new Indian carrier Kingfisher Airlines; and</FONT>
  <LI><FONT face=serif size=2>A contract for Boeing 737 NG pilot training for
  the new Indian low-cost carrier SpiceJet.</FONT> </LI></UL>
<P align=left><B><I><FONT face=sans-serif size=1>6.4.5</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
size=1>OUTLOOK</FONT></I></B></P>
<P align=left><FONT face=serif size=2>Management saw positive signs in the civil
aviation market during the later part of calendar 2005, as traffic levels, pilot
hiring and deliveries for both commercial and business aircraft maintained their
growth trend. However, some segments continued to struggle, notably the US
legacy airlines which continued to lose money and the 50-seat regional jet
market which experienced lower demand. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the high
growth emerging Asia-Pacific and Middle Eastern markets, Management observes
some pilot shortage and expects this trend to continue, which will create some
pilot training and supply opportunities for TS/C. Accordingly, TS/C is actively
exploring with partners potential training solutions in those markets. It should
be noted that the growth may eventually be constrained by the lack of airport
infrastructure or economic conditions. TS/C is one of the most experienced
training providers and can offer a wide range of services to various airlines
which has proven to be a key differentiator in the past. The recent success in
the Middle East combined with the order received by CAE in August 2005 for a
Boeing 737-800 full-flight simulator from the Zhuhai Flight Training Centre,
CAE&#146;s joint venture with China Southern Airlines, further supports our strategy
in these high-growth markets.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
mature North American and European markets, airlines are being affected by high
fuel costs and intense domestic competition. As a result, Management continues
to expect pricing pressures on training rates in these markets.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Management
needs to continue to capitalize on these and future opportunities and to improve
its success. In so doing, it is currently implementing a risk management process
and culture through the implementation of a Six Sigma initiative within
TS/C.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>TS/C
near-term priorities remain to optimize returns on existing training investments
by improving its mix of fully integrated solutions (wet training) and lease of
simulators (dry training) while pacing its entry into developing growth markets.
TS/C&#146;s immediate financial goals are to drive positive free cash flow and
improve return on capital.</FONT></P>
<P align=right><FONT face=sans-serif size=1>23 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><!--$$/page=--><A name=page_36></A>
<TABLE style="WIDTH: 978px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Depending on
the timing and the number of simulators that will be relocated as part of CAE&#146;s
restructuring plan (refer to Section 5), the results of the quarters in which
the relocations will occur (fourth quarter of fiscal 2006 and during fiscal
2007) may be negatively impacted. After full redeployment of the assets,
Management is of the view that the attributable revenue loss associated with the
relocation will be compensated by new revenue opportunity created over time.
</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif
size=2>Notwithstanding the actions related to significant progress achieved in
the restructuring plan, TS/C continues to actively look at various ways to drive
more efficiencies and minimize any overlap in order to deliver the most
cost-effective and competitive training services. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap
     ><B><FONT face=sans-serif size=1>6.5</FONT></B>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><B><FONT
      face=sans-serif size=1>TRAINING &amp; SERVICES / MILITARY</FONT></B>
</TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap
     ><B><I><FONT face=sans-serif
      size=1>6.5.1</FONT></I></B>&nbsp; &nbsp; &nbsp; </TD>
    <TD width="100%"
     ><B><I><FONT face=sans-serif size=1>NATURE OF
      OPERATIONS</FONT></I></B> </TD></TR>
  <TR>
    <TD colSpan=2
 >&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Ongoing military training services
operations in North America, Europe, Australia, and other parts of the world
continue to generate steady revenues for TS/M. CAE&#146;s TS/M provides its customers
with turnkey training services and a full range of training support services
from over 60 locations around the globe. Services range from pilot, maintenance
technician and crew member training to technical services, support training in
engineering and maintenance, consulting in modelling and simulation, and
training centre design and operation.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Today&#146;s
military forces are under constant pressure to reduce operating costs, improve
performance, and above all, maintain a high state of readiness. With limited
financial and human resources, meeting these challenges is increasingly
difficult. Over the past decade, there has been a growing trend in the military
community to outsource a variety of training services. This outsourcing can
range from a complete, turnkey training operation such as the private finance
initiatives undertaken by the UK Ministry of Defence to the outsourcing of
simulator and academic instruction, courseware development, simulator
maintenance, and logistics support.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>TS/M is
uniquely qualified to handle all training service needs. TS/M has been a leader
in providing state-of-the-art training and support across the entire range of
combat skills. TS/M has a range of experience and capability, including delivery
of a turnkey training service as evidenced by CAE&#146;s Medium Support Helicopter
Aircrew Training Facility (MSHATF) in the UK and the C-130 Training Centre in
Tampa, Florida.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE has
traditionally applied its simulation technology and expertise to training
services. However, simulation is an increasingly key part of the entire defence
system lifecycle and CAE has established a Professional Services division,
within TS/M, to help customers apply simulation to analysis, design, research,
and experimentation applications. Our experts offer professional services in
areas such as project management, human factors, capability engineering,
modelling and simulation, and emergency management. The establishment of the
Professional Services division is consistent with defence forces&#146; desire to use
more simulation for not only training, but throughout the lifecycle of platforms
and weapon systems.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>It should be
noted that a strong connectivity exists between the Company&#146;s military segments,
SP/M and TS/M, where training equipment sales and related services are part of
the same program and should be looked at in an integrated way.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"
     ><B><I><FONT face=sans-serif size=1
     >6.5.2 FINANCIAL RESULTS
      &#150; HISTORICAL PERSPECTIVE</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><B><FONT
      face=sans-serif size=1
     >TS/M FINANCIAL RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><B><FONT
      face=sans-serif size=1
     >FISCAL YEARS ENDED MARCH 31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><I><FONT
      face=serif size=1>(amounts in
      millions, except operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=2>2003</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;
      187.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>184.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>168.7</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      20.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>23.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>19.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Operating
      margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><I><FONT face=serif
      size=1
     >%&nbsp;&nbsp;&nbsp;&nbsp; 11.1</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>12.5</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><I><FONT face=serif
      size=1>11.6</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 8.0</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>5.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>5.5</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      2.1</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>2.4</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT
      face=serif size=1>Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="18%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;
      890.3</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>799.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>741.7</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>From fiscal 2002 with revenue close to
$150 million, TS/M experienced a constant growth, reaching revenue of $187.1
million in fiscal 2005. Because of the long-term and recurring nature of the
military service business, operating margins were relatively stable.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>However, in
fiscal 2003, TS/M revenue and SOI were adversely impacted by foreign exchange.
Although it witnessed the same trend in fiscal 2004, TS/M achieved a strong
performance on some Canadian and Australian programs. As has been the case for
the Military Simulation Products segment, TS/M had to incur high bid costs for
major programs in Europe and the US.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2> In fiscal
2005, Helicopter Flight Training Services (HFTS), a consortium with three other
major European defence contractors in which CAE has a 25% investment, was
awarded a long-term training services contract by the German government,
contributing to the replenishment of CAE&#146;s TS/M backlog by </FONT><FONT
face=sans-serif size=1>&euro;</FONT><FONT face=serif size=2>122.0 million.
</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 24</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_37></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="20%" colSpan=3><B><FONT
      face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"
     ><B><I><FONT face=sans-serif size=1
     >6.5.3 FINANCIAL RESULTS &#150;
      CURRENT</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><B><FONT
      face=sans-serif size=1
     >TS/M FINANCIAL RESULTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><B><FONT
      face=sans-serif size=1
     >LAST 15 MONTHS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><I><FONT
      face=serif size=1>(amounts in
      millions, except operating margins)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="16%" colSpan=3
     ><B><FONT face=serif size=1
     >q3-</FONT></B><B><FONT face=serif size=2
     >2006</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>q2</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>q1</FONT><FONT face=serif size=2
     >-2006</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>q4</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>q3</FONT><FONT face=serif size=2
     >-2005</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
BASEALIGN="left">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      52.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>50.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>49.3</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>48.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>46.6</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"
BASEALIGN="left">&nbsp;</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp; &nbsp;&nbsp;
      8.4</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>5.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2.0</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>4.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>4.9</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><FONT
      face=serif size=1>Operating
      margins</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><I><FONT face=serif
      size=1
     >%&nbsp;&nbsp; 15.9</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><I><FONT face=serif
      size=1>10.7</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>4.1</FONT></I>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>8.6</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><I><FONT face=serif
      size=1>10.5</FONT></I>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &nbsp;1.6</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.9</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.7</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &nbsp;1.5</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>7.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>6.5</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="36%"><FONT
      face=serif size=1>Backlog</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%">&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$797.8</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>829.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>904.0</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>890.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>932.6</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="100%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>For the three months ended December 31,
2005, TS/M&#146;s revenues amounted to $52.8 million, a quarter-over-quarter increase
of 4% ($2.1 million). On a year-over-year basis, revenue increased by 13% ($6.2
million). The quarter-over-quarter increase is mainly attributable to increased
maintenance and technical logistic support services on various German and
American bases. The year-over-year increase is attributable mainly to the
reasons mentioned above and the integration of Greenley &amp; Associates Inc.,
acquired last year and which specializes in modelling and simulation services.
Offsetting the increases over prior quarter and prior year are negative foreign
exchange impacts (approximately 25% of TS/M revenues are in US dollars, 20% in
Euro and 30% in British pounds). </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenue for
the first nine months of the year amounted to $152.8 million, a year-over-year
increase of $14.3 million (or 10%). The increase is a result of increased
maintenance and support services on German and American bases and the
integration of Greenley &amp; Associates Inc.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Segment
Operating Income for the three months ended December 31, 2005, amounted to $8.4
million, a quarter-over-quarter increase of 56% ($3.0 million). On a
year-over-year basis, Segment Operating Income increased by 71% ($3.5 million).
Sequential and year-over-year increases are mainly due to a cost recovery
resulting from the annual rate negotiations with the Canadian Government, a
dividend received from a TS/M investment in the UK and increased revenues from
support services on German bases.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Year-to-date
segment operating income was $15.8 million, a year-over-year decrease of 5% (or
$0.8 million). The decrease is attributable to the write-down of deferred bid
costs (incurred post selection) following the change in the UK Ministry of
Defence approach for procuring its training of its Army Armoured Vehicles
Training Service (AVTS) program. Without the negative impact of this write-down,
segmented operating income for the year-to-date would have amounted to $20.2
million, an increase of 22% ($3.6 million) over the same period a year ago. The
increase is primarily due to a higher revenue volume as well as the factors
mentioned above for the quarter.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Capital
expenditures for the quarter amounted to $1.5 million and are mainly related to
the building of training centres in Germany for the NH90 program.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The capital
employed for TS/M as at December 31, 2005 was $93.0 million compared to $105.8
million as at September 30, 2005. The decrease is mainly due to increased cash
flows on deposits on contracts.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"
     ><B><I><FONT face=sans-serif size=1
     >6.5.4
      BACKLOG</FONT></I></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=sans-serif size=1
     >TS/M BACKLOG CONTINUITY SCHEDULE</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="37%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="37%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="17%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Backlog,
      beginning of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 829.4</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 890.3</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ Orders for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>60.7</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>173.2</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>- Revenue for
      the period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(52.8)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(152.8)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;
      &nbsp;<FONT face=serif size=1>+ /-
      Adjustments (mainly FX)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>(39.5)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>(112.9)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><B><FONT
      face=serif size=1>Backlog, end
      of period</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="29%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$ 797.8</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$ 797.8</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Adjustments for the three and nine-month
periods ended December 31, 2005 had a negative impact on the backlog of $39.5
million and $112.9 million respectively. These adjustments were mainly due to
the negative foreign exchange impact on all foreign locations especially in the
UK (Burgess Hill and Benson locations) and Germany. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The order
intake for the third quarter of fiscal 2006 amounted to $60.7 million and mainly
consisted of the renewal of a yearly maintenance service contract on various
German bases, as well as other simulator maintenance contracts in North
America.</FONT></P>
<P align=right><FONT face=sans-serif size=1>25</FONT><B><FONT face=sans-serif
size=1> &gt;</FONT></B></P>
<HR align=center width="100%" noShade SIZE=2>
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  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><I><FONT face=sans-serif size=1>6.5.5</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif
size=1>OUTLOOK</FONT></I></B></P>
<P align=left><FONT face=serif size=2>More militaries and governments are
continuing to explore the benefits and advantages of outsourced or privatized
training service delivery. Management expects significant opportunities &#150; both
short and long term &#150; to provide a range of training services. The TS/M segment
continues to aggressively pursue training services as well as professional
service opportunities around the world. As governments and defence forces
scrutinize budgets and utilize weapon systems such as aircraft in a high
operational tempo, they are increasingly willing to adopt synthetic training for
more and more of their training requirements. While synthetic training will
never be a complete replacement for live combat training, we see more militaries
increasing the number of synthetic training hours to complement live training.
