Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2011

1. HIGHLIGHTS

FINANCIAL

FOURTH QUARTER OF FISCAL 2011

Higher revenue over last quarter and higher revenue over the fourth quarter of fiscal 2010

- Consolidated revenue was $464.4 million this quarter, $53.1 million or 13% higher than last quarter and $68.5 million or 17% higher than the fourth quarter of fiscal 2010.

Higher net earnings compared to last quarter and compared to the fourth quarter of fiscal 2010 excluding the restructuring charge

- Net earnings were $49.7 million (or $0.19 per share) this quarter, compared to $40.7 million (or $0.16 per share) last quarter, representing an increase of $9.0 million or 22%, and compared to $40.5 million (or $0.16 per share) in the fourth quarter of last year, representing an increase of $9.2 million or 23%;

- Excluding the reversal of the restructuring provision of $1.0 million booked this quarter, net earnings were $48.9 million (or $0.19 per share). Excluding the restructuring charge of $1.9 million booked in the fourth quarter of fiscal 2010, net earnings were $42.3 million (or $0.16 per share).

Positive free cash flow^[1] at $161.2 million this quarter

- Net cash provided by continuing operations was $190.5 million this quarter, compared to $32.2 million last quarter and $148.7 million in the fourth quarter of last year;

- Maintenance capital expenditures¹ and other asset expenditures were $19.3 million this quarter, $17.2 last quarter, and $26.2 million in the fourth quarter of last year;

- Cash dividends were $10.1 million this quarter and last quarter and $7.6 million in the fourth quarter of last year.

FISCAL 2011

Higher revenue over fiscal 2010

- Consolidated revenue was $1,629.0 million, $102.7 million or 7% higher than last year.

Higher net earnings

- Net earnings were $169.8 million (or $0.66 per share) compared to $144.5 million (or $0.56 per share) last year, representing a $25.3 million or 18% increase;

- Excluding the reversal of the restructuring provision of $1.0 million booked this year, net earnings were $169.0 million (or $0.66 per share). Excluding the restructuring charge of $34.1 million incurred last year, net earnings were $168.6 million (or $0.66 per share) in fiscal 2010.

Positive free cash flow at $147.1 million

- Net cash provided by continuing operations was $247.0 million this year, compared to $267.0 million last year;

- Maintenance capital expenditures and other asset expenditures were $63.5 million this year, compared to $66.5 million last year;

- Cash dividends were $37.9 million this year, compared to $30.3 million last year.

Capital employed¹ ending at $1,467.5 million

- Capital employed increased by $131.9 million or 10% this year;

- Property, plant and equipment increased by $32.9 million;

- Non-cash working capital¹ increased by $54.0 million in fiscal 2011, ending at $13.6 million;

- Net debt¹increased by $18.3 million this year, ending at $198.1 million.

ORDERS¹

- The book-to-sales ratio¹ for the quarter was 1.03x (combined civil was 1.09x and combined military was 0.98x). The ratio for the last 12 months was 1.14x (combined civil was 1.20x and combined military was 1.09x);

- Total order intake this year was $1,854.5 million, up $279.6 million over last year;

- Total backlog¹ was $3,440.5 million at March 31, 2011, $397.7 million higher than last year.

[1] Non-GAAP measure (see Section 3.6).

Management’s Discussion and Analysis

2. INTRODUCTION

In this report, we, us, our, CAE and Company refer to CAE Inc. and its subsidiaries. Unless we have indicated otherwise:

- This year and 2011 mean the fiscal year ending March 31, 2011;

- Last year, prior year and a year ago mean the fiscal year ended March 31, 2010;

- Dollar amounts are in Canadian dollars.

This report was prepared as of May 19, 2011, and includes our management’s discussion and analysis (MD&A) for the year and the three-month period ended March 31, 2011 and the consolidated financial statements and notes for the year ended March 31, 2011. We have written it to help you understand our business, performance and financial condition for fiscal 2011. Except as otherwise indicated, all financial information has been reported in accordance with Canadian Generally Accepted Accounting Principles (GAAP). All quarterly information disclosed in the MD&A is based on unaudited figures.

For additional information, please refer to our annual consolidated financial statements for this fiscal year, which you will find in the annual report for the year ended March 31, 2011. The MD&A provides you with a view of CAE as seen through the eyes of management and helps you understand the company from a variety of perspectives:

- Our vision;

- Our strategy and value proposition;

- Our operations;

- Foreign exchange;

- Non-GAAP and other financial measures;

- Consolidated results;

- Acquisitions, business combinations and divestitures;

- Business risk and uncertainty;

- Changes in accounting policies;

- Controls and procedures;

- Oversight role of the Audit Committee and Board of Directors.

You will find our most recent annual report and annual information form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.

ABOUT MATERIAL INFORMATION

This report includes the information we believe is material to investors after considering all circumstances, including potential market sensitivity. We consider something to be material if:

- It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or;

- It is quite likely that a reasonable investor would consider the information to be important in making an investment decision.

ABOUT FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements about our activities, events and developments that we expect or anticipate may occur in the future including, for example, statements about our business outlook, assessment of market conditions, strategies, future plans, future sales, pricing for our major products and capital spending. Forward-looking statements normally contain words like believe, expect, anticipate, intend, continue, estimate, may, will, should and similar expressions. Such statements are not guarantees of future performance. They are based on management’s expectations and assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate in the circumstances.

We have based these statements on estimates and assumptions that we believed were reasonable when the statements were prepared. Our actual results could be substantially different because of the risks and uncertainties associated with our business. Important risks that could cause such differences include, but are not limited to, the length of sales cycle, rapid product evolution, level of defence spending, condition of the civil aviation industry, competition, availability of critical inputs, foreign exchange rate occurrences and doing business in foreign countries. Additionally, differences could arise because of events that are announced or completed after the date of this report, including mergers, acquisitions, other business combinations and divestitures. You will find more information about the risks and uncertainties affecting our business in Business risk and uncertainty in the MD&A.

We do not update or revise forward-looking information even if new information becomes available unless legislation requires us to do so. You should not place undue reliance on forward-looking statements.

CAE Year-End Financial Results 2011 | 3

Management’s Discussion and Analysis

3. ABOUT CAE

3.1 Who we are

CAE is a world leader in simulation and modeling technologies and training solutions for civil aviation and defence. We are globally diversified with more than 7,500 people at more than 100 sites and training locations in over 20 countries. We have annual revenue exceeding $1.6 billion, nearly 90% of which comes from worldwide exports and international activities. We have the largest installed base of civil and military flight simulators and a broad global aviation training network of 32 civil aviation, military and helicopter training centres where we train more than 80,000 civil and military crewmembers annually. Approximately half our revenue comes from the sale of simulation products, software and simulator updates, and the balance from services including training, maintenance, aviation services and professional services. We are leveraging these competencies and aviation best practices to establish positions in new markets like healthcare and mining where similar operational imperatives exist.

Our main products include full-flight simulators (FFSs), which replicate aircraft performance in a full array of situations and environmental conditions. Sophisticated visual systems simulate hundreds of airports and geo-specific terrain locations around the world, as well as a wide range of landing areas and flying environments. These work with motion and sound to create a realistic training environment for pilots and crews at all levels.

Founded in 1947 and headquartered in Montreal, Canada, CAE has built an excellent reputation and long-standing customer relationships based on more than 60 years of experience, strong technical capabilities, a highly trained workforce, and global reach.

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

3.2 Our vision

Our vision is for CAE to be synonymous with safety, efficiency and mission readiness. We intend to be the mission partner of choice for customers operating in complex mission-critical environments by providing the most innovative product and service solutions to enhance safety, improve efficiency and provide superior decision-making capabilities.

3.3 Our strategy and value proposition

Our strategy

We are a world-leading provider of modeling and simulation-based training and decision support solutions. We currently serve customers in two primary markets: civil aerospace and defence. We are extending our capabilities into new markets of simulation‑based training and optimization solutions in healthcare and mining.

A key tenet of our strategy in our core civil aerospace and defence markets is to derive an increasing proportion of our business from the existing fleet. This would include providing solutions for customers in support of the global fleet of civilian and military aircraft. Historically, the primary driver of our business was the delivery of new commercial aircraft. Our SP/C segment, which in fiscal 2011 represented 17% of our consolidated revenue, is most dependent on this more deeply cyclical market driver. As a result of our diversification efforts, the balance of our business involves mainly more stable and recurring sources of revenue like training and services as well as military simulation products and services.

In addition to diversifying our interests among customer markets, our strategy has also involved more balance between products, which tend to be more short-term and cyclical, and services, which tend to be more long term and stable. As well, we continue to diversify our interests globally. This is intended to bring our solutions closer to our customers’ home bases, which we think is a distinct competitive advantage. This also allows us to be less dependent on any one market, and since business conditions are rarely identical in all regions of the world, we believe this provides a degree of stability to our performance. We are investing in both the mature and emerging markets to capitalize on current and future growth opportunities. Approximately one third of our revenue comes from the U.S., one third from Europe and one third from the rest of the world including the high growth, emerging markets. We continue to execute our growth strategy by selectively investing to meet the long-term needs of our aerospace and defence customers, investing in adjacencies within our core markets, and by investing in our new core markets.

Value proposition

4 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Our core competencies and competitive advantages include:

- World-leading modeling and simulation technology;

- Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and simulation;

- Total array of training products and services solutions;

- Broad-reaching customer intimacy;

- Extensive global coverage and in-depth country familiarity;

- High-brand equity;

- Proven systems engineering and program management processes;

- Best-in-class customer support;

- Well established in new and emerging markets.

World-leading modeling and simulation technology

We pride ourselves on our technological leadership. Pilots around the world view our simulation as the closest thing to the true experience of flight. We have consistently led the evolution of flight training and simulation systems technology with a number of industry firsts. We have simulated the entire range of large civil aircraft, a large number of the leading regional and business aircraft and a number of civil helicopters. We are an industry leader in providing simulation and training solutions for fixed-wing transport aircraft, maritime patrol aircraft and helicopter platforms for the military. We also have extensive knowledge, experience and credibility in designing and developing simulators for prototype aircraft of major aircraft manufacturers. We have extended our expertise in modeling and simulation beyond training into other mission‑critical areas where these technologies are used to support superior decision‑making capabilities. As well, we are now applying these capabilities to new markets, such as healthcare and mining.

Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and simulation

We revolutionized the way aviation training is performed when we introduced our CAE Simfinity^TM-based training solutions
and courseware. These training devices effectively bring the virtual aircraft cockpit into the classroom at the earliest stages of ground school training, making it a more effective and efficient training experience overall. We build upon the CAE Simfinity^TM product line to develop the trainers that are used in the Airbus pilot and maintenance technician training programs. We also developed e-Learning solutions to enable pilots and technicians to train anytime and anywhere.

Total array of training products and services solutions

With a large network of training centres, we are a global leader in aviation training providing the complete solution to meet our customers’ training and pilot placement needs. Our civil pilot training programs span over 90 different aircraft models including business aircraft, civil helicopters and commercial airliners and provide curricula for initial, type rating, recurrent and maintenance training. Our civil pilot provisioning solution adds value and moves our customers’ businesses forward by identifying, screening, selecting, training and ultimately placing pilots at their airlines. In addition, we deliver civil ab-initio pilot training through our CAE Global Academy which is the largest network of ab initio flight schools in the world, with 11 schools across the globe. With over 60 years of experience in simulation, we are an industry expert in aviation training and are the industry’s civil training solution one-stop shop.

Broad-reaching customer intimacy

We have been in business for more than 60 years and have relationships with most of the world’s airlines and the governments of approximately 50 different national defence forces, including all branches of the U.S. forces. Our customer advisory boards and technical advisory boards involve airlines and operators worldwide. By listening carefully to customers, we are able to gain a deep understanding of their mission needs and respond with innovative product and service offerings that help improve the safety and efficiency of their operations and their ability to make superior decisions.

Extensive global coverage and in-depth country familiarity

We have operations and offer training and support services in more than 20 countries on five continents and sell our products and services to customers in more than 150 countries. Our broad geographic coverage allows us to respond quickly and cost effectively to customer needs and new business opportunities while having a deep understanding and respect of the regulations and customs of the local market. We operate a fleet of more than 170 full‑flight and full‑mission simulators in 32 civil aviation, military and helicopter training centres to meet the wide range of operational requirements of our customers. Our fleet includes simulators for various types of aircraft from major manufacturers, including commercial jets, business jets and helicopters, both civil and military.

High-brand equity

Our simulators are typically rated among the highest in the industry for reliability and availability. This is a key benefit because simulators normally operate in high-duty cycles of up to 20 hours a day.

We have a broad global footprint, which enables close, long-term relationships with our customers. Our brand not only promises leading technology, but also superior customer support. CAE has a customer sales and support organization that rivals the size of a number of our competitor’s entire organizations.

6 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

We design our products so customers can upgrade them, giving them more flexibility and opportunity as products change or new air‑worthiness regulations are introduced.

As we enter new markets like healthcare and mining, we find that the CAE brand is widely regarded as the benchmark for modeling and simulation-based technology and for training services.

Proven systems engineering and program management processes

We continue to develop solutions and deliver technically complex programs within schedule to help ensure that there are trained and mission-ready aircrew and combat troops around the world. This includes MH-60 simulators for the U.S. Navy; C-130J simulators for the U.S., Indian and Canadian Defence Forces; MRH90 simulators for the Australian Defence Forces, Royal Netherlands Navy and German Armed Forces; A330 Multi-Role Tanker Transport training devices for the Royal Australian Air Force, UAE Air Force and Royal Saudi Air Force; and M-346 jet trainer simulators for the Italian Air Force and an Asian military customer. These and other programs combined with our continued investment in R&D continue to strengthen our technological leadership and strengthen our management expertise to deliver complex programs that feature sensor simulation for maritime operations, synthetic tactical environments for naval and fighter operations as well as our visualization and common database technologies that deliver rich, immersive synthetic environments for the most effective training and mission rehearsal possible.

