Amendment No. 1 to AAR CORP. Directors' Retirement Plan

WHEREAS, AAR CORP. ("Company") adopted the AAR CORP. Directors' Retirement Plan ("Plan") effective April 14, 1992; and

WHEREAS, the Company now desires to amend the Plan in certain respects;

NOW, THEREFORE, the Company hereby amends the Plan as follows:

1. A new subsection 1.03.5 is added as follows:

"1.03.05 "Change in Control" means the earliest of:

(a) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), has acquired (other than directly from the Company) beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 20% of the outstanding capital stock of the Company entitled to vote for the election of directors;

(b) the effective time of (i) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such business combination hold less than 60% of the voting stock of the surviving or resulting corporation, or (ii) a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or

(c) the election, over any period of time, to the Board of Directors of the Company without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of (i) three directors, or (ii) directors constituting a majority of the number of directors of the Company then in office."

2. A new subsection 3.01(b) is added as follows:

"3.01(b) Notwithstanding the provisions of Section 3.01(a) above, the Company shall enter into a trust agreement ("Trust Agreement") with a bank or trust company (with a combined capital and surplus in excess of $100 million dollars), located in the Continental United States, as trustee, whereby the Company shall agree to contribute to a trust ("Trust") initially and annually thereafter, for the purpose of accumulating assets actuarially sufficient to satisfy accrued obligations to Participants under Article II hereof, in the event of a Change in Control of the Company. The Trust

Agreement shall obligate the Company to make contributions sufficient to satisfy the obligations to Participants, under Article II hereof; provided, however, that such initial contribution shall be made on the earlier to occur of (i) within 10 days after the date the Board, in its discretion, deems a Change in Control of the Company likely to occur and
(ii) the date a Change in Control actually occurs. The discretion of the Board shall be binding and conclusive with respect to the likelihood of a Change in Control of the Company to occur. Such Trust Agreement shall be substantially in the form of the model trust agreement set forth in Internal Revenue Service Revenue Procedure 92-64, or any subsequent Internal Revenue Service Revenue Procedure, and shall include provisions required in such model trust agreement that all assets of the Trust shall be subject to the creditors of the Company in the event of insolvency. The Trust provided for herein may be the same trust as the Company establishes for funding of benefits under the Company's AAR CORP. Supplemental Key Employee Retirement Plan ("SKERP").

AAR CORP.

                                            By /s/ David P. Storch
                                              ----------------------------------


Dated: May 26, 2000

AAR CORP. AMENDED AND RESTATED
SUPPLEMENTAL KEY EMPLOYEE RETIREMENT PLAN

WHEREAS, the AAR CORP. Supplemental Key Employee Retirement Plan ("SKERP") was adopted effective June 1, 1994, for the Executive Officers, and other designated officers and key employees, of AAR CORP. and its Affiliated Companies who participate in the qualified retirement plans from time to time established and maintained by AAR CORP. The purpose of the Plan is to ensure that the retirement benefits provided to Executive Officers and certain other officers and key employees enhance the overall effectiveness of the AAR CORP. executive compensation program and attract, retain and motivate such individuals.

WHEREAS, the Company amended the Plan on June 1, 1995, January 1, 1996 and June 1, 1996; and

WHEREAS, the Company now desires to further amend the Plan in certain respects and to restate the Plan in its entirety for administrative convenience;

NOW, THEREFORE, the AAR CORP. Supplemental Key Employee Retirement Plan is hereby amended and restated, effective April 11, 2000, as set forth below:

ARTICLE I
DEFINITIONS

Wherever used herein the following terms shall have the meanings hereinafter set forth:

1.1. "Affiliated Company" means a business entity, or predecessor of such entity, if any, which controls, or is under common control with, the Company.

1.2. "Board" means the Board of Directors of the Company.

1.3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations relating thereto.

1.4. "Committee" means the Retirement Committee responsible for the administration of the Qualified Retirement Plan.

1.5. "Company" means AAR CORP., a Delaware corporation, or, to the extent provided in Section 8.10 below, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company.

1.5.1. "Change in Control" means the earliest of:

(a) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), has acquired (other than

directly from the Company) beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 20% of the outstanding capital stock of the Company entitled to vote for the election of directors;

(b) the effective time of (i) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such business combination hold less than 60% of the voting stock of the surviving or resulting corporation, or (ii) a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or

(c) the election, over any period of time, to the Board of Directors of the Company without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of (i) three directors, or (ii) directors constituting a majority of the number of directors of the Company then in office.

1.6. "Executive Officer" means each of (a) the President and Chief Executive Officer and (b) the Vice President, General Counsel and Secretary of the Company holding office at the Plan effective date. The Compensation Committee of the Board, upon recommendation of management, shall have the discretion from time to time to designate individuals occupying other executive positions with the Company or an Affiliated Company as Executive Officers for purposes of the Plan.

1.7. "Key Employee" means each employee of the company who may from time to time be designated as such for purposes of the Plan by and in the discretion of the Compensation Committee of the Board, upon recommendation of management.

1.8. "Normal Retirement Date" means the first day of the calendar month coincident with or next following the date a Participant attains age 65.

1.9. "Participant" means any individual who has been designated an Executive Officer, or Key Employee of the Company or an Affiliated Company for purposes of the Plan.

1.10. "Plan" means the AAR CORP. Supplemental Key Employee Retirement Plan.

1.11. "Plan Year" means the calendar year or any other 12 consecutive month period that constitutes the fiscal year of the Qualified Profit Sharing Plan.

1.12. "Qualified Company Account" means the account maintained for a Participant under the Qualified Profit Sharing Account that is credited with Qualified Company Contributions.

1.13. "Qualified Company Contribution" means the Company Contribution made by the Company or an Affiliated Company for the benefit of a Participant under and in accordance with the terms of the Qualified Profit Sharing Plan in any Plan Year.

1.14. "Qualified Profit Sharing Account" means the account maintained for a

Participant under the Qualified Profit Sharing Plan that is credited with Qualified Profit Sharing Contributions.

1.15. "Qualified Profit Sharing Contribution" means the Profit Sharing Contribution made by the Company or an Affiliated Company for the benefit of a Participant under and in accordance with the terms of the Qualified Profit Sharing Plan.

1.16. "Qualified Profit Sharing Plan" means the AAR CORP. Employees' Profit Sharing Plan established effective June 1, 1965, as amended from time to time, and each successor or replacement plan.

1.17. "Qualified Retirement Benefit" means the aggregate benefit payable to a Participant pursuant to the Qualified Retirement Plan, and all annuities provided with respect to the Participant under the Qualified Retirement Plan, by reason of his termination of employment with the Company and all Affiliated Companies for any reason other than death.

1.18. "Qualified Retirement Plan" means the AAR CORP. Retirement Plan established effective August 1, 1988, as amended from time to time, and each successor or replacement plan.

1.19. "Qualified Salary Deferral Account" means the account maintained for a Participant under the Qualified Profit Sharing Plan that is credited with Qualified Salary Deferral Contributions.

1.20. "Qualified Salary Deferral Contribution" means the Salary Deferral Contribution made by the Company or an Affiliated Company for the benefit of a Participant under and in accordance with the terms of the Qualified Profit Sharing Plan in any Plan Year.

1.21. "Qualified Surviving Spouse Benefit" means the aggregate benefit payable to the Surviving Spouse of a Participant pursuant to the Qualified Retirement Plan, and all annuities provided with respect to the Participant under the Qualified Retirement Plan, in the event of the death of the Participant at any time prior to the commencement of payment of his Qualified Retirement Benefit.

1.22. "Supplemental Company Account" means the account maintained by the Company for a Participant under the Plan that is credited with Supplemental Company Contributions.

1.23. "Supplemental Company Contribution" means the contribution made by the Company for the benefit of a Participant pursuant to Section 4.3 of the Plan in any Plan Year.

1.24. "Supplemental Profit Sharing Account" means the account maintained by the Company for a Participant under the Plan that is credited with Supplemental Profit Sharing Contributions.

1.25. "Supplemental Profit Sharing Contribution" means the contribution made

by the Company for the benefit of a Participant pursuant to Section 4.4 of the Plan in any Plan Year.

1.26. "Supplemental Retirement Benefit" means the benefit payable to a Participant pursuant to Section 3.1 or 3.2 of the Plan by reason of his termination of employment with the Company and all Affiliated Companies for any reason other than death.

1.27. "Supplemental Salary Deferral Agreement" means a written agreement entered into by a Participant pursuant to the provisions of Section 4.2.

1.28. "Supplemental Salary Deferral Account" means the account maintained by the Company for a Participant under the Plan that is credited with Supplemental Salary Deferral Contributions.

1.29. "Supplemental Salary Deferral Contribution" means the contribution made by the Company for the benefit of a Participant pursuant to
Section 4.1 of the Plan in any Plan Year.

1.30. "Supplemental Surviving Spouse Benefit" means the benefit payable to a Surviving Spouse pursuant to Section 3.3 of the Plan.

1.31. "Surviving Spouse" means a person who is married to a Participant throughout the one year period ending on the date of his death.

1.32. Except as otherwise provided in this Article I, all defined terms used in the Plan that are defined in the Qualified Retirement Plan or in the Qualified Profit Sharing Plan, as applicable, shall have the same meaning in the Plan as is set forth in the definition in the Qualified Retirement Plan or the Qualified Profit Sharing Plan.

1.33. Words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless qualified by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof.

ARTICLE II
ELIGIBILITY

2.1. EXECUTIVE OFFICERS. Each Executive Officer shall be a Participant in the Plan with respect to the Supplemental Retirement Benefit and Supplemental Surviving Spouse Benefit set forth in Sections 3.1 and 3.3, and the Supplemental Salary Deferral Contributions, the Supplemental Company Contributions and the Supplemental Profit Sharing Contributions set forth in Article IV.

2.2. KEY EMPLOYEES. Each Key Employee shall be a Participant in the Plan with respect to the Supplemental Retirement Benefit and the Supplemental Surviving Spouse Benefit set forth in Sections 3.2 and 3.3, and the Supplemental Salary Deferral Contributions, the Supplemental Company Contributions and the Supplemental Profit

Sharing Contributions set forth in Article IV.

ARTICLE III
SUPPLEMENTAL RETIREMENT BENEFIT AND
SUPPLEMENTAL SURVIVING SPOUSE BENEFIT

3.1. EXECUTIVE OFFICERS. Effective as of June 1, 1994, the Supplemental Retirement Benefit of an Executive Officer who is a Participant as described in Section 2.1, payable in the form of an annuity over the lifetime of the Participant or actuarial equivalent lump sum, commencing on his Normal Retirement Date, shall be a monthly amount equal to the difference between (a) and (b) below:

(a) The monthly amount of the Qualified Retirement Benefit to which the Participant would have been entitled under the Qualified Retirement Plan if (1) his Accrued Benefit earned under the Qualified Retirement Plan was based on 60% for the President and Chief Executive Officer and on 50% for all other Executive Officers (unless otherwise specified by the Compensation Committee at the time an individual is designated an Executive Officer participant), of Final Average Earnings, and (2) such Qualified Retirement Benefit was computed without giving effect to any limitations on benefits at any time imposed by any provision of the Code;

LESS

(b) The monthly amount of the Qualified Retirement Benefit actually payable to the Participant under the Qualified Retirement Plan.

The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliated Companies in the form of an annuity payable over the lifetime of the Participant only, commencing on his Normal Retirement Date.

3.2. KEY EMPLOYEES. Effective as of June 1, 1994, the Supplemental Retirement Benefit of a Participant who is a Key Employee of the Company, payable in the form of an annuity over the lifetime of the Participant only, commencing on his Normal Retirement Date, shall be a monthly amount equal to the difference between (a) and (b) below:

(a) The monthly amount of the Qualified Retirement Benefit to which the Participant would have been entitled under the Qualified Retirement Plan if such Qualified Retirement Benefit was computed without giving effect to any limitations on benefits imposed by any provision of the Code;

LESS

(b) The monthly amount of the Qualified Retirement Benefit actually payable to the Participant under the Qualified Retirement Plan.

The amounts described in (a) and (b) shall be computed on the date of termination of employment of a Participant with the Company and all Affiliated Companies in the form of an annuity payable over the lifetime of the Participant only,

commencing on his Normal Retirement Date. For purposes of calculating the Qualified Retirement Benefit under this subsection 3.2 only, any Key Employee Participant who was over the age of 55 on January 1, 2000 shall be deemed a "Grandfathered Participant as defined under the Qualified Plan."

3.3. SUPPLEMENTAL SURVIVING SPOUSE BENEFITS. Effective as of June 1, 1994, if a Participant described in Section 2.2 or 2.3 dies prior to commencement of payment of his Qualified Retirement Benefit under circumstances in which a Qualified Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit is payable to his Surviving Spouse in a lump sum amount equal to the lump sum amount that would have been payable to the Participant at Normal Retirement Age, present dollar valued to the date of Participant's death, using the interest rate assumption then in effect under the AAR CORP. Retirement Plan. The Supplemental Surviving Spouse Benefit shall be paid to the Surviving Spouse within 45 days of the death of the Participant.

3.4. FORM OF SUPPLEMENTAL RETIREMENT BENEFIT. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Qualified Retirement Benefit is payable to the Participant. The Participant's election under the Qualified Retirement Plan of any optional form of payment of his Qualified Retirement Benefit (with the valid consent of his Surviving Spouse where required under the Qualified Retirement Plan) shall also be applicable to the payment of his Supplemental Retirement Benefit. If paid in a lump sum, the lump sum amount shall be the actuarial value of the annuity benefit over the lifetime of the Participant based on the mortality and interest rate assumptions then in effect for the AAR CORP. Retirement Plan, present dollar valued to the date of payment.

3.5. COMMENCEMENT OF SUPPLEMENTAL RETIREMENT BENEFIT. Payment of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Qualified Retirement Benefit to the Participant commences. Any election under the Qualified Retirement Plan made by the Participant with respect to the commencement of payment of his Qualified Retirement Benefit shall also be applicable with respect to the commencement of payment of his Supplemental Retirement Benefit.

3.6. APPROVAL OF COMPANY. Notwithstanding the provisions of Sections 3.4 and 3.5 above, an election made by the Participant under the Qualified Retirement Plan with respect to the form of payment of his Qualified Retirement Benefit (with the valid consent of his Surviving Spouse where required under the Qualified Retirement Plan), or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefit hereunder unless such election is expressly approved in writing by the Company with respect to his Supplemental Retirement Benefit. If the Company shall not approve such election in writing, then the form of payment or date for commencement of payment of the Participant's Supplemental Retirement Benefit shall be selected by the Company in its sole discretion.

3.7. EQUIVALENCIES. A Supplemental Retirement Benefit that is payable in any form other than an annuity over the lifetime of the Participant only, or that commences at any time prior to the Participant's Normal Retirement Date, shall be the equivalent of the Supplemental Retirement Benefit determined pursuant to Section 3.1 or 3.2 above,

as applicable, based upon the same adjustments and assumptions as those specified in the Qualified Retirement Plan with respect to determination of the amount of the Qualified Retirement Benefit or the date for commencement of payment thereunder.

ARTICLE IV
SUPPLEMENTAL CONTRIBUTIONS

4.1. SUPPLEMENTAL SALARY DEFERRAL CONTRIBUTIONS. The Supplemental Salary Deferral Contribution to be made by the Company for the benefit of a Participant for any Plan Year shall be an amount equal to the difference between
(a) and (b) below:

(a) The Qualified Salary Deferral Contribution that would have been withheld and deposited to the Qualified Salary Deferral Account of the Participant for the Plan Year, as determined by the Salary Deferral Agreement between the Participant and the Company or an Affiliated Company in effect for such Year pursuant to the terms of the Qualified Profit Sharing Plan, without giving effect to any limitations imposed by the Code on the Qualified Profit Sharing Plan;

LESS

(b) The amount of the Qualified Salary Deferral Contribution actually allocated to the Qualified Salary Deferral Account of the Participant for the Plan Year.

A Supplemental Salary Deferral Contribution made for the benefit of a Participant for any Plan Year shall be credited to a Supplemental Salary Deferral Account maintained under the Plan in the name of such Participant at the same time as Qualified Salary Deferral Contributions are made for such Plan Year.