In addition, we see an increasing use of synthetic training for joint and
distributed mission training as well as mission rehearsal activities.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The TS/M
segment continues to experience steady business from long-term training service
contracts. These include contracts such as the MSHATF at Royal Air Force Base
Benson in the UK and the Management Support of Aerospace Simulators for the
Australian Defence Forces. The training service delivery at the MSHATF is
indicative of the trend for militaries to use synthetic training for more
distributed, mission preparation-type training. The RAF now regularly conducts
&#147;Thursday War&#148; exercises that involve the networking of various simulators and
computer-generated forces in mission scenarios.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE is also
part of a consortium that will provide the German Armed Forces with NH90
helicopter training services over a 14.5 -year period beginning in 2008. The
TS/M segment also expects other NH90 training service opportunities to
materialize over the next several years. Within the next few months, Rotorsim, a
consortium between CAE and Agusta, will start operations in Sesto Calende, Italy
by offering comprehensive training on the A109 helicopter. Ongoing services
contracts that currently provide relatively steady revenue streams for CAE
include the instruction, maintenance and support services under sub-contract to
Lockheed Martin for C-130 and C-130J training systems for the US Air Force as
well as the operation of the US Air Force Predator UAV schoolhouse.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the most
recent quarter, TS/M won several key contracts for the provision of maintenance
and support services for various defence forces around the world. In Germany,
the TS/M segment provides maintenance and support for virtually all German Armed
Forces flight simulators. In Canada, TS/M provides maintenance, upgrade and
systems engineering support for the Canadian Air Force CF-18 fleet under
sub-contract to L3 MAS. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The TS/M
segment continues to actively seek teaming arrangements with various OEMs and
service providers to ensure best-in-class solutions that offer the best value
for training and service requirements. As militaries look to increase their use
of synthetic training, CAE becomes an attractive partner because of its
simulation products capability as well as training service delivery
experience.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>7</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>ACQUISITIONS, BUSINESS
      COMBINATIONS AND DIVESTITURES</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>7.1</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>CLEANING
      TECHNOLOGIES</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>In fiscal 2004, CAE completed the sale of
its last Cleaning Technologies business, Alpheus Inc., to Cold Jet Inc. The
Company was entitled to receive further consideration based on the performance
of the business until 2007 and also had certain obligations to Cold Jet Inc.
During the third quarter of fiscal 2006, CAE and Cold Jet Inc. concluded an
agreement to settle on the further consideration and cancel the outstanding
obligations of the Company. On January 24, 2006 an amount of $0.3 million was
received by the Company. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>7.2</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>FORESTRY
SYSTEMS</FONT></B></P>
<P align=left><FONT face=serif size=2>On August 16, 2002, CAE sold substantially
all the assets of the sawmill division of its Forestry Systems. The Company was
entitled to receive further cash consideration from the sale based on operating
performance of the disposed business for a three-year period to August 2005. In
November 2005, the Company received a notice from the buyers saying that the
targeted level of operating performance that would trigger a further payment had
not been achieved. CAE has completed a review of the buyers&#146; books and records
and has, in January 2006, instituted legal proceedings to collect the payment
that it believes is owed to the Company. The Company has incurred $0.2 million
of fees to date in connection with the evaluation and litigation
exercise.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>7.3</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>MARINE
CONTROLS</FONT></B></P>
<P align=left><FONT face=serif size=2>As reported in the Company&#146;s MD&amp;A for
fiscal 2005, in the second quarter of fiscal 2005, the Board of Directors
approved a plan to divest its Marine business. On February 3, 2005, CAE
completed with L-3 Communications Corporation the sale of the substantial
components of its Marine segment for a cash consideration of $238.6 million.
This amount is subject to the approval by L-3 of the net working capital of the
Marine Controls segment which should be finalized around the end of fiscal 2006.
CAE does not believe that this will result in a material adjustment to the gain
on disposal already recorded. During the second and third quarters, in
accordance with the purchase agreement, L-3 acquired the two components of the
Marine Controls segment that were subject to regulatory approvals. This
transaction resulted in the assumption by L-3 of CAE&#146;s guarantee of $53.0
million (&#163; 23 million) of project-financed related debt for the UK Astute Class
submarine training program.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>&gt;</FONT></B><FONT
face=sans-serif size=1> 26</FONT></P>
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BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>8</FONT></B><FONT face=sans-serif>
</FONT><B><FONT face=sans-serif size=1>LIQUIDITY </FONT></B></P>
<P align=left><FONT face=serif size=2>The Company&#146;s financing needs are met
through internally generated cash flows, available funds under credit facilities
and direct access to capital markets for additional long-term capital resources.
CAE considers that its present and expected capital resources and current credit
facilities will enable it to meet all its current and expected financial
requirements for the foreseeable future.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>8.1</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>SOURCES OF
LIQUIDITY</FONT></B></P>
<P align=left><FONT face=serif size=2>CAE maintains committed bank lines at
floating rates, each provided by a syndicate of lenders. These credit facilities
permit the Company and certain designated subsidiaries to borrow funds directly
for operating and general corporate purposes as well as issue letters of credit
and bank guarantees (see below description of new revolving credit
facility).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The total
available amount of committed bank lines as at December 31, 2005 was $604.4
million, of which 23% was utilized ($139.8 million split between borrowings of
$20.7 million and letters of credit of $119.1 million). As at March 31, 2005,
the total amount available was $580.3 million, of which 5% ($30.4 million) was
utilized. The increase in total utilization was due mainly to the use of the
credit facility for the issuances of letters of credit and bank guarantees,
which as at March 31, 2005, were issued under separate credit agreements, while
borrowings decreased slightly.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE also has
the ability to borrow under non-committed operating lines in various currencies
for up to $40.5 million, of which $2.0 million was drawn as at December 31,
2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As at
December 31, 2005, CAE had long-term debt totalling $275.6 million, compared to
$342.9 million as at March 31, 2005. As at December 31, 2005, the short-term
portion of the long-term debt was $11.1 million compared to $35.3 million as at
March 31, 2005. The decrease in the short-term portion results mainly from the
repayment of the $20.0 million Canadian dollar Senior Note Tranche due in June
2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During the
third quarter of fiscal 2006, the Company took advantage of available liquidity
and the strength of the Canadian dollar and proceeded with the prepayment of a
relatively high-cost (approximately 8%) asset-backed financing amounting to
</FONT><FONT face=sans-serif size=1>&euro;</FONT><FONT face=serif size=2>22.7 million
(the Amsterdam asset-backed financing). This financing structure was
consolidated, at the beginning of the fourth quarter of fiscal 2005, as a result
of the adoption of new accounting guidelines on consolidation of variable
interest entities. The repayment was partially financed with cash on hand and by
a </FONT><FONT face=sans-serif size=1>&euro;</FONT><FONT face=serif size=2>15.0
million borrowing under the revolving term credit facility. Swap unwind and
early prepayment charges totalling $2.8 million were paid as part of the
refinancing of the debt and was recorded in the interest expense and reported as
a non-recurring item in Section 5. The repayment is consistent with the
objectives of reducing CAE&#146;s cost of debt and providing additional operational
flexibility with respect to the mobility of the simulators within its European
operations.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As well,
during the third quarter, CAE concluded an agreement to obtain financing for the
establishment of its Enterprise Resource Planning (ERP) system. An unsecured
facility has been put in place with an initial draw down amount of $5.1 million
for the costs incurred to date on the implementation. Amounts will be drawn down
from the facility as incurred, on a quarterly basis, with monthly repayments for
a term of seven years beginning at the end of the first month after the end of
each quarter.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During the
second quarter, two additional debts have been incurred to finance CAE&#146;s
operations. The first debt is related to the NH90 project where a non-recourse
PFI has been put in place to finance the build out of the project. An amount of
$14.5 million has been incurred, resulting from CAE&#146;s proportionate share (25%)
of the initial draw down of the debt facility. The drawdown is under a total
facility of </FONT><FONT face=sans-serif size=1>&euro;</FONT><FONT face=serif
size=2>175.5 million to be drawn down over the build out of the project. The
debt is non-recourse to CAE and has a final maturity of December 2019. The
second debt has been incurred by the Zhuhai Training Centre to finance the
acquisition of a simulator. An amount of $4.6 million has been incurred as a
result of CAE&#146;s proportionate share (49%) of the initial drawdown of a term debt
for CAE&#146;s joint venture participation in the Zhuhai Training Centre. The debt is
non-recourse to CAE and has a final maturity of January 2008.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The Company
sells some of its third-party receivables on a non-recourse basis to a financial
institution for an amount of up to $25.0 million. Under the terms of the
agreement, the Company will continue to act as a collection agent. As at
December 31, 2005, $24.8 million of specific accounts receivable were sold to
the financial institution pursuant to this agreement. Net proceeds of the sale
were used to repay borrowings under the Company&#146;s committed credit
facilities.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On July 7,
2005, the Company entered into a new revolving credit agreement. This new
revolving unsecured term credit facility has a committed term of five years,
maturing in July 2010. The total credit available is equal to US$400.0 million
and </FONT><FONT face=sans-serif size=1>&euro;</FONT><FONT face=serif size=2>100.0
million. The facility has covenants including minimum shareholders&#146; equity,
interest coverage and debt coverage ratios. The new facility has extended the
Company&#146;s ability to enter into project financings which are non-recourse to the
Company. The facility also provides the capability to issue letters of credit
and bank guarantees.</FONT></P>
<P align=right><FONT face=sans-serif size=1>27</FONT><B><FONT face=sans-serif
size=1> &gt;</FONT></B></P>
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  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>8.2</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>CONTRACTUAL
OBLIGATIONS</FONT></B></P>
<P align=left><FONT face=serif size=2>In the normal course of business, CAE
enters into certain contractual obligations and commercial commitments, such as
debentures and notes, letters of credit and others. The table below provides a
summary of the various maturities of the Company&#146;s long-term debt as at December
31, 2005.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="15%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>jan </FONT><FONT face=serif size=2
     >06</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>jan </FONT><FONT face=serif size=2
     >07</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>jan </FONT><FONT face=serif size=2
     >08</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>jan </FONT><FONT face=serif size=2
     >09</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>jan </FONT><FONT face=serif size=2
     >10</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="7%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="15%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>dec </FONT><FONT face=serif size=2
     >06</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>dec </FONT><FONT face=serif size=2
     >07</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>dec </FONT><FONT face=serif size=2
     >08</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>dec </FONT><FONT face=serif size=2
     >09</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>dec </FONT><FONT face=serif size=2
     >10</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="12%" colSpan=3><FONT
      face=serif size=1>thereafter</FONT>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>total</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="15%"><FONT
      face=serif size=1>Long-term
      debt</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>$ 9.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 29.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 10.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 80.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 41.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>100.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$ 271.8</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="15%"><FONT
      face=serif size=1>Capital lease</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>1.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>0.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>3.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="15%"><B><FONT
      face=serif size=1
     >Total</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="14%"><B><FONT face=serif
      size=1>$ 11.1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 31.3</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 10.5</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 80.9</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 41.7</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1>$</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>100.1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$ 275.6</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>As at December 31, 2005, CAE had other
long-term liabilities that were not included in the table above. They consisted
of some accrued pension liabilities and post-retirement benefits, deferred
revenue and gains on assets and various other long-term liabilities. Cash
obligations for accrued employee pension liability and post-retirement benefits
depend on various elements such as market returns, actuarial losses and gains
and interest rate.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>8.3</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif
size=1>COMMITMENTS</FONT></B></P>
<P align=left><FONT face=serif size=2>CAE&#146;s commitments for capital expenditures
include investments to add new facilities to its training centre network in
order to meet customer demand. Research and development expenditures are
incurred to provide new products to the marketplace as alternative ways of
training are developed and different types of training equipment are needed for
our clients&#146; training needs.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>9 OFF-BALANCE SHEET
ARRANGEMENTS</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=1>9.1</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif
size=1>GUARANTEES</FONT></B></P>
<P align=left><FONT face=serif size=2>In the normal course of business, CAE has
issued letters of credit and performance guarantees for a total of $101.5
million as at December 31, 2005, compared to $73.3 million as at March 31, 2005.
The increase in the outstanding amount results mainly from additional
project-related requirements. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>9.2</FONT></B><B><FONT
face=sans-serif size=1> </FONT></B><B><FONT face=sans-serif size=1>SALE AND
LEASEBACK TRANSACTIONS</FONT></B></P>
<P align=left><FONT face=serif size=2>The following is a summary, as at December
31, 2005, of the existing sale and leaseback transactions for full-flight
simulators currently in service in TS/C training locations, accounted for as
operating leases on CAE&#146;s financial statements. Refer to the Company&#146;s MD&amp;A
for fiscal 2005 for more information related to its sale and leaseback
transactions.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="47%" colSpan=5
     ><B><FONT face=sans-serif size=1
     >EXISTING FULL-FLIGHT SIMULATORS UNDER SALE AND
      LEASEBACK</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>number of</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>initial</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>imputed</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>unamortized</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>residual</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>fiscal</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>simulators</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>lease</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>term</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>interest</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>deferred</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>value</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><I><FONT
      face=serif size=1>(amounts in
      millions, unless otherwise noted)</FONT></I>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>year</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>(units)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>obligation</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>(years)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>rate</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>gain</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>guarantee</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>SimuFlite</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2002 to 2005</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>14</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 189.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>10 to 20</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>5.5% to 6.7%</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>$ 12.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$ &#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>Toronto training
      centre</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2002</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>40.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>21</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>6.4%</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>15.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>9.2</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>Air Canada training
      centre</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2000</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>31.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>20</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>7.6%</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>14.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>8.3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>Denver/Dallas training
      centres</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2003</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>82.3</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>20</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>5.0%</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>29.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>China Southern Joint
      Venture</FONT><SUP><FONT face=serif size=1
     >(1)</FONT></SUP>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2003</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>20.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>15</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>3.0%</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>Others</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>37.1</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>3 to 8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>2.9% to 7.0%</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>15.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>15.6</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>35</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 401.9</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="8%"><FONT face=serif
      size=1>$ 87.8</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$ 33.1</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%" colSpan=3
     ><FONT face=serif size=1
     >Annual lease payments (upcoming 12 months)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 32.7</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="23%"><FONT
      face=serif size=1>(1) Joint venture in which
      CAE has a 49% interest.</FONT>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="11%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="8%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="6%">&nbsp;
</TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Rental expenses related to operating
leases of the simulators under sale and leaseback arrangements was $10.0 million
during the third quarter and $29.7 million on a year-to-date basis for fiscal
2006 compared to $10.4 million and $32.9 million for the same periods last year.