Best-in-class customer support

We maintain a strong focus on after-sales support, which is often critical in winning additional sales contracts as well as important update and maintenance services business. Our customer support practices, including a web-based customer portal, performance dashboard, and automated report cards, have resulted in enhanced customer support according to customer comments and feedback.

Well established in new and emerging markets

Our approach to global markets is to model ourselves as a multi-domestic rather than a foreign company. This has enabled us to be a first mover into growth markets like China, India, the Middle East, South America and Southeast Asia.

3.4 Our operations

We primarily serve two markets globally:

- The civil market includes aircraft manufacturers, major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, third-party training centres, ab initio student pilots and flight training organizations;

- The military market includes original equipment manufacturers (OEMs), government agencies and defence forces worldwide.

We have begun to serve the healthcare market, involving hospital and university simulation centres, medical societies and OEMs, and the mining market, serving global mining corporations, exploration companies, mining contractors and the world’s premier mining consultancies.

We manage our operations and report our results in four segments, one for products and one for services, for each market. Each segment is a significant contributor to our overall results.

CIVIL MARKET

Training & Services/Civil (TS/C)

Provides business and commercial aviation training for flight and ground personnel and associated services

Our TS/C business is the largest provider of commercial aviation training services in the world and the second largest provider of business aviation training services. CAE has a broad global network of training centres and we serve all sectors of the civil aviation market including general aviation, regional airlines, commercial airlines, civil helicopter operators and business aviation. We offer a full range of services, including training solutions and curriculum development, training centre operations, pilot training, aircraft technician training, simulator spare parts inventory management, e-Learning and courseware solutions and consulting services. We are a leader in flight sciences, using flight data analysis to enable the effective study and understanding of recorded flight data to improve airline safety, maintenance, flight operations and training. The CAE Global Academy is the world’s largest network of ab initio flight training organizations with a fleet of almost 300 aircraft between the CAE owned and operating flight schools and the independent CAE Global Academy members, with a capacity of training more than 1,800 pilot cadets annually. Along with the CAE Global Academy, we offer airlines a long-term solution to pilot recruitment with our pilot placement service, whereby we seek to match the supply of new commercial airline pilots with the demand for pilots from our global base of airline customers. We have achieved our leading position through acquisitions, joint ventures and organic investments in new facilities. We currently operate 156 FFSs and we provide aviation training and services in approximately 20 countries around the world, including aviation training centres, flight training organizations (FTO) and third-party locations. We make selective investments to add new revenue simulator equivalent units (RSEU) to our network to maintain our position, increase our market share and address new market opportunities.

CAE Year-End Financial Results 2011 | 7

Management’s Discussion and Analysis

Simulation Products/Civil (SP/C)

Designs, manufactures and supplies civil flight simulation training devices and visual systems

Our SP/C segment is the world leader in the provision of civil flight simulation equipment. We have designed and manufactured more civil FFSs for major and regional commercial airlines, third-party training centres and OEMs than any other company. We have a wealth of experience in developing simulators for new types of aircraft, including over 25 models; most recently we have developed, or have been awarded contracts to develop simulators for the Airbus A350 XWB, Boeing 747-8 and 787, Mitsubishi Regional Jet (MRJ), ATR42-600 and ATR72-600, Bombardier CSeries, Global Express and Learjet 85, Embraer Phenom 100 and 300, Dassault Falcon 7X, and the Commercial Aircraft Corporation of China, Ltd (COMAC) ARJ21. We also offer a full range of support services including simulator updates, upgrades, maintenance services, sales of spare parts and simulator relocations.

Market trends and outlook

In Commercial aviation, aircraft capacity and passenger traffic growth are primarily driven by global GDP. This measure of economic activity underlies the aerospace industry’s widely-held expectation that long-term average growth for air travel will be approximately 5% annually over the next two decades. The growth rates in the emerging markets such as China, India, South America, the Middle East and Southeast Asia have, with their increasing affluent populations, outpaced the growth of mature markets like Europe and North America. This robust level of activity has contributed to high commercial backlogs of approximately 8,000 aircraft. Commercial aircraft OEMs have increased their production rates and announced new programs such as the Airbus A320NEO and A350, the Boeing B747-8 and B787, the Bombardier CSeries and the Mitsubishi MRJ. Other OEMs have also announced new platforms such as Russia’s UAC SSJ100, which just entered service and the COMAC ARJ121 and C919 aircraft.

In Business aviation, aircraft orders and utilization are also primarily driven by GDP, but more specifically corporate profitability. During the last recession, the industry experienced a sharp reduction in aircraft deliveries and a significant drop in flight hours and cycles that have yet to recover to pre-downturn levels. Although the indicators are positive both in terms of U.S. Corporate profit growth and higher aircraft utilization, aircraft deliveries and U.S. operated aircraft utilization have about 15-20% improvement required to recover the ground lost during the recession. Major business aircraft OEMs, such as Bombardier, Dassault and Gulfstream, have in recent months announced new aircraft programs which are an indication of their market confidence. Demand for business jet training has improved in the large- and mid-size cabin segments; while the small cabin segment has remained stable at current low levels. Higher demand would normally flow from improvements and sustainment in economic factors such as corporate profit and capital expenditure growth.

In the SP/C segment, the level of market activity has improved in the current fiscal year; however the competitive environment remains intense with pricing slightly improved from recession levels. In fiscal 2011, we won orders for 29 FFSs. At this point, we expect about the same number of simulator sales for fiscal 2012.

The following trends support our positive medium-to-long-term view for the civil market:

- Aircraft backlogs;

- New and more fuel-efficient aircraft platforms;

- Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel;

- Expected long-term growth in air travel;

- Long-term demand for trained crew members;

- International requirements for the qualification of flight simulation training devices (FSTDs);

- New more stringent training requirements.

Aircraft backlogs

The commercial civil aerospace market conditions have improved significantly since the last global economic recession. In calendar 2010, Boeing received 530 net orders (firm orders minus cancellations) for new aircraft, compared to 142 in calendar 2009. Airbus received 574 net orders in calendar 2010 compared to 271 in 2009. While net aircraft orders for Boeing and Airbus were 106 and 1 respectively for the three-month period ending March 31, 2011, they continue to work through strong backlog levels, each of which is over 3,000 aircraft, and this should help generate opportunities for our full portfolio of training products and services. In calendar 2010, Boeing reported a total of 462 commercial airplane deliveries, while Airbus reported 510 deliveries for the same period, essentially flat over the prior year. For the three-month period ending March 31, 2011, commercial airplane deliveries were 104 for Boeing and 119 for Airbus.

In calendar 2010, Airbus announced it was increasing production of the A320-family jets, taking it in phases to 40 per month by the first quarter of 2012. For the A320 family, Airbus has indicated that they may raise production to 42 or even 44 per month beyond 2012, while also announcing plans to introduce the A320 New Engine Option (NEO). Boeing has also laid out plans for an incremental ramp-up of the 737NG production rate, from 31.5 aircraft per month to 35 by early 2012, and then to 38 by the second quarter of 2013. For the 737NG, Boeing is also investigating the possibility of reaching 42 a month, with a subsequent surge to 50 a month in the future. As for the 777, monthly production will increase from 5 to 7 aircraft a month by mid-2011, with a further increase to 8.3 aircraft a month in the first quarter of 2013. The increases will take some time to implement and should ultimately translate into higher demand for training products and services.

8 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Renewed optimism is seen in the business aviation industry. Business aviation aircraft orders are increasing and are being driven by large cabin segment demand, especially in international and emerging markets. While market uncertainty remains, OEMs have increased production rates and are launching a significant number of new programs. Worldwide shipments in the last quarter of 2010 increased by 7% compared to the previous year according to the General Aviation Manufacturers Association (GAMA). In addition, the number of business jet flights has risen in the last 12 months with the majority of growth seen in overseas travel according to the Federal Aviation Administration (FAA). This year, NetJets, the world’s biggest private jet operator, signed a firm order for 50 Global business jets from Bombardier with options for 70 more. This is in addition to another large order NetJets placed in the fall of 2010 for 50 Phenom 300 aircraft from Embraer with options for 75 more. These large orders are encouraging signs of revival of the business jet industry which is slowly recovering from the economic downturn.

New and more fuel-efficient aircraft platforms

OEMs have announced plans to introduce, or have already introduced, new platforms that will drive worldwide demand for simulators and training services. The Boeing 747-8 and 787, Airbus A350 XWB and Airbus A320 NEO, Embraer 190, Dassault Falcon 7X, Embraer Phenom 100 VLJ and 300 LJ aircraft, MRJ, COMAC ARJ21 and the Bombardier Learjet 85 and CSeries are some recent examples.

New platforms will drive the demand for new kinds of simulators and training programs. One of our strategic priorities is to partner with manufacturers to strengthen relationships and position ourselves for future opportunities. For example, during fiscal 2010, we signed contracts with Bombardier to use our modeling and simulation expertise to support the design, development and validation of the new CSeries aircraft, and we will also develop the first CSeries FFS. In the first quarter of fiscal 2011 we signed an agreement with ATR as a framework for providing a range of products and support services to operators of ATR aircraft, which includes the development of the first simulator for the new ATR42/72-600 aircraft. In the second quarter of fiscal 2011 we announced a 10-year exclusive training provider program with Mitsubishi Aircraft Corporation to develop and deliver a comprehensive training solution for the new MRJ. In support of the agreement, we are expanding our training network and developing two CAE 7000 Series MRJ FFSs as well as CAE Simfinity^TM integrated procedures trainers. In the second quarter of fiscal 2011, we also announced a contract with Airbus to design and manufacture two CAE 7000 Series FFSs for the A350 XWB, representing the world’s first FFSs for the new long-range aircraft. We will also develop six CAE Simfinity^TM A350 XWB Airbus Procedures Trainers (APTs). Deliveries of new model aircraft are susceptible to program launch delays, which in turn will affect the timing of our orders and deliveries.

Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel

Emerging markets such as Southeast Asia, the Indian sub-continent, the Middle East, South America and China are expected to continue experiencing higher air traffic and economic growth over the long term than mature markets, as well as an increasing liberalization of air policy and bilateral air agreements. We expect these markets to drive the long-term demand for the broad array of products and services solutions that CAE brings to bear.

Expected long-term growth in air travel

In calendar 2010, passenger traffic increased 8.2% compared to calendar 2009 while freight-tonne-kilometres increased over 20.6%. For the first three months of calendar 2011, passenger traffic increased by 5.9% compared to the fist three month of calendar 2010, while freight-tonne-kilometres increased by 4.6% over the same period. Over the past 20 years, air travel grew at an average of 4.8% and we expect that over the next 20 years both passenger and cargo travel will meet or slightly exceed this growth. Possible impediments to the steady growth progression in air travel include major disruptions like regional political instability, acts of terrorism, pandemics, natural disasters, a sharp and sustained increase in fuel costs, major prolonged economic recessions or other major world events.

Long-term demand for trained crew members

Worldwide demand is expected to increase over the long term

Growth in the civil aviation market has driven the demand for pilots, maintenance technicians and flight attendants worldwide, which has created a shortage of qualified crew members in several markets. Supply constraints include aging crew demographics, fewer military pilots transferring to civil airlines, and low enrolment in technical schools. In high-growth markets like India, China, South America and Southeast Asia, long-term air traffic growth is expected to outpace the growth expected in developed countries, and the infrastructure available to meet the projected demand for crew members is lacking.

This shortage creates opportunities for pilot placement, our turnkey service that includes identifying, screening, selecting and training and placement services. The shortage also creates an opportunity for CAE Global Academy, which now totals 11 flight training organizations around the world, making it the largest network of ab initio flight schools. Along with our partners, through CAE Global Academy, we have the capacity to train more than 1,800 pilot cadets annually as they aspire to a career as a professional fixed-wing aircraft or helicopter pilot. Additionally, a global shortage of maintenance technicians has created an opportunity for us to accelerate our technical training solutions. This trend is also affecting cabin crew, for whom we are also delivering training solutions.

New pilot certification process requires simulation-based training

Simulation-based pilot certification training is beginning to take on an even greater role with the Multi-crew Pilot License (MPL) certification process developed by the International Civil Aviation Organization (ICAO), which is gradually being adopted by individual national aviation authorities around the world. The MPL process places more emphasis on simulation-based training to develop ab initio students into qualified First Officers for modern aircraft such as airliners. In the fourth quarter of fiscal 2010, we launched an MPL beta program with AirAsia satisfying new performance-based requirements developed by Transport Canada. To date, the beta program has met or exceeded all expectations and the initial group of cadets has completed the core and basic phases of the program. If the MPL process continues to be adopted and gains momentum in markets like China, India, Southeast Asia and the Middle East, where there is the greatest need for a large supply of qualified pilots trained in an efficient and effective manner, it would result in increased use of simulation-based training.

CAE Year-End Financial Results 2011 | 9

Management’s Discussion and Analysis

International requirements for the qualification of flight simulation training devices (FSTD)

During the summer of 2009, the ICAO published a strategic analysis intended to define flight simulation requirements for the qualification of FSTDs in the 190 ICAO member states. The ICAO document states that the top‑fidelity ICAO Standard FSTD (Type VII) is required to support each of the required training tasks contained in a number of crucial training to proficiency contexts including recurrent and initial training, MPL and the Airline Transport Pilot License (ATPL). It also confirms and recognizes the long-term necessity of high-fidelity FSTDs for such highly critical training contexts. The qualification requirements of the ICAO Type VII simulator require a higher fidelity of simulation (including visuals, motion, sound and air traffic control simulation) than today’s level D simulator requirements and we believe the increased demand for more realistic and more immersive training aligns well with our strengths and expertise in aviation training. A similar ICAO initiative is in process to identify requirements for civil helicopter FSTDs.

