AAR CORP (Form: 10-K405, Received: 08/27/2001 11:23:49)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2001 Commission file number 1-6263

AAR CORP.

(Exact Name of Registrant as Specified in its Charter)

Delaware		36-2334820
(State or Other Jurisdiction of Incorporation or Organization)		(I. R. S. Employer Identification No.)
One AAR Place, 1100 N. Wood Dale Road, Wood Dale, Illinois		60191
(Address of Principal Executive Offices)		(Zip Code)
Registrant's telephone number, including area code (630) 227-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $1.00 par value		New York Stock Exchange Chicago Stock Exchange
Common Stock Purchase Rights		New York Stock Exchange Chicago Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/

At July 31, 2001, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $397,771,055 (based upon the closing price of the Common Stock at July 31, 2001 as reported on the New York Stock Exchange). The calculation of such market value has been made for the purposes of this report only and should not be considered as an admission or conclusion by the Registrant that any person is in fact an affiliate of the Registrant.

On July 31, 2001, there were 26,936,243 shares of Common Stock outstanding.

Documents Incorporated by Reference

Portions of the definitive proxy statement relating to the Registrant's 2001 Annual Meeting of Stockholders, to be held October 10, 2001, are incorporated by reference in Part III to the extent described therein.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business	2
	Item 2.	Properties	4
	Item 3.	Legal Proceedings	4
	Item 4.	Submission of Matters to a Vote of Security Holders	4
		Supplemental Item — Executive Officers of the Registrant	5
PART II
	Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	6
	Item 6.	Selected Financial Data	7
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	13
	Item 8.	Financial Statements and Supplementary Data	14
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	40
PART III
	Item 10.	Directors and Executive Officers of the Registrant	41
	Item 11.	Executive Compensation	41
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	41
	Item 13.	Certain Relationships and Related Transactions	41
PART IV
	Item 14.	Exhibits, Financial Statements, Schedules and Reports on Form 8-K	42
SIGNATURES			43

PART I

ITEM 1. BUSINESS (Dollars in thousands)

AAR CORP. and its subsidiaries are referred to herein collectively as "AAR" or the "Company," unless the context indicates otherwise. The Company was organized in 1955 as the successor to a business founded in 1951 and was reincorporated in Delaware in 1966. The Company is a leading independent provider of value-added products and services to the worldwide aviation/aerospace industry.

Certain of the Company's aviation-related activities and products are subject to licensing, certification and other requirements imposed by the Federal Aviation Administration (FAA) and other regulatory agencies, both domestic and foreign. The Company believes that it has all licenses and certifications that are material to the conduct of its business.

The Company reports its activities in three business segments: (i) Aircraft and Engines, (ii) Airframe and Accessories and (iii) Manufacturing.

The Company's Aircraft and Engines segment activities include (i) the purchase, sale and lease of used commercial jet aircraft, (ii) the purchase, sale and lease of a wide variety of new, overhauled and repaired engines and engine products for the aviation aftermarket, including a broad range of spare engines and engine parts and other engine components and accessories, and (iii) the overhaul, repair and exchange of a wide range of engine parts and components and other engine support services for its commercial and military customers. The Company also provides customized inventory supply and management programs for engine parts and components in support of customer maintenance activities. The Company has two FAA licensed repair stations in the U.S. to perform engine component overhaul services which cover a broad range of internal engine parts and components. The Company also provides turbine engine overhaul and parts supply services to industrial gas and steam turbine operators. The Company's primary sources of aviation products for its Aircraft and Engines segment are domestic and foreign airlines, independent aviation service companies, aircraft leasing companies and original equipment manufacturers.

The Company's Airframe and Accessories segment activities include (i) the purchase, sale and lease of new, overhauled and repaired airframe parts and accessories for the aviation aftermarket, and (ii) the overhaul, repair and exchange of a wide variety of airframe and accessory parts and components for its commercial, military and general aviation customers. The Company also provides customized inventory supply and management programs for certain airframe parts and components in support of customer maintenance activities. The Company's primary sources of airframe parts for its Airframe and Accessories segment are domestic and foreign airlines, independent aviation service companies, aircraft leasing companies and original equipment manufacturers. The Company is also an authorized distributor for more than 150 leading aviation/aerospace product manufacturers.

The Company's Airframe and Accessories overhaul and repair capabilities include most commercial aircraft landing gear, a wide variety of avionics, instruments, electrical, electronic, fuel, hydraulic and pneumatic components and a broad range of internal airframe components. AAR also operates an aircraft maintenance facility providing maintenance, modification, special equipment installation, painting services and aircraft terminal services for various models of commercial, military, regional, business and general aviation aircraft. AAR's overhaul and repair of parts and components also support the sale, lease and inventory management activities of the Company. AAR has nine FAA-licensed repair stations in the U.S. and two in Europe to perform airframe/component overhaul services. During the second quarter of fiscal 2001, the Company purchased substantially all of the net assets of Hermetic Aircraft International (Hermetic), an aircraft component support company providing repair and distribution services to the North American aftermarket primarily on behalf of European aircraft component manufacturers.

The Company's Manufacturing segment activities include (i) the design, manufacture and installation of in-plane cargo loading and handling systems for commercial and military aircraft and helicopters, (ii) the design and manufacture of advanced composite materials for commercial, business and military aircraft, and (iii) the manufacture and repair of a wide array of containers, pallets and shelters in support of military and humanitarian rapid deployment activities.

For each of its reportable segments, the Company furnishes aviation products and services primarily through its own employees. The principal customers for the Company's products and services in the Aircraft and Engines and Airframe and Accessories segments are domestic and foreign commercial airlines, regional/commuter airlines, business aircraft operators, aviation original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies. In the Manufacturing segment, principal customers include domestic and foreign commercial airlines, aviation original equipment manufacturers and domestic and foreign military organizations. Sales of aviation products and services to commercial airlines are generally affected by such factors as the number, type and average age of aircraft in service, the levels of aircraft utilization (e.g . , frequency of schedules), the number of airline operators and the level of sales of new and used aircraft.

Competition in the worldwide aviation/aerospace industry is based on quality, ability to provide a broad range of products and services, speed of delivery and price. Competitors in both aircraft and engine parts supply businesses include the original equipment manufacturers, commercial airlines, and other independent suppliers of parts and services. In certain of its leasing and commercial jet aircraft and engine sales activities, the Company faces competition from financial institutions, syndicators, commercial and specialized leasing companies and other entities that provide financing. AAR also competes with various repair and overhaul organizations, which include the service arms of original equipment manufacturers, the maintenance departments or divisions of large commercial airlines (some of which also offer maintenance services to third parties) and independent organizations. AAR's pallet, container and shelter manufacturing activities compete with several modest-sized private companies, and its cargo systems competitors include a number of divisions of large corporations. Although certain of the Company's competitors have substantially greater financial and other resources than the Company, the Company believes that it has maintained a satisfactory competitive position through its responsiveness to customer needs, its attention to quality and its unique combination of market expertise, technical capabilities and financial strength.

At May 31, 2001, backlog believed to be firm was approximately $74,100 compared to $79,800 at May 31, 2000. An additional $7,000 of unfunded government options on awarded contracts also existed at May 31, 2001. It is expected that approximately $73,700 of the May 31, 2001 backlog will be shipped in fiscal 2002.

Sales to the U.S. Government, its agencies and its contractors were approximately $139,072 (15.9% of total sales), $132,048 (12.9% of total sales) and $98,954 (9.4% of total sales) in fiscal years 2001, 2000 and 1999, respectively. Because such sales are subject to competitive bidding and government funding, no assurance can be given that such sales will continue at levels previously experienced. The majority of the Company's government contracts are for aviation products and services used for ongoing routine military logistic support activities; unlike weapons systems and other high-technology military requirements, these products and services are less likely to be affected by reductions in defense spending. The Company's contracts with the U.S. Government and its agencies are typically firm agreements to provide aviation products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the government agency. Although the Company's government contracts are subject to termination at the election of the government, in the event of such a termination the Company would be entitled to recover from the government all allowable costs incurred by the Company through the date of termination.

At May 31, 2001, the Company employed approximately 2,500 persons worldwide.

For additional information concerning the Company's business segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business Segment Information" in Note 11 of Notes to Consolidated Financial Statements.

ITEM 2. PROPERTIES

The Company's principal aircraft and engines sales and leasing activities as well as aftermarket engine parts distribution activities in the Aircraft and Engines segment are conducted from a building owned by the Company in Wood Dale, Illinois. In addition to warehouse space, the facility includes executive, sales and administrative offices and shares space with an operating unit in the Airframe and Accessories segment. This segment also conducts overhaul and repair activities in buildings owned by the Company in Frankfort, New York and Windsor, Connecticut and engine parts distribution activities in facilities leased by the Company in Hannover, Germany; Caerphilly, Wales; and Brussels, Belgium.

The Company's principal aftermarket airframe parts distribution activities in the Airframe and Accessories segment are conducted from the aforementioned owned building in Wood Dale, Illinois. New parts distribution activities are conducted primarily from an owned building in Elk Grove Village, Illinois. Overhaul and repair activities are conducted in owned buildings located in Garden City and Holtsville, New York; and in The Netherlands near Schiphol International Airport. This segment also conducts overhaul and repair activities in buildings leased by the Company in Miami, Florida; London, England; Macon, Georgia; Roswell, New Mexico; and Oklahoma City, Oklahoma.

The Company's activities in the Manufacturing segment are conducted at owned facilities in Clearwater, Florida (subject to an industrial revenue bond); Port Jervis, New York; and Cadillac and Livonia, Michigan.

The Company believes that its owned and leased facilities are suitable and adequate for its existing business.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material, pending legal proceedings (including any governmental or environmental proceedings) other than routine litigation incidental to its existing business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Supplemental Item:

EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning each executive officer of the Company is set forth below:

Name	Age	Present Position with the Company
David P. Storch	48	President and Chief Executive Officer; Director
Joseph M. Gullion	51	Executive Vice President and Chief Operating Officer
Howard A. Pulsifer	58	Vice President; General Counsel; Secretary
Timothy J. Romenesko	44	Vice President and Chief Financial Officer
Michael J. Sharp	39	Vice President and Controller; Chief Accounting Officer

Mr. Storch has been President of the Company since 1989 and Chief Executive Officer since 1996. Previously, he was Chief Operating Officer from 1989 to 1996 and a Vice President of the Company from 1988 to 1989. Mr. Storch joined the Company in 1979 and was President of a major subsidiary from 1984 to 1988. Mr. Storch has been a director of the Company since 1989. Mr. Storch is Ira A. Eichner's son-in-law. Mr. Eichner is Chairman of the Board and a Director of the Company.

Mr. Gullion has been Executive Vice President and Chief Operating Officer of the Company since June 1, 2001. Mr. Gullion joined the Company in March, 2001 as Vice President, Strategic Planning and Acquisitions. Prior to joining the Company, he was President of Boeing Airplane Services, Inc. from 1998 to 2001 and Vice President of Global Sales, Marketing, and New Business Development for Allied Signal Aerospace.

Mr. Pulsifer has been Vice President, General Counsel and Secretary of the Company since 1990. Previously he served as Vice President (since 1990) and General Counsel (since 1987). He was previously with United Airlines, Inc. for 14 years, most recently as Senior Counsel.

Mr. Romenesko has been Vice President and Chief Financial Officer since 1994. Previously he served as Controller of the Company from 1991 to 1995 and in various other positions since joining the Company in 1981.

Mr. Sharp has been Vice President and Controller, Chief Accounting Officer since 1999. Previously he served as Controller of the Company from 1996 to 1999. Prior to joining the Company he was with Kraft Foods from 1994 to 1996, and with KPMG LLP from 1984 to 1994, most recently as audit senior manager.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(Dollars in thousands, except per share amounts)

The Company's Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. On June 30, 2001, there were approximately 10,000 holders of the Common Stock of the Company, including participants in security position listings.

Certain of the Company's debt agreements contain provisions restricting the payment of dividends or repurchase of its shares. See Note 2 of Notes to Consolidated Financial Statements included herein. Under the most restrictive of these provisions, the Company may not pay dividends (other than stock dividends) or acquire its capital stock if, after giving effect to the aggregate amounts paid on or after June 1, 1995, such amounts exceed the sum of $20,000 plus 50% of Consolidated Net Income of the Company after June 1, 1994. At May 31, 2001 unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares totaled approximately $27,783. At June 1, 2001, unrestricted consolidated retained earnings increased to $37,049, due to inclusion of 50% of Consolidated Net Income of the Company for fiscal 2001.

The table below sets forth for each quarter of the fiscal year indicated the reported high and low market prices of the Company's Common Stock on the New York Stock Exchange and the quarterly dividends declared.

	Fiscal 2001						Fiscal 2000
Per Common Share	Market Prices						Market Prices
Per Common Share	Market Prices				Quarterly Dividends		Market Prices				Quarterly Dividends
Quarter	High		Low		Quarterly Dividends		High		Low		Quarterly Dividends
First	$	15.1875	$	10.3125	$	.085	$	23.2500	$	18.3750	$	.085
Second		13.5625		10.0000		.085		21.9375		15.9375		.085
Third		15.1900		10.3125		.085		26.8750		15.8125		.085
Fourth		15.2500		10.9500		.085		23.6250		13.8750		.085

					$	.340					$	.340

ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)

			For the Year Ended May 31,
			2001		2000		1999		1998			1997
RESULTS OF OPERATIONS
	Sales		$	853,659	$	957,525	$	918,036	$	782,123		$	589,328
	Pass through sales ¹			20,596		66,808		132,572		74,514			44,225
	Total sales			874,255		1,024,333		1,050,608		856,637			633,553
	Gross profit			136,467		172,853		173,259		148,406			108,541
	Operating income			40,390		70,658		77,381		64,716			42,890
	Interest expense			21,887		23,431		18,567		14,494			10,786
	Income before provision for income taxes			20,220		49,526		59,786		51,157			32,975
	Net income			18,531		35,163		41,671		35,657			23,025

	Share data: ²
		Earnings per share — basic	$	.69	$	1.30	$	1.51	$	1.29		$	.92
		Earnings per share — diluted	$	.69	$	1.28	$	1.49	$	1.27		$	.91
		Cash dividends per share	$	.34	$	.34	$	.34	$	.33		$	.32
		Average common shares outstanding — basic		26,913		27,103		27,549		27,588			25,026

		Average common shares outstanding — diluted		26,985		27,415		28,006		28,174			25,399

FINANCIAL POSITION
	Working capital		$	360,464	$	347,451	$	334,600	$	319,252		$	314,119
	Total assets			701,854		737,977		723,018		667,039			526,735
	Short-term debt			13,652		26,314		420		237			1,474
	Long-term debt			179,987		180,447		180,939		177,509	³		116,818
	Total debt			193,639		206,761		181,359		177,746	³		118,292
	Stockholders' equity			340,212		336,494		322,423		297,330			266,410

	Number of shares outstanding at end of year ²			26,937		26,865		27,381		27,717			27,306

	Book value per share of common stock ²		$	12.63	$	12.53	$	11.78	$	10.73		$	9.76

Notes:

¹: In connection with certain long-term inventory management programs, the Company purchases factory-new products on behalf of its customers from original equipment manufacturers. These products are purchased from the manufacturer and "passed through" to the Company's customers at the Company's cost.
²: All share and per share information reflects the three-for-two stock split on February 23, 1998.
³: In December 1997, the Company sold $60,000 of unsecured 6.875% Notes due December 15, 2007.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)

Results of Operations

The Company reports its activities in three business segments: Aircraft and Engines, Airframe and Accessories and Manufacturing. The table below sets forth net sales for the Company's three business segments and for pass through sales for each of the last three fiscal years ended May 31.

		For the Year Ended May 31,
		2001		2000		1999
Sales:
	Aircraft and Engines	$	337,192	$	440,285	$	416,099
	Airframe and Accessories		419,313		397,307		376,356
	Manufacturing		97,154		119,933		125,581

			853,659		957,525		918,036
	Pass through sales		20,596		66,808		132,572

		$	874,255	$	1,024,333	$	1,050,608

Three-Year Sales Summary

Over the last three fiscal years, consolidated sales, excluding pass through sales, decreased from $918,036 in fiscal 1999 to $853,659 in fiscal 2001. Total sales, which include pass through sales, decreased from $1,050,608 in fiscal 1999 to $874,255 in fiscal 2001. The decline in sales from fiscal 1999 to fiscal 2001 was primarily the result of lower sales from engine parts inventory management programs to a major customer, resulting in a decrease in the Company's Aircraft and Engines sales from $416,099 in fiscal 1999 to $337,192 in fiscal 2001. The sales decline was also influenced by a decline in airline profitability during the three-year period as a result of an overall economic slowdown and higher fuel prices.

The engine parts inventory management programs with a major customer supported older technology JT8D and JT9D engine families which are being phased out of the world airlines' fleets, resulting in softer demand for the spare parts required to maintain these engine types. As demand for these parts by this major customer decreased, the justification for carrying a just-in-time exclusive parts support arrangement became less viable and the program was dissolved by mutual agreement in fiscal 2001. Because all pass through sales were derived from these inventory management programs, pass through sales declined as well.

The sales decline over the three-year period in the Aircraft and Engines segment was partially offset by a sales increase in the Airframe and Accessories segment from $376,356 in fiscal 1999 to $419,313 in fiscal 2001. This increase was the result of new aircraft component repair capability and capacity in both the commercial airline and military aviation markets, and additional penetration of the landing gear overhaul market, including the relatively fast-growing regional aircraft market. In addition, the sales increase from fiscal 2000 to fiscal 2001 reflects the favorable impact of the acquisition of Hermetic in the second quarter of fiscal 2001.

Sales in the Manufacturing segment declined from $125,581 in fiscal 1999 to $97,154 in fiscal 2001 primarily as a result of reduced demand for the Company's rapid deployment products supporting the U.S. Government, and also the divestiture of the Company's floor maintenance products manufacturing facility in fiscal 1999.

Although commercial airline profitability has significantly declined over the past three years, worldwide air traffic growth, the primary underlying long-term growth factor in the Company's commercial markets, continues to expand, creating future opportunities for the Company. The Company believes that its established position as the leading independent provider of value-added aviation products and services to the worldwide aviation/aerospace industry will enable it to take advantage of continuing market opportunities.*

Fiscal 2001 Compared with Fiscal 2000

Consolidated sales in fiscal 2001, excluding pass through sales, decreased $103,866 or 10.8% compared to the prior year as the Company experienced lower sales in the Aircraft and Engines and Manufacturing segments, partially offset by increased sales in the Airframe and Accessories segment.

In the Aircraft and Engines segment, fiscal 2001 sales declined $103,093 or 23.4% compared to fiscal 2000 primarily as a result of lower revenue in the Company's aircraft sales business and lower sales of engine parts and components. The decline in aircraft sales is mainly due to the type of aircraft sold in the current year compared to the prior year. The decline in engine parts sales was primarily the result of reduced demand by a major customer for certain engine parts due principally to fewer engine shop visits to this customer for the engine types the Company supports, and from the impact of converting the Company's exclusive engine parts support agreement with this major customer to preferred status, which occurred in December 2000. The reduction in pass through sales of $46,212 also was attributable to these factors. Because the exclusive engine parts support agreements with this major customer were dissolved, in future periods the Company does not believe it will have pass through sales.*

In the Airframe and Accessories segment, fiscal 2001 sales increased over the prior year $22,006 or 5.5% primarily as a result of higher sales of airframe parts and from the favorable impact of the acquisition of Hermetic, which the Company acquired on September 29, 2000. Fiscal 2001 revenues for Hermetic included in consolidated sales were approximately $13,100.

In the Manufacturing segment, fiscal 2001 sales declined $22,779 or 19.0% compared to fiscal 2000 primarily as a result of lower sales of products supporting the U.S. Government's rapid deployment program, and lower sales of the Company's cargo systems and composite structure products.

Consolidated gross profit decreased $36,386 or 21.1% over the prior year due to the impact of lower sales and a reduction in the consolidated gross profit margin. The decline in the gross profit margin was attributable to lower margins in the Aircraft and Engines segment due to pricing pressure on older technology engine parts and reduced demand from a major inventory management program customer. Gross profit margins were also lower in the Manufacturing segment reflecting lower demand for certain of the Company's manufactured products. The consolidated gross profit margin was also negatively impacted by a $5,400 provision recorded in the fourth quarter of fiscal 2001 to adjust certain inventories previously used to support the major program customer to their net realizable value.

Selling, general and administrative costs declined $6,118 or 6.0% reflecting lower personnel costs as the Company reduced its cost structure in response to more difficult industry conditions. Selling, general and administrative expense declined also as a result of lower bad debt expense in fiscal 2001 compared to the prior year. Interest expense decreased $1,544 principally as a result of reduced average short-term borrowings outstanding during fiscal 2001. Interest income declined $582 as a result of the reduction in average outstanding interest-bearing trade notes receivable during the current year compared to the prior year.

*: This section contains forward-looking statements which are identified with an asterisk (*). Please see comments on forward-looking statement risk factors in the "Forward-Looking Statements" section on page 12.

The Company's effective tax rate for fiscal 2001 was 8.4% compared to 29.0% for fiscal 2000. The fiscal 2001 provision for income taxes includes a reduction in income tax expense of $3,300. This adjustment represents the reversal of Federal and state income tax liabilities for years prior to fiscal 1998, now closed to assessments.

Consolidated net income declined $16,632 as a result of the factors discussed above.

Fiscal 2000 Compared with Fiscal 1999

Consolidated sales in fiscal 2000, excluding pass through sales, increased 4.3% to $957,525 from $918,036 in fiscal 1999. This increase was attributable to higher demand in both the Aircraft and Engines and Airframe and Accessories segments.

In the Aircraft and Engines segment, sales increased $24,186 or 5.8% as the Company experienced strong demand for its whole engine and aircraft products, partially offset by a continued decrease in sales from engine parts inventory management programs. This decrease was primarily the result of reduced demand by a major customer for certain engine parts due principally to significantly fewer engine shop visits to this customer for the engine types the Company supported. Pass through sales were $66,808 compared to $132,572 in the prior year. As certain of the Company's inventory management programs matured, pass through sales declined as the Company sourced more of its customer's parts requirements with used serviceable parts, rather than with factory-new parts. The reduction in pass through sales during the fiscal year is attributable to the maturation of the Company's long-term inventory management programs, as well as a decline in the number of shop visits for the engine types the Company supports at certain long-term inventory management programs.

Sales in the Airframe and Accessories segment increased $20,951 or 5.6% reflecting increased demand for the Company's aircraft maintenance and component overhaul and repair services. These increases were partially offset by lower new aircraft parts sales to general aviation customers.

In the Manufacturing segment, sales declined $5,648 or 4.5% as a result of the divestiture of the Company's floor maintenance products manufacturing subsidiary in November 1998, partially offset by higher sales of the Company's products supporting the U.S. Government's deployment needs.

Consolidated gross profit was essentially even with the prior fiscal year. The fiscal 2000 consolidated gross profit margin, excluding the impact from pass through sales, was 18.1%, compared to 18.9% in fiscal 1999. The decrease in the gross profit margin can be attributed to lower margins in the Aircraft and Engines segment due to the unfavorable impact of the mix of inventories sold. Gross profit margins increased in the Airframe and Accessories segment principally due to increased demand for the Company's landing gear and component overhaul and repair services.

Selling, general and administrative expenses increased $6,317 or 6.6% as a result of a $4,000 charge to increase the allowance for doubtful accounts in response to the Company's accounts receivable exposure, which included two airlines that filed for bankruptcy protection during fiscal 2000, as well as increased information technology costs incurred as a result of the Company's e-business activities. Interest expense increased $4,864 principally as a result of increased average short-term borrowings outstanding during fiscal year 2000 compared to fiscal 1999, and interest income increased $1,327 as a result of an increase in average outstanding interest-bearing notes receivable during fiscal 2000 compared to fiscal 1999.

Consolidated net income declined $6,508 or 15.6% from fiscal 1999 as a result of the above factors.

Fiscal 1999 Compared with Fiscal 1998

Consolidated sales in fiscal 1999, excluding pass through sales, increased 17.4% to $918,036 from $782,123 in fiscal 1998. This increase was attributable to continued strong demand for the Company's

broad range of products and services and, among other things, full-year sales from businesses acquired in fiscal 1998.

Sales in the Aircraft and Engines segment increased $76,800 or 22.6% resulting from higher sales of engine parts, driven primarily from strength in inventory management programs, and increased aircraft sales and leasing revenues. These increases were partially offset by the impact of certain engine parts sales which were recorded by Turbine Engine Asset Management L.L.C. (an unconsolidated joint venture company) during fiscal 1999, but were recorded by the Aircraft and Engines segment during the first half of fiscal 1998. Pass through sales were $132,572 compared to $74,514 in fiscal 1998. The increase in pass through sales in fiscal 1999 compared to fiscal 1998 was attributable to the addition of new inventory management programs during fiscal 1999 and late fiscal 1998.

Sales in the Airframe and Accessories segment increased $43,073 or 12.9% driven primarily by the impact of full-year sales from the new-parts distribution companies acquired during fiscal 1998, as well as increased demand for aircraft maintenance and landing gear overhaul repair capabilities.

Sales in the Manufacturing segment increased $16,040 or 14.6% due to increased sales of products supporting the U.S. Government's rapid deployment program, the inclusion of full-year sales from AAR Composites (acquired in fiscal 1998) and higher sales of cargo handling systems. These gains were partially offset by the unfavorable impact on sales as a result of the divestiture of the Company's floor maintenance products manufacturing subsidiary in November 1998.

Consolidated gross profit increased $24,853 or 16.7% due to increased consolidated net sales. The fiscal 1999 consolidated gross profit margin of 18.9%, excluding the impact of pass through sales, is slightly less than the consolidated gross profit margin of 19.0% in fiscal 1998. The gross profit margin in the Aircraft and Engines segment remained flat, while the gross profit margin increased in the Company's Manufacturing segment primarily due to increased demand for cargo handling systems. The gross profit margin in the Airframe and Accessories segment declined due to the mix of inventories sold.

Selling, general and administrative expenses were lower as a percentage of consolidated net sales; however, total expenses increased due to the impact from companies acquired during fiscal 1998, as well as increased marketing support and information technology costs, which include Year 2000 compliance costs. Interest expense increased $4,073 or 28.1% over the prior year primarily due to the full-year effect of the $60,000 of unsecured 6.875% Notes issued in December 1997.

Consolidated net income increased $6,014 or 16.9% over the prior year as a result of the above-noted factors.

Liquidity and Capital Resources

At May 31, 2001, the Company's liquidity and capital resources included cash and cash equivalents of $13,809 and working capital of $360,464. At May 31, 2001, the Company's long-term debt-to-capitalization ratio was 34.6% compared to 34.9% at May 31, 2000, and the Company's total debt-to-capitalization ratio was 36.3% at May 31, 2001 compared to 38.1% at May 31, 2000. The reduction in the total debt-to-capitalization ratio was due to lower short-term borrowings outstanding at May 31, 2001 compared to May 31, 2000. The Company continues to maintain its external sources of financing including $125,000 of unused available committed bank lines, and a universal shelf registration on file with the Securities and Exchange Commission under which up to $200,000 of common stock, preferred stock or medium- or long-term debt securities may be issued or sold subject to market conditions, and an accounts receivable securitization program under which the Company may sell an interest in a defined pool of accounts receivable. At May 31, 2001, accounts receivable, net of retained interest, sold under this arrangement were $18,984, compared to $29,359 at May 31, 2000.

During fiscal 2001, the Company generated $46,093 of cash flow from operations compared to $10,051 and $28,525 during fiscal 2000 and 1999, respectively. The increase in cash flow from operations compared to the prior year was principally due to effective working capital management as the Company reduced its investment in inventories and improved accounts receivable turnover.

During fiscal 2001, the Company's investing activities generated $2,141 of cash. Cash generated from investing activities principally reflects cash received from the sale of the Company's interest in a leveraged lease and cash received in connection with the sale and dissolution of three joint venture companies, offset by property, plant and equipment expenditures of $13,134 and the cash payment for the Hermetic acquisition of $3,200.

During fiscal 2001, the Company's financing activities used $35,616 of cash principally reflecting the reduction of bank lines of $25,885 and the payment of cash dividends of $9,157.

The Company believes that its liquidity and available sources of capital will continue to provide the Company with the ability to meet its ongoing working capital requirements, make anticipated capital expenditures, meet contractual commitments and pay dividends.*

A summary of key indicators of financial condition and lines of credit follows:

		May 31,
		2001			2000
Description
Working capital		$	360,464		$	347,451
Current ratio			3.9:1			3.1:1
Bank credit lines:
	Borrowings outstanding	$	—		$	25,885
	Available but unused committed lines		125,000			84,115

Total available committed credit lines		$	125,000		$	110,000

Long-term debt, less current maturities		$	179,987		$	180,447
Ratio of long-term debt-to-capitalization			34.6	%		34.9	%
Ratio of total debt-to-capitalization			36.3	%		38.1	%

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 and are identified by an asterisk(*). These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including: general economic conditions; ability to acquire inventory at favorable prices; integration of acquisitions; marketplace competition; economic and aviation/aerospace market stability and Company profitability. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

*: This section contains forward-looking statements which are identified with an asterisk (*). Please see comments on forward-looking statement risk factors in the "Forward-Looking Statements" section on page 12.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk is limited to fluctuating interest rates under its unsecured bank credit agreements and foreign exchange rates. During fiscal 2001 and 2000, the Company did not utilize derivative financial instruments to offset these risks.

At May 31, 2001, $125,000 ($100,000 available through February 9, 2003 and $25,000 available through April 10, 2002) was available under credit lines with domestic banks under revolving credit and term loan agreements, and $2,700 was available under credit agreements with foreign banks (credit facilities). Interest on amounts borrowed under the credit facilities is LIBOR based. As of May 31, 2001, the outstanding balance under these agreements was $0. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during fiscal 2001 would have reduced the Company's pre-tax income by approximately $482 during fiscal 2001.

Revenues and expenses of the Company's foreign operations in The Netherlands are translated at average exchange rates during the year and balance sheet accounts are translated at year-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders' equity as a component of accumulated other comprehensive income (loss). A hypothetical 10 percent devaluation of foreign currencies against the U.S. dollar would not have a material impact on the financial position or results of operations of the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF AAR CORP.:

We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAR CORP. and subsidiaries as of May 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois
June 27, 2001

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

		For the Year Ended May 31,
		2001			2000			1999
		(In thousands except per share data)

Sales:
	Sales from products and leasing	$	753,104		$	859,214		$	828,142
	Sales from services		100,555			98,311			89,894
	Pass through sales		20,596			66,808			132,572

			874,255			1,024,333			1,050,608

Costs and operating expenses:
	Cost of products and leasing		636,349			706,042			672,625
	Cost of services		80,843			78,630			72,152
	Cost of pass through sales		20,596			66,808			132,572
	Selling, general and administrative and other		96,077			102,195			95,878

			833,865			953,675			973,227

Operating income			40,390			70,658			77,381
Interest expense			(21,887	)		(23,431	)		(18,567	)
Interest income			1,717			2,299			972

Income before provision for income taxes			20,220			49,526			59,786
Provision for income taxes			1,689			14,363			18,115

Net income		$	18,531		$	35,163		$	41,671

Earnings per share of common stock — basic		$	.69		$	1.30		$	1.51

Earnings per share of common stock — diluted		$	.69		$	1.28		$	1.49

The accompanying notes to consolidated financial statements
are an integral part of these statements.

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

		May 31,
		2001			2000
		(In thousands)

Current assets:
	Cash and cash equivalents	$	13,809		$	1,241
	Accounts receivable		115,187			128,348
	Inventories		263,099			275,817
	Equipment on or available for short-term leases		57,491			60,201
	Deferred tax assets, deposits and other		36,270			45,660

Total current assets			485,856			511,267

Property, plant and equipment, at cost:
	Land		6,893			6,331
	Buildings and improvements		70,258			68,387
	Equipment, furniture and fixtures		125,234			127,879

			202,385			202,597
Accumulated depreciation			(93,478	)		(92,594	)

			108,907			110,003

Other assets:
	Investment in leveraged leases		28,715			34,487
	Cost in excess of underlying net assets of acquired companies, net		45,375			38,840
	Other		33,001			43,380

			107,091			116,707

		$	701,854		$	737,977

The accompanying notes to consolidated financial statements
are an integral part of these statements.

AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

			May 31,
			2001			2000
			(In thousands)

Current liabilities:
	Short-term debt		$	—		$	25,885
	Current maturities of long-term debt			410			429
	Notes payable			13,242			—
	Accounts and trade notes payable			73,975			107,879
	Accrued liabilities			35,706			26,596
	Accrued taxes on income			2,059			3,027

Total current liabilities				125,392			163,816

Long-term debt, less current maturities				179,987			180,447
Deferred tax liabilities				55,063			56,020
Retirement benefit obligation				1,200			1,200

				236,250			237,667

Stockholders' equity:
	Preferred stock, $1.00 par value, authorized 250 shares; none issued			—			—
	Common stock, $1.00 par value, authorized 100,000 shares; issued 29,371 and 29,168 shares, respectively			29,371			29,168
	Capital surplus			148,316			146,557
	Retained earnings			219,848			210,474
	Treasury stock, 2,434 and 2,303 shares at cost, respectively			(39,041	)		(37,236	)
	Unearned restricted stock awards			(2,499	)		(3,021	)
	Accumulated other comprehensive income (loss):
		Cumulative translation adjustments		(12,731	)		(9,448	)
		Minimum pension liability		(3,052	)		—

				340,212			336,494

			$	701,854		$	737,977

The accompanying notes to consolidated financial statements
are an integral part of these statements.

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THREE YEARS ENDED MAY 31, 2001

		Common Stock			Treasury Stock									Unearned Restricted Stock Awards			Accumulated Other Comprehensive Income (Loss)
		Common Stock			Treasury Stock				Capital Surplus		Retained Earnings									Comprehensive Income (Loss)
		Shares	Amount		Shares	Amount			Capital Surplus		Retained Earnings									Comprehensive Income (Loss)
		(In thousands)
Balance, May 31, 1998		28,832	$	28,832	1,128	$	(16,470	)	$	140,898	$	152,233		$	(3,520	)	$	(4,643	)
	Net income	—		—	—		—			—		41,671			—			—		$	41,671
	Cash dividends	—		—	—		—			—		(9,375	)		—			—			—
	Treasury stock	—		—	489		(8,993	)		—		—			—			—			—
	Exercise of stock options and stock awards	166		166	—		—			3,197		—			—			—			—
	Restricted stock activity	—		—	—		—			—		—			(92	)		—			—
	Adjustment for net translation loss	—		—	—		—			—		—			—			(1,481	)		(1,481	)

	Comprehensive income for fiscal 1999																			$	40,190

Balance, May 31, 1999		28,998	$	28,998	1,617	$	(25,463	)	$	144,095	$	184,529		$	(3,612	)	$	(6,124	)
	Net income	—		—	—		—			—		35,163			—			—		$	35,163
	Cash dividends	—		—	—		—			—		(9,218	)		—			—			—
	Treasury stock	—		—	686		(11,773	)		—		—			—			—			—
	Exercise of stock options and stock awards	170		170	—		—			2,462		—			—			—			—
	Restricted stock activity	—		—	—		—			—		—			591			—			—
	Adjustment for net translation loss	—		—	—		—			—		—			—			(3,324	)		(3,324	)

Comprehensive income for fiscal 2000																				$	31,839

Balance, May 31, 2000		29,168	$	29,168	2,303	$	(37,236	)	$	146,557	$	210,474		$	(3,021	)	$	(9,448	)
	Net income	—		—	—		—			—		18,531			—			—		$	18,531
	Cash dividends	—		—	—		—			—		(9,157	)		—			—			—
	Treasury stock	—		—	131		(1,805	)		—		—			—			—			—
	Exercise of stock options and stock awards	203		203	—		—			1,759		—			—			—			—
	Restricted stock activity	—		—	—		—			—		—			522			—			—
	Adjustment for net translation loss	—		—	—		—			—		—			—			(3,283	)		(3,283	)
	Minimum pension liability	—		—	—		—			—		—			—			(3,052	)		(3,052	)

	Comprehensive income for fiscal 2001																			$	12,196

Balance, May 31, 2001		29,371	$	29,371	2,434	$	(39,041	)	$	148,316	$	219,848		$	(2,499	)	$	(15,783	)

The accompanying notes to consolidated financial statements
are an integral part of these statements.