Future minimum lease payments for such arrangements amount to approximately
$401.9 million as at December 31, 2005.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>&gt;</FONT></B><FONT
face=sans-serif size=1> 28</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_41></A>
<TABLE style="WIDTH: 975px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="56%"><B><FONT
      face=sans-serif size=1
     >MANAGEMENT&#146;S DISCUSSION AND
      ANALYSIS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="41%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>10</FONT></B><FONT
face=sans-serif> </FONT><B><FONT face=sans-serif size=1>FINANCIAL INSTRUMENTS
</FONT></B></P>
<P align=left><FONT face=serif size=2>CAE employs foreign exchange forward
contracts to manage exposures created when sales are made in foreign currencies.
The amount and timing of the maturity of these forward contracts varies
according to a number of project-related factors, including milestone billings
and the use of foreign materials and/or sub-contractors. As at December 31,
2005, CAE had $279.1 million Canadian-dollar equivalent in forward contracts
compared to $305.0 million Canadian-dollar equivalent as at March 31, 2005. The
decrease since March 2005 is due mainly to a reduced number of foreign currency
denominated contracts being hedged.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE also
uses financial instruments to manage its exposure to changing interest rates and
to adjust its mix of fixed and floating interest rate debt at a desirable level.
The mix of fixed rate versus floating rate debt on its long-term debt was 61%
vs. 39% respectively as at December 31, 2005. The variation in the mix since
March 31, 2005, when it stood at 70% vs. 30% respectively, is due mainly to the
repayment of the $20.0 million Canadian dollar Senior Note Tranche due in June
2005, which was a fixed rate debt.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As well, CAE
reduces its exposure to the fluctuation in its share price, which impacts the
cost of the management compensation deferred share unit (DSU) programs. As at
December 31, 2005, the settlement hedge contract covered 600,000 shares of the
Company, the same as at March 31, 2005. </FONT></P>
<P align=left><FONT face=serif size=2>For further information on financial
instruments, refer to the Company&#146;s MD&amp;A for fiscal 2005.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>11 BUSINESS RISKS AND
UNCERTAINTIES </FONT></B></P>
<P align=left><FONT face=serif size=2>As described in the </FONT><I><FONT
face=serif size=2>Business Risks and Uncertainties</FONT></I><FONT face=serif
size=2> section included in CAE&#146;s Annual Information Form (AIF) for the year
ended March 31, 2005, numerous factors could cause the Company&#146;s results to
differ materially from those in the forward-looking statements. These factors
have not significantly changed in the third quarter of fiscal 2006.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><B><FONT face=sans-serif size=1>12</FONT></B>&nbsp;
      &nbsp; &nbsp; </TD>
    <TD width="100%"><B><FONT face=sans-serif size=1>FINANCIAL STATEMENTS
      DISCLOSURE</FONT></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><B><I><FONT face=sans-serif
      size=1>12.1</FONT></I></B>&nbsp; &nbsp; &nbsp; </TD>
    <TD width="100%"><B><I><FONT face=sans-serif size=1>SIGNIFICANT CHANGES IN
      ACCOUNTING STANDARDS &#150; FISCAL 2005 TO FISCAL 2006</FONT></I></B> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Information on significant changes in
accounting standards have been described in the Company&#146;s most recent annual
MD&amp;A (included in the Company&#146;s annual report for the year ended March 31,
2005). No significant changes have occurred since then.</FONT></P>
<P align=left><B><I><FONT face=sans-serif size=1>12.2</FONT></I></B><B><FONT
face=sans-serif size=1> </FONT></B><B><I><FONT face=sans-serif size=1>CRITICAL
ACCOUNTING ESTIMATES</FONT></I></B></P>
<P align=left><FONT face=serif size=2>The preparation of financial statements in
conformity with GAAP requires CAE&#146;s Management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses for the period reported. On an
ongoing basis, Management reviews its estimates, particularly as they relate to
accounting for long-term contracts, useful lives, employee future benefits,
income taxes, impairment of long-lived assets and goodwill, based on
Management&#146;s best knowledge of current events and actions that the Company may
undertake in the future. Significant changes in estimates and/or assumptions
could result in impairment of certain assets. Actual results could differ from
those estimates.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE&#146;s
critical accounting policies are those that it believes are the most important
in determining its financial condition and results and require significant
subjective judgment by Management. See Note 1 of the fiscal 2005 consolidated
financial statements for a description of the Company&#146;s accounting policies. The
Company considers an accounting estimate to be critical if the estimate requires
Management to make assumptions about matters that were highly uncertain at the
time the estimate was made, if different estimates could have been reasonably
used or if changes in the estimate that would have a material impact on CAE&#146;s
financial condition or results of operations are likely to occur from period to
period. </FONT></P>
<P align=left><B><FONT face=sans-serif size=1>13 SYSTEMS, PROCEDURES AND
CONTROLS</FONT></B></P>
<P align=left><FONT face=serif size=2>Management is responsible for establishing
appropriate information systems, procedures and controls to ensure that all
financial information disclosed externally, including this MD&amp;A, and used
internally by Management, is complete and reliable. These procedures include a
review of the financial statements and associated information, including this
MD&amp;A, by the Audit Committee of the Board of Directors. In the quarter ended
December 31, 2005, the Company did not make any significant changes in, nor take
any significant corrective actions regarding its internal controls or other
factors that could significantly affect such internal controls.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>14 ADDITIONAL
INFORMATION</FONT></B></P>
<P align=left><FONT face=serif size=2>Additional information relating to the
Company, including its AIF for fiscal 2005, is available on-line at
www.sedar.com as well as at the Company&#146;s website at www.cae.com.</FONT></P>
<P align=right><FONT face=sans-serif size=1>29 </FONT><B><FONT face=sans-serif
size=1>&gt;</FONT></B></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_42></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=sans-serif size=1
     >CONSOLIDATED BALANCE STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><B><FONT
      face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=sans-serif size=4
     >CONSOLIDATED</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=sans-serif size=4
     >BALANCE SHEETS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>as at march</FONT> <FONT face=serif
      size=2>31</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><I><FONT
      face=serif size=1>(amounts in
      millions of Canadian dollars)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=2>2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=serif size=1
     >Assets</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Current
    assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Cash and cash
      equivalents</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>$
    66.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>$ 57.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Accounts
      receivable</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>255.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>255.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1
     >Inventories</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>92.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>101.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Prepaid
      expenses</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>15.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>17.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Income taxes
      recoverable</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>71.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>58.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Future income
      taxes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>6.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>2.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Current assets
      held for sale</FONT> <FONT face=sans-serif size=1
     >(Note 3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>5.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>507.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>498.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Property, plant and
      equipment, net</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>793.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>792.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Future income
    taxes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>96.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>101.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Intangible
    assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>20.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>20.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Goodwill</FONT> <FONT
      face=sans-serif size=1>(Note
    13)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>91.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>92.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Other
    assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>134.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>138.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Long-term assets held for
      sale</FONT> <FONT face=sans-serif size=1
     >(Note 3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>5.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>57.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>$
    1,650.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>$ 1,699.7</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=serif size=1>Liabilities
      and Shareholders&#146; Equity</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Current
    liabilities</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Accounts
      payable and accrued liabilities</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>$
    324.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>$ 312.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Deposits on
      contracts</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>140.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>93.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Long-term debt
      due within one year</FONT> <FONT face=sans-serif size=1
     >(Note 4)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>11.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>35.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Future income
      taxes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>22.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>19.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;
      &nbsp;<FONT face=serif size=1>Current
      liabilities related to assets held for sale</FONT> <FONT face=sans-serif
      size=1>(Note 3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>7.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>498.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>469.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Long-term debt</FONT>
      <FONT face=sans-serif size=1>(Note
      4)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>264.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>307.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Deferred gains and other
      long-term liabilities</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>198.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>179.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Future income
    taxes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>30.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>38.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Long-term liabilities
      related to assets held for sale</FONT> <FONT face=sans-serif size=1
     >(Note 3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>53.4</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>991.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>1,048.1</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><B><FONT
      face=serif size=1>Shareholders&#146;
      Equity</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Capital stock</FONT> <FONT
      face=sans-serif size=1>(Note
    7)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>386.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>373.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Contributed
    surplus</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>5.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>3.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Retained
    earnings</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>388.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>340.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>Currency translation
      adjustment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >(121.3)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>(66.3)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
>659.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>651.6</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>$
    1,650.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%"><FONT face=serif
      size=1>$ 1,699.7</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="47%"><FONT
      face=serif size=1>The accompanying notes
      form an integral part of these consolidated financial
    statements.</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="23%"
BASEALIGN="left">&nbsp;</TD></TR></TABLE><BR>
<P align=left><FONT face=sans-serif size=1>&gt; 30</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_43></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"><B><FONT
      face=sans-serif size=1
     >CONSOLIDATED BALANCE STATEMENTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="21%" colSpan=5><B><FONT
      face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT
      face=sans-serif size=4
     >CONSOLIDATED STATEMENTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT
      face=sans-serif size=4>OF
      EARNINGS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>(unaudited)</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<I><FONT
      face=serif size=1>(amounts in
      millions of Canadian dollars, except per share amounts)</FONT></I>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Revenue</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 276.6</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 257.5</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 822.9</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=right width="10%" colSpan=3
     ><FONT face=serif size=1
     >$</FONT>&nbsp; <FONT face=serif size=1
     >723.5</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Earnings (loss) before
      interests and income taxes </FONT><FONT face=sans-serif size=1
     >(Note 10)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 32.7</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (426.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 96.7</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><FONT
      face=serif size=1>$ (372.3)</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Interest expense, net
      </FONT><FONT face=sans-serif size=1
     >(Note 6)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>6.1</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>5.4</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>15.3</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>16.0</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Earnings (loss) before
      income taxes</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 26.6</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (431.4)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 81.4</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><FONT
      face=serif size=1>$ (388.3)</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Income tax expense
      (recovery)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>9.1</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(85.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>25.3</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(74.3)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Earnings (loss) from
      continuing operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 17.5</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (345.7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 56.1</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><FONT
      face=serif size=1>$ (314.0)</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Results of discontinued
      operations </FONT><FONT face=sans-serif size=1
     >(Note 3)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>0.1</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(1.3)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(0.6)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>5.3</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Net earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 17.6</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (347.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 55.5</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><FONT
      face=serif size=1>$ (308.7)</FONT>&nbsp;
  </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Basic and diluted earnings
      (loss) per share from continuing operations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 0.07</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (1.40)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 0.22</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=right width="10%" colSpan=3
     ><FONT face=serif size=1
     >$</FONT>&nbsp; <FONT face=serif size=1
     >(1.27)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Basic and diluted earnings
      (loss) per share</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 0.07</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (1.40)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ 0.22</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD align=right width="10%" colSpan=3
     ><FONT face=serif size=1
     >$</FONT>&nbsp; <FONT face=serif size=1
     >(1.25)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Weighted average number of
      shares outstanding</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>250.2</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>247.0</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>249.6</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>246.8</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>The accompanying notes
      form an integral part of these consolidated financial
      statements.</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT
      face=sans-serif size=4
     >CONSOLIDATED STATEMENTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT
      face=sans-serif size=4>OF
      RETAINED EARNINGS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>(unaudited)</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="22%" colSpan=3><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="21%" colSpan=5><B><FONT
      face=serif size=1>december
      </FONT></B><B><FONT face=serif size=2
     >31</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<I><FONT
      face=serif size=1>(amounts in
      millions of Canadian dollars)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=2>2004</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Retained earnings at
      beginning of period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ </FONT></B><B><FONT
      face=serif size=1
     >373.7</FONT></B>&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 585.6</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ </FONT></B><B><FONT
      face=serif size=1
     >340.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><FONT
      face=serif size=1>$ 562.1</FONT>&nbsp;
</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Net earnings
      (loss)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>17.6</FONT></B>&nbsp;
</TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(347.0)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>55.5</FONT></B>&nbsp;
</TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(308.7)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Dividends</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>(2.5)</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(7.4)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>(7.5)</FONT></B>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(22.2)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>Retained earnings at end
      of period</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ 388.8</FONT></B>&nbsp;
    </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 231.2</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$ </FONT></B><B><FONT
      face=serif size=1
     >388.8</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="10%" colSpan=3><FONT
      face=serif size=1>$ 231.2</FONT>&nbsp;
</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT
      face=serif size=1>The accompanying notes
      form an integral part of these consolidated financial