New more stringent training requirements

On August 1, 2010, the U.S. approved the Airline Safety and Federal Aviation Administration Act of 2010. This Act requires the FAA to develop and issue new and updated regulations with effective dates between August 2012 and August 2013 for significant issues such as:

- Limitations on the hours of flight time and duty time to address pilot fatigue. This will effectively increase the pilot work force;

- New regulations on specialized pilot training such as airplane stalls, airplane upsets, icing, wind shear and other adverse weather phenomenon;

- Pilot training programs with respect to their duration, frequency and content;

- The requirement for First Officers (co-pilots) to hold an Airline Transport Pilot (ATP) license involving a minimum experience of 1,500 flight hours, a change from the existing requirement that they hold a Commercial Pilot License (CPL) requiring at least 250 flight hours. The FAA may consider an equivalency system that would include certain academic experiences and the use of simulators to meet a portion of the 1500-hour requirement.

The FAA has chartered Aviation Rulemaking Committees (ARCs) to assist the FAA in formulating the new regulations. CAE is participating in these ARCs to help the FAA and the US aviation industry meet the new demands presented by the new Act.

MILITARY MARKET

We generate revenue in six interrelated areas of the defence market value chain. We provide simulation products such as full-mission simulators (FMS); we perform updates and upgrades to simulators; we provide maintenance and support services; we offer turnkey training services; we have a range of capabilities to provide simulation-based professional services and facilities for analysis, training and operational decision-making; and we have a software business called Presagis, which develops and sells commercial‑off‑the‑shelf modeling and simulation software solutions to OEMs, government agencies and defence forces.

Our strategy in the defence market has been to globalize and diversify our military business. There are pressures on many traditional defence budgets around the world, while some regions such as India and the Middle East are planning growth in defence expenditures. In becoming globally diversified, our interests span a broad range of national markets and related defence budgets, which we believe provides us with a more resilient and predictable stream of military business. We are a leading supplier of modeling, simulation and training solutions and have a significant local presence in key defence markets. Through the successful execution of our strategy, we have seen tangible and positive results from our efforts. While there may be some delays and cuts to programs that could have some impact, we are encouraged by the global trend of militaries increasing their use of simulation, which gives us long‑term confidence that simulation-based solutions will be well-placed to address some of the budget challenges facing the defence establishment.

We approach the world’s defence markets by leveraging our global footprint and our in-country expertise. We have a local presence and centres of excellence in key markets including the U.S., U.K., Canada, Germany, Australia, India and Singapore. We have developed global operating processes which allow us to place a high level of decision-making autonomy within the regions while leveraging the full breadth of our products, services and capabilities. This results in greater efficiency and stronger customer relationships.

Simulation Products/Military (SP/M)

Designs, manufactures and supplies advanced military training equipment and software tools for air forces, armies and navies

Our SP/M segment is a world leader in the design and production of military flight simulation equipment. We develop simulation equipment, training systems and software tools for a variety of military aircraft, including fast jets, helicopters, maritime patrol and tanker/transport aircraft. We also offer simulation-based solutions for land and naval forces. We have designed the broadest range of military helicopter simulators in the world, and we have also developed more training systems for the C-130 Hercules transport aircraft than any other company. We have delivered simulation products and training systems to more than 50 defence operators in approximately 35 countries, including all of the U.S. services.

10 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Training & Services/Military (TS/M)

Supplies turnkey training services, support services, systems maintenance and modeling and simulation solutions

Our TS/M segment provides turnkey training services and training systems integration expertise to global defence forces, such as the Medium Support Helicopter Aircrew Training Facility (MSHATF) at Royal Air Force (RAF) Benson in the U.K., the Operational Training Systems Provider (OTSP) program for the Canadian Forces and the KC-135 Aircrew Training System for the United States Air Force (USAF). We also provide a range of training support services such as contractor logistics support, maintenance services and simulator training at over 60 sites around the world. TS/M additionally provides a variety of modeling and simulation-based professional and defence services.

Market trends and outlook

We are witnessing varying degrees of global defence spending rationalization including measures detailed in the U.K. and Germany. In the U.S., Defense Secretary Gates outlined the latest Defence budget, which includes $100 billion in cost savings. We have not witnessed any major program cancellations that would substantially change our outlook; however, we have experienced delays in obtaining contracts for U.S. defence programs as a result of the government’s delayed funding of the defence budget under the extended Continuing Resolution. These developments will present new challenges to the defence industry as a whole. Nevertheless, CAE should see the benefit of increased adoption over the long term of simulation-based training in all of our markets as an important need to reduce costs.

Long term forecasting is more difficult given the evolving market conditions, but our current estimate is that approximately 9,000 new military manned aircraft will be deployed into global military fleets over the next five years and this should generate demand for approximately 275 FMSs. We do not today address all platforms and all markets, but we have the capability to serve a portion of this expected demand.

We believe CAE is uniquely positioned in the current environment to be part of the solution to reducing the cost of military readiness. In addition to supporting the global installed base and new aircraft introductions, demand for our products and services should continue to be driven by the:

- Explicit desire of governments and defence forces to increase the use of modeling and simulation;

- Growing demand for our specialized modeling and simulation-based products and services;

- High cost of operating live assets for training which leads to more use of simulation;

- Current nature of warfare which requires joint forces training and mission rehearsal.

We have a good track record for delivering programs on time and on budget and we are well positioned to provide defence forces with solutions on a range of military platforms involving transport aircraft, aerial refueling tankers, helicopters, lead-in fighter trainers, and maritime patrol aircraft. These aircraft segments specifically include the C-130J Hercules transport aircraft, P-8A Poseidon and P‑3C Orion maritime patrol aircraft, A330 Multi-Role Tanker Transport, NH90 helicopter, M-346 and Hawk lead-in fighter trainers, S‑70 and H-60 helicopter variants, CH-47 Chinook heavy-lift helicopter, Unmanned Aerial Systems (UAS) and other aircraft that form part of the backbone of defence forces globally. Our positive outlook is supported by the expectation that these aircraft types will continue to be in demand globally. These platforms involve newer aircraft types with long program lives ahead of them and we believe this will drive opportunities for us over the next decade. As well, we continue to pursue new growth in a range of defence markets such as land vehicle training, as evidenced by our acquisition in the fourth quarter of fiscal 2011 of RTI International’s TAL business unit.

Explicit desire of governments and defence forces to increase the use of modeling and simulation

Also helping to drive our military business is the explicit desire of governments and defence forces to increase the use of modeling and simulation for analysis, training, and operational decision-making. These sentiments are expressed by militaries globally, especially by the U.S. and other defence forces facing budget challenges. Unlike civil aviation where the use of simulators for training is common practice, there are no requirements to train in simulators in defence and therefore the level of adoption has traditionally been much lower. Simulation offers a number of advantages that address an ever-increasing global threat level and new economic constraints that are pressuring top-line defence spending. The cost savings from the use of modeling and simulation are considerable. The USAF estimates that live training is approximately 10 times more costly than simulation-based training. According to the Department of Defence Fiscal Year 2012 budget request, the USAF officials, in an effort to reduce costs, have proposed cutting the service’s flight training budget. The USAF promises that, by spending more time in “advanced simulator training” aircrews will make up the lost flight training. The cost of fuel, detrimental environmental impacts, and significant wear and tear on weapon systems all point to the greater use of simulation and synthetic training. This type of training is critical for ensuring the readiness of global defence forces as they face new and challenging threats. As one U.K. military official stated when speaking about the pending cuts to the U.K. defence budget – “despite all of the uncertainties surrounding the strategic defence review, the one certainty is that simulation activity will increase going forward given its compelling value proposition.”

CAE Year-End Financial Results 2011 | 11

Management’s Discussion and Analysis

Growing demand for our specialized modeling and simulation-based products and services

New aircraft platforms

One of our strategic priorities is to partner with manufacturers in the defence market to strengthen relationships and position ourselves for future opportunities. OEMs are introducing new platforms that will drive worldwide demand for simulators and training. For example, Hawker Beechcraft is now offering the AT-6 light attack and armed reconnaissance aircraft, Boeing is developing a new maritime patrol aircraft called the P-8A Poseidon, NH Industries is delivering the NH90 helicopter, EADS is aggressively marketing the A330 MRTT and C-295 transport aircraft worldwide, Lockheed Martin is doubling production of the C‑130 aircraft, Alenia Aermacchi is successfully marketing the M-346 advanced lead-in fighter trainer and Sikorsky is offering new models of its H-60 helicopter to armies and navies worldwide, all of which fuel the demand for new simulators and training, and for all of which we have products at different development and production stages.

Use of modeling and simulation for analysis and decision support

Traditionally, modeling and simulation have been used to support training. This specific application is well understood and employed by militaries and civilian agencies around the world. We believe there are growth opportunities in taking the simulation out of the simulator and applying simulation across the program lifecycle, including support for analysis and decision-making operations. We see governments and militaries looking to use simulation-based synthetic environments to support research and development programs, system design and testing, and providing the decision support tools necessary to support mission planning in operations. A good example is a contract we signed in early 2011 to develop a National Modelling and Simulation Centre (NMSC) for the Ministry of Defence of Brunei. The NMSC will be used by the Royal Brunei Armed Forces and Ministry of Defence to analyze force structure options, evaluate and validate capabilities, develop doctrine and tactics, and support training and mission rehearsal exercises.

Trend towards outsourcing of training and maintenance services

With finite defence budgets and resources, defence forces and governments continue to scrutinize expenditures to find ways to save money and allow active-duty personnel to focus on operational requirements. There has been a growing trend among defence forces to outsource a variety of training services and we expect this trend to continue. Governments are outsourcing training services because they can be delivered more quickly and more cost effectively. For example, we have won or participated in contracts of this nature in Canada, Germany, Australia, the U.K. and the U.S. In the third quarter of fiscal 2011, we announced that CAE USA was awarded what is expected to be a ten-year contract (subject to annual funding) to provide comprehensive KC-135 aircrew training services to the USAF. CAE USA is to be the prime contractor responsible for providing program management, academic and simulator instruction, maintenance and logistics services, training device upgrades, and relocation services for more than 3,500 USAF KC-135 tanker aircrews.

Extension and upgrade of existing weapon system platforms

OEMs are extending the life of existing weapon system platforms by introducing upgrades or adding new features, which increases the demand for upgrading simulators to meet the new standards. For example, several OEMs are offering global militaries operating C-130 aircraft a suite of avionics upgrades, which in turn leads to a requirement for major upgrades to existing C-130 training systems or potential new C-130 training systems. In the United Kingdom, the Royal Air Force’s fleet of Puma helicopters is undergoing a life extension program to keep the aircraft in service until 2022. This resulted in us signing a contract with the United Kingdom Ministry of Defence (UK MoD) to upgrade the Puma simulator and training program at our MSHATF. The USAF is upgrading 52 legacy C‑5 aircraft to the new C-5M configuration, which includes both avionics upgrades and a re-engining program. In the second quarter of fiscal 2011 we won a competitive contract to perform upgrades on the USAF’s C-5 training devices over the next several years.

High cost of operating live assets for training which leads to more use of simulation

More defence forces and governments are adopting simulation in training programs because it improves realism, significantly lowers costs, reduces operational demands on aircraft that are being depreciated faster than originally planned, and lowers risk compared to operating actual weapon system platforms. Using a simulator for training also reduces actual aircraft flying hours and allows training for situations where an actual aircraft and/or its crew and passengers would be at risk.

Current nature of warfare which requires joint forces training and mission rehearsal

Demand for networking

Allies are cooperating and creating joint and coalition forces, which is driving the demand for joint and networked training and operations. Training devices can be networked to train different crews and allow for networked training across a range of platforms.

Growing acceptance of synthetic training for mission rehearsal

There is a growing trend among defence forces to use synthetic training to meet more of their training requirements. Synthetic environment software allows defence clients to plan sophisticated missions and carry out full-mission rehearsals as a complement to traditional live training or mission preparation. Synthetic training offers militaries a cost-effective way to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. For example, over the past several years we have delivered MH-47G and MH-60L combat mission simulators to the U.S. Army’s 160^th Special Operations Aviation Regiment that feature the CAE-developed Common Environment/Common Database (CE/CDB). The CE/CDB enhances rapid simulation-based mission rehearsal capabilities.

12 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

NEW CORE MARKETS

Healthcare market

Simulation-based training is becoming recognized as one of the most effective ways to prepare healthcare professionals to care for patients and respond to critical situations while reducing the overall risk to patients. Through acquisitions and partnerships with experts in the healthcare field, we are leveraging our knowledge, experience and best practices in simulation-based aviation training to work with healthcare experts to deliver innovative education, technologies and service solutions to improve the safety and efficiency of this industry. Currently, our healthcare services range from providing simulation-based training solutions to managing simulation‑based training centres.

During the last year, CAE Healthcare further developed its capabilities in two areas: training centre solutions and medical solutions. We leveraged our broad expertise in managing aviation simulation centres to expand our offering for healthcare simulation centres, including training centre management services and training solutions, as well as the launch of the CAE Owl^TM system. The CAE Owl^TM system, a training technology adapted from aviation, is a brief/debrief system used for optimizing the way training is conducted. In the area of medical solutions, we entered the imaging and surgical training fields; both of which are important focus areas for us and where CAE Healthcare can leverage CAE’s core simulation and modeling capabilities. The acquisitions of ICCU Imaging Inc. (ICCU) and VIMEDIX Virtual Medical Imaging Training Systems Inc. (VIMEDIX) give us the ability to offer a complete solution for bedside ultrasound training by combining simulators with a comprehensive curriculum. The acquisition of three medical product lines from the company Immersion enabled our entry into the training field for minimally invasive surgical procedures.