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

				For the Year Ended May 31,
				2001			2000			1999
				(In thousands)
Cash flows from operating activities:
	Net income			$	18,531		$	35,163		$	41,671
	Adjustments to reconcile net income to net cash provided from operating activities:
		Depreciation and amortization			18,577			18,373			17,063
		Deferred taxes			(312	)		9,570			10,970
		Changes in certain assets and liabilities, excluding effects of acquired businesses:
			Accounts receivable		20,712			31,532			(6,991	)
			Inventories		17,887			(6,644	)		(46,212	)
			Equipment on or available for short-term leases		2,356			(26,593	)		3,214
			Accounts and trade notes payable		(35,034	)		(21,536	)		24,659
			Accrued liabilities and taxes on income		79			(13,786	)		(3,933	)
			Other		3,297			(16,028	)		(11,916	)

		Net cash provided from operating activities			46,093			10,051			28,525

Cash flows from investing activities:
	Property, plant and equipment expenditures, net				(13,134	)		(22,344	)		(36,131	)
	Acquisitions, less cash acquired				(3,200	)		—			(15,175	)
	Proceeds from sale of business				—			—			11,685
	Investment in equipment on long-term leases and leveraged leases				5,446			(434	)		23,369
	Cash from (investments in) joint ventures and other				13,029			(431	)		(6,641	)

		Net cash provided from (used in) investing activities			2,141			(23,209	)		(22,893	)

Cash flows from financing activities:
	Proceeds (repayments) of short-term debt				(25,885	)		25,885			—
	Change in borrowings				(479	)		(484	)		2,053
	Cash dividends				(9,157	)		(9,218	)		(9,375	)
	Purchases of treasury stock				(211	)		(10,530	)		(7,558	)
	Proceeds from exercise of stock options and other				116			376			278

		Net cash provided from (used in) financing activities			(35,616	)		6,029			(14,602	)

Effect of exchange rate changes on cash					(50	)		120			(2	)

Increase (decrease) in cash and cash equivalents					12,568			(7,009	)		(8,972	)
Cash and cash equivalents, beginning of year					1,241			8,250			17,222

Cash and cash equivalents, end of year				$	13,809		$	1,241		$	8,250

The accompanying notes to consolidated financial statements
are an integral part of these statements.

AAR CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies

Description of Business

AAR CORP. (the Company) supplies a variety of products and services to the worldwide aviation/aerospace industry. Products and services are sold primarily to commercial, domestic and foreign airlines; business aircraft operators; aviation original equipment manufacturers; aircraft leasing companies; domestic and foreign military agencies and independent aviation support companies.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany accounts and transactions.

Revenue Recognition

Sales and related cost of sales for product sales are recognized upon shipment of products. Service revenues and the related cost of services are generally recognized when customer-owned material is shipped. Lease revenues are recognized as earned.

In connection with certain long-term inventory management programs, the Company purchases factory-new products on behalf of its customers from original equipment manufacturers. These products are purchased from the manufacturer and "passed through" to the Company's customer at the Company's cost. During the third quarter of fiscal 2000, the SEC issued Staff Accounting Bulletin (SAB) No. 101 summarizing the SEC's view in applying generally accepted accounting principles to revenue recognition. As a result of SAB No. 101, the Company began reporting pass through sales in the consolidated income statement beginning with the third quarter of fiscal 2000. Prior to SAB No. 101, the Company believed that excluding pass through sales from sales was appropriate given the limited nature of the services provided in connection with these transactions.

New Accounting Standards

SFAS (Statement of Financial Accounting Standards) No. 133 "Accounting for Derivative Instruments and Hedging Activities" is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for certain hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations to be accounted for using the purchase method. SFAS No. 142 eliminated the amortization of goodwill and also requires that goodwill be tested for impairment. SFAS No. 141 is effective for business combinations after June 30, 2001. SFAS No. 142 is required for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with a fiscal year beginning after March 2001, provided that the first quarter financial statements have not previously been issued. Because the Company expects to adopt these statements effective with the first quarter of fiscal 2002, the Company will not have goodwill amortization after fiscal 2001.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At May 31, 2001 and 2000, cash equivalents of approximately $139 and $122, respectively, represent investments in funds holding U.S. Government agency-issued securities. The carrying amount of cash equivalents approximates fair value at May 31, 2001 and 2000, respectively.

Transfer of Financial Assets

During fiscal 2001, the Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires the Company to recognize the financial and servicing assets it controls and the liabilities it has incurred, and to derecognize financial assets when control has been surrendered.

One of the Company's consolidated subsidiaries, a special purpose entity, has an agreement (securitization) with a major financial institution to sell an undivided interest in its accounts receivable up to $35,000. The agreement involves the sale of accounts receivable by certain of the Company's domestic subsidiaries to the special purpose entity which in turn sells the accounts receivable to the financial institution. Accounts receivable greater than 120 days past due are not eligible to be sold to the financial institution. The Company retains collection and administrative responsibilities for the accounts receivable sold.

At May 31, 2001, accounts receivable sold under the program were $30,455, and the cash proceeds from the transaction were $18,984. This resulted in a $18,984 reduction in accounts receivable on the May 31, 2001 consolidated balance sheet. At May 31, 2000, accounts receivable sold under the program were $42,218 and the cash proceeds were $29,359. This resulted in a $29,359 reduction in accounts receivable on the May 31, 2000 consolidated balance sheet. The retained undivided interest of $11,471 and $12,859 as of May 31, 2001 and 2000, respectively, are included in accounts receivable at fair value, which takes into consideration expected credit losses based on the specific identification of uncollectable accounts. Since substantially all accounts receivable sold carry 30 day payment terms, the retained interest is not discounted.

Foreign Currency

All balance sheet accounts of foreign subsidiaries transacting business in currencies other than the Company's functional currency are translated at year-end exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in stockholders' equity as a component of accumulated other comprehensive income (loss).

Financial Instruments and Concentrations of Market or Credit Risk

Financial instruments that potentially subject the Company to concentrations of market or credit risk consist principally of trade receivables. While the Company's trade receivables are diverse based on the number of entities and geographic regions, the majority are in the aviation/aerospace industry. The Company performs evaluations of customers' financial condition prior to extending credit privileges and performs ongoing credit evaluations of payment experience, current financial condition and

risk analysis. The Company typically requires collateral in the form of security interests in assets, letters of credit, and/or obligation guarantees from financial institutions for transactions other than on normal trade terms.

SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities are reflected in the consolidated financial statements at fair value because of the short-term maturity of these instruments. The carrying value of long-term debt bearing a variable interest rate approximates fair market value.

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by either the specific identification, average cost or first-in, first-out method.

The following is a summary of inventories:

	May 31,
	2001		2000
Raw materials and parts	$	55,851	$	51,180
Work-in-process		20,208		19,121
Purchased aircraft, parts, engines and components held for sale		187,040		205,516

	$	263,099	$	275,817

During the fourth quarter fiscal 2001, the Company recorded a $5,400 provision to reduce the value of certain inventory previously used to support a major program customer to net realizable value.

Equipment under Operating Leases

Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation is computed on a straight-line method over the estimated service life of the equipment, and maintenance costs are expensed as incurred. The balance sheet classification is based on the lease term, with fixed-term leases less than twelve months classified as short-term and all others classified as long-term.

Equipment on short-term lease consists of aircraft engines and parts on or available for lease to satisfy customers' immediate short-term requirements. The leases are renewable with fixed terms, which generally vary from one to twelve months.

Property, Plant and Equipment

Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures and capitalized software. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the applicable lease.

Repair and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts, and related gains and losses are included in results of operations.

Leveraged Leases

The Company acts as an equity participant in leveraged lease transactions. The equipment cost in excess of equity contribution is financed by third parties in the form of secured debt. Under the lease agreements, the third parties have no recourse against the Company for nonpayment of the obligations. The third-party debt is collateralized by the lessees' rental obligations and the leased equipment.

The Company has ownership rights to the leased assets and is entitled to the investment tax credits and benefits of tax deductions for depreciation on the leased assets and for interest on the secured debt financing.

Cost in Excess of Underlying Net Assets of Acquired Companies

The cost in excess of underlying net assets of acquired companies is being amortized over a period of 40 years. The increase in cost in excess of underlying net assets of acquired companies at May 31, 2001 is attributable to the acquisition of Hermetic during fiscal 2001. Amortization expense was $1,249, $1,213 and $802 in fiscal 2001, 2000 and 1999, respectively. Accumulated amortization is $7,437 and $6,188 at May 31, 2001 and 2000, respectively. See New Accounting Standards section of this note for a description of SFAS No. 142, which will result in no amortization of goodwill after fiscal 2001. The Company evaluates the existence of impairment on the basis of whether the cost in excess of underlying net assets of acquired companies is fully recoverable from projected, undiscounted net cash flows.

Income Taxes

Income taxes are determined in accordance with SFAS No. 109.

The benefits of investment tax credits are recognized for financial reporting purposes under the deferral method of accounting for leveraged leases. The investment tax credits are recognized in the year earned for income tax purposes.

Statements of Cash Flows

Supplemental information on cash flows follows:

	For the Year Ended May 31,
	2001		2000		1999
Interest paid	$	21,700	$	22,800	$	18,800
Income taxes paid		3,200		11,300		4,400
Income tax refunds and interest received		6,900		500		900

Use of Estimates

Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosures of contingent liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates.

Reclassification

Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year's presentation.

2. Financing Arrangements

Short-term borrowing activity was as follows:

	For the Year Ended May 31,
	2001			2000			1999
Maximum amount borrowed	$	110,500		$	127,600		$	92,300
Average daily borrowings		71,917			94,881			45,455
Average interest rate during the year		6.7	%		5.9	%		5.4	%

At May 31, 2001, aggregate unsecured bank credit arrangements were $127,700. Of this amount, $125,000 was available under revolving credit and term loan agreements with domestic banks and $2,700 was available under credit agreements with foreign banks. There are no compensating balance requirements in connection with domestic or foreign lines of credit.

The Company may borrow a maximum of $125,000 ($100,000 available through February 9, 2003 and $25,000 available through April 10, 2002) under revolving credit and term loan agreements with domestic banks. Certain revolving credit borrowings may, at the Company's option, be converted to term loans payable in equal quarterly installments over five years. Interest on amounts borrowed under the credit facilities is LIBOR based. Borrowings outstanding under these agreements at May 31, 2001 were $0. There are no compensating balance requirements on any of the committed lines, but the Company is required to pay a commitment fee. There are no restrictions on the withdrawal or use of these funds.

Long-term debt was as follows:

	May 31,
	2001			2000
Notes payable due November 1, 2001 with interest of 9.5% payable semi-annually on May 1 and November 1	$	65,000		$	65,000
Notes payable due October 15, 2003 with interest of 7.25% payable semi-annually on April 15 and October 15		50,000			50,000
Notes payable due December 15, 2007 with interest of 6.875% payable semi-annually on June 15 and December 15		60,000			60,000
Other, primarily industrial revenue bonds (secured by trust indentures on property, plant and equipment) with weighted average interest of approximately 3.25% to 6.5% at May 31, 2001		5,397			5,876

		180,397			180,876
Current maturities		(410	)		(429	)

	$	179,987		$	180,447

The Company is subject to a number of covenants under the revolving credit and term loan agreements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, sales of assets, additional financing, purchase of the Company's shares and other matters. The Company is in compliance with all restrictive financial provisions of the agreements. At May 31, 2001, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares was approximately $27,783. Effective June 1, 2001, unrestricted consolidated retained earnings increased to $37,049 due to inclusion of 50% of the consolidated net income of the Company for fiscal 2001. The aggregate amount of long-term debt maturing during each of the next five fiscal years is $65,410 in 2002, $394 in 2003, $51,406 in 2004, $284 in 2005 and $289 in 2006. The Company's long-term debt was estimated to have a fair value of approximately $180,285 at May 31, 2001 and was based on estimates using discounted future cash flows at an assumed rate for borrowings currently prevailing in the marketplace for similar instruments.

On June 7, 2001, the Company completed a $75,000 private placement of long-term debt, including $55,000 of ten-year notes at 8.39% due May 15, 2011 and $20,000 of seven-year notes at 7.98% due May 15, 2008.

3. Income Taxes

The provision for income taxes included the following components:

		For the Year Ended May 31,
		2001			2000		1999
Current
	Federal	$	1,580		$	4,070	$	6,045
	State		421			723		1,100

			2,001			4,793		7,145
Deferred			(312	)		9,570		10,970

		$	1,689		$	14,363	$	18,115

The deferred tax provisions (benefits) result primarily from differences between financial reporting and tax income arising from depreciation and leveraged leases.

Deferred tax liabilities and assets result primarily from the differences in the timing of the recognition for transactions between financial reporting and income tax purposes and consist of the following components:

		May 31,
		2001		2000
Deferred tax liabilities attributable to:
	Depreciation	$	34,863	$	28,710
	Leveraged leases		21,200		27,120
	Other		630		630

	Total deferred tax liabilities	$	56,693	$	56,460

Deferred tax assets-current attributable to:
	Inventory costs	$	4,810	$	3,160
	Employee benefits		100		2,980
	Alternative minimum tax		3,100		1,090
	Other		5		240

	Total deferred tax assets-current	$	8,015	$	7,470

Deferred tax assets-noncurrent attributable to:
	Postretirement benefits	$	1,630	$	440

	Total deferred tax assets-noncurrent	$	1,630	$	440

	Total deferred tax assets	$	9,645	$	7,910

Net deferred tax liabilities		$	47,048	$	48,550

The Company has determined that the realization of deferred tax assets is more likely than not, and that a valuation allowance is not required based upon the Company's history of prior operating earnings, its expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to leveraged leases, which exceed the amount of the deferred tax assets.

The provision for income taxes differs from the amount computed by applying the U.S. Federal statutory income tax rate of 35% for fiscal 2001, 2000 and 1999, for the following reasons:

		For the Year Ended May 31,
		2001			2000			1999
Provision for income taxes at the Federal statutory rate		$	7,080		$	17,330		$	20,925
	Tax benefits on exempt earnings from export sales		(2,700	)		(3,815	)		(3,690	)
	State income taxes, net of Federal benefit and refunds		670			900			900
	Non-deductible portion of goodwill amortization		300			298			280
	Reduction in income tax liabilities		(3,300	)		—			—
	Other, net		(361	)		(350	)		(300	)

Provision for income taxes as reported		$	1,689		$	14,363		$	18,115

Effective income tax rate			8.4	%		29.0	%		30.3	%

The fiscal 2001 provision for income taxes includes a reduction in income tax expense of $3,300. This adjustment represents the reversal of Federal and state income tax liabilities for years prior to fiscal 1998, now closed to assessments.

4. Common Stock and Stock Option Plans

The Company has established stock option plans for officers and key employees of the Company. Stock option awards typically expire ten years from the date of grant or earlier upon termination of employment, become exercisable in five equal increments on successive grant anniversary dates at the New York Stock Exchange closing stock price on the date of grant and are accompanied by reload features and, for certain individuals, stock rights exercisable in the event of a change in control of the Company.

The Company accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Stock Options Granted In Fiscal Year
	2001		2000		1999
Risk-free interest rate	4.93	%	6.57	%	5.74	%
Expected volatility of common stock	44.8	%	38.7	%	31.6	%
Dividend yield	1.8	%	1.6	%	1.8	%
Expected option term in years	4.0		4.0		4.0

The fair value weighted average per share of stock options granted during fiscal 2001, 2000 and 1999 was $4.43, $7.81 and $5.20, respectively. Had compensation cost for stock options awarded under

the plans been determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been changed to the following pro forma amounts:

		For the Year Ended May 31,
		2001		2000		1999
Net income:	As reported	$	18,531	$	35,163	$	41,671
	Pro forma		16,001		33,097		40,403
Earnings per share — basic:	As reported	$	.69	$	1.30	$	1.51
	Pro forma	$	.59	$	1.22	$	1.47
Earnings per share — diluted:	As reported	$	.69	$	1.28	$	1.49
	Pro forma	$	.59	$	1.21	$	1.44

A summary of changes in stock options (in thousands) granted to officers, key employees and nonemployee directors under stock option plans for the three years ended May 31, 2001 follows:

		Number of Shares		Weighted Average Exercise Price
Outstanding, May 31, 1998 (785 exercisable)		2,484		$	16.54
	Granted	827			19.41
	Exercised	(71	)		11.95
	Surrendered/expired/cancelled	(64	)		18.53

Outstanding, May 31, 1999 (1,148 exercisable)		3,176			17.36
	Granted	519			22.48
	Exercised	(105	)		12.40
	Surrendered/expired/cancelled	(164	)		20.05

Outstanding, May 31, 2000 (1,508 exercisable)		3,426			18.16
	Granted	946			12.32
	Exercised	(140	)		8.83
	Surrendered/expired/cancelled	(164	)		18.36

Outstanding, May 31, 2001 (2,355 exercisable)		4,068		$	16.79

The following table provides additional information regarding options (in thousands) outstanding as of May 31, 2001:

Option Exercise Price Range	Options Outstanding	Weighted Average Remaining Contractual Life of Options (Years)	Number of Options Exercisable	Weighted Average Exercise Price of Options Exercisable
$6.13 - 12.25	843	6.7	503	$	10.25
$12.26 - 18.38	1,763	6.7	877		15.53
$18.39 - 24.50	1,382	6.9	901		23.20
$24.51 - 30.63	80	3.9	74		27.27

	4,068	6.7	2,355	$	17.70

The AAR CORP. Stock Benefit Plan also provides for the grant of restricted stock awards. Restrictions are released at the end of applicable restricted periods. The number of shares and the restricted period, which varies from three to ten years, are determined by the Compensation Committee of the Board of Directors. At the date of grant, the market value of the award (based on the New York Stock Exchange closing price) is recorded in common stock and capital surplus; an offsetting amount is recorded as a component of stockholders' equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. The expense relating to outstanding restricted stock awards was $1,055, $1,354 and $1,667 in fiscal 2001, 2000 and 1999, respectively.

The AAR CORP. Employee Stock Purchase Plan is open to employees of the Company (other than officers, directors or participants in other stock option plans of the Company) and permits employees to purchase common stock in periodic offerings through payroll deductions.

The numbers of options and awards outstanding and available for grant or issuance for each of the Company's stock plans are as follows:

	May 31, 2001
	Outstanding	Available	Total
Stock Benefit Plan (officers, directors and key employees)	4,364	1,069	5,433
Employee Stock Purchase Plan	—	144	144

Pursuant to a shareholder rights plan adopted in 1997, each outstanding share of the Company's common stock carries with it a Right to purchase one and one half additional shares at a price of $83.33 per share (adjusted to reflect the February 23, 1998 stock split and subject to further antidilution adjustments). The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person or group (an "Acquiring Person") or the commencement of a tender or exchange offer for 15% or more of the common stock.

In the event that an Acquiring Person acquires 15% or more of the common stock, or if the Company is the surviving corporation in a merger involving an Acquiring Person or if the Acquiring Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase, for $83.33 per share (or the then-current exercise price), shares of the Company's common stock having a market value of $166.66 (or two times the exercise price), subject to certain exceptions. Similarly, if the Company is acquired in a merger or other business combination or 50% or more of its assets or earning power is sold, each Right entitles the holder to purchase at the then-current exercise price that number of shares of common stock of the surviving corporation having a market value of two times the exercise price. The Rights do not entitle the holder thereof to vote or to receive dividends. The Rights will expire on August 6, 2007, and may be redeemed by the Company for $.01 per Right under certain circumstances.

On September 21, 1990, the Board of Directors authorized the Company to purchase up to 1,500 shares (adjusted for the three-for-two stock split) of the Company's common stock on the open market or through privately negotiated transactions. On October 13, 1999, the Board of Directors authorized the Company to purchase up to 1,500 additional shares of the Company's common stock. As of May 31, 2001, the Company had purchased 1,720 shares of its common stock on the open market under these programs at an average price of $14.09 per share.

5. Earnings Per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share is based on the weighted average number of common shares outstanding during the year plus, when their effect is dilutive, potentially issuable common stock consisting of shares subject to stock options. The following table provides a reconciliation of the computations of basic and diluted earnings per share information for each of the years in the three-year period ended May 31, 2001.

		For the Year Ended May 31,
		2001		2000		1999
Basic EPS:
	Net income	$	18,531	$	35,163	$	41,671
	Average common shares outstanding		26,913		27,103		27,549
	Earnings per share — basic	$	.69	$	1.30	$	1.51

Diluted EPS:
	Net income	$	18,531	$	35,163	$	41,671
	Average common shares outstanding		26,913		27,103		27,549
	Additional shares due to hypothetical exercise of stock options		72		312		457

	Average common shares outstanding-diluted		26,985		27,415		28,006
	Earnings per share — diluted	$	.69	$	1.28	$	1.49

6. Employee Benefit Plans

The Company has defined contribution or defined benefit plans covering substantially all full-time domestic employees and certain employees in The Netherlands.

Defined Benefit Plans

Prior to January 1, 2000, the pension plan for domestic salaried employees had benefit formulas primarily based on years of service and compensation. Effective January 1, 2000, the Company converted its existing defined benefit plan for substantially all domestic salaried employees to a cash balance pension plan. Under the cash balance pension plan, the retirement benefit is expressed as a dollar amount in an account that grows with annual pay-based credits and interest on the account balance. The pension benefit for hourly employees is generally based on a fixed amount per year of service. The Company follows the provisions of SFAS No. 87 "Employers' Accounting for Pensions" and SFAS No. 132 "Employer's Disclosures about Pension and Other Postretirement Benefits" for all pension and postretirement plans.

The Company's funding policy for domestic plans is to contribute annually, at a minimum, an amount which is deductible for Federal income tax purposes and that is sufficient to meet actuarially computed pension benefits. Contributions are intended to provide for benefits attributed to service to date and for benefits expected to be earned in the future. The assets of the pension plans are invested primarily in mutual funds, common stocks, investment grade bonds and U.S. Government obligations.

Certain foreign operations of domestic subsidiaries also have pension plans. In most cases, the plans are defined benefit in nature. Assets of the plans are comprised of insurance contracts. Benefit formulas are based generally on years of service and compensation. It is the policy of these subsidiaries to fund at least the minimum amounts required by local law and regulation.

The Company provides its outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are paid quarterly in cash in an amount equal to 25.0% of the annual retainer fee payable by the Company to active outside directors. Payment of benefits commences upon retirement and continues for a period equal to the total number of years of the retired director's service as a director to a maximum of ten years, or death, whichever occurs first. In the fourth quarter of fiscal 2001, the Company terminated this plan for any new members of the Board of Directors elected after May 31, 2001.

The Company also provides supplemental retirement and profit sharing benefits for current and former executives and key employees to supplement benefits provided by the Company's other benefit plans. The plans are not fully funded and may require funding in the event of a change in control of the Company as determined by the Company's Board of Directors.

The following table sets forth the plans' funded status, including the change in plan assets, and the amount recognized in the Company's Consolidated Balance Sheets.

		May 31,
		2001			2000
Change in benefit obligation:
	Benefit obligation at beginning of year	$	59,268		$	52,516
	Service cost		2,867			2,785
	Interest cost		4,411			4,035
	Plan participants' contributions		218			220
	Amendments		887			3,564
	Net actuarial (gain) loss		1,011			(1,874	)
	Benefits paid		(3,827	)		(1,978	)

Benefit obligation at end of year		$	64,835		$	59,268

Change in plan assets:
	Fair value of plan assets at beginning of year	$	46,349		$	44,096
	Actual return on plan assets		391			2,369
	Employer contributions		5,918			1,642
	Plan participants' contributions		218			220
	Benefits paid		(3,827	)		(1,978	)

Fair value of plan assets at end of year		$	49,049		$	46,349

	Funded status	$	(15,786	)	$	(12,919	)
	Unrecognized actuarial losses		10,745			5,916
	Unrecognized prior service cost		5,292			4,890
	Unrecognized transitional obligation		325			418

Prepaid pension costs		$	576		$	(1,695	)

The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 7.75% at May 31, 2001 and 8.25% at May 31, 2000, and an assumed average compensation increase of 4.5%. The expected long-term rate of return on assets is 10.0% for fiscal 2001 and 2000. The unrecognized actuarial losses, prior service cost and transition obligation are amortized on a straight-line basis over the estimated average future service period.

The projected benefit obligation for nondomestic plans is determined using an assumed weighted average discount rate of 6.0% at May 31, 2001 and 6.5% at May 31, 2000, and an assumed average compensation increase of 4.0%. The expected long-term rate of return on assets is 6.5% for fiscal 2001 and 2000.

Pension expense charged to results of operations includes the following components:

	For the Year Ended May 31,
	2001			2000			1999
Service cost	$	2,867		$	2,785		$	2,426
Interest cost		4,411			4,035			3,476
Expected return on plan assets		(4,275	)		(3,881	)		(3,560	)
Amortization of prior service cost		485			266			235
Recognized net actuarial loss		24			460			398
Transitional obligation		89			91			92

	$	3,601		$	3,756		$	3,067

Defined Contribution Plan

The defined contribution plan is a profit sharing plan which is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 15.0% of their pretax compensation, subject to applicable regulatory limits. The Company may make matching contributions up to 6.0% of compensation. Participants vest on a pro-rata basis in Company contributions during the first three years of employment. Expense charged to results of operations was $1,550, $1,634 and $1,491 in fiscal 2001, 2000 and 1999, respectively.

Postretirement Benefits Other Than Pensions

The Company provides health and life insurance benefits for certain eligible employees and retirees under a variety of plans. Generally these benefits are contributory with retiree contributions adjusted annually. The postretirement plans are unfunded, and the Company has the right to modify or terminate any of these plans in the future, in certain cases, subject to union bargaining agreements. In fiscal 1995, the Company completed termination of postretirement healthcare and life insurance benefits attributable to future services of collective bargaining and other domestic employees.

Postretirement benefit cost for the years ended May 31, 2001, 2000 and 1999 included the following components:

	2001		2000		1999
Service cost	$	—	$	—	$	—
Interest cost		105		104		96
Amortization of prior service cost		16		16		16

	$	121	$	120	$	112

The funded status of the plans at May 31, 2001 and 2000 was as follows:

		2001			2000
Change in benefit obligations:
	Benefit obligations at beginning of year	$	1,357		$	1,463
	Interest cost		105			104
	Benefits paid		(170	)		(153	)
	Unrecognized actuarial (gain) loss		45			(57	)
	Plan participants' contributions		—			—

Benefit obligation at end of year		$	1,337		$	1,357

Change in plan assets:
	Fair value of plan assets at beginning of year	$	—		$	—
	Company contributions		170			153
	Benefits paid		(170	)		(153	)
	Plan participants' contributions		—			—

Fair value of plan assets at end of year		$	—		$	—

	Funded status	$	(1,337	)	$	(1,357	)
	Unrecognized actuarial gains		(7	)		(3	)
	Unrecognized prior service cost		144			160

Accrued postretirement costs		$	(1,200	)	$	(1,200	)

The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.75% at May 31, 2001 and 8.25% at May 31, 2000. The assumed rate of future increases in healthcare costs was 6.8% and 7.5% in fiscal 2001 and 2000, respectively, declining to 5.25% by the year 2004 and remaining at that rate thereafter. A one percent increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $49 as of May 31, 2001 and would not result in a significant change to the annual postretirement benefit expense.

7. Commitments and Contingencies

The Company leases certain facilities and equipment under agreements which are accounted for as operating leases that expire at various dates through 2011. The Company also leases certain aviation equipment which are accounted for as operating leases. The terms of these arrangements are one to five years with options to renew annually at the election of the Company. If the Company elects to not renew a lease, the Company is required to purchase the aviation equipment at its stipulated lease value. The Company may also sublease the aviation equipment to a customer on a short- or

long-term basis. Future minimum payments and sublease income under leases with initial or remaining terms of one year or more at May 31, 2001 are as follows:

	Future Minimum Payments
Year	Facilities and Equipment		Aviation Equipment		Sublease Income
2002	$	5,020	$	2,319	$	2,220
2003		3,919		2,319		2,220
2004		3,307		2,319		2,220
2005		2,719		1,159		2,220
2006 and thereafter		1,255		18,146		2,035

Rental expense during the past three fiscal years was as follows:

		2001			2000			1999
Facilities and Equipment		$	8,484		$	9,663		$	8,339
Aviation Equipment			10,199			8,344			4,242

The Company routinely issues letters of credit, performance bonds or credit guarantees in the ordinary course of its business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 2001 was approximately $27,600.

The Company is involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition or results of operations.

8. Investment in Leveraged Leases

From time to time, the Company acquires aircraft under leases that qualify for leveraged lease accounting treatment. Typically, these are long-term leases of late-model aircraft operated by major carriers where the Company is an equity participant of at least 20% and there is a third-party provider of nonrecourse debt of the remaining equipment cost.

During the lease term the Company is required, in accordance with SFAS No. 13, to adjust the elements of the investment in leveraged leases to reflect changes in important economic assumptions,

such as the renegotiation of the interest rate on the nonrecourse debt or changes in income tax rates. The Company's net investment in leveraged leases is comprised of the following elements:

	May 31,
	2001			2000
Rentals receivable (net of principal and interest on the nonrecourse debt)	$	13,415		$	15,488
Estimated residual value of leased assets		26,615			32,952
Unearned and deferred income		(11,315	)		(13,953	)

		28,715			34,487
Deferred taxes		(21,200	)		(27,120	)

Net investment in leveraged leases	$	7,515		$	7,367

Pretax income from leveraged leases was $2,640, $695 and $702 in fiscal 2001, 2000 and 1999, respectively.

9. Other Noncurrent Assets

At May 31, 2001 and 2000, other noncurrent assets consisted of the following:

	May 31,
	2001		2000
Investment in joint ventures	$	3,784	$	22,811
Notes receivable		6,353		7,822
Cash surrender value of life insurance		3,538		2,719
Debt issuance costs		609		818
Other		18,717		9,210

	$	33,001	$	43,380

10. Acquisitions

On September 29, 2000, the Company acquired substantially all the assets and assumed certain liabilities of Hermetic, an aircraft component support company providing repair and distribution services to the North American aftermarket primarily on behalf of European aircraft component manufacturers. The purchase price of $16,442 was paid with a cash payment of $3,200 and a note of $13,242 that was due and paid on June 1, 2001. The transaction was recorded under the purchase method of accounting. The Company has included in its consolidated financial statements the results of Hermetic since the date of acquisition.

On October 19, 1998, the Company acquired substantially all of the assets and assumed certain liabilities of Tempco Hydraulics Inc. (Tempco), a regional aircraft landing gear repair and overhaul business. The purchase price was approximately $7,500. The transaction was recorded under the purchase method of accounting. The Company has included in its consolidated financial statements the results of operations of Tempco since the date of acquisition.

Had the acquisitions occurred as of the beginning of the respective years, the Company's results of operations would not have been materially different.

11. Business Segment Information

Segment Reporting

The Company is a leading provider of value-added products and services to the global aviation/aerospace industry. The Company's three reportable business segments are Aircraft and Engines, Airframe and Accessories and Manufacturing.

Revenues in the Aircraft and Engines segment are derived from the sale and lease of used commercial aircraft and from the sale and lease of a wide variety of new, overhauled and repaired commercial aircraft engines and engine products, including spare engines and engine parts and accessories. Revenues in the Aircraft and Engines segment are also derived from the overhaul and repair of a wide range of commercial aircraft engine parts and components, as well as the overhaul and supply of parts to industrial gas and steam turbine operators.

Revenues in the Airframe and Accessories segment are derived from the sale and lease of new, overhauled and repaired airframe parts and accessories and from the overhaul and repair of a wide variety of airframe and accessory parts and components.

Revenues in the Manufacturing segment are derived from the manufacture and sale of in-plane cargo loading and handling systems, advanced composite materials, and a wide array of containers, pallets and shelters.

The accounting policies of the reportable segments are the same as those described in Note 1. The chief decision making officer of the Company evaluates performance based on the reportable segments. The expenses and assets related to corporate activities are not allocated to the reportable segments.

Selected financial information for each reportable segment is as follows:

		For the Year Ended May 31,
		2001		2000		1999
Net Sales, including pass through sales:
	Aircraft and Engines	$	357,788	$	507,093	$	548,671
	Airframe and Accessories		419,313		397,307		376,356
	Manufacturing		97,154		119,933		125,581

		$	874,255	$	1,024,333	$	1,050,608

		For the Year Ended May 31,
		2001		2000		1999
Gross Profit:
	Aircraft and Engines	$	51,297	$	84,586	$	91,335
	Airframe and Accessories		72,497		69,607		63,833
	Manufacturing		12,673		18,660		18,091

		$	136,467	$	172,853	$	173,259

		May 31,
		2001		2000		1999
Total Assets:
	Aircraft and Engines	$	249,937	$	309,215	$	308,064
	Airframe and Accessories		301,012		291,838		264,891
	Manufacturing		84,041		84,811		83,812
	Corporate		66,864		52,113		66,251

		$	701,854	$	737,977	$	723,018

		For the Year Ended May 31,
		2001		2000		1999
Capital Expenditures:
	Aircraft and Engines	$	1,261	$	2,976	$	7,623
	Airframe and Accessories		6,488		10,844		13,369
	Manufacturing		2,554		2,761		6,268
	Corporate		2,831		5,763		8,871

		$	13,134	$	22,344	$	36,131

		For the Year Ended May 31,
		2001		2000		1999
Depreciation and Amortization:
	Aircraft and Engines	$	3,268	$	3,526	$	2,916
	Airframe and Accessories		6,557		6,106		5,146
	Manufacturing		4,082		3,747		3,455
	Corporate		4,670		4,994		5,546

		$	18,577	$	18,373	$	17,063

Sales to the U.S. Government, its agencies and its contractors were approximately $139,072 (15.9% of total sales), $132,048 (12.9% of total sales) and $98,954 (9.4% of total sales) in fiscal 2001, 2000 and 1999, respectively. Sales to the Company's largest customer, excluding pass through sales, were $57,400 and $114,000 during fiscal 2001 and 2000, respectively. Including pass through sales, sales to the largest customer were $78,000 and $180,800 during fiscal 2001 and 2000, respectively.

Geographic Data

		May 31,
		2001		2000
Long-Lived Assets:
	United States	$	208,973	$	220,784
	Europe		6,953		5,812
	Other		72		114

		$	215,998	$	226,710

Export sales from the Company's U.S. operations to unaffiliated customers, the majority of which are located in Europe, the Middle East, Canada, Mexico, South America and Asia (including sales through foreign sales offices of domestic subsidiaries), were approximately $213,864 (24.5% of total sales), $184,718 (18.0% of total sales) and $209,712 (20.0% of total sales) in fiscal 2001, 2000 and 1999, respectively.

12. Selected Quarterly Data (Unaudited)

The unaudited selected quarterly data for fiscal years ended May 31, 2001 and 2000 follows. The sales amounts include pass through sales.

Fiscal 2001
Quarter	Sales		Gross Profit		Net Income		Diluted Earnings Per Share
First	$	241,770	$	34,415	$	3,159	$	.12
Second		211,335		35,337		4,278		.16
Third		200,071		35,746		5,388		.20
Fourth		221,079		30,969		5,706		.21

	$	874,255	$	136,467	$	18,531	$	.69

Fiscal 2000
Quarter	Sales		Gross Profit		Net Income		Diluted Earnings Per Share
First	$	266,683	$	44,190	$	10,831	$	.39
Second		260,240		45,728		10,906		.40
Third		272,331		45,074		10,955		.40
Fourth		225,079		37,861		2,471		.09

	$	1,024,333	$	172,853	$	35,163	$	1.28

13. Allowance for Doubtful Accounts

		May 31,
		2001			2000			1999
Balance, beginning of year		$	10,080		$	4,830		$	3,157
	Provision charged to operations		2,141			5,470			2,902
	Deductions for accounts written off, net of recoveries		(1,205	)		(220	)		(1,229	)

Balance, end of year		$	11,016		$	10,080		$	4,830

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item regarding the Directors of the Company is incorporated by reference to the information contained under the caption "Board of Directors" in the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders.