      statements.</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD width="3%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="9%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp;
</TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=1>31 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_44></A>
<TABLE style="WIDTH: 983px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="54%"><B><FONT
      face=sans-serif size=1
     >CONSOLIDATED BALANCE STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="43%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=sans-serif size=4
     >CONSOLIDATED STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=sans-serif size=4>OF
      CASH FLOWS</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="21%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="21%" colSpan=3
     >&nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT face=serif
      size=1>december</FONT></B>
      <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD align=right width="18%" colSpan=5
     >&nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT face=serif
      size=1>december</FONT></B>
      <B><FONT face=serif size=2
     >31</FONT></B>&nbsp; &nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><I><FONT
      face=serif size=1>(amounts in
      millions of Canadian dollars)</FONT></I>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=2>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Operating
      activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net earnings
    (loss)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$
    17.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ (347.0)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      55.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>$
  (308.7)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Results of discontinued
      operations</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(0.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.3</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>0.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(5.3)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Earnings (loss) from
      continuing operations</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>17.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(345.7)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>56.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(314.0)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Adjustments to reconcile
      earnings to cash flows from operating activities:</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Impairment of
      goodwill, tangible and intangible assets</FONT> <FONT face=sans-serif
      size=1>(Note 11)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>443.3</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>443.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1
     >Depreciation</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>13.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>13.8</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>39.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>40.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Amortization
      of deferred financing costs</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>0.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.6</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>1.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>1.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Amortization
      of intangible and other assets</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>4.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>6.9</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>15.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>15.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Future income
      taxes</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>3.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(81.7)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(1.7)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(68.9)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Investment tax
      credits</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(3.0)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(4.0)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(5.7)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(24.1)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Stock-based
      compensation</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>0.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>1.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>1.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1
   >Other</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(1.8)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>1.3</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>3.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>4.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;
      &nbsp;<FONT face=serif size=1>Decrease in
      non-cash working capital</FONT> <FONT face=sans-serif size=1
     >(Note 9)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>55.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>57.8</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>55.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>18.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net cash provided by
      continuing operating activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>90.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>92.8</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>166.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>119.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net cash (used in)
      provided by discontinued operating activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(5.6)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>15.0</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Net cash
      provided by operating activities</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>90.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>87.2</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>168.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>134.1</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Investing
      activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Purchase of business (net
      of cash and cash equivalents acquired)</FONT> <FONT face=sans-serif size=1
     >(Note 2)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(6.6)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Proceeds from disposal of
      discontinued operations</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(4.9)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>0.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(45.6)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(37.3)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(87.8)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(103.5)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Proceeds from sale and
      leaseback of assets</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>28.0</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>28.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Deferred development
      costs</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(0.4)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(2.5)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(0.4)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(9.4)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Deferred pre-operating
      costs</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(0.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(0.4)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(1.3)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Other
    assets</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(5.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(1.0)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(17.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(5.1)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net cash used in
      continuing investing activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(51.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(12.8)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(108.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(97.1)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net cash used in
      discontinued investing activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(2.1)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(2.3)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(6.2)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Net cash used
      in investing activities</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(51.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(14.9)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(110.4)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(103.3)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Financing
      activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net borrowing under
      revolving unsecured credit facilities</FONT> <FONT face=sans-serif size=1
     >(Note 4)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(13.3)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(16.4)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>(</FONT><B><FONT face=serif size=1
     >9.7)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>10.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Proceeds from long-term
      debt</FONT> <FONT face=sans-serif size=1
     >(Note 4)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>4.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.1</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>25.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>3.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Repayments of long-term
      debt</FONT> <FONT face=sans-serif size=1
     >(Note 4)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(33.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(14.8)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(61.9)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(22.4)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Dividends
    paid</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(2.4)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(7.2)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(7.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(21.6)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Common stock
      issuances</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>1.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>6.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>1.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Other</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>2.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(0.6)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>1.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>2.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net cash used in
      continuing financing activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(40.6)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(38.4)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(45.0)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(27.0)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Net cash provided by
      discontinued financing activities</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.7</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>1.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>2.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Net cash used
      in financing activities</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
   >(40.6)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(37.7)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >(43.8)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%" colSpan=3><FONT
      face=serif size=1>(24.5)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Effect of
      foreign exchange rate changes on cash and cash
    equivalents</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(2.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(9.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(1.0)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Net
      (decrease) increase in cash and cash equivalents</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1
>(3.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>35.1</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>5.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>5.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Cash and cash
      equivalents at beginning of period</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>69.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>32.1</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>61.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>61.9</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><B><FONT
      face=serif size=1>Cash and cash
      equivalents at end of period</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$
    66.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 67.2</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      66.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$&nbsp; 67.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Cash and cash equivalents
      related to:</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Continuing
      operations</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      66.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$&nbsp; 63.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>Discontinued
      operations</FONT> <FONT face=sans-serif size=1
     >(Note 3)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>4.0</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      66.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$&nbsp; 67.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=serif size=1>The accompanying notes
      form an integral part of these consolidated financial
    statements.</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT
      face=sans-serif size=1
     >&gt; 32&nbsp;</FONT></TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
BASEALIGN="left">&nbsp;</TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_45></A>
<P align=right>
<TABLE>

  <TR>
    <TD noWrap align=right><B><FONT face=sans-serif size=1>&gt; CAE THIRD
      QUARTER REPORT 2006 </FONT></B><BR></TD></TR></TABLE></P>
<P align=left><B><FONT face=sans-serif size=5>NOTES TO CONSOLIDATED
</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=5>FINANCIAL STATEMENTS
(</FONT></B><B><FONT face=sans-serif>UNAUDITED</FONT></B><B><FONT
face=sans-serif size=5>)</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=2>NOTE 1.</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=2>NATURE OF OPERATIONS AND
SIGNIFICANT ACCOUNTING POLICIES</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=1>NATURE OF
OPERATIONS</FONT></B></P>
<P align=left><FONT face=serif size=2>CAE Inc. (or the Company) designs,
manufactures and supplies simulation equipment and services and develops
integrated training solutions for the military, commercial airlines, business
aircraft operators and aircraft manufacturers. CAE&#146;s flight simulators replicate
aircraft performance in normal and abnormal operations as well as a
comprehensive set of environmental conditions utilizing visual systems that
contain an extensive database of airports, other landing areas, flying
environments, motion and sound cues to create a fully immersive training
environment. The Company offers a full range of flight training devices based on
the same software used in its simulators. CAE also operates a global network of
training centres in locations around the world.</FONT></P>
<P align=left><FONT face=serif size=2>Effective April 1</FONT><SUP><FONT
face=serif size=2>st</FONT></SUP><FONT face=serif size=2>, 2005, the Company
changed its internal organization structure such that operations are managed
through four segments:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(i)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Civil &#150;
      designs, manufactures and supplies civil flight simulators, training
      devices and visual systems;</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(ii)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Military &#150;
      designs, manufactures and supplies advanced military training products for
      air, land and sea applications;</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iii)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Civil &#150;
      provides business and commercial aviation training and related services;
      and</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iv)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Military
      &#150; supplies military turn key training and operational solutions, support
      services, life extensions, systems maintenance and modelling and
      simulation solutions.</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Previously, the Company&#146;s operations were
broken down into the following operating segments; Military Simulation &amp;
Training (Military), Civil Simulation &amp; Training (Civil) and Marine Controls
(Marine) until its disposal in the fourth quarter of fiscal 2005.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND FINANCIAL STATEMENT PRESENTATION</FONT></B></P>
<P align=left><FONT face=serif size=2>These interim unaudited consolidated
financial statements have been prepared, in all material respects, in accordance
with generally accepted accounting principles in Canada (GAAP) as defined by the
Canadian Institute of Chartered Accountants (CICA). These accounting principles
are different in some respects from United States generally accepted accounting
principles (US GAAP).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>These
financial statements comply with generally accepted accounting principles
applicable to interim financial statements and, except as otherwise indicated
hereunder, have been prepared on a basis consistent with CAE&#146;s annual
consolidated financial statements for the year ended March 31, 2005. These
statements do not include all of the disclosures applicable to annual financial
statements; for a full description of the Company&#146;s accounting policies, refer
to CAE&#146;s annual consolidated financial statements for the year ended March 31,
2005 available on-line at www.sedar.com as well as at the Company&#146;s website at
www.cae.com.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>CAE&#146;s
business operating segments are affected in varying degrees by market
cyclicality and/or seasonality. As such, operating performance over a given
interim period should not necessarily be considered indicative of full fiscal
year performance.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Simulation Products/Civil segment sells equipment directly to airlines and to
the extent that the entire commercial airline industry is affected by cycles of
expansion and contraction, the Company&#146;s performance will also be affected. The
Training &amp; Services/Civil segment activities are affected by the seasonality
of its industry &#150; in times of peak travel (such as holidays), airline and
business jet pilots are generally occupied flying aircraft rather than attending
training sessions. The converse also holds true &#150; slower travel periods tend to
be more active training periods for pilots. Therefore, the Company has
historically experienced greater demand for training services in the first and
fourth quarters of the fiscal year and lower demand during the second and third
quarters.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Order intake
for CAE&#146;s two Military business segments &#150; Simulation Products/Military and
Training &amp; Services/Military &#150; has historically not shown any noticeable
degree of cyclicality or seasonality in the course of providing solutions for
government customers.</FONT></P>
<P align=left><FONT face=serif size=2>Certain comparative figures have been
reclassified to conform to the current presentation. </FONT></P>
<P align=left><FONT face=serif size=2>Except where otherwise noted, all amounts
in these financial statements are expressed in Canadian dollars.</FONT></P>
<P align=right><FONT face=sans-serif size=1>33 &gt; </FONT>
<HR align=center width="100%" noShade SIZE=2>

<P></P><A name=page_46></A>
<TABLE style="WIDTH: 980px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>USE OF ESTIMATES</FONT></B></P>
<P align=left><FONT face=serif size=2>The preparation of financial statements in
conformity with GAAP requires CAE&#146;s management (Management) to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the period
reported. On an ongoing basis, Management reviews its estimates, particularly as
they relate to accounting on long-term contracts, useful lives, employee future
benefits, income taxes, impairment of long-lived assets and goodwill, based on
Management&#146;s best knowledge of current events and actions that the Company may
undertake in the future. While measurements in both annual financial statements
and interim financial statements are often based on reasonable estimates, the
preparation of interim financial statements will generally require a greater use
of estimation than of annual financial statements. Actual results could differ
from those estimates; significant changes in estimates and/or assumptions could
result in impairment of certain assets.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>BASIS OF
CONSOLIDATION</FONT></B></P>
<P align=left><FONT face=serif size=2>The consolidated financial statements
include the accounts of CAE Inc. and all majority-owned subsidiaries and
variable interest entities for which the Company is the primary beneficiary.