During the first quarter of 2011, CAE Healthcare announced that it was awarded five new contracts to supply its new CAE Owl^TM simulation centre management system. Contracts were signed with Université Laval, The Michener Institute for Applied Health Sciences, the University of Ottawa and the Hôpital Sacré-Coeur de Montréal (HSCM). CAE Healthcare also announced that it sold its first transthoracic echocardiography simulator, CAE VIMEDIX^TM, to the Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School.

CAE Healthcare and The Michener Institute for Applied Health Sciences formally celebrated the official opening of one of Canada’s largest healthcare simulation centres during the first quarter of fiscal 2011.

In the second quarter of fiscal 2011, CAE Healthcare increased sales of our CAE VIMEDIX and CAE ICCU bedside ultrasound solutions as well as our surgical simulators. We also continued to deploy a number of CAE Owl^TM brief/debrief systems to customers. CAE VIMEDIX^TM sales totaled 15 units, including key U.S. military contracts. In addition, our ICCU program was selected by the American College of Chest Physicians (ACCP) to be integrated in its first critical care ultrasound certification program. We also sold 10 surgical simulation systems and a variety of upgrades to systems already deployed with our customer installed base.

In the third quarter of fiscal 2011, CAE Healthcare continued to increase market share. Progress was made in Asia, the Middle East and Russia. We are delivering surgical and imaging solutions to medical institutions including Novosibirsk NII PK/ Meshalkin, a major cardio-surgery hospital in Russia, Princess Noura University in Riyadh, Kingdom of Saudi Arabia, multiple universities in Japan and other important institutions in China, Singapore, Indonesia, India and Turkey. In North America we made multiple deployments in key hospital teaching institutions including New York Presbyterian Hospital (Columbia University), St. Michaels Hospital (Toronto) and multiple U.S. Department of Defense (DoD) accounts and Veterans Administration Medical Centers (VAMC).

In the fourth quarter of fiscal 2011, CAE Healthcare announced the launch of its CAE Caesar^TM trauma patient simulator. CAE Caesar is a high-fidelity patient simulator designed primarily to enhance the initial and sustainment training of soldier medics and the training of tactical law enforcement medics, search and rescue teams and any organization involved in the care of trauma patients at the point of injury.

Mining market

In the first quarter of fiscal 2011, we acquired Datamine to expand our entry into the mine simulation and optimization field. Datamine has an extensive product and consulting portfolio ranging from exploration data management and geological (orebody) modeling to mine planning and mine operations management. This is part of our long-term strategy to leverage our modeling, simulation and training capabilities in new markets that have the same imperatives to reduce risks and enhance operational efficiency as the civil aviation and defence sectors.

We continued to make good progress in CAE Mining with the sale of our mine planning, management and optimization software solutions to major mining companies including BHP Mitsubishi Alliance, Vale Ferrus, and Anglo American.

On January 1, 2011, we acquired the shares of Century, a supplier of geological data management and governance systems to the mining industry. Integration is underway to leverage their expertise in geological data management systems into broader markets and solutions.

The fourth quarter of fiscal 2011 saw continued growth in software sales with new customers in Latin America including Colquisiri, Minera Lincuna and Yamana (Caraiba) and further sales to Votorantim Metais in Brazil, as well as multiple sites of Fresnillo in Mexico.

The fourth quarter of fiscal 2011 also saw CAE Mining begin to communicate our vision beyond its software and product consulting businesses to the mining market. In support of that vision, agreements were made with leading research organizations to further our thought leadership in mining technology and extend our product and service offerings in training and consulting.

Our New Core Market initiatives are still very much in their infancy. They offer attractive long-term potential for growth and the possibility for CAE to emerge as a market leader, as we have done in all of our core businesses. The New Core Market results are included in TS/C.

CAE Year-End Financial Results 2011 | 13

Management’s Discussion and Analysis

3.5 Foreign exchange

We report all dollar amounts in Canadian dollars. We value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as required by GAAP.

The tables below show the variations of the closing and average exchange rates for our three main operating currencies. We used the foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of each of the following periods:

			Increase
	2011	2010	(decrease)
U.S. dollar (US$ or USD)	0.97	1.02	(5%)
Euro (€)	1.38	1.37	1%
British pound (£ or GBP)	1.56	1.54	1%

We used the average foreign exchange rates below to value our revenues and expenses:

	2011	2010	Decrease
U.S. dollar (US$ or USD)	1.02	1.09	(6%)
Euro (€)	1.34	1.54	(13%)
British pound (£ or GBP)	1.58	1.74	(9%)

For fiscal 2011, the effect of translating the results of our self-sustaining subsidiaries into Canadian dollars resulted in a decrease in revenue of $81.0 million and a decrease in net earnings of $11.7 million, when compared to fiscal 2010.

Three areas of our business are affected by changes in foreign exchange rates:

- Our network of civil and military training centres

Most of our training network revenue and costs are in local currencies. Changes in the value of local currencies relative to the Canadian dollar therefore have an impact on the network’s net profitability and net investment. Under GAAP, gains or losses in the net investment in a self-sustaining subsidiary that result from changes in foreign exchange rates are deferred in the foreign currency translation adjustment (accumulated other comprehensive loss), which is part of the shareholders’ equity section of the balance sheet. Any effect of the fluctuation between currencies on the net profitability has an immediate translation impact on the statement of earnings and an impact on year-to-year and quarter-to-quarter comparisons.

- Our simulation products operations outside of Canada (Germany, U.S., U.K., Australia and India)

Most of the revenue and costs in these operations from self-sustaining subsidiaries are generated in their local currency except for some data and equipment bought in different currencies from time to time as well as any work performed by our Canadian manufacturing operations. Changes in the value of the local currency relative to the Canadian dollar therefore have a translation impact on the operation’s net profitability and net investment when expressed in Canadian dollars.

- Our simulation products operations in Canada

Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except for receivables and payables in foreign currencies), a significant portion of our annual revenue generated from Canada is in foreign currencies (mostly the U.S. dollar and the euro), while a significant portion of our expenses are in Canadian dollars.

We generally hedge the milestone payments in sales contracts denominated in foreign currencies to protect ourselves from some of the foreign exchange exposure. Since less than 100% of our revenue is hedged, it is not possible to completely offset the effects of changing foreign currency values, which leaves some residual exposure that can affect the statement of earnings.

We continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues presented by the current high-level volatility of the Canadian dollar versus the U.S. currency. The hedges are intended to cover a portion of the revenue in order to allow the unhedged portion to match the foreign cost component of the contract. With respect to the remaining expected future revenues, our manufacturing operations in Canada remain exposed to changes in the value of the Canadian dollar.

14 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Sensitivity analysis

We conducted a sensitivity analysis to determine the current impact of variations in the value of foreign currencies. We evaluated the sources of foreign currency revenues and expenses and determined that our consolidated exposure to foreign currency mainly occurs in two areas:

- Foreign currency revenues and expenses in Canada for the manufacturing business – we hedge a portion of these exposures;

- Translation of foreign currency operations of self-sustaining subsidiaries in foreign countries. Our exposure is mainly in our operating profits.

First we calculated the revenue and expenses per currency to determine the operating income in each currency. Then we deducted the amount of hedged revenues to determine a net exposure by currency. Next we added the net exposure from the self-sustaining subsidiaries to determine the consolidated foreign exchange exposure in different currencies.

Finally, we conducted a sensitivity analysis to determine the impact of a weakening of one cent in the Canadian dollar against each of the other three currencies. The table below shows the typical impact of this change, after taxes, on our yearly revenue and operating income, as well as our net exposure:

					Operating				Net
Exposure	(amounts in millions)		Revenue		Income		Hedging		Exposure
U.S. dollar (US$ or USD)		$	9.0	$	2.2	$	(1.4)	$	0.8
Euro (€)			2.6		0.3		(0.1)		0.2
British pound (£ or GBP)			1.0		0.2		(0.1)		0.1

A possible strengthening of one cent in the Canadian dollar would have the opposite impact.

3.6 Non-GAAP and other financial measures

This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. You should not confuse this information with, or use it as an alternative for, performance measures calculated according to GAAP. You should also not use them to compare with similar measures from other companies.

Backlog

Backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed.

- For the SP/C, SP/M and TS/M segments, we consider an item part of our backlog when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract or an order;

- Military contracts are usually executed over a long-term period and some of them must be renewed each year. For the SP/M and TS/M segments, we only include a contract item in backlog when the customer has authorized the contract item and has received funding for it;

- For the TS/C segment, we include revenues from customers with both long-term and short-term contracts when these customers commit to paying us training fees, or when we reasonably expect them from current customers.

The book-to-sales ratio is the total orders divided by total revenue in the period.

Capital employed

Capital employed is a non-GAAP measure we use to evaluate and monitor how much we are investing in our business. We measure it from two perspectives:

Capital used:

- For the company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities
(not including long-term debt and its current portion);

16 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

- For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtract total liabilities (not including tax accounts, long-term debt and its current portion and other non-operating liabilities).

Source of capital:

- We add net debt to total shareholders’ equity to understand where our capital is coming from.

Capital expenditures (maintenance and growth)

Maintenance capital expenditure is a non-GAAP measure we use to calculate the investment needed to sustain the current level of economic activity.

Growth capital expenditure is a non-GAAP measure we use to calculate the investment needed to increase the current level of economic activity.

EBIT

Earnings before interest and taxes (EBIT) is a non-GAAP measure that shows us how we have performed before the effects of certain financing decisions and tax structures. We track EBIT because we believe it makes it easier to compare our performance with previous periods, and with companies and industries that do not have the same capital structure or tax laws.

Free cash flow

Free cash flow is a non-GAAP measure that shows us how much cash we have available to build the business, repay debt and meet ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking the net cash generated by our continuing operating activities, subtracting maintenance capital expenditures, other assets not related to growth and dividends paid and adding proceeds from the sale of property, plant and equipment.

Gross margin

Gross margin is a non-GAAP measure equivalent to the segment operating income excluding selling, general and administrative expenses.

Net debt

Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt, including the current portion, and subtracting cash and cash equivalents.

Non-cash working capital

Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day operation of our business. We calculate it by taking current assets (not including cash and cash equivalents or the current portion of assets held-for-sale) and subtracting current liabilities (not including the current portion of long-term debt or the current portion of liabilities related to assets held-for-sale).

Return on capital employed

Return on capital employed (ROCE) is a non-GAAP measure that we use to evaluate the profitability of our invested capital. We calculate this ratio over a rolling four-quarter period by taking earnings from continuing operations excluding interest expense, after tax, divided by the average capital employed. In addition, we also calculate this ratio adjusting earnings and capital employed to reflect the ordinary off-balance sheet operating leases.

Revenue simulator equivalent unit

Revenue simulator equivalent unit (RSEU) is a financial measure we use to show the total average number of FFSs available to generate revenue during the period. For example, in the case of a 50/50 flight training joint venture, we will report only 50% of the FFSs deployed under this joint venture as an RSEU. If a FFS is being powered down and relocated, it will not be included as an RSEU until the FFS is re-installed and available to generate revenue.

Segment operating income

Segment operating income (SOI) is a non-GAAP measure and our key indicator of each segment’s financial performance. This measure gives us a good indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segment’s performance. We calculate it by using earnings before other income (expense), interest, income taxes and discontinued operations. These items are presented in the reconciliation between total segment operating income and EBIT (see Note 26 of the consolidated financial statements).

Unfunded backlog

Unfunded backlog is a non-GAAP measure that represents firm military orders we have received but have not yet executed for which funding authorization has not yet been obtained. We include unexercised options with a high probability that they will be exercised, but exclude indefinite-delivery/ indefinite-quantity (IDIQ) contracts.

CAE Year-End Financial Results 2011 | 17

Management’s Discussion and Analysis

4. CONSOLIDATED RESULTS[2]

4.1 Results of our operations – fourth quarter of fiscal 2011

(amounts in millions, except per share amounts)		Q4-2011	Q3-2011	Q2-2011	Q1-2011	Q4-2010
Revenue	$	464.4	411.3	386.6	366.7	395.9
Total segment operating income²	$	69.4	64.8	61.9	62.2	64.9
Reversal of restructuring provision (charge)	$	1.0	-	-	-	(1.9)
Earnings before interest and income taxes (EBIT)²	$	70.4	64.8	61.9	62.2	63.0
As a % of revenue	%	*15.2*	15.8	16.0	17.0	15.9
Interest expense, net	$	7.8	8.4	7.6	6.9	5.5
Earnings before taxes	$	62.6	56.4	54.3	55.3	57.5
Income tax expense	$	12.9	15.7	14.3	15.9	17.0
Net earnings	$	49.7	40.7	40.0	39.4	40.5
Basic and diluted earnings per share (EPS)	$	0.19	0.16	0.16	0.15	0.16

[2] Non-GAAP measure (see Section 3.6).

18 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Revenue was 13% higher than last quarter and 17% higher compared to the fourth quarter of fiscal 2010

Revenue was $53.1 million higher than last quarter mainly because:

- SP/M’s revenue increased by $25.7 million, or 17%, mainly due to higher volume on programs executed in Canada, an increased level of activity on our various NH90 programs, the integration of RTI International’s TAL business unit, acquired in February, and from a contract awarded this quarter to develop a state-of-the-art NMSC in Brunei;

- TS/M’s revenue increased by $10.0 million, or 15%, mainly due to a higher level of activity in our Professional Services business in Canada and the U.S., a higher volume of training activity in Canada and increased in-service support for a European contract, partially offset by an unfavourable foreign exchange impact;

- SP/C’s revenue increased by $9.6 million, or 14%, mainly due to higher production levels resulting from an increase in order intake, partially offset by less favourable hedging rates;

- TS/C’s revenue increased by $7.8 million, or 6%, mainly due to higher revenue generated in North and South America and to a lesser extent in Europe, as well as to the integration into our results of CHC Helicopter’s HFTO. The increase was partially offset by the negative effect from the stronger Canadian dollar against the U.S. dollar and the Euro.