The information required by this item regarding the Executive Officers of the Company appears under the caption "Executive Officers of the Registrant" in Part I, Item 4 above.

The information required by this item regarding the compliance with Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by reference to the information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the information contained under the captions "Executive Compensation and Other Information" (but excluding the following sections thereof: "Compensation Committee's Report on Executive Compensation" and "Stockholder Return Performance Graph"); "Employment and Other Agreements" and "Directors' Compensation" in the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the information contained under the caption "Security Ownership of Management and Others" in the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Financial Statements and Financial Statement Disclosures

		Page
Independent Auditors' Report, KPMG LLP		14
Financial Statements — AAR CORP. and Subsidiaries:
	Consolidated statements of income for the three years ended May 31, 2001	15
	Consolidated balance sheets as of May 31, 2001 and 2000	16-17
	Consolidated statements of stockholders' equity for the three years ended May 31, 2001	18
	Consolidated statements of cash flows for the three years ended May 31, 2001	19
	Notes to consolidated financial statements	20-40
	Selected quarterly data (unaudited) for the years ended May 31, 2001 and 2000 (Note 12 to consolidated financial statements)	40
Financial data schedule for the twelve-month period ended May 31, 2001 See Exhibit Index

Exhibits

The Exhibits filed as a part of this report are set forth in the Exhibit Index contained elsewhere herein. Each of the material contracts identified as Exhibits 10.1 through 10.13 is a management contract or compensatory plan or arrangement.

Reports on Form 8-K

The Company filed no reports on Form 8-K during the three-month period ended May 31, 2001.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

		AAR CORP. (Registrant)
Date: August 24, 2001		By:		/s/ DAVID P. STORCH David P. Storch President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ IRA A. EICHNER Ira A. Eichner	Chairman of the Board Director	August 24, 2001
/s/ DAVID P. STORCH David P. Storch	President and Chief Executive Officer; Director (Principal Executive Officer)	August 24, 2001
/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko	Vice President and Chief Financial Officer (Principal Financial Officer)	August 24, 2001
/s/ MICHAEL J. SHARP Michael J. Sharp	Vice President — Controller (Principal Accounting Officer)	August 24, 2001
/s/ A. ROBERT ABBOUD A. Robert Abboud	Director	August 24, 2001
/s/ HOWARD B. BERNICK Howard B. Bernick	Director	August 24, 2001
/s/ JAMES G. BROCKSMITH, JR James G. Brocksmith, Jr	Director	August 24, 2001
/s/ EDGAR D. JANNOTTA Edgar D. Jannotta	Director	August 24, 2001
/s/ JOEL D. SPUNGIN Joel D. Spungin	Director	August 24, 2001
/s/ LEE B. STERN Lee B. Stern	Director	August 24, 2001
/s/ RICHARD D. TABERY Richard D. Tabery	Director	August 24, 2001

EXHIBIT INDEX

	Index		Exhibits
3.	Articles of Incorporation and By-Laws	3.1	Restated Certificate of Incorporation ¹ ; Amendments thereto dated November 3, 1987 ² , October 19, 1988 ² , October 16, 1989 ²⁴ and November 3, 1999. ²⁵
		3.2	By-Laws, as amended. ² Amendment thereto dated April 12, 1994 ¹² , January 13, 1997 ²² , July 16, 1992 ²⁴ and April 11, 2000. ²⁶
4.	Instruments defining the rights of security holders	4.1	Restated Certificate of Incorporation and Amendments (see Exhibit 3.1).
		4.2	By-Laws, as amended (See Exhibit 3.2).
		4.3	Credit Agreement dated September 9, 1996, between the Registrant and the Bank of America, Illinois. ¹⁵
		4.4	Rights Agreement between the Registrant and the First National Bank of Chicago dated July 8, 1997. ¹⁷
		4.5	Indenture dated October 15, 1989 between the Registrant and U.S. Bank Trust National Association (formerly known as First Trust, National Association, as successor in interest to Continental Bank, National Association) as Trustee, relating to debt securities; ⁵ First Supplemental Indenture thereto dated August 26, 1991; ⁶ Second Supplemental Indenture thereto dated December 10, 1997. ¹⁸
		4.6	Officers' certificates relating to debt securities dated October 24, 1989 ¹⁰ and October 12, 1993. ¹⁰
		4.7	Second Amended and Restated Credit Agreement dated February 10, 1998, between the Registrant and The First National Bank of Chicago. ¹⁹
		4.8	Credit Agreement dated November 1, 1997 between the Registrant and The Northern Trust Company. ²⁰ Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant is not filing certain documents. The Registrant agrees to furnish a copy of each such document upon the request of the Commission.
		4.9	Revolving Loan Agreement dated April 11, 2001 between Registrant and LaSalle Bank National Association (filed herewith).
		4.10	Note Purchase Agreement dated May 1, 2001 between Registrant and various purchasers, relating to the issuance of debt securities to institutional investors (filed herewith).
10.	Material Contracts	10.1	AAR CORP. Stock Benefit Plan, ¹¹ Amendments thereto dated July 29, 1996, January 2, 1997, ¹⁵ May 6, 1997, ²¹ and March 20, 1998, ¹⁹ December 16, 1998, ²³ October 14, 1999 ²⁵ and October 11, 2000 (filed herewith).

		10.2	Death Benefit Agreement dated August 24, 1984 between the Registrant and Ira A. Eichner, ⁸ Amendments thereto dated August 12, 1988 ⁴ , May 25, 1990 ²⁴ and October 9, 1996, ²⁴ and his agreement to terminate such Death Benefit Agreement dated May 30, 1999. ²⁴
		10.3	Further Restated and Amended Employment Agreement dated August 1, 1985 between the Registrant and Ira A. Eichner, ³ Amendments thereto dated August 12, 1988, ⁴ May 25, 1990, ¹⁶ July 13, 1994, ¹⁶ October 9, 1996 ²¹ and October 31, 1997. ²¹
		10.4	Trust Agreement dated August 12, 1988 between the Registrant and Ira A. Eichner ⁴ and amendments thereto dated May 25, 1990 ¹⁶ , February 4, 1994 ¹² , October 9, 1996 ²⁴ and May 31, 1999. ²⁴
		10.5	AAR CORP Directors' Retirement Plan, dated April 14, 1992, ⁹ amended May 26, 2000 ²⁶ and April 10, 2001 (filed herewith).
		10.6	AAR CORP. Amended and Restated Supplemental Key Employee Retirement Plan, dated May 4, 2000 ²⁶ and amended April 10, 2001 (filed herewith).
		10.7	Amended and Restated Employment Agreement dated July 14, 1998 between the Registrant and David P. Storch. ²⁶
		10.8	Amended and Restated Severance and Change in Control agreement dated April 11, 2000 between the Registrant and Philip C. Slapke. ²⁶
		10.9	Amended and Restated Severance and Change in Control agreement dated April 11, 2000 between the Registrant and Howard A. Pulsifer. ²⁶
		10.10	Amended and Restated Severance and Change in Control agreement dated August 1, 2000 between the Registrant and Michael J. Sharp (filed herewith).
		10.11	Employment and Severance and Change in Control agreement dated June 1, 2001 between the Registrant and Joseph M. Gullion (filed herewith).
		10.12	Amended and Restated Severance and Change in Control agreement dated April 11, 2000 between the Registrant and Timothy J. Romenesko. ²⁶
		10.13	Amended and Restated AAR CORP. Nonemployee Directors' Deferred Compensation Plan, dated April 8, 1997, amended May 26, 2000. ²⁶
21.	Subsidiaries of the Registrant	21.1	Subsidiaries of AAR CORP. (filed herewith).
23.	Consents of experts and counsel	23.1	Consent of KPMG LLP (filed herewith).

Notes:

¹: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987.
²: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989.
³: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1986.
⁴: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988.
⁵: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1989.
⁶: Incorporated by reference to Exhibits to Registrant's Registration Statement on Form S-3 filed August 27, 1991.
⁷: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991.
⁸: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1985.
⁹: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.
¹⁰: Incorporated by reference to Exhibits to the Registrant's Current Reports on Form 8-K dated October 24, 1989 and October 12, 1993, respectively.
¹¹: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993.
¹²: Incorporated by reference to Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994.
¹³: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994.
¹⁴: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1995.
¹⁵: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.
¹⁶: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
¹⁷: Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 4, 1997.
¹⁸: Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed December 10, 1997.
¹⁹: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.
²⁰: Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed May 15, 1998.

²¹: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.
²²: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1998.
²³: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998.
²⁴: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1999.
²⁵: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
²⁶: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2000.

QuickLinks

TABLE OF CONTENTS
PART I

ITEM 1. BUSINESS (Dollars in thousands)

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (Dollars in thousands, except per share amounts)

ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands)

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Consolidated Financial Statements

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Financial Statements and Financial Statement Disclosures
Signatures
EXHIBIT INDEX

REVOLVING LOAN AGREEMENT

This REVOLVING LOAN AGREEMENT dated as of April 11, 2001 (the "Agreement"), is entered into by and between AAR CORP., a Delaware corporation (the "Borrower"), whose address is 1100 North Wood Dale Road, Wood Dale, Illinois 60191 and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), whose address is 135 South LaSalle Street, Chicago, Illinois 60603.

In consideration of the mutual agreements hereinafter set forth, the Borrower and the Bank hereby agree as follows:

1. DEFINITIONS.

1.1 DEFINED TERMS. For the purposes of this Agreement, the following capitalized words and phrases shall have the meanings set forth below.

"ACCOUNT" shall have the meaning set forth in Section 12.1.

"ACCOUNTS RECEIVABLE" shall have the meaning set forth in
Section 8.4.

"ACQUISITION" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership.

"AFFILIATE" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.

"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a legal holiday on which banks are authorized or required to be closed for the conduct of commercial banking business in Chicago, Illinois.

"BORROWER'S UNSECURED LENDERS" shall mean any lender extending credit to Borrower on an unsecured basis under similar revolving loan facilities, including, but not

limited to, Bank One, Bank of America, N.A. The Northern Trust Company and any other lenders who may replace these lenders or be added to these facilities from time to time.

"CAPITAL LEASE" shall mean, as to any person or entity, a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such person or entity as lessee that is, or should be, in accordance with Financial Accounting Standards Board Statement No. 13, as amended from time to time, or, if such Statement is not then in effect, such statement of GAAP as may be applicable, recorded as a "capital lease" on the balance sheet of the Borrower prepared in accordance with GAAP.

"CAPITALIZED LEASE OBLIGATIONS" of a person means the amount of the obligations of such person under Capitalized Leases which would be shown as a liability on a balance sheet of such person prepared in accordance with GAAP.

"CHANGE IN CONTROL" means (i) the acquisition by any person, or two or more persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of 20% or more of the outstanding shares of voting stock of the Borrower or (ii) a majority of the directors on the Borrower's Board of Directors shall cease to be directors of the Borrower during an twelve month period.

"CODE" shall mean the United States Bankruptcy Code, as now existing or hereafter amended.

"CONSOLIDATED ASSETS" means the total consolidated assets of the Borrower and its Subsidiaries determined in accordance with GAAP.

"CONSOLIDATED CURRENT ASSETS" means the total consolidated current assets of the Borrower and its Subsidiaries determined in accordance with GAAP.

"CONSOLIDATED CURRENT LIABILITIES" means the total consolidated current liabilities of the Borrower and its Subsidiaries determined in accordance with GAAP.

"CONSOLIDATED EARNINGS AVAILABLE FOR FIXED CHARGES" means, for any period, the sum of (i) Consolidated Net Income (excluding gains and losses from the sale of assets other than in the ordinary course of business and income or losses derived from discontinued operations), PLUS to the extent deducted in determining Consolidated Net Income (ii) all provisions for any federal, state, or other income taxes made by the Borrower and its Subsidiaries during such period, PLUS (iii) Consolidated Fixed Charges during such period, and PLUS (iv) deferred financing costs for such period.

"CONSOLIDATED FIXED CHARGES" means, without duplication, for any period, the sum of (i) current maturities for such period, (ii) interest expense on indebtedness (excluding capitalized leases) for such period, PLUS (iii) total rental expense under all

leases other than capitalized leases, and PLUS (iv) imputed interest expense under capitalized leases for the Borrower and its Subsidiaries for such period.

"CONSOLIDATED FUNDED DEBT" means all Indebtedness having a final maturity of more than one year plus unsecured Indebtedness to the Bank.. Consolidated Funded Debt shall not include payments due within one year from the date as of which a calculation of Consolidated Funded Debt is made.

"CONSOLIDATED LIABILITIES" means the total consolidated liabilities of the Borrower and its Subsidiaries determined in accordance with GAAP.

"CONSOLIDATED NET INCOME" shall mean, for any period, the net income (or loss) of the Borrower and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in accordance with GAAP; PROVIDED, that there shall be excluded (i) the income (or loss) of any Affiliate of the Borrower or other Person(other than a Subsidiary of the Borrower) in which any Person (other than the Borrower or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower, or any of its Subsidiaries by such Affiliate or other Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries or that Person's assets are acquired by the Borrower or any of its Subsidiaries, and (iii) the income of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary.

"CONSOLIDATED NET WORTH" means, as of any date of determination, the consolidated stockholders' equity of the Borrower and its Subsidiaries determined in accordance with GAAP.

"CONSOLIDATED SECURED LIABILITIES" means the aggregate amount of Consolidated Liabilities which are secured by any Lien (other than Liens permitted pursuant to any of clauses (a), (d), (e), (f), (h) and
(k) of Section 8.6) on any property of the Borrower or any of its Subsidiaries.

"CONSOLIDATED TANGIBLE NET WORTH" means, as of any date of determination, the sum of (a) Consolidated Net Worth, less consolidated Intangible Assets of the Borrower and its Subsidiaries, plus (b) Subordinated Debt. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such Consolidated Net Worth ) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) in the book value of any asset owned by the Borrower or a Consolidated Subsidiary subsequent to May 31, 2000, and (ii) all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, organization or development

expenses, costs in excess of underlying assets of acquired companies, covenants to not compete, and other intangible items, for purposes of this clause (ii), in each case, to the extent such items are disclosed as separate line items on the Borrower's financial statements required under Section 9.7.

"CONSOLIDATED TOTAL CAPITALIZATION" means the sum of (i) the remainder of (a) Consolidated Tangible Net Worth, minus (b) Subordinated Debt, plus (ii) Consolidated Funded Debt.

"CONTINGENT OBLIGATION" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, a comfort letter, operating agreement, take-or-pay contract or application for a letter of credit or similar instrument; provided, however, that Contingent Obligations shall not include (i) Contingent Obligations resulting from endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of the Borrower's and each Subsidiary's business, (ii) Contingent Obligations by the Borrower of any Subsidiary's Indebtedness (including, for the avoidance of doubt, obligations arising out of overdraft and similar cash management facilities) permitted to exist pursuant to this Agreement and any Subsidiary's obligations for Rentals permitted by Section 8.7, (iii) any obligations in connection with the Receivables Securitization.

"CONTROLLED GROUP" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Internal Revenue Code.

"DEFAULT RATE" shall mean a floating per annum rate of interest equal to the Prime Rate plus two percent (2.00%).

"DOMESTIC SUBSIDIARY" means any Subsidiary of the Borrower organized under the laws of any State of the United States of America or the District of Columbia, all or substantially all of whose assets are located, and whose business is conducted, in one or more of any such States or District.

"ENVIRONMENTAL LAWS" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to the Borrower's business or facilities owned or operated by the Borrower, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes in the environment (including, without limitation, ambient air, surface water, land surface or subsurface strata) or otherwise relating to the

generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials.

"ERISA" means the United States Employee Retirement Income Security Act of 1974, as amended.

"EVENT OF DEFAULT" shall mean any of the events or conditions set forth in Section 11 hereof.

"FACILITY FEE" means a facility fee on the Commitment in an amount equal to (a) 0.175% per annum when the Borrower has an Investment Grade Rating or (b) 0.25% per annum when the Borrower does not have an Investment Grade Rating.

"FIXED CHARGE COVERAGE RATIO" means, for any period, the ratio of (a) Consolidated Earnings Available for Fixed Charges to (b) Consolidated Fixed Charges for such period.

"FOREIGN ACCOUNTS" means Accounts with respect to which the obligor is a Person which is (i) organized under the laws of a jurisdiction other than the United States of America, any State of the United States of America or the District of Columbia, in the case of a Person which is not a natural person, or (ii) a citizen of a country other than the United States of America, in the case of a natural person.

"FOREIGN SUBSIDIARY" means any Subsidiary of the Borrower, which is not a Domestic Subsidiary.

"GAAP" shall mean generally accepted accounting principles, using the accrual basis of accounting and consistently applied.

"HAZARDOUS MATERIALS" shall mean any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials or wastes that are or become regulated under any Environmental Law (including without limitation, any that are or become classified as hazardous or toxic under any Environmental Law).

"INDEBTEDNESS" shall mean as determined in accordance with GAAP (i) obligations for borrowed money other than those incurred on a non-recourse basis, (ii) obligations representing the deferred purchase price of property or services (other than accounts payable and other accrued liabilities arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens (other than Liens permitted pursuant to any of clauses (a),

(d), (e), (f), (h) and (k) of Section 8.6) or payable out of the proceeds or production from property now or hereafter owned or acquired
(iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) Capitalized Lease Obligations and (vi) net liabilities under currency or interest rate swap, exchange or cap agreements; provided, however, that Indebtedness shall not include obligations in connection with operating leases and leveraged leases.

"INTEREST PERIOD" shall mean, with regard to any LIBOR Loan, successive two week, one, two, three or six month periods as selected from time to time by the Borrower by notice given to the Bank not less than three Business Days prior to the first day of each respective Interest Period; provided, however, that (i) each such Interest Period occurring after the initial Interest Period of any LIBOR Loan shall commence on the day on which the preceding Interest Period for such LIBOR Loan expires, (ii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that if such extension would cause the last day of such Interest period to occur in the next following calendar month, then the last day of such Interest Period shall occur on the immediately preceding Business Day; (iii) whenever the first day of any Interest Period occurs on a day of a month for which there is no numerically corresponding day in the calendar month in which such Interest Period terminates, such Interest Period shall end on the last Business Day of such calendar month; and (iv)the final Interest Period must be such that this expiration occurs on or before the Maturity Date.

"INTEREST RATE" shall mean the Borrower's option of,

(i) LIBOR for the relevant Interest Period (rounded upward if necessary, to the nearest 1/16 of 1.00%) plus (1) .40% at all times when the Borrower has an Investment Grade Rating; and (2) 1.00% at all times when the Borrower does not have an Investment Grade Rating. The LIBOR Rate shall be fixed for each Interest Period; or

(ii) the Prime Rate plus zero % at all times when the Borrower has in Investment Grade Rating and 0.50% at all times when the Borrower does not have an Investment Grade Rating.

Provided, however, that in no event shall the Interest Rate be less than the highest rate charged at any time by the Borrower's Unsecured Lenders.

"INTERNAL REVENUE CODE" means the United States Internal Revenue Code of 1986, as amended from time to time.

"INVESTMENT" of a person means any loan, advance (other than commission, travel and similar advances to its officers, employees, agents and representatives made in the ordinary course of business), extension of credit (other than accounts receivable arising in

the ordinary course of business), deposit account or contribution of capital by such person to any other person or any investment in, or purchase or other acquisition of, the stock, partnership interests, notes, debentures or other securities of any other person made by such person.

"INVESTMENT GRADE RATING" means, the context of the Borrower having an Investment Grade Rating, that the Borrower's senior unsecured long term debt is rated both (a) BBB- or better by Standard & Poor's Ratings Services, a division of the McGraw Hill Companies, Inc. and (b) Baa3 or better by Moody's Investor Service, Inc.

"LIABILITIES" shall mean at all times all liabilities of the Borrower that would be shown as such on a balance sheet of the Borrower prepared in accordance with GAAP.

"LIBOR" shall mean a rate of interest equal to the per annum rate of interest at which United States dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan and for a period equal to the relevant Interest Period are offered generally to the Bank (rounded upward if necessary, to the nearest 1/16 of 1.00%) in the London Interbank Eurodollar market at 11:00 a.m. (London time) two Business Days prior to the commencement of each Interest Period, or as LIBOR is otherwise determined by the Bank in its sole and absolute discretion, such rate to remain fixed for such Interest Period. The Bank's determination of LIBOR shall be conclusive, absent manifest error.

"LIBOR LOAN" or "LIBOR LOANS" shall mean that portion, and collectively those portions, of the aggregate outstanding principal balance of the Revolving Loans that will bear interest at the LIBOR Rate, of which at any time and from time to time, the Borrower may identify no more than five advances of the Revolving Loans which will bear interest at the LIBOR Rate, of which each particular LIBOR Loan must be in the amount of $1,000,000 or a higher integral multiple of $500,000.

"LIEN" shall mean any mortgage, pledge, hypothecation, judgment lien or similar legal process, title retention lien, or other lien or security interest, including, without limitation, the interest of a vendor under any conditional sale or other title retention agreement and the interest of a lessor under a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such person or entity as lessee that is, or should be, a Capital Lease on the balance sheet of the Borrower prepared in accordance with GAAP.

"LOANS" shall mean, collectively, all Revolving Loans made by the Bank to the Borrower under and pursuant to this Agreement.

"LOAN DOCUMENTS" shall have the meaning set forth in Section 3.1.

"MATERIAL ADVERSE EFFECT" means a material adverse effect on
(i) the business, properties, financial condition, or results of operations on the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its Obligations

under this Agreement, or (iii) the validity or enforceability of this Agreement or the rights or remedies of the Bank thereunder.

"MATURITY DATE" shall mean April 10, 2002.

"MULTIEMPLOYER PLAN" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions.

"NOTE" shall mean the Revolving Note.

"OBLIGATIONS" shall mean the Loans, as evidenced by the Note, all interest accrued thereon, any accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Bank arising under the Loan Documents.

"PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto.

"PLAN" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Internal Revenue Code, as to which the Borrower or any member of the Controlled Group may have any liability.

"PRIME RATE" shall mean the floating per annum rate of interest which at any time, and from time to time, shall be most recently announced by the Bank as its Prime Rate, which is not intended to be the Bank's lowest or most favorable rate of interest at any one time. The effective date of any change in the Prime Rate shall for purposes hereof be the date the Prime Rate is changed by the Bank. The Bank shall not be obligated to give notice of any change in the Prime Rate.

"REGULATORY CHANGE" means any change in law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive, to which the Bank must comply.

"RENTALS" of a person means the aggregate fixed amounts payable by such person under any lease or real or personal property having an original term (including any required renewals or any renewals at the option of the lessor or lessee) on one year or more, but does not include any amounts payable under Capitalized Leases of such person.

"REPORTABLE EVENT" means a reportable event as defined in
Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provide, however, that a failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code and of Section 302 of ERISA shall be a Reportable

Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or
Section 412(d) of the Internal Revenue Code.

"RESTRICTED PAYMENTS" means collectively, all dividends (cash, stock, asset or otherwise) and all payments on any class of securities (specifically including all Subordinated Debt, but excluding any other debt securities) issued by the Borrower or any Subsidiary, whether such securities are now, or may hereafter be, authorized or outstanding and any payment by the Borrower or any Subsidiary on account of the purchase, redemption or retirement of any class of securities (specifically including all Subordinated Debt, but excluding all other debt securities) issued by it, and any distribution in respect to any of the foregoing, whether directly or indirectly.

"REVOLVING LOAN" or "REVOLVING LOANS" shall mean, respectively, each direct advance and the aggregate of all such direct advances, made by the Bank to the Borrower under and pursuant to this Agreement, as set forth in Section 2.1 of this Agreement.

"REVOLVING LOAN COMMITMENT" shall mean Twenty Five Million and 00/100 Dollars ($25,000,000.00).

"REVOLVING NOTE" shall have the meanings set forth in Section 4 hereof.

"SINGLE EMPLOYER PLAN" means a Plan maintained by the Borrower of any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group.

"SUBORDINATED DEBT" means indebtedness of the Borrower or any Subsidiary evidenced by instruments containing provisions by which the payment of such indebtedness is postponed and subordinated to the payment of the Revolving Note, which subordination provisions and the provisions for payment shall be in form and substance satisfactory to the Bank as evidenced by its prior written consent thereto.

"SUBSIDIARY" and "SUBSIDIARIES" shall mean, respectively, each and all such corporations, partnerships, limited partnerships, limited liability companies, limited liability partnerships or other entities of which or in which the Borrower owns directly or indirectly more than fifty percent (50.00%) of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such entity if a corporation, (ii) the management authority and capital interest or profits interest of such entity, if a partnership, limited partnership, limited liability company, limited liability partnership, joint venture or similar entity, or (iii) the beneficial interest of such entity, if a trust, association or other unincorporated organization.

"UCC" shall mean the Uniform Commercial Code in effect in Illinois from time to time.

"UNFUNDED LIABILITIES" means the aggregate unfunded value of accumulated benefits under all Single Employer Plans, all determined in accordance with GAAP as of the then most recent valuation date for such Plans.

1.2 ACCOUNTING TERMS. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP. Calculations and determinations of financial and accounting terms used and not otherwise specifically defined hereunder and the preparation of financial statements to be furnished to the Bank pursuant hereto shall be made and prepared, both as to classification of items and as to amount, in accordance with GAAP as used in the preparation of the financial statements of the Borrower on the date of this Agreement. If any changes in accounting principles or practices from those used in the preparation of the financial statements are hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or any successor thereto or agencies with similar functions), which results in a material change in the method of accounting in the financial statements required to be furnished to the Bank hereunder or in the calculation of financial covenants, standards or terms contained in this Agreement, the parties hereto agree to enter into good faith negotiations to amend such provisions so as equitably to reflect such changes to the end that the criteria for evaluating the financial condition and performance of the Borrower will be the same after such changes as they were before such changes; and if the parties fail to agree on the amendment of such provisions, the Borrower will furnish financial statements in accordance with such changes but shall provide calculations for all financial covenants, perform all financial covenants and otherwise observe all financial standards and terms in accordance with applicable accounting principles and practices in effect immediately prior to such changes. Calculations with respect to financial covenants required to be stated in accordance with applicable accounting principles and practices in effect immediately prior to such changes shall be reviewed and certified by the Borrower's accountants.

1.3 OTHER TERMS DEFINED IN UCC. All other capitalized words and phrases used herein and not otherwise specifically defined shall have the respective meanings assigned to such terms as in the UCC in effect from time to time.

1.4 OTHER DEFINITIONAL PROVISIONS; CONSTRUCTION. Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word "Borrower" shall be so construed. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and references to Article, Section, Subsection, Annex, Schedule, Exhibit and like references are references to this Agreement unless otherwise specified. An Event of Default shall "continue" or be "continuing" until such Event of Default has been cured to the reasonable satisfaction of the Bank or waived in accordance with Section 13.3 hereof. References in this Agreement to any party shall include such party's successors and permitted assigns. References to any "Section" shall be a reference to such Section of this Agreement unless otherwise stated. To the extent any of the provisions of the other Loan Documents are inconsistent with the terms of this Loan Agreement, the provisions of this Loan Agreement shall govern.

2. COMMITMENT OF THE BANK.

2.1 REVOLVING LOANS.

(a) REVOLVING LOAN COMMITMENT. Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein and in the other Loan Documents, the Bank agrees to make such Revolving Loans at such times as the Borrower may from time to time request until, but not including, the Maturity Date, and in such amounts as the Borrower may from time to time request, provided, however, that the aggregate principal balance of all Revolving Loans outstanding at any time shall not exceed the Revolving Loan Commitment. Revolving Loans made by the Bank may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including the Maturity Date unless the Revolving Loans are otherwise terminated or extended as provided in this Agreement. The Revolving Loans shall be used by the Borrower for general corporate needs of the Borrower.

(b) REVOLVING LOAN INTEREST AND PAYMENTS. Except as otherwise provided in this Section 2.1(b), the principal amount of the Revolving Loans outstanding from time to time shall bear interest at the Interest Rate. Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time which are Prime Loans, shall be due and payable monthly, in arrears, commencing on May 1, 2001 and continuing on the first day of each calendar month thereafter, and on the Maturity Date. Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time which are LIBOR Loans shall be payable LIBOR on the last Business Day of each Interest Period, commencing on the first such date to occur after the date hereof, on the date of any principal repayment of a LIBOR Loan and on the Maturity Date; provided however, that interest on six month LIBOR borrowings shall be payable quarterly. Any amount of principal or interest on the Revolving Loans which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest payable on demand at the Default Rate.

(i) MANDATORY PRINCIPAL PREPAYMENTS. All Revolving Loans hereunder shall be repaid by the Borrower on the Maturity Date, unless payable sooner pursuant to the provisions of this Agreement. In the event the aggregate outstanding principal balance of all Revolving Loans hereunder at any time exceed the Revolving Loan Commitment, the Borrower shall, without notice or demand of any kind, immediately make such repayments of the Revolving Loans or take such other actions as shall be necessary to eliminate such excess.

(ii) OPTIONAL PREPAYMENTS. The Borrower may from time to time prepay the Revolving Loans, in whole or in part, without any prepayment penalty whatsoever.

2.2 ADDITIONAL LIBOR LOAN PROVISIONS.

(a) LIBOR LOAN PREPAYMENTS. Notwithstanding anything to the contrary contained herein, the principal balance of any LIBOR Loan may not be prepaid in whole or in part at any time. If, for any reason, a LIBOR Loan is paid prior to the last Business Day of any Interest Period, the Borrower agrees to indemnify the Bank against any loss (including any loss on redeployment of the funds repaid), cost or expense incurred by the Bank as a result of such prepayment.

(b) LIBOR UNAVAILABILITY. If the Bank determines in good faith (which determination shall be conclusive, absent manifest error) prior to the commencement of any Interest Period that (i) United States dollar deposits of sufficient amount and maturity for funding any LIBOR Loan are not available to the Bank in the London Interbank Eurodollar market in the ordinary course of business, or (ii) by reason of circumstances affecting the London Interbank Eurodollar market, adequate and fair means do not exist for ascertaining the rate of interest to be applicable to the relevant LIBOR Loan, the Bank shall promptly notify the Borrower thereof and, so long as the foregoing conditions continue, a Revolving Loan may not be advanced as a LIBOR Loan thereafter. In addition, at the Borrower's option, each existing LIBOR Loan shall be immediately (i) converted to a Prime Loan on the last Business Day of the then existing Interest Period, or (ii) due and payable on the last Business Day of the then existing Interest Period, without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower.

(c) REGULATORY CHANGE. In addition, if, after the date hereof, a Regulatory Change shall, in the reasonable determination of the Bank, make it unlawful for the Bank to make or maintain the LIBOR Loans, then the Bank shall promptly notify the Borrower and Revolving Loans may not be advanced as a LIBOR Loan thereafter. In addition, at the Borrower's option, each existing LIBOR Loan shall be immediately (i) converted to a Prime Loan on the last Business Day of the then existing Interest Period or on such earlier date as required by law, or (ii) due and payable on the last Business Day of the then existing Interest Period or on such earlier date as required by law, all without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower.

(d) LIBOR LOAN INDEMNITY. If any Regulatory Change shall (a) impose, modify or deem applicable any assessment, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of or loans by, or any other acquisition of funds or disbursements by, the Bank; (b) subject the Bank or any LIBOR Loan to any tax, duty, charge, stamp tax or fee or change the basis of taxation of payments to the Bank of principal or interest due from the Borrower to the Bank hereunder (other than a change in the taxation of the overall net income of the Bank); or (c) impose on the Bank any other condition regarding such LIBOR Loan or the Bank's funding thereof, and the Bank shall reasonably determine (which determination shall be conclusive, absent manifest error) that the result of the foregoing is to increase the cost to

the Bank of making or maintaining such LIBOR Loan or to reduce the amount of principal or interest received by the Bank hereunder, then the Borrower shall pay to the Bank, within 15 days of demand by the Bank, such additional amounts as the Bank shall, from time to time, determine are sufficient to compensate and indemnify the Bank for that portion of such increased cost or reduced amount attributable to making, funding and maintaining such LIBOR Loan.

2.3 INTEREST AND FEE COMPUTATION; COLLECTION OF FUNDS. Except as otherwise set forth herein, all interest and fees shall be calculated on the basis of a year consisting of 360 days and shall be paid for the actual number of days elapsed. Principal payments submitted in funds not immediately available shall continue to bear interest until collected. If any payment to be made by the Borrower hereunder or under the Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment.

2.4 FEES. The Borrower further agrees to pay to the Bank the Facility Fee for the period from the date hereof to and including the Maturity Date. The Facility Fee shall be payable quarterly in advance on the date hereof and on each Payment Date thereafter. The obligations of the Borrower under this Section 2.4 shall survive the payment of the Advances and the termination of this Agreement.

3. CONDITIONS OF BORROWING.

Notwithstanding any other provision of this Agreement, the Bank shall not be required to disburse or make all or any portion of the Loans if any of the following conditions shall have occurred.

3.1 LOAN DOCUMENTS. The Borrower shall have failed to execute and deliver to the Bank any of the following Loan Documents (collectively, the "Loan Documents"), all of which must be satisfactory to the Bank and the Bank's counsel in form, substance and execution:

(a) Revolving Loan Agreement. Two copies of this Agreement clearly executed by the Borrower.

(b) Revolving Note. A Revolving Note duly executed by the Borrower in the form of Exhibit A.

(c) A copy, certified as of the date hereof by the secretary or assistant secretary of the Borrower, of its board of directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for the Bank) authorizing the execution of the Loan Documents.

(d) An incumbency certificate dated the date hereof, executed by the secretary or assistant secretary of the Borrower, which shall identify by name and title and bear the signature of the officers of the Borrower authorized to sign the Loan Documents and to

make borrowings hereunder, upon which certificate the Bank shall be entitled to rely until informed of any change in writing by the Borrower.

(e) A certificate signed by the chief financial officer of the Borrower stating that on the closing date no Default or Unmatured Default has occurred and is continuing.

(f) A written opinion dated the date hereof of the Borrower's counsel, addressed to the Bank.

(g) A certified copy of articles of incorporation.

(h) A certified copy of a good standing certificate.

(i) Such other documents as the Bank or its counsel may have reasonably requested.

3.2 EVENT OF DEFAULT. Any Event of Default, or any event which, with notice or lapse of time, or both would constitute an Event of Default, shall have occurred and be continuing.

3.3 ADVERSE EFFECT. There exists no Material Adverse Effect.

3.4 LITIGATION. Any litigation or governmental proceeding shall have been instituted against the Borrower or any of its Subsidiaries which in the discretion of the Bank, reasonably exercised, has a Material Adverse Effect on the financial condition or continued operation of the Borrower and its Subsidiaries taken as a whole.

3.5 REPRESENTATIONS AND WARRANTIES. Any representation or warranty of the Borrower contained herein or in any Loan Document shall be untrue or incorrect in any material way as of the date of any Loan as though made on such date, except to the extent such representation or warranty expressly relates to an earlier date.

4. NOTES EVIDENCING LOANS.

The Revolving Loans shall be evidenced by a single Revolving Note (together with any and all renewal, extension, modification or replacement notes executed by the Borrower and delivered to the Bank and given in substitution therefor, the "Revolving Note") dated as of the date hereof in the form of EXHIBIT "A" attached hereto, duly executed by the Borrower and payable to the order of the Bank. At the time of the initial disbursement of a Revolving Loan and at each time an additional Revolving Loan shall be requested hereunder or a repayment made in whole or in part thereon, an appropriate notation thereof shall be made on the books and records of the Bank. All amounts recorded shall be, absent demonstrable error, conclusive and binding evidence of (i) the principal amount of the Revolving Loans advanced hereunder (ii) any unpaid interest owing on the Revolving Loans, and (iii) all amounts repaid on the Revolving Loans. The failure to record any such amount or any error in recording such amounts shall not, however, limit or otherwise affect the obligations of the Borrower under the Revolving Note to repay the principal amount of the Revolving Loans, together with all interest accruing thereon.