They also include the Company&#146;s proportionate share of assets, liabilities and
earnings of joint ventures in which the Company has an interest. All significant
intercompany accounts and transactions have been eliminated. Investments over
which CAE exercises significant influence are accounted for using the equity
method and portfolio investments are accounted for using the cost
method.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>NOTE 2.</FONT></B><BR><B><FONT
      face=sans-serif size=2>BUSINESS ACQUISITIONS AND
      COMBINATIONS</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><B><FONT face=sans-serif size=1>TERRAIN EXPERTS,
INC.</FONT></B></P>
<P align=left><FONT face=serif size=2>On May 20, 2005, the Company acquired all
the issued and outstanding shares of Terrain Experts, Inc. (Terrex), which
develops software tools for terrain database generation and visualization. Total
consideration for this acquisition amounted to US$11.1 million ($14.0 million)
payable in common shares issued by CAE and a nominal cash portion in three
instalments as follows:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(i)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>1,000,000 shares representing
      US$4.8 million (approximately $6.1 million issued at a price of $6.13 per
      share, the closing price of the common shares on the TSX on May 20, 2005),
      and US$0.2 million ($0.3 million) in cash together representing US$5.0
      million ($6.4 million) at the closing date;</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(ii)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>US$3.6 million through the
      issuance of CAE shares in fiscal 2007 (twelve months following the closing
      of the acquisition) to be calculated at the TSX stock price on the date of
      issuance; and</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iii)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>US$2.5 million through the
      issuance of CAE shares in fiscal 2008 (twenty-four months following the
      closing of the transaction) to be calculated at the TSX stock price on the
      date of issuance.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>During the second quarter of fiscal 2006,
the Company adjusted the purchase price allocation. Those adjustments resulted
in a net increase of $1.1 million of non-cash working capital items, an increase
of $0.4 million for goodwill and a decrease of $0.1 million of future income
taxes from the preliminary allocation previously disclosed.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The purchase
price is still subject to an adjustment based on performance of the business for
the twelve-month period following the acquisition. Any changes in the total
consideration will be accounted for as a change in goodwill.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 34<B></B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_47></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="32%" colSpan=3
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT 2006</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=2>The fair value of net
      assets acquired from Terrex are summarized as follows:</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>(unaudited)</FONT>&nbsp;
    </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Current
      assets</FONT><SUP><FONT face=serif size=1
     >(1)</FONT></SUP>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="26%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT face=serif size=1
     >$</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>1.9</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Current
      liabilities</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>(2.1)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Property, plant and
      equipment and other assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>3.6</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Intangible
      assets</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="4%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=center width="65%"><FONT face=serif
      size=1>Trade names</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>0.3</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=center width="65%"><FONT face=serif
      size=1>Technology</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>1.6</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%">&nbsp;
      &nbsp;<FONT face=serif size=1>Customer
      relations</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>0.8</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Goodwill</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>4.5</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Future income
      taxes</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>0.5</FONT></B>&nbsp;
  </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><B><FONT
      face=serif size=1>Fair value of
      net assets acquired exclusing cash position at
      acquisition</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1>11.1</FONT></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><B><FONT
      face=serif size=1>Cash position
      at acquisition</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>2.9</FONT></B>&nbsp;
  </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><B><FONT
      face=serif size=1>Fair value of
      net assets acquired</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1>14.0</FONT></B>&nbsp;
  </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><FONT
      face=serif size=1>Less: Issuance of
      1,000,000 common shares </FONT><FONT face=sans-serif size=1
     >(Note 7)</FONT>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>(6.1)</FONT></B>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=center width="65%"><FONT face=serif
      size=1>Shares to be issued </FONT><SUP><FONT
      face=serif size=1>(2)</FONT></SUP>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=left width="26%">&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>(7.6)</FONT></B>&nbsp;
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%"><B><FONT
      face=serif size=1>Total cash
      consideration</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="26%">&nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT face=serif size=1
     >$</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=center width="4%"><B><FONT face=serif
      size=1>0.3</FONT></B>&nbsp;
  </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=1>(1)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=1>Excluding cash on hand.</FONT>
  </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=1>(2)</FONT>&nbsp; &nbsp;
      &nbsp; </TD>
    <TD width="100%"><FONT face=serif size=1>Has been accounted for as a
      liability pending issuance.</FONT> </TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>The acquisition was accounted for under
the purchase method and the operating results have been included from its
acquisition date. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
allocation of the purchase price of Terrex is based on Management&#146;s best
estimate of the fair value of assets and liabilities. Allocation involves a
number of estimates as well as the gathering of information over a number of
months. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The net
assets of Terrex, excluding cash and cash equivalents and income taxes, were
previously included in the Training &amp; Services/Military segment. At the
beginning of the third quarter, the net assets and results from operation of
Terrex were reclassified to the Simulation Products/ Military segment. This
revised segmentation better reflects the nature of operations of the acquired
entity.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>GREENLEY &amp; ASSOCIATES
INC.</FONT></B></P>
<P align=left><FONT face=serif size=2>During the second quarter of fiscal 2006,
the Company completed the purchase price allocation for this acquisition which
closed on November 30, 2004. There were no adjustments required on the
preliminary allocation previously disclosed.</FONT></P>
<P align=left><B><FONT face=sans-serif size=2>NOTE 3.</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=2>DISCONTINUED OPERATIONS AND ASSETS
HELD FOR SALE</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=1>CLEANING
TECHNOLOGIES</FONT></B></P>
<P align=left><FONT face=serif size=2>In fiscal 2004, CAE completed the sale of
its last Cleaning Technologies business, Alpheus Inc, to Cold Jet Inc. The
Company was entitled to receive further consideration based on the performance
of the business until 2007 and also had certain obligations to Cold Jet Inc.
During the third quarter of fiscal 2006, CAE and Cold Jet Inc. concluded an
agreement to settle on the further consideration and cancel the outstanding
obligations of the Company. On January 24, 2006 an amount of $0.3 million was
received by the Company.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>FORESTRY SYSTEMS</FONT></B></P>
<P align=left><FONT face=serif size=2>On August 16, 2002, CAE sold substantially
all the assets of the sawmill division of its Forestry Systems. The Company was
entitled to receive further cash consideration from the sale based on operating
performance of the disposed business for a three-year period to August 2005. In
November 2005, the Company received a notice from the buyers saying that the
targeted level of operating performance that would trigger the payment had not
been achieved. CAE has completed a review of the buyers&#146; books and records and
has in January 2006 instituted legal proceedings to collect the payment that it
believes is owed to the Company. The Company has incurred $0.2 million of fees
to date in connection with the evaluation and litigation exercise.</FONT></P>
<P align=left><B><FONT face=sans-serif size=1>MARINE CONTROLS</FONT></B></P>
<P align=left><FONT face=serif size=2>In the second quarter of fiscal 2005, the
Board of Directors approved a plan to divest its Marine Controls business. On
February 3, 2005, CAE completed with L-3 Communications Corporation (L-3) the
sale of the substantial components of its Marine Controls segment for cash
consideration of $238.6 million. This amount is subject to the approval by L-3
of the net working capital of the Marine Controls segment which</FONT></P>
<P align=right><FONT face=sans-serif size=1>35 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_48></A>
<TABLE style="WIDTH: 985px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>should be finalized around the end of
fiscal 2006. CAE does not believe that this will result in a material adjustment
to the gain on disposal already recorded. During the second and third quarters,
in accordance with the purchase agreement, L-3 acquired the two components of
the Marine Controls segment that were subject to regulatory approvals. This
transaction resulted in the assumption by L-3 of CAE&#146;s guarantee of $53.0
million (&#163;23 million) of project-financed related debt for the UK Astute Class
submarine training program.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The results
of Marine Controls have been reported as discontinued operations and previously
reported statements have been reclassified. Interest expense relating to debt
not directly attributable to the continuing operations and paid with the
proceeds of the sale of the Marine Controls business has been allocated to
discontinued operations based on its share of net assets.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=2>Summarized financial
      information for the discontinued operations is as follows:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=17>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%" colSpan=7><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="21%" colSpan=7><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD align=right width="18%" colSpan=5
     >&nbsp; &nbsp; &nbsp;<B><FONT face=serif size=1
     >december</FONT></B> <B><FONT face=serif
      size=2>31</FONT></B>&nbsp;
    &nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD align=right width="15%" colSpan=5
     >&nbsp; &nbsp; &nbsp; &nbsp;<B><FONT face=serif size=1
     >december</FONT></B> <B><FONT
      face=serif size=2
     >31</FONT></B>&nbsp; &nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%" colSpan=3><FONT
      face=serif size=2>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=2>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Marine
      Controls</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp; 34.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>$ 98.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp; 34.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>$ 98.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Net earnings (loss) from
      Cleaning Technologies,</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Net of tax
      expense of $0.1 (2004; Quarter - $nil, YTD - $nil)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$
0.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$ (4.4)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      0.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>$ (4.4)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Net loss from Forestry
      Systems,</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Net of tax
      recovery of $0.1 (2004; $nil)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1
BASEFACE="serif">(0.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1
BASEFACE="serif">(0.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Net earnings (loss) from
      Marine Controls,</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Net of tax
      expense of $nil (2004; Quarter - $1.7, YTD - $5.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>3.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1
BASEFACE="serif">(0.7)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>9.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Net loss from Training
      &amp; Services/Civil,</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Net of tax
      recovery of $nil (2004; Quarter - $0.1, YTD - $0.1)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(0.2)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>(0.2)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Net earnings (loss) from
      discontinued operations</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    0.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$ (1.3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$
    (0.6)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>$ 5.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=2>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=17>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%" colSpan=5><B><FONT
      face=serif size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="15%" colSpan=5><FONT
      face=serif size=1>as at march</FONT> <FONT
      face=serif size=2>31</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%" colSpan=3><B><FONT
      face=serif size=2
     >2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=2>2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%" colSpan=3><B><FONT
      face=serif size=1
     >marine</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%" colSpan=3><FONT
      face=serif size=1>marine</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%" colSpan=3><B><FONT
      face=serif size=1
     >controls</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%" colSpan=3><B><FONT
      face=serif size=1
     >other</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%" colSpan=3><FONT
      face=serif size=1>controls</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>other</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Current assets held for
      sale</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Cash and cash
      equivalents</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 4.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
BASEINDENT="0">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>$&nbsp;&nbsp; &nbsp;
  &#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Accounts
      receivable</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>1.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Prepaid
      expenses</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 5.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
BASEINDENT="0">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;
    &#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Long-term assets held for
      sale</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment, net</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$
5.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp; 50.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>$ 4.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Other
      assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>2.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$
5.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>&nbsp; $&nbsp; 53.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%" colSpan=3><FONT
      face=serif size=1>$ 4.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Current liabilities
      related to assets held for sale</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;
      &nbsp;<FONT face=serif size=1>Accounts
      payable and accrued liabilities</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1
     >$&nbsp;&nbsp;&nbsp;&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 7.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;
    &#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 7.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;
    &#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"><FONT
      face=serif size=1>Long-term liabilities
      related to assets held for sale</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=serif size=1
     >Long-term debt</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&nbsp;$&nbsp;&nbsp;
      &nbsp;&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp; 53.0</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;
    &#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%"
     >&nbsp;<FONT face=serif size=1
     >Future income taxes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>0.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="51%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp; &nbsp;
      &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$&nbsp; 53.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;&nbsp;
    &#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Other property, plant and equipment held
for sale are expected to be disposed and consist of land and buildings related
to the Training &amp; Services/Civil segment.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During the
third quarter of fiscal 2006, CAE as part of its review of performance and
strategic orientation, decided to close its training centre located in
Maastricht. As a result a building was reclassified in assets held for sale for
a value of $1.8 million.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt;<FONT face=sans-serif
size=1></FONT>3</FONT><FONT face=sans-serif size=1>6</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_49></A>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="63%" colSpan=3
     ><B><FONT face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%" colSpan=3><B><FONT
      face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="63%" colSpan=3
     ><B><FONT face=sans-serif size=2
     >NOTE 4.</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="63%" colSpan=3
     ><B><FONT face=sans-serif size=2
     >LONG-TERM DEBT</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=9>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="63%" colSpan=3
     ><FONT face=serif size=1
     >(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%" colSpan=3><B><FONT
      face=serif size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>as at march</FONT> <FONT face=serif
      size=2>31</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="63%" colSpan=3
     ><I><FONT face=serif size=1
     >(amounts in millions, unless otherwise
    stated)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=2>2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(i)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Senior
    notes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align=right width="2%">&nbsp;&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
    125.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>$ 150.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(ii)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Revolving unsecured term
      credit facilities,</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>5 years
      maturing July 2010; US$400.0 (outstanding December 31, 2005 &#150; $nil and US$
      nil)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>5 years
      maturing April 2006; US$350.0 (outstanding March 31, 2005 &#150; $30.4 and US$
      nil)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>30.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="70%" colSpan=3
     >&nbsp; &nbsp;<FONT face=serif size=1
     >5 years maturing July 2010,</FONT> <FONT face=sans-serif
      size=1>&euro;</FONT><FONT face=serif size=1
     >100.0 (outstanding December 31, 2005
      &#150;</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >15.0; March 31, 2005 &#150;</FONT> <FONT face=sans-serif
      size=1>&euro;</FONT><FONT face=serif size=1
     >nil)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>20.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(iii)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Term loans maturing in May
      and June 2011</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>(outstanding
      December 31, 2005 &#150;</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >27.8 and</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >5.5; March 31, 2005 &#150;</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >30.5 and</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >6.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>46.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>57.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(iv)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Term loans of &#163;12.7
      secured, maturing in October 2016</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>(outstanding
      December 31, 2005 &#150; &#163;5.2; March 31, 2005 &#150; &#163;6.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>10.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>13.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(v)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Grapevine Industrial
      Development Corporation bonds, secured maturing in January
    2010</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>and 2013
      (US$27.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>31.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>32.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(vi)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Term loan maturing in
      December 2019</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>(outstanding
      December 31, 2005 &#150;</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >10.4; March 31, 2005 &#150;</FONT> <FONT face=sans-serif
      size=1>&euro;</FONT><FONT face=serif size=1
     >nil)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>14.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(vii)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Amsterdam asset-backed
      financing maturing in December 2007 and August 2008</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="6%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="14%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;
      &nbsp;<FONT face=serif size=1>(outstanding
      December 31, 2005 &#150;</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >nil; March 31, 2005 &#150;</FONT> <FONT face=sans-serif size=1
     >&euro;</FONT><FONT face=serif size=1
     >24.7)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>38.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(viii)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Miami Dade County Bonds,
      maturing in March 2024 (US$11.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>12.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>13.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(ix)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Obligations under capital
      lease commitments</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>3.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>6.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%"><FONT
      face=serif size=1>(x)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%"><FONT
      face=serif size=1>Other debt maturing
      January 2008 to December 2012</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>10.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1
BASEFACE="serif">275.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>342.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="63%" colSpan=3
     ><FONT face=serif size=1>Less:
      Long-term debt due within one year</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>11.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>35.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="58%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align=right width="2%">&nbsp;&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;
    264.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="14%"><FONT face=serif
      size=1>$ 307.6</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Total debt as at December 31, 2005 is
$275.6 million compared to $342.9 million as at March 31, 2005. The net decrease
in total debt of $67.3 million results mainly (as set-out below) from the
incurrence of new debt of $25.8 million offset by the repayment of $71.6 million
of debt and reduction of debt due to foreign exchange fluctuations in the amount
of $21.5 million.</FONT></P>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><FONT face=serif size=2>The new debt is split as
      follows:</FONT><BR></TD></TR></TABLE></P>
<UL>
  <LI><FONT face=serif size=2>Increase of $14.3 million from CAE&#146;s proportionate
  share (25%) of the initial drawdown of debt in the NH90 project. The debt is
  non-</FONT> <FONT face=serif size=2>recourse to CAE.</FONT>
  <LI><FONT face=serif size=2>Increase of $5.0 million resulting from CAE&#146;s
  proportionate share (49%) of the initial drawdown of a term debt for CAE&#146;s
  joint venture</FONT> <FONT face=serif size=2>in the Zhuhai Training Centre.