Revenue was $68.5 million higher than the same period last year largely because:

- SP/M’s revenue increased by $30.1 million, or 20%, mainly due to higher volume on programs executed in Canada, Germany and Australia and the integration of RTI International’s TAL business unit, acquired in February, partially offset by an unfavourable foreign exchange impact;

- TS/C’s revenue increased by $18.5 million, or 16%, mainly due to higher revenue generated in North and South America and in the emerging markets, to the integration into our results of the CSWAFC joint venture and CHC Helicopter’s HFTO as well as the higher contribution from our New Core Markets. The increase was partially offset by the negative effect from the stronger Canadian dollar against the U.S. dollar and the Euro;

- SP/C’s revenue increased by $11.4 million, or 18%, mainly due to higher production levels resulting from an increase in order intake, partially offset by less favourable hedging rates;

- TS/M’s revenue increased by $8.5 million, or 12%, mainly due to increased revenue on the KC-135 Aircrew Training System (ATS) program, a higher volume of activity in Canada and increased in-service support for a European contract, partially offset by an unfavourable foreign exchange impact.

You will find more details in Results by segment.

EBIT was $5.6 million higher than last quarter and $7.4 million higher compared to the fourth quarter of fiscal 2010

EBIT for this quarter was $70.4 million, or 15.2% of revenue. EBIT was up $5.6 million, or 9%, compared to last quarter, and up $7.4 million, or 12%, compared to the fourth quarter of fiscal 2010. A restructuring provision reversal of $1.0 million was booked this quarter, compared to a restructuring charge of $1.9 million booked in the fourth quarter of fiscal 2010.

Compared to last quarter, segment operating income was up by 7%, or $4.6 million. Increases of $2.6 million, $1.9 million and $0.7 million from SP/M, TS/C and SP/C respectively, were partially offset by a decrease of $0.6 million from TS/M.

Compared to the fourth quarter of fiscal 2010, segment operating income was up by 7%, or 4.5 million. Increases of $5.1 million and $0.7 million for SP/M and TS/M respectively, were offset by a decrease of $0.9 million for SP/C and a decrease of $0.4 million for TS/C.

You will find more details in Results by segment.

Net interest expense was $0.6 million lower than last quarter and $2.3 million higher compared to the fourth quarter of fiscal 2010

Net interest expense was lower than last quarter mainly because of lower average foreign exchange rates and higher capitalized interest for assets under construction. The increase over the fourth quarter of fiscal 2010 was mainly due to higher utilization of the revolving credit facility and other interest, in addition to a decrease in capitalized interest for assets under construction, partially offset by lower interest income.

Effective income tax rate is 21% this quarter

Income taxes this quarter were $12.9 million, representing an effective tax rate of 21%, compared to 28% for the last quarter and 30% in the fourth quarter of fiscal 2010.

The decrease in the effective tax rate in the fourth quarter was mainly attributable to the recognition of tax assets arising from the reduction in the valuation allowance of net operating losses in the U.K. and other tax recoveries. This quarter we also recorded additional benefits due to the reduction of future tax rates at which future tax liabilities will materialize. Excluding those elements, the income tax expense this quarter would have been $17.5 million, representing an effective tax rate of 28%.

CAE Year-End Financial Results 2011 | 19

Management’s Discussion and Analysis

4.2 Results of our operations – fiscal 2011

(amounts in millions, except per share amounts)		FY2011	FY2010	FY2009
Revenue	$	1,629.0	1,526.3	1,662.2
Gross Margin³	$	493.9	452.2	499.9
As a % of revenue	%	*30.3*	29.6	30.1
Total segment operating income	$	258.3	264.1	305.8
Reversal of restructuring provision (charge)	$	1.0	(34.1)	-
Earnings before interest and income taxes (EBIT)	$	259.3	230.0	305.8
As a % of revenue	%	*15.9*	15.1	18.4
Interest expense, net	$	30.7	26.0	20.2
Earnings from continuing operations (before taxes)	$	228.6	204.0	285.6
Income tax expense	$	58.8	59.5	83.4
Earnings from continuing operations	$	169.8	144.5	202.2
Results from discontinued operations	$	-	-	(1.1)
Net earnings	$	169.8	144.5	201.1
Basic and diluted EPS	$	0.66	0.56	0.79

Revenue was 7% or $102.7 million higher than last year[3]

Revenue was higher than last year mainly because:

- TS/C’s revenue increased by $58.5 million, or 13%, mainly due to higher revenue generated in North and South America, in Europe, in the emerging markets and from FTOs’ activities. The increase was also due to the integration into our results of the CSWAFC joint venture and CHC Helicopter’s HFTO. The contribution of our New Core Markets was fully offset by the negative effect from the stronger Canadian dollar against the Euro, the U.S. dollar and the British Pound;

- SP/M’s revenue increased by $40.5 million, or 7%, mainly due to higher volume on programs executed in Canada, Germany and the U.S., partially offset by an unfavourable foreign exchange impact of $22.8 million on the translation of foreign self-sustaining subsidiaries and a decrease in NH90 program revenue, primarily due to the delivery of a major NH90 German program in fiscal 2010;

- TS/M’s revenue increased by $15.9 million, or 6%, mainly due to a higher volume of training activity in the U.S. and in our European training centres network, increased revenue on the KC-135 ATS program and a higher level of activity in our Professional Services business in the U.S., partially offset by an unfavourable foreign exchange impact of $20.7 million on the translation of foreign self-sustaining subsidiaries;

- SP/C’s revenue decreased by $12.2 million, or 4%, mainly due to less favourable hedging rates and less revenue recorded for sales-type capital leases, partially offset by higher production levels resulting from an increase in order intake.

You will find more details in Results by segment.

Gross margin was $41.7 million higher than last year

The gross margin was $493.9 million this year, or 30.3% of revenue compared to $452.2 million or 29.6% of revenue last year. As a percentage of revenue, gross margin was stable when compared to last year.

EBIT was $29.3 million higher than last year

EBIT this year was $259.3 million, or 15.9% of revenue. EBIT was up $29.3 million, or 13%, compared to last year. A restructuring provision reversal of $1.0 million was booked this year, compared to a restructuring charge of $34.1 million booked in fiscal 2010.

You will find more details in Results by segment.

[3] Non-GAAP measure (see Section 3.6).

20 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Net interest expense was $4.7 million higher than last year

			FY2010 to		FY2009 to
(amounts in millions)			FY2011		FY2010
Net interest, prior period		$	26.0	$	20.2
	Increase in interest on long-term debt		3.4		1.5
	Increase in interest income		(1.5)		-
	(Increase) decrease in capitalized interest		(0.7)		1.9
	Increase (decrease) in amortization of deferred financing charges		0.7		(0.3)
	Other		2.8		2.7
Increase in net interest expense from the prior period		$	4.7	$	5.8
Net interest, current period		$	30.7	$	26.0

Net interest expense was $30.7 million this year, $4.7 million or 18% higher than last year. This was mainly attributed to higher interest expense on overall long-term debt, primarily resulting from a higher utilization of the revolving credit facility and an increase in other interest expense, partially offset by an increase in other interest income.

Effective income tax rate is 26%

This fiscal year, income taxes were $58.8 million, representing an effective tax rate of 26%, compared to 29% for the same period last year. The decrease in the effective tax rate compared to fiscal 2010 was principally due to lower Canadian and foreign statutory rates, combined with the mix of income from various jurisdictions. In addition, the tax rate was favourably impacted by changes in enacted tax rates, the reduction in the valuation allowance of net operating losses in the U.K. and other tax recoveries.

4.3 Results of our operations – fiscal 2010 versus fiscal 2009

Revenue

Revenue was $1,526.3 million in fiscal 2010, $135.9 million or 8% lower than fiscal 2009. The decrease was mainly due to:

- Lower production levels resulting from a decline in order intake for the SP/C segment. The decrease was partially offset by more favourable rates on revenue hedging contracts in fiscal 2010;

- Market softness in North America and Europe and to the negative effect from the stronger Canadian dollar for the TS/C segment. The decrease was partially offset by the contribution of additional RSEUs to our network, by the increase of FTOs’ activities and by higher revenue generated in the emerging markets;

- An increase in volume and the integration into our results of Bell Aliant’s former Defence, Security and Aerospace (DSA) business unit, acquired in May 2009, for the SP/M segment. The increase was partially offset by the negative foreign exchange impact;

- A higher level of activity in our Professional Services business and increased training services in Europe for our TS/M segment. The increase was partially offset by a negative foreign exchange impact.

Gross margin

The gross margin was $452.2 million, or 29.6% of revenue in fiscal 2010, $47.7 million or 10% lower than in fiscal 2009. The gross margin in fiscal 2009 was $499.9 million, or 30.1% of revenue. As a percentage of revenue, the gross margin remained stable.

EBIT

EBIT was $230.0 million, or 15.1% of revenue in fiscal 2010, representing a decrease of $75.8 million or 25% over the fiscal 2009 EBIT of $305.8 million. A restructuring charge of $34.1 million was booked in fiscal 2010, compared to nil in fiscal 2009.

Segment operating income was down by 14%, or $41.7 million. Decreases in segment operating income for the civil segments of $42.7 million for SP/C and $11.9 million for TS/C were partially offset by increases for the military segments of $8.0 million and $4.9 million for SP/M and TS/M respectively.

Net interest

Net interest was $26.0 million in fiscal 2010, a $5.8 million or 29% increase over fiscal 2009. This was mainly due to:

- Higher interest expense on overall long-term debt, mainly resulting from a net increase of senior notes of $15.0 million and US$45.0 million by way of a private placement in the first quarter of fiscal 2010, a net increase in capital leases and issuance of new debts;

- A decrease in capitalized interests for assets under construction;

- An increase in other interest expense.

Income taxes

In fiscal 2010, income taxes were $59.5 million, representing an effective tax rate of 29%, compared to 29% in fiscal 2009.

CAE Year-End Financial Results 2011 | 21

Management’s Discussion and Analysis

4.4 Consolidated orders and backlog

Our consolidated backlog was $3,440.5 million at the end of fiscal 2011, which is 13% higher than last year. New orders of $1,854.5 million and adjustments of $172.2 million increased the backlog this year, while $1,629.0 million in revenue was generated from the backlog.

Backlog up by 13% over last year

(amounts in millions)		FY2011		FY2010		FY2009
Backlog, beginning of period	$	3,042.8	$	3,181.8	$	2,899.9
+ orders		1,854.5		1,574.9		1,940.2
- revenue		(1,629.0)		(1,526.3)		(1,662.2)
+ / - adjustments		172.2		(187.6)		3.9
Backlog, end of period	$	3,440.5	$	3,042.8	$	3,181.8

In fiscal 2011, in addition to the negative foreign exchange impact resulting from the stronger Canadian dollar, adjustments included an amount of $187.8 million related to the acquisition of CHC Helicopter’s HFTO, $56.3 related to the acquisition of RTI International’s TAL business unit, and revised downward revenue expectations of $21.1 million for contracts acquired in the purchase of DSA, for which work has been delayed.

In fiscal 2010, in addition to the negative foreign exchange impact resulting from the stronger Canadian dollar, adjustments included a downwards revision of $44.5 million made in TS/C to incorporate the impact of revised revenue expectations for contracts signed with customers, reflecting market conditions during that period, and contracts acquired in the DSA acquisition for a total of $177.8 million.

The book-to-sales ratio for the quarter was 1.03x. The ratio for the last 12 months was 1.14x.

You will find more details in Results by segment, below.

5. RESULTS BY SEGMENT

We manage our business and report our results in four segments:

Civil segments:

- Training & Services/Civil (TS/C);

- Simulation Products/Civil (SP/C).

Military segments:

- Simulation Products/Military (SP/M);

- Training & Services/Military (TS/M).

Transactions between segments are mainly transfers of simulators from SP/C to TS/C and are recorded at cost at the consolidated level.

If we can measure a segment’s use of jointly used assets, costs and liabilities (mostly corporate costs), we allocate them to the segment in that proportion. If we cannot measure a segment’s use, we allocate in proportion to the segment’s cost of sales.