4.2. SUPPLEMENTAL SALARY DEFERRAL AGREEMENT. As a condition to the Company's obligation to make a Supplemental Salary Deferral Contribution for the benefit of a Participant pursuant to Section 4.1, the Participant must execute a Supplemental Salary Deferral Agreement in the form attached hereto. A Supplemental Salary Deferral Agreement shall be made at least thirty days prior to the effective date thereof and shall remain in full force and effect subsequently until revised or revoked by a Participant by written instrument delivered to the Committee at least 30 days prior to the date the revision or revocation is to become effective.

4.3. SUPPLEMENTAL COMPANY CONTRIBUTIONS. The Supplemental Company Contribution to be made by the Company for the benefit of a Participant for any Plan Year shall be an amount equal to the difference between (a) and (b) below:

(a) The Qualified Company Contribution that would have been allocated to the Qualified Company Account of the Participant for the Plan Year without giving effect to any limitations imposed by the Code on the Qualified Profit Sharing Plan;

LESS

(b) The amount of the Qualified Company Contribution actually allocated to the Qualified Company Account of the Participant for the Plan Year.

A Supplemental Company Contribution made for the benefit of a Participant for any Plan Year shall be credited to a Supplemental Company Account maintained under the Plan in the name of such Participant at the same time as Qualified Company Contributions are made for such Plan Year.

4.4. SUPPLEMENTAL PROFIT SHARING CONTRIBUTIONS. The Supplemental Profit Sharing Contribution to be made by the Company for the benefit of a Participant for any Plan Year shall be an amount equal to the difference between
(a) and (b) below:

(a) The Qualified Profit Sharing Contribution that would have been allocated to the Qualified Profit Sharing Account of the Participant for the Plan Year without giving effect to any limitations imposed by the Code on the Qualified Profit Sharing Plan;

LESS

(b) The amount of the Qualified Profit Sharing Contribution actually allocated to the Qualified Profit Sharing Account of the Participant for the Plan Year.

A Supplemental Profit Sharing Contribution made for the benefit of a Participant for any Plan Year shall be credited to a Supplemental Profit Sharing Account maintained under the Plan in the name of such Participant at the same time as Qualified Profit Sharing Contributions are made for such Plan Year.

4.5. INVESTMENT OF SUPPLEMENTAL CONTRIBUTIONS.

(a) INVESTMENTS. Amounts credited hereunder to the Supplemental Salary Deferral Account, Supplemental Company Account, and Supplemental Profit Sharing Account of a Participant shall be treated as if they were actually invested in various investment funds that are made available by the Committee from time to time and as are designated by each Participant pursuant to investment directions given to the Committee. Such Accounts shall be credited with earnings, gains and losses of the applicable investment funds on the last day of each calendar quarter or on such other date selected by the Committee. Investment directions shall be made by a Participant in specified multiples of 10%.

(b) INVESTMENT CHANGES. Each Participant shall have the right to direct the Committee to modify his investment directions made pursuant to paragraph (a) above with respect to amounts credited to his Supplemental Salary Deferral Account, Supplemental Company Account and Supplemental Profit Sharing Account after the date such modification direction becomes effective, in specified multiples of 10%. Each Participant shall also have the right to direct the Committee to change the investment directions made pursuant to paragraph (a)

above with respect to amounts credited to his Accounts on the date such direction to change becomes effective, in specified multiples of 10%.

(c) EFFECTIVE DATE OF INVESTMENT DIRECTION. Any investment direction, or modification or change of an investment direction, made pursuant to paragraph (a) or (b) above, shall be effective as soon as practicable (and in any event not later than the first day of the month that occurs at least 30 days) after the date the applicable direction is given to the Committee. A modification or change of an investment direction made pursuant to paragraph (b) may, if required by an administrative rule promulgated by the Committee, be made only once in each calendar quarter.

In the event that the sponsor of the investment funds permits more frequent fund transfers than permitted above, or does not require written direction to authorize fund transactions, the Committee may waive or modify the requirements set forth in the preceding provisions of this Section as it deems appropriate.

(d) INVESTMENT FUNDS. Any investments made by the Company or by the Trustee of Trust Agreement No. 2 referred to in paragraph (f) below to conform to directions made by a Participant pursuant to this
Section shall be in investment funds maintained in the name of the Company, or in the name of such Trustee, and no Participant shall at any time have any interest in the assets of any such investment fund.

(e) STATEMENT OF ACCOUNTS. A statement of accounts for each Participant, showing contributions, earnings, gains and losses and current balances of the Accounts provided for under this Article IV shall be provided to each Participant on not less than a quarterly basis.

(f) TRUST AGREEMENT NO. 2. Notwithstanding the preceding provisions of this Section, during the existence of Trust Agreement No. 2 referred to in the second paragraph of Section 8.2, the Company shall direct the Trustee of Trust Agreement No. 2 to invest and reinvest amounts to conform to directions made by a Participant pursuant to the preceding provisions of this Section 4.5. Directions shall be given by the Company to the Trustee of Trust Agreement No. 2 as soon as practicable after such directions are given to the Company by the Participant.

4.6. DISTRIBUTIONS.

(a) TERMINATION OF EMPLOYMENT PRIOR TO DEATH. Following termination of a Participant's employment with the Company and all Affiliated Companies for any reason other than death, a Participant shall receive a distribution of all amounts credited to his Supplemental Salary Deferral Account, his Supplemental Company Account, and his Supplemental Profit Sharing Account, including gains and losses credited in accordance with Section 4.5.

(b) DISTRIBUTION DUE TO DEATH. If a Participant dies before distribution to him of the full amount of his Supplemental Salary Deferral Account, his

Supplemental Company Account and his Supplemental Profit Sharing Account, any remaining amount shall be distributed to his beneficiary designated under the Qualified Profit Sharing Plan. If a Participant has not designated a beneficiary under the Qualified Profit Sharing Plan, or if no designated beneficiary is living on the date of distribution hereunder, amounts distributable pursuant to this paragraph shall be distributed to those persons or entities entitled to receive distributions of the Participant's accounts under the Qualified Profit Sharing Plan.

(c) HARDSHIP DISTRIBUTION. A Participant shall be entitled to request a distribution from his Supplemental Salary Deferral Account, prior to his termination of employment with the Company and all Affiliated Companies, in order to satisfy a hardship as defined under the Qualified Profit Sharing Plan. The amount of a hardship distribution, and the procedures for requesting and receiving such a distribution, shall satisfy the requirements set forth in the Qualified Profit Sharing Plan with respect to a hardship distribution from his Qualified Salary Deferral Account. A request for a hardship distribution pursuant to this paragraph shall be made separate and apart from a request for a hardship distribution under the Qualified Profit Sharing Plan, and a request for a hardship distribution under the Qualified Profit Sharing Plan shall not automatically be deemed a request for a hardship distribution hereunder.

(d) TIME AND METHOD OF DISTRIBUTION. All amounts distributable under this Article IV to a Participant, or to his beneficiary in the event of his death, shall be distributed in the same manner and at the same time as is applicable to the distribution of the Participant's accounts under the Qualified Profit Sharing Plan following his termination of employment with the Company and all Affiliated Companies for any reason including death. Notwithstanding the preceding sentence, an election made by a Participant under the Qualified Profit Sharing Plan with respect to the form of distribution of his accounts thereunder following termination of employment, or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his accounts pursuant to this Article IV, unless such election is expressly approved in writing by the Company. If the Company shall not approve such election in writing, the form of payment or date for commencement of payment under this Article shall be selected by the Company in its sole discretion. If a Participant does not elect a time or form of distribution under this Article, such distribution shall be made at the same time and in the same method as is applicable to distributions made with respect to his accounts under the Qualified Profit Sharing Plan. In no event may a Participant borrow amounts credited to the accounts maintained for him pursuant to this Article IV.

ARTICLE V
FORFEITURES

5.1 FORFEITURE OF SUPPLEMENTAL RETIREMENT BENEFIT AND SUPPLEMENTAL SURVIVING SPOUSE BENEFIT. Notwithstanding any other provisions of the Plan, (i) if the employment of a Participant with the Company and all Affiliated Companies terminates due to Cause, or (ii) if a Participant during his employment with the Company and all

Affiliated Companies or at any time during the one year period after the termination of such employment, violates the covenant not to compete with the Company and its Affiliated Companies set forth in Section 5.3, all rights of the Participant and his Surviving Spouse to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefit, shall be forfeited and shall be retained by the Company free of any and all claims of the Participant, his Surviving Spouse or any other person claiming with respect to the Participant or his Surviving Spouse.

5.2 TERMINATION FOR CAUSE. For purposes of this Section, a termination for Cause shall mean termination of a Participant's employment by the Company or any Affiliated Company because of (i) the Participant's conduct, involving theft, embezzlement or fraud, or (ii) the Participant's willful misconduct in the performance of his duties that materially injures the Company or any Affiliated Company, as determined by the Board.

5.3 COVENANT NOT TO COMPETE. A Participant shall not, during the term of the Participant's employment with the Company and all Affiliated Companies, and for a period of one year thereafter, without the Company's express written consent, directly or indirectly, alone or as a member of a partnership, group, or joint stock venture, or as an employee, officer, director or stockholder of any corporation, or in any capacity (a) engage in any activity which is competitive with any of the businesses conducted by the Company or its Affiliated Companies from time to time or at any time during the Participant's term of employment, provided that the foregoing provision shall not be deemed to prohibit the Participant from purchasing for investment any securities or interest in any publicly-owned organization which is competitive with the business of the Company and its Affiliated Companies, so long as the Participant's investment in such organization does not exceed the lesser of one percent of its total outstanding equity securities or Two Hundred Fifty Thousand Dollars ($250,000); (b) solicit in connection with any activity which is competitive with any of the businesses of the Company and its Affiliated Companies, any customers or suppliers of the Company and its Affiliated Companies; (c) use the name "AAR" or any variant thereof; or (d) actively solicit, directly or indirectly, any employee or induce any customer or supplier of the Company or any of its Affiliated Companies to terminate or materially change such relationship.

5.4 In the event of a termination of Participant's employment with the Company under circumstances which trigger Change in Control employment termination benefits under the change in control provisions of an employment agreement or severance and change in control agreement between the Participant and the Company, the provisions of subsections 5.1, 5.2 and 5.3 above shall be deemed waived by the Company and null and void.

ARTICLE VI
ADMINISTRATION OF THE PLAN

6.1. ADMINISTRATION BY THE COMMITTEE. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof.

6.2. GENERAL POWERS OF ADMINISTRATION. All provisions set forth in the Qualified Retirement Plan with respect to the administrative powers and duties of the Committee, expenses of administration, and procedures for filing claims, shall also be applicable with respect to the Plan. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to the Plan.

ARTICLE VII
AMENDMENT OR TERMINATION

7.1. AMENDMENT OR TERMINATION. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date of such resolution or such later date as the resolution may expressly state.

7.2 EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of the Plan shall (i) directly or indirectly deprive any current or former Participant or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit, the right to which has accrued prior to the effective date of such amendment or termination, or which would be payable if the Participant terminated employment for any reason, including death, on such effective date, or (ii) directly or indirectly reduce the balance of any Supplemental Salary Deferral Account, Supplemental Company Account or Supplemental Profit Sharing Account held hereunder as of the effective date of such amendment or termination. Upon termination of the Plan, distribution of Supplemental Retirement Benefits and Supplemental Surviving Spouse Benefits, and of amounts in Supplemental Salary Deferral Accounts, Supplemental Company Accounts and Supplemental Profit Sharing Accounts shall be made to Participants, their Surviving Spouses or beneficiaries in the manner and at the time described in Sections 3.4 through 3.8 and 4.6(d) of the Plan. No additional Supplemental Retirement Benefits or Supplemental Surviving Spouse Benefits shall be earned after termination of the Plan, and no additional credits of Supplemental Salary Reduction Contributions, Supplemental Company Contributions or Supplemental Profit Sharing Contributions shall be made to the accounts of Participants after termination of the Plan, but the Company shall continue to credit gains and losses to accounts pursuant to Section 4.5 until the balances of such accounts have been fully distributed to Participants or their beneficiaries.

7.3 EFFECT OF A CHANGE IN CONTROL. Notwithstanding subsections 7.1 and 7.2 above, in the event of a Change in Control, (i) the SKERP shall continue in effect as to any Participant's or Participant's Surviving Spouse who is a Participant or Participant's Surviving Spouse immediately prior to a Change in Control, and (ii) no amendment to or termination of the Plan shall be effective as to any such Participant or Surviving Spouse to the extent the effect of such amendment or termination would be to reduce such Participant's or Participant's Surviving Spouse benefits or rights under the Plan from those available to Participant under the Plan immediately prior to any such amendment

or termination.

ARTICLE VIII
GENERAL PROVISIONS

8.1. PARTICIPANTS' RIGHTS UNSECURED. Except as set forth in Section 8.2, the Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or an Affiliated Company for payment of any benefits hereunder. The right of a Participant or his Surviving Spouse or beneficiary to receive a benefit hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor a Surviving Spouse or beneficiary shall have any rights in or against any specific assets of the Company or any Affiliated Company. All amounts credited to Supplemental Salary Deferral Accounts, Supplemental Company Accounts and Supplemental Profit Sharing Accounts of Participants shall constitute general assets of the Company.

8.2. TRUST AGREEMENT. Notwithstanding the provisions of Section 8.1, the Company, promptly after the Plan effective date, shall enter into a trust agreement ("Trust Agreement") with a bank or trust company (with a combined capital and surplus in excess of $100 million dollars), located in the Continental United States, as trustee, whereby the Company shall agree to contribute to a trust ("Trust") initially and annually thereafter, for the purpose of accumulating assets actuarially sufficient to satisfy accrued obligations to Participants and Surviving Spouses under Article III hereof, in the event of a Change in Control of the Company. The Trust Agreement shall obligate the Company to make contributions sufficient to satisfy the obligations to Participants, and Surviving Spouses under Article III hereof; provided, however, that such initial contribution shall be made within 10 days after the date the Board, in its discretion, deems a change in control of the Company likely to occur. The discretion of the Board shall be binding and conclusive with respect to the likelihood of a Change in Control of the Company to occur. Such Trust Agreement shall be substantially in the form of the model trust agreement set forth in Internal Revenue Service Revenue Procedure 92-64, or any subsequent Internal Revenue Service Revenue Procedure, and shall include provisions required in such model trust agreement that all assets of the Trust shall be subject to the creditors of the Company in the event of insolvency. Notwithstanding the provisions of Section 8.1, the Company on or as soon as practicable after January 1, 1996, shall enter into a Trust Agreement ("Trust Agreement No. 2") with a bank or trust company (with a combined capital and surplus in excess of $100,000,000) located in the continental United States as Trustee, whereby the Company shall agree to contribute to a trust ("Trust No. 2") initially and annually thereafter for the purpose of accumulating assets sufficient to provide for Supplemental Salary Deferral Contributions, Supplemental Company Contributions and Supplemental Profit Sharing Contributions with respect to Participants under Article IV hereof. Trust Agreement No. 2 shall be substantially in the form of the model trust agreement set forth in Internal Revenue Service Procedure 92-64, or any subsequent Internal Revenue Service Procedure, and shall include provisions required in such model trust agreement that all assets of Trust No. 2 shall be subject to the creditors of the Company in the event of insolvency. Trust Agreement No. 2 shall include such provisions as are applicable with respect to the investment and reinvestment of such Contributions pursuant to directions

given by Participants to the Company and transmitted by the Company to the Trustee of Trust Agreement No. 2 pursuant to paragraph (f) of Section 4.5.

8.3. GENERAL CONDITIONS. Except as otherwise expressly provided herein, all terms and conditions of the Qualified Retirement Plan applicable to a Qualified Retirement Benefit, or a Qualified Surviving Spouse Benefit, shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefit payable hereunder, and all terms and conditions of the Qualified Profit Sharing Plan applicable to a Qualified Salary Deferral Contribution, a Qualified Company Contribution or a Qualified Profit Sharing Contribution shall also be applicable to a Supplemental Salary Deferral Contribution, Supplemental Company Contribution or Supplemental Profit Sharing Contribution to be made hereunder. Any Qualified Retirement Benefit or Qualified Surviving Spouse Benefit or any other benefit payable under the Qualified Retirement Plan shall be paid solely in accordance with the terms and conditions of the Qualified Retirement Plan, any Qualified Salary Deferral Contribution, Qualified Company Contribution or Qualified Profit Sharing Contribution, or any other contribution to be made under the Qualified Profit Sharing Plan shall be made solely in accordance with the terms and conditions of the Qualified Profit Sharing Plan, and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Retirement Plan or the Qualified Profit Sharing Plan.