  The debt is non-recourse to CAE and has a final maturity of January
  2008.</FONT>
  <LI><FONT face=serif size=2>Incurrence of $5.1 million of financing for the
  establishment of the Enterprise Resource Planning (ERP) system. An unsecured
  facility</FONT> <FONT face=serif size=2>has been put in place in order to
  secure financing for the cost of the ERP implementation. Amounts will be drawn
  down from the facility</FONT> <FONT face=serif size=2>as incurred, on a
  quarterly basis, with monthly repayments for a term of seven years beginning
  at the end of the first month after the end</FONT> <FONT face=serif size=2>of
  each quarter.</FONT>
  <LI><FONT face=serif size=2>Increase of approximately $1.4 million on various
  other debts.</FONT></LI></UL>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><FONT face=serif size=2>The reduction of debt is as
      follows:</FONT><BR></TD></TR></TABLE></P>
<UL>
  <LI><FONT face=serif size=2>Reduction of $20.0 million Canadian dollar Senior
  Notes Tranche which matured in June 2005.</FONT>
  <LI><FONT face=serif size=2>Reduction of $30.4 million in the North American
  Tranche of the revolving term credit facility, offset by an increase of $20.7
  million</FONT> <FONT face=serif size=2>(Euro 15.0 million) of drawdown on the
  European Tranche of the revolving term credit facility in order to partially
  finance the repayment</FONT> <FONT face=serif size=2>of the Amsterdam
  asset-backed financing.</FONT>
  <LI><FONT face=serif size=2>During the quarter the Company repaid the
  Amsterdam asset-backed financing reducing the debt by approximately $34.2
  million with</FONT> <FONT face=serif size=2>a mix of excess cash and
  borrowings under the revolving term credit facility.</FONT>
  <LI><FONT face=serif size=2>Repayments of capital of approximately $7.7
  million on various other debts.</FONT></LI></UL>
<P align=left><FONT face=serif size=2>On July 7, 2005, the Company entered into
a new revolving credit agreement. This new revolving unsecured term credit
facility has a committed term of five years maturing in July 2010. The total
credit available is equal to US$400.0 million and</FONT> <FONT face=sans-serif
size=1>&euro;</FONT><FONT face=serif size=2>100.0 million. The facility has covenants
covering minimum shareholders&#146; equity, interest coverage and debt coverage
ratios. The new facility has extended the Company&#146;s ability to enter into
project financings which are non-recourse to the Company. The facility also
provides capability to issue letters of credit and bank guarantees.</FONT></P>
<P align=right><FONT face=sans-serif size=1>37</FONT><FONT face=sans-serif
size=1></FONT><FONT face=sans-serif size=1><B>&gt;</B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_50></A>
<TABLE style="WIDTH: 973px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>NOTE 5.</FONT></B><BR><B><FONT
      face=sans-serif size=2>LETTERS OF CREDIT AND
  GUARANTEES</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>As at December 31, 2005, CAE had
outstanding letters of credit and performance guarantees in the amount of $101.5
million (March 31, 2005 &#150; $73.3 million) issued in the normal course of
business. These guarantees are issued under standby facilities available to the
Company through various financial institutions. The increase in the outstanding
amount results mainly from additional project-related requirements.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="42%" colSpan=3><B><FONT
      face=serif size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>as at march</FONT></B>
      <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=2
 >2005</FONT></B>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Advance
    payment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      39.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><FONT face=serif
      size=1>$ 25.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Contract
      performance</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>13.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><FONT face=serif
      size=1>7.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Operating lease
      obligation</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>27.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><FONT face=serif
      size=1>37.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Relocation
      obligation</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>19.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Other</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>2.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><FONT face=serif
      size=1>2.6</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Total</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="34%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><B><FONT face=serif
      size=1>$
    101.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><FONT face=serif
      size=1>$ 73.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>The advance payment guarantees are related
to progress/milestone payments made by our customers and are reduced or
eliminated upon delivery of the product.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The contract
performance guarantees are linked to the completion of the intended product or
service rendered by CAE and at the satisfaction of the customer. It represents
10% to 20% of the overall contract amount. The customer releases the Company
from these guarantees at the signature of a certificate of completion or
according to the guarantee period set in the contract which date has been
specified in the performance guarantee as the maturity date.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The letter
of credit for the operating lease obligation provides credit support for the
benefit of the owner participant, in the September 30, 2003 sale and leaseback
transaction. The reduction from the March 31, 2005 amount results from a
cancellation during the quarter as CAE exercised a purchase option on an
operating lease which was supported by the letter of credit.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
relocation obligation is a letter of credit covering CAE&#146;s potential inability
to relocate a simulator upon a possible request of the lessor. In the event of a
draw down on the letter of credit, ownership of the simulator would revert back
to CAE.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><B><FONT face=sans-serif
      size=2>NOTE
    6.</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="17%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%"
   >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><B><FONT face=sans-serif
      size=2>INTEREST EXPENSE,
      NET</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="17%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%"
   >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=2
     >The Company&#146;s interest expense, net, was as
      follows:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="17%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%"
   >&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="31%" colSpan=5
   ><B><FONT face=serif size=1
     >three months
    ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=5
   ><B><FONT face=serif size=1
     >nine months
    ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD align=right width="31%" colSpan=5
   >&nbsp; &nbsp; &nbsp; &nbsp;
      &nbsp; &nbsp;<B><FONT face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp; &nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=5
   ><B><FONT face=serif size=1
     >december</FONT></B> <B><FONT
      face=serif size=2
   >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><I><FONT face=serif size=1
     >(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%" colSpan=3
   ><FONT face=serif size=2
     >2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=2
     >2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Interest on long-term debt</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >$ 7.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp; 7.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >$ 17.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp; 23.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Amortization of deferred financing costs and
      other</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >0.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >1.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >3.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >3.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Allocation of interest expense to
      discontinued operations</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >(0.3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >(1.0)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Interest capitalized</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >(0.8)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >(1.9)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >(2.6)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >(5.8)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Interest on long-term debt</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >$ 7.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp; &nbsp;6.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >$ 18.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   ><FONT face=serif size=1
     ></FONT></TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp; 20.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13
   >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Interest income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >$ (1.4)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >$&nbsp; (1.2)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >$ (3.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp; (4.7)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Other interest expense (income),
    net</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >0.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >(0.2)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >(0.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >0.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Other interest income, net</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >$ (1.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >$&nbsp; (1.4)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >$ (3.3)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp; (4.2)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"
   ><FONT face=serif size=1
     >Interest expense, net</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%"
   ><B><FONT face=serif size=1
     >$ 6.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp;&nbsp; 5.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"
   ><B><FONT face=serif size=1
     >$ 15.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"
   ><FONT face=serif size=1
     >$&nbsp;&nbsp;&nbsp; 16.0</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>Almost all of the Company&#146;s interest
income is coming from the advances to CVS Leasing Ltd. (CVS). CVS is an entity
that owns the simulators and other equipment used to train the UK Ministry of
Defence pilots at CAE&#146;s training centre in Benson, England. The Company has a
minority shareholding of 14% in CVS.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt;<FONT face=sans-serif
size=1></FONT>38<FONT face=sans-serif size=1></FONT></FONT><FONT face=sans-serif
size=1><B></B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_51></A>
<TABLE style="WIDTH: 971px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><B><FONT
      face=sans-serif size=2
     >NOTE 7.</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="11%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><B><FONT
      face=sans-serif size=2
     >CAPITAL STOCK</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="25%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="11%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=11>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="38%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=3><FONT
      face=serif size=1>twelve months
    ended</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1>(</FONT><I><FONT
      face=serif size=1>amounts in
      millions, except number of shares)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="38%" colSpan=5><B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31, 2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=3><FONT
      face=serif size=1>march</FONT> <FONT
      face=serif size=2>31,
2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >number</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1
   >stated</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>number</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>stated</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1>of
    shares</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1
>value</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>of shares</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>value</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1>Balance at beginning of
      period</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >248,070,329</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    373.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>246,649,180</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$ 367.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1>Shares issued
    (a)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >1,091,564</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>6.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>424,628</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>2.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1>Stock options
      exercised</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >1,116,315</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>5.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>869,620</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>3.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1>Stock
    dividends</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >37,861</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>0.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>126,901</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>0.7</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><FONT
      face=serif size=1>Balance at end of
      period</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="25%"><B><FONT face=serif
      size=1
   >250,316,069</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="3%"></TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    386.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"><FONT face=serif
      size=1>248,070,329</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$ 373.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(a)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>On May 20, 2005, the Company
      issued 1,000,000 common shares at a price of $6.13 per share for the
      acquisition of Terrain Experts, Inc. On November 30, 2005, the Company
      issued 91,564 common shares at a price of $8.07 per share for the second
      payment of the original purchase price, already accounted for in the
      purchase price allocation of Greenley &amp; Associates Inc.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>NOTE 8.</FONT></B><BR><B><FONT
      face=sans-serif size=2>EMPLOYEE FUTURE
  BENEFITS</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>The Company has two registered defined
benefit pension plans in Canada (one for employees and one for designated
executives) that provide benefits based on length of service and final average
earnings.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif
size=2>Contributions reflect actuarial assumptions concerning future investment
returns, salary projections and future service benefits. The actuarial present
value of accrued pension benefits has been estimated taking into consideration
economic and demographic factors over an extended future period. Plan assets are
represented primarily by Canadian and foreign equities and government and
corporate bonds.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=2>Significant assumptions
      used in the calculation are as follows:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="15%" colSpan=3><B><FONT
      face=serif size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%" colSpan=5><FONT
      face=serif size=1>as at march</FONT> <FONT
      face=serif size=2>31</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=2>2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Expected return on plan
      assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>6.5%</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="8%" colSpan=3><FONT
      face=serif size=1>6.5%</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Discount rate for pension
      costs</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>6.5%</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="8%" colSpan=3><FONT
      face=serif size=1>6.5%</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Compensation rate
      increases</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>4.5%</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="8%" colSpan=3><FONT
      face=serif size=1>4.5%</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" colSpan=9
     ><FONT face=serif size=2>The
      total benefit cost in the registered plans for the periods ended December
      31 included the following components:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=15>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="32%" colSpan=7><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD align=right width="21%" colSpan=5
     ><B><FONT face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp; &nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="17%" colSpan=5><B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="15%" colSpan=3
     >&nbsp; &nbsp;<B><FONT face=serif size=2
     >2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Current service
      cost</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><B><FONT
      face=serif size=1>$&nbsp;&nbsp;
      1.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 0.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
3.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 2.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Interest cost on projected
      pension obligations</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><B><FONT
      face=serif size=1
     >2.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>7.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>6.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Expected return on plan
      assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><B><FONT face=serif
      size=1
>(2.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(1.9)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>(6.3)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>(5.7)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Amortization of net
      actuarial loss</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><B><FONT
      face=serif size=1
     >0.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>1.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>0.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Amortization of past
      service costs</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><B><FONT
      face=serif size=1
     >0.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>0.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>0.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT
      face=serif size=1>Net pension
    expense</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><B><FONT
      face=serif size=1>$&nbsp;&nbsp;
      2.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 1.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
6.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 5.1</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>The actual employer&#146;s contribution to the
registered pension plans for the current fiscal year is not expected to be
significantly different from amounts previously disclosed in the annual
consolidated financial statements for the year ended March 31, 2005
(approximately $7.4 million annually).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In addition,
the Company maintains a supplemental arrangement to provide defined benefits for
designated executives. This supplemental arrangement is solely the obligation of
the Company and there is no requirement to fund. The Company, however, is
obligated to pay the benefits when they become due. Once the designated
executive retires from the Company, the Company is required to secure the
obligation for that executive. As at December 31, 2005, the Company has issued
letters of credit totalling $19.5 million to secure the obligations under the
supplementary plan.</FONT></P>
<P align=right><FONT face=sans-serif size=1>39</FONT><FONT face=sans-serif
size=1></FONT><FONT face=sans-serif size=1><B>&gt;</B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_52></A>
<TABLE style="WIDTH: 987px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The net
pension expense of the supplemental arrangement for the three-month period ended
December 31, 2005 was $0.4 million (2004 &#150; $0.4 million) and is made up of $0.2
million of current service costs (2004 &#150; $0.2 million) and $0.2 million of
interest cost on projected obligations (2004 &#150; $0.2 million). For the nine-month
period ended December 31, 2005, the net pension expense is $1.3 million (2004 &#150;
$1.3 million) and is composed of $0.6 million of current service cost (2004 &#150;
$0.6 million) and $0.7 million of interest cost on projected obligations (2004 &#150;
$0.7 million). The pension benefits paid and expected to be paid by the Company
are not significantly different from benefits previously disclosed in the annual
consolidated financial statements for the year ended March 31, 2005
(approximately $0.8 million annually).</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><B><FONT
      face=sans-serif size=2
     >NOTE 9.</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><B><FONT
      face=sans-serif size=2
     >SUPPLEMENTARY INFORMATION</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="32%" colSpan=5><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD align=right width="32%" colSpan=5
     >&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp; &nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=5><B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%" colSpan=3><FONT
      face=serif size=2>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=1>Cash provided by (used in)
      non-cash working capital:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Accounts
    receivable</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>$
8.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp; 39.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    (4.7)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 31.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2
BASEFACE="serif">Inventories</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>5.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>8.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1
   >(20.7)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>6.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Prepaid
    expenses</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>8.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>9.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>5.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>7.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Income taxes
      recoverable</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>6.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>7.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1
BASEFACE="serif">(4.0)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>(2.7)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Accounts payable and
      accrued liabilities</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>20.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>(8.7)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>21.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>(37.9)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Deposits on
      contracts</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>7.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>1.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>57.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>13.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Decrease in non-cash
      working capital</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>$
    55.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp; 57.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    55.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 18.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Supplemental cash flow