22 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

KEY PERFORMANCE INDICATORS

Segment operating income
(amounts in millions, except operating margins)		FY2011	FY2010	Q4-2011	Q3-2011	Q2-2011	Q1-2011	Q4-2010
Civil segments
Training & Services/Civil	$	80.4	75.1	20.6	18.7	18.9	22.2	21.0
	%	*16.3*	17.3	*15.6*	15.0	16.0	18.9	18.5
Simulation Products/Civil	$	30.3	49.4	8.0	7.3	6.8	8.2	8.9
	%	*11.1*	17.4	*10.5*	11.0	10.8	12.3	13.8
Military segments
Simulation Products/Military	$	101.9	95.7	30.9	28.3	24.7	18.0	25.8
	%	*17.4*	17.5	*17.2*	18.4	18.0	15.5	17.3
Training & Services/Military	$	45.7	43.9	9.9	10.5	11.5	13.8	9.2
	%	*16.4*	16.7	*12.9*	15.7	16.8	20.8	13.4
Total segment operating income (SOI)	$	258.3	264.1	69.4	64.8	61.9	62.2	64.9
Reversal of restructuring provision (charge)	$	1.0	(34.1)	1.0	-	-	-	(1.9)
EBIT	$	259.3	230.0	70.4	64.8	61.9	62.2	63.0

Capital employed⁴

		March 31	December 31	September 30	June 30	March 31
(amounts in millions)		2011	2010	2010	2010	2010
Civil segments
Training & Services/Civil	$	1,066.1	1,001.8	1,020.2	1,007.2	969.8
Simulation Products/Civil	$	25.7	86.4	83.1	76.9	29.6
Military segments
Simulation Products/Military	$	201.0	229.6	194.5	177.4	147.0
Training & Services/Military	$	187.4	193.0	201.7	202.2	174.2
	$	1,480.2	1,510.8	1,499.5	1,463.7	1,320.6

5.1 Civil segments

FISCAL 2011 [4]EXPANSIONS AND NEW INITIATIVES

- We have acquired an equity interest in CSWAFC near Perth, Australia and will manage the pilot training school as part of the CAE Global Academy network. CSWAFC will operate as a joint venture owned 53% by China Southern Airlines and 47% by CAE;

- We have placed four new business aviation FFSs into service: a Bombardier Learjet 40/40XR/45/45XR convertible FFS and a Cessna Citation II FFS in Burgess Hill, U.K.; and an Embraer Phenom 100/300 convertible FFS and a Dassault Falcon 50EX in Dallas, USA;

- We signed an agreement with aircraft manufacturer ATR as a framework for providing a range of products and support services to operators of ATR aircraft. As part of this agreement, ATR and CAE will collaborate on deployment of simulation equipment and training programs in ATR, CAE or customer training centres worldwide;

- We signed an agreement with Mitsubishi Aircraft Corporation (MJET) to develop and deliver a comprehensive training solution for the new MRJ. The agreement includes a 10-year Exclusive Training Provider program and the establishment of two training centres initially in Japan and the United States. In support of the agreement we are expanding our training network and are developing two CAE 7000 Series MRJ FFSs as well as CAE Simfinity^TM integrated procedures trainers;

- We expanded the Honeywell-CAE Training Alliance and are now offering maintenance training courses for technicians in Europe, the Middle East, and Asia;

[4] Non-GAAP measure (see Section 3.6).

CAE Year-End Financial Results 2011 | 23

Management’s Discussion and Analysis

- We placed the first CAE 3000 Series helicopter mission simulator, a Eurocopter AS350 B2 model, at a training centre in Phoenix, Arizona, and it has been qualified by the U.S. FAA for Level 7 flight training device credits;

- We announced that the AirAsia cadets in CAE's MPL beta program class have successfully completed the Core and Basic phases of the program;

- We are working with key airline customers to expand our training capacity in the rapidly growing South American commercial aviation market, adding four Level D FFSs, including a new training location in Peru, to support the renewal of long-term training contracts;

- We agreed with Airbus to renew our flight crew training services cooperation agreement through 2017. The cooperation began in 2002 and provides Airbus operators with a joint global network of training centres with the largest fleet of FFSs for Airbus aircraft types, standardized courseware and expert instructors;

- We will install a CAE 5000 Series FFS for the Cessna Citation Sovereign in mid-2011 at the CAE North East Training Centre in Morristown, New Jersey;

- We received FAA approval to deliver the pilot training ground school for the Eurocopter AS350 helicopter through a CAE Simfinity^TM e-Learning program enabling pilots to reduce their time at the training centre for both initial and recurrent training;

- We announced availability together with APS Emergency Maneuver Training of an online computer-based training course designed to improve the ability of business jet pilots to recognize, avoid and, if necessary, recover from situations of loss of control in-flight (LOC-I);

- We acquired CHC Helicopter’s HFTO, including 4 FFSs located in Norway, the United Kingdom and Canada and executed an agreement to become CHC’s long-term training partner, responsible for training more than 2,000 helicopter pilots and maintenance engineers as well as providing general training, pilot provisioning and certain types of search and rescue training in support of CHC’s global fleet;

- We announced, together with Líder Aviação, the largest helicopter operator in Brazil, an agreement to form a joint venture that will provide advanced, simulation-based, helicopter pilot training in South America in early 2012. The new joint venture company will purchase the first full-motion Level D CAE 3000 Series FFS, which will replicate the Sikorsky S-76C++ aircraft;

- We announced, together with the Airports Authority of India (AAI), a new helicopter pilot ab initio training program at the CAE Global Academy in Gondia, India. The program will lead to a commercial helicopter pilot licence (CHPL) and within three years is expected to graduate approximately 100 new helicopter pilots annually;

- We announced that our training centre in Bangalore, India is the first non-airline training centre to earn approval as a fixed-wing Type Rating Training Organization (TRTO) by India's Directorate General of Civil Aviation (DCGA);

- We announced the introduction of the third generation of our market-leading CAE Tropos^TM-6000 simulation visual image generator (IG) for civil aviation training. The new IG provides a more immersive environment and an enhanced pilot training experience with new features leveraging the power of the latest NVIDIA commercial graphics processors.

TRAINING & SERVICES/CIVIL

TS/C obtained contracts this quarter expected to generate future revenues of $168.3 million, including:

- A multi-year agreement with Virgin America to develop and support a new pilot training centre near the airline’s home base in San Francisco, USA;

- A one-year renewal to provide initial and recurrent pilot training to XOJET;

- A contract to deliver a comprehensive flight safety laboratory for the Federal Republic of Nigeria’s Accident Investigation Bureau (AIB);

- A long-term contract with the European Institute of Aviation and Business GmbH (EIAB), Saarlouis, Germany, to train self‑sponsored ab initio pilot cadets as part of its Bachelor of Aviation degree program;

- A new contract with Omni Aviation Training Center, Tires, Portugal, to train ab initio pilot cadets in Visual Flight Rules (VFR);

- Additional contracts through our Pilot Provisioning service to provide more than 150 pilots to three airlines in Asia and Europe, as well as to the Association des Pilotes Professionels Antillo-Guyanais (APPAG), an aviation initiative sponsored by the European Commission.

Financial Results
(amounts in millions, except operating margins, RSEU and FFSs deployed)		FY2011	FY2010	Q4-2011	Q3-2011	Q2-2011	Q1-2011	Q4-2010
Revenue	$	492.0	433.5	132.1	124.3	118.0	117.6	113.6
Segment operating income	$	80.4	75.1	20.6	18.7	18.9	22.2	21.0
Operating margins	%	*16.3*	17.3	*15.6*	15.0	16.0	18.9	18.5
Amortization & depreciation	$	66.3	65.2	17.1	16.9	16.3	16.0	15.5
Capital expenditures	$	82.2	79.5	28.4	18.3	24.0	11.5	23.9
Capital employed	$	1,066.1	969.8	1,066.1	1,001.8	1,020.2	1,007.2	969.8
Backlog	$	986.5	728.7	986.5	774.2	695.3	706.8	728.7
RSEU⁵		131	129	132	132	131	132	131
FFSs deployed		156	148	156	152	151	150	148
New Core Markets (included above)
Revenue	$	38.0	2.3	11.1	11.1	8.1	7.7	1.2
Segment operating income (loss)	$	(6.9)	(2.3)	(2.6)	(1.3)	(1.2)	(1.8)	(1.3)

24 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Revenue [5]up by 6% over last quarter and up by 16% compared to the fourth quarter of fiscal 2010

The increase over last quarter was mainly attributable to higher revenue generated in North and South America and to a lesser extent in Europe, as well as to the integration into our results of CHC Helicopter’s HFTO. The increase was partially offset by the negative effect from the stronger Canadian dollar against the U.S. dollar and the Euro.

The increase compared to the fourth quarter of fiscal 2010 was mainly attributable to higher revenue generated in North and South America and in the emerging markets, to the integration into our results of the CSWAFC joint venture and CHC Helicopter’s HFTO as well as the higher contribution from our New Core Markets. The increase was partially offset by the negative effect from the stronger Canadian dollar against the U.S. dollar and the Euro.

Revenue was $492.0 million this year, 13% or $58.5 million higher than last year

The increase over last year was mainly attributable to higher revenue generated in North and South America, in Europe, in the emerging markets and from FTOs’ activities. The increase was also due to the integration into our results of the CSWAFC joint venture and CHC Helicopter’s HFTO. The contribution of our New Core Markets was fully offset by the negative effect from the stronger Canadian dollar against the Euro, the U.S. dollar and the British Pound.

Segment operating income up by 10% over last quarter and down 2% compared to the fourth quarter of fiscal 2010

Segment operating income was $20.6 million (15.6% of revenue) this quarter, compared to $18.7 million (15.0% of revenue) last quarter and $21.0 million (18.5% of revenue) in the same period last year. Without taking into account the impact of our New Core Markets, segment operating income would have been $23.2 million (19.2% of revenue) this quarter, compared to $20.0 million (17.7% of revenue) last quarter and $22.3 million (19.8% of revenue) in the same period last year.

Segment operating income increased by $1.9 million, or 10%, over last quarter. The increase was mainly attributable to the stronger revenue generated in the current period. The increase was partially offset by the negative effect from the stronger Canadian dollar and the higher expenditures related to our New Core Markets.

Segment operating income decreased by $0.4 million, or 2%, compared to the fourth quarter of fiscal 2010. The higher expenditures related to our New Core Markets and the negative effect from the stronger Canadian dollar was partially offset by the positive impact from the stronger revenue generated in the current period.

Segment operating income was $80.4 million, up 7% or $5.3 million over last year

Segment operating income was $80.4 million (16.3% of revenue) this year, compared to $75.1 million (17.3% of revenue) last year. Without taking into account the impact of our New Core Markets, segment operating income would have been $87.3 million (19.2% of revenue) this year, compared to $77.4 million (17.9% of revenue) last year.

The increase was mainly attributable to the stronger revenue generated in the current period. Also, a gain was recorded on the sale of our investment in a minor training operation in Germany. The increase was partially offset by the realization of a larger gain on the disposal of used assets last year, the higher expenditures related to our New Core Markets and the negative effect from the stronger Canadian dollar.

Capital expenditures at $28.4 million this quarter and $82.2 million for the year

Maintenance capital expenditures were $4.3 million for the quarter and $15.8 million for the year. Growth capital expenditures were $24.1 million for the quarter and $66.4 million for the year. We continue to selectively expand the training network to address additional market share and in response to training demands from our customers.

Capital employed increased by $64.3 million over last quarter and by $96.3 million over last year

Capital employed increased over the last quarter mainly due to the impact of the integration of CHC Helicopter’s HFTO, the investments in our training network, the increase in non-cash working capital and the investments in our New Core Markets. The increase was partially offset by the impact of the stronger Canadian dollar.

Capital employed increased over the prior year mainly due to the impact of the integration of our New Core Markets, primarily resulting from the Datamine acquisition, as well as CHC Helicopter’s HFTO, the investments in our training network and the increase in non-cash working capital. The increase was partially offset by the impact of the stronger Canadian dollar.


Backlog up by 35% over last year

(amounts in millions)	FY2011		FY2010
Backlog, beginning of period	$	728.7	$	1,006.4
+ orders		584.9		351.2
- revenue		(492.0)		(433.5)
+ / - adjustments		164.9		(195.4)
Backlog, end of period	$	986.5	$	728.7

[5] Non-GAAP measure (see Section 3.6).

CAE Year-End Financial Results 2011 | 25

Management’s Discussion and Analysis

SIMULATION PRODUCTS/CIVIL

SP/C was awarded contracts for the following 7 FFSs this quarter:

- One CAE 3000 Series Sikorsky S-76C++ FFS to a joint venture between CAE and Líder Aviação;

- One CAE 5000 Series A320 FFS to Lufthansa Flight Training;

- Two CAE 7000 Series Boeing 737NG to Xiamen Airlines;

- One CAE 3000 Series Sikorsky S-76C++ FFS to the joint venture between CAE and China Southern Airlines;

- One CAE 5000 Series B737 FFS to the joint venture between CAE and China Southern Airlines;

- One CAE 5000 Series A320 FFS to an undisclosed airline in Asia.

This brings SP/C’s order intake for the year to 29 FFSs.

Financial Results
(amounts in millions, except operating margins)		FY2011	FY2010	Q4-2011	Q3-2011	Q2-2011	Q1-2011	Q4-2010
Revenue	$	271.9	284.1	75.9	66.3	62.8	66.9	64.5
Segment operating income	$	30.3	49.4	8.0	7.3	6.8	8.2	8.9
Operating margins	%	*11.1*	17.4	*10.5*	11.0	10.8	12.3	13.8
Amortization & depreciation	$	6.2	6.5	1.5	1.7	1.5	1.5	1.7
Capital expenditures	$	7.4	14.7	1.7	1.7	2.6	1.4	12.3
Capital employed	$	25.7	29.6	25.7	86.4	83.1	76.9	29.6
Backlog	$	305.1	252.4	305.1	325.3	305.3	251.7	252.4

Revenue up 14% over last quarter and up 18% from the fourth quarter of 2010

The increase over last quarter and the fourth quarter of fiscal 2010 was mainly due to higher production levels resulting from an increase in order intake, partially offset by less favourable hedging rates.

Revenue was $271.9 million for the year, 4% or $12.2 million lower than last year

The decrease in revenue was primarily due to less favourable hedging rates and less revenue recorded for sales-type capital leases, partially offset by higher production levels resulting from an increase in order intake.

Segment operating income up by 10% over last quarter and down 10% from the fourth quarter of fiscal 2010

Segment operating income was $8.0 million (10.5% of revenue) this quarter, compared to $7.3 million (11.0% of revenue) last quarter and $8.9 million (13.8% of revenue) in the fourth quarter of fiscal 2010.

The increase from last quarter was primarily due to higher margins on specific projects and an increase in volume, as mentioned above, partially offset by an unfavourable foreign exchange impact.

The decrease from the fourth quarter of fiscal 2010 was mainly due to an unfavourable foreign exchange impact, partially offset by an increase in volume, as mentioned above.

Segment operating income was $30.3 million for the year, 39% or $19.1 million lower than last year

Segment operating income was $30.3 million (11.1% of revenue) this year, compared to $49.4 million (17.4% of revenue) last year.