5. MANNER OF BORROWING.

Each Revolving Loan shall be made available to the Borrower upon its written request in the form of EXHIBIT B, from any person whose authority to so act has not been revoked by the Borrower in writing previously received by the Bank. Each Revolving Loan may be advanced either as a Prime Loan or a LIBOR Loan, provided, however, that at any time and from time to time, the Borrower may identify no more than five (5) Revolving Loans, which may be LIBOR Loans. A request for a Prime Loan must be received by no later than 12:00 p.m. Chicago, Illinois time, on the day it is to be funded. A request for a LIBOR Loan must be
(i) received by no later than 12:00 p.m. Chicago, Illinois time, two days before the day it is to be funded, and (ii) in an amount equal to One Million and 00/100 Dollars ($1,000,000.00) or a higher integral multiple of Five Hundred Thousand and 00/100 Dollars ($500,000.00). If for any reason the Borrower shall fail to select timely an Interest Period for an existing LIBOR Loan, then such LIBOR Loan shall be immediately converted to a Prime Loan on the last Business Day of the then existing Interest Period, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. The proceeds of each Prime Loan or LIBOR Loan shall be made available at the office of the Bank by credit to the account of the Borrower or by other means requested by the Borrower and acceptable to the Bank.

The Bank is authorized to rely on the telephonic, telecopy (including facsimile copy) or telegraphic loan requests which the Bank believes in its good faith judgment to emanate from a properly authorized representative of the Borrower, whether or not that is in fact the case. The Borrower does hereby irrevocably confirm, ratify and approve all such forms of loan requests referred to in the aforementioned sentence and advances by the Bank in reasonable reliance thereon and does hereby indemnify the Bank against losses and expenses (including court costs, attorneys' and paralegals' fees) and shall hold the Bank harmless with respect thereto.

6. INTENTIONALLY OMITTED.

7. REPRESENTATIONS AND WARRANTIES.

To induce the Bank to make the Loans, the Borrower makes the following representations and warranties to the Bank, each of which shall be true and correct as of the date of the execution and delivery of this Agreement, and which shall survive the execution and delivery of this Agreement:

7.1 ORGANIZATION. The Borrower is duly organized, existing and in good standing under the laws of the State of Delaware and it has full and adequate power to carry on and conduct its business as presently conducted, and it is duly licensed or qualified in all foreign jurisdictions wherein the failure to qualify would have a Material Adverse Effect , and each Subsidiary of the Borrower is duly organized, existing and in good standing under the laws of the state wherein such Subsidiary was organized or formed, with full and adequate power to carry on and conduct its business as presently conducted, and is duly licensed or qualified in all foreign jurisdictions wherein the failure to qualify would have a Material Adverse Effect.

7.2 AUTHORIZATION; VALIDITY. The Borrower has full right, power and authority to enter into this Agreement, to make the borrowings and execute and deliver the Loan Documents as provided herein and to perform all of its duties and obligations under this Agreement and the Loan Documents. The execution and delivery of this Agreement and the Loan Documents will not, nor will the observance or performance of any of the matters and things herein or therein set forth, violate or contravene any provision of law to which the Borrower is subject. All necessary and appropriate action has been taken on the part of the Borrower to authorize the execution and delivery of this Agreement and the Loan Documents. This Agreement and the Loan Documents are valid and binding agreements and contracts of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, equity or similar laws affecting the enforcement of creditors rights generally.

7.3 COMPLIANCE WITH LAWS. The nature and transaction of the business and operations of the Borrower, and the use of its properties and assets, including, but not limited to, any real estate owned or occupied by the Borrower or its Subsidiaries, do not and during the term of the Loans shall not, violate or conflict with any applicable law, statute, ordinance, rule, regulation or order of any kind or nature binding on the Borrower or any of its Subsidiaries, including, without limitation, the provisions of the Fair Labor Standards Act or any zoning, land use, building, noise abatement, occupational health and safety or other laws, any building permit or any condition, grant, easement, covenant, condition or restriction, whether recorded or not binding on the Borrower or any or its Subsidiaries except where the failure to comply would not be reasonably expected to have a Material Adverse Effect.

7.4 ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES. Neither the Borrower or any Subsidiary has received any notice to the effect that its operations are not in material compliance with any applicable Environmental Laws or the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of Hazardous Materials into the environment which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect.

7.5 ABSENCE OF BREACH. The execution, delivery and performance of this Agreement, the Loan Documents and any other documents or instruments to be executed and delivered by the Borrower in connection with the Loans shall not:
(i) violate any provisions of law or any applicable regulation, order, writ, injunction or decree of any court or governmental authority binding on the Borrower, or (ii) violate or result in any breach or default of any of the terms, covenants, conditions, or provisions of any indenture, mortgage, deed of trust, other instrument, agreement or contract of any kind to which the Borrower, is a party or by which the Borrower, or any of its property or assets may be bound.

7.6 FINANCIAL STATEMENTS. All financial statements submitted to the Bank have been prepared in accordance with GAAP on a basis, except as otherwise noted therein, consistent with the previous fiscal year and fairly present the financial condition of the Borrower and the consolidated results of the operations for the Borrower and its Subsidiaries as of such date and for the periods indicated. Since the November 30, 2000 financial statement submitted by the

Borrower to the Bank, there has been no Material Adverse Effect in the financial condition or in the assets or liabilities of the Borrower and its Subsidiaries taken as a whole.

7.7 LITIGATION . There is no litigation or governmental proceeding pending, or to the knowledge of the Borrower, threatened, against the Borrower, which, if adversely determined, would result in any Material Adverse Effect in the financial condition or properties, business or operations of the Borrower. The Borrower has filed or will file all applicable material income or other material tax returns and has paid or will pay all material income or other material taxes when due. There is no material controversy or objection pending, or to the knowledge of the Borrower, threatened in respect of any material tax returns of the Borrower.

7.8 EVENT OF DEFAULT. No Event of Default has occurred and is continuing, and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under this Agreement or any of the Loan Documents and the Borrower and/or Subsidiaries are not in default (without regard to grace or cure periods) under any contract or agreement to which it is a party, the effect of which default shall materially adversely affect the performance by the Borrower of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement.

7.9 ERISA OBLIGATIONS. The Borrower and its Subsidiaries have promptly paid and discharged all obligations and liabilities arising under the Employee Retirement Income Security Act of 1974 ("ERISA") of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its properties or assets.

7.10 ADVERSE CIRCUMSTANCES. There is no Material Averse Effect.

7.11 LENDING RELATIONSHIP. The Borrower acknowledges and agrees that the relationship hereby created with the Bank is and has been conducted on an open and arm's length basis in which no fiduciary relationship exists and that the Borrower has not relied and is not relying on any such fiduciary relationship in executing this Agreement and in consummating the Loans. The Bank represents that it will receive the Note payable to its order as evidence of a bank loan.

7.12 INTENTIONALLY OMITTED.

7.13 COMPLIANCE WITH REGULATION U. No portion of the proceeds of the Loans shall be used by the Borrower, or its Subsidiaries, either directly or indirectly, for the purpose of purchasing or carrying any margin stock, within the meaning of Regulation U as adopted by the Board of Governors of the Federal Reserve System.

7.14 COMPLETE INFORMATION. This Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials submitted to the Bank in connection with or in furtherance of this Agreement by or on behalf of the Borrower fully and fairly state the matters with which they purport to deal, and neither misstate any material fact nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading.

7.15 PLACE OF BUSINESS. The principal place of business of the Borrower is 1100 North Wood Dale Road, Wood Dale, Illinois 60191 and the Borrower shall promptly notify the Bank of any change in such location.

7.16 PLACE OF INCORPORATION. The place of incorporation of the Borrower is the State of Delaware and the Borrower shall promptly notify the Bank of any change in such location.

8. NEGATIVE COVENANTS.

8.1 RESTRICTED PAYMENTS. The Borrower will not, nor will it permit any Subsidiary to, declare or make any Restricted Payments, which together with all Restricted Payments made on or after May 31, 1995 would exceed an amount equal to the sum of (i) $20,000,000 plus (ii) 50% of Consolidated Net Income for the period commencing June 1, 1994 and extending to and including the last day of the fiscal year of the Borrower immediately preceding the date on which such Restricted Payment was made, said period to be taken as one accounting period, except that:

(a) The Borrower may declare and pay dividends payable solely in stock of the Borrower of the same class as that on which such dividend is paid.

(b) The Borrower may purchase, redeem or otherwise acquire or retire any class of its stock out of the proceeds of, or in exchange for, a substantially concurrent issue and sale of such stock in addition to that now issued and outstanding; provided that Borrower is in compliance with all affirmative, negative and financial covenants herein.

8.2 MERGER. The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person, except that:

(a) Any Domestic Subsidiary may merge or consolidate with the Borrower (providing the Borrower shall be the continuing or surviving corporation).

(b) Any Domestic Subsidiary may merge or consolidate with any other Domestic Subsidiary, which is a Wholly Owned Subsidiary.

(c) Any Foreign Subsidiary may merge or consolidate with any other Subsidiary, which is a Wholly Owned Subsidiary (provided that if a Domestic Subsidiary is involved, such Domestic Subsidiary shall be the continuing or surviving corporation).

8.3 SALE OF ASSETS. The Borrower will not, nor will it permit any Subsidiary to, sell, lease, transfer, assign or otherwise dispose of (including, for the avoidance of doubt, in connection with a sale leaseback transaction), any of its assets (including, for the avoidance of doubt, the capital stock of Subsidiaries, but excluding (i) inventory sold in the ordinary course of the Borrower's or any Subsidiary's business, (ii) property formerly used in the Borrower's or any

Subsidiary's business which is worn out or obsolete, (iii) assets of any Domestic Subsidiary transferred to the Borrower or to another Domestic Subsidiary which is a Wholly-Owned Subsidiary, (iv) assets of any Foreign Subsidiary transferred to the Borrower or to another Subsidiary which is a Wholly-Owned Subsidiary, (v) assets permitted to be sold or otherwise transferred pursuant to Section 8.4 and (vi) promissory note ("Payment Note") received as partial or full payment for assets sold if, after giving effect thereto, the sum of all such assets transferred, assigned or otherwise disposed of during the twelve-month period ending with (and including) the month of such disposition either (a) represents more than 10% of Consolidated Assets determined as of the date of (and after giving effect to ) such disposition or
(b) were responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries during such twelve-month period.

8.4 SALE OF ACCOUNTS RECEIVABLE. Anything in Section 8.3 to the contrary notwithstanding, the Borrower will not, nor will it permit any Subsidiary to, sell, with or without recourse, transfer, assign, encumber or otherwise dispose of any of its note or accounts receivable, leases or chattel paper (collectively referred to in this Section as "Accounts Receivable") to any Person, except that:

(a) The Borrower or any Subsidiary may sell or otherwise dispose of any of its Accounts Receivable to the Borrower or any Subsidiary on terms and conditions, which are in compliance with
Section 8.9.

(b) The Borrower or any Subsidiary may enter into any arrangement with another Person pursuant to which such Person collects the Accounts Receivable of the Borrower or such Subsidiary on behalf of the Borrower or such Subsidiary, so long as such arrangement does not provide for any transfer of title to, or any other interest in, such Accounts Receivable to such Person.

(c) The Borrower or any Subsidiary may sell or otherwise dispose of its Foreign Accounts to any Person for the purposes of collection, provided that the aggregate face amount of all such Foreign Accounts so transferred by the Borrower and its Subsidiaries during any fiscal year of the Borrower shall not exceed an amount equal to 20% of the gross Accounts Receivable of the Borrower and its Subsidiaries as of the last day of the Borrower's immediately preceding fiscal year and determined from the Borrower's consolidated balance sheet delivered pursuant to Section 9.7(a).

(d) The Borrower or any Subsidiary may sell or otherwise dispose of its interest in notes or accounts receivable on a limited recourse basis, provided that such transfer qualifies as a sale under GAAP and that the amount of such financing does not exceed $50,000,000 at any one time outstanding (the "Receivables Securitization").

(e) The Borrower or any Subsidiary may sell or otherwise dispose of a Payment Note.

8.5 INVESTMENTS AND ACQUISITIONS. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Investments (including without limitation, loans and

advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except:

(a) Short-term obligations of, or fully guaranteed by, the United States of America.

(b) Commercial paper rated A-1 or better by Standard and Poor's Ratings Services, a division of McGraw Hill Companies, Inc. or P-1 or better by Moody's Investors Service, Inc.

(d) Certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000.

(e) Existing Investments in Subsidiaries and other Investments in existence on the date hereof.

(f) Loans by the Borrower to its Domestic Subsidiaries.

(g) Equity Investment by the Borrower or any of its Subsidiaries, AAR Financial Services Corp. in leveraged leases of aircraft, aircraft engines and related products, including investments in partnerships and/or joint ventures related thereto not to exceed $50,000,000.00.

(h) Loans by the Borrower and its Subsidiaries to their respective officers and key employees in an aggregate amount not to exceed $4,000,000 at any one-time outstanding.

(i) Investments in any institutional money market fund (i) rated A-1 or better by Standard and Poor's Ratings Services, a division of McGraw Hill Companies, Inc., (ii) rated P-1 by Moody's Investors Service, Inc. or (iii) that invests in High Quality Money Market Instruments. For purposes of this Agreement, "High Quality Money Market Instruments" are (i) U.S. dollar-denominated instruments that have a remaining maturity of 397 days or less and (ii) issued by an issuer that is rated in one of the two highest rating categories for short-term debt by any two nationally recognized statistical rating organizations ("NRSROs") or, if only one NRSRO has issued a rating, by that NRSRO, or if unrated, the investment advisor determines the issuer is of comparable quality.

(j) Investments evidenced by Payment Notes.

(k) Any Acquisition that after giving effect thereto does not cause the sum of (i) Consolidated Funded Debt, plus (ii) the aggregate amount of Contingent Obligations of the Borrower and its Subsidiaries to exceed 55% of Consolidated Total Capitalization.

(l) Investments (including without limitation Investments in funds (insured or uninsured) managed by banks federally chartered by the United States of America and having stockholders' equity in excess of $150,000,000) in addition to those permitted under clauses (a) through (k) of this Section, provided that after giving effect thereto the aggregate amount of all such Investments for the Borrower and all Subsidiaries during the term of this Agreement shall not exceed the greater of (i) $6,000,000 or (ii) 20% of Consolidated Tangible Net Worth as of the last day of the Borrower's fiscal year immediately preceding the date on which any such Investment is made.

In determining the amount of Investments permitted under this Section, Investments shall always be taken at the original cost thereof, regardless of any subsequent appreciation or depreciation therein, and loans and advances shall be taken at the principal amount thereof then remaining unpaid from time to time.

8.6 LIENS. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the property of the Borrower or any of its Subsidiaries, except:

(a) Liens for taxes, assessments or governmental charges or levies on its property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books.

(b) Deposits or pledges to secure performance of bids, tenders, contracts (other than contracts for the repayment of Indebtedness), leases, public or statutory obligations, surety or appeal bonds, or other deposits or pledges for purposes of like general nature in the ordinary course of the Borrower's business or any Subsidiary's business.

(c) Liens incurred by the Borrower or any Subsidiary in connection with the acquisition of property provided such Liens shall attach only to the property acquired in the transactions in which such Liens were created or assumed and shall secure only the Indebtedness incurred to finance the cost of acquiring such property.

(d) Liens arising out of pledges or deposits under workers' compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation.

(e) Liens incidental to the conduct of business or the ownership of properties and assets, including, those imposed by law, such as carrier's, warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books in accordance with GAAP, or other Liens incurred in the ordinary course of business and not in connection with borrowed money.

(f) Utility easements, other easements, leases, sub-leases, rights-of-way, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or the Subsidiaries.

(g) Liens existing on the date hereof.

(h) Liens which secure only Indebtedness of any Domestic Subsidiary to the Borrower or another Domestic Subsidiary.

(i) Subject to Section 8.5(c), Liens on property the purchase of which is being financed by the Borrower or any Domestic Subsidiary, as the case may be, by letters of credit (or similar instruments) issued for the account of the Borrower or any Domestic Subsidiary, as the case may be, provided such Liens secure only the letter of credit (or similar instrument) which is being used to finance the purchase of such property and provided further such Liens attach only to such property.

(j) Liens incurred by the Borrower in connection with the real estate located in Wood Dale, Illinois, known as the Corporate Headquarters of the Borrower securing debt not to exceed Twenty Five Million Dollars ($25,000,000.00).

(k) Liens incurred by the Borrower and its Subsidiaries in connection with the Receivable Securitization not to exceed Fifty Million Dollars ($50,000,000.00) at any one-time outstanding.

8.7 RENTALS. The Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any obligation for Rentals if, as a consequence thereof, obligations for Rentals created, incurred or suffered to existing any one fiscal year shall be in an aggregate consolidated amount for the Borrower and its Subsidiaries in excess of 10% of Consolidated Revenues (as defined below) as at the end of the Borrower's fiscal year immediately preceding the date on which such obligation is entered into, on a non-cumulative basis from year to year. It is expressly agreed and understood that, for the purpose of this Section, any contract between the Borrower or any Domestic Subsidiary and the vendor of aircraft fuel shall not be considered a lease and any payments made under any such contract by the Borrower or any Domestic Subsidiary to such vendor shall not be considered a lease payment. "Consolidated Revenues" shall mean the amount of "net revenues" as shown on the Borrower's consolidated income statement.

8.8 RETIREMENT AND MODIFICATION OF SUBORDINATED INDEBTEDNESS. The Borrower will not, nor will it permit any Subsidiary to, purchase, acquire, redeem or retire, or make any payment on account of principal of, any Subordinated Debt except at the stated maturity thereof or as required by mandatory prepayment provisions or sinking fund provisions relating thereto. The Borrower will not, nor will it permit any Subsidiary to, alter, amend, modify, rescind, terminate or waive, or permit any breach or event of default to exist under, any note or note evidencing such Subordinated Debt.

8.9 AFFILIATES. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any property or service), with, or make any payment or transfer to, any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms not less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction. The transactions entered into in connection with the Receivables Securitization shall be deemed to be arms-length transactions.

8.10 MODIFICATION OF ORGANIZATIONAL DOCUMENTS. Not permit the Certificate or Articles of Incorporation, By-Laws or other organizational documents of the Borrower to be amended or modified in any way that might reasonably be expected to materially adversely affect the interests of the Bank.

9. AFFIRMATIVE COVENANTS.

9.1 COMPLIANCE WITH BANK REGULATORY REQUIREMENTS. Upon demand by the Bank, the Borrower shall reimburse the Bank for the Bank's additional costs and/or reductions in the amount of principal or interest received or receivable by the Bank if at any time after the date of this Agreement any law, treaty or regulation or any change in any law, treaty or regulation or the interpretation thereof by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or the Loans, whether or not having the force of law, shall impose, modify or deem applicable any reserve (except reserve requirements taken into account in calculating the Interest Rate) and/or special deposit requirement against or in respect of assets held by or deposits in or for the account of the Loans by the Bank or impose on the Bank any other condition with respect to this Agreement or the Loans, the result of which is to either increase the cost to the Bank of making or maintaining the Loans or to reduce the amount of principal or interest received or receivable by the Bank with respect to such Loans. Said additional costs and/or reductions will be those which directly result from the imposition of such requirement or condition on the making or maintaining of such Loans. All Loans shall be deemed to be match funded for the purposes of the Bank's determination in the previous sentence. Notwithstanding the foregoing, the Borrower shall not be required to pay any such additional costs, which could be avoided by the Bank with the exercise of reasonable conduct and diligence.

9.2 CONDUCT OF BUSINESS. The Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and to do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic or foreign corporation, as the case may be, in its jurisdiction of incorporation and main all requisite authority to conduct its business in each jurisdiction in which its business is conducted; provided, that nothing contained in this Section 9.2 shall prohibit (a) any Subsidiary from entering into a merger or consolidation otherwise permitted by
SECTION 8.2 or (b) the liquidation of any Subsidiary substantially all of whose assets have been transferred to the Borrower or another Subsidiary in compliance with SECTION 8.3.

9.3 INSURANCE. The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all their property in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to Bank upon request full information as to the insurance carried.

9.4 TAX LIABILITIES. The Borrower and its Subsidiaries will at all times pay and discharge all property and other taxes, assessments and governmental charges upon, and all claims (including claims for labor, materials and supplies) against the Borrower, and its Subsidiaries, or any of their respective properties, before the same shall become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings, or would not have a Material Adverse Effect.

9.5 ERISA LIABILITIES. The Borrower and its Subsidiaries shall at all times promptly pay and discharge all ERISA obligations and liabilities of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its properties or assets and will promptly notify the Bank of (i) the occurrence of any Reportable Event which might result in the termination by the PBGC of any Plan covering any officers or employees of the Borrower, any benefits of which are, or are required to be, guaranteed by PBGC,
(ii) receipt of any notice from PBGC of its intention to seek termination of the Plan or appointment of a trustee therefor, and (iii) its intention to terminate or withdraw from the Plan. Neither the Borrower nor any Subsidiary shall terminate any such Plan or withdraw therefrom unless it shall be in compliance with all of the terms and conditions of this Agreement after giving effect to any liability to PBGC resulting from such termination or withdrawal.

9.6 FINANCIAL STATEMENTS. The Borrower shall at all times maintain a standard and modern system of accounting, on the accrual basis of accounting and in all respects in accordance with GAAP, and shall furnish to the Bank or its authorized representatives such information regarding the business affairs, operations and financial condition of the Borrower and its Subsidiaries, including, but not limited to:

(a) as soon as available, and in any event, within 90 days after the close of each of its fiscal years, a copy of the annual audited financial statements of the Borrower and its Subsidiaries, on a consolidated and consolidating basis, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal year then ended and such other information (including nonfinancial information) as the Bank may reasonably request, in reasonable detail, prepared and certified by an independent certified public accountant acceptable to the Bank, containing an unqualified opinion; and
(b) as soon as available, and in any event, within 45 days following the end of each fiscal quarter, a copy of the unaudited financial statements of the Borrower and its Subsidiaries, on a consolidated and consolidating basis, regarding such fiscal quarter, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal quarter then ended and the fiscal year to date and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified as accurate by the Borrower; and

(c) At the request of the Lender, within 90 days after the close of each fiscal year of the Borrower, for each active Subsidiary, an unaudited balance sheet as at the close of such fiscal year and an unaudited profit and loss statement for such fiscal year, all certified by the Borrower's chief financial officer or Treasurer.

(d) At the request of the Lender, within 60 days after the close of the first three quarterly periods of each of its fiscal years, for each active Subsidiary, an unaudited balance sheet as at the close of each such period and an unaudited profit and loss statement for the period from the beginning of such fiscal year to the end of such quarter, all certified by the Borrower's chief financial officer or Treasurer.

(e) Within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA, except that the Borrower shall not be required to deliver such statement for any such fiscal year to the extent that such information is specifically set forth in the audit report for such fiscal year delivered to the Lender pursuant to clause (a) of this Section 9.7.

(f) As soon as possible and in any event within 10 days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the chief financial officer or Treasurer of the Borrower, describing said Reportable Event and the action which the Borrower proposes to take with respect thereto.

The Borrower represents and warrants to the Bank that the financial statements delivered to the Bank at or prior to the execution and delivery of this Agreement and to be delivered at all times thereafter fairly present the financial condition of the Borrower and its Subsidiaries. The Bank shall have the right at all times during business hours to inspect the books and records of the Borrower and its Subsidiaries and make extracts therefrom. The Borrower agrees to advise the Bank immediately of any Material Adverse Effect in the financial condition, the operations or any other status of the Borrower or any of its Subsidiaries.

9.7 SUPPLEMENTAL FINANCIAL STATEMENTS. The Borrower shall immediately upon receipt thereof, provide to the Bank copies of interim and supplemental reports if any, submitted to the Borrower or any of its Subsidiaries by independent accountants in connection with any interim audit or review of the books of the Borrower or any of its Subsidiaries.

9.8 COVENANT/QUARTER COMPLIANCE REPORT. The Borrower shall, within 45 days after the end of each fiscal quarter commencing with the fiscal quarter end February 28, 2001, deliver to the Bank a computation in such detail as the Bank shall specify, showing compliance by the Borrower with the financial covenants set forth in Section 10, and certified to as accurate by the Borrower by execution and delivery to the Bank of a Compliance Certificate satisfactory to the Bank.

9.9 OTHER REPORTS. The Borrower shall, within such period of time as the Bank may specify, deliver to the Bank such other information (including non-financial information) as the Bank may reasonably request.

9.10 NOTICE OF PROCEEDINGS. The Borrower shall, promptly after knowledge thereof shall have come to the attention of any officer of the Borrower, give written notice to the Bank of all threatened or pending actions, suits, and proceedings before any court or governmental department, commission, board or other administrative agency which, if adversely determined would reasonably be expected to have a Material Adverse Effect on the business, property or operations of the Borrower and any of its Subsidiaries.

9.11 NOTICE OF DEFAULT. The Borrower shall, within 10 days of its knowledge, give notice to the Bank in writing of the occurrence of an Event of Default.

9.12 SEC REPORTS AND REPORTS TO SHAREHOLDERS. The Borrower shall deliver to the Bank, promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of the Borrower or any Subsidiary filed with the Securities and Exchange Commission ("SEC"); copies of all registration statements of the Borrower or any Subsidiary filed with the SEC; and copies of all proxy statements or other communications made to security holders generally. In addition after an Event of Default, Borrower shall deliver to the Bank promptly upon receipt thereof, copies of any reports received from the SEC.

9.13 OTHER DOCUMENTS. The Borrower shall deliver to Bank, promptly upon receipt thereof, copies of all documents entered into between Borrower and Borrower's Unsecured Lenders, including but not limited to any and all amendments, modifications, extensions, waivers, forbearance agreements, instruments and all documents required to be delivered in accordance with all said documents.

10. FINANCIAL COVENANTS.

10.1 WORKING CAPITAL. The Borrower will maintain at all times a ratio of Consolidated Current Assets to Consolidated Current Liabilities of at least 1.50 to 1.00.

10.2 CONSOLIDATED TANGIBLE NET WORTH. The Borrower will maintain at all times Consolidated Tangible Net Worth in an amount not less than the sum of (a) $240,000,000 plus (b) the net cash proceeds received by the Borrower from the sale of any of its capital stock on or after May 31, 2000 plus (c) an amount equal to the aggregate of one-third of Consolidated Net Income earned during each of its fiscal years beginning with its fiscal year commencing June 1, 2000, said fiscal year to be taken as one accounting period.

10.3 CONSOLIDATED SECURED LIABILITIES. The Borrower will maintain at all times Consolidated Secured Liabilities in an amount not in excess of $20,000,000 in addition to the permitted liens under Section 8.6. For purposes of calculating Consolidated Secured Liabilities hereunder the obligations of the Borrower less than $10,000,000, secured by the real estate located in Wood Dale, Illinois, known as the Corporate Headquarters of the Borrower, shall be excluded.

10.4 LIMITATION OF FUNDED DEBT. The Borrower will not permit the sum of
(i) Consolidated Funded Debt plus (ii) the aggregate amount of Contingent Obligations of the Borrower and its Subsidiaries to exceed 60% of Consolidated Total Capitalization; PROVIDED, however, that the Borrower will not permit the sum of (i) Consolidated Funded Debt, plus (ii) the aggregate amount of Contingent Obligations of the Borrower and its Subsidiaries to exceed 55% of Consolidated Total Capitalization, in the event that the Borrower or any Subsidiary has made any Acquisition under Section 8.5(k) of this Agreement.

10.5 FIXED CHARGE COVERAGE RATIO. At such time as the Borrower is obligated to maintain a Fixed Charge Coverage Ratio for the Unsecured Lenders, the Borrower will also maintain a Fixed Charge Coverage Ratio of not less than 1.20:1:00 as of the last day of each fiscal quarter of the Borrower. The Fixed Charge Coverage Ratio shall be determined based on four of the previous five fiscal quarters of the Borrower that occurred immediately prior to the calculation date, at the Borrower's option.

10.6 OTHER FINANCIAL COVENANTS. The Borrower agrees that the foregoing covenants shall be automatically modified to reflect the modification of any similar financial covenant set forth in the documents between the Borrower and Borrower' Unsecured Lenders, the effect of which is to cause said financial covenants to be more restrictive than the financial covenants set forth herein.

11. EVENTS OF DEFAULT.

The Borrower, without notice or demand of any kind, shall be in default under this Agreement upon the occurrence of any of the following events (each an "Event of Default").

11.1 NONPAYMENT OF OBLIGATIONS. Any amount due and owing on the Note or any of the Obligations, whether by its terms or as otherwise provided herein, is not paid.

11.2 MISREPRESENTATION. Any written warranty, representation, certificate or statement in this Agreement, the Loan Documents shall be false in any material respect on the date when made.

11.3 NONPERFORMANCE. Any failure to perform or default in the performance of any covenant, condition or agreement contained in this Agreement and, if capable of being cured, such failure to perform or default in performance continues for a period of thirty (30) days after the Borrower receives notice or knowledge from the Bank of such failure to perform or default in performance.

11.4 DEFAULT UNDER LOAN DOCUMENTS. A default under any of the other Loan Documents, all of which covenants, conditions and agreements contained therein are hereby incorporated in this Agreement by express reference, and such failure to perform or default in performance continues beyond any applicable grace or cure period, shall be and constitute an Event of Default under this Agreement and any other of the Obligations.

11.5 CHANGE IN CONTROL. A Change in Control shall occur.

11.6 DEFAULT UNDER OTHER AGREEMENTS. Failure of the Borrower or any of its Subsidiaries to pay any Indebtedness (other than the Obligations) in an aggregate principal amount of Two Million Dollars ($2,000,000.00), when due; or the failure by the Borrower or any of its Subsidiaries to perform any term, provision or condition contained in any agreement or agreements under which any Indebtedness (other than the Obligations) in an aggregate principal amount of Two Million Dollars ($2,000,000.00) was created or is governed, or any other event shall occur or condition exist, the effect of which is to cause, or to permit the holder or holders of such Indebtedness in an aggregate principal amount of Two Million Dollars ($2,000,000.00) to cause, such Indebtedness to become due prior to its stated maturity; or any Indebtedness of the Borrower or any of its Subsidiaries (other than the Obligations) in an aggregate principal amount of Two Million Dollars ($2,000,000.00), shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due in an aggregate principal amount of Two Million Dollars ($2,000,000.00).

11.7 BANKRUPTCY. The Borrower or any of its Domestic Subsidiaries shall
(i) have an order for relief entered with respect to its under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its property, (iv) institute any proceeding seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 11.7 or (vi) fail to contest in good faith any appointment or proceeding described in Section 11.8.

11.8 RECEIVERSHIP. Without the application, approval or consent of the Borrower or any of its Domestic Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Domestic Subsidiaries or any substantial part of its property, or a proceeding described in Section 11.7(iv) shall be instituted against the Borrower or any of its Domestic Subsidiaries and such appointment continues undischarged or such proceeding continues undismisssed or unstayed for a period of 30 consecutive days.

11.9 ASSIGNMENT FOR CREDITORS. Any Foreign Subsidiary shall have taken or instituted or permitted to be taken or instituted any action or proceeding, or any such action or proceeding is instituted against such Foreign Subsidiary, whereby a substantial amount of its property shall or may be assigned or in any manner transferred or delivered to any receive, assignee, liquidator or other Person, whether appointed by such Foreign Subsidiary or by a court or by any governmental authority or any law, whereby such property shall or may be distributed among the creditors of such Foreign Subsidiary, provided the aggregate claims of all such creditors against such Foreign Subsidiary or against all such Foreign Subsidiaries shall exceed $2,000,000 and such action or proceeding remains undismissed or unstayed on appeal for a period of 90 days; or

any governmental authority having jurisdiction shall have taken or instituted any action or proceeding for the dissolution or disestablishment of any Foreign Subsidiary or for the suspension of its operations, provided the assets of any such Foreign Subsidiary or the aggregate assets of all such Foreign Subsidiaries shall exceed $2,000,000 and such action or proceeding remains undismissed or unstayed on appeal for a period of 90 days; or all of the property of any Foreign Subsidiary shall have been condemned, seized or appropriated, provided the net assets of any such Foreign Subsidiary or the aggregate net assets of all such Foreign Subsidiaries resulting from or the total of all claims against any Foreign Subsidiary or all Foreign Subsidiaries resulting from any action or proceeding described in this Section 11.9 and the amount of assets or net assets, as the case may be, of any Foreign Subsidiary or all Foreign Subsidiaries which are subject to any action, proceeding, condemnation, seizure or appropriation described in this Section 11.9 shall exceed $2,000,000.

11.10 CONDEMNATION. Any court, governmental or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of all or any substantial portion of the property of the Borrower or any of its Subsidiaries.

11.11 JUDGMENTS. The Borrower or any of its Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $2,000,000, which is not stayed on appeal or otherwise being appropriately contested in good faith.

11.12 ERISA. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $10,000,000; or any Reportable Event shall occur in connection with any Plan; or the Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all Unfunded Liabilities of all Single Employer Plans and all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability, exceeds $10,000,000.

11.13 VIOLATION OF LAW. Any court, governmental or governmental agency shall find or hold, or formally notify the Borrower or any Subsidiary, that the Borrower or any Subsidiary (i) has violated any Environmental Law, or (ii) bears responsibility for any removal or remedial or similar action in connection with the release of the Borrower or any other person of any Hazardous Materials into the environment, or is otherwise liable in any manner in connection with any such release; and such finding, holding or notification could reasonably be expected (taking into account the expected outcome of any legal appeals available to the Borrower or such Subsidiary, as well as the likelihood and extent of contribution from any other persons who may be jointly and severally liable with the Borrower or such Subsidiary) to have a Material Adverse Effect on the ability of the Borrower to perform its obligations under the Loan Documents.

12. REMEDIES.

Upon the occurrence of an Event of Default, the Bank shall have all rights, powers and remedies set forth in the Loan Documents, in any written agreement or instrument (other than this Agreement or the Loan Documents) relating to any of the Obligations, or as otherwise

provided at law or in equity. Without limiting the generality of the foregoing, the Bank may, at its option upon the occurrence of an Event of Default, declare its commitments to the Borrower to be terminated and all Obligations to be immediately due and payable, provided, however, that upon the occurrence of an Event of Default under Section 11.9, "Assignment for Creditors", or Section 11.7, "Bankruptcy", all commitments of the Bank to the Borrower shall be immediately terminated and all Obligations shall be automatically due and payable, all without demand, notice or further action of any kind required on the part of the Bank. The Borrower hereby waives any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Bank's rights under the Loan Documents, notwithstanding anything contained herein or in the Loan Documents to the contrary. In addition to the foregoing:

12.1 OFFSET RIGHTS. In addition to, and without limitation of, any rights of the Bank under applicable law, so long as any Event of Default has occurred and is continuing, any indebtedness from the Bank to Borrower (including account balances, whether provisional or final and whether or not collected or available, hereinafter called "Accounts") may be offset and applied toward the payment of the Obligations then due and owing to the Bank.

12.2 ADDITIONAL REMEDIES. The Bank shall have the right and power to:

(a) extend, renew or modify for one or more periods (whether or not longer than the original period) the Note, any other of the Obligations, any obligation of any nature of any other obligor with respect to the Note or any of the Obligations;

(b) grant releases, compromises or indulgences with respect to the Note, any of the Obligations, any extension or renewal of any of the Obligations, any security therefor, or to any other obligor with respect to the Note or any of the Obligations;

(c) transfer the whole or any part of securities which may constitute Accounts into the name of the Bank or the Bank's nominee , and any corporation, association, or any of the managers or trustees of any trust issuing any of said securities, or any transfer agent, shall not be bound to inquire, in the event that the Bank or said nominee makes any further transfer of said securities, or any portion thereof, as to whether the Bank or such nominee has the right to make such further transfer, and shall not be liable for transferring the same;

(d) make an election with respect to the Accounts or any other from time to time collateral for any of the Obligations under Section 1111 of the Code or take action under Section 364 or any other section of the Code; provided, however, that any such action of the Bank as set forth herein shall not, in any manner whatsoever, impair or affect the liability of the Borrower hereunder, nor prejudice, waive, nor be construed to impair, affect, prejudice or waive the Bank's rights and remedies at law, in equity or by statute, nor release, discharge, nor be construed to release or discharge, the Borrower, any guarantor or other person, firm, corporation or other entity liable to the Bank for the Obligations; and

(e) at any time, and from time to time, accept additions to, releases, reductions, exchanges or substitution of the Accounts s, without in any way altering, impairing, diminishing or affecting the provisions of this Agreement, the Loan Documents, or any of the other Obligations, or the Bank's rights hereunder, under the Note or under any of the other Obligations.