      disclosure:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Interest
    paid</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>$
4.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>&nbsp;$&nbsp; 10.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    17.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 28.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Income taxes paid
      (recovered)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>$
4.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$(8.7)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
9.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ (3.0)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR>
    <TD width="99%" colSpan=13>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Supplemental statement of
      earnings disclosure:</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="18%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="43%"><FONT
      face=serif size=2>Foreign exchange
      gain</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%"><B><FONT face=serif
      size=1>$
    (0.2)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$ (3.7)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    (8.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ (6.0)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=13>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=2>NOTE 10.</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=2>OPERATING SEGMENTS AND GEOGRAPHIC
INFORMATION</FONT></B></P>
<P align=left><FONT face=serif size=2>The Company elected to organize its
businesses based principally on products and services. Effective April
1</FONT><SUP><FONT face=serif size=2>st</FONT></SUP><FONT face=serif size=2>,
2005, the Company changed its internal organization structure such that
operations are managed through four segments:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(i)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Civil &#150;
      designs, manufactures and supplies civil flight simulators, training
      devices and visual systems;</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(ii)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>Simulation Products/Military &#150;
      designs, manufactures and supplies advanced military training products for
      air, land and sea applications;</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iii)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Civil &#150;
      provides business and commercial aviation training and related services;
      and</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(iv)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>Training &amp; Services/Military
      &#150; supplies military turn key training and operational solutions, support
      services, life extensions, systems maintenance and modelling and
      simulation solutions.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><FONT face=serif size=2>Due to this change, the corresponding
items of segment information for earlier periods have been restated to conform
to the new internal organization. The accounting policies of each segment are
the same as those described in the Company&#146;s annual consolidated financial
statements for the year ended March 31, 2005 (Note 1 to the consolidated
financial statements).</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Previously,
the Company&#146;s operations were broken down into the following operating segments:
Military Simulation &amp; Training (Military), Civil Simulation &amp; Training
(Civil) and Marine Controls (Marine) up to its disposal in the fourth quarter of
fiscal 2005.</FONT></P>
<P align=left><FONT face=sans-serif size=1><B>&gt;</B> 40</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_53></A>
<TABLE style="WIDTH: 989px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>RESULTS BY SEGMENTS</FONT></B>
<FONT face=sans-serif></FONT></P>
<P align=left><FONT face=serif size=2>The profitability measure employed by the
Company for making decisions about allocating resources to segments and
assessing segment performance is earnings before other income (expense) net,
interest, income taxes and discontinued operations (hereinafter referred to as
Segment Operating Income). The Simulation Products/Civil and the Simulation
Products/Military segments operate under an integrated organization sharing
substantially all engineering, development, global procurement, program
management and manufacturing functions. The accounting principles used to
prepare the information by operating segment are the same as those used to
prepare the consolidated financial statements of the Company. Transactions
between operating segments are mainly simulator transfers from the Simulation
Products/Civil segment to the Training &amp; Services/Civil segment which are
recorded at cost. The method used for the allocation of assets jointly used by
operating segments and costs and liabilities jointly incurred (mostly corporate
costs) between operating segments is based on level of utilization when
determinable and measurable, otherwise the allocation is made based on a
proportion of each segment&#146;s cost of sales.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="24%" colSpan=5><B><FONT
      face=serif size=1>simulation
      products</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="21%" colSpan=3><B><FONT
      face=serif size=1>training
      &amp; services</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%"><B><FONT
      face=serif size=1
     >total</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><I><FONT
      face=serif size=1>three
      months ended December 31 (amounts in millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><B><FONT
      face=sans-serif size=1
     >CIVIL</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>External
    revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"><B><FONT
      face=serif size=1
     >&nbsp;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    63.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 52.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    78.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 75.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
    141.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ 128.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>10.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>(3.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>14.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>9.0</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>24.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>6.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>1.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>9.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>8.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>11.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>10.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Intangible and
      other assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>0.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>1.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>4.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>2.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>41.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>32.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>43.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>34.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><B><FONT
      face=sans-serif size=1
     >MILITARY</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>External
    revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    82.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 82.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    52.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 46.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
    135.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ 129.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>6.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>6.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>8.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>4.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>14.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>11.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>1.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>1.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>3.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Intangible and
      other assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>1.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>0.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>0.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>2.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>1.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>1.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><B><FONT
      face=sans-serif size=1
     >TOTAL</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>External
    revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%" colSpan=3><B><FONT
      face=serif size=1>$
      145.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 135.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>$
    130.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>$ 122.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
    276.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ 257.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>16.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>3.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>22.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>13.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>39.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>17.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>2.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>3.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>10.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>10.0</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>13.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>13.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Intangible and
      other assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>1.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>1.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>2.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>5.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>4.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>6.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>3.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>3.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><B><FONT face=serif
      size=1>42.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><FONT face=serif
      size=1>33.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>45.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>37.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=17>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=1>41 <B>&gt;</B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_54></A>
<TABLE style="WIDTH: 985px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="23%" colSpan=3><B><FONT
      face=serif size=1>simulation
      products</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="21%" colSpan=3><B><FONT
      face=serif size=1>training
      &amp; services</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"><B><FONT
      face=serif size=1
     >total</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><I><FONT
      face=serif size=1>nine months
      ended December 31 (amounts in millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2004</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><B><FONT
      face=sans-serif size=1
     >CIVIL</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="12%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>External
    revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>$
    179.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 159.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$
    241.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 227.4</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
    420.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 386.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>20.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>10.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>42.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>26.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>63.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>36.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="12%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>4.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>4.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>27.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>26.2</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>32.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>31.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Intangible and
      other assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>5.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>4.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>8.7</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>9.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>11.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>3.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>7.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>66.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>90.4</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>69.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>97.9</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><B><FONT
      face=sans-serif size=1
     >MILITARY</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="12%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>External
    revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>$
    249.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 198.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$
    152.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 138.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
    402.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 336.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>20.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>17.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>15.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>16.6</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>36.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>34.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="12%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>4.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>6.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>3.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.0</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>7.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>9.8</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Intangible and
      other assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>3.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>0.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>2.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>5.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>3.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>3.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>15.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>2.0</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>18.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>5.6</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><B><FONT
      face=sans-serif size=1
     >TOTAL</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="12%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>External
    revenue</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>$
    428.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 357.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$
    394.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 365.9</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$
    822.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; 723.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Segment Operating
      Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>41.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>27.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>58.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>43.1</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
BASEFACE="serif">100.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>71.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Depreciation and
      amortization</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="12%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Property,
      plant and equipment</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>8.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>11.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>31.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>29.2</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>39.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>40.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%">&nbsp;
      &nbsp;<FONT face=serif size=1>Intangible and
      other assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>8.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>6.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>12.2</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>15.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>15.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="29%"><FONT
      face=serif size=1>Capital
      expenditures</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="12%"><B><FONT face=serif
      size=1>6.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>11.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>81.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>92.4</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>87.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>103.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>The Company is subject to examination by
the taxation authorities in various jurisdictions. The determination of tax
liabilities and investment tax credits (ITC) recoverable involve certain
uncertainties in the interpretation of complex tax regulations. Therefore, the
Company provides for potential tax liabilities and ITC recoverable based on
Management&#146;s best estimates. Differences between the estimates and the ultimate
amounts of taxes and ITC are recorded in earnings at the time they can be
determined. In the three-month period ended June 30, 2004, an amount of $11.4
million, net of tax of $4.7 million, of ITC was recognized in net earnings and
$0.4 million was recorded against deferred development costs. These amounts
related to the results of examinations by the taxation authorities for fiscal
years 2000 to 2002, and to Management&#146;s reassessment of its best estimate of
potential tax liabilities for the subsequent fiscal years. On a per segment
basis gross ITC were recognized as follows: Simulation Products/Civil $9.8
million, Simulation Products/ Military $4.4 million and discontinued operations
$1.9 million.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 42</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_55></A>
<TABLE style="WIDTH: 979px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>The following table provides the segment
operating income, including and excluding ITC provisions reversed based on
recent tax examinations:</FONT> <FONT face=sans-serif></FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="42%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="34%" colSpan=3><FONT
      face=serif size=1>segment
    operating</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%"><FONT face=serif
      size=1>segment operating</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="34%" colSpan=3><FONT
      face=serif size=1>income
    including</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%"><FONT face=serif
      size=1>income excluding</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><I><FONT
      face=serif size=1>nine months
      ended December 31, 2004 (amounts in millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="34%" colSpan=3><FONT
      face=serif size=1>itc provisions
      reversed</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%"><FONT face=serif
      size=1>itc provisions
    reversed</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><FONT
      face=serif size=1>Simulation
      Products/Civil</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="27%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp; 10.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%"><FONT face=serif
      size=1>$ 0.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%"><FONT
      face=serif size=1>Simulation
      Products/Military</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="27%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>17.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%"><FONT face=serif
      size=1>13.2</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="42%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="27%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif
      size=1>$&nbsp; 27.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%"><FONT face=serif
      size=1>$ 13.7</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=7>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>CONSOLIDATED EARNINGS BEFORE
INTEREST AND INCOME TAXES</FONT></B></P>
<P align=left><FONT face=serif size=2>The following table provides
reconciliation between total segment operating income and earnings before
interest and income taxes:</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="24%" colSpan=3
   ><B><FONT face=serif size=1
     >three months
    ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%" colSpan=3
   ><B><FONT face=serif size=1
     >nine months
    ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="24%" colSpan=3
   ><B><FONT face=serif size=1
     >december</FONT></B> <B><FONT
      face=serif size=2
   >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="19%" colSpan=3
   ><B><FONT face=serif size=1
     >december</FONT></B> <B><FONT
      face=serif size=2
   >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><I><FONT face=serif size=1
     >(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=2
     >2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=2
     >2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=2
     >2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >Total Segment Operating
    Income</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=1
     >$ 39.4</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >$ 17.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=1
     >$ 100.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >$ 71.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >Foreign exchange (loss) gain</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="11%"
   >&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="10%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="10%"
   >&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%"
   >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   >&nbsp; &nbsp;<FONT
      face=serif size=1>on the reduction of the
      investment in certain self-sustaining subsidiaries (a)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=1
     >(0.7)</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=1
     >5.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >Impairment of goodwill, tangible and
      intangible assets</FONT> <FONT face=sans-serif size=1
     >(Note 11)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=1
     >&#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >(443.3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=1
     >&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >(443.3)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >Restructuring charge</FONT> <FONT
      face=sans-serif size=1>(Note
    12)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=1
     >(2.6)</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=1
     >(5.1)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >Other costs associated with the
      restructuring plan (b)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=1
     >(3.4)</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=1
     >(3.8)</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >&#150;</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="52%"
   ><FONT face=serif size=1
     >Earnings before interest and income
      taxes</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%"
   ><B><FONT face=serif size=1
     >$ 32.7</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><FONT face=serif size=1
     >$ (426.0)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"
   ><B><FONT face=serif size=1
     >$ 96.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"