8.4. NO GUARANTY OF BENEFITS. Nothing contained in the Plan shall constitute a guaranty by the Company, any Affiliated Company, or any other person or entity that the assets of the Company or any Affiliated Company will be sufficient to pay any benefit hereunder. No Participant, Surviving Spouse or beneficiary shall have any right to receive a benefit or a distribution of contributions under the Plan except in accordance with the terms of the Plan.

8.5 NO ENLARGEMENT OF EMPLOYEE RIGHTS. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company or any Affiliated Company.

8.6. SPENDTHRIFT PROVISION. No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings.

8.7 APPLICABLE LAW. The Plan shall be construed and administered under the laws of the State of Illinois except to the extent preempted by federal law.

8.8. SMALL BENEFITS. If the actuarial value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit is less than $5,000, the Company may pay the actuarial value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further Benefit payments hereunder.

8.9. INCAPACITY OF RECIPIENT. If any person entitled to a payment under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor.

8.10. CORPORATE SUCCESSORS. The Plan shall be continued, following a transfer or sale of assets of the Company, or following the merger or consolidation of the Company into or with any other corporation or entity, by the transferee, purchaser or successor entity, unless the Plan has been terminated by the Company pursuant to the provisions of Article VII, prior to the effective date of such transaction.

8.11. UNCLAIMED BENEFIT. Each Participant, Surviving Spouse or beneficiary shall keep the Company informed of his current address. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three years after the date on which payment of the Participant's benefits under the Plan may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse or beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant, Surviving Spouse or beneficiary or any other person and such benefit shall be irrevocably forfeited.

8.12. LIMITATIONS ON LIABILITY. Notwithstanding any of the preceding provisions of the Plan, none of the Company, any Affiliated Company, any member of the Committee, nor any individual acting as an employee or agent of the Company, any Affiliated Company or the Committee, shall be liable to any Participant, former Participant, Surviving Spouse or any other beneficiary or other person for any claim, loss, liability or expense incurred by such Participant, Surviving Spouse or other beneficiary or other person in connection with the Plan.

IN WITNESS WHEREOF, this Plan has been executed this 4th day of May, 2000.

AAR CORP.

                                              By /s/ David P. Storch
                                                --------------------------------

ATTEST:

/s/ Howard A. Pulsifer
---------------------------------

AMENDED AND RESTATED
EMPLOYMENT AGREEMENT*

This Amended and Restated Employment Agreement ("Agreement") made and entered into as of the 14th day of July, 1998, by and between AAR CORP., a Delaware corporation ("Company"), and David P. Storch ("Employee").

WHEREAS, Employee is currently an elected director of the Company; and

WHEREAS, the Company currently employs Employee pursuant to a certain Employment Agreement dated June 1, 1994, as amended by amendments dated October 9, 1996, May 29, 1997, July 14, 1997 and July 14, 1998 ("Original Agreement"); and

WHEREAS, the Company and Employee desire to further amend the Original Agreement as herein set forth to reflect certain mutually agreed changes to the terms and conditions thereof; and

WHEREAS, for their mutual convenience, the Company and Employee desire to restate the Original Agreement, as so amended, in its entirety.

NOW, THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows:

1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth.

2. TERM. The term of this Agreement shall commence as of the date hereof and, unless earlier terminated as hereinafter provided, shall end on May 31, 1997, subject to extension as follows:

On each day after May 31, 1994, while the Employee continues in employment hereunder, the term of employment shall automatically be extended for an additional one-day period so that on any day from and after June 1, 1994, while the Employee continues in employment hereunder, the term of employment shall expire three years thereafter until terminated pursuant to the terms hereof.

3. DUTIES.

(a) Employee shall have the title, duties and responsibilities of President and Chief Executive Officer and such other duties and responsibilities as may from time to time be assigned that are consistent with such duties and responsibilities and shall report to the Chairman of the Board of the Company.

* including Amendment 4 (Amended and Restated Employment Agreement)

(b) Employee agrees to do and perform all such acts and duties faithfully and diligently and to furnish such services as the Chairman of the Board may from time to time direct, and do and perform all acts in the ordinary course of business of the Company (within such limits as the Company may prescribe) necessary and conducive to the best interest of the Company.

(c) Employee agrees to devote his full time, energy and skill to the business of the Company and to the promotion of the best interests of the Company and the performance of his duties as President and Chief Executive Officer of the Company; provided that the Employee shall not (to the extent not inconsistent with paragraphs 3(d) and 10(b) below) be prevented from
(a) serving as a director of any corporation consented to in advance by resolution of the Board of Directors of the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on his part in the operation or affairs of the business in which such investments are made which would detract from or interfere or cause a conflict of interest with performance of his duties hereunder.

(d) Employee agrees to observe policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest.

4. COMPENSATION. The Company shall pay to Employee, for all services to be performed by Employee an annual base salary ("Base Salary") at the rate of Six Hundred Fifty Thousand Dollars ($650,000.00) per fiscal year, or such greater amount as may be authorized by the Board of Directors of the Company, in its sole discretion upon annual review during the term of employment, payable in periodic installments in accordance with the Company's payroll practice in effect from time to time and prorated for any portion of a fiscal year (Company's fiscal year currently being the period from June 1 of each year through May 31 of the following year).

5. INCENTIVE BONUS PAYMENTS. In addition to the Base Salary described above, Employee will continue to participate in and receive payments under such incentive bonus programs as the Company, in its sole discretion, may authorize from time to time for Employee and other executive officers of the Company; provided, however, Employee will be entitled to the following during the term of this Employment Agreement:

(a) ANNUAL DISCRETIONARY INCENTIVE BONUS OPPORTUNITY. Employee will have a graduated annual incentive bonus opportunity of up to 100% of base salary for performance at or below target and up to an additional 50% of base salary for performance in excess of target. Performance will be measured against annual financial targets approved by the Compensation Committee of the Board of Directors. Eighty percent (80%) of any bonus granted under this subsection will be paid in cash

and the balance will be paid in restricted stock awards subject to the Company's qualified Stock Benefit Plan (valued at NYSE closing price on date of grant). Thirty-three and one third percent (33 1/3%) of each such restricted stock award shall vest on the successive anniversary dates of the respective award over a three year period based solely on the passage of time unless employment is terminated voluntarily by the Employee in violation of this Agreement or by the Company for Cause.

The cash portion of the incentive bonus payable under this subsection will be paid within 45 days of the end of each fiscal year; the restricted stock shall have a grant date of May 31 of the year granted.

(b) LONG TERM INCENTIVE BONUS AWARDS. Employee will receive restricted stock awards, stock option grants and performance shares of stock in the Company in accordance with appendix (i) hereto, which is incorporated herein by reference.

6. VACATION AND FRINGE BENEFITS. Employee will accrue vacation in accordance with the Company's policy in effect from time to time for other executive officers; provided that no decrease in vacation benefits from those available on the date hereof shall be applicable to Employee during the term hereof. Employee shall be entitled to participate, according to eligibility provisions of each, in such medical, life and disability insurance programs, profit sharing plans, retirement plans and in other fringe benefit plans as may be in effect from time to time during the term hereof and available to other executive officers of the Company.

7. CLUB DUES AND BUSINESS EXPENSES. During the term hereof, Employee will be entitled to reimbursement for normal travel and business expenses in accordance with applicable Company policy, and will be reimbursed membership dues in the Green Acres Country Club, the Standard Club and such professional clubs/organizations that are appropriate and conducive to the performance of his duties.

8. PROFESSIONAL FEES. The Company will reimburse Employee for professional financial planning and income tax preparation assistance expenses actually incurred in an amount not to exceed $5,000/year during the term hereof.

9. TERMINATION.

(a) The Company may terminate this Agreement at any time for Cause. Any such termination will be by majority action of the Board of Directors (with Employee's vote disregarded) taken at a regular or specially called meeting of the Board, after a minimum 10 day notice thereof to Employee, with termination of this Agreement listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with his attorney present if Employee desires.

The term "Cause" means:

(i) Employee engages, during the performance of his duties hereunder, in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance; or

(ii) Employee intentionally disobeys or disregards a lawful and proper direction of the Board or the Company; or

(iii) Employee materially breaches the Agreement and such breach by its nature, is incapable of being cured, or such breach remains uncured for more than 10 days following receipt by Employee of written notice from the Company specifying the nature of the breach and demanding the cure thereof. For purposes of this clause (iii), a material breach of the Agreement that involves inattention by Employee to his duties under the Agreement shall be deemed a breach capable of cure.

(b) Without limiting the generality of the foregoing, the following shall not constitute Cause for the termination of the employment of Employee or the modification or diminution of any of his authority hereunder:

(i) any personal or policy disagreement between Employee and the Company or any member of the Board, or

(ii) any action taken by Employee in connection with his duties hereunder, or any failure to act, if Employee acted or failed to act in good faith and in a manner he reasonably believed to be in and not opposed to the best interest of the Company and he had no reasonable cause to believe his conduct was unlawful; or

(iii) termination of employment of Employee for unsatisfactory performance (including failure to meet financial goals).

Termination for Cause shall be limited to a good faith finding by resolution of the Board, setting forth the particulars thereof. Any such resolution shall be final and binding upon Employee.

(c) The Company may terminate this Agreement at any time prior to a Change in Control of the Company as defined in Section 12(d)(i) for unsatisfactory performance by Employee of his duties and responsibilities hereunder (including but not limited to failure to meet financial goals as may be approved by the Compensation Committee), provided that the Company has given Employee (i) written notice setting forth the particulars of his performance deficiencies and (ii) six months opportunity to correct them to the satisfaction of the Company. Any termination under this section 9(c) shall be by resolution of the Board of Directors of the Company, which shall be final and binding upon Employee. In the event of termination pursuant to this section 9(c), the

Company will pay to Employee, monthly for 24 months, an amount (subject to applicable withholding) equal to Employee's regular monthly base salary at time of termination; provided, however, all such payment obligations shall terminate immediately upon any breach by Employee of section 10 of this Agreement. Upon termination pursuant to this section 9(c), no further compensation or benefits shall accrue or be payable to Employee under this Agreement except for (i) the salary continuation payments provided for above, and (ii) any compensation bonus or other benefits which have accrued to Employee prior to the date of any such termination.

(d) The Company or the Employee may terminate this Agreement at any time because of the Disability of Employee. "Disability" shall mean a physical or mental condition which has prevented Employee from substantially performing his duties under this Agreement for a period of 180 days and which is expected to continue to render Employee unable to substantially perform his duties for the remaining term of this Agreement on a full-time basis. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law.

In the event of termination by the Company for Disability, a good faith determination of the existence of a Disability shall be made by resolution of the Board of Directors of the Company, in its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability.

Upon termination of this Agreement for Disability, Employee will continue to be eligible to participate in the Company's medical, dental and life insurance programs available to executive officers in accordance with their terms applicable to employees for a period of 3 years from the date of such termination of this Agreement.

(e) This Agreement shall automatically terminate upon the death of Employee during the term. In such event, death benefits payable under any of the Company's benefit plans in which Employee was a participant at the time of his death shall be payable in accordance with the terms of such plans.

(f) Employee may terminate this Agreement upon 30 days written notice if any person other than Employee is selected by the Board of Directors to succeed the present Chairman of the Board upon his retirement, resignation or other departure from that office. In the event of termination by Employee for such reason, the Company will pay to Employee, monthly for 24 months, an amount (subject to applicable withholding) equal to Employee's regular monthly base salary at time of termination plus an amount equal to 1/12th of the most recent fiscal year cash bonus paid to Employee; provided all such payment obligations shall terminate immediately

upon any breach by Employee of paragraph 10 of this Agreement. Upon termination of this Agreement by Employee pursuant to this paragraph, no further compensation or benefits shall accrue or be payable to Employee under this Agreement except for (i) the salary continuation payments provided for above, and (ii) any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination.

10. CONFIDENTIAL INFORMATION AND RESTRICTION OF COMPETITION.

(a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by the Company and other subsidiaries of the Company (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform his duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless either such information is or has been made generally available to the public or express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, he shall not take with him any documents or other papers containing or reflecting trade secrets, confidential information, secret processes or know-how. Employee acknowledges that his employment hereunder will place him in a position of utmost confidence and that he will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph.

(b) Employee agrees that during the term hereof and for a period of two (2) years after voluntary termination of employment hereunder by Employee or termination of employment hereunder by Company pursuant to section 9 above, he shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (ii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers or suppliers of the Company or any Affiliated Company; (iii) solicit for employment any sales, marketing or management employee of Company or any

Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of this covenant not to compete and non-solicitation and the reasonableness thereof, including but not limited to the geographic area and duration of time which are a part hereof. This covenant not to compete may be enforced with respect to any geographic area in which the Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being the legal or equitable holder of not more than 5% of the outstanding capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company.

(c) If at any time, any clause or portion of this Section 10 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein.

(d) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of this Section 10 and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies.

(e) This Section 10 shall survive any termination of this Agreement and any termination of Employee's employment.

11. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business. Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations, may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem desirable, and Employee shall have no claim or recourse by reason of such action. Provided, however, no such action shall result in the reduction of Employee's Base Salary hereunder; provided, further that if the Company discontinues operations, a discretionary bonus may or may not be granted, however, Employee will be entitled to a pro-rata share of any non-discretionary incentive bonus through the date of discontinuance. Said pro-rata bonus will be

calculated by the Chief Financial Officer of the Company whose determination will be final.

12. CHANGE IN CONTROL.

(a) In the event:

(i) a Change in Control of the Company occurs, and

(ii) (A) at any time during the 24 month period commencing on the date of the Change in Control the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates his employment for Good Reason, in either case by written notice to the other party (including the particulars thereof), and having given the other party the opportunity to be heard with respect thereto, or (B) Employee's employment with the Company terminates for any reason other than Disability or death during the 30-day period commencing on the expiration of the aforementioned 18 month period, then:

(1) the Company shall promptly pay to Employee a lump sum cash payment in an amount equal to the sum of (A) all base salary earned through the date of termination, (B) any annual cash bonus earned by Employee for the fiscal year of the Company most recently ended prior to the date of termination to the extent unpaid on the date of termination, (C) a prorata portion of the annual cash bonus, including value of any restricted stock grant in lieu of annual cash bonus, Employee would have earned had he been employed by the Company on the last day of the fiscal year in which the date of termination occurs (as if all performance targets had been met) that is applicable to the period commencing on the first day of such fiscal year and ending on the date of termination, and (D) any and all other benefits and amounts earned by Employee prior to the date of termination to the extent unpaid, all subject to applicable withholding.

(2) The Company shall promptly pay to Employee in a lump sum, a cash payment in an amount equal to three times Employee's total cash compensation (base salary plus annual cash bonus, including value of any restricted stock grant in lieu of cash bonus) for either the fiscal year of the Company most recently ended prior to the date of termination, or the preceding fiscal year, whichever is the highest total compensation subject to applicable withholding. Employee may elect to take payment of any amounts on a schedule of his own choosing; provided that such schedule shall be completed no later than three years from the date of Employee's termination of employment.

(3) Employee and his dependents shall continue to be covered by, and receive employee welfare and executive fringe benefits in accordance with the terms of, all of the Company's benefit plans and executive fringe benefit programs for three years following the date of termination, and at no less than the levels he and his dependents were receiving

immediately prior to the Change in Control. Employee's dependents shall be entitled to continued coverage pursuant to the preceding sentence for the balance of such three year period in the event of Employee's death during such period. The period during which Employee and his dependents are entitled to continuation of group health plan coverage pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended, shall commence on the date next following the expiration of the aforementioned three year period.

(4) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans or programs applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had he accumulated three additional continuous years of service. Such amount shall be paid to Employee in a cash lump sum payment on the Employee's Retirement Date, as defined in the AAR CORP. Retirement Plan or any successor plan or promptly upon a termination of employment which triggers Change in Control termination of employment benefits hereunder. In such event, the Company shall concurrently pay Employee a gross-up bonus in an amount equal to any federal, state and local income taxes and excise taxes (including FICA or any similar taxes) payable by Employee on such lump sum payment and such gross-up bonus.

