AAR CORP (Form: 10-K, Received: 08/18/2003 11:33:02)

UNITED STATES

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, 2003

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, including 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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

At July 31, 2003, the aggregate market value of the Registrant’s voting stock held by nonaffiliates was approximately $234,422,189 (based upon the closing price of the Common Stock at July 31, 2003 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, 2003, there were 31,849,811 shares of Common Stock outstanding.

Documents Incorporated by Reference

Portions of the definitive proxy statement relating to the Registrant’s 2003 Annual Meeting of Stockholders, to be held October 8, 2003, 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	5
Item 3.	Legal Proceedings	5
Item 4.	Submission of Matters to a Vote of Security Holders	6
	Supplemental Item — Executive Officers of the Registrant	6
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	7
Item 6.	Selected Financial Data	8
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 8.	Financial Statements and Supplementary Data	19
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	52
PART III
Item 10.	Directors and Executive Officers of the Registrant	53
Item 11.	Executive Compensation	53
Item 12.	Security Ownership of Certain Beneficial Owners and Management	53
Item 13.	Certain Relationships and Related Transactions	54
Item 14.	Controls and Procedures	54
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	55
SIGNATURES		56

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 industry. The Company also markets and sells certain of its products and services to the U.S. Government, including various branches and agencies within the U.S. Military. The Company conducts its business activities primarily through five principal operating subsidiaries: AAR Parts Trading, Inc., AAR Aircraft & Engine Sales & Leasing, Inc., AAR Distribution, Inc., AAR Manufacturing, Inc., and AAR International, Inc. The Company’s international business activities are conducted primarily through AAR International, Inc.

The Company reports its activities in four business segments: (i) Inventory and Logistic Services, comprised primarily of business activities conducted through AAR Parts Trading, Inc. and AAR Distribution, Inc., (ii) Maintenance, Repair and Overhaul, comprised primarily of business activities conducted through AAR Engine Services, Inc. and AAR Allen Services, Inc., wholly-owned subsidiaries of AAR Parts Trading, Inc. and AAR Distribution, Inc., respectively, (iii) Manufacturing, comprised primarily of business activities conducted through AAR Manufacturing, Inc., and (iv) Aircraft and Engine Sales and Leasing, comprised of business activities primarily conducted through AAR Aircraft & Engine Sales & Leasing, Inc.

The Company’s Inventory and Logistic Services segment activities include the purchase and sale of a wide variety of new, overhauled and repaired engine parts and components and airframe parts and components for the aviation aftermarket and military customers. The Company also provides customized inventory supply and management programs for engine and airframe parts and components in support of customer maintenance activities. The Company is an authorized distributor for more than 150 leading aviation and aerospace product manufacturers. The Company acquires aviation products for the Inventory and Logistic Services segment from domestic and foreign airlines, independent aviation service companies, aircraft leasing companies and original equipment manufacturers. In the Inventory and Logistic Services segment, the