The Borrower hereby ratifies and confirms whatever the Bank may do with respect to the Accounts, and agrees that the Bank shall not be liable for any error of judgment or mistakes of fact or law with respect to actions taken in connection with the Accounts absent manifest error.

12.3 INTENTIONALLY OMITTED.

12.4 APPLICATION OF PROCEEDS. The Bank will within 3 Business Days after receipt of cash or solvent credits from collection of items of payment, proceeds of Accounts or any other source, apply the whole or any part thereof against the Obligations secured hereby. The Bank shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on the Obligations, and such determination shall be conclusive upon the Borrower. Any proceeds of any disposition by the Bank of all or any part of the Accounts may be first applied by the Bank to the payment of expenses incurred by the Bank in connection with the Accounts, including attorneys' fees and legal expenses as provided for in Section 13 hereof.

12.5 NO WAIVER. No Event of Default shall be waived by the Bank except in writing. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver of the exercise of the same or any other right at any other time; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. There shall be no obligation on the part of the Bank to exercise any remedy available to the Bank in any order. The remedies provided for herein are cumulative and not exclusive of any remedies provided at law or in equity. The Borrower agrees that in the event that the Borrower fails to perform, observe or discharge any of its Obligations or liabilities under this Agreement or any other agreements with the Bank, no remedy of law will provide adequate relief to the Bank, and further agrees that the Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

13 MISCELLANEOUS.

13.1 OBLIGATIONS ABSOLUTE. None of the following shall affect the Obligations of the Borrower to the Bank under this Agreement or the Bank's rights with respect to any from time to time collateral for the Obligations:

(a) acceptance or retention by the Bank of other property or any interest in property as security for the Obligations;

(b) release by the Bank of any guarantors of the Obligations or of all or any part of any from time to time collateral for the Obligations or of any party liable with respect to the Obligations;

(c) release, extension, renewal, modification or substitution by the Bank of the Note, or any note evidencing any of the Obligations, or the compromise of the liability of any guarantor of the Obligations; or

(d) failure of the Bank to resort to any other security or to pursue the Borrower or any other obligor liable for any of the Obligations before resorting to remedies against any from time to time collateral for the Obligations.

13.2 ENTIRE AGREEMENT. This Agreement (i) is valid, binding and enforceable against the Borrower and the Bank in accordance with its provisions and no conditions exist as to its legal effectiveness; (ii) constitutes the entire agreement between the parties; and (iii) is the final expression of the intentions of the Borrower and the Bank. No promises, either expressed or implied, exist between the Borrower and the Bank, unless contained herein. This Agreement supersedes all negotiations, representations, warranties, commitments, offers, contracts (of any kind or nature, whether oral or written) prior to or contemporaneous with the execution hereof.

13.3 AMENDMENTS; WAIVERS. No amendment, modification, termination, discharge or waiver of any provision of this Agreement or of the Loan Documents, or consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only for the specific purpose for which given.

13.4 WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR ANY OF THE OTHER OBLIGATIONS, ANY FROM TIME TO TIME COLLATERAL FOR THE OBLIGATIONS, OR ANY OTHER AGREEMENT EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE BORROWER ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER.

13.5 LITIGATION. TO INDUCE THE BANK TO MAKE THE LOANS, THE BORROWER AND THE BANK IRREVOCABLY AGREES THAT ALL ACTIONS ARISING, DIRECTLY OR INDIRECTLY, AS A RESULT OR CONSEQUENCE OF THIS AGREEMENT, OR THE NOTE, SHALL BE INSTITUTED AND LITIGATED ONLY IN COURTS HAVING THEIR SITUS IN THE CITY OF CHICAGO, ILLINOIS. THE BORROWER AND THE BANK HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT HAVING ITS

SITUS IN SAID CITY, AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS. THE BORROWER AND THE BANK HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER OR THE BANK AS SET FORTH HEREIN IN THE MANNER PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF COURT OR OTHERWISE.

13.6 ASSIGNABILITY. The Bank may at any time assign the Bank's rights in this Agreement, the Note, the Obligations, or any part thereof. In addition, the Bank may at any time sell one or more participations in the Loans. The Borrower may not sell or assign this Agreement, or any portion thereof, either voluntarily or by operation of law, without the prior written consent of the Bank. This Agreement shall be binding upon the Bank and the Borrower and their respective legal representatives and successors. All references herein to the Borrower shall be deemed to include any successors, whether immediate or remote.

13.7 CONFIDENTIALITY. The Borrower and the Bank hereby agree and acknowledge that any and all information relating to the Borrower which is (i) furnished by the Borrower to the Bank (or to any affiliate of the Bank), and
(ii) non-public, confidential or proprietary in nature, shall be kept confidential by the Bank or such affiliate in accordance with applicable law, provided, however, that such information and other credit information relating to the Borrower may be distributed by the Bank or such affiliate to the Bank's or such affiliate's directors, officers, employees, attorneys, affiliates, auditors and regulators, who have a need to know, and upon the order of a court or other governmental agency having jurisdiction over the Bank or such affiliate, to any other party. The Borrower and the Bank further agree that this provision shall survive the termination of this Agreement.

13.8 BINDING EFFECT. This Agreement shall become effective upon execution by the Borrower and the Bank. If this Agreement is not dated or contains any blanks when executed by the Borrower, the Bank is hereby authorized, without notice to the Borrower, to date this Agreement as of the date when it was executed by the Borrower, and to complete any such blanks according to the terms upon which this Agreement is executed.

13.9 GOVERNING LAW. This Agreement, the Loan Documents and the Note shall be delivered and accepted in and shall be deemed to be contracts made under and governed by the internal laws of the State of Illinois (but giving effect to federal laws applicable to national banks), and for all purposes shall be construed in accordance with the laws of such State, without giving effect to the choice of law provisions of such State.

13.10 ENFORCEABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

13.11 SURVIVAL OF BORROWER REPRESENTATIONS. All covenants, agreements, representations and warranties made by the Borrower herein shall, notwithstanding any investigation by the Bank, be deemed material and relied upon by the Bank and shall survive the making and execution of this Agreement and the Loan Documents and the issuance of the Note, and shall be deemed to be continuing representations and warranties until such time as the Borrower has fulfilled all of its Obligations to the Bank, and the Bank has been paid in full. The Bank, in extending financial accommodations to the Borrower, is expressly acting and relying on the aforesaid representations and warranties.

13.12 EXTENSIONS OF BANK'S COMMITMENT AND NOTE. This Agreement shall secure and govern the terms of any extensions or renewals of the Bank's commitment hereunder and the Note pursuant to the execution of any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Note.

13.13 TIME OF ESSENCE. Time is of the essence in making payments of all amounts due the Bank under this Agreement and in the performance and observance by the Borrower of each covenant, agreement, provision and term of this Agreement.

13.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.

13.15 FACSIMILE SIGNATURES. The Bank is hereby authorized to rely upon and accept as an original any Loan Documents or other communication which is sent to the Bank by facsimile, telegraphic or other electronic transmission (each, a "Communication") which the Bank in good faith believes has been signed by Borrower and has been delivered to the Bank by a properly authorized representative of the Borrower, whether or not that is in fact the case. Notwithstanding the foregoing, the Bank shall not be obligated to accept any such Communication as an original and may in any instance require that an original document be submitted to the Bank in lieu of, or in addition to, any such Communication.

13.16 NOTICES. Except as otherwise provided herein, the Borrower waives all notices and demands in connection with the enforcement of the Bank's rights hereunder. All notices, requests, demands and other communications provided for hereunder shall be in writing, sent by certified or registered mail, postage prepaid, by facsimile, telegram or delivered in person, and addressed as follows:

If to the Borrower:   AAR CORP.
                      1100 Wood Dale Road
                      Wood Dale, Illinois  60191
                      Attention:    Timothy J. Romenesko
                                    Vice President and
                                    Chief Financial Officer

                     34

If to the Bank:       LaSalle Bank National Association
                      135 South LaSalle Street
                      Chicago, Illinois  60603

Attention: Scott Carbon

or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this subsection. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.

13.17 EXPENSES; INDEMNIFICATION. The Borrower shall reimburse the Bank for any and all reasonable costs and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Bank, which attorneys may be employees of the Bank) paid or incurred by the Bank in connection with the preparation, negotiation, execution ,delivery, review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Bank for any and all reasonable costs and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Bank, which attorneys may be employees of the Bank) paid or incurred by the Bank in connection with the collection and enforcement of the Loan Documents. The Borrower further agrees to indemnify the Bank, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Bank is a party thereto) which any of them may pay or incur arising out of any term or condition contained in this Agreement or the other Loan Documents, or the direct or indirect application or proposed application of the proceeds of any Advance hereunder, except to the extent any of the foregoing arising solely from the gross negligence or willful misconduct of the party requesting indemnification. The obligations of the Borrower under this Section shall survive the termination of this Agreement.

IN WITNESS WHEREOF, the Borrower and the Bank have executed this Revolving Loan Agreement as of the date first above written.

AAR CORP

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

Name: Timothy J. Romenesko
     -----------------------------------

Title: Vice President and Chief
      ----------------------------------
       Financial Officer
      ----------------------------------

Agreed and accepted:

LASALLE BANK NATIONAL ASSOCIATION

By: /s/ Bruce S. Linger
   -------------------------------------

Name: Bruce S. Linger
     -----------------------------------

Title: Senior Vice President
      ----------------------------------

EXHIBIT "A"

REVOLVING NOTE

                                                             No. _______________
$25,000,000.00                                        Date: as of April __, 2001
Chicago, Illinois                                       Due Date: April __, 2002

FOR VALUE RECEIVED, AAR CORP., a Delaware corporation (the "Borrower"), whose address is 1100 North Wood Dale Road, Wood Dale, Illinois 60191, promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (hereinafter, together with any holder hereof, called the "Bank"), at its office at 135 South LaSalle Street, Chicago, Illinois 60603, on or before April __, 2002 (the "Maturity Date"), the lesser of (i) the principal sum of TWENTY-FIVE MILLION and 00/100 DOLLARS ($25,000,000.00), or (ii) the aggregate principal amount of all Loans outstanding under and pursuant to that certain Revolving Loan Agreement dated as of April __, 2001 between the Borrower and the Bank, as amended from time to time (as amended, supplemented or modified from time to time, the "Loan Agreement"), and made available by the Bank to the Borrower at the maturity or maturities and in the amount or amounts stated on the records of the Bank, together with interest (computed on the actual number of days elapsed on the basis of a 360 day year) as herein after provided on the aggregate principal amount of all Revolving Loans outstanding from time to time hereunder from the date hereof through and including the Maturity Date. Capitalized words and phrases not otherwise defined herein shall have the meanings assigned thereto in the Loan Agreement.

The unpaid principal amount hereof shall bear interest as provided for in the Loan Agreement. Interest after maturity (whether by reason of acceleration or otherwise) on the unpaid principal balance of this Revolving Note (the "Note") and all accrued and unpaid interest hereon, shall accrue at a floating per annum rate of interest equal to the Default Rate and shall be payable on demand from the Bank.

All Loans shall be repaid by the Borrower on the Maturity Date, unless payable sooner pursuant to the provisions of the Loan Agreement. In the event the aggregate outstanding principal balance of all Loans exceeds the Revolving Loan Commitment, the Borrower shall, without notice or demand of any kind, immediately make such repayments of the Revolving Loans or take such other actions as shall be necessary to eliminate such excess.

Principal and interest shall be paid to the Bank at its address set forth above, or at such other place as the holder of this Note shall designate in writing to the Borrower.

This Note evidences the Revolving Loans and other indebtedness incurred by the Borrower under and pursuant to the Loan Agreement, to which reference is hereby made for a statement of the terms and conditions under which the Maturity Date or any payment hereon may be accelerated. The holder of this Note is entitled to all of the benefits and security provided for in the Loan Agreement.

Except for such notices as may be required under the terms of the Loan Agreement, the Borrower waives presentment, demand, notice, protest, and all other demands, or notices, in connection with the delivery, acceptance, performance, default, or enforcement of this Note, and assents to any extension or postponement of the time of payment or any other indulgence.

THE BANK AND THE BORROWER EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN AGREEMENT, THIS NOTE OR ANY OF THE OBLIGATIONS, THE COLLATERAL, OR ANY OTHER AGREEMENT EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THE LOAN AGREEMENT, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE BORROWER ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER.

TO INDUCE THE BANK TO MAKE THE LOANS, THE BORROWER AND THE BANK IRREVOCABLY AGREES THAT ALL ACTIONS ARISING, DIRECTLY OR INDIRECTLY, AS A RESULT OR CONSEQUENCE OF THE LOAN AGREEMENT, OR THIS NOTE, SHALL BE INSTITUTED AND LITIGATED ONLY IN COURTS HAVING SITUS IN THE CITY OF CHICAGO, ILLINOIS. THE BORROWER AND THE BANK HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT HAVING ITS SITUS IN SAID CITY AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS. THE BORROWER AND THE BANK HEREBY WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER OR THE BANK IN THE MANNER PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF COURT OR OTHERWISE.

The Revolving Loans evidenced hereby have been made and/or issued and this Note has been delivered at the Bank's main office. This Note shall be governed and construed in accordance with the laws of the State of Illinois, in which state it shall be performed, and shall be binding upon the Borrower, and its legal representatives, successors, and assigns. Wherever possible, each provision of the Loan Agreement and this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Loan Agreement or this Note shall be prohibited by or be invalid under such law, such provision shall be severable, and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of the Loan Agreement or this Note.

As used herein, all provisions shall include the masculine, feminine, neuter, singular and plural thereof, wherever the context and facts require such construction and in particular the word "Borrower" shall be so construed.

IN WITNESS WHEREOF, the Borrower has executed this Revolving Note as of the date set forth above.

AAR CORP.

By:
   -------------------------------------
Its:
    ------------------------------------

Attention:    Timothy J. Romenesko
              1100 North Wood Dale Road
              Wood Dale, Illinois  60191

EXHIBIT "B"

BORROWING NOTICE

_______________, 2001

To: LaSalle Bank National Association

Re: Borrowing Notice

Ladies and Gentlemen:

We make reference to that certain Revolving Loan Agreement dated as of April __, 2001, between AAR Corp. and LaSalle Bank National Association, as it may from time to time be amended, modified, renewed or extended (the "Loan Agreement"). All capitalized terms used herein shall have the meanings attributed to them in the Loan Agreement.

The Borrower hereby gives irrevocable notice pursuant to Section 5 of the Loan Agreement for the following Advance(s):

Borrowing Date: _______________, 2001(1)

Principal Amount(2)            Type of Advance(3)            Interest Period(4)
-------------------            ------------------            ------------------



                                    Sincerely yours,

                                    AAR CORP.


                                    By:
                                           -------------------------------------
                                    Title:
                                           -------------------------------------


--------

(1) Borrowing Date must be a Business Day prior to or on the Maturity Date.
(2) Subject to the minimum amount requirements set forth in Section 5.
(3) Specify Prime or LIBOR.
(4) Applicable to LIBOR only. See definition of Interest Period and Section 5 (Restrictions on Interest Periods).

AAR CORP.

$75,000,000

$20,000,000 7.98% Series 2001-A1 Senior Notes due May 15, 2008 and $55,000,000 8.39% Series 2001-A2 Senior Notes due May 15, 2011

NOTE PURCHASE AGREEMENT

DATED AS OF MAY 1, 2001

                               TABLE OF CONTENTS

SECTION                             HEADING                                 PAGE

SECTION 1.      AUTHORIZATION OF NOTES.........................................1


SECTION 2.      SALE AND PURCHASE OF NOTES ....................................1

  Section 2.1.  Series 2001-A Notes............................................1
  Section 2.2.  Additional Series of Notes.....................................2

SECTION 3.      CLOSING........................................................2


SECTION 4.      CONDITIONS TO CLOSING..........................................3

  Section 4.1.  Representations and Warranties.................................3
  Section 4.2.  Performance; No Default........................................3
  Section 4.3.  Compliance Certificates........................................3
  Section 4.4.  Opinions of Counsel............................................4
  Section 4.5.  Purchase Permitted by Applicable Law, Etc......................4
  Section 4.6.  Related Transactions...........................................4
  Section 4.7.  Payment of Special Counsel Fees................................4
  Section 4.8.  Private Placement Number.......................................4
  Section 4.9.  Changes in Corporate Structure.................................4
  Section 4.10. Proceedings and Documents......................................4
  Section 4.11. Conditions to Issuance of Additional Notes.....................5

SECTION 5.      REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................5

  Section 5.1.  Organization; Power and Authority..............................5
  Section 5.2.  Authorization, Etc.............................................5
  Section 5.3.  Disclosure.....................................................6
  Section 5.4.  Organization and Ownership of Shares of Subsidiaries;
                 Affiliates....................................................6
  Section 5.5.  Financial Statements...........................................7
  Section 5.6.  Compliance with Laws, Other Instruments, Etc ..................7
  Section 5.7.  Governmental Authorizations, Etc...............................7
  Section 5.8.  Litigation; Observance of Statutes and Orders..................7
  Section 5.9.  Taxes..........................................................7
  Section 5.10. Title to Property; Leases .....................................8
  Section 5.11. Licenses, Permits, Etc.........................................8
  Section 5.12. Compliance with ERISA..........................................8
  Section 5.13. Private Offering by the Company................................9
  Section 5.14. Use of Proceeds; Margin Regulations............................9
  Section 5.15. Existing Debt; Future Liens...................................10
  Section 5.16. Foreign Assets Control Regulations, Etc ......................10
  Section 5.17. Status under Certain Statutes.................................10


                                       -i-

  Section 5.18. Environmental Matters ........................................10

SECTION 6.      REPRESENTATIONS OF EACH PURCHASER.............................11

  Section 6.1.  Purchase for Investment.......................................11
  Section 6.2.  Source of Funds...............................................11

SECTION 7.      INFORMATION AS TO COMPANY.....................................13

  Section 7.1.  Financial and Business Information............................13
  Section 7.2.  Officer's Certificate.........................................15
  Section 7.3.  Inspection....................................................16

SECTION 8.      PREPAYMENT OF THE NOTES.......................................16

  Section 8.1.  No Scheduled Prepayments of the Series 2001-A Notes...........16
  Section 8.2.  Optional Prepayments with Make-Whole Amount...................16
  Section 8.3.  Allocation of Partial Prepayments.............................17
  Section 8.4.  Maturity; Surrender, Etc......................................17
  Section 8.5.  Purchase of Notes.............................................17
  Section 8.6.  Make-Whole Amount for Series 2001-A Notes.....................18
  Section 8.7.  Change in Control.............................................19

SECTION 9.      AFFIRMATIVE COVENANTS.........................................21

  Section 9.1.  Compliance with Law...........................................21
  Section 9.2.  Insurance.....................................................22
  Section 9.3.  Maintenance of Properties.....................................22
  Section 9.4.  Payment of Taxes..............................................22
  Section 9.5.  Corporate Existence, Etc......................................22

SECTION 10.     NEGATIVE COVENANTS ...........................................22

  Section 10.1. Consolidated Adjusted Net Worth...............................22
  Section 10.2. Current Ratio.................................................23
  Section 10.3. Limitations on Debt...........................................23
  Section 10.4. Liens.........................................................23
  Section 10.5. Sale of Assets. etc...........................................26
  Section 10.6. Merger, Consolidation, etc....................................26
  Section 10.7. Line of Business..............................................27
  Section 10.8. Transactions with Affiliates..................................27
  Section 10.9. Designation of Restricted and Unrestricted Subsidiaries.......27

SECTION 11.     EVENTS OF DEFAULT.............................................28

SECTION 12.     REMEDIES ON DEFAULT, ETC......................................30

  Section 12.1. Acceleration..................................................30
  Section 12.2. Other Remedies................................................31


                                      -ii-

  Section 12.3. Rescission ...................................................31
  Section 12.4. No Waivers or Election of Remedies, Expenses, Etc ............31

SECTION 13.     REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES ................31

  Section 13.1. Registration of Notes.........................................31
  Section 13.2. Transfer and Exchange of Notes................................32
  Section 13.3. Replacement of Notes..........................................32

SECTION 14.     PAYMENTS ON NOTES.............................................32

  Section 14.1. Place of Payment..............................................32
  Section 14.2. Home Office Payment...........................................33

SECTION 15.     EXPENSES, ETC.................................................33

  Section 15.1. Transaction Expenses .........................................33
  Section 15.2. Survival......................................................33

SECTION 16.     SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT..34

SECTION 17.     AMENDMENT AND WAIVER..........................................34

  Section 17.1. Requirements..................................................34
  Section 17.2. Solicitation of Holders of Notes .............................34
  Section 17.3. Binding Effect, Etc ..........................................35
  Section 17.4. Notes Held by Company, Etc....................................35

SECTION 18.     NOTICES.......................................................35

SECTION 19.     REPRODUCTION OF DOCUMENTS.....................................36

SECTION 20.     CONFIDENTIAL INFORMATION......................................36

SECTION 21.     SUBSTITUTION OF PURCHASER ....................................37

SECTION 22.     MISCELLANEOUS.................................................37

  Section 22.1. Successors and Assigns........................................38
  Section 22.2. Payments Due on Non-Business Days.............................38
  Section 22.3. Severability..................................................38
  Section 22.4. Construction..................................................38
  Section 22.5. Counterparts..................................................38
  Section 22.6. Governing Law ................................................38


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SCHEDULE A     -- INFORMATION RELATING TO COMMITMENTS AND PURCHASERS

SCHEDULE B     -- DEFINED TERMS

SCHEDULE 5.4   -- Subsidiaries of the Company and Ownership of Subsidiary Stock

SCHEDULE 5.5   -- Financial Statements

SCHEDULE 5.15  -- Existing Indebtedness

EXHIBIT 1-A    -- Form of 7.98% Series 2001-A1 Senior Note due May 15, 2008

EXHIBIT 1-B    -- Form of 8.39% Series 2001-A2 Senior Note due May 15, 2011

EXHIBIT 4.4(a) -- Form of Opinion of Special Counsel for the Company

EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel for the Purchasers

EXHIBIT S      -- Form of Supplement


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AAR CORP.
1100 NORTH WOOD DALE ROAD
WOOD DALE, ILLINOIS 60191

$20,000,000 7.98% Series 2001-A1 Senior Notes due May 15, 2008 and $55,000,000 8.39% Series 2001-A2 Senior Notes due May 15, 2011

Dated as of May 1, 2001

TO THE PURCHASERS LISTED IN
THE ATTACHED SCHEDULE A:

Ladies and Gentlemen:

AAR CORP., a Delaware corporation (the "Company"), agrees with the Purchasers listed in the attached Schedule A to this Note Purchase Agreement (this "Agreement") as follows:

SECTION 1. AUTHORIZATION OF NOTES.

The Company will authorize the issue and sale of (i) $20,000,000 aggregate principal amount of its 7.98% Series 2001-A1 Senior Notes due May 15, 2008 (the "TRANCHE A1 NOTES"), and (ii) $55,000,000 aggregate principal amount of its 8.39% Series 2001-A2 Senior Notes due May 15, 2011 (the "TRANCHE A2 NOTES" and together with the Tranche A1 Notes, the "SERIES 2001-A NOTES"). The Series 2001-A Notes together with each Series of Additional Notes which may from time to time be issued pursuant to the provisions of Section 2.2 are collectively referred to as the "NOTES" (such term shall also include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Tranche A1 Notes and the Tranche A2 Notes shall be substantially in the forms set out in Exhibits 1-A and 1-B, respectively, with such changes therefrom, if any, as may be approved by the Purchasers and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.

SECTION 2. SALE AND PURCHASE OF NOTES.

SECTION 2.1. SERIES 2001-A NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3, Series 2001-A Notes in the principal amount and of the Tranche specified opposite such Purchaser's name in Schedule A at the purchase price of 100% of the principal amount thereof. The obligations of each Purchaser hereunder are several and not joint obligations and each Purchaser shall have no obligation and no liability to any Person for the performance or nonperformance by any other Purchaser hereunder.

AAR Corp. Note Purchase Agreement

SECTION 2.2. ADDITIONAL SERIES OF NOTES. The Company may, from time to time, in its sole discretion but subject to the terms hereof, issue and sell one or more additional Series of its unsecured promissory notes under the provisions of this Agreement pursuant to a supplement (a "SUPPLEMENT") substantially in the form of Exhibit S. Each additional Series of Notes (the "ADDITIONAL NOTES") issued pursuant to a Supplement shall be subject to the following terms and conditions:

(i) each Series of Additional Notes, when so issued, shall be differentiated from all previous Series by sequential alphabetical designation inscribed thereon;

(ii) Additional Notes of the same Series may consist of more than one different and separate Tranches and may differ with respect to outstanding principal amounts, maturity dates, interest rates and premiums, if any, and price and terms of redemption or payment prior to maturity, but all such different and separate tranches of the same Series shall vote as a single class and constitute one Series;

(iii) each Series of Additional Notes shall be dated the date of issue, bear interest at such rate or rates, mature on such date or dates, be subject to such mandatory and optional prepayment on the dates and at the premiums, if any, have such additional or different conditions precedent to closing, such representations and warranties and such additional covenants as shall be specified in the Supplement under which such Additional Notes are issued and upon execution of any such Supplement, this Agreement shall be amended to reflect such additional covenants without further action on the part of the holders of the Notes outstanding under this Agreement, PROVIDED, that any such additional covenants shall inure to the benefit of all holders of Notes so long as any Additional Notes issued pursuant to such Supplement remain outstanding;

(iv) each Series of Additional Notes issued under this Agreement shall be in substantially the form of Exhibit 1 to Exhibit S hereto with such variations, omissions and insertions as are necessary or permitted hereunder;

(v) the minimum principal amount of any Note issued under a Supplement shall be $100,000, except as may be necessary to evidence the outstanding amount of any Note originally issued in a denomination of $100,000 or more;

(vi) all Additional Notes shall constitute Senior Debt of the Company and shall rank PARI PASSU with all other outstanding Notes; and

(vii) no Additional Notes shall be issued hereunder if at the time of issuance thereof and after giving effect to the application of the proceeds thereof, any Default or Event of Default shall have occurred and be continuing.

SECTION 3. CLOSING.

The sale and purchase of the Series 2001-A Notes to be purchased by each Purchaser shall occur at the offices of Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, at

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10:00 a.m. Chicago time, at a closing (the "Closing") on June 7, 2001 or on such other Business Day thereafter on or prior to June 30, 2001 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Series 2001-A Notes of the Tranche to be purchased by such Purchaser in the form of a single Series 2001-A Note of such Tranche (or such greater number of Series 2001-A Notes of such Tranche in denominations of at least $100,000 as such Purchaser may request) dated the date of the Closing and registered in such Purchaser's name (or in the name of such Purchaser's nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 58-04493, ABA No. 071000013 at Bank One, Chicago, Illinois 60670. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3, or any of the conditions specified in
Section 4 shall not have been fulfilled to any Purchaser's satisfaction, such Purchaser shall, at such Purchaser's election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.

SECTION 4. CONDITIONS TO CLOSING.

The obligation of each Purchaser to purchase and pay for the Series 2001-A Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser's satisfaction, prior to or at the Closing, of the following conditions:

SECTION 4.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.

SECTION 4.2. PERFORMANCE; NO DEFAULT. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing, and, after giving effect to the issue and sale of the Series 2001-A Notes (and the application of the proceeds thereof as contemplated by Section 5.14), no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Restricted Subsidiary shall have entered into any transaction since April 16, 2001, the date of the Memorandum, that would have been prohibited by Sections 10.4, 10.5, 10.6, 10.7 or 10.8 hereof had such Sections applied since such date.

SECTION 4.3. COMPLIANCE CERTIFICATES.

(a) OFFICER'S CERTIFICATE. The Company shall have delivered to such Purchaser an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled.

(b) SECRETARY'S CERTIFICATE. The Company shall have delivered to such Purchaser a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Series 2001-A Notes and this Agreement.

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SECTION 4.4. OPINIONS OF COUNSEL. Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a) from Donald J. Vilim, Esq., Senior Counsel of the Company, and Schiff Hardin & Waite, counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as such Purchaser or the Purchasers' special counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to such Purchaser) and (b) from Chapman and Cutler, the Purchasers' special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as such Purchaser may reasonably request.

SECTION 4.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing each purchase of Series 2001-A Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which each Purchaser is subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject any Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by any Purchaser, such Purchaser shall have received an Officer's Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.

SECTION 4.6. RELATED TRANSACTIONS. The Company shall have consummated the sale of the entire principal amount of the Series 2001-A Notes scheduled to be sold on the date of Closing pursuant to this Agreement.

SECTION 4.7. PAYMENT OF SPECIAL COUNSEL FEES. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing, the fees, charges and disbursements of the Purchasers' special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing.

SECTION 4.8. PRIVATE PLACEMENT NUMBER. A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for each Tranche of the Series 2001-A Notes.

SECTION 4.9. CHANGES IN CORPORATE STRUCTURE. The Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5.

SECTION 4.10. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to such Purchaser and such Purchaser's special counsel, and such Purchaser and such Purchaser's special counsel shall have

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received all such counterpart originals or certified or other copies of such documents as such Purchaser or such Purchaser's special counsel may reasonably request.

SECTION 4.11. CONDITIONS TO ISSUANCE OF ADDITIONAL NOTES. The obligations of the Additional Purchasers to purchase any Additional Notes shall be subject to the following conditions precedent, in addition to the conditions specified in the Supplement pursuant to which such Additional Notes may be issued:

(a) COMPLIANCE CERTIFICATE. A duly authorized Senior Financial Officer shall execute and deliver to each Additional Purchaser and each holder of Notes an Officer's Certificate dated the date of issue of such Series of Additional Notes stating that such officer has reviewed the provisions of this Agreement (including any Supplements hereto) and setting forth the information and computations (in sufficient detail) required in order to establish whether the Company is in compliance with the requirements of Section 10.3 on such date.

(b) EXECUTION AND DELIVERY OF SUPPLEMENT. The Company and each such Additional Purchaser shall execute and deliver a Supplement substantially in the form of Exhibit S hereto.

(c) REPRESENTATIONS OF ADDITIONAL PURCHASERS. Each Additional Purchaser shall have confirmed in the Supplement that the representations set forth in Section 6 are true with respect to such Additional Purchaser on and as of the date of issue of the Additional Notes.

SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each Purchaser that:

SECTION 5.1. ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof.

SECTION 5.2. AUTHORIZATION, ETC. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general

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principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

SECTION 5.3. DISCLOSURE. The Company, through its agent, Banc of America Securities LLC, has delivered to each Purchaser a copy of a Private Placement Memorandum, dated April 16, 2001 (the "MEMORANDUM"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. The documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the financial statements listed in Schedule 5.5, since May 31, 2000, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any of its Subsidiaries except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact Known to the Company that could reasonably be expected to have a Material Adverse Effect.

SECTION 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES. (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Restricted and Unrestricted Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) of the Company's Affiliates, other than Subsidiaries,
(iii) of the Company's directors and senior officers and (iv) Investments permitted pursuant to paragraph (d) of the definition of "Restricted Investments".

(b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4).

(c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.

(d) No Subsidiary is a party to, or otherwise subject to, any legal restriction or any agreement (other than this Agreement and customary limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary.

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SECTION 5.5. FINANCIAL STATEMENTS. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such financial statements and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments).

SECTION 5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Agreement and the Notes will not (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Restricted Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or other Material agreement or instrument to which the Company or any Restricted Subsidiary is bound or by which the Company or any Restricted Subsidiary or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Restricted Subsidiary or (c) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Restricted Subsidiary.

SECTION 5.7. GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes.

SECTION 5.8. LITIGATION; OBSERVANCE OF STATUTES AND ORDERS. (a) There are no actions, suits or proceedings pending or, to the Knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

SECTION 5.9. TAXES. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any returns or taxes and assessments (a) the filing or amount of which is not individually or in the aggregate Material or (b) the amount, applicability

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or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended May 31, 1997.

SECTION 5.10. TITLE TO PROPERTY; LEASES. The Company and its Restricted Subsidiaries have good and sufficient title to their respective properties that they own or purport to own and that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Restricted Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all Material respects. The property of Unrestricted Subsidiaries is not material individually or in the aggregate in relationship to the property of the Company and its Subsidiaries on a consolidated basis, and the aggregate cash flow attributable to Unrestricted Subsidiaries is not material in relationship to the cash flow of the Company and its Subsidiaries on a consolidated basis.

SECTION 5.11. LICENSES, PERMITS, ETC.

(a) the Company and its Restricted Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without Known conflict with the rights of others except for those conflicts, that, individually or in the aggregate, could not have a Material Adverse Effect;

(b) to the best Knowledge of the Company, no product of the Company or any of its Restricted Subsidiaries infringes in any Material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and

(c) to the best Knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Restricted Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Restricted Subsidiaries.

SECTION 5.12. COMPLIANCE WITH ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or

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condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as could not be individually or in the aggregate Material.

(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The Company has no present intent to terminate any Plan, and, accordingly, each Plan is evaluated as a continuing Plan. The term "BENEFIT LIABILITIES" has the meaning specified in Section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meanings specified in Section 3 of ERISA.

(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under
Section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.

(d) Except as set forth in Note 6 to the Company's financial statements for its fiscal year ended May 31, 2000, the expected post-retirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by Section 4980B of the Code) of the Company and its Subsidiaries is not Material.

(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of each Purchaser's representation in Section 6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by such Purchaser.

SECTION 5.13. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has, in the six months preceding Closing, offered the Series 2001-A Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than not more than 62 Institutional Investors (including the Purchasers), each of which has been offered the Series 2001-A Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act.

SECTION 5.14. USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes to repay existing indebtedness of the Company and its Restricted

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Subsidiaries and to other general corporate purposes. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). The Company does not presently have, and has no present intention to acquire, legal or beneficial ownership of any margin stock. As used in this Section, the terms "MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said Regulation U.

SECTION 5.15. EXISTING DEBT; FUTURE LIENS. (a) Schedule 5.15 sets forth a complete and correct list of all outstanding Debt of the Company and its Restricted Subsidiaries as of February 28, 2001, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Debt of the Company or its Restricted Subsidiaries. Neither the Company nor any Restricted Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Debt of the Company or such Restricted Subsidiary, the outstanding aggregate principal amount of which exceeds $5,000,000, and no event or condition exists with respect to any Debt of the Company or any Restricted Subsidiary, the outstanding aggregate principal amount of which exceeds $5,000,000, that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Debt to become due and payable before its stated maturity or before its regularly scheduled dates of payment.

(b) Except as disclosed in Schedule 5.15, neither the Company nor any Restricted Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by
Section 10.4.

SECTION 5.16. FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.

SECTION 5.17. STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Subsidiary is an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, or is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended.

SECTION 5.18. ENVIRONMENTAL MATTERS. Neither the Company nor any Restricted Subsidiary has Knowledge of any liability or has received any notice of any liability, and no proceeding has been instituted raising any liability against the Company or any of its Restricted Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws,

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except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect individually or in the aggregate. Except as otherwise disclosed to you in writing:

(a) neither the Company nor any Restricted Subsidiary has Knowledge of any facts which would give rise to any liability, public or private, for violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect;

(b) neither the Company nor any of its Restricted Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them or has disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and

(c) all buildings on all real properties now owned, leased or operated by the Company or any of its Restricted Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.

SECTION 6. REPRESENTATIONS OF EACH PURCHASER.

SECTION 6.1. PURCHASE FOR INVESTMENT. Each Purchaser represents that it has received a copy of the Memorandum and that it is purchasing the Series 2001-A Notes for its own account or for one or more separate accounts maintained by it or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser's or such pension or trust funds' property shall at all times be within such Purchaser's or such pension or trust funds' control. Each Purchaser understands that the Series 2001-A Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Series 2001-A Notes.

SECTION 6.2. SOURCE OF FUNDS. Each Purchaser represents that at least one of the following statements is an accurate representation as to each source of funds (a "SOURCE") to be used by it to pay the purchase price of the Series 2001-A Notes to be purchased by it hereunder:

(a) the Source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan, treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan, exceeds ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement for such Purchaser most recently filed with such Purchaser's state of domicile; or

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(b) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as such Purchaser has disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or

(c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in
Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or

(d) the Source is a governmental plan; or

(e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or

(f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA; or

(g) the Source is an insurance company separate account maintained solely in connection with the fixed contractual obligations of the insurance company under which the amounts payable, or credited, to any employee benefit plan (or its related trust) and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account.