The decrease was primarily due to an unfavourable foreign exchange impact, a lower utilization of funds from our research and development cost-sharing programs and a decline in project margins, resulting from more challenging market conditions in fiscal 2011 than in fiscal 2010.

Capital employed decreased by $60.7 million from last quarter and decreased by $3.9 million from last year

Capital employed was lower than last quarter mainly due to a decrease in non-cash working capital accounts.

Capital employed was lower than last year mainly due to a decrease in non-cash working capital accounts, partially offset by higher intangible assets and other assets.

Backlog up 21% compared to last year

(amounts in millions)	FY2011		FY2010
Backlog, beginning of period	$	252.4	$	288.2
+ orders		330.8		254.6
- revenue		(271.9)		(284.1)
+ / - adjustments (mainly FX)		(6.2)		(6.3)
Backlog, end of period	$	305.1	$	252.4

This quarter's book-to-sales ratio was 0.76x. The ratio for the last 12 months was 1.22x.

CAE Year-End Financial Results 2011 | 27

Management’s Discussion and Analysis

Combined civil performance

Revenue was $208.0 million this quarter, compared to $190.6 million last quarter and $178.1 million in the fourth quarter of fiscal 2010. For fiscal 2011, revenue was $763.9 million, compared to $717.6 million for fiscal 2010. Excluding the negative foreign exchange impact of $37.5 million arising on the translation of self-sustaining foreign subsidiaries when compared to fiscal 2010, fiscal 2011 revenue would have been $801.4 million.

Segment operating income was $28.6 million (13.8% of revenue) this quarter, compared to $26.0 million (13.6% of revenue) last quarter and $29.9 million (16.8% of revenue) in the fourth quarter of fiscal 2010. For fiscal 2011, segment operating income was $110.7 million (14.5% of revenue), compared to $124.5 million (17.3% of revenue) for fiscal 2010.

Without taking into account the impact of the New Core Markets, revenue and segment operating income would have been $196.9 million and $31.2 million (15.8% of revenue) respectively this quarter, and $725.9 million and $117.6 million (16.2% of revenue) for fiscal 2011.

The combined civil book-to-sales ratio was 1.09x for the quarter and 1.20x on a trailing 12-month basis.

5.2 Military segments

FISCAL 2011 EXPANSIONS AND NEW INITIATIVES

- We signed a teaming agreement with Hawker Beechcraft as their ground-based training systems provider for the AT-6 Light Attack and Armed Reconnaissance aircraft;

- We announced that India's first advanced full-fidelity helicopter simulator, a Bell 412 model, has been certified to Level D by India’s Directorate General Civil Aviation (DGCA) and the European Aviation Safety Agency (EASA). The FFS is located at the Helicopter Academy to Train by Simulation of Flying (HATSOFF), the joint venture owned equally by Hindustan Aeronautics Limited (HAL) and CAE;

- We were awarded a USAF contract to provide comprehensive KC-135 aircrew training services marking the first time we have won a USAF ATS program as a prime contractor;

- We demonstrated new capabilities related to unmanned aerial system (UAS) mission training solutions at the world’s largest military simulation and training exhibition – the Interservice/Industry Training Simulation and Education Conference;

- We acquired, through our subsidiary CAE USA, RTI International’s TAL business unit in order to further expand our offering of land simulation and training solutions. TAL has provided maintenance trainers for the U.S. Army's ground vehicles since the early 1990s. TAL designs, manufactures and delivers full-scale, high-fidelity maintenance trainers as well as virtual desktop trainers for a range of variants of the Bradley Fighting Vehicle, Abrams tanks, and the High Mobility Artillery Rocket System (HIMARS);

- We took delivery, through HATSOFF, of the civil/conventional variant of the Dhruv simulator cockpit, which will now be installed and integrated with the CAE-built full-mission simulator currently in operation at HATSOFF. The cockpit for the civil/conventional variant of the Dhruv will be ready-for-training in May 2011;

- CAE, AgustaWestland (a Finmeccanica company) and BAE Systems formed an industry team to pursue the AIR 9000 Phase 7 program in Australia. The AIR 9000 Phase 7 program, also called the Helicopter Aircrew Training System (HATS), is intended to provide a rotary wing training capability for the Australian Navy and Army to meet the future rotary wing training needs of the Australian Defence Forces (ADF).

SIMULATION PRODUCTS/MILITARY

SP/M was awarded $129.8 million in orders this quarter, including:

- A contract from the United States Navy to design and manufacture a suite of P-3C training devices for the Taiwan Navy. The contract was awarded to CAE USA under the United States foreign military sales program. CAE USA will design and manufacture a P-3C operational flight trainer (OFT) as well as a P-3C operational tactics trainer (OTT);

- A contract from the United States Navy to perform a major upgrade on an MH-60S operational flight trainer located at Naval Air Station (NAS) North Island. This MH-60S OFT was designed and manufactured by another contractor. CAE will now provide a range of simulator upgrades to this MH-60S OFT, including software updates, new control loading, enhanced instructor operator station and the addition of forward-looking infrared (FLIR) image generators;

- A contract from Rotorsim, the consortium owned equally by CAE and AgustaWestland, for a CAE 3000 Series FFS replicating the AW139 aircraft. The new AW139 FFS, to be delivered in 2012, will be jointly developed by CAE and AgustaWestland.

28 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Financial results
(amounts in millions, except operating margins)		FY2011	FY2010	Q4-2011	Q3-2011	Q2-2011	Q1-2011	Q4-2010
Revenue	$	586.1	545.6	179.4	153.7	137.2	115.8	149.3
Segment operating income	$	101.9	95.7	30.9	28.3	24.7	18.0	25.8
Operating margins	%	*17.4*	17.5	*17.2*	18.4	18.0	15.5	17.3
Amortization & depreciation	$	9.9	11.3	2.6	2.4	2.4	2.5	2.8
Capital expenditures	$	10.1	5.8	3.2	2.5	2.6	1.8	0.9
Capital employed	$	201.0	147.0	201.0	229.6	194.5	177.4	147.0
Backlog	$	886.6	868.0	886.6	881.0	920.3	921.2	868.0

Revenue up by 17% over last quarter and by 20% compared to the fourth quarter of fiscal 2010

The increase over last quarter was mainly due to higher volume on programs executed in Canada, an increased level of activity on our various NH90 programs, the integration of RTI International’s TAL business unit, acquired in February, and from a contract awarded this quarter to develop a state-of-the-art NMSC in Brunei.

The increase over the fourth quarter of fiscal 2010 was mainly due to higher volume on programs executed in Canada, Germany and Australia and the integration of RTI International’s TAL business unit, acquired in February, partially offset by an unfavourable foreign exchange impact.

Revenue was $586.1 million this year, 7% or $40.5 million higher than last year

The increase in revenue over last year was mainly due to higher volume on programs executed in Canada, Germany and the U.S., partially offset by an unfavourable foreign exchange impact of $22.8 million on the translation of foreign self-sustaining subsidiaries and a decrease in NH90 program revenue, primarily due to the delivery of a major NH90 German program in fiscal 2010.

Segment operating income up by 9% over last quarter and up 20% compared to the fourth quarter of fiscal 2010

Segment operating income was $30.9 million (17.2% of revenue) this quarter, compared to $28.3 million (18.4% of revenue) last quarter and $25.8 million (17.3% of revenue) in the fourth quarter of fiscal 2010.

The increase over last quarter was primarily due to increased volume and better execution on certain programs in Canada. The increase was partially offset by negative annual labour rate adjustments in Germany.

The increase over the fourth quarter of fiscal 2010 was mainly due to increased volume and better execution on certain programs in Canada, Australia and the U.S.

Segment operating income was $101.9 million this year, 6% or $6.2 million higher than last year

Segment operating income was $101.9 million (17.4% of revenue) this year, compared to $95.7 million (17.5% of revenue) last year.

Segment operating income increased mainly due to higher volume in Canada and the U.S., as mentioned above, partially offset by a lower utilization of funds from our research and development cost-sharing programs and an unfavourable foreign exchange impact.

Capital employed decreased by $28.6 million over last quarter and was up $54.0 million over last year

The decrease over last quarter was due to lower non-cash working capital accounts, partially offset by non-cash working capital, goodwill and intangibles arising from the acquisition of RTI International’s TAL business unit.

The increase over last year was mainly due to an increase in non-cash working capital accounts, goodwill and intangible assets.

Backlog up by 2% over last year

(amounts in millions)		FY2011		FY2010
Backlog, beginning of period	$	868.0	$	893.0
+ orders		558.9		545.7
- revenue		(586.1)		(545.6)
+ / - adjustments		45.8		(25.1)
Backlog, end of period	$	886.6	$	868.0

Adjustments in fiscal 2011 included an amount of $56.3 million related to the acquisition of RTI International's TAL business unit.

This quarter's book-to-sales ratio was 0.72x. The ratio for the last 12 months was 0.95x.

TRAINING & SERVICES/MILITARY

TS/M was awarded $120.4 million in orders this quarter including:

- A contract from Lockheed Martin to provide maintenance, logistics, and engineering support services for the USAF C‑130J Maintenance and Aircrew Training System program;

CAE Year-End Financial Results 2011 | 29

Management’s Discussion and Analysis

- A contract from Lockheed Martin to provide a range of support services including maintenance and integrated logistics support for the CAE-built C-130J training devices operated by the Italian Air Force at the National Training Centre in Pisa, Italy;

- A contract from Lockheed Martin to provide contractor run maintenance and support services for the RAF’s C-130J training systems located at RAF Lyneham under a program called the UK RAF C-130J Hercules Integrated Operational Support;

- A contract from Canada’s Department of National Defence (DND) for the Aircraft Technician Training Models program;

- A contract from Canada’s DND to provide operational research and analysis support services to Canada’s Defence Research and Defence Canada (DRDC) Centre for Operational Research and Analysis (CORA);

- A seven-year contract by the Commonwealth of Australia to provide aircrew training services for the Royal Australian Air Force’s Multi-Role Tanker Transport (MRTT) aircraft. This contract forms part of CAE’s Management and Support of Australian Defence Forces Aerospace Simulators (MSAAS) contract with the Commonwealth of Australia, running through 2018.

Financial results
(amounts in millions, except operating margins)		FY2011	FY2010	Q4-2011	Q3-2011	Q2-2011	Q1-2011	Q4-2010
Revenue	$	279.0	263.1	77.0	67.0	68.6	66.4	68.5
Segment operating income	$	45.7	43.9	9.9	10.5	11.5	13.8	9.2
Operating margins	%	*16.4*	16.7	*12.9*	15.7	16.8	20.8	13.4
Amortization & depreciation	$	14.5	10.2	5.2	3.1	3.3	2.9	2.3
Capital expenditures	$	15.2	30.9	3.8	1.5	2.3	7.6	11.4
Capital employed	$	187.4	174.2	187.4	193.0	201.7	202.2	174.2
Backlog	$	1,262.3	1,193.7	1,262.3	1,234.8	1,270.0	1,226.4	1,193.7

Revenue up by 15% over last quarter and up 12% compared to the fourth quarter of fiscal 2010

The increase over last quarter mainly resulted from a higher level of activity in our Professional Services business in Canada and the U.S., a higher volume of training activity in Canada and increased in-service support for a European contract, partially offset by an unfavourable foreign exchange impact.

The increase over the fourth quarter of fiscal 2010 was mainly due to increased revenue on the U.S. KC-135 ATS program, a higher volume of activity in Canada and increased in-service support for a European contract, partially offset by an unfavourable foreign exchange impact.

Revenue was $279.0 million this year, 6% or $15.9 million higher than last year

The increase was mainly the result of a higher volume of training activity in the U.S. and in our European training centres network, increased revenue on the U.S. KC-135 ATS program and a higher level of activity in our Professional Services business in the U.S., partially offset by an unfavourable foreign exchange impact of $20.7 million on the translation of foreign self-sustaining subsidiaries.

Segment operating income down 6% from last quarter and up 8% compared to the fourth quarter of fiscal 2010

Segment operating income was $9.9 million (12.9% of revenue) this quarter, compared to $10.5 million (15.7% of revenue) last quarter and $9.2 million (13.4% of revenue) in the fourth quarter of fiscal 2010.

The decrease from last quarter was mainly due to negative annual labour rate adjustments related to military contracts in the U.S. and Europe, partially offset by higher Professional Services activity in Canada and increased in-service support for a European contract.

The increase over the fourth quarter of fiscal 2010 was mainly due to an increased volume and better execution of in-service support for European contracts and a different program mix in Canada, partially offset by a negative annual labour rate adjustment related to military contracts in the U.S.

Segment operating income was $45.7 million this year, 4% or $1.8 million higher than last year

Segment operating income was $45.7 million (16.4% of revenue) this year, compared to $43.9 million (16.7% of revenue) last year.

The increase was primarily due to a higher volume of training activity in our European training centres network, partially offset by an unfavourable foreign exchange impact.

Capital employed decreased by $5.6 million over last quarter and increased $13.2 million over last year

The decrease from last quarter was due to decrease in non-cash working capital accounts.

The increase over last year was mainly due to an increase in other assets, property, plant and equipment and non-cash working capital accounts. The increase was partially offset by higher deferred gains and other long-term liabilities.

30 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Combined military performance

Revenue was $256.4 million this quarter, compared to $220.7 million last quarter and $217.8 million in the fourth quarter of fiscal 2010. For fiscal 2011, revenue was $865.1 million, compared to $808.7 million for the same period last year. Excluding the negative foreign exchange impact of $43.5 million arising on the translation of self-sustaining foreign subsidiaries when compared to fiscal 2010, fiscal 2011 revenue would have been $908.6 million, representing an increase of $99.9 million or 12%.

Segment operating income was $40.8 million (15.9% of revenue) this quarter, compared to $38.8 million (17.6% of revenue) last quarter and $35.0 million (16.1% of revenue) in the fourth quarter of fiscal 2011. For fiscal 2011, segment operating income was $147.6 million (17.1% of revenue), compared to $139.6 million (17.3% of revenue) for fiscal 2010.