(5) The Company, at its expense, shall provide Employee with outplacement services of a nationally recognized outplacement firm of the Employee's choosing until the earlier of the Employee's attainment of employment or the date eighteen months from the date of Employee's termination of employment; provided, however, that the cost of such outplacement services shall not exceed 3.5% of the cash payment due to Employee pursuant to subsection 12(a)(ii)(2) above.

(b) The amounts paid to the Employee under this Change in Control provision applicable to Employee shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments.

(c) In the event that a Change in Control has occurred, both for purposes of this Agreement and for purposes of the AAR CORP. Stock Benefit Plan, as amended ("Plan"), whether or not such Change in Control has the prior written approval of a majority of the Continuing Directors (as defined in the Plan), and notwithstanding any conditions or restrictions, related to any Award granted to Employee under the Plan, all options grants and restricted stock awards provided for hereunder which have not then become vested (including released restrictions) or exercisable, shall immediately become exercisable or vested, as the case may be, all performance shares to be awarded hereunder shall be immediately awarded according to Appendix (i) of this Agreement, and all Options or Limited Rights, or both, granted to Employee under the Plan will become immediately

exercisable and remain exercisable for the full remaining life of the option(s) whether or not Employee's employment continues, and all restrictions on Restricted Stock granted to Employee under the Plan, including any performance share awards, will immediately lapse.

(d) For purposes of this provision

(i) Change in Control means the earliest of:

(A) any person (as such term is used in
Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), has acquired (other than directly from the Company) beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 20% of the outstanding capital stock of the Company entitled to vote for the election of directors; or

(B) the effective time of (1) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such business combination hold less than 60% of the voting stock of the surviving or resulting corporation, or (2) a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or

(C) the election, over any period of time, to the Board of Directors of the Company without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of
(1) three directors, or (2) directors constituting a majority of the number of directors of the Company then in office.

(ii) "Good Reason" means:

(A) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control, or a material reduction in Employee's compensation (including benefits), occurring at any time during the two-year period immediately after the Change in Control; or

(B) a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances thereafter, he is unable to carry out his duties and responsibilities contemplated by this Agreement in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or

(C) a material breach of this Agreement by the Company; or

(D) a relocation of the primary place of employment of at least 100 miles.

(e) The Company shall promptly pay Employee a gross-up bonus in an amount equal to (i) all excise taxes payable under Section 280G of the Internal Revenue Code on any amounts constituting "golden parachute" payments, plus (ii) any federal, state, and local income taxes and excise taxes (including FICA) payable by Employee on such gross-up bonus in order to put Employee in the same position he would have been in if the excise tax provision (Section 280G) did not apply.

(f) The Company will continue to provide SKERP benefits to Employee at no less than the level Employee and Employee's dependents were receiving or entitled to receive immediately prior to the Change in Control, under the SKERP as it was then in effect.

(g) The Company will pay reasonable legal/attorney's fees (including court costs and other costs of litigation) incurred by Employee in connection with enforcement of any right or benefit under this Agreement.

13. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below:

(a) If to the Company, to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: Chairman and Chief Executive Officer

With a copy to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: General Counsel

(b) If to Employee, to:

David P. Storch 908 Elm Place Glencoe, IL 60022

or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address.

14. NON-ASSIGNMENT.

(a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided,

however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto.

(b) The Employee agrees on behalf of himself, his heirs, executors and administrators, and any other person or person claiming any benefit under him by virtue of this Employment Agreement, that this Employment Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Employment Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect.

15. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained.

16. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof.

17. ENTIRE AGREEMENT. This Agreement as amended and restated herein and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof, including, but not limited to, all prior compensation arrangements between the Company and the Employee concerning compensation and benefits. This Agreement shall not be modified or amended except by the mutual written agreement of the Company and Employee.

18. WAIVER. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party

hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

19. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles.

20. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement.

WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written.

Employer:

COMPENSATION COMMITTEE
AAR CORP. BOARD OF DIRECTORS

By: /s/ Erwin E. Schulze
   -----------------------------
     Erwin E. Schulze, Chairman

AAR CORP.

By: /s/ Timothy J. Romenesko
   -----------------------------
     Timothy J. Romenesko
     Vice President

Employee:

/s/ David P. Storch
--------------------------------
David P. Storch

Appendix (i) to Amended and Restated Employment Agreement dated as of July 14, 1998

AAR CORP.
CEO
LONG-TERM INCENTIVE COMPENSATION

RESPONSIBILITY AND AUTHORITY

The Compensation Committee of the Board of Directors will be responsible for the administration of the CEO's long-term incentive compensation arrangements. Any interpretation or adjustments will be by the Committee, whose decision is final.

OVERALL STRUCTURE OF THE PLAN

Long-term incentive compensation for the CEO will consist of:

- 200,000 options awarded at the beginning of the 4-year performance period from date of appointment as CEO (July 9, 1996), vesting at 25% of the award on each of the 4 anniversary dates of the award. This grant will be made at fair market value as of the grant date.

- Up to 15,000 restricted shares in each of the 4 years of the performance period with the initial grant at the beginning of the 4-year performance period and subsequent grant on the next three successive anniversary dates of the CEO's appointment as CEO. Award will be made at fair market value on the date of the grant with vesting of 33% of the award on each of the 3 anniversary dates following the award. The actual number of shares granted is at the discretion of the Committee.

- Up to 360,000 performance units (payable in performance restricted stock in the manner described below) to be determined at the end of the four year performance period based on achievement of the following specified performance goals in four categories over the 4-year performance period:

A. The Company's cumulative percentage Total Return to Shareholders as compared to that of the S&P 500 Composite Index Total Return to Shareholders; and

B. The Company's cumulative percentage Total Return to Shareholders as compared to that of its Peer Group Composite Index Total Return to Shareholders; and

C. The Company's average Return on Capital as compared to that of the S&P 500 Composite Index Average Return on Capital; and

D. The Company's average Return on Capital as compared to that of the Company's Peer Group Composite Index Average Return on Capital.

- Restricted shares will be awarded out of treasury shares according to the performance unit matrix below upon completion of the four year performance period ending July 9, 2000.

- One share of restricted stock will be awarded for each performance unit earned subject to a maximum dollar value of $12,690,000 based on the NYSE closing price for the Company's Common Stock on July 9, 2000; provided, however, in the event Mr. Storch's Employment Agreement is terminated following a Change in Control of the Company (as defined in Mr. Storch's Employment Agreement) occurring prior to July 9, 2000 pursuant to the Change in Control provisions of Mr. Storch's Employment Agreement, the above stated dollar value limit will be removed and one share of restricted stock will be awarded for each performance unit earned.

- The performance restricted shares awarded at the end of the four year performance period will be restricted for three years: 50% of the shares will vest on the first anniversary of the award; 50% of the shares will vest on the third anniversary of the award.

- No shares will be awarded in any category of award in which the result for AAR is negative.

- Except as otherwise provided below with respect to the 360,000 options, a Change of control (as elsewhere defined in this agreement) will cause all options under this plan to become vested/exercisable, all restricted stock to vest and performance shares to be awarded according to the performance unit matrix below based on the higher of target or actual performance through the effective date of a Change in Control using the latest data then available to determine goals applicable for the partial performance period.

- At the direction of the Compensation Committee, transactions which significantly alter the capital structure of AAR may be excluded from the measurement period (in whole or in part) in a manner determined by the Committee.

% OF TARGET ACHIEVED**     SHARES AWARD FOR EACH OF THE FOUR CRITERIA
----------------------     ------------------------------------------
          0-80                                  0
            81                             30,000
           100                             60,000
           120                             75,000
           120+                            90,000

* Results between the amounts on the schedule will be calculated by linear interpolation.

** With respect to Total Return to Shareholders goals, 100% achievement will be the median of the S&P 500 and the 60th percentile of the Peer Group; with respect to the Return on Capital goals, 100% achievement will be 80% of the median of the S&P 500 and 60th percentile of the Peer Group.

- 360,000 options awarded in accordance with the following schedule:

ISSUE DATE                         # OF OPTION SHARES
----------                         ------------------
July 14, 1997                               100,000
January 1, 1998                             130,000
January 1, 1999                             130,000

- All such options will vest at the end of the performance period on July 9, 2000; provided, however, in the event the dollar value limit on the performance restricted stock award is removed due to a Change in Control of the Company as described above, options not yet granted under the above schedule shall not be awarded and any such options already awarded shall lapse. The exercise price of all such options will be $35.25, the NYSE closing price on July 14, 1997, the date of Compensation Committee approval of this performance stock program.

DEFINITIONS:

- Total Return to Shareholders -- Cumulative price appreciation plus dividends (reinvested).

- Peer Group -- Selected companies used from time to time for performance comparison in AAR proxy. Any deletions or additions to the peer group during the performance period will cause measurement/calculation changes on a prospective

basis from the date of the change in the peer group (beginning of the fiscal year in which the proxy is issued).

- Return on Capital -- Earnings before interest and taxes (EBIT) divided by total capital (debt plus equity minus cash).

AMENDED AND RESTATED
SEVERANCE AND CHANGE IN CONTROL AGREEMENT

This Amended and Restated Severance and Change in Control Agreement ("Agreement") made and entered into as of the 11th day of April, 2000, by and between AAR CORP., a Delaware corporation ("Company"), and Philip C. Slapke ("Employee").

WHEREAS, the Company currently employs Employee as an employee at will in the capacity of Executive Vice President; and

WHEREAS, the Company and Employee entered into a Severance and Change in Control Agreement dated February 24, 1995 ("Agreement"); and

WHEREAS, the Company and Employee amended and restated the Agreement as of the 8th day of April, 1997, and further amended the Agreement as of the 14th day of July, 1998 ("Original Agreement"); and

WHEREAS, the Company and Employee desire to further amend the Agreement as herein set forth to reflect certain mutually agreed changes to the terms and conditions thereof; and

WHEREAS, for their mutual convenience, the Company and Employee desire to restate the Agreement, as so amended, in its entirety.

NOW, THEREFORE, in consideration of the mutual agreements herein set forth and other good and valuable consideration, the parties hereto agree as follows:

1. EMPLOYMENT. Employee will continue employment with the Company as an at will employee subject to the terms and conditions hereinafter set forth.

2. DUTIES. During the continuation of Employee's employment, Employee shall:

(a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of Employee's employment and the business of the Company (within such limits as the Company may from time to time prescribe), professionally, faithfully and diligently.

(b) devote Employee's full time, energy and skill to the business of the Company and Employee's assigned duties and responsibilities, and to the promotion of the best interests of the Company; provided that Employee shall not (to the extent not inconsistent with Section 5 below) be prevented from (a) serving as a director of any corporation consented to in advance in writing by the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on Employee's part in the operation or affairs of the business in which such investments are made or which would detract from or interfere or cause a conflict of interest with performance of Employee's duties hereunder.

(c) observe all policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest.

3. BENEFITS. Employee shall be entitled to participate, according to the eligibility provisions of each, in such welfare plans (including but not limited to medical, dental, life, accident and disability insurance programs), vacation, retirement plans and other fringe benefits as may be in effect from time to time and available to other officers of the Company during Employee's employment term. Employee shall also be entitled to participate in such additional executive fringe benefits as may be authorized from time to time by the President and Chief Executive Officer of the Company. Employee shall be eligible to participate in the Company's Supplemental Key Employee Retirement Plan as an executive legal participant.

4. CONFIDENTIAL INFORMATION, ASSIGNMENT OF INVENTIONS.

(a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by AAR CORP. and its affiliates or subsidiaries (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform Employee's duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless (i) such information is or has been made generally available to the public, (ii) disclosure of such information is required by law in the opinion of Employee's counsel (provided that written notice thereof is given to Company as soon as possible but not less than 24 hours prior to such disclosure), or (iii) express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, Employee shall not take any electronically stored data, documents or other papers containing or reflecting trade secrets, confidential information, secret processes, know-how, or computer software programs from Company. Employee acknowledges that Employee's employment hereunder will place Employee in a position of utmost confidence and that Employee will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, computer software programs, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the sole and exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph.

(b) Employee hereby assigns to the Company all rights that Employee may have as author, designer, inventor or otherwise as creator of any written or graphic material, design, invention, improvement, or any other idea or thing whatever that Employee may write, draw, design, conceive, perfect, or reduce to practice during employment with the Company or within 120 days after termination of such employment, whether done during or outside of normal work hours, and whether done alone or in conjunction with others ("Intellectual Property"),

provided, however, that Employee reserves all rights in anything done or developed entirely by Employee on Employee's own personal time and without the use of any Company equipment, supplies, facilities or information, or the participation of any other Company employee, unless it relates to the Company's business or reasonably anticipated business, or grows out of any work performed by Employee for the Company. Employee will promptly disclose all such Intellectual Property developed by Employee to the Company, and fully cooperate at the Company's request and expense in any efforts by the Company or its assignees to secure protection for such Intellectual Property by way of domestic or foreign patent, copyright, trademark or service mark registration or otherwise, including executing specific assignments or such other documents or taking such further action as may be considered necessary to vest title in Company or its assignees and obtain patents or copyrights in any and all countries.

5. NON-COMPETE; SEVERANCE.

(a) Employee agrees that during Employee's continuation of employment with the Company and for one (1) year thereafter so long as the Company makes the severance payments to Employee pursuant to subsections 4(b) or 4(c) below, Employee shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) take or convert for Employee's personal gain or benefit or for the benefit of any third party, any business opportunities which may be of interest to the Company or any Affiliated Company which Employee becomes aware of during the term of his employment; (ii) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (iii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers of the Company or any Affiliated Company; (iv) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of the foregoing covenants not to compete and non-solicitation, including but not limited to the geographic area and duration of time which are a part hereof, and further, that the restrictions stated in this
Section 5 are reasonably necessary for the protection of Employer's legitimate proprietary interests. This covenant not to compete may be enforced with respect to any geographic area in which the Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being the legal or equitable holder, solely for investment purposes, of less than 5% of the capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company.

(b) Upon termination of Employee's employment by the Company prior to a Change in Control (as defined in 7(c)(i) below) for any reason other than Cause (as defined in 7(c)(iv) below), the Company will pay Employee severance each month

for 12 months ("Severance Period"), in an amount (subject to applicable withholding) equal to 1/12 of Employee's base salary; and, further, the Company will pay Employee a PIP bonus award in accordance with and subject to the terms and conditions of Employee's PIP in a lump sum at the time any such PIP bonuses are payable under the PIP or at such time as the Severance Period is complete, whichever is later (with interest at prime rate plus one percentage point from the earlier of such dates), for any PIP bonuses earned (1) in the completed fiscal year preceding termination but not due and payable prior to termination, and (2) prorata for the period prior to termination of employment in any partial PIP fiscal year based on Employee's performance against Employee's PIP during such partial period; provided, however, that (i) all such monthly payment obligations shall terminate immediately upon Employee obtaining full time employment in a comparable position in terms of salary level, and (ii) all such payment obligations shall terminate or lapse immediately upon any breach by Employee of Section 4 or 5(a) of this Agreement or if Employee shall commence any action or proceeding in any court or before any regulatory agency arising out of or in connection with termination of Employee's employment.

(c) If Employee terminates Employee's employment or Employee's employment is terminated by the Company for Cause (as defined below), the Company may elect (but is not required to), by written notice thereof to Employee, within five (5) days of any such termination of Employee's employment with the Company prior to a Change in Control (as defined below), to pay Employee severance as provided in and subject to the provisions of subsection 5(b) above.

(d) Employee may terminate this Severance and Change in Control Agreement effective immediately upon notice thereof in writing to Company at any time while still employed within a sixty
(60) calendar day period immediately following the effective date of any reduction by Company in (i) Employee's level of responsibility or position from that held by Employee as Executive Vice President on the effective date of this Agreement, or (ii) Employee's level of compensation, including retirement benefits in effect immediately prior to any such change.

(e) If at any time, any clause or portion of this Section 5 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions set forth in 5(a) shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein.

(f) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 4 or Section 5(a) above, and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other

security being required) in addition to other available legal and equitable remedies.