If any Purchaser or any Additional Purchaser or any subsequent transferee of the Notes indicates that such Purchaser or any Additional Purchaser or such transferee is relying on any representation contained in paragraph (b), (c) or
(e) above, the Company shall deliver on the date of issuance of such Notes and on the date of any applicable transfer a certificate, which shall (if true) either state that (i) it is neither a party in interest nor a "disqualified person" (as defined in Section 4975(e)(2) of the Code), with respect to any plan identified pursuant to paragraphs (b) or (e) above, or (ii) with respect to any plan, identified pursuant to paragraph (c) above, neither it nor any "affiliate" (as defined in Section V(c) of the QPAM Exemption) has at such time, and during the immediately preceding one year, exercised the authority to appoint or terminate said QPAM as

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manager of any plan identified in writing pursuant to paragraph (c) above or to negotiate the terms of said QPAM's management agreement on behalf of any such identified plan. As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

SECTION 7. INFORMATION AS TO COMPANY.

SECTION 7.1. FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes that is an Institutional Investor:

(a) QUARTERLY STATEMENTS -- within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,

(i) an unaudited consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and

(ii) unaudited consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,

setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from normal, recurring year-end adjustments, PROVIDED that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a);

(b) ANNUAL STATEMENTS -- within 105 days after the end of each fiscal year of the Company, duplicate copies of,

(i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and

(ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year,

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the

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financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, PROVIDED that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this
Section 7.1(b);

(c) SEC AND OTHER REPORTS -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material (but excluding trade and commercial announcements);

(d) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- within five Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section
11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;

(e) ERISA MATTERS -- within five Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:

(i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or

(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or

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(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;

(f) NOTICES FROM GOVERNMENTAL AUTHORITY -- within 30 Business Days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;

(g) SUPPLEMENTS -- within 10 Business Days after the execution and delivery of any Supplement, a copy thereof;

(h) REQUESTED INFORMATION -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Restricted Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes that is an Institutional Investor; and

(i) UNRESTRICTED SUBSIDIARIES -- In the event that one or more Unrestricted Subsidiaries shall either (i) account for more than 10% of the total consolidated assets of the Company and its Subsidiaries, or
(ii) account for more than 10% of the consolidated sales of the Company and its Subsidiaries, determined in each case in accordance with GAAP, then, within the respective periods provided in Sections 7.1(a) and
(b), above, the Company shall deliver to each holder of Notes that is an Institutional Investor, financial statements of the character and for the dates and periods as in said Sections 7.1(a) and (b) covering all Unrestricted Subsidiaries (on a combined basis), together with a consolidating statement reflecting eliminations or adjustments required to reconcile the financial statements of such Unrestricted Subsidiaries to the financial statements delivered pursuant to Sections 7.1(a) and (b).

SECTION 7.2. OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes that is an Institutional Investor pursuant to
Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth:

(a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.1 through Section 10.6 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount,

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ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and

(b) EVENT OF DEFAULT -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such officer has no Knowledge of the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.

SECTION 7.3. INSPECTION. The Company shall permit each holder of Notes that is an Institutional Investor:

(a) NO DEFAULT -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Restricted Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and

(b) DEFAULT -- if a Default or Event of Default then exists, at the expense of the Company, to visit and inspect any of the offices or properties of the Company or any Restricted Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested.

SECTION 8. PREPAYMENT OF THE NOTES.

SECTION 8.1. NO SCHEDULED PREPAYMENTS OF THE SERIES 2001-A NOTES. The entire principal amount of each Tranche of the Series 2001-A Notes is payable at their respective maturity dates.

SECTION 8.2. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes of any Series, in an amount not less than $5,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, together with interest accrued thereon to the date of such prepayment, plus the Make-Whole Amount determined for the prepayment date with respect to

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such principal amount of each Note of the applicable Series then outstanding. The Company will give each holder of Notes of the Series to be prepaid written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes and each Series of Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes of the Series to be prepaid a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date.

SECTION 8.3. ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes pursuant to the provisions of Section 8.2, the principal amount of the Notes of the Series to be prepaid shall be allocated among all of the Notes of such Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof. All regularly scheduled partial prepayments made with respect to each Tranche of any Additional Series of Notes pursuant to any Supplement shall be allocated as provided therein.

SECTION 8.4. MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.

SECTION 8.5. PURCHASE OF NOTES. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement (including any Supplement hereto) and the Notes or (b) pursuant to an offer to purchase made by the Company or an Affiliate pro rata to the holders of all Notes at the time outstanding upon the same terms and conditions. Any such offer shall provide each holder with sufficient information to enable it to make an informed decision with respect to such offer, and shall remain open for at least 20 Business Days. If the holders of more than 10% of the principal amount of the Notes then outstanding accept such offer, the Company shall promptly notify the remaining holders of such fact and the expiration date for the acceptance by holders of Notes of such offer shall be extended by the number of days necessary to give each such remaining holder at least 10 Business Days from its receipt of such notice to accept such offer. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.

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SECTION 8.6. MAKE-WHOLE AMOUNT FOR SERIES 2001-A NOTES. The term "MAKE-WHOLE AMOUNT" means, with respect to any Series 2001-A Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, PROVIDED that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

"CALLED PRINCIPAL" means, with respect to any Series 2001-A Note, the principal of such Note that is to be prepaid pursuant to
Section 8.2 or 8.7 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.

"DISCOUNTED VALUE" means, with respect to the Called Principal of any Series 2001-A Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series 2001-A Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.

"REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, the sum of 0.5% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-1" on the Bloomberg Financial Market Screen (or such other display as may replace "PX-1" on the Bloomberg Financial Market Screen) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Average Life.

"REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.

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"REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Series 2001-A Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, PROVIDED that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series 2001-A Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2, 8.7 or 12.1.

"SETTLEMENT DATE" means, with respect to the Called Principal of any Series 2001-A Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or 8.7 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.

SECTION 8.7. CHANGE IN CONTROL.

(a) NOTICE OF CHANGE IN CONTROL OR CONTROL EVENT. The Company will, within fifteen Business Days after it obtains Knowledge of the occurrence of any Change in Control or Control Event, give written notice of such Change in Control or Control Event to each holder of Notes unless notice in respect of such Change in Control (or the Change in Control contemplated by such Control Event) shall have been given pursuant to subparagraph (b) of this Section 8.7. If a Change in Control has occurred, such notice shall contain and constitute an offer to prepay Notes as described in subparagraph (c) of this Section 8.7 and shall be accompanied by the certificate described in subparagraph (g) of this
Section 8.7.

(b) CONDITION TO COMPANY ACTION. The Company will not take any action that consummates a Change in Control unless (i) at least 30 days prior to such action it shall have given to each holder of Notes written notice containing and constituting an offer to prepay Notes as described in subparagraph (c) of this
Section 8.7, accompanied by the certificate described in subparagraph (g) of this Section 8.7, and (ii) (unless such offer shall have been rescinded in accordance with subparagraph (f) of this Section 8.7) contemporaneously with such action, it prepays all Notes required to be prepaid in accordance with this
Section 8.7.

(c) OFFER TO PREPAY NOTES. The offer to prepay Notes contemplated by subparagraphs (a) and (b) of this Section 8.7 shall be an offer to prepay, in accordance with and subject to this Section 8.7, all, but not less than all, the Notes held by each holder (in this case only, "holder" in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such offer (the "PROPOSED PREPAYMENT DATE"). If such Proposed Prepayment Date is in connection with an offer contemplated by subparagraph (a) of this Section 8.7, such date shall be not less than 30 days and not more than 60 days after the date of such offer (if the Proposed Prepayment Date shall not be specified in such offer, the Proposed Prepayment Date shall be the 30th day after the date of such offer).

(d) REJECTION. A holder of Notes may reject the offer to prepay made pursuant to this Section 8.7 by causing a notice of such rejection to be delivered to the Company at least 15 days prior to the Proposed Prepayment Date. A failure by a holder of Notes to respond to an offer to

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prepay made pursuant to this Section 8.7 shall be deemed to constitute an acceptance of such offer by such holder.

(e) PREPAYMENT. Prepayment of the Notes to be prepaid pursuant to this
Section 8.7 shall be the unpaid principal amount of such Notes, plus the Make-Whole Amount determined for the date of prepayment with respect to such principal amount, together with interest on such Notes accrued and unpaid to the date of prepayment. The prepayment shall be made on the Proposed Prepayment Date except as provided in subparagraph (f) of this Section 8.7.

(f) DEFERRAL OR RESCISSION OF PREPAYMENT. (i) The obligation of the Company to prepay Notes pursuant to the offers required by subparagraph (b) and accepted in accordance with subparagraph (d) of this Section 8.7 is subject to the occurrence of the Change in Control in respect of which such offers and acceptances shall have been made. In the event that such Change in Control does not occur on or before the Proposed Prepayment Date in respect thereof, the prepayment shall be deferred until, and shall be made on the date on which, such Change in Control occurs. The Company shall keep each holder of Notes reasonably and timely informed of (i) any such deferral of the date of prepayment, (ii) the date on which such Change in Control and the prepayment are expected to occur, and (iii) any determination by the Company that efforts to effect such Change in Control have ceased or been abandoned (in which case the offers and acceptances made pursuant to this Section 8.7 in respect of such Change in Control shall be deemed rescinded).

(ii) The obligation of the Company to prepay Notes pursuant to the offers required by subparagraph (b) and accepted in accordance with subparagraph
(d) of this Section 8.7 shall be deemed to have been rescinded in the event that, on or before the Proposed Prepayment Date, the Holders have received satisfactory evidence that the Notes have been accorded a rating of Investment Grade or better by both Rating Agencies, after giving effect on a pro forma basis to the consummation of the Change in Control and all other events and transactions that are conditions to the Change in Control or are to occur in connection therewith.

(g) OFFICER'S CERTIFICATE. Each offer to prepay the Notes pursuant to this Section 8.7 shall be accompanied by a certificate, executed by a Senior Financial Officer of the Company and dated the date of such offer, specifying:
(i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this
Section 8.7; (iii) the principal amount of each Note offered to be prepaid; (iv) the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation; (v) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; and (vi) in reasonable detail, the nature and date or proposed date of the Change in Control. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes which has accepted or is deemed to have accepted the Company's offer to prepay the Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date.

(h) "CHANGE IN CONTROL" DEFINED. "Change in Control" means the occurrence of any one or more of the following events:

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(i) any person (as such term is used in Section 13(d) of the Exchange Act) acquires beneficial ownership (as that term is defined in Rule 13d-3 under the Exchange Act), of more than 50% of the outstanding capital stock of the Company entitled to vote for the election of directors;

(ii) either (x) a merger or consolidation or other business combination of the Company with one or more other corporations as a result of which the beneficial owners of the outstanding voting stock of the Company immediately prior to such business combination beneficially own (either by remaining outstanding or by being converted into voting securities of the surviving or resulting corporation or any parent thereof) less than 60% of the outstanding voting stock of the Company or the surviving or resulting corporation or any parent thereof immediately after such merger or consolidation or business combination, or (y) 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

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

(i) "CONTROL EVENT" DEFINED. "CONTROL EVENT" means:

(i) the execution of any definitive written agreement which, when fully performed by the parties thereto, would result in a Change in Control, or

(ii) the making of any written offer by any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act as in effect on the date of the Closing) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act as in effect on the date of the Closing) to the holders of the common stock of the Company, which offer, if accepted by the requisite number of holders, would result in a Change in Control.

SECTION 9. AFFIRMATIVE COVENANTS.

The Company covenants that so long as any of the Notes are outstanding:

SECTION 9.1. COMPLIANCE WITH LAW. The Company will, and will cause each of its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

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SECTION 9.2. INSURANCE. The Company will, and will cause each of its Restricted Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.

SECTION 9.3. MAINTENANCE OF PROPERTIES. The Company will, and will cause each of its Restricted Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Restricted Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

SECTION 9.4. PAYMENT OF TAXES. The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the non-filing or nonpayment of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect.

SECTION 9.5. CORPORATE EXISTENCE, ETC. Subject to Sections 10.5 and 10.6, the Company will at all times preserve and keep in full force and effect its corporate existence, and will at all times preserve and keep in full force and effect the corporate existence of each of its Restricted Subsidiaries (unless merged into the Company or a Wholly-Owned Restricted Subsidiary) and all rights and franchises of the Company and its Restricted Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

SECTION 10. NEGATIVE COVENANTS.

The Company covenants that so long as any of the Notes are outstanding:

SECTION 10.1. CONSOLIDATED ADJUSTED NET WORTH. The Company will not, at any time, permit Consolidated Adjusted Net Worth to be less than the sum of (a) $230,000,000, plus (b) an aggregate amount equal to 25% of its Consolidated Net Income (but without reduction for any loss

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in any completed fiscal year or any fiscal quarter which is not part of a completed fiscal year since February 28, 2000) for each completed fiscal quarter beginning with the fiscal quarter ending May 31, 2001, plus (c) an aggregate amount equal to 50% of the Net Proceeds of Capital Stock for the period commencing with March 1, 2001 and ending with the date of determination.

SECTION 10.2. CURRENT RATIO. The Company will not, at any time, permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities to be less than 1.5 to 1.

SECTION 10.3. LIMITATIONS ON DEBT.

(a) MAINTENANCE OF CONSOLIDATED DEBT. The Company will not at any time permit Consolidated Debt to exceed 60% of Consolidated Total Capitalization as of the then most recently ended fiscal quarter of the Company.

(b) MAINTENANCE OF PRIORITY DEBT. The Company will not at any time permit Priority Debt to exceed 10% of Consolidated Net Worth as of the then most recently ended fiscal quarter of the Company.

SECTION 10.4. LIENS. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any property or asset (including, without limitation, any document or instrument in respect of goods or accounts receivable) of the Company or any such Restricted Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom or assign or otherwise convey any right to receive income or profits (unless it makes, or causes to be made, effective provision whereby the Notes will be equally and ratably secured with any and all other obligations thereby secured, such security to be pursuant to an agreement reasonably satisfactory to the Required Holders and, in any such case, the Notes shall have the benefit, to the fullest extent that, and with such priority as, the holders of the Notes may be entitled under applicable law, of an equitable Lien on such property), except:

(a) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.4;

(b) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other similar Liens, in each case, incurred in the ordinary course of business and not in connection with borrowed money for sums not yet due and payable or the payment of which is being contested in good faith by appropriate proceedings ;

(c) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business (i) in connection with workers' compensation, unemployment insurance and other types of social security or retirement benefits, or (ii) to secure (or to obtain letters of credit that secure) the performance of tenders, statutory obligations, surety bonds, appeal bonds, bids, leases (other than Capital Leases), performance bonds, purchase, construction or sales contracts and other similar obligations,

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in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property;

(d) Liens securing Nonrecourse Debt incurred by the Company or any Restricted Subsidiary (or any Person in which the Company or any Restricted Subsidiary shall be the beneficial owner), PROVIDED that such Lien is restricted to aircraft and engines and the lease thereof to a Person other than the Company or a Restricted Subsidiary;

(e) any attachment or judgment Lien, unless the judgment it secures shall not, within 60 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay or could not reasonably be expected to have a Material Adverse Effect;

(f) Liens on property or assets of the Company or any of its Restricted Subsidiaries securing Debt owing to the Company or to another Restricted Subsidiary;

(g) Liens existing on the date of this Agreement and securing the Debt of the Company and its Restricted Subsidiaries referred to in items 4, 5, 6, 10 and 11 of Schedule 5.15;

(h) leases or subleases (including aircraft or engine leases) granted to others, easements, rights-of-way, restrictions and other similar charges, encumbrances or survey exceptions, in each case incidental to, and not interfering with, the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries, provided that such Liens do not, in the aggregate, Materially detract from the value of such property;

(i) the interest of the lessor of any property subject to a lease (other than a Capitalized Lease) of such property under which the Company or any Restricted Subsidiary is lessee, whether or not such interest is protected by a precautionary filing;

(j) any Lien existing on property of a Person immediately prior to its being consolidated with or merged into the Company or a Restricted Subsidiary or its becoming a Restricted Subsidiary, or any Lien existing on any property acquired by the Company or any Restricted Subsidiary at the time such property is so acquired (whether or not the Debt secured thereby shall have been assumed), provided that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Restricted Subsidiary or such acquisition of property, and (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by the terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property;

(k) any Lien created to secure all or any part of the purchase price, or to secure Debt incurred or assumed to pay all or any part of the purchase price or cost of construction, of property (or any improvement thereon) acquired or constructed by the Company or a Restricted Subsidiary after the date of the Closing, PROVIDED that

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(i) any such Lien shall extend solely to the item or items of such property (or improvement thereon) so acquired or constructed and, if required by the terms of the instrument originally creating such Lien, other property (or improvement thereon) which is an improvement to or is acquired for specific use in connection with such acquired or constructed property (or improvement thereon) or which is real property being improved by such acquired or constructed property (or improvement thereon),

(ii) the principal amount of the Debt secured by any such Lien shall at no time exceed an amount equal to the lesser of (A) the cost to the Company or such Restricted Subsidiary of the property (or improvement thereon) so acquired or constructed and (B) the Fair Market Value (as determined in good faith by a Senior Financial Officer of the Company) of such property (or improvement thereon) at the time of such acquisition or construction,

(iii) in the case of Inventory, the net book value, net of applicable reserves, of all Inventory subject to such Liens shall not at any time exceed 20% of the aggregate net book value, net of applicable reserves, of all Inventory of the Company and its Restricted Subsidiaries, and

(iv) any such Lien shall be created contemporaneously with, or within 365 days after, the acquisition or construction of such property;

(l) any Lien renewing, extending or refunding any Lien permitted by paragraphs (g), (j) and (k) of this Section 10.4, PROVIDED that (i) the principal amount of Debt secured by such Lien immediately prior to such extension, renewal or refunding is not increased or the maturity thereof reduced, (ii) such Lien is not extended to any other property, and (iii) immediately after such extension, renewal or refunding no Default or Event of Default would exist;

(m) Liens securing indebtedness incurred to finance the acquisition and improvement of the real property in Wood Dale, Illinois, used or to be used as the corporate headquarters of the Company, PROVIDED that (i) the aggregate principal amount of indebtedness secured by such Liens shall not exceed $25,000,000 at any time outstanding and (ii) any such Lien shall extend solely to the item or items of such property (or improvement thereon) so acquired or constructed and, if required by the terms of the instrument originally creating such Lien, other property (or improvement thereon) which is an improvement to or is acquired for specific use in connection with such acquired or constructed property (or improvement thereon) or which is real property being improved by such acquired or constructed property (or improvement thereon);

(n) Liens on notes or accounts receivable sold by the Company or any Restricted Subsidiary, PROVIDED that (i) such sale constitutes a "true sale" under GAAP, (ii) recourse to the Company and its Restricted Subsidiaries in connection with such sale shall be limited to the retained portion of the notes or accounts receivable and (iii) the

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unpaid principal amount of indebtedness secured by such Liens shall not exceed $50,000,000 at any time outstanding;

(o) Liens on property of the Company or any Restricted Subsidiary securing synthetic lease financing programs PROVIDED that the aggregate unpaid principal amount of such financings does not at any time exceed $79,000,000; and

(p) other Liens not otherwise permitted by paragraphs (a) through (o) of this Section, PROVIDED that the aggregate amount of Priority Debt of the Company shall not at any time exceed 10% of Consolidated Net Worth.

SECTION 10.5. SALE OF ASSETS, ETC. Except as permitted under Section 10.6 the Company will not, and will not permit any of its Restricted Subsidiaries to, make any Asset Disposition unless:

(a) in the good faith opinion of the Company, the Asset Disposition is in exchange for consideration having a Fair Market Value at least equal to that of the property exchanged and is in the best interest of the Company or such Restricted Subsidiary; and

(b) immediately after giving effect to the Asset Disposition, no Default or Event of Default would exist; and

(c) immediately after giving effect to the Asset Disposition, the Disposition Value of all property that was the subject of any Asset Disposition occurring in the then current fiscal year of the Company would not exceed 10% of Consolidated Assets as of the end of the then most recently ended fiscal year of the Company.

If the Net Proceeds Amount for any Transfer is applied to a Debt Prepayment Application or a Property Reinvestment Application within 365 days after such Transfer, then such Transfer, only for the purpose of determining compliance with subsection (c) of this Section as of a date on or after the Net Proceeds Amount is so applied, shall be deemed not to be an Asset Disposition.

SECTION 10.6. MERGER, CONSOLIDATION, ETC. The Company will not, and will not permit any of its Restricted Subsidiaries to, consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person (except that a Restricted Subsidiary of the Company may (x) consolidate with or merge with, or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to, the Company or another Restricted Subsidiary of the Company or any other Person that will, after giving effect to the consummation of such transaction or series of transactions, constitute a Restricted Subsidiary and (y) convey, transfer or lease all of its assets in compliance with the provisions of Section 10.5), PROVIDED that the foregoing restriction does not apply to the consolidation or merger of the Company with, or the conveyance, transfer or lease of substantially all of the assets of the Company in a single transaction or series of transactions to, any Person so long as:

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(a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be (the "SUCCESSOR CORPORATION"), shall be a solvent corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia;

(b) if the Company is not the Successor Corporation, such corporation shall have executed and delivered to each holder of Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement and the Notes (pursuant to such agreements and instruments as shall be reasonably satisfactory to the Required Holders), and the Company shall have caused to be delivered to each holder of Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof; and

No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any Successor Corporation from its liability under this Agreement or the Notes.

SECTION 10.7 LINE OF BUSINESS. The Company will not, and will not permit any of its Restricted Subsidiaries to, engage in any business if, as a result, the general nature of the business in which the Company and its Restricted Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature of the business in which the Company and its Restricted Subsidiaries, taken as a whole, are engaged on the date of this Agreement as described in the Memorandum.

SECTION 10.8. TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Restricted Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Restricted Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate.

SECTION 10.9. DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES.
(a) The Board of Directors of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary and may designate any Restricted Subsidiary as an Unrestricted Subsidiary, PROVIDED that (i) at such time and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, and (ii) the designation of such Subsidiary as Restricted or Unrestricted shall not be changed pursuant to this Section 10.9 on more than two occasions. The Company shall give written notice of such action to each holder of a Note within 10 days after the

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designation of any Subsidiary as Restricted or Unrestricted. Any Subsidiary acquired or created by the Company after the date of this Agreement will be a Restricted Subsidiary unless such Subsidiary shall be designated an Unrestricted Subsidiary in accordance with this Section 10.9.

(b) The Company acknowledges and agrees that if, after the date hereof, any Person becomes a Restricted Subsidiary, all Debt, leases and other obligations and all Liens and Investments of such Person existing as of the date such Person becomes a Restricted Subsidiary shall be deemed, for all purposes of this Agreement, to have been incurred, entered into, made or created at the same time such Person so becomes a Restricted Subsidiary.

SECTION 11. EVENTS OF DEFAULT.

An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing:

(a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or

(b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or

(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d), Section 10.1, Section 10.2,
Section 10.3, Section 10.5 or Section 10.6; or

(d) the Company defaults in the performance of or compliance with any term contained herein or in any Supplement (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining Knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or

(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any Supplement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any Material respect on the date as of which made; or

(f) (i) the Company or any Significant Subsidiary is in default (as principal or as guarantor or other surety) in one or more payments of any combination aggregating $100,000 or more of any principal of or premium or make-whole amount or interest on any Recourse Debt that is outstanding in an aggregate principal amount equal to or greater than 5% of Consolidated Net Worth beyond any period of grace provided with respect thereto, or (ii) the Company or any Significant Subsidiary is in default in the performance of or compliance with any term of any evidence of any Recourse Debt in an aggregate

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outstanding principal amount equal to or greater than 5% of Consolidated Net Worth or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Recourse Debt has become, or has been declared (or one or more Persons are entitled to declare such Recourse Debt to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Recourse Debt to convert such Recourse Debt into equity interests), (x) the Company or any Significant Subsidiary has become obligated to purchase or repay Debt before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount equal to or greater than 5% of Consolidated Net Worth, or (y) one or more Persons have the right to require the Company or any Significant Subsidiary so to purchase or repay such Recourse Debt; or

(g) the Company or any Significant Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or

(h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Significant Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Significant Subsidiaries, or any such petition shall be filed against the Company or any of its Significant Subsidiaries and such petition shall not be dismissed within 60 days; or

(i) a final judgment or judgments for the payment of money in an amount equal to or greater than 5% of Consolidated Net Worth in the aggregate outstanding at any time are rendered against one or more of the Company and its Significant Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or

(j) If (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under Section 4042 of

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ERISA to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of Section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall equal or exceed an amount equal to 5% of Consolidated Net Worth, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect.

As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

SECTION 12. REMEDIES ON DEFAULT, ETC.

SECTION 12.1. ACCELERATION. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 has occurred, all the Notes of every Series then outstanding shall automatically become immediately due and payable.

(b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes of any Series at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes of such Series then outstanding to be immediately due and payable.

(c) If any Event of Default described in paragraph (a) or (b) of
Section 11 has occurred and is continuing with respect to any Series of Notes, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes of such Series held by it or them to be immediately due and payable.

Upon any Note's becoming due and payable under this Section 12.1, whether automatically or by declaration, such Note will forthwith mature and the entire unpaid principal amount of such Note, plus (i) all accrued and unpaid interest thereon and (ii) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.

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SECTION 12.2. OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.

SECTION 12.3. RESCISSION. At any time after any Notes of any Series have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of not less than 50% in principal amount of the Notes of such Series then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences as to such Series if (a) the Company has paid all overdue interest on the Notes of such Series, all principal of and Make-Whole Amount, if any, on any Notes of such Series that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes of such Series, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to any Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.

SECTION 12.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements.

SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.

SECTION 13.1. REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes, maintained separately by Series and Tranche. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes.

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SECTION 13.2. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) of an identical Series (and of an identical Tranche if such Series has separate Tranches) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of the Note of such Series and Tranche originally issued hereunder or pursuant to any Supplement. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $250,000, PROVIDED that if necessary to enable the registration of transfer by a holder of its entire holding of Notes in a Series or Tranche, one Note may be in a denomination of less than $250,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2, PROVIDED that such holder may (in reliance upon information provided by the Company, which shall not be unreasonably withheld) make a representation to the effect that the purchase by such holder of any Note will not constitute a non-exempt prohibited transaction under Section 406(a) of ERISA.

SECTION 13.3. REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and

(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (PROVIDED that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $1,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or

(b) in the case of mutilation, upon surrender and cancellation thereof,

the Company at its own expense shall execute and deliver, in lieu thereof, a new Note of an identical Series (and of an identical Tranche if such Series has separate Tranches), dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.

SECTION 14. PAYMENTS ON NOTES.

SECTION 14.1. PLACE OF PAYMENT. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in

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Chicago, Illinois at the principal office of Bank of America in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.

SECTION 14.2. HOME OFFICE PAYMENT. So long as any Purchaser or such Purchaser's nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose for such Purchaser on Schedule A hereto or Schedule A attached to any Supplement, or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by any Purchaser or such Purchaser's nominee such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note.

SECTION 15. EXPENSES, ETC.

SECTION 15.1. TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all reasonable costs and expenses (including reasonable attorneys' fees of one special counsel) incurred by the Purchasers and each other holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement (including any Supplement) or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement (including any Supplement) or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement (including any Supplement) or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save each Purchaser and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by the Purchasers).

SECTION 15.2. SURVIVAL. The obligations of the Company under this
Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement, any Supplement or the Notes, and the termination of this Agreement or any Supplement.

-33-

SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT .

All representations and warranties contained herein or in any Supplement shall survive the execution and delivery of this Agreement, such Supplement and the Notes, the purchase or transfer by any Purchaser or any Additional Purchaser of any Note or portion thereof or interest therein and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of any Purchaser or any Additional Purchaser or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement or any Supplement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement (including every Supplement) and the Notes embody the entire agreement and understanding between the Purchasers and the Additional Purchasers and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.

SECTION 17. AMENDMENT AND WAIVER.

SECTION 17.1. REQUIREMENTS. (a) This Agreement (including any Supplement) and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the holders of Notes holding more than 50% in aggregate principal amount of the Notes of all Series at the time outstanding, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the all of the holders of Notes of any Tranche at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes of such Tranche, (ii) change the percentage of the principal amount of the Notes of such Tranche, the holders of such Tranche which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20.

(b) SUPPLEMENTS. Notwithstanding anything to the contrary contained herein, the Company may enter into any Supplement providing for the issuance of one or more Series of Additional Notes consistent with Sections 2.2 and 4.11 hereof without obtaining the consent of any holder of any other Series of Notes.

SECTION 17.2. SOLICITATION OF HOLDERS OF NOTES.

(a) SOLICITATION. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof, any Supplement or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes.

-34-

(b) PAYMENT. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof or any Supplement unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment.

SECTION 17.3. BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.

SECTION 17.4. NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes of such Tranche or Series then outstanding, Notes of such Tranche or Series directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.

SECTION 18. NOTICES.

All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:

(i) if to a Purchaser or such Purchaser's nominee, to such Purchaser or such Purchaser's nominee at the address specified for such communications in Schedule A to this Agreement or any Supplement, or at such other address as such Purchaser or such Purchaser's nominee shall have specified to the Company in writing,

(ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or

-35-

(iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing.

Notices under this Section 18 will be deemed given only when actually received.

SECTION 19. REPRODUCTION OF DOCUMENTS.

This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by each Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to each Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This
Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.

SECTION 20. CONFIDENTIAL INFORMATION.

For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to any Purchaser by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is confidential or proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by such Purchaser as being confidential information of the Company or such Subsidiary, PROVIDED that such term does not include information that
(a) was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser's behalf,
(c) otherwise becomes known to such Purchaser from any Person not subject to a confidentiality obligation or in violation thereof other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, PROVIDED that such Purchaser may deliver or disclose Confidential Information to (i) such Purchaser's directors, trustees, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by such Purchaser's Notes), (ii) such Purchaser's financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which such Purchaser sells or offers to sell such Note or any part thereof or any participation

-36-

therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which such Purchaser offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser's investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, Rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser's Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this
Section 20.

SECTION 21. SUBSTITUTION OF PURCHASER.

Each Purchaser shall have the right to substitute any one of such Purchaser's Affiliates as the purchaser of the Notes that such Purchaser has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Purchaser's Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "Purchaser" is used in this Agreement (other than in this
Section 21), such word shall be deemed to refer to such Affiliate in lieu of such Purchaser. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to such Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "Purchaser" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to such Purchaser, and such Purchaser shall have all the rights of an original holder of the Notes under this Agreement.

SECTION 22. MISCELLANEOUS.

SECTION 22.1. SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement (including all covenants and other agreements contained in any Supplement) by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not.

-37-

SECTION 22.2. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day.

SECTION 22.3. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

SECTION 22.4. CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.

SECTION 22.5. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.

SECTION 22.6. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Illinois excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State.

* * * * *

-38-

The execution hereof by the Purchasers shall constitute a contract among the Company and the Purchasers for the uses and purposes hereinabove set forth. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement.

Very truly yours,

AAR CORP.

By /s/ Timothy J. Romenesko
   ------------------------------------
   Name: Timothy J. Romenesko
        -------------------------------
   Title: Vice President and Chief
         ------------------------------
          Financial Officer
         ------------------------------

-39-

Accepted as of May 1, 2001              JOHN HANCOCK LIFE INSURANCE COMPANY



                                        By /s/ Paul E. Harris
                                          -------------------------------------
                                          Name: Paul E. Harris
                                          Title: Director


                                        SIGNATURE 5 L.P.

                                        By: John Hancock Life Insurance Company,
                                            as Portfolio Advisor



                                        By /s/ Paul E. Harris
                                          -------------------------------------
                                          Name: Paul E. Harris
                                          Title: Authorized Signatory

JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY

By /s/ Paul E. Harris
  -------------------------------------
  Name: Paul E. Harris
  Title: Authorized Signatory

INVESTORS PARTNER LIFE INSURANCE
COMPANY

By /s/ Paul E. Harris
  -------------------------------------
  Name: Paul E. Harris
  Title: Authorized Signatory

-40-

MINNESOTA LIFE INSURANCE COMPANY

By: Advantus Capital Management, Inc.

By /s/ Al Steinkopf
  ---------------------------------
  Name: Allen Steinkopf
  Title: Vice President

INTER-STATE ASSURANCE COMPANY/LIFE &
CAPITAL

By: Advantus Capital Management, Inc.

By /s/ Al Steinkopf
  ---------------------------------
  Name: Allen Steinkopf
  Title: Vice President

FARM BUREAU LIFE INSURANCE COMPANY OF
MICHIGAN

By: Advantus Capital Management, Inc.

By /s/ Al Steinkopf
  ---------------------------------
  Name: Allen Steinkopf
  Title: Vice President

MTL INSURANCE COMPANY

By: Advantus Capital Management, Inc.

By /s/ Al Steinkopf
  ---------------------------------
  Name: Allen Steinkopf
  Title: Vice President

-41-

AMERICAN REPUBLIC INSURANCE COMPANY

By: Advantus Capital Management, Inc.

By /s/ Sean M. O'Connell
  ---------------------------------
  Name: Sean M. O'Connell
  Title: Vice President

UNITY MUTUAL LIFE INSURANCE COMPANY-
ANNUITY PORTFOLIO

By: Advantus Capital Management, Inc.

By /s/ Sean M. O'Connell
  ---------------------------------
  Name: Sean M. O'Connell
  Title: Vice President

FARM BUREAU MUTUAL INSURANCE
COMPANY OF MICHIGAN

By: Advantus Capital Management, Inc.

By /s/ Sean M. O'Connell
  ---------------------------------
  Name: Sean M. O'Connell
  Title: Vice President

GREAT WESTERN INSURANCE COMPANY

By: Advantus Capital Management, Inc.

By /s/ Sean M. O'Connell
  ---------------------------------
  Name: Sean M. O'Connell
  Title: Vice President

-42-

NATIONWIDE LIFE INSURANCE COMPANY

By /s/ Mark W. Poeppelman
  -------------------------------------
  Name: Mark W. Poeppelman
  Title: Associate Vice President

NATIONWIDE LIFE AND ANNUITY INSURANCE
COMPANY

By /s/ Mark W. Poeppelman
  -------------------------------------
  Name: Mark W. Poeppelman
  Title: Associate Vice President

-43-

AMERICAN FAMILY LIFE INSURANCE
COMPANY

By /s/ Phillip Hannifan
  -------------------------------------
  Name: Phillip Hannifan
  Title: Investment Director

-44-

THE OHIO NATIONAL LIFE INSURANCE
COMPANY

By /s/ Michael A. Boedeker
  -------------------------------------
  Name: Michael A. Boedeker
  Title: Senior Vice President,
         Investments

-45-

INFORMATION RELATING TO COMMITMENTS AND PURCHASERS

PURCHASER COMMITMENT

                                                        TRANCHE A1    TRANCHE A2
JOHN HANCOCK LIFE INSURANCE COMPANY                                  $17,500,000

JOHN HANCOCK LIFE INSURANCE COMPANY                                    3,500,000

SIGNATURE 5 L.P.                                                       2,000,000

JOHN HANCOCK VARIABLE LIFE INSURANCE
  COMPANY                                                              1,750,000

INVESTORS PARTNER LIFE INSURANCE COMPANY                                 250,000

MINNESOTA LIFE INSURANCE COMPANY                                       7,500,000

INTER-STATE ASSURANCE COMPANY/LIFE &
  CAPITAL                                                              3,000,000

FARM BUREAU LIFE INSURANCE COMPANY OF
  MICHIGAN                                                             3,000,000

MTL INSURANCE COMPANY                                                  2,000,000

AMERICAN REPUBLIC INSURANCE COMPANY                                    1,500,000

UNITY MUTUAL LIFE INSURANCE COMPANY-ANNUITY
  PORTFOLIO                                                            1,000,000

FARM BUREAU MUTUAL INSURANCE COMPANY OF
  MICHIGAN                                                             1,000,000

GREAT WESTERN INSURANCE COMPANY                                        1,000,000

NATIONWIDE LIFE INSURANCE COMPANY                      $12,000,000

NATIONWIDE LIFE AND ANNUITY INSURANCE
  COMPANY                                                3,000,000

AMERICAN FAMILY LIFE INSURANCE COMPANY                   5,000,000     5,000,000

THE OHIO NATIONAL LIFE INSURANCE COMPANY                               5,000,000
                                                       -----------   -----------

TOTALS                                                 $20,000,000   $55,000,000

SCHEDULE A
(to Note Purchase Agreement)

NAMES AND ADDRESSES OF PURCHASERS

JOHN HANCOCK LIFE INSURANCE COMPANY
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117

Payments

All payments on account of the Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to:

Fleet Boston
ABA #011000390
Boston, Massachusetts 02110

Account of: John Hancock Life Insurance Company Private Placement Collection Account Account Number 541-55417
On Order of: [Name of Issuer and PPN Number]
[Full name, interest rate and maturity date of the Notes or other obligations]

Notices

Contemporaneous with the above wire transfer, advice setting forth (1) the full name, interest rate and maturity date of the Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent, shall be faxed and mailed to:

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Accounting Division, B-3 Fax: (617) 572-0628

All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall also be faxed and mailed as set forth immediately above.