   ><FONT face=serif size=1
     >$ (372.3)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(a)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>During the first and the third
      quarter of fiscal 2006, the Company reduced the capitalization of certain
      of its self-sustaining subsidiaries. Accordingly, the corresponding amount
      of foreign exchange accumulated in the currency translation adjustment
      account was transferred to the consolidated statement of
    earnings.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(b)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>Since the beginning of fiscal
      year 2006, the Company has also incurred incremental costs related to its
      restructuring plan which are included in earnings before interests and
      income taxes according to GAAP. CAE&#146;s Management has decided to isolate
      these costs from the Segment Operating Income to disclose all costs of the
      restructuring plan. A significant portion of these costs relates to the
      re-engineering of the Company&#146;s business processes from which a portion is
      associated with the deployment of the ERP system (excluding the portion
      capitalized). The Company also incurred costs related to its strategy and
      restructuring acivities.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=left><B><FONT face=sans-serif size=1>ASSETS EMPLOYED BY
SEGMENTS</FONT></B></P>
<P align=left><FONT face=serif size=2>CAE uses assets employed to assess
resources allocated to each segment. Assets employed includes accounts
receivable, inventories, prepaid expenses, property, plant and equipment,
goodwill, intangible assets and other assets. Assets employed excludes cash,
income taxes accounts, assets held for sale and assets of certain non-operating
subsidiaries.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="38%" colSpan=3><B><FONT
      face=serif size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="13%" colSpan=3><FONT
      face=serif size=1>as at march</FONT> <FONT
      face=serif size=2>31</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=2>2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Simulation
      Products/Civil</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=center width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>$&nbsp;
    145.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp; &nbsp;
  167.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Simulation
      Products/Military</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>234.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>280.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Training &amp;
      Services/Civil</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>789.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>762.6</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Training &amp;
      Services/Military</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>153.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>138.7</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Total assets
      employed</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >1,322.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>1,349.1</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Assets not included in
      assets employed</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
>327.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>350.6</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="44%"><FONT
      face=serif size=1>Total
    assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=center width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >$1,650.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$1,699.7</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=9>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=1>43 <B>&gt;</B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_56></A>
<TABLE style="WIDTH: 985px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=1>GEOGRAPHIC
INFORMATION</FONT></B></P>
<P align=left><FONT face=serif size=2>The Company markets its products and
services in over 18 countries. Sales are attributed to countries based on the
location of customers.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="16%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%" colSpan=3><B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="16%" colSpan=5><B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%"><FONT
      face=serif size=1>Revenue from external
      customers</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1
   >Canada</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>&nbsp;&nbsp;
      15.1</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 15.1</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1>$&nbsp;&nbsp;
      60.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
    61.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>United
      States</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>92.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>104.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1
BASEFACE="serif">291.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>314.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>United
      Kingdom</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>20.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>19.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1>64.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>62.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1
   >Germany</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>42.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>36.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1
BASEFACE="serif">115.0</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>83.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>Other European
      countries</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>39.8</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>31.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1
BASEFACE="serif">122.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>95.9</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>Asia and
      Middle Eastern countries</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>51.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>17.9</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1
BASEFACE="serif">121.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>45.0</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>Other
      countries</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1>14.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>31.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1>47.4</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>61.1</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><B><FONT face=serif
      size=1
   >&nbsp;276.6</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 257.5</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><B><FONT face=serif
      size=1>$
    822.9</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%"><FONT face=serif
      size=1></FONT></TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ 723.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=2>
    </TD></TR>
  <TR>
    <TD width="100%" colSpan=15>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="16%" colSpan=3><B><FONT
      face=serif size=1>as at
      december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="11%" colSpan=3><FONT
      face=serif size=1>as at march</FONT> <FONT
      face=serif size=2>31</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=2>2005</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%"><FONT
      face=serif size=1>Property, plant and
      equipment, goodwill and intangible assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1
   >Canada</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    229.3</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ 195.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>United
      States</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1
BASEFACE="serif">287.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>277.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>European
      countries</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1
BASEFACE="serif">356.5</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>405.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;
      &nbsp;<FONT face=serif size=1>Other
      countries</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>32.7</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>26.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="45%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><B><FONT face=serif
      size=1>$&nbsp;
    906.2</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif
      size=1>$ 904.5</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=15>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=2>NOTE 11.</FONT></B></P>
<P align=left><B><FONT face=sans-serif size=2>IMPAIRMENT OF GOODWILL, TANGIBLE
AND INTANGIBLE ASSETS</FONT></B></P>
<P align=left><FONT face=serif size=2>During the third quarter of fiscal 2005,
CAE&#146;s management performed a comprehensive review of current performance and
strategic orientation of its reporting units. This strategic review revealed
that, several factors had severely and persistently affected mainly the Civil
business: including the enduring adverse economic environment of the airline
industry creating a new market reality, slower than anticipated training
outsourcing opportunities (due to pilot-related restructuring efforts at some
major airlines), the escalating cost of manufacturing full-flight simulators,
the erosion of the 30 to 50-seat regional jet market and the appreciation of the
Canadian dollar. These elements had caused the recalibration of some key
assumptions in Civil&#146;s strategic planning, which led to the review of the
carrying amount of certain assets including; goodwill intangible assets acquired
in previous acquisitions, inventory levels for the regional jet market,
non-performing training equipment and certain other assets.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Therefore,
based on this review, the Company recorded as at December 31, 2004 a $443.3
million impairment charge, virtually all related to its Civil segments, detailed
as follows:</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="41%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="34%" colSpan=3><B><FONT
      face=serif size=1>three months
      ended</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=5><B><FONT
      face=serif size=1>nine months
      ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1
BASEFACE="serif">(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="34%" colSpan=3
     >&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;
      &nbsp;<B><FONT face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=5><B><FONT
      face=serif size=1
     >december</FONT></B> <B><FONT face=serif size=2
     >31</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=2>2005</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=2>2004</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Goodwill</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>$ &#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 205.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$ 205.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Customer
    relations</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>86.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>86.7</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Trades names and other
      intangible assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>20.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>20.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Property, plant and
      equipment (simulators)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>78.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>78.4</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1
BASEFACE="serif">Inventories</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>33.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>33.3</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Other
    assets</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>19.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>&#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>19.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="41%"><FONT
      face=serif size=1>Total</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="22%"><B><FONT face=serif
      size=1>$ &#150;</FONT></B>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 443.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="10%"><B><FONT face=serif
      size=1>$ &#150;</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif
      size=1>$ 443.3</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><FONT face=sans-serif size=1>&gt; 44</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_57></A>
<TABLE style="WIDTH: 982px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>NOTE 12.</FONT></B><BR><B><FONT
      face=sans-serif size=2>RESTRUCTURING
CHARGE</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>In fiscal 2004 and fiscal 2005, the
Company proceeded with three measures intended to restore its profitability,
cash flows and return on investment. The first two initiatives were announced at
the end of the fourth quarter of fiscal 2004 and carried out during the first
and second quarters of fiscal 2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The first
initiative resulted in a restructuring charge of $8.2 million that was recorded
in the results of the fourth quarter of fiscal 2004. An amount of $0.7 million
related to the sale of its Marine Controls segment has been allocated to
discontinued operations. The charge included severance and other involuntary
termination costs that related mainly to the workforce reduction of
approximately 250 employees in the Montreal plant, following the loss of a major
simulation equipment contract to a competitor. The complete amount was disbursed
during the first and second quarters of fiscal 2005.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The second
initiative was designed to integrate a number of functions at certain European
training centres. A restructuring charge of $1.8 million, mainly for severance
and other costs, was also recorded in the results of the fourth quarter of
fiscal 2004. During fiscal 2005, an amount of $1.2 million was disbursed,
leaving a provision of $0.6 million, mostly paid during the second quarter of
fiscal 2006.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During the
fourth quarter of 2005, following a comprehensive review of current performance
and the strategic orientation of its operations, the Company announced a broad
restructuring plan (third initiative) aimed at the elimination of existing
duplications between the Civil and Military segments and the achievement of a
more competitive cost structure. The plan, which includes a workforce reduction
of approximately 450 employees and the closing of redundant facilities, has a
significant effect on the Company&#146;s operations in Montreal and around the world,
including some European and US training centres, and will be executed over 18
months. A restructuring charge of $24.5 million, consisting mainly of severance
and other related costs, was recorded in the results of the fourth quarter of
fiscal 2005. During the fourth quarter of fiscal 2005, $13.9 million was paid,
resulting in a balance of $10.6 million as at March 31, 2005. During the first
nine months, $9.1 million was disbursed and additional expenses of $5.1 million
were incurred resulting from, among other items, progress achieved in the
restructuring plan in European Civil training centres during the third
quarter.</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><B><FONT
      face=sans-serif size=1
     >RESTRUCTURING COSTS SUMMARY</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="32%" colSpan=3><FONT
      face=serif size=1>employee</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="7%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="32%" colSpan=3><FONT
      face=serif size=1>termination
    costs</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="18%" colSpan=3><FONT
      face=serif size=1>other
costs</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>total</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Provision as at March 31,
      2005</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
    9.2</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
    2.0</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 11.2</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Additional
    expenses</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>3.7</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>1.4</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>5.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Payments
    made</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(7.2)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>(2.5)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(9.7)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Foreign
    exchange</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(0.7)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>(0.1)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(0.8)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="34%"><FONT
      face=serif size=1>Provision as at December
      31, 2005</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$&nbsp;&nbsp; 5.0</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$&nbsp;&nbsp;&nbsp;
    0.8</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 5.8</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<P align=left><B><FONT face=sans-serif size=2>NOTE 13. GOODWILL</FONT></B></P>
<P align=left><FONT face=serif size=2>At April 1</FONT><SUP><FONT face=serif
size=2>st</FONT></SUP><FONT face=serif size=2>, 2005, following the changes in
its internal organization structure related to the operating segments of the
Company, goodwill has been reassigned to the reporting segment using a relative
fair value allocation approach and is divided as follows between Simulation
Products/Military and Training &amp; Services/Military:</FONT></P>
<TABLE cellSpacing=1 cellPadding=0 border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="32%"><FONT
      face=serif size=1
>(unaudited)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="30%" colSpan=3><FONT
      face=serif size=1>simulation</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=3><FONT
      face=serif size=1>training</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="32%"><I><FONT
      face=serif size=1>(amounts in
      millions)</FONT></I>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="30%" colSpan=3><FONT
      face=serif size=1>products</FONT><FONT
      face=serif size=2>/</FONT><FONT face=serif
      size=1>military</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="20%" colSpan=3><FONT
      face=serif size=1>services</FONT><FONT
      face=serif size=2>/</FONT><FONT face=serif
      size=1>military</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>total</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="32%"><FONT
      face=serif size=1>Balance as at March 31,
      2005</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="22%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$ 52.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="11%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$ 39.6</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 92.1</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="32%"><FONT
      face=serif size=1>Acquisition
    (a)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="22%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>4.5</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="11%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>&#150;</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>4.5</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="32%"><FONT
      face=serif size=1>Foreign
    exchange</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="22%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>(4.4)</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="11%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>(0.3)</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>(4.7)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="32%"><FONT
      face=serif size=1>Balance as at December 31,
      2005</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=right width="22%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="6%"><FONT face=serif
      size=1>$ 52.6</FONT>&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD noWrap align=left width="11%"
     >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="7%"><FONT face=serif
      size=1>$ 39.3</FONT>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="9%"><FONT face=serif
      size=1>$ 91.9</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=11>
      <HR noShade SIZE=1>
    </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(a)</FONT>&nbsp; &nbsp;
    &nbsp;</TD>
    <TD width="100%"><FONT face=serif size=2>At the beginning of the third
      quarter, the net assets (including goodwill) and results from operation of
      Terrex were reclassified to the Simulation Products/Military segment. This
      revised segmentation better reflects the nature of operations of the
      acquired entity.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR></TABLE>
<P align=right><FONT face=sans-serif size=1>45 <B>&gt;</B></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<A name=page_58></A>
<TABLE style="WIDTH: 983px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BASEBORDER="0">

  <TR vAlign=bottom>
    <TD noWrap align=left width="58%"><B><FONT
      face=sans-serif size=1
     >NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS</FONT></B>&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD noWrap align=right width="39%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
    2006</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=left>
<TABLE>

  <TR>
    <TD noWrap><B><FONT face=sans-serif size=2>NOTE 14.</FONT></B><BR><B><FONT
      face=sans-serif size=2>GOVERNMENT COST
SHARING</FONT></B><BR></TD></TR></TABLE></P>
<P align=left><FONT face=serif size=2>The Company plans to invest $630 million
in Project Phoenix, a research and development (R&amp;D) program that will span
the next six years. During the third quarter, the Government of Canada and the
Company have signed an agreement for an investment of approximately 30% ($189
million) of the value of CAE&#146;s R&amp;D program (reducing by approximatly 25% the
amount of income tax credit otherwise available). This agreement is included in
the Technology Partnerships Canada (TPC) program created by Industry Canada to
invest strategically in research and development, to encourage private sector
investment and to increase technological capabilities in the Canadian industry.
The Government of Canada investment will be repayable starting in fiscal 2012
through royalties based on consolidated revenue. The royalty period ends in 2030
or earlier if a predetermined royalty ceiling, which exceed the amount of the
maximum contribution, is reached.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The Company
has recorded in its third quarter results an account receivable of $7.3 million,
based on costs incurred starting in June 2005, of which $5.6 million was
recorded as a reduction of costs and $1.7 million against fixed asset or other
capitalized costs.</FONT></P>
<P align=left><FONT face=sans-serif size=1>&gt; 46</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_59></A>
<TABLE style="WIDTH: 991px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="38%"><B><FONT
      face=serif size=2
     >NOTES</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="59%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=1>47 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_60></A>
<TABLE style="WIDTH: 984px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=left width="37%"><B><FONT
      face=serif size=2
     >NOTES</FONT></B>&nbsp; </TD>
    <TD width="2%">&nbsp; </TD>
    <TD noWrap align=right width="60%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=left><FONT face=sans-serif size=1>&gt; 48</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<!--$$/page=--><A name=page_61></A>
<TABLE style="WIDTH: 989px; HEIGHT: 25px" cellSpacing=1 cellPadding=0 border=0
BCLEMPTYCOL>

  <TR vAlign=bottom>
    <TD noWrap align=right width="100%"
     ><B><FONT face=sans-serif size=1
     >&gt; CAE THIRD QUARTER REPORT
      2006</FONT></B>&nbsp; </TD></TR></TABLE><BR>
<P align=right><FONT face=sans-serif size=1>49 &gt;</FONT></P>
<HR align=center width="100%" noShade SIZE=2>


<!--$$/page=-->
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<IMG src="x62x1.jpg" border=0>
<BR>
<P align="left">
<FONT size=5 face="serif">www.cae.com</FONT></P>

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