6. TERMINATION OF EMPLOYMENT.

(a) Upon and after termination of employment howsoever arising, Employee shall, upon request by Company:

(1) immediately return to the Company all correspondence, documents, business calendars/diaries, or other property belonging to the Company which is in Employee's possession,

(2) immediately resign from any office Employee holds with the Company or any Affiliated Company; and

(3) cooperate fully and in good faith with the Company in the resolution of all matters Employee worked on or was involved in during Employee's employment with the Company. Employee's cooperation will include reasonable consultation by telephone. Further, in connection therewith, Employee will, at Company's request upon reasonable advance notice and subject to Employee's availability, make Employee available to Company in person at Company's premises, for testimony in court, or elsewhere; provided, however, that in such event, Company shall reimburse all Employee's reasonable expenses and pay Employee a reasonable per diem or hourly stipend.

7. CHANGE IN CONTROL.

(a) In the event (i) a Change in Control of AAR CORP. occurs, and
(ii) (A) at any time during the 18 month period commencing on the date of the Change in Control the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates Employee's employment for Good Reason, in either case by written notice to the other party (including the particulars thereof), and having given the other party the opportunity to be heard with respect thereto, or (B) Employee's employment with the Company terminates for any reason other than Disability or death during the 30 day period commencing on the expiration of the aforementioned 18 month period, then:

(1) the Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to the sum of (A) all base salary earned through the date of termination, (B) any annual cash bonus earned by Employee for the fiscal year of the Company most recently ended prior to the date of termination to the extent unpaid on the date of termination, (C) a prorata portion of the annual cash bonus, including the value of any restricted stock grant in lieu of annual cash bonus, Employee would have earned had Employee been employed by the Company on the last day of the fiscal year in which the date of termination occurs (as if all performance targets have been met or, in the event the bonus is of the "discretionary" type, the bonus shall be based on a percentage of base

salary which is not less than percentage of base salary received as bonus for the preceding fiscal year) that is applicable to the period commencing on the first day of such fiscal year and ending on the date of termination, and (D) any and all other benefits and amounts earned by Employee prior to the date of termination to the extent unpaid, all subject to applicable withholding.

(2) The Company shall promptly pay to Employee in a lump sum, a cash payment in an amount equal to three times Employee's total compensation (base salary plus annual cash bonus, including the value of any restricted stock grant in lieu of annual cash bonus) for either the fiscal year of the Company most recently ended prior to the date of termination, or the preceding fiscal year, whichever is the highest total compensation, or such lesser amount as Employee may elect to take, subject to applicable withholding. Employee may elect to take payment of any amounts on a schedule of Employee's own choosing; provided that such schedule shall be completed no later than three years from the date of Employee's termination of employment.

(3) Employee and Employee's dependents shall continue to be covered by, and receive employee welfare and executive fringe benefits (including but not limited to medical, dental, life, accident and disability insurance available to officers of the Company and additional executive retirement and other fringe benefits approved by the President and CEO of the Company) in accordance with the terms of the Company's benefit plans and executive fringe benefit programs, for three years following the date of termination, and at no less than the levels Employee and Employee's dependents were receiving immediately prior to the Change in Control. Employee's dependents shall be entitled to continued benefits coverage pursuant to the preceding sentence for the balance of such three year period in the event of Employee's death during such period. The period during which Employee and Employee's dependents are entitled to continuation of group health plan coverage pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended, shall commence on the date next following the expiration of the aforementioned three year period.

(4) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans or programs applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had Employee accumulated three additional continuous years of service. Such amount shall be paid to Employee in a cash lump sum payment on the earlier to occur of Employee's termination of employment following a Change in Control or Employee's Retirement Date, together with a gross-up bonus in an amount equal to any federal, state and local income taxes and excise taxes (including FICA and any similar taxes) payable by Employee on such lump sum payment and such gross-up bonus.

(5) The Company, at its expense, shall provide Employee with outplacement services of a nationally recognized outplacement firm of the Employee's choosing until the earlier of (a) the Employee's attainment of employment, or (b) the date eighteen (18) months from the date of Employee's termination of employment; provided, however, that the cost of such outplacement services shall not exceed 3.5% of the cash payment due to Employee pursuant to subsection 7(a)(2) above.

(6) The amounts paid to Employee under this Change in Control provision applicable to Employee shall be considered severance pay in consideration of past service Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement of those payments.

(b) In the event that a Change in Control occurs, whether or not such Change in Control has the prior written approval of a majority of the Continuing Directors (as defined in the AAR CORP. Stock Benefit Plan), and notwithstanding any conditions or restrictions related to any Award granted to Employee under the Plan, all Options or Limited Rights, or both, granted to Employee under the Plan will become immediately exercisable and remain exercisable for the full remaining life of the option whether or not Employee's employment continues, and all restrictions on Restricted Stock granted to Employee under the Plan will immediately lapse.

(c) For purposes of this Agreement

(i) "Change in Control" means the earliest of:

(1) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), has acquired (other than directly from the Company) beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 20% of the outstanding capital stock of the Company entitled to vote for the election of directors; or

(2) the effective time of (i) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such business combination hold less than 60% of the voting stock of the surviving or resulting corporation, or a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or

(3) the election over any period of time to the Board of Directors of the Company without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of (i)

three directors, or (ii) directors constituting a majority of the number of directors of the Company then in office.

(ii) "Good Reason" means:

(1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control, or a material reduction in Employee's compensation (including benefits), occurring at any time during the two-year period immediately after the Change in Control; or

(2) if the incumbent in the position of President & CEO of the Company on August 8, 1997 is not the President & CEO of the Company at the time of termination, a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances at any time during the immediate two year period after the Change in Control, Employee is unable to carry out Employee's assigned duties and responsibilities in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or

(3) a relocation of the primary place of employment of at least 100 miles.

(iii) "Disability" means:

(1) a physical or mental condition which has prevented Employee from substantially performing Employee's assigned duties for a period of 180 consecutive days and which is expected to continue to render Employee unable to substantially perform Employee's duties on a full-time basis and otherwise meets the benefit eligibility requirements of the Company's Long Term Disability Welfare Benefit Plan or any executive program in which Employee was a participant at the time of a Change in Control. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law.

In the event of termination by the Company for Disability after a Change in Control, a good faith determination of the existence of a Disability shall be made by resolution of the Compensation Committee of the Board of Directors of the Company, in its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability, and Employee will cooperate in providing any such information. Employee will be provided with reasonable opportunity to present additional medical

evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability.

Upon termination of Employment by Company for Disability after a Change in Control, Employee will receive Disability payments pursuant to the Company's short and long term Disability welfare benefit plans then in effect according to the terms of such plans and continue to be eligible to participate in the Company's medical, dental and life insurance programs then in effect and available to officers of the Company in accordance with their terms for a period of 3 years from the date of such termination of this Agreement.

(iv) "Cause" means:

(1) Employee engages, during the performance of Employee's duties hereunder, in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance;

(2) Employee intentionally disobeys or disregards a lawful and proper direction of the Board or the Company; or

(3) Employee materially breaches the Agreement and such breach by its nature, is incapable of being cured, or such breach remains uncured for more than 10 days following receipt by Employee of written notice from the Company specifying the nature of the breach and demanding the cure thereof. For purposes of this clause (3), a material breach of the Agreement that involves inattention by Employee to Employee's duties under the Agreement shall be deemed a breach capable of cure.

Without limiting the generality of the foregoing, the following shall not constitute Cause for the termination of the employment of Employee or the modification or diminution of any of Employee's authority hereunder:

(1) any personal or policy disagreement between Employee and the Company or any member of the Board; or

(2) any action taken by Employee in connection with Employee's duties hereunder, or any failure to act, if Employee acted or failed to act in good faith and in a manner Employee reasonably believed to be in and not opposed to the best interest of the Company and Employee had no reasonable cause to believe Employee's conduct was unlawful, or

(3) termination of Employee's employment for overall unsatisfactory performance (including, but not limited to, failure to meet financial goals).

Termination for Cause shall be limited to a good faith finding by resolution of the Compensation Committee of the Board, setting forth the particulars thereof. Any such action shall be taken at a regular or specially called meeting of the Compensation Committee of the Board, after a minimum 10 days notice thereof to Employee, with termination of Employee's employment with the Company for Cause listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. Any such resolution shall be final and binding.

Upon termination of employment by the Company for Cause, no further compensation or benefits shall accrue or be payable to Employee by the Company, except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination.

Nothing herein shall be construed to prevent the Company from terminating Employee's employment at any time for any reason or for no reason.

(d) The Company will pay reasonable legal/attorney's fees (including court costs and other costs of litigation) incurred by Employee in connection with enforcement of any right or benefit under this Agreement.

(e) The Company shall promptly pay Employee a gross-up bonus in an amount equal to (i) all excise taxes payable under Section 280G of the Internal Revenue Code on any amounts constituting "golden parachute" payments, plus (ii) any federal, state, and local income taxes and excise taxes (including FICA) payable by Employee on such gross-up bonus in order to put Employee in the same position Employee would have been in if the excise tax provision (Section 280G) did not apply.

(f) The Company will continue to provide SKERP retirement benefits to Employee and Employee's spouse at no less than the level they are receiving or entitled to receive under the SKERP as it was in effect immediately prior to the Change in Control.

8. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business and retirement and other employee health and welfare benefit plans ("Plans"). Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations or Plans (subject to their terms), may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem desirable, and Employee shall have no claim or recourse against the Company, its officers, directors or employees, by reason of such action except for enforcement of the provisions of Section 5 and 7 of this Agreement.

9. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 5 and 7 above, no further compensation, payments, liabilities or benefits shall accrue or be payable to Employee upon or as a result of termination of Employee's employment for any reason whatsoever except for any compensation, bonus or other benefits which accrued to Employee prior to the date of employment termination.

The amounts paid to the Employee under Section 5 and 7 of this Agreement shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments.

10. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below:

(a) If to the Company, to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: Chairman

With a copy to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: General Counsel

(b) If to Employee, to:

Philip C. Slapke 10 Walnut Lane S. Barrington, IL 60010

or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address.

11. NON-ASSIGNMENT.

(a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit

of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto.

(b) The Employee agrees on behalf of Employee, Employee's heirs, executors and administrators, and any other person or person claiming any benefit under Employee by virtue of this Agreement, that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect.

12. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained.

13. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof.

14. ENTIRE AGREEMENT. This Agreement as amended and restated herein and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof.

15. WAIVER. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

16. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles.

17. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement.

WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written.

Employer:

AAR CORP.

By: /s/ Howard A. Pulsifer
   -------------------------------------
Title:  Vice President

Employee:

/s/ Philip C. Slapke
----------------------------------------
Philip C. Slapke

AMENDED AND RESTATED
SEVERANCE AND CHANGE IN CONTROL AGREEMENT

This Amended and Restated Severance and Change in Control Agreement ("Agreement") made and entered into as of the 11th day of April, 2000, by and between AAR CORP., a Delaware corporation ("Company"), and Howard A. Pulsifer ("Employee").

WHEREAS, the Company currently employs Employee as an employee at will in the capacity of Vice President, General Counsel and Secretary; and

WHEREAS, the Company and Employee entered into a Severance and Change in Control Agreement dated February 24, 1995 ("Agreement"); and

WHEREAS, the Company and Employee amended and restated the Agreement as of the 8th day of April, 1997, and further amended the Agreement as of the 14th day of July, 1998 ("Original Agreement"); and

WHEREAS, the Company and Employee desire to further amend the Agreement as herein set forth to reflect certain mutually agreed changes to the terms and conditions thereof; and

WHEREAS, for their mutual convenience, the Company and Employee desire to restate the Agreement, as so amended, in its entirety.

NOW, THEREFORE, in consideration of the mutual agreements herein set forth and other good and valuable consideration, the parties hereto agree as follows:

1. EMPLOYMENT. Employee will continue employment with the Company as an at will employee subject to the terms and conditions hereinafter set forth.

2. DUTIES. During the continuation of Employee's employment, Employee shall:

(a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of Employee's employment and the business of the Company (within such limits as the Company may from time to time prescribe), professionally, faithfully and diligently.

(b) devote Employee's full time, energy and skill to the business of the Company and Employee's assigned duties and responsibilities, and to the promotion of the best interests of the Company; provided that Employee shall not (to the extent not inconsistent with Section 5 below) be prevented from (a) serving as a director of any corporation consented to in advance in writing by the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on Employee's part in the operation or affairs of the business in which such

investments are made or which would detract from or interfere or cause a conflict of interest with performance of Employee's duties hereunder.

(c) observe all policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest.

3. BENEFITS. Employee shall be entitled to participate, according to the eligibility provisions of each, in such welfare plans (including but not limited to medical, dental, life, accident and disability insurance programs), vacation, retirement plans and other fringe benefits as may be in effect from time to time and available to other officers of the Company during Employee's employment term. Employee shall also be entitled to participate in such additional executive fringe benefits as may be authorized from time to time by the President and Chief Executive Officer of the Company. Employee shall be eligible to participate in the Company's Supplemental Key Employee Retirement Plan as an executive level participant.

4. CONFIDENTIAL INFORMATION, ASSIGNMENT OF INVENTIONS.

(a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by AAR CORP. and its affiliates or subsidiaries (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform Employee's duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless (i) such information is or has been made generally available to the public, (ii) disclosure of such information is required by law in the opinion of Employee's counsel (provided that written notice thereof is given to Company as soon as possible but not less than 24 hours prior to such disclosure), or (iii) express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, Employee shall not take any electronically stored data, documents or other papers containing or reflecting trade secrets, confidential information, secret processes, know-how, or computer software programs from Company. Employee acknowledges that Employee's employment hereunder will place Employee in a position of utmost confidence and that Employee will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, computer software programs, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the sole and exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph.

(b) Employee hereby assigns to the Company all rights that Employee may have as author, designer, inventor or otherwise as creator of any written or graphic material, design, invention, improvement, or any other idea or thing whatever that Employee may write, draw, design, conceive, perfect, or reduce to practice during employment with the Company or within 120 days after termination of such employment, whether done during or outside of normal work hours, and whether done alone or in conjunction with others ("Intellectual Property"), provided, however, that Employee reserves all rights in anything done or developed entirely by Employee on Employee's own personal time and without the use of any Company equipment, supplies, facilities or information, or the participation of any other Company employee, unless it relates to the Company's business or reasonably anticipated business, or grows out of any work performed by Employee for the Company. Employee will promptly disclose all such Intellectual Property developed by Employee to the Company, and fully cooperate at the Company's request and expense in any efforts by the Company or its assignees to secure protection for such Intellectual Property by way of domestic or foreign patent, copyright, trademark or service mark registration or otherwise, including executing specific assignments or such other documents or taking such further action as may be considered necessary to vest title in Company or its assignees and obtain patents or copyrights in any and all countries.

5. NON-COMPETE; SEVERANCE.

(a) Employee agrees that during Employee's continuation of employment with the Company and for one (1) year thereafter so long as the Company makes severance payments to Employee pursuant to subsections 5(b) or 5(c) below, Employee shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) take or convert for Employee's personal gain or benefit or for the benefit of any third party, any business opportunities which may be of interest to the Company or any Affiliated Company which Employee becomes aware of during the term of his employment; (ii) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (iii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers of the Company or any Affiliated Company; (iv) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of the foregoing covenants not to compete and non-solicitation, including but not limited to the geographic area and duration of time which are a part hereof, and further, that the restrictions stated in this
Section 5 are reasonably necessary for the protection of Employer's legitimate proprietary interests. This covenant not to compete may be enforced with respect to any geographic area in which the Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being

the legal or equitable holder, solely for investment purposes, of less than 5% of the capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company.

(b) The Company will pay Employee, upon termination of Employee's employment by the Company prior to a Change in Control (as defined in 7(c)(i) below) for any reason other than Cause (as defined in 7(c)(iv) below), severance each month for 12 months, in an amount (subject to applicable withholding) equal to 1/12 of Employee's base salary; and, further, if the Company pays discretionary bonuses to its officers for the fiscal year in which Employee's employment is terminated, Employee will be paid a bonus in a lump sum at the time any such bonuses are paid to other officers or at such time as the Severance Period is complete, whichever is later (with interest at prime rate plus one percentage point from the earlier of such dates), (1) for the completed fiscal year preceding termination if such bonus has not been paid prior to termination, and (2) for the fiscal year in which employment is terminated, prorata for the period prior to termination of employment based on Employee's performance during such period; provided, however, that (i) all such monthly payment obligations shall terminate immediately upon Employee obtaining full time employment in a comparable position in terms of salary level, and (ii) all such payment obligations shall terminate or lapse immediately upon any breach by Employee of Section 4 or 5(a) of this Agreement or if Employee shall commence any action or proceeding in any court or before any regulatory agency arising out of or in connection with termination of Employee's employment.