All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be faxed and mailed to:

A-2

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57 Fax: (617) 572-1605

A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be faxed and mailed to:

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-30 Fax: (617) 572-9269

Name in which Notes are to be issued: John Hancock Life Insurance Company

Taxpayer I.D. Number: 04-1414660

A-3

NAMES AND ADDRESSES OF PURCHASERS

SIGNATURE 5 L.P.
c/o John Hancock Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117

Payments

HARE & CO.

c/o The Bank of New York
ABA #021-000-018
BNF: IOC566
FFC: Account Number 77634
On Order of: [Name of Issuer and PPN Number]
[Full name, interest rate and maturity date of the Notes or other obligations]

Notices

Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
Attention: Mike DeVelis
Fax: (617) 927-8302

and

HARE & CO.

c/o The Bank of New York
P. O. Box 19266
Newark, New Jersey 07195

All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall also be faxed and mailed as set forth immediately above.

A-4

All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be faxed and mailed to:

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57 Fax: (617) 572-1605

A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be faxed and mailed to:

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-30 Fax: (617) 572-9269

Name in which Notes are to be issued: HARE & CO.

Taxpayer I.D. Number: Not Applicable

A-5

NAMES AND ADDRESSES OF PURCHASERS

JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117

Payments

Fleet Boston
ABA #011000390
Boston, Massachusetts 02110

Notices

John Hancock Variable Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Accounting Division, B-3 Fax: (617) 572-0628

All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall also be faxed and mailed as set forth immediately above.

All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be faxed and mailed to:

A-6

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57 Fax: (617) 572-1605

A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be faxed and mailed to:

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-30 Fax: (617) 572-9269

Name in which Notes are to be issued: John Hancock Variable Life Insurance Company

Taxpayer I.D. Number: 04-2664016

A-7

NAMES AND ADDRESSES OF PURCHASERS

INVESTORS PARTNER LIFE INSURANCE COMPANY
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117

Payments

Fleet Boston
ABA #011000390
Boston, Massachusetts 02110

Notices

Investors Partner Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Accounting Division, B-3 Fax: (617) 572-0628

All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall also be faxed and mailed as set forth immediately above.

All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be faxed and mailed to:

A-8

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57 Fax: (617) 572-1605

A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be faxed and mailed to:

John Hancock Life Insurance Company 200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-30 Fax: (617) 572-9269

Name in which Notes are to be issued: Investors Partner Life Insurance Company

Taxpayer I.D. Number: 13-3072894

A-9

NAMES AND ADDRESSES OF PURCHASERS

MINNESOTA LIFE INSURANCE COMPANY
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Advantus Capital Management, Inc. Telefacsimile: (651) 223-5959

Payments

All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "AAR Corp., 8.39% Series 2001-A2 Senior Notes due 2011, PPN 000361 A@4, principal, premium or interest") to:

U.S. Bank Trust N.A.
Minneapolis, Minnesota
ABA #091000022

BNF Minnesota Life Insurance Company

Account Number 1801-10-00600-4

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 41-0417830

A-10

NAMES AND ADDRESSES OF PURCHASERS

INTER-STATE ASSURANCE COMPANY/LIFE & CAPITAL
c/o Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Client Administrator

Payments

Deutsche Bank
New York, New York
ABA #021-001-033
Account 99-911-145
Ref: Inter-State Assurance Company/Life & Capital Account Number 98954

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: Salkeld & Co.

Taxpayer I.D. Number: 42-0329210

A-11

NAMES AND ADDRESSES OF PURCHASERS

FARM BUREAU LIFE INSURANCE COMPANY OF MICHIGAN
c/o Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Client Administrator

Payments

Comerica Bank
Detroit, Michigan
ABA #072-000-096

For credit to: Trust Operation--Fixed Income Unit Cost Center 98530
Account Number 21585-98530

For further credit to: Farm Bureau Life Insurance Company of Michigan Account Number: 011000312124

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 38-6053670

A-12

NAMES AND ADDRESSES OF PURCHASERS

MTL INSURANCE COMPANY
c/o Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Client Administrator

Payments

The Northern Chgo/Trust
ABA #071-000-152

for credit to: Account Number 5186041000 for further credit to: MTL Insurance Company Account Number 26-00621
Attention: Income Collections

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: ELL & Co.

Taxpayer I.D. Number: 36-1516780

A-13

NAMES AND ADDRESSES OF PURCHASERS

AMERICAN REPUBLIC INSURANCE COMPANY
c/o Advantus Capital Management Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Client Administrator

Payments

Wells Fargo Bank, N.A.
ABA #091000019
BNFA=0000840245 (include all 10 digits)

BNF=Trust Clearing Account
FFC Attn: Income Collections, a/c #20983400

(add additional information such as cusip and P&I)

Fur further credit to: American Republic Insurance Co. Account Number: 20983400

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: Wells Fargo Bank N.A. as custodian for American Republic Insurance Company

Taxpayer I.D. Number: 42-0113630

A-14

NAMES AND ADDRESSES OF PURCHASERS

UNITY MUTUAL LIFE INSURANCE COMPANY-ANNUITY PORTFOLIO
c/o Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Client Administrator

Payments

Chase NYC
ABA #021-000-021

For credit to: Chase Rochester
DDA #0000400044

Attention: Ms. Roni Norkus (716) 258-7784

For further credit to: Unity Mutual Life Insurance Company Annuity Portfolio
Advantus - 611002310

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: Trulin & Co.

Taxpayer I.D. Number: 15-0475585

A-15

NAMES AND ADDRESSES OF PURCHASERS

FARM BUREAU MUTUAL INSURANCE COMPANY OF MICHIGAN
c/o Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Client Administrator

Payments

Comerica Bank
Detroit, Michigan
ABA #072-000-096

For credit to: Trust Operation-- Fixed Income Unit Cost Center 98530
Account Number 21585-98530

For further credit to: Farm Bureau Mutual Insurance Company of Michigan Account Number: 011000312132

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 38-1316179

A-16

NAMES AND ADDRESSES OF PURCHASERS

GREAT WESTERN INSURANCE COMPANY
c/o Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Attention: Christine Rule

Payments

Northern Trust Intl Banking
ABA #026-001-122
For credit to: Merrill Lynch
Account #106476-20010 For further credit to: ML Acct #70G-13700

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: Merrill Lynch for Great Western Insurance Company

Taxpayer I.D. Number: 87-0395954

A-17

NAMES AND ADDRESSES OF PURCHASERS

NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43215-2220
Attention: Corporate Fixed-Income Securities

Payments

All notices of payment on or in respect of the Notes and written confirmation of each such payment to:

The Bank of New York
ABA #021-000-018
BNF: IOC566

F/A/O Nationwide Life Insurance Company

Attention: P&I Department
PPN #000361 A* 6
Security Description: AAR Corp., 7.98% Series 2001-A1 Senior Note due 2008

All notices of payment on or in respect of the Notes and written confirmation of each such payment to:

Nationwide Life Insurance Company c/o The Bank of New York
P. O. Box 19266
Newark, New Jersey 07195
Attention: P&I Department

With a copy to:

Nationwide Life Insurance Company One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
Attention: Investment Accounting

All notices and communications other than those in respect to payments to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 31-4156830

A-18

NAMES AND ADDRESSES OF PURCHASERS

NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43215-2220
Attention: Corporate Fixed-Income Securities

Payments

All notices of payment on or in respect of the Notes and written confirmation of each such payment to:

The Bank of New York
ABA #021-000-018
BNF: IOC566
F/A/O Nationwide Life and Annuity Insurance Company Attention: P&I Department
PPN #000361 A* 6
Security Description: AAR Corp., 7.98% Series 2001-A1 Senior Note due 2008

Notices

All notices of payment on or in respect of the Notes and written confirmation of each such payment to:

Nationwide Life and Annuity Insurance Company c/o The Bank of New York
P. O. Box 19266
Newark, New Jersey 07195
Attention: P&I Department

With a copy to:

Nationwide Life and Annuity Insurance Company One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
Attention: Investment Accounting

All notices and communications other than those in respect to payments to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 31-1000740

A-19

NAMES AND ADDRESSES OF PURCHASERS

AMERICAN FAMILY LIFE INSURANCE COMPANY
6000 American Parkway
Madison, Wisconsin 53783-0001
Attention: Investment Division - Private Placements

Payments

All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds. Each such wire transfer shall set forth the name of the Company, the full title (including the coupon rate and final maturity date) of the Notes, and the due date and application among principal and interest of the payment being made. Payment shall be made to:

Firstar Bank Milwaukee, N.A.

Account of Firstar Trust Company
ABA #075000022
For Credit to Account #112-950-027

For the following Trust Accounts:

PRINCIPAL AMOUNT   SERIES AND         ACCOUNT               TRUST ACCOUNT
    OF NOTES         TRANCHE            NAME                    NUMBER

   $3,000,000        2001-A1   Universal Life Portfolio     #000018012510
   $2,000,000        2001-A1   Annuities Portfolio          #000018012800
   $5,000,000        2001-A2   AFLIC-Traditional Portfolio  #000018012500

Attention: Donna Glidden (414) 765-6709 Credit for PPN #000361 A* 6 in the case of the 2001-A1 Notes and PPN #000361 A@ 4 in the case of the 2001-A2 Note

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment as well as quarterly and annual financial statements, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: BAND & Co.

Taxpayer I.D. Number: 39-6040365

A-20

NAMES AND ADDRESSES OF PURCHASERS

THE OHIO NATIONAL LIFE INSURANCE COMPANY
P. O. Box 237
Cincinnati, Ohio 45201
Attention: Investment Department
Telefacsimile: (513) 794-4506
OVERNIGHT DELIVERY ADDRESS:
One Financial Way
Cincinnati, Ohio 45242

Payments

Firstar Bank, N.A.
ABA #042-000013
Fifth and Walnut Streets
Cincinnati, Ohio 45202

for credit to: The Ohio National Life Insurance Company Account Number 910-275-7

Notices

All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above.

Name of Nominee in which Notes are to be issued: None

Taxpayer I.D. Number: 31-0397080

A-21

DEFINED TERMS

As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:

"ADDITIONAL NOTES" is defined in Section 2.2.

"ADDITIONAL PURCHASERS" means purchasers of Additional Notes.

"AFFILIATE" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "AFFILIATE" is a reference to an Affiliate of the Company.

"ASSET DISPOSITION" means any Transfer except:

(a) any

(i) Transfer from a Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary;

(ii) Transfer from the Company to a Wholly-Owned Restricted Subsidiary;

(iii) Transfer from the Company to a Restricted Subsidiary (other than a Wholly-Owned Restricted Subsidiary) or from a Restricted Subsidiary to another Restricted Subsidiary (other than a Wholly-Owned Restricted Subsidiary), which in either case is for Fair Market Value, and

(iv) Transfer of property from the Company or any Restricted Subsidiary in connection with a Sale-and-Leaseback Transaction entered into within 365 days after the initial acquisition or construction of such property by the Company or any Restricted Subsidiary,

so long as immediately before and immediately after the consummation of any such Transfer and after giving effect thereto, no Default or Event of Default exists; and

(b) any Transfer made in the ordinary course of business and involving only property that is either (i) inventory held for rent or sale or (ii) equipment, fixtures, supplies

SCHEDULE B
(to Note Purchase Agreement)

or materials no longer required in the operation of the business of the Company or any of its Restricted Subsidiaries or that is obsolete.

"BUSINESS DAY" means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in Chicago, Illinois, are required or authorized to be closed.

"CAPITAL LEASE" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.

"CAPITAL LEASE OBLIGATION" means, with respect to any Person and a Capital Lease, the amount of the obligation of such Person as the lessee under such Capital Lease which would, in accordance with GAAP, appear as a liability on a balance sheet of such Person.

"CHANGE IN CONTROL" has the meaning set forth in Section 8.7.

"CLOSING" is defined in Section 3.

"CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.

"COMPANY" means AAR Corp., a Delaware corporation.

"CONFIDENTIAL INFORMATION" is defined in Section 20.

"CONSOLIDATED ADJUSTED NET WORTH" means, at any time,

(a) the sum of (i) Consolidated Net Worth, plus (ii) Subordinated Debt as of such time, MINUS

(b) the sum of (i) the amount by which the book value of all Restricted Investments of the Company and its Restricted Subsidiaries exceeds 20% of Consolidated Net Worth, plus (ii) Consolidated Intangible Assets as of such time.

"CONSOLIDATED ASSETS" means, at any time, the total assets of the Company and its Restricted Subsidiaries which would be shown as assets on a consolidated balance sheet of the Company and its Restricted Subsidiaries as of such time prepared in accordance with GAAP, after eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of Restricted Subsidiaries.

"CONSOLIDATED CURRENT ASSETS" means, at any time, the total assets of the Company and its Restricted Subsidiaries which would be shown as current assets on a balance sheet of the Company and its Restricted Subsidiaries prepared in accordance with GAAP at such time.

B-2

"CONSOLIDATED CURRENT LIABILITIES" means, at any time, the total liabilities of the Company and its Restricted Subsidiaries which would be shown as current liabilities on a balance sheet of the Company and its Restricted Subsidiaries prepared in accordance with GAAP at such time.

"CONSOLIDATED DEBT" means, as of any date of determination, the total of all Debt of the Company and its Restricted Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Restricted Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Restricted Subsidiaries in accordance with GAAP.

"CONSOLIDATED INTANGIBLE ASSETS" means, at any time, the sum of

(a) the net book value of all assets, after deducting any reserves applicable thereto, which would be treated as intangible assets of the Company and its Restricted Subsidiaries under GAAP, including, without limitation, good will, trademarks, trade names, service marks, brand names, copyrights, patents and unamortized debt discount and expense, organizational expenses and the excess of the equity in any Restricted Subsidiary over the cost of the investment in such Restricted Subsidiary, PLUS

(b) any increase in the amount of Consolidated Net Worth attributable to a write-up in the book value of any assets on the books of the Company and its Restricted Subsidiaries resulting from a revaluation thereof subsequent to February 28, 2001 (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within 12 months after the acquisition of such business).

"CONSOLIDATED NET INCOME" means, with reference to any period, the net income (or loss) of the Company and its Restricted Subsidiaries for such period (taken as a cumulative whole), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the Company and its Restricted Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Restricted Subsidiaries in accordance with GAAP.

"CONSOLIDATED NET WORTH" means, at any time,

(a) the sum of (i) the par value (or value stated on the books of the corporation) of the capital stock (but excluding treasury stock and capital stock subscribed and unissued) of the Company and its Restricted Subsidiaries plus (ii) the amount of the paid-in capital and retained earnings of the Company and its Restricted Subsidiaries, in each case as such amounts would be shown on a consolidated balance sheet of the Company and its Restricted Subsidiaries as of such time prepared in accordance with GAAP, MINUS

(b) to the extent included in clause (a), all amounts properly attributable to minority interests, if any, in the stock and surplus of Restricted Subsidiaries.

"CONSOLIDATED TOTAL CAPITALIZATION" means, at any time, the sum of the remainder of Consolidated Adjusted Net Worth and Consolidated Debt minus Subordinated Debt at such time.

B-3

"DEBT" means, with respect to any Person, without duplication,

(a) its liabilities for borrowed money determined in accordance with GAAP;

(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable and other accrued liabilities arising in the ordinary course of business but including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);

(d) all liabilities for borrowed money (other than Nonrecourse Debt) secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); and

(e) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (d) hereof.

Debt of any Person shall include all obligations of such Person of the character described in clauses (a) through (e) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. For further certainty, obligations of the Company and its Restricted Subsidiaries as lessee in respect of operating leases (including "leveraged leases" and "synthetic leases" that are accounted for as operating leases) under GAAP shall not constitute "Debt".

"DEBT PREPAYMENT APPLICATION" means, with respect to any Transfer of property, the application by the Company or its Restricted Subsidiaries of cash in an amount equal to the Net Proceeds Amount with respect to such Transfer to pay Debt of the Company (other than (i) Subordinated Debt and (ii) Debt owing to the Company, any of its Subsidiaries or any Affiliate).

"DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

"DEFAULT RATE" means that rate of interest that is 2% per annum above the rate of interest stated in clause (a) of the first paragraph of any Tranche of Notes.

"DISPOSITION VALUE" means, at any time, with respect to any property

(a) in the case of property that does not constitute Restricted Subsidiary Stock, the book value thereof, valued at the time of such disposition in good faith by the Company, and

(b) in the case of property that constitutes Restricted Subsidiary Stock, an amount equal to that percentage of book value of the assets of the Restricted Subsidiary that issued such stock as is equal to the percentage that the book value of such Restricted

B-4

Subsidiary Stock represents of the book value of all of the outstanding capital stock of such Restricted Subsidiary (assuming, in making such calculations, that all Securities convertible into such capital stock are so converted and giving full effect to all transactions that would occur or be required in connection with such conversion) determined at the time of the disposition thereof, in good faith by the Company.

"ENVIRONMENTAL LAWS" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials, air emissions and discharges to waste or public systems.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

"ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under Section 414 of the Code.

"EVENT OF DEFAULT" is defined in Section 11.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

"FAIR MARKET VALUE" means, at any time and with respect to any property, the sale value of such property that would be realized in an arm's-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell).

"GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America.

"GOVERNMENTAL AUTHORITY" means

(a) the government of

(i) the United States of America or any State or other political subdivision thereof, or

(ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or

(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.

"GUARANTY" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person

B-5

guaranteeing or in effect guaranteeing any Debt, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:

(a) to purchase such Debt or obligation or any property constituting security therefor;

(b) to advance or supply funds (i) for the purchase or payment of such Debt or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Debt or obligation;

(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Debt or obligation of the ability of any other Person to make payment of the Debt or obligation; or

(d) otherwise to assure the owner of such Debt or obligation against loss in respect thereof.

In any computation of the Debt or other liabilities of the obligor under any Guaranty, the Debt or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.

"HAZARDOUS MATERIAL" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls).

"HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1.

"INSTITUTIONAL INVESTOR" means (a) any original purchaser of a Note,
(b) any holder of a Note holding more than $2,000,000 of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form.

"INVENTORY" means equipment and parts held by the Company or its Restricted Subsidiaries and available for sale or for short-term leasing, whether or not at the time subject to a lease.

"INVESTMENT" means any investment, made in cash or by delivery of property, by the Company or any of its Restricted Subsidiaries (i) in any Person, whether by acquisition of stock, indebtedness or other obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise, or
(ii) in any property.

B-6

"INVESTMENT GRADE" means a rating of the Notes of Baa3 or better by Moody's and BBB-or better by S&P.

"KNOWLEDGE" or "KNOWN" means knowledge of any officer of the Company.

"LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).

"MAKE-WHOLE AMOUNT" shall have the meaning (i) set forth in Section 8.6 with respect to any Series 2001-A Note and (ii) set forth in the applicable Supplement with respect to any other Series of Notes.

"MATERIAL" means material in relation to the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Restricted Subsidiaries taken as a whole.

"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement (including any Supplement) and the Notes, or (c) the validity or enforceability of this Agreement (including any Supplement) or the Notes.

"MEMORANDUM" is defined in Section 5.3.

"MOODY'S" means Moody's Investors Service, Inc.

"MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA).

"NET PROCEEDS AMOUNT" means, with respect to any Transfer of any Property by any Person, an amount equal to the DIFFERENCE of

(a) the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such Transfer) received by such Person in respect of such Transfer, MINUS

(b) all ordinary and reasonable out-of-pocket costs and expenses actually incurred by such Person in connection with such Transfer.

"NET PROCEEDS OF CAPITAL STOCK" means, with respect to any period, cash proceeds (net of all costs and out-of-pocket expenses in connection therewith, including, without limitation, placement, underwriting and brokerage fees and expenses), received by the Company during such

B-7

period, from the sale of all capital stock (other than Redeemable capital stock) of the Company, including in such net proceeds:

(a) the net amount paid upon issuance and exercise during such period of any right to acquire any capital stock, or paid during such period to convert a convertible debt Security to capital stock (but excluding any amount paid to the Company upon issuance of such convertible debt Security); and

(b) any amount paid to the Company upon issuance of any convertible debt Security issued after February 28, 2001 and thereafter converted to capital stock during such period.

"NONRECOURSE DEBT" means any Debt of any Person which, by the terms thereof, does not represent a claim against any general assets or revenues of such Person other than the specific assets that are subject to a Lien securing such Debt.

"NOTES" is defined in Section 1.

"OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.

"PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.

"PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof.

"PLAN" means an "employee benefit plan" (as defined in Section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.

"PRIORITY DEBT" means without duplication the sum of (a) all Debt of the Company secured by Liens other than those permitted by paragraphs (a) through (o), both inclusive, of Section 10.4, and (b) all Debt of Restricted Subsidiaries other than (i) Debt owed to the Company or other Restricted Subsidiaries and (ii) Debt outstanding at the time such Person became a Subsidiary.

"PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.

"PROPERTY REINVESTMENT APPLICATION" means, with respect to any Transfer of property, the application of an amount equal to the Net Proceeds Amount with respect to such Transfer to

B-8

acquire, develop or maintain assets used in the ordinary course of the Company's or Restricted Subsidiaries' business.

"QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor.

"RATING AGENCY" means Moody's, S&P or any successor to either Moody's or S&P.

"RECOURSE DEBT" of a Person means all Debt of such Person other than Nonrecourse Debt.

"REDEEMABLE" means, with respect to the capital stock of any Person, each share of such Person's capital stock that is:

(a) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into Debt of such Person (i) at a fixed or determinable date, whether by operation of sinking fund or otherwise, (ii) at the option of any Person other than such Person, or (iii) upon the occurrence of a condition not solely within the control of such Person; or

(b) convertible into other Redeemable capital stock.

"REQUIRED HOLDERS" means, at any time, the holders of more than 50% in principal amount of the Notes of all Series at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).

"RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with primary responsibility for the administration of the relevant portion of this Agreement.

"RESTRICTED INVESTMENTS" means all Investments except the following:

(a) property to be used in the ordinary course of business of the Company and its Restricted Subsidiaries;

(b) assets (including promissory notes) arising from the sale of goods and services in the ordinary course of business of the Company and its Restricted Subsidiaries;

(c) Investments in one or more Restricted Subsidiaries or any Person that concurrently with such Investment becomes a Restricted Subsidiary;

(d) Investments existing on the date of the Closing and disclosed in Schedule 5.4;

(e) Investments in United States Governmental Securities, PROVIDED that such obligations mature within 365 days from the date of acquisition thereof;

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(f) Investments in certificates of deposit or banker's acceptances issued by an Acceptable Bank, PROVIDED that such obligations mature within 365 days from the date of acquisition thereof;

(g) Investments in commercial paper given the highest rating by a credit rating agency of recognized national standing and maturing not more than 270 days from the date of creation thereof;

(h) Investments in Repurchase Agreements;

(i) Investments in tax-exempt obligations of any state of the United States of America, or any municipality of any such state, in each case rated "AA" or better by S&P, "Aa2" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing, PROVIDED that such obligations mature within 365 days from the date of acquisition thereof;

(j) loans by the Company and its Restricted Subsidiaries to their respective officers and key employees in an aggregate amount not to exceed $4,000,000 at any time outstanding;

(k) treasury stock; and

(l) Investments in the common stock of investment companies subject to regulation under the Investment Company Act, or so-called "money market funds", whose investments are restricted to those described in paragraphs (e), (f), (g), (h) and (i), both inclusive, above.

As of any date of determination, each Restricted Investment shall be valued at the greater of:

(x) the amount at which such Restricted Investment is shown on the books of the Company or any of its Restricted Subsidiaries (or zero if such Restricted Investment is not shown on any such books); and

(y) either

(i) in the case of any Guaranty of the obligation of any Person, the amount which the Company or any of its Restricted Subsidiaries has paid on account of such obligation less any recoupment by the Company or such Restricted Subsidiary of any such payments, or

(ii) in the case of any other Restricted Investment, the excess of (x) the greater of (A) the amount originally entered on the books of the Company or any of its Restricted Subsidiaries with respect thereto and (B) the cost thereof to the Company or its Restricted Subsidiary over (y) any return of capital (after income taxes applicable thereto) upon such Restricted Investment through the sale or other liquidation thereof or part thereof or otherwise.

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As used in this definition of "Restricted Investments":

"ACCEPTABLE BANK" means Bank of America and any other bank or trust company (i) which is organized under the laws of the United States of America or any State thereof, and (ii) whose long-term unsecured debt obligations (or the long-term unsecured debt obligations of the bank holding company owning all of the capital stock of such bank or trust company) shall have been given a rating of "A" or better by S&P, "A2" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing.

"ACCEPTABLE BROKER-DEALER" means any Person other than a natural person (i) which is registered as a broker or dealer pursuant to the Exchange Act and (ii) whose long-term unsecured debt obligations shall have been given a rating of "A" or better by S&P, "A2" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing.

"REPURCHASE AGREEMENT" means any written agreement

(a) that provides for (i) the transfer of one or more United States Governmental Securities in an aggregate principal amount at least equal to the amount of the Transfer Price (defined below) to the Company or any of its Restricted Subsidiaries from an Acceptable Bank or an Acceptable Broker-Dealer against a transfer of funds (the "TRANSFER PRICE") by the Company or such Restricted Subsidiary to such Acceptable Bank or Acceptable Broker-Dealer, and (ii) a simultaneous agreement by the Company or such Restricted Subsidiary, in connection with such transfer of funds, to transfer to such Acceptable Bank or Acceptable Broker-Dealer the same or substantially similar United States Governmental Securities for a price not less than the Transfer Price plus a reasonable return thereon at a date certain not later than 365 days after such transfer of funds,

(b) in respect of which the Company or such Restricted Subsidiary shall have the right, whether by contract or pursuant to applicable law, to liquidate such agreement upon the occurrence of any default thereunder, and

(c) in connection with which the Company or such Restricted Subsidiary, or an agent thereof, shall have taken all action required by applicable law or regulations to perfect a Lien in such United States Governmental Securities.

"UNITED STATES GOVERNMENTAL SECURITY" means any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America.

B-11

"RESTRICTED SUBSIDIARY" means any Subsidiary which (i) at least a majority of the voting securities of such Subsidiary are owned by the Company and/or one or more Wholly-Owned Restricted Subsidiaries, and
(ii) has not been designated as an Unrestricted Subsidiary by the Company as reflected in Schedule 5.4 or by written notice given to the holders of all Notes in accordance with Section 10.9.

"RESTRICTED SUBSIDIARY STOCK" means, with respect to any Person, the stock (or any options or warrants to purchase stock or other Securities exchangeable for or convertible into stock) of any Restricted Subsidiary of such Person.

"SALE-AND-LEASEBACK TRANSACTION" means a transaction or series of transactions pursuant to which the Company or any Restricted Subsidiary shall sell or transfer to any Person (other than the Company or a Restricted Subsidiary) any property, whether now owned or hereafter acquired, and, as part of the same transaction or series of transactions, the Company or any Restricted Subsidiary shall rent or lease as lessee or similarly acquire the right to possession or use of, such property or one or more properties which it intends to use for the same purpose or purposes as such property.

"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc.

"SECURITIES ACT" means the Securities Act of 1933, as amended from time to time.

"SECURITY" has the meaning set forth in section 2(1) of the Securities Act of 1933, as amended.

"SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company.

"SERIES" means all of the Notes of all Tranches issued pursuant to the original Note Agreement or, as the case may be, any Supplement.

"SIGNIFICANT SUBSIDIARY" means at any time any Restricted Subsidiary which accounts for more than (i) 10% of the Consolidated Assets of the Company and its Restricted Subsidiaries or (ii) 10% of consolidated revenue of the Company and its Restricted Subsidiaries.

"SUBORDINATED DEBT" means any Debt of the Company that is
(i) junior and subordinate in right of payment to the Notes of all Series pursuant to subordination provisions that have been approved in writing by the Required Holders and (ii) has a final maturity no earlier than any of the Notes and a weighted average life to maturity (determined in accordance with standard financial practice) that is no shorter than any of the Notes.

"SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the

B-12

profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company.

"SUCCESSOR CORPORATION" has the meaning set forth in
Section 10.6.

"TRANCHE" means all Notes of any Series having the same ranking, maturity, interest rate and schedule for mandatory prepayments.

"TRANSFER" means, with respect to any Person, any transaction in which such Person sells, conveys, transfers or leases (as lessor) any of its property, including, without limitation, Restricted Subsidiary Stock. For purposes of determining the application of the Net Proceeds Amount in respect of any Transfer, the Company may designate any Transfer as one or more separate Transfers each yielding a separate Net Proceeds Amount. In any such case, the Disposition Value of any property subject to each such separate Transfer shall be determined by ratably allocating the aggregate Disposition Value of all property subject to all such separate Transfers to each such separate Transfer on a proportionate basis.

"UNRESTRICTED SUBSIDIARY" means AAR Financial Services Corp. and AAR International Financial Services, LLC and any other Subsidiary which is so designated pursuant to Section 10.9.

"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of the Company all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Restricted Subsidiaries.

B-13

SUBSIDIARIES OF THE COMPANY
AND OWNERSHIP OF SUBSIDIARY STOCK

                                                  RESTRICTED/     JURISDICTION             % SHARES
           ENTITY                               UNRESTRICTED/   OF ORGANIZATION          OUTSTANDING AND
                                                  AFFILIATE                                   OWNED

AAR CORP.                                        Restricted         Delaware                     100%
d/b/a AAR Aviation                               Restricted
d/b/a AAR Marketing Services Company             Restricted

AAR AIRCRAFT & ENGINE GROUP, INC.                Restricted         Illinois                     100%
d/b/a AAR Aircraft Turbine Center                Restricted
d/b/a AAR Aircraft Sales & Leasing               Restricted
d/b/a AAR Engine Sales & Leasing                 Restricted
d/b/a AAR Allen Aircraft                         Restricted

AAR ENGINE SERVICES, INC.                        Restricted         Illinois                     100%
d/b/a AAR Engine Component Services              Restricted
d/b/a AAR Energy Services                        Restricted

AAR AIRFRAME & ACCESSORIES GROUP, INC.           Restricted         Illinois                     100%
d/b/a AAR Distribution                           Restricted
d/b/a AAR Expendables                            Restricted
d/b/a AAR Defense Systems                        Restricted
d/b/a AAR Air Sales                              Restricted
d/b/a AAR Oklahoma                               Restricted
d/b/a AAR Aircraft Services                      Restricted

AAR ALLEN SERVICES, INC.                         Restricted         Illinois                     100%
d/b/a AAR Landing Gear Services                  Restricted
d/b/a AAR Aircraft Component Services            Restricted
d/b/a AAR Hermetic                               Restricted
d/b/a AAR Tempco                                 Restricted
d/b/a Mars Aircraft Radio                        Restricted

AAR CORP. CHARITABLE FOUNDATION                  Restricted         Illinois            N/A - Not for Profit

AAR DO BRASIL LTDA.                              Restricted          Brazil                       99%
                                                                                                  1%

AAR FINANCIAL SERVICES CORP.                     Unrestricted       Illinois                     100%

AAR INTERNATIONAL FINANCIAL SERVICES, L.L.C.     Unrestricted       Illinois                      10%
                                                                                                  90%

AAR INTERNATIONAL, INC.                          Restricted         Illinois                     100%
d/b/a AAR Distribution International             Restricted
d/b/a AAR Aircraft Component Services            Restricted

AAR IRELAND LIMITED                              Restricted         Ireland                      100%

AAR MANUFACTURING GROUP, INC.                    Restricted         Illinois                     100%
d/b/a AAR Manufacturing                          Restricted
d/b/a AAR-ATICS                                  Restricted
d/b/a AAR Cargo Systems                          Restricted
d/b/a AAR Cadillac Manufacturing                 Restricted
d/b/a AAR Composites                             Restricted
d/b/a AAR Craig Systems                          Restricted
d/b/a AAR Skydyne                                Restricted

AAR POWERBOSS, INC.                              Restricted         Illinois                     100%
d/b/a AAR PowerBoss                              Restricted

AAR RECEIVABLES CORPORATION                      Restricted         Illinois                     100%

AAR TRANSNATIONAL CORPORATION                    Restricted     U.S. Virgin Islands              100%

TECHNISCH HANDELSKANTOOR LLOYD B.V.              Restricted        Netherlands                   100%

ALLEN AIRMOTIVE PROPERTIES B.V.                  Restricted        Netherlands                   100%

AAR/SSB I, LLC                                    Affiliate         Illinois                      50%
                                                                                                  50%

AAR/SSB II, LLC                                   Affiliate         Illinois                      50%
                                                                                                  50%

ARICRAFT NO. 1, LLC                               Affiliate         Illinois                      50%
                                                                                                  50%

AIRCRAFT NO. 2, LLC                               Affiliate         Illinois                      50%
                                                                                                  50%

                                                                 OWNER
ENTITY                                               (INDICATE OFFICER OR DIRECTOR)



AAR CORP.                                                     Publicly Held
d/b/a AAR Aviation
d/b/a AAR Marketing Services Company

AAR AIRCRAFT & ENGINE GROUP, INC.                               AAR Corp.
d/b/a AAR Aircraft Turbine Center
d/b/a AAR Aircraft Sales & Leasing
d/b/a AAR Engine Sales & Leasing
d/b/a AAR Allen Aircraft

AAR ENGINE SERVICES, INC.                           AAR Aircraft & Engine Group, Inc.
d/b/a AAR Engine Component Services
d/b/a AAR Energy Services

AAR AIRFRAME & ACCESSORIES GROUP, INC.                          AAR Corp.
d/b/a AAR Distribution
d/b/a AAR Expendables
d/b/a AAR Defense Systems
d/b/a AAR Air Sales
d/b/a AAR Oklahoma
d/b/a AAR Aircraft Services

AAR ALLEN SERVICES, INC.                         AAR Airframe & Accessories Group, Inc.
d/b/a AAR Landing Gear Services
d/b/a AAR Aircraft Component Services
d/b/a AAR Hermetic
d/b/a AAR Tempco
d/b/a Mars Aircraft Radio

AAR CORP. CHARITABLE FOUNDATION                                 AAR Corp.

AAR DO BRASIL LTDA.                                      AAR International, Inc.
                                                                AAR Corp.

AAR FINANCIAL SERVICES CORP.                                    AAR Corp.

AAR INTERNATIONAL FINANCIAL SERVICES, L.L.C.             AAR International, Inc.
                                                      AAR Financial Services Corp.

AAR INTERNATIONAL, INC.                                         AAR Corp.
d/b/a AAR Distribution International
d/b/a AAR Aircraft Component Services

AAR IRELAND LIMITED                                      AAR International, Inc.

AAR MANUFACTURING GROUP, INC.                                   AAR Corp.
d/b/a AAR Manufacturing
d/b/a AAR-ATICS
d/b/a AAR Cargo Systems
d/b/a AAR Cadillac Manufacturing
d/b/a AAR Composites
d/b/a AAR Craig Systems
d/b/a AAR Skydyne

AAR POWERBOSS, INC.                                   AAR Manufacturing Group, Inc.
d/b/a AAR PowerBoss

AAR RECEIVABLES CORPORATION                                     AAR Corp.

AAR TRANSNATIONAL CORPORATION                                   AAR Corp.