The combined military book-to-sales ratio was 0.98x for the quarter and 1.09x on a trailing 12-month basis.

Combined military unfunded backlog⁶

The combined military unfunded backlog was $461.4 million at March 31, 2011. This includes contracts such as the KC-135 Aircrew Training System contract, the CF-18 services contract under subcontract with L-3 Communications MAS (Canada) Inc., the C-130 Aircrew Training System contract under subcontract to Lockheed Martin in the U.S., and the MH-60R tactical operational flight trainers for the U.S. Navy.

6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY

We manage liquidity and regularly monitor the factors that could affect it, including:

- Cash generated from operations, including timing of milestone payments and management of working capital;

- Capital expenditure requirements;

- Scheduled repayments of long-term debt obligations, our credit capacity and expected future debt market conditions.

6.1 Consolidated cash movements

(amounts in millions)			FY2011		FY2010		FY2009		Q4-2011		Q3-2011		Q4-2010
Cash provided by continuing operating
	activities*	$	284.4	$	270.6	$	289.5	$	91.6	$	56.0	$	87.6
Changes in non-cash working capital			(37.4)		(3.6)		(95.1)		98.9		(23.8)		61.1
Net cash provided by continuing
	operations	$	247.0	$	267.0	$	194.4	$	190.5	$	32.2	$	148.7
Maintenance capital expenditures⁶			(38.2)		(53.5)		(54.5)		(10.8)		(9.2)		(23.0)
Other assets			(25.3)		(13.0)		(5.7)		(8.5)		(8.0)		(3.2)
Proceeds from the sale of property, plant
	and equipment		1.5		8.8		-		0.1		0.1		-
Cash dividends			(37.9)		(30.3)		(29.6)		(10.1)		(10.1)		(7.6)
Free cash flow⁶		$	147.1	$	179.0	$	104.6	$	161.2	$	5.0	$	114.9
Growth capital expenditures⁶			(76.7)		(77.4)		(149.2)		(26.3)		(14.8)		(25.5)
Deferred development costs			(22.6)		(14.6)		(10.5)		(6.3)		(7.7)		(5.2)
Other cash movements, net			0.4		5.6		(4.1)		7.4		0.6		1.5
Business acquisitions (net of cash and cash
	equivalents acquired)		(74.1)		(34.7)		(41.5)		(49.2)		(3.7)		(5.1)
Joint venture (net of cash and cash
	equivalents acquired)		(1.9)		-		-		-		-		-
Effect of foreign exchange rate changes on
	cash and cash equivalents		(4.0)		(32.1)		17.7		(2.5)		(4.5)		(11.7)
Net (decrease) increase in cash before
	proceeds and repayment of long-term debt	$	(31.8)	$	25.8	$	(83.0)	$	84.3	$	(25.1)	$	68.9
* before changes in non-cash working capital

32 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

The increase compared to the fourth quarter of fiscal 2010 was mainly due to favourable change in non-cash working capital and a decrease in maintenance capital expenditures.

The favourable change in non-cash working capital of $98.9 million this quarter was primarily due to higher accounts payable and accrued liabilities and lower contracts in progress. The favourable change was partially offset by higher accounts receivable.

Free cash flow was $147.1 million this year

Free cash flow was 18% or $31.9 million lower than last year.

The decrease in free cash flow was mainly due to an unfavourable change in non-cash working capital, increased other assets, primarily resulting from investments in our ERP system, and increased dividends paid, partially offset by a decrease in maintenance capital expenditures and an increase in cash provided by continuing operating activities.

The unfavourable change in non-cash working capital of $37.4 million in fiscal 2011 was primarily due to higher accounts receivable and lower deposits on contracts. The unfavourable change was partially offset by lower contracts in progress, in addition to higher accounts payable and accrued liabilities.

Maintenance capital expenditures decreased by $15.3 million while growth capital expenditures decreased by $0.7 million this year

Total capital expenditures of $114.9 million this year included the ongoing investment to grow our training network.

6.2 Sources of liquidity

We have committed lines of credit at floating rates, each provided by a syndicate of lenders. We and some of our subsidiaries can borrow funds directly from these credit facilities to cover operating and general corporate expenses and to issue letters of credit and bank guarantees.

The total amount available through these committed bank lines at March 31, 2011 was US$450.0 million (2010 – US$400.0 million and €100.0 million) with an option to increase to a total amount of US$650.0 million, of which US$168.8 million was used for letters of credit (2010 – US$189.7 million). The applicable interest rate on this revolving term credit facility is at our option, based on the bank’s prime rate, bankers’ acceptance rates or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poor’s Rating Services. There were no borrowings under the facilities as at March 31, 2011 nor as at March 31, 2010. Effective April 1, 2011, we amended the agreement to extend the maturity date by two years, from April 2013 to April 2015. As well, the spread over LIBOR has been reduced to reflect current market pricing.

Effective March 31, 2011, we converted non-recourse debt in two of our civil training centres to recourse debt. In doing so, we will obtain full flexibility under the financing to further realize the potential of the training centers and growth opportunities, along with reducing the cost of the financing structure. As at March 31, 2011, the total amount outstanding for these debts was $80.9 million (2010 - $89.5 million).

We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$150.0 million. This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As at March 31, 2011, the total outstanding for all these instruments, translated into Canadian dollars, was $63.3 million compared to $100.0 million as at March 31, 2010.

We have a facility of €30.0 million with a European bank for the issuance of bank guarantees and letters of credit, under which approximately $21.5 million was used in support of our European military operations.

We are involved in a program under which we sell certain accounts receivable. In fiscal 2011, we modified the agreements to permit the sale of contracts in progress, and increased the facilities from $50.0 million to $150.0 million. As at March 31, 2011, we sold $54.4 million of accounts receivable (2010 - $36.7 million) and $37.4 million of contracts in progress (2010 – nil).

We believe that our cash and cash equivalents, access to credit facilities and expected free cash flow will enable the pursued growth of our business, the payment of dividends and will enable us to meet all other expected financial requirements in the near term.

34 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

6.3 Government cost-sharing

We have signed agreements with various governments whereby the latter shares in the cost, based on expenditures incurred by us, of certain R&D programs for modeling and simulation, visual systems and advanced flight simulation technology for civil applications and networked simulation for military applications. We also partner with the government in our new core market initiatives.

During fiscal 2006, we launched Project Phoenix, a $630-million, five-to-six-year R&D initiative to improve leading-edge technologies and to develop additional applications that reinforce our industry position as a world leader in simulation, modeling and services. The Government of Canada agreed, through Technology Partnerships Canada (TPC), to invest up to 30% ($189 million) of the value of the program. We also signed an agreement in fiscal 2007 with the Government of Québec for Investissement Québec (IQ) to contribute up to $31.5 million to Project Phoenix over five years. As at March 31, 2011, Project Phoenix was completed and we no longer have outstanding contributions for this project.

During fiscal 2009, we announced that we will invest up to $714 million in Project Falcon, an R&D program that will continue over five years. The goal of Project Falcon is to expand our modeling and simulation technologies, develop new ones and increase our capabilities beyond training into other areas of the aerospace and defence market, such as analysis and operations. Concurrently, the Government of Canada agreed to participate in Project Falcon through a repayable investment of up to $250 million made through the Strategic Aerospace and Defence Initiative (SADI), which supports strategic industrial research and pre-competitive development projects in the aerospace, defence, space and security industries (refer to Notes 1 and 12 of our consolidated financial statements).

During fiscal 2010, we announced that we will invest up to $274 million in Project New Core Markets, an R&D program extending over seven years. The aim is to leverage our modeling, simulation and training services expertise into the new markets of healthcare, mining and energy. The Québec government agreed to participate up to $100 million in contributions related to costs incurred before the end of fiscal 2016.

In addition to these programs, we have also signed, in previous years, R&D agreements with the Government of Canada, in order to share in a portion of the specific costs incurred by us on previous R&D programs.

You will find more details in Note 22 of our consolidated financial statements.

6.4 Contractual obligations

We enter into contractual obligations and commercial commitments in the normal course of our business. These include debentures and notes and others. The table below shows when they mature.

36 | CAE Year-End Financial Results 2011

Management’s Discussion and Analysis

Contractual obligations
As at March 31, 2011 (amounts in millions)		2012		2013		2014		2015		2016	Thereafter			Total
Long-term debt (excluding interest)	$	27.1	$	57.5	$	50.4	$	33.4	$	27.4	$	251.5	$	447.3
Capital leases (excluding interest)		4.4		4.4		4.7		4.9		3.0		8.4		29.8
Operating leases		60.2		47.5		41.2		33.3		19.5		112.3		314.0
Purchase obligations		2.1		1.1		0.2		0.1		-		-		3.5
	$	93.8	$	110.5	$	96.5	$	71.7	$	49.9	$	372.2	$	794.6

We also had total availability under the committed credit facilities of US$281.2 million available as at March 31, 2011 compared to US$210.3 million and €100.0 million at March 31, 2010.

We have purchase obligations related to agreements that are enforceable and legally binding. Most are agreements with subcontractors to provide services for long-term contracts that we have with our clients. The terms of the agreements are significant because they set out obligations to buy goods or services in fixed or minimum amounts, at fixed, minimum or variable prices and at approximate times.

As at March 31, 2011 we had other long-term liabilities that are not included in the table above. These include some accrued pension liabilities, deferred revenue, deferred gains on assets and various other long-term liabilities. Cash obligations on accrued employee pension liability depend on various elements including market returns, actuarial gains and losses and the interest rate.

We did not include future income tax liabilities since future payments of income taxes depend on the amount of taxable earnings and on whether there are tax loss carry-forwards available.

CAE Year-End Financial Results 2011 | 37

Management’s Discussion and Analysis

7. CONSOLIDATED FINANCIAL POSITION[7]

7.1 Consolidated capital employed

		As at March 31		As at March 31
(amounts in millions)	2011		2010
Use of capital:
Current assets	$	1,022.2	$	963.0
Less: cash and cash equivalents		(276.4)		(312.9)
Current liabilities		(762.9)		(741.6)
Less: current portion of long-term debt		30.7		51.1
Non-cash working capital⁷	$	13.6	$	(40.4)
Property, plant and equipment, net		1,180.1		1,147.2
Other long-term assets		655.6		511.7
Other long-term liabilities		(381.8)		(282.9)
Total capital employed	$	1,467.5	$	1,335.6
Source of capital:
Current portion of long-term debt	$	30.7	$	51.1
Long-term debt		443.8		441.6
Less: cash and cash equivalents		(276.4)		(312.9)
Net debt⁷	$	198.1	$	179.8
Shareholders’ equity		1,269.4		1,155.8
Source of capital	$	1,467.5	$	1,335.6

Capital employed increased 10% over last year

The increase was mainly the result of an increase in other long-term assets, non-cash working capital and property, plant and equipment, partially offset by an increase in other long-term liabilities.

Our return on capital employed⁷ (ROCE) was 12.9% (12.3% adjusted for operating leases) this year compared to 11.4%
(10.9% adjusted for operating leases) for last year.

Non-cash working capital increased by $54.0 million

The increase was mainly due to an increase in accounts receivable, income taxes recoverable and prepaid expenses, in addition to a decrease in deposits on contracts. The increase was partially offset by higher accounts payable and accrued liabilities.

Net property, plant and equipment up $32.9 million

The increase was mainly due to capital expenditures of $114.9 million and property, plant and equipment acquired in business combinations of $8.9 million, partially offset by depreciation of $74.8 million and foreign exchange of $16.9 million.

Net debt higher than last year

The increase was largely caused by a decrease in cash before proceeds and repayment of long-term debt, partially offset by the effect of foreign exchange rate changes on long-term debt.

[7] Non-GAAP measure (see Section 3.6).

38 | CAE Year-End Financial Results 2011

Backlog up 6% over last year

(amounts in millions)	FY2011		FY2010
Backlog, beginning of period	$	1,193.7	$	994.2
+ orders		379.9		423.4
- revenue		(279.0)		(263.1)
+ / - adjustments		(32.3)		39.2
Backlog, end of period	$	1,262.3	$	1,193.7

Fiscal 2011 adjustments include, in addition to the negative foreign exchange impact resulting from the strong Canadian dollar, revised downward revenue expectations of $21.1 million for contracts acquired in the purchase of DSA, for which work has been delayed.

This quarter's book-to-sales ratio was 1.56x. The ratio for the last 12 months was 1.36x.

The following table summarizes the long-term debt:
	As at March 31		As at March 31
(amounts in millions)	2011		2010
Total long-term debt	$	474.5	$	492.7
Less:
Current portion of long-term debt		26.3		40.1
Current portion of capital lease		4.4		11.0
Long-term portion of long-term debt	$	443.8	$	441.6

1. HIGHLIGHTS

Higher revenue over last quarter and higher revenue over the fourth quarter of fiscal 2010

Positive free cash flow [1] at $161.2 million this quarter

Higher revenue over fiscal 2010

Positive free cash flow at $147.1 million

World-leading modeling and simulation technology

Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and simulation

Total array of training products and services solutions

Broad-reaching customer intimacy

Extensive global coverage and in-depth country familiarity

High-brand equity

Proven systems engineering and program management processes

Best-in-class customer support

Well established in new and emerging markets

Aircraft backlogs

New and more fuel-efficient aircraft platforms

Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel

Expected long-term growth in air travel

Long-term demand for trained crew members

Explicit desire of governments and defence forces to increase the use of modeling and simulation

Growing demand for our specialized modeling and simulation-based products and services

High cost of operating live assets for training which leads to more use of simulation

Current nature of warfare which requires joint forces training and mission rehearsal

Healthcare market

Positive free cash flow^[1] at $161.2 million this quarter