(c) If Employee terminates Employee's employment or Employee's employment is terminated by the Company for Cause (as defined below), the Company may elect (but is not required to), by written notice thereof to Employee, within five (5) days of any such termination of Employee's employment with the Company prior to a Change in Control (as defined below), to pay Employee severance as provided in and subject to the provisions of subsection 5(b) above.

(d) Employee may terminate this Severance and Change in Control Agreement effective immediately upon notice thereof in writing to Company at any time while still employed within a sixty
(60) calendar day period immediately following the effective date of any reduction by Company in (i) Employee's level of responsibility or position from that held by Employee as Vice President, General Counsel and Secretary on the effective date of this Agreement, or (ii) Employee's level of compensation, including retirement benefits in effect immediately prior to any such change.

(e) If at any time, any clause or portion of this Section 5 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions set forth in 5(a) shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the

restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein.

(f) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 4 or Section 5(a) above, and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies.

6. TERMINATION OF EMPLOYMENT.

(a) Upon and after termination of employment howsoever arising, Employee shall, upon request by Company:

(1) immediately return to the Company all correspondence, documents, business calendars/diaries, or other property belonging to the Company which is in Employee's possession,

(2) immediately resign from any office Employee holds with the Company or any Affiliated Company; and

(3) cooperate fully and in good faith with the Company in the resolution of all matters Employee worked on or was involved in during Employee's employment with the Company. Employee's cooperation will include reasonable consultation by telephone. Further, in connection therewith, Employee will, at Company's request upon reasonable advance notice and subject to Employee's availability, make Employee available to Company in person at Company's premises, for testimony in court, or elsewhere; provided, however, that in such event, Company shall reimburse all Employee's reasonable expenses and pay Employee a reasonable per diem or hourly stipend.

7. CHANGE IN CONTROL.

(a) In the event (i) a Change in Control of AAR CORP. occurs and
(ii) (A) at any time during the 18 month period commencing on the date of the Change in Control the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates Employee's employment for Good Reason, in either case by written notice to the other party (including the particulars thereof), and having given the other party the opportunity to be heard with respect thereto, or (B) Employee's employment with the Company terminates for any reason other than Disability or death during the 30 day period commencing on the expiration of the aforementioned 18 month period, then:

(1) The Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to the sum of (A) all base salary earned through the date of termination, (B) any annual cash bonus earned by Employee for the fiscal year of the Company most recently ended prior to the date of

termination to the extend unpaid on the date of termination, (C) a prorata portion of the annual cash bonus, including the value of any restricted stock grant in lieu of annual cash bonus, Employee would have earned had Employee been employed by the Company on the last day of the fiscal year in which the date of termination occurs (as if all performance targets have been met or, in the event the bonus is of the "discretionary" type, the bonus shall be based on a percentage of base salary which is not less than percentage of base salary received as bonus for the preceding fiscal year) that is applicable to the period commencing on the first day of such fiscal year and ending on the date of termination, and (D) any and all other benefits and amounts earned by Employee prior to the date of termination to the extent unpaid, all subject to applicable withholding.

(2) The Company shall promptly pay to Employee in a lump sum, a cash payment in an amount equal to three times Employee's total compensation (base salary plus annual cash bonus) for either the fiscal year of the Company most recently ended prior to the date of termination, or the preceding fiscal year, whichever is the highest total compensation, subject to applicable withholding. Employee may elect to take payment of any amounts on a schedule of Employee's own choosing; provided that such schedule shall be completed no later than three years from the date of Employee's termination of employment.

(3) Employee and Employee's dependents shall continue to be covered by, and receive employee welfare and executive fringe benefits (including but not limited to medical, dental, life, accident and disability insurance available to officers of the Company and additional executive retirement and other fringe benefits approved by the President and CEO of the Company) in accordance with the terms of the Company's benefit plans and executive fringe benefit programs, for three years following the date of termination, and at no less than the levels Employee and Employee's dependents were receiving immediately prior to the Change in Control. Employee's dependents shall be entitled to continued benefits coverage pursuant to the preceding sentence for the balance of such three year period in the event of Employee's death during such period. The period during which Employee and Employee's dependents are entitled to continuation of group health plan coverage pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended, shall commence on the date next following the expiration of the aforementioned three year period.

(4) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans or programs applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had Employee accumulated three additional continuous years of service. Such amount shall be paid to Employee in a cash lump sum payment on the earlier to

occur of Employee's termination of employment following a Change in Control or Employee's Retirement Date, together with a gross-up bonus in an amount equal to any federal, state and local income taxes and excise taxes (including FICA and any similar taxes) payable by Employee on such lump sum payment and such gross-up bonus.

(5) The Company, at its expense, shall provide Employee with outplacement services of a nationally recognized outplacement firm of the Employee's choosing until the earlier of (a) the Employee's attainment of employment, or (b) the date eighteen (18) months from the date of Employee's termination of employment; provided, however, that the cost of such outplacement services shall not exceed 3.5% of the cash payment due to Employee pursuant to subsection 7(a)(2) above.

(6) The amounts paid to Employee under this Change in Control provision applicable to Employee shall be considered severance pay in consideration of past service Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement of those payments.

(b) In the event that a Change in Control occurs, whether or not such Change in Control has the prior written approval of a majority of the Continuing Directors (as defined in the AAR CORP. Stock Benefit Plan), and notwithstanding any conditions or restrictions related to any Award granted to Employee under the Plan, all Options or Limited Rights, or both, granted to Employee under the Plan will become immediately exercisable and remain exercisable for the full remaining life of the option whether or not Employee's employment continues, and all restrictions on Restricted Stock granted to Employee under the Plan will immediately lapse.

(c) For purposes of this Agreement

(i) "Change in Control" means the earliest of:

(1) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), has acquired (other than directly from the Company) beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 20% of the outstanding capital stock of the Company entitled to vote for the election of directors; or

(2) the effective time of (i) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such business combination hold less than 60% of the voting stock of the surviving or resulting corporation, or (ii) a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or

(3) the election over any period of time to the Board of Directors of the Company without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of (i) three directors, or
(ii) directors constituting a majority of the number of directors of the Company then in office.

(ii) "Good Reason" means:

(1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control, or a material reduction in Employee's compensation (including benefits), occurring at any time during the two-year period immediately after the Change in Control; or

(2) if the incumbent in the position of President and CEO of the Company on August 8, 1997 is not the President and CEO of the Company at the time of termination, a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances at any time during the immediate two year period after the Change in Control, Employee is unable to carry out Employee's assigned duties and responsibilities in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or

(3) a relocation of the primary place of employment of at least 100 miles.

(iii) "Disability" means:

(1) a physical or mental condition which has prevented Employee from substantially performing Employee's assigned duties for a period of 180 consecutive days and which is expected to continue to render Employee unable to substantially perform Employee's duties on a full-time basis and otherwise meets the benefit eligibility requirements of the Company's Long Term Disability Welfare Benefit Plan or any executive program in which Employee was a participant at the time of a Change in Control. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law.

In the event of termination by the Company for Disability after a Change in Control, a good faith determination of the existence of a Disability shall be made by resolution of the Compensation Committee of the Board of Directors of the Company, in its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The

Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability, and Employee will cooperate in providing any such information. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability.

Upon termination of Employment by Company for Disability after a Change in Control, Employee will receive Disability payments pursuant to the Company's short and long term Disability welfare benefit plans then in effect according to the terms of such plans and continue to be eligible to participate in the Company's medical, dental and life insurance programs then in effect and available to officers of the Company in accordance with their terms for a period of 3 years from the date of such termination of this Agreement.

(iv) "Cause" means:

(1) Employee engages, during the performance of Employee's duties hereunder, in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance;

(2) Employee intentionally disobeys or disregards a lawful and proper direction of the Board or the Company; or

(3) Employee materially breaches the Agreement and such breach by its nature, is incapable of being cured, or such breach remains uncured for more than 10 days following receipt by Employee of written notice from the Company specifying the nature of the breach and demanding the cure thereof. For purposes of this clause (3), a material breach of the Agreement that involves inattention by Employee to Employee's duties under the Agreement shall be deemed a breach capable of cure.

Without limiting the generality of the foregoing, the following shall not constitute Cause for the termination of employment of Employee or the modification or diminution of any of Employee's authority hereunder:

(1) any personal or policy disagreement between Employee and the Company or any member of the Board; or

(2) any action taken by Employee in connection with Employee's duties hereunder, or any failure to act, if Employee acted or failed to act in good faith and in a manner Employee reasonably believed to be in and not opposed to the best interest of

the Company and Employee had no reasonable cause to believe Employee's conduct was unlawful; or

(3) termination of Employee's employment for overall unsatisfactory performance (including, but not limited to, failure to meet financial goals).

Termination for Cause shall be limited to a good faith finding by resolution of the Compensation Committee of the Board,. setting forth the particulars thereof. Any such action shall be taken at a regular or specially called meeting of the Compensation Committee of the Board, after a minimum 10 days notice thereof to Employee, with termination of Employee's employment with the Company for Cause listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. Any such resolution shall be final and binding.

Upon termination of employment by Company for Cause, no further compensation or benefits shall accrue or be payable to Employee by the Company, except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination.

Nothing herein shall be construed to prevent the Company from terminating Employee's employment at any time for any reason or for no reason.

(d) The Company will pay reasonable legal/attorney's fees
(including court costs and other costs of litigation) incurred by Employee in connection with enforcement of any right or benefit under this Agreement.

(e) The Company shall promptly pay Employee a gross-up bonus in an amount equal to (i) all excise taxes payable under Section 280G of the Internal Revenue Code on any amounts constituting "golden parachute" payments, plus (ii) any federal, state, and local income taxes and excise taxes (including FICA) payable by Employee on such gross-up bonus in order to put Employee in the same position Employee would have been in if the excise tax provision (Section 280G) did not apply.

(f) The Company will continue to provide SKERP retirement benefits to Employee and Employee's spouse at no less than the level they are receiving or entitled to receive under the SKERP as it was in effect immediately prior to the Change in Control.

8. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business and retirement and other employee health and welfare benefit plans ("Plans"). Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations or Plans (subject to their terms), may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one

or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem desirable, and Employee shall have no claim or recourse against the Company, its officers, directors or employees by reason of such action except for enforcement of the provisions of Sections 5 and 7 of this Agreement.

9. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 5 and 7 above, no further compensation, payments, liabilities or benefits shall accrue or be payable to Employee upon or as a result of termination of Employee's employment for any reason whatsoever except for any compensation, bonus or other benefits which accrued to Employee prior to the date of employment termination.

The amounts paid to the Employee under Section 5 and 7 of this Agreement shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments.

10. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below:

(a) If to the Company, to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: Chairman

With a copy to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: General Counsel

(b) If to Employee, to:

Howard A. Pulsifer 630 Indian Way Barrington, IL 60010

or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address.

11. NON-ASSIGNMENT.

(a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto.

(b) The Employee agrees on behalf of Employee, Employee's heirs, executors and administrators, and any other person or person claiming any benefit under Employee by virtue of this Agreement, that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect.

12. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained.

13. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof.

14. ENTIRE AGREEMENT. This Agreement as amended and restated herein and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof.

15. WAIVER. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or

provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

16. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles.

17. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement.

WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written.

Employer:

AAR CORP.

/s/ David P. Storch
-----------------------------------
By:

Title:  President

Employee:

/s/ Howard A. Pulsifer
-----------------------------------
Howard A. Pulsifer

AMENDED AND RESTATED
SEVERANCE AND CHANGE IN CONTROL AGREEMENT

This Amended and Restated Severance and Change in Control Agreement ("Agreement") made and entered into as of the 11th day of April, 2000, by and between AAR CORP., a Delaware corporation ("Company"), and Timothy J. Romenesko ("Employee").

WHEREAS, the Company currently employs Employee as an employee at will in the capacity of Vice President-Chief Financial Officer; and

WHEREAS, the Company and Employee entered into a Severance and Change in Control Agreement dated February 24, 1995 ("Agreement"); and

WHEREAS, the Company and Employee amended and restated the Agreement as of the 8th day of April, 1997, and further amended the Agreement as of the 14th day of July, 1998 ("Original Agreement"); and

WHEREAS, the Company and Employee desire to further amend the Agreement as herein set forth to reflect certain mutually agreed changes to the terms and conditions thereof; and

WHEREAS, for their mutual convenience, the Company and Employee desire to restate the Agreement, as so amended, in its entirety.

NOW, THEREFORE, in consideration of the mutual agreements herein set forth and other good and valuable consideration, the parties hereto agree as follows:

1. EMPLOYMENT. Employee will continue employment with the Company as an at will employee subject to the terms and conditions hereinafter set forth.

2. DUTIES. During the continuation of Employee's employment, Employee shall:

(a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of Employee's employment and the business of the Company (within such limits as the Company may from time to time prescribe), professionally, faithfully and diligently.

(b) devote Employee's full time, energy and skill to the business of the Company and Employee's assigned duties and responsibilities, and to the promotion of the best interests of the Company; provided that Employee shall not (to the extent not inconsistent with Section 5 below) be prevented from (a) serving as a director of any corporation consented to in advance in writing by the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on Employee's part in the operation or affairs of the business in which such

investments are made or which would detract from or interfere or cause a conflict of interest with performance of Employee's duties hereunder.

(c) observe all policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest.

3. BENEFITS. Employee shall be entitled to participate, according to the eligibility provisions of each, in such welfare plans (including but not limited to medical, dental, life, accident and disability insurance programs), vacation, retirement plans and other fringe benefits as may be in effect from time to time and available to other officers of the Company during Employee's employment term. Employee shall also be entitled to participate in such additional executive fringe benefits as may be authorized from time to time by the President and Chief Executive Officer of the Company. Employee shall be eligible to participate in the Company's Supplemental Key Employee Retirement Plan as an executive level participant.

4. CONFIDENTIAL INFORMATION, ASSIGNMENT OF INVENTIONS.

(a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by AAR CORP. and its affiliates or subsidiaries (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform Employee's duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless (i) such information is or has been made generally available to the public, (ii) disclosure of such information is required by law in the opinion of Employee's counsel (provided that written notice thereof is given to Company as soon as possible but not less than 24 hours prior to such disclosure), or (iii) express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, Employee shall not take any electronically stored data, documents or other papers containing or reflecting trade secrets, confidential information, secret processes, know-how, or computer software programs from Company. Employee acknowledges that Employee's employment hereunder will place Employee in a position of utmost confidence and that Employee will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, computer software programs, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the sole and exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph.

(b) Employee hereby assigns to the Company all rights that Employee may have as author, designer, inventor or otherwise as creator of any written or graphic material, design, invention, improvement, or any other idea or thing whatever that Employee may write, draw, design, conceive, perfect, or reduce to practice during employment with the Company or within 120 days after termination of such employment, whether done during or outside of normal work hours, and whether done alone or in conjunction with others ("Intellectual Property"), provided, however, that Employee reserves all rights in anything done or developed entirely by Employee on Employee's own personal time and without the use of any Company equipment, supplies, facilities or information, or the participation of any other Company employee, unless it relates to the Company's business or reasonably anticipated business, or grows out of any work performed by Employee for the Company. Employee will promptly disclose all such Intellectual Property developed by Employee to the Company, and fully cooperate at the Company's request and expense in any efforts by the Company or its assignees to secure protection for such Intellectual Property by way of domestic or foreign patent, copyright, trademark or service mark registration or otherwise, including executing specific assignments or such other documents or taking such further action as may be considered necessary to vest title in Company or its assignees and obtain patents or copyrights in any and all countries.