TECHNISCH HANDELSKANTOOR LLOYD B.V.                             AAR Corp.

ALLEN AIRMOTIVE PROPERTIES B.V.                    Technisch Handelskantoor Lloyd B.V.

AAR/SSB I, LLC                                  AAR International Financial Services, LLC
                                                    State Street Bank & Trust Company

AAR/SSB II, LLC                                 AAR International Financial Services, LLC
                                                    State Street Bank & Trust Company

ARICRAFT NO. 1, LLC                                      AAR International, Inc.
                                                            Crane 737-200, LLC

AIRCRAFT NO. 2, LLC                                      AAR International, Inc.
                                                            Crane 737-200, LLC

SCHEDULE 5.4
(to Note Purchase Agreement)

5.4-2

AAR CORP.

OFFICERS

David P. Storch              President & CEO
Philip C. Slapke             Vice President, Aircraft and Engine Sales & Leasing
Peter K. Chapman             Vice President, Marketing & Business Development
Joseph M. Guillion           Vice President, Strategic Planning & Acquisitions
A. Lee Hall                  Vice President, Special Projects
Douglas S. Hara              Vice President, Purchasing & Facilities
Michael K. Carr              Vice President, Tax and Assistant Treasurer
James J. Clark               Vice President, Component Services
J. Steven McConnell          Vice President, Parts Trading
Robert McQuade               Vice President, Human Resources
David E. Prusiecki           Vice President, Defense Programs
James N. Vincent             Vice President, Aircraft Turbine Center
Timothy Romenesko            Vice President, Chief Financial Officer & Treasurer
Michael J. Sharp             Vice President, Chief Accounting Officer & Controller
Howard A. Pulsifer           Vice President, General Counsel & Secretary
Timothy O. Skelly            Assistant Secretary
Donald J. Vilim              Assistant Secretary

BOARD MEMBERS

A. Robert Abboud
Howard B. Bernick
James G. Brocksmith, Jr.
Ira A. Eichner
Edgar D. Jannotta
Joel D. Spungin
Lee B. Stern
David P. Storch
Richard D. Tabery

5.4-3

AAR CORP. AND RESTRICTED SUBSIDIARIES
INVESTMENTS

(in thousands)
February 28, 2001

Restricted Securities                 5,936

Investment in Joint Ventures          6,467
                                      -----
TOTAL                                12,403
                                     ======

5.4-4

FINANCIAL STATEMENTS

1. AAR Corp. Form 10-K for the annual period ended May 31, 2000.

2. AAR Corp. Form 10-Q for the quarterly period ended August 31, 2000

3. AAR Corp. Form 10-Q for the quarterly period ended November 30, 2000

4. AAR Corp. Form 10-Q for the quarterly period ended February 28, 2001

SCHEDULE 5.5
(to Note Purchase Agreement)

AAR CORP. AND RESTRICTED SUBSIDIARIES
EXISTING INDEBTEDNESS AND LIENS

                                                                                        (in thousands)
EXISTING INDEBTEDNESS                                                                  February 28, 2001

1.   Notes payable due November 1, 2001 with interest of 9.5%
     payable semi-annually on May 1 and November 1 (Public Debt)                            65,000

2.   Notes payable due October 15, 2003, with interest of 7.25%
     payable semi-annually on April 15 and October 15 (Public Debt)                         50,000

3.   Notes payable due December 15, 2007 with interest of 6.875%
     payable semi-annually on June 15 and December 15 (Public Debt)                         60,000

4.   Industrial revenue bonds due in quarterly installments to 2011
     with weighted average interest of approximately 4.60%
     (secured by trust indentures on property, plant and equipment)                          2,008

5.   Industrial revenue bonds due in installments to 2002 with
     weighted average interest of approximately 7.47%
     (secured by trust indentures on property, plant and equipment)                             42

6.   Industrial revenue bonds due in monthly installments to 2019 with
     Interest of 5.65% (secured by trust indentures on property, plant and
     equipment)                                                                              2,121

7.   Note payable due in annual installments to October 2003 with
     interest of 6.5%                                                                        1,358

8.   Note payable due June 2001                                                             13,242

9.   Short term debt                                                                        36,000

TOTAL                                                                                      229,771
                                                                                           =======

LIENS

10.  Receivables securitization program                                                     18,984

11.  Factored receivables with recourse (secured by specific accounts)                      14,489


TOTAL                                                                                       33,473
                                                                                            ======

SCHEDULE 5.15
(to Note Purchase Agreement)

[FORM OF NOTE]

AAR CORP.

7.98% SERIES 2001-A1 SENIOR NOTE DUE MAY 15, 2008

No. A1-[____] [Date] $[__________] PPN 000361 A* 6

FOR VALUE RECEIVED, the undersigned, AAR CORP. (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [_____________________] or registered assigns, the principal sum of [______________] DOLLARS on May 15, 2008 with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.98% per annum from the date hereof, payable semiannually, on the first day of June and December in each year, commencing with the first day of June or December next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at 9.98% per annum.

Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of Bank of America in Chicago, Illinois, or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below.

This Note is one of a Series of Senior Notes (herein called the "NOTES") issued pursuant to separate Note Purchase Agreement, dated as of May 1, 2001 (as from time to time amended, supplemented or modified, the "NOTE PURCHASE AGREEMENT"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreement.

This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary.

EXHIBIT 1-A
(to Note Purchase Agreement)

AAR Corp. Note Purchase Agreement

The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise.

If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement.

This Note shall be construed and enforced in accordance with, and the rights of the issuer and holder hereof shall be governed by, the law of the State of Illinois excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State.

AAR CORP.

By ____________________________________
Name:__________________________________
Title: ________________________________

E-1-A-2

[FORM OF NOTE]

AAR CORP.

8.39% SERIES 2001-A2 SENIOR NOTE DUE MAY 15, 2011

No. A2-[____]
[Date] $[__________] PPN 000361 A@ 4

FOR VALUE RECEIVED, the undersigned, AAR CORP. (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [_____________________] or registered assigns, the principal sum of [______________] DOLLARS on May 15, 2011 with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 8.39% per annum from the date hereof, payable semiannually, on the first day of June and December in each year, commencing with the first day of June or December next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at 10.39% per annum.

EXHIBIT 1-B
(to Note Purchase Agreement)

AAR Corp. Note Purchase Agreement

AAR CORP.

By ___________________________________
Name: _______________________________
Title: ________________________________

E-1-B-2

FORM OF OPINION OF SPECIAL COUNSEL
TO THE COMPANY

The closing opinion of Schiff Hardin & Waite, special counsel to the Company, which is called for by Section 4.4 of the Note Purchase Agreement, shall be dated the date of Closing and addressed to the Purchasers, shall be satisfactory in scope and form to each Purchaser and shall be to the effect that:

1. To such counsel's knowledge, after due inquiry, no consent or approval of any nature or form, or filing with, any Governmental Authority of the States of Delaware or Illinois or the United States of America, is necessary in connection with the execution and delivery of the Note Purchase Agreement or the Series 2001-A Notes.

2. The issuance and sale of the Series 2001-A Notes and the execution, delivery and performance by the Company of the Note Purchase Agreement do not violate the Articles of Incorporation or By-laws of the Company.

3. The issuance, sale and delivery of the Series 2001-A Notes under the circumstances contemplated by the Note Purchase Agreement do not, under existing law, require the registration of the Series 2001-A Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended.

4. Neither the issuance of the Series 2001-A Notes nor the application of the proceeds of the sale of the Series 2001-A Notes will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulation issued pursuant thereto, including, without limitation, Regulation U, T or X of the Board of Governors of the Federal Reserve System.

5. The Company is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended.

The opinion of Schiff Hardin & Waite shall cover such other matters relating to the sale of the Series 2001-A Notes as each Purchaser may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and other officers of the Company.

EXHIBIT 4.4(a)
(to Note Purchase Agreement)

FORM OF OPINION OF SENIOR COUNSEL
TO THE COMPANY

The closing opinion of Donald J. Vilim, Esq., Senior Counsel to the Company, which is called for by Section 4.4 of the Note Purchase Agreement, shall be dated the date of Closing and addressed to the Purchasers, shall be satisfactory in scope and form to each Purchaser and shall be to the effect that:

1. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the corporate power and the corporate authority to execute and perform the Note Purchase Agreement and to issue the Series 2001-A Notes and, to such counsel's knowledge, each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company has the full corporate power and the corporate authority to conduct the activities in which it is now engaged. The Company and each Subsidiary are duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary except in jurisdictions where the failure to be so qualified or licensed would not have a Material Adverse Effect.

2. All of the issued and outstanding shares of capital stock of each such Subsidiary have been duly issued, are fully paid and non-assessable and are owned by the Company, by one or more Subsidiaries, or by the Company and one or more Subsidiaries.

3. The Note Purchase Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law).

4. The Series 2001-A Notes have been duly authorized by all necessary corporate action on the part of the Company, have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law).

5. The issuance and sale of the Series 2001-A Notes and the execution, delivery and performance by the Company of the Note Purchase Agreement will not violate or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any Lien upon any of the property of the Company pursuant to the provisions of any agreement or other instrument which has been filed as an exhibit to AAR's Annual Report on Form 10-K for the period ended May 31, 2000 or any subsequent Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission prior to the date hereof.

EXHIBIT 4.4(a)
(to Note Purchase Agreement)

AAR Corp. Note Purchase Agreement

6. There are no actions, suits or proceedings pending or, to the knowledge of such counsel after due inquiry, threatened against or affecting the Company or any Subsidiary before any Governmental Authority or arbitration board or tribunal which, if adversely determined, would have a Material Adverse Effect. To the knowledge of such counsel, neither the Company nor any Subsidiary is in default with respect to any court or governmental authority, or arbitration board or tribunal.

The opinion of Senior Counsel to the Company shall cover such other matters relating to the sale of the Series 2001-A Notes as each Purchaser may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and other officers of the Company.

EXHIBIT 4.4(a)-2

FORM OF OPINION OF SPECIAL COUNSEL
TO THE PURCHASERS

The closing opinion of Chapman and Cutler, special counsel to the Purchasers, called for by Section 4.4 of the Note Purchase Agreement, shall be dated the date of Closing and addressed to each Purchaser, shall be satisfactory in form and substance to each Purchaser and shall be to the effect that:

1. The Company is a corporation, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the corporate power and the corporate authority to execute and deliver the Note Purchase Agreement and to issue the Series 2001-A Notes.

2. The Note Purchase Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law).

3. The Series 2001-A Notes have been duly authorized by all necessary corporate action on the part of the Company, and the Series 2001-A Notes being delivered on the date hereof have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law).

4. The issuance, sale and delivery of the Series 2001-A Notes under the circumstances contemplated by the Note Purchase Agreement do not, under existing law, require the registration of the Series 2001-A Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended.

The opinion of Chapman and Cutler shall also state that the opinion of Schiff Hardin & Waite, special counsel to the Company, and the opinion of Donald J. Vilim, Esq., Senior Counsel to the Company, are satisfactory in scope and form to Chapman and Cutler and that, in their opinion, the Purchasers are justified in relying thereon. With respect to matters of fact upon which such opinion is based, Chapman and Cutler may rely on appropriate certificates of public officials and officers of the Company and upon representations of the Company and the Purchasers delivered in connection with the issuance and sale of the Series 2001-A Notes.

In rendering the opinion set forth in paragraph 1 above, Chapman and Cutler may rely, as to matters referred to in paragraph 1, solely upon an examination of the Certificate of Incorporation certified by, and a certificate of good standing of the Company from, the Secretary of State of the State of Delaware, the Bylaws of the Company and the general business corporation law of the State of Delaware. The opinion of Chapman and Cutler is limited to the laws of the State of Illinois, the general business corporation law of the State of Delaware and the Federal laws of the United States.

EXHIBIT 4.4(b)
(to Note Purchase Agreement)

AAR CORP.

[NUMBER] SUPPLEMENT TO NOTE PURCHASE AGREEMENT

Dated as of ______________________

Re: $_________________% Series __ Senior Notes Due _____________________

EXHIBIT S
(to Note Purchase Agreement)

AAR CORP.
1100 NORTH WOOD DALE ROAD WOOD
DALE, ILLINOIS 60191

Dated as of
____________________, 20__

To the Purchaser(s) named in
Schedule A hereto

Ladies and Gentlemen:

This [Number] Supplement to Note Purchase Agreement (the "SUPPLEMENT") is between AAR CORP., a _________ corporation (the "COMPANY"), and the institutional investors named on Schedule A attached hereto (the "PURCHASERS").

Reference is hereby made to that certain Note Purchase Agreement dated as of May 1, 2001 (the "NOTE PURCHASE AGREEMENT") between the Company and the purchasers listed on Schedule A thereto. All capitalized terms not otherwise defined herein shall have the same meaning as specified in the Note Purchase Agreement. Reference is further made to Section 4.11 of the Note Purchase Agreement which requires that, prior to the delivery of any Additional Notes, the Company and each Additional Purchaser shall execute and deliver a Supplement.

The Company hereby agrees with the Purchaser(s) as follows:

1. The Company has authorized the issue and sale of $__________ aggregate principal amount of its _____% Series ___ Senior Notes due _________, ____ (the "SERIES ___ NOTES"). The Series ___ Notes, together with the Series 2001-A Notes
[and the Series __ Notes] initially issued pursuant to the Note Purchase Agreement and each Series of Additional Notes which may from time to time hereafter be issued pursuant to the provisions of Section 2.2 of the Note Purchase Agreement, are collectively referred to as the "Notes" (such term shall also include any such notes issued in substitution therefor pursuant to Section 13 of the Note Purchase Agreement). The Series ___ Notes shall be substantially in the form set out in Exhibit 1 hereto with such changes therefrom, if any, as may be approved by the Purchaser(s) and the Company.

2. Subject to the terms and conditions hereof and as set forth in the Note Purchase Agreement and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to each Purchaser, and each Purchaser agrees to purchase from the Company, Series __ Notes in the principal amount set forth opposite such Purchaser's name on Schedule A hereto at a price of 100% of the principal amount thereof on the closing date hereafter mentioned.

3. The sale and purchase of the Series __ Notes to be purchased by each Purchaser shall occur at the offices of [Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois

60603,] at 11:00 A.M. Chicago time, at a closing (the "CLOSING") on ______, ____ or on such other Business Day thereafter on or prior to _______, ____ as may be agreed upon by the Company and the Purchasers. At the Closing, the Company will deliver to each Purchaser the Series __ Notes to be purchased by such Purchaser in the form of a single Series __ Note (or such greater number of Series __ Notes in denominations of at least $100,000 as such Purchaser may request) dated the date of the Closing and registered in such Purchaser's name (or in the name of such Purchaser's nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number [__________________________] at ____________ Bank,
[INSERT BANK ADDRESS, ABA NUMBER FOR WIRE TRANSFERS, AND ANY OTHER RELEVANT WIRE
TRANSFER information]. If, at the Closing, the Company shall fail to tender such Series __ Notes to any Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to any Purchaser's satisfaction, such Purchaser shall, at such Purchaser's election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.

4. The obligation of each Purchaser to purchase and pay for the Series __ Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser's satisfaction, prior to the Closing, of the conditions set forth in Section 4 of the Note Purchase Agreement with respect to the Series __ Notes to be purchased at the Closing, and to the following additional conditions:

(a) Except as supplemented, amended or superceded by the representations and warranties set forth in Exhibit A hereto, each of the representations and warranties of the Company set forth in Section 5 of the Note Purchase Agreement shall be correct as of the date of Closing and the Company shall have delivered to each Purchaser an Officer's Certificate, dated the date of the Closing certifying that such condition has been fulfilled.

(b) Contemporaneously with the Closing, the Company shall sell to each Purchaser, and each Purchaser shall purchase, the Series __ Notes to be purchased by such Purchaser at the Closing as specified in Schedule A.

5. [Here insert special provisions for Series A Notes including prepayment provisions applicable to Series __ Notes (including Make-Whole Amount) and closing conditions applicable to Series ___ Notes].

6. Each Purchaser represents and warrants that the representations and warranties set forth in Section 6 of the Note Purchase Agreement are true and correct on the date hereof with respect to the purchase of the Series __ Notes by such Purchaser.

7. The Company and each Purchaser agree to be bound by and comply with the terms and provisions of the Note Purchase Agreement as fully and completely as if such Purchaser were an original signatory to the Note Purchase Agreement.

-2-

The execution hereof shall constitute a contract between the Company and the Purchaser(s) for the uses and purposes hereinabove set forth, and this agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement.

AAR CORP.

By_____________________________________
Name:________________________________
Title:_______________________________

Accepted as of __________, _____

[VARIATION]

By_____________________________________
Name:________________________________
Title:_______________________________

-3-

INFORMATION RELATING TO PURCHASERS

                                                                 PRINCIPAL
NAME AND ADDRESS OF PURCHASER                                AMOUNT OF SERIES
                                                               __ NOTES TO BE
                                                                 PURCHASED


 [NAME OF PURCHASER]                                         $

(1)    All payments by wire transfer

of immediately available funds to:

with sufficient information to identify the source and application of such funds.

(2) All notices of payments and written confirmations of such wire transfers:

(3) All other communications:

SCHEDULE A
(to Supplement)

SUPPLEMENTAL REPRESENTATIONS

The Company represents and warrants to each Purchaser that except as hereinafter set forth in this Exhibit A, each of the representations and warranties set forth in Section 5 of the Note Purchase Agreement is true and correct as of the date hereof with respect to the Series __ Notes with the same force and effect as if each reference to "Series ____ Notes" set forth therein was modified to refer the "Series __ Notes" and each reference to "this Agreement" therein was modified to refer to the Note Purchase Agreement as supplemented by the _______ Supplement. The Section references hereinafter set forth correspond to the similar sections of the Note Purchase Agreement which are supplemented hereby:

SECTION 5.3. DISCLOSURE. The Company, through its agent, Banc of America Securities LLC, has delivered to each Purchaser a copy of a Private Placement Memorandum, dated ____________ (the "MEMORANDUM"), relating to the transactions contemplated by the ______ Supplement. The Note Purchase Agreement, the Memorandum, the documents, certificates or other writings delivered to each Purchaser by or on behalf of the Company in connection with the transactions contemplated by the Note Purchase Agreement and the _______ Supplement and the financial statements listed in Schedule 5.5 to the _____ Supplement, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Since ____________, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Restricted Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect.

SECTION 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF RESTRICTED SUBSIDIARIES. (a) Schedule 5.4 to the ______ Supplement contains (except as noted therein) complete and correct lists of the Company's Restricted and Unrestricted Subsidiaries, and showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary.

SECTION 5.13. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Series ___ Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than the Purchasers and not more than [_] other Institutional Investors, each of which has been offered the Series __ Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act.

SECTION 5.14. USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Series __ Notes to ______________________________ and for general corporate purposes. No part of the proceeds from the sale of the Series __ Notes pursuant to the _____ Supplement will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 222), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of
EXHIBIT A

(to Supplement)

said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation U.

SECTION 5.15. EXISTING DEBT; FUTURE LIENS. (a) Schedule 5.15 to the _________ Supplement sets forth a complete and correct list of all outstanding Debt of the Company and its Restricted Subsidiaries as of _____________, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Debt of the Company or its Restricted Subsidiaries. Neither the Company nor any Restricted Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Debt of the Company or such Restricted Subsidiary and no event or condition exists with respect to any Debt of the Company or any Restricted Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Debt to become due and payable before its stated maturity or before its regularly scheduled dates of payment.

[Add any additional Sections as appropriate at the time the Series ___ Notes are issued]

-2-

[FORM OF SERIES __ NOTE]

AAR CORP.

___% SERIES __ SENIOR NOTE DUE ______________

No. [_________] [Date] $[____________] PPN[_____________]

FOR VALUE RECEIVED, the undersigned, AAR CORP. (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of ____________, hereby promises to pay to [________________], or registered assigns, the principal sum of [________________] DOLLARS on _______________, with interest (computed on the basis of a 360-day year of twelve 30-day months)
(a) on the unpaid balance thereof at the rate of ____% per annum from the date hereof, payable semiannually, on the _____ day of ______ and ______ in each year, commencing on the first of such dates after the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) [coupon + 2%]% or (ii) 2% over the rate of interest publicly announced by _________________ from time to time in ____________________ as its "base" or "prime" rate.

Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at ______________________, in ______________________, or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below.

This Note is one of a Series of Senior Notes (the "NOTES") issued pursuant to a Supplement to the Note Purchase Agreement dated as of May 1, 2001 (as from time to time amended, supplemented or modified, the "NOTE PURCHASE AGREEMENT"), between the Company, the Purchasers named therein and Additional Purchasers of Notes from time to time issued pursuant to any Supplement to the Note Purchase Agreement. This Note and the holder hereof are entitled equally and ratably with the holders of all other Notes of all Series from time to time outstanding under the Note Purchase Agreement to all the benefits provided for thereby or referred to therein. Each holder of this Note will be deemed, by its acceptance hereof, to have made the representation set forth in Section 6.2 of the Note Purchase Agreement, PROVIDED that such holder may (in reliance upon information provided by the Company, which shall not be unreasonably withheld) make a representation to the effect that the purchase by such holder of any Note will not constitute a non-exempt prohibited transaction under Section 406(a) of ERISA.

This Note is registered with the Company and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note of an identical Series for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary.

[The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement.] [This Note is not subject to regularly scheduled prepayments of principal.] This Note is [also] subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise.

This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of __________ excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State.

AAR CORP.

By_______________________________________
Name:_______________________________
Title:______________________________

-2-

SEVENTH AMENDMENT TO

AAR CORP. STOCK BENEFIT PLAN

WHEREAS, AAR CORP. (the "Company") adopted the AAR CORP. Stock Benefit Plan (the "Plan") on July 16, 1992, amended the Plan by a First Amendment dated July 29, 1996, a Second Amendment dated January 2, 1997, a Third Amendment dated May 6, 1997, a Fourth Amendment dated March 20, 1998, a Fifth Amendment dated July 14, 1998, and a Sixth Amendment dated December 16, 1999, and reserved the right to further amend the Plan; and

WHEREAS, the Company deems it appropriate to further amend the Plan as described below, effective October 11, 2000, and such amendment was duly adopted by the Board of Directors through its Compensation Committee at its October 11, 2000 meeting, subject to shareholder approval of the amendment at the next shareholder annual meeting.

NOW, THEREFORE, the Plan is hereby amended as follows, effective October 11, 2000; provided, however, that if this amendment does not receive shareholder approval at the 2001 annual meeting of shareholders, then this amendment shall be null and void ab initio:

Section 4.3 is amended to read as follows:

"4.3 The total number of shares with respect to which options may be granted under the Plan to any Grantee during any calendar year shall not exceed the number of shares available for issue under the Plan at the time of grant."

This Seventh Amendment has been executed by the Company, by its duly authorized officer, effective the 11th day of October, 2000, and attested by its Secretary.

AAR CORP.

                                    By /s/ David P. Storch
                                      -------------------------
                                       David P. Storch
                                       President and Chief Executive Officer

ATTEST:




/s/ Howard A. Pulsifer
--------------------------------
Howard A. Pulsifer, Secretary

SEAL

Amendment No. 2 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 reserved the right to amend or terminate the Plan at any time and from time to time, provided, however, that no such amendment or termination shall reduce accrued retirement benefits for participants under the Plan; and

WHEREAS, the Company desires to amend the Plan in certain respects and to terminate the Plan prospectively effective April 10, 2001, except as otherwise provided for below;

NOW, THEREFORE, the Company hereby amends and terminates the Plan as set forth below, effective as of April 10, 2001:

1. Any individual who was a Director on April 9, 2001, and who was not then an employee of the Company, shall be deemed to be a grandfathered Participant under the Plan. The rights of a grandfathered Participant to receive benefits under the Plan in accordance with Plan provisions shall survive termination of the Plan and such benefits shall be determined without regard to whether the grandfathered Participant's Years of Service are completed before or after termination of the Plan.

2. The Plan is hereby terminated effective April 10, 2001, subject to the rights of (i) all vested Participants and (ii) all Participants who are grandfathered pursuant to paragraph 1 above, to receive or continue to receive benefits pursuant to the terms of the Plan as the Plan was in effect from time to time prior to such termination and applicable to such Participant.

IN WITNESS WHEREOF, the Company has caused this instrument to be executed in its name by its duly authorized officer as of the 10th day of April, 2001.

AAR CORP.

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

Amendment No. 1 to AAR CORP. Amended and Restated
SUPPLEMENTAL KEY EMPLOYEE RETIREMENT PLAN

WHEREAS, the Company amended and restated the AAR CORP. Supplemental Key Employee Retirement Plan effective April 11, 2000 as the AAR CORP. Amended and Restated Supplemental Key Employee Retirement Plan ("SKERP" or "Plan"); and

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

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

1. Section 1.17 is hereby amended to read as follows:

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

2. Sections 3.1, 3.2, 3.3 and 3.4 are hereby amended to read as follows:

"3.1 EXECUTIVE OFFICERS. The Supplemental Retirement Benefit of an Executive Officer who is a Participant as described in Section 2.1 shall be a monthly amount equal to the difference between (a) and (b) below:

(a) The monthly amount equal to, in the case of the President and Chief Executive Officer, one-twelfth of 60% of Final Average Earnings, without giving effect to the limitations imposed by Section 401(a)(17) of the Code or, in the case of all other Executive Officers, the monthly amount equal to one-twelfth of 50% of Final Average Earnings (or as otherwise specified in a Compensation Committee resolution designating an individual an Executive Officer participant), without giving effect to the limitations imposed by Section 401(a)(17) of the Code, payable at the Participant's Normal Retirement Date, and if applicable, reduced for early commencement as provided in Section 3.7;

LESS

(b) the monthly amount of the Qualified Retirement Benefit payable to the Participant under the Qualified Retirement Plan at the Participant's Benefit Commencement Date.

The amount described in (a) above for any Participant who enters the Plan after January 1, 2001 shall be multiplied by a fraction, the numerator of which shall be Years of Credited Service, not to exceed twenty, and the denominator of which shall be twenty. Final Average Earnings and years of Credited Service shall be determined as of the Participant's date of termination of employment with the Company and all Affiliated Companies. The amounts described in (a) and (b) shall be computed in the form of an annuity payable over the Participant's lifetime.

3.2 KEY EMPLOYEES. The Supplemental Retirement Benefit of a Participant who is a Key Employee of the Company as described in
Section 2.2 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 without giving effect to the limitations imposed by Section 401(a)(17) of the Code, payable to the Participant under the Qualified Retirement Plan at the Participant's Benefit Commencement Date;

LESS

(b) The monthly amount of the Qualified Retirement Benefit payable to the Participant under the Qualified Retirement Plan at the Participant's Benefit Commencement Date.

The amounts described in (a) and (b) shall be computed in the form of an annuity payable over the Participant's lifetime. For purposes of calculating the Qualified Retirement Benefit under this subsection 3.2(a) 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. If a Participant described in Section 2.1 or 2.2 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 shall be payable under this Plan. The Supplemental Surviving Spouse Benefit shall be paid in a lump sum that is the actuarial equivalent of the amount that would have been payable to the Participant under Section 3.1 or 3.2 at the date of death. Actuarial equivalence shall be determined using the mortality and interest rate assumptions for lump sums 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 Participant's death.

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. Notwithstanding the preceding sentence, an election made by a Participant under the Qualified Retirement Plan with respect to the form of distribution of his benefit 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 Supplemental Retirement Benefit unless (i) such election is expressly approved in writing by the Company, and (ii) if such benefits are to be paid to a Participant in a lump sum distribution, Participant has agreed in writing to reimburse Company such payment amount, plus interest thereon at 8% per annum, immediately upon demand in the event of forfeiture of benefits under this Article III pursuant to Article IV below. If the Company shall not approve such election in writing, the form of payment or date for commencement of payment under this Section shall be selected by the Company in its sole discretion."

3. Subsection 4.6(d) is hereby amended to read as follows:

"(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 (i) such election is expressly approved in writing by the Company and (ii) if such benefits are to be paid to a Participant in a lump sum distribution, Participant has agreed, in writing, to reimburse Company for all such payment amounts plus interest thereon at 8% per annum immediately upon demand in the event of a forfeiture of benefits hereunder pursuant to Article V below. 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.

If the Company shall not approve an election made by a Participant pursuant to the preceding paragraph within 10 days of the date such

election is made, the Participant shall have the right to have the approval of the form of payment or date for commencement of payment determined by an independent arbitrator mutually selected by the Participant and the Company. In making its decision, the arbitrator shall consider the financial needs and other interests of the Participant and the Company, including the security of payment that would be afforded to the Participant if payment is not made in a lump sum, and the decision of the arbitrator shall be final and conclusive for all purposes of the Plan. The Company shall pay the costs of such arbitration, including reasonable attorneys' fees and costs of the parties."

IN WITNESS WHEREOF, this Amendment No. 1 has been executed effective as of April 10, 2001. AAR CORP.

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

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 1st day of August, 2000, by and between AAR CORP., a Delaware corporation ("Company"), and Michael J. Sharp ("Employee").

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

WHEREAS, Employee desires the Company to pay Employee certain severance payments upon a Change in Control of AAR CORP. and upon termination of employment prior to a Change in Control; and

WHEREAS, the Company is willing to pay Employee severance payments under certain circumstances if Employee agrees to confidentiality, non-compete and certain other covenants.

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 key employee 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, Controller and Chief Accounting Officer 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.

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.

(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:

Michael J. Sharp
814 S. Aldine
Park Ridge, IL 60068

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/ Michael J. Sharp
------------------------------
Michael J. Sharp

EMPLOYMENT AND SEVERANCE AND CHANGE IN CONTROL AGREEMENT

This Employment and Severance and Change in Control Agreement ("Agreement") made and entered into as of the 1st day of June, 2001, by and between AAR CORP., a Delaware corporation ("Company"), and JOSEPH M. GULLION ("Employee").

WHEREAS, the Employee has been employed with the Company as its Vice President-Strategic Planning & Acquisitions since March 1, 2001, on an employment-at-will basis; and

WHEREAS, the Company has offered Employee continued employment for a specified term, as provided for below, and Employee has accepted such offer of continued employment pursuant to the terms and conditions set forth herein.

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.

(a) Employee agrees to continue his employment with the Company through May 31, 2005 subject to the terms and conditions set forth herein. After May 31, 2005 Employee's employment shall continue on an employment-at-will basis terminable by either party at any time for any reason or no reason, and subject to the terms and conditions set forth herein. The Company may change Employee's title, duties and location of employment from time to time as the Company determines, in its sole discretion, to be in the bests interest of the Company.

b. Compensation and benefits shall be as set forth in Attachment A hereto.

2. DUTIES. During his employment, Employee shall:

(a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of his 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 his full time, energy and skill to the business of the Company and his 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 4 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 his 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 his duties hereunder.

3. 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 the 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.

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.

4. NON-COMPETE; SEVERANCE.

(a) Employee agrees that through May 31, 2005, or thereafter during Employee's continuation of employment with the Company and for one year thereafter, provided that the Company makes severance payments to Employee pursuant to subsections 4(b) and 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 4 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 6(c)(i) below) for any reason other than Cause (as defined in 6(c)(iv) below), severance each month for

twelve months in an amount (subject to applicable withholding) equal to 1/12 of Employee's annual 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 prior to May 31, 2005, Employee shall be subject to the provisions of subsection 4(a) until May 31, 2005. If Employee's employment is terminated by the Company for Cause (as defined below) or Employee terminates his employment after May 31, 2005, and prior to a Change in Control, 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 4(b) above.

(d) If at any time, any clause or portion of this Section 4 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 4(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.

(e) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 3 or Section 4(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.

(f) Except as otherwise provided in this Agreement, Section 3 and 4 of this Agreement shall survive any termination of Employee's employment with the Company.

5. 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

6. 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 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:

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.

(3) Employee and his 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 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.

(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

(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:

(2) if the incumbent in the position of President and CEO of the Company on the effective date hereof 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 two year period immediately 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.

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.

(iv) "Cause" means:

(1) 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;

(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 his 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 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 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.

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

(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.

7. 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 4 and 6 of this Agreement.

8. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 4 and 6 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 4 and 6 of this Agreement shall be considered severance pay in consideration of Employee's 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.

9. 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.

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

With a copy to:

AAR CORP.

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

(b) If to Employee, to:

Joseph M. Gullion
551 E. Windgate Court
Arlington Heights, IL 60005

10. NON-ASSIGNMENT.

(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 assignment, 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.

11. 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.

12. 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.

13. ENTIRE AGREEMENT. This Agreement, 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.

14. 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.

15. 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.

16. 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.

Company:

AAR CORP.

By: /s/ Roberta R. McQuade
   -----------------------------
Title:  Vice President

Employee:

/s/ Joseph M. Gullion
--------------------------------
Joseph M. Gullion

Joseph M. Gullion Employment and Severance and Change in Control Agreement Dated June 1, 2001

ATTACHMENT 1

Compensation and Fringe Benefits

1. Base Salary: $420,000 subject to annual merit review (any increases to be approved by the Compensation Committee of the Board of Directors).

2. Bonus: Employee's performance incentive bonus opportunity shall be as follows, measured against an annual plan determined by the President and CEO and communicated to Employee:

50% of Base Salary at threshold* 80% of Base Salary at target** Up to 100% of Base Salary for exceptional performance as determined in the discretion of the President and CEO and approved by the Compensation Committee

3. Stock Benefit Plan participation:

- Eligible to receive stock options and restricted stock awards subject to terms of the AAR CORP. Stock Benefit Plan.

- CEO recommendation for FY02 of a stock option grant of not less than 75,000 shares (subject to approval by the Compensation Committee in its sole discretion).

- Restricted stock awards (as may be determined annually by the Compensation Committee in its sole discretion).

4. Other Benefits: Participation, according to eligibility provisions of each, in such welfare (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, including:

*Threshold equals 80% of Plan.
**Target equals 100% of Plan.

- Executive disability program
- Executive financial counseling program
- Country Club membership dues
- Annual executive physical
- Executive Participant in SKERP (50% of eligible Compensation multiplied by a fraction, the numerator of which shall be Years of Credited Service not to exceed twenty, and the denominator of which shall be twenty)

EXHIBIT 21.1

SUBSIDIARIES OF AAR CORP. (1)

                                                                 State of
                      Name of Corporation                      Incorporation
                      -------------------                      -------------
AAR Airframe & Accessories Group, Inc. (2)...................    Illinois
AAR Allen Services, Inc. (3).................................    Illinois
AAR Aircraft & Engine Group, Inc. (4)........................    Illinois
AAR Engine Services, Inc. (5)................................    Illinois
AAR Financial Services Corp..................................    Illinois
AAR International, Inc. (6)..................................    Illinois
AAR Manufacturing Group, Inc. (7)............................    Illinois

(1) Subsidiaries required to be listed pursuant to Regulation S-K Item 601(b)(21).

(2) Also does business under the names AAR Distribution, AAR Expendables, and AAR Defense Systems.

(3) Also does business under the names AAR Landing Gear, AAR Component Services, and Mars Aircraft Radio.

(4) Also does business under the names AAR Aircraft Turbine Center, AAR Aircraft Sales and Leasing, AAR Allen Aircraft, and AAR Engine Sales & Leasing.

(5) Also does business under the name AAR Engine Component Services and AAR Energy Services.

(6) Also does business under the names AAR Distribution, AAR Aircraft Component Services, AAR Engine Group International, and AAR Allen Group International.

(7) Also does business under the names AAR Cargo Systems, AAR Cadillac Manufacturing, AAR Composites, AAR Craig Systems, and AAR Skydyne.

EXHIBIT 23.1

CONSENT OF KPMG LLP

The Board of Directors
AAR CORP.:

We consent to the incorporation by reference in Registration Statements Nos. 33-19767, 333-54178, 333-95433, 333-71067, 333-44693, 333-38671, 33-26783, 33-38042, 33-43839, 33-58456, 333-56023, 33-57753, 333-15327, 333-22175, 333-26093, 333-00205 and 002-002-95635 on Form S-8 and in Registration Statement No. 333-52853 on Form S-3 of AAR CORP. of our report dated June 27, 2001 relating to the consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 2001, which report appears in the May 31, 2001 annual report on Form 10-K of AAR CORP.

KPMG LLP

Chicago, Illinois
August 24, 2001