5. NON-COMPETE; SEVERANCE.

(a) Employee agrees that during Employee's continuation of employment with the Company and for one (1) year thereafter so long as the Company makes severance payments to Employee pursuant to subsections 5(b) or 5(c) below, Employee shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) take or convert for Employee's personal gain or benefit or for the benefit of any third party, any business opportunities which may be of interest to the Company or any Affiliated Company which Employee becomes aware of during the term of his employment; (ii) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (iii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers of the Company or any Affiliated Company; (iv) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of the foregoing covenants not to compete and non-solicitation, including but not limited to the geographic area and duration of time which are a part hereof, and further, that the restrictions stated in this
Section 5 are reasonably necessary for the protection of Employer's legitimate proprietary interests. This covenant not to compete may be enforced with respect to any geographic area in which the Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being

the legal or equitable holder, solely for investment purposes, of less than 5% of the capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company.

(b) The Company will pay Employee, upon termination of Employee's employment by the Company prior to a Change in Control (as defined in 7(c)(i) below) for any reason other than Cause (as defined in 7(c)(iv) below), severance each month for 12 months, in an amount (subject to applicable withholding) equal to 1/12 of Employee's base salary; and, further, if the Company pays discretionary bonuses to its officers for the fiscal year in which Employee's employment is terminated, Employee will be paid a bonus in a lump sum at the time any such bonuses are paid to other officers or at such time as the Severance Period is complete, whichever is later (with interest at prime rate plus one percentage point from the earlier of such dates), (1) for the completed fiscal year preceding termination if such bonus has not been paid prior to termination, and (2) for the fiscal year in which employment is terminated, prorata for the period prior to termination of employment based on Employee's performance during such period; provided, however, that (i) all such monthly payment obligations shall terminate immediately upon Employee obtaining full time employment in a comparable position in terms of salary level, and (ii) all such payment obligations shall terminate or lapse immediately upon any breach by Employee of Section 4 or 5(a) of this Agreement or if Employee shall commence any action or proceeding in any court or before any regulatory agency arising out of or in connection with termination of Employee's employment.

(c) If Employee terminates Employee's employment or Employee's employment is terminated by the Company for Cause (as defined below), the Company may elect (but is not required to), by written notice thereof to Employee, within five (5) days of any such termination of Employee's employment with the Company prior to a Change in Control (as defined below), to pay Employee severance as provided in and subject to the provisions of subsection 5(b) above.

(d) Employee may terminate this Severance and Change in Control Agreement effective immediately upon notice thereof in writing to Company at any time while still employed within a sixty
(60) calendar day period immediately following the effective date of any reduction by Company in (i) Employee's level of responsibility or position from that held by Employee as Timothy J. Romenesko on the effective date of this Agreement, or (ii) Employee's level of compensation, including retirement benefits in effect immediately prior to any such change.

(e) If at any time, any clause or portion of this Section 5 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions set forth in 5(a) shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the

restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein.

(f) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 4 or Section 5(a) above, and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies.

6. TERMINATION OF EMPLOYMENT.

(a) Upon and after termination of employment howsoever arising, Employee shall, upon request by Company:

(1) immediately return to the Company all correspondence, documents, business calendars/diaries, or other property belonging to the Company which is in Employee's possession,

(2) immediately resign from any office Employee holds with the Company or any Affiliated Company; and

(3) cooperate fully and in good faith with the Company in the resolution of all matters Employee worked on or was involved in during Employee's employment with the Company. Employee's cooperation will include reasonable consultation by telephone. Further, in connection therewith, Employee will, at Company's request upon reasonable advance notice and subject to Employee's availability, make Employee available to Company in person at Company's premises, for testimony in court, or elsewhere; provided, however, that in such event, Company shall reimburse all Employee's reasonable expenses and pay Employee a reasonable per diem or hourly stipend.

7. CHANGE IN CONTROL.

(a) In the event (i) a Change in Control of AAR CORP. occurs and
(ii) (A) at any time during the 18 month period commencing on the date of the Change in Control the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates Employee's employment for Good Reason, in either case by written notice to the other party (including the particulars thereof), and having given the other party the opportunity to be heard with respect thereto, or (B) Employee's employment with the Company terminates for any reason other than Disability or death during the 30 day period commencing on the expiration of the aforementioned 18 month period, then:

(1) The Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to the sum of (A) all base salary earned through the date of termination, (B) any annual cash bonus earned by Employee for the fiscal year of the Company most recently ended prior to the date of

termination to the extend unpaid on the date of termination, (C) a prorata portion of the annual cash bonus, including the value of any restricted stock grant in lieu of annual cash bonus, Employee would have earned had Employee been employed by the Company on the last day of the fiscal year in which the date of termination occurs (as if all performance targets have been met or, in the event the bonus is of the "discretionary" type, the bonus shall be based on a percentage of base salary which is not less than percentage of base salary received as bonus for the preceding fiscal year) that is applicable to the period commencing on the first day of such fiscal year and ending on the date of termination, and (D) any and all other benefits and amounts earned by Employee prior to the date of termination to the extent unpaid, all subject to applicable withholding.

(2) The Company shall promptly pay to Employee in a lump sum, a cash payment in an amount equal to three times Employee's total compensation (base salary plus annual cash bonus) for either the fiscal year of the Company most recently ended prior to the date of termination, or the preceding fiscal year, whichever is the highest total compensation, subject to applicable withholding. Employee may elect to take payment of any amounts on a schedule of Employee's own choosing; provided that such schedule shall be completed no later than three years from the date of Employee's termination of employment.

(3) Employee and Employee's dependents shall continue to be covered by, and receive employee welfare and executive fringe benefits (including but not limited to medical, dental, life, accident and disability insurance available to officers of the Company and additional executive retirement and other fringe benefits approved by the President and CEO of the Company) in accordance with the terms of the Company's benefit plans and executive fringe benefit programs, for three years following the date of termination, and at no less than the levels Employee and Employee's dependents were receiving immediately prior to the Change in Control. Employee's dependents shall be entitled to continued benefits coverage pursuant to the preceding sentence for the balance of such three year period in the event of Employee's death during such period. The period during which Employee and Employee's dependents are entitled to continuation of group health plan coverage pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended, shall commence on the date next following the expiration of the aforementioned three year period.

(4) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans or programs applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had Employee accumulated three additional continuous years of service. Such amount shall be paid to Employee in a cash lump sum payment on the earlier to

occur of Employee's termination of employment following a Change in Control or Employee's Retirement Date, together with a gross-up bonus in an amount equal to any federal, state and local income taxes and excise taxes (including FICA and any similar taxes) payable by Employee on such lump sum payment and such gross-up bonus.

(5) The Company, at its expense, shall provide Employee with outplacement services of a nationally recognized outplacement firm of the Employee's choosing until the earlier of (a) the Employee's attainment of employment, or (b) the date eighteen (18) months from the date of Employee's termination of employment; provided, however, that the cost of such outplacement services shall not exceed 3.5% of the cash payment due to Employee pursuant to subsection 7(a)(2) above.

(6) The amounts paid to Employee under this Change in Control provision applicable to Employee shall be considered severance pay in consideration of past service Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement of those payments.

(b) In the event that a Change in Control occurs, whether or not such Change in Control has the prior written approval of a majority of the Continuing Directors (as defined in the AAR CORP. Stock Benefit Plan), and notwithstanding any conditions or restrictions related to any Award granted to Employee under the Plan, all Options or Limited Rights, or both, granted to Employee under the Plan will become immediately exercisable and remain exercisable for the full remaining life of the option whether or not Employee's employment continues, and all restrictions on Restricted Stock granted to Employee under the Plan will immediately lapse.

(c) For purposes of this Agreement

(i) "Change in Control" means the earliest of:

(1) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), has acquired (other than directly from the Company) beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 20% of the outstanding capital stock of the Company entitled to vote for the election of directors; or

(2) the effective time of (i) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such business combination hold less than 60% of the voting stock of the surviving or resulting corporation, or (ii) a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or

(3) the election over any period of time to the Board of Directors of the Company without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of (i) three directors, or
(ii) directors constituting a majority of the number of directors of the Company then in office.

(ii) "Good Reason" means:

(1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control, or a material reduction in Employee's compensation (including benefits), occurring at any time during the two-year period immediately after the Change in Control; or

(2) if the incumbent in the position of President and CEO of the Company on August 8, 1997 is not the President and CEO of the Company at the time of termination, a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances at any time during the immediate two year period after the Change in Control, Employee is unable to carry out Employee's assigned duties and responsibilities in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or

(3) a relocation of the primary place of employment of at least 100 miles.

(iii) "Disability" means:

(1) a physical or mental condition which has prevented Employee from substantially performing Employee's assigned duties for a period of 180 consecutive days and which is expected to continue to render Employee unable to substantially perform Employee's duties on a full-time basis and otherwise meets the benefit eligibility requirements of the Company's Long Term Disability Welfare Benefit Plan or any executive program in which Employee was a participant at the time of a Change in Control. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law.

In the event of termination by the Company for Disability after a Change in Control, a good faith determination of the existence of a Disability shall be made by resolution of the Compensation Committee of the Board of Directors of the Company, in its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The

Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability, and Employee will cooperate in providing any such information. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability.

Upon termination of Employment by Company for Disability after a Change in Control, Employee will receive Disability payments pursuant to the Company's short and long term Disability welfare benefit plans then in effect according to the terms of such plans and continue to be eligible to participate in the Company's medical, dental and life insurance programs then in effect and available to officers of the Company in accordance with their terms for a period of 3 years from the date of such termination of this Agreement.

(iv) "Cause" means:

(1) Employee engages, during the performance of Employee's duties hereunder, in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance;

(2) Employee intentionally disobeys or disregards a lawful and proper direction of the Board or the Company; or

(3) Employee materially breaches the Agreement and such breach by its nature, is incapable of being cured, or such breach remains uncured for more than 10 days following receipt by Employee of written notice from the Company specifying the nature of the breach and demanding the cure thereof. For purposes of this clause (3), a material breach of the Agreement that involves inattention by Employee to Employee's duties under the Agreement shall be deemed a breach capable of cure.

Without limiting the generality of the foregoing, the following shall not constitute Cause for the termination of employment of Employee or the modification or diminution of any of Employee's authority hereunder:

(1) any personal or policy disagreement between Employee and the Company or any member of the Board; or

(2) any action taken by Employee in connection with Employee's duties hereunder, or any failure to act, if Employee acted or failed to act in good faith and in a manner Employee reasonably believed to be in and not opposed to the best interest of

the Company and Employee had no reasonable cause to believe Employee's conduct was unlawful; or

(3) termination of Employee's employment for overall unsatisfactory performance (including, but not limited to, failure to meet financial goals).

Termination for Cause shall be limited to a good faith finding by resolution of the Compensation Committee of the Board,. setting forth the particulars thereof. Any such action shall be taken at a regular or specially called meeting of the Compensation Committee of the Board, after a minimum 10 days notice thereof to Employee, with termination of Employee's employment with the Company for Cause listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. Any such resolution shall be final and binding.

Upon termination of employment by Company for Cause, no further compensation or benefits shall accrue or be payable to Employee by the Company, except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination.

Nothing herein shall be construed to prevent the Company from terminating Employee's employment at any time for any reason or for no reason.

(d) The Company will pay reasonable legal/attorney's fees
(including court costs and other costs of litigation) incurred by Employee in connection with enforcement of any right or benefit under this Agreement.

(e) The Company shall promptly pay Employee a gross-up bonus in an amount equal to (i) all excise taxes payable under Section 280G of the Internal Revenue Code on any amounts constituting "golden parachute" payments, plus (ii) any federal, state, and local income taxes and excise taxes (including FICA) payable by Employee on such gross-up bonus in order to put Employee in the same position Employee would have been in if the excise tax provision (Section 280G) did not apply.

(f) The Company will continue to provide SKERP retirement benefits to Employee and Employee's spouse at no less than the level they are receiving or entitled to receive under the SKERP as it was in effect immediately prior to the Change in Control.

8. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business and retirement and other employee health and welfare benefit plans ("Plans"). Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations or Plans (subject to their terms), may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one

or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem desirable, and Employee shall have no claim or recourse against the Company, its officers, directors or employees by reason of such action except for enforcement of the provisions of Sections 5 and 7 of this Agreement.

9. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 5 and 7 above, no further compensation, payments, liabilities or benefits shall accrue or be payable to Employee upon or as a result of termination of Employee's employment for any reason whatsoever except for any compensation, bonus or other benefits which accrued to Employee prior to the date of employment termination.

The amounts paid to the Employee under Section 5 and 7 of this Agreement shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments.

10. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below:

(a) If to the Company, to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: Chairman

With a copy to:

AAR CORP.
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
Attention: General Counsel

(b) If to Employee, to:

Timothy J. Romenesko 515 Lake Shore Drive North Barrington, IL 60010

or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address.

11. NON-ASSIGNMENT.

(a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto.

(b) The Employee agrees on behalf of Employee, Employee's heirs, executors and administrators, and any other person or person claiming any benefit under Employee by virtue of this Agreement, that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect.

12. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained.

13. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof.

14. ENTIRE AGREEMENT. This Agreement as amended and restated herein and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof.

15. WAIVER. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or

provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

16. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles.

17. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement.

WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written.

Employer:

AAR CORP.

/s/ Howard A. Pulsifer
--------------------------------
By:

Title:  Vice President

Employee:

/s/ Timothy J. Romenesko
--------------------------------
Timothy J. Romenesko

COMPOSITE* OF

AAR CORP.
NONEMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN

AS AMENDED AND RESTATED EFFECTIVE APRIL 8, 1997

*includes Amendment No. 1

AAR CORP.
NONEMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN

AS AMENDED AND RESTATED EFFECTIVE APRIL 8, 1997

TABLE OF CONTENTS

                                                                                                               PAGE
                                                                                                               ----
SECTION I - INTRODUCTION......................................................................................- 1 -

SECTION II - PLAN PARTICIPANTS................................................................................- 1 -

SECTION III - DEFERRAL ELECTIONS..............................................................................- 1 -

SECTION IV - PARTICIPANT ACCOUNTS.............................................................................- 4 -

SECTION V - DISTRIBUTION OF ACCOUNTS..........................................................................- 5 -

SECTION VI - ADMINISTRATION OF THE PLAN.......................................................................- 8 -

SECTION VII - AMENDMENT OR TERMINATION........................................................................- 10-

SECTION VIII - GENERAL PROVISIONS.............................................................................- 10-

AAR CORP.
NONEMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN

AS AMENDED AND RESTATED EFFECTIVE APRIL 8, 1997

SECTION I - INTRODUCTION

Effective January 1, 1996 AAR CORP. ("Company") established the Nonemployee Directors' Deferred Compensation Plan ("Plan") for members of its Board of Directors ("Board"), who are not employees of the Company or an affiliate ("Nonemployee Directors"). The Plan is amended and restated, effective April 8, 1997, as set forth below:

SECTION II - PLAN PARTICIPANTS

Each Nonemployee Director shall become a Participant under the Plan by filing the written Election Form described in Section III below with the Plan Administrator appointed by the Compensation Committee of the Board ("Committee") with respect to the Retainers and Meeting Fees payable to the Nonemployee Director for his services as a member of the Board.

SECTION III - DEFERRAL ELECTIONS

(a) Each Participant shall make the following election with respect to his Retainer:

(i) The Participant may elect to defer receipt of his entire Retainer until the date on which his service on the Board terminates for any reason, and have the cash value of such Retainer credited to the Stock Unit Account established for him under the Plan and converted to Stock Units, pursuant to the provisions of paragraph
(a) of Section IV below; or

(ii) If an election is not made pursuant to clause (i) above, a Participant shall

receive distribution of a number of shares of common stock of AAR CORP. ("Common Stock") equal to the cash value of each quarterly payment of his Retainer divided by the Fair Market Value (as defined in paragraph
(b) of Section VIII) of a share of Common Stock on the date on which such quarterly payment of such Retainer is payable. Such distribution shall be evidenced by a certificate representing the applicable number of shares of Common Stock, registered in the name of the Participant, and distributed to the Participant as soon as practicable after the date on which each quarterly payment of such Retainer is payable.

(b) Each Participant shall elect (i) to have his entire Meeting Fee paid to him in cash as soon as practicable after the date on which such Meeting Fee is otherwise payable, or (ii) to defer receipt of his entire Meeting Fee until the date on which his service on the Board terminates for any reason, and have the cash value of such Meeting Fee credited to the Cash Account established for him under the Plan pursuant to the provisions of paragraph (b) of Section IV below.

(c) Each election with respect to a Retainer and Meeting Fee for a calendar year shall be set forth on an Election Form provided by the Plan Administrator. Such Election Form shall be in writing and shall specify the elections described above with respect to Retainers and Meeting Fees.

(d) An Election Form effective for a calendar year shall be delivered to the Plan Administrator prior to the first day of such calendar year. An Election Form shall remain in effect for subsequent calendar years until a written notice to revise the Election Form is delivered to the Plan Administrator on or before the first day of the calendar year in which the revision is

to become effective. Except as provided in paragraph (e) below, an initial Election Form or a revised Election Form shall only apply to a Retainer or Meeting Fee otherwise payable to a Participant after the end of the calendar year in which such initial or revised Election Form is delivered to the Plan Administrator. Any Election Form delivered by a Participant shall be irrevocable with respect to any Retainer or Meeting Fee covered by the elections set forth therein. If an Election Form is not in effect for a Nonemployee Director for a calendar year, he shall be deemed to have elected the options specified in clause (i) of paragraphs (a) and (b) of this Section for such calendar year.

(e) Notwithstanding the preceding provisions of this Section:

(i) An election by a Participant with respect to a Retainer or Meeting Fee payable on or after April 8, 1997 may be made pursuant to an Election Form delivered to the Plan Administrator prior to April 8, 1997; and

(ii) An election made by a Participant in the calendar year in which he first becomes eligible to participate in the Plan may be made pursuant to an Election Form delivered to the Plan Administrator within 30 days after the date on which he initially becomes eligible to participate, and such Election Form shall be effective with respect to Retainers and Meeting Fees earned from and after the date such Election Form is delivered to the Plan Administrator.

(f) All Retainers and Meeting Fees deferred by a Participant pursuant to the provisions of the Plan prior to April 8, 1997, shall be credited to the Cash Account established for the Participant under the Plan.

SECTION IV - PARTICIPANT ACCOUNTS

(a) (i) A Retainer of a Participant deferred pursuant to clause (i) of paragraph (a) of Section III shall be credited as a dollar amount to the Participant's Stock Unit Account as of the quarterly date on which each quarterly payment of such Retainer otherwise would have been paid, and shall be converted as of such date into Stock Units equivalent to Common Stock. Such conversion shall be determined by dividing the dollar balance of the quarterly payment of such Retainer by the Fair Market Value of a share of Common Stock on such quarterly date. The number of Stock Units for full shares of Common Stock so determined shall be credited to the Participant's Stock Unit Account and the aggregate value thereof shall be charged to the cash balance of his Stock Unit Account. Any cash balance remaining in the Participant's Stock Unit Account after such conversion, together with other subsequent credits of deferred Retainers thereto and credits thereto pursuant to clause (ii) next below, shall be converted into Stock Units on the next quarterly conversion date.

(ii) Additional credits shall be made to a Participant's Stock Unit Account in dollar amounts equal to the cash dividends (or the fair market value of dividends paid in property other than Common Stock) that the Participant would have received had he been the owner on each record date of a number of shares of Common Stock equal to the number of Stock Units in his Stock Unit Account on such date. In the case of a dividend in Common Stock or a Common Stock split, additional credits will be made to a Participant's Stock Unit Account of a number of Stock Units equal to the number of full shares of Common Stock that the Participant would have received had he been the owner on each record date of a number of shares of Common Stock equal to the number of Stock Units in his Stock Unit Account on such date. Any cash dividends

(or dividends paid in property other than Common Stock) shall be converted into Stock Units at the next quarterly conversion date as set forth in clause (i) of this paragraph.

(b) A Meeting Fee of a Participant deferred pursuant to clause
(ii) of paragraph (b) of Section III shall be credited to the Participant's Cash Account as of the date it would otherwise have been paid. Until the entire balance of a Cash Account has been paid to the Participant, or to the beneficiaries of a deceased Participant, such balance shall be increased on the last day of each calendar quarter to reflect accrued interest on such balance based on the 10 year United States Treasury Bond rate at the end of the applicable calendar quarter. The Committee may, from time to time, change prospectively the interest rate applied with respect to Participants' Cash Balance Accounts.

(c) Each Stock Unit Account and each Cash Account shall be maintained on the books of the Company until full payment of the balance thereof has been made to the applicable Participant (or the beneficiaries of a deceased Participant). No funds shall be set aside or earmarked for any Account, which shall be purely a bookkeeping device.

SECTION V - DISTRIBUTION OF ACCOUNTS

(a) The entire balance of a Participant's Stock Unit Account and of his Cash Account shall be paid to him (or to his beneficiaries in the event of his death) in a single lump sum as of the January 31 next following the date the Participant's service on the Board terminates for any reason.

(b) The balance of a Participant's Stock Unit Account shall be distributed in shares of Common Stock or in cash as designated by the Participant (or his beneficiaries in the event of his

death) by written notice delivered to the Plan Administrator prior to the applicable January 31 distribution date. If a timely designation is not received by the Plan Administrator, distribution shall be made in cash or in Common Stock as the Company shall decide. In the event of a distribution in Common Stock, a certificate representing a number of shares of Common Stock equal to the number of Stock Units in the Participant's Stock Unit Account, registered in the name of the Participant (or his beneficiaries), and any remaining cash in the Stock Unit Account, shall be distributed to the Participant (or his beneficiaries). In the event of a cash distribution, the Participant (or his beneficiaries) shall receive an amount in cash equal to the aggregate of (i) the number of Stock Units in the Stock Unit Account multiplied by the Fair Market Value of a share of Common Stock on the applicable January 31, and (ii) any remaining cash in the Stock Unit Account.

(c) The balance of a Participant's Cash Account shall be distributed to the Participant (or his beneficiaries) in cash on the applicable January 31 distribution date.

(d) If a Participant's service on the Board shall terminate by reason of his death, or if he shall die after becoming entitled to distribution hereunder, but prior to receipt of his entire distribution, all cash or Common Stock then distributable hereunder with respect to him shall be distributed to such beneficiary or beneficiaries as such Participant shall have designated by an instrument in writing last filed with the Committee prior to his death, or in the absence of such designation or of any living beneficiary, to his spouse, or if not then living, to his then living descendants, PER STIRPES, or if none is then living, to the personal representative of his estate, in the same manner as would have been distributed to the Participant had he continued to live.

(e) In the written discretion of the Plan Administrator, and at the written request of a Participant, up to 100% of the balance in his Stock Unit Account and in his Cash Account,

determined as of the last day of the calendar month prior to the date of distribution, may be distributed to a Participant in a lump sum in the case of an Unforeseeable Emergency, subject to the limitations set forth below. For purposes of this paragraph an Unforeseeable Emergency is a severe financial hardship of the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Internal Revenue Code) of the Participant, loss of the Participant's property due to casualty or other similar, extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an Unforeseeable Emergency will depend upon the facts of each case, as determined by the Plan Administrator in its discretion, but in any case payment may not be made to the extent that such hardship is or may be relieved:

(i) through reimbursement or compensation by insurance or otherwise;

(ii) by liquidation of the Participant's assets to the extent the liquidation of such assets would not itself cause severe financial hardship; or

(iii) by cessation of deferrals under the Plan.

Withdrawal of amounts because of an Unforeseeable Emergency shall be permitted only to the extent reasonably needed to satisfy the Unforeseeable Emergency.

(f) Notwithstanding any other provisions of the Plan, the entire balance of each Participant's Stock Unit Account and Cash Account shall be distributed to such Participant on the earlier to occur of (1) within 10 days after the date the Board, in its discretion, deems a Change in Control of the Company likely to occur, and (2) the date a Change in Control actually occurs. Distribution of each Participant's Cash Account shall be made in cash. Distribution of each Participant's Stock Unit Account shall be made in shares of Common Stock or in cash as

designated by the Participant (or his beneficiaries in the event of his death) pursuant to the procedures set forth in paragraph (b) of this Section V; provided that the references to "the applicable January 31" in paragraph (b) shall be references to the date set forth in this paragraph for distribution of the Participant's Stock Unit Account. For purposes of this paragraph (f), the definition of a Change in Control of the Company shall be the same as that found in the AAR CORP. Stock Benefit Plan, as amended and restated from time to time.

SECTION VI - ADMINISTRATION OF THE PLAN

(a) The Committee shall appoint one or more employees of the Company to act as the Plan Administrator. The Plan Administrator shall be responsible for the general operation and administration of the Plan, and shall have such powers as are necessary to discharge its duties under the Plan, including, without limitation, the following:

(i) with the advice of the General Counsel of the Company, to construe and interpret the Plan, to decide all questions of eligibility, to determine the amount, manner and time of payment of any benefits hereunder, to prescribe rules and procedures to be followed by Participants and their beneficiaries under the Plan, and to otherwise to carry out the purposes of the Plan; and

(ii) To appoint or employ individuals to assist in the administration of the Plan and any other agents deemed advisable.

The decisions of the Plan Administrator shall be binding and conclusive upon all Participants, beneficiaries and other persons.

(b) Any Participant claiming a benefit, requesting an interpretation or ruling, or

requesting information, under the Plan, shall present the request in writing to the Plan Administrator, which shall respond in writing as soon as practicable. If the claim or request is denied, the written notice of denial shall state the following:

(i) The reasons for denial, with specific reference to the Plan provisions upon which the denial is based;

(ii) A description of any additional material or information required and an explanation of why it is necessary; and

(iii) An explanation of the Plan's review procedure.

The initial notice of denial shall normally be given within 90 days after receipt of the claim. If special circumstances require an extension of time, the claimant shall be so notified and the time limit shall be 180 days. Any person whose claim or request is denied, or who has not received a response within 30 days, may request review by notice in writing to the Plan Administrator. The original decision shall be reviewed by the Plan Administrator, which may, but shall not be required to, grant the claimant a hearing. On review, whether or not there is a hearing, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. The decision on review shall ordinarily be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be so notified and the time limit shall be extended to 120 days. The decision on review shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned.

SECTION VII - AMENDMENT OR TERMINATION

(a) The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date of such resolution or such later date as the resolution may expressly state.

(b) No amendment or termination of the Plan shall (i) directly or indirectly deprive any current or former Participant or his beneficiaries of all or any portion of his Accounts as determined as of the effective date of such amendment or termination, or (ii) directly or indirectly reduce the balance of any Account held hereunder as of the effective date of such amendment or termination. Upon termination of the Plan, distribution of balances in all Accounts shall be made to Participants or their beneficiaries in the manner and at the time described in Section V as if each Participant's service on the Board had then terminated. No additional deferred Retainers or Meeting Fees shall be credited to the Accounts of Participants after termination of the Plan, but the Company shall continue to credit earnings, gains and losses to Accounts pursuant to Section IV until the balances of such Accounts have been fully distributed to Participants or their beneficiaries.

SECTION VIII - GENERAL PROVISIONS

(a) The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. The right of a Participant or his beneficiary to receive a benefit hereunder shall be an

unsecured claim against the general assets of the Company, and neither the Participant nor a beneficiary shall have any rights in or against any specific assets of the Company. All amounts credited to Accounts shall constitute general assets of the Company.

(b) For all purposes of the Plan, the Fair Market Value of a share of Common Stock as of a given date shall be the closing price per share of the Common Stock on the New York Stock Exchange on such date, or if such date is not a regular trading date on such Exchange, on the next following regular trading date.

(c) Shares of Common Stock distributed under the Plan may be treasury shares of the Company or shares purchased by the Company on the open market. The Company shall reserve such number of shares of Common Stock as may be issuable under the Plan.

(d) Nothing contained in the Plan shall constitute a guaranty by the Company, the Committee, the Plan Administrator, or any other person or entity, that the assets of the Company will be sufficient to pay any benefit hereunder. No Participant or beneficiary shall have any right to receive a distribution under the Plan except in accordance with the terms of the Plan.

(e) Establishment of the Plan shall not be construed to give any Participant the right to be retained as a member of the Board.

(f) No interest of any person or entity in, or right to receive a distribution under, the Plan, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings.

(g) The Plan shall be construed and administered under the laws of the State of Illinois, except to the extent preempted by federal law.

(h) If any person entitled to a payment under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution that is contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company, the Committee, the Plan Administrator and the Plan therefor.

(i) The Plan shall be continued, following a transfer or sale of assets of the Company, or following the merger or consolidation of the Company into or with any other corporation or entity, by the transferee, purchaser or successor entity, unless the Plan has been terminated by the Company pursuant to the provisions of Section VII prior to the effective date of such transaction.

(j) Each Participant or beneficiary shall keep the Plan Administrator informed of his current address. The Plan Administrator shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Plan Administrator within three years after the date on which payment of the Participant's benefits under the Plan may first be made, payment may be made as though the Participant had died at the end of the three year period. If, within one additional year after such three year period has elapsed, or, within three years after the actual death of a Participant, the Plan Administrator is unable to locate any beneficiary of the Participant, then the Company shall have no further obligation to pay any

benefit hereunder to such Participant, or beneficiary or any other person and such benefit shall be forfeited. If such Participant, or his beneficiary or any other person, subsequently makes a valid claim for distribution of the amount forfeited, such amount, without gains or earnings thereon, shall be distributed to such Participant or his beneficiary or such other person pursuant to Section V.

(k) Notwithstanding any of the preceding provisions of the Plan, none of the Company, any member of the Committee, any Plan Administrator or any individual acting as an employee or agent of the Company, the Committee or the Plan Administrator, shall be liable to any Participant, former Participant, or any beneficiary or other person for any claim, loss, liability or expense incurred by such Participant, or beneficiary or other person in connection with the Plan.

(l) The aggregate number of Stock Units that may be issuable under the Plan and the number of Stock Units in each Stock Unit Account shall all be appropriately adjusted as the Committee may determine for any increase or decrease in the number of shares of issued Common Stock resulting from a subdivision or consolidation of shares, whether through reorganization, recapitalization, stock split-up, spin-off, stock distribution or combination of shares or other increase or decrease in the number of such shares outstanding effected without receipt of consideration by the Company. Adjustments under this paragraph (l) shall be made in the sole discretion of the Committee, and its decisions shall be binding and conclusive.

(m) Notwithstanding anything to the contrary contained in the Plan, (a) if the Internal Revenue Service prevails in a claim by it that amounts credited to a Participant's Account, and/or earnings thereon, constitute taxable income to the Participant or his beneficiary for any taxable

year of his, prior to the taxable year in which such credits and/or earnings are distributed to him or (b) legal counsel satisfactory to the Company, and the applicable Participant or his beneficiary, renders an opinion that the Internal Revenue Service would likely prevail in such a claim, the balance of such Participant's Account shall be immediately distributed to the Participant or his beneficiary. For purposes of this paragraph, the Internal Revenue Service shall be deemed to have prevailed in a claim if such claim is upheld by a court of final jurisdiction, or if the Company, or a Participant or beneficiary, based upon an opinion of legal counsel satisfactory to the Company and the Participant or his beneficiary, fails to appeal a decision of the Internal Revenue Service, or a court of applicable jurisdiction, with respect to such claim, to an appropriate Internal Revenue Service appeals authority or to a court of higher jurisdiction, within the appropriate time period.

(n) The Company shall withhold from any deferred or nondeferred Retainer or Meeting Fee, or any payments made pursuant to Section V, any amounts required by applicable federal, state and local tax laws and regulations thereunder. A Participant may pay any applicable taxes due with respect to any shares of Common Stock distributed under the Plan in cash or in Common Stock, either by having the Company withhold a portion of the shares of Common Stock otherwise distributable, or by delivering to the Company shares of Common Stock otherwise owned by the Participant.

(o) Any notice under the Plan shall be in writing, or by electronic means, and shall be received when actually delivered, or mailed postage paid as first class U.S. Mail. Notices shall be directed to the Company at its principal business office at One AAR Place, 1100 North Wood Dale Road, Wood Dale, Illinois 60191, to a Nonemployee Director at the address stated in his

Election Form, and to a beneficiary entitled to benefits at the address stated in the Participant's beneficiary designation, or to such other addresses any party may specify by notice to the other parties.

IN WITNESS WHEREOF, this amendment and restatement of the Plan has been executed on behalf of the Company on this 9th day of April, 1997.

AAR CORP.

By: /s/ Ira A. Eichner
   -------------------------------------
   Ira A. Eichner, Chairman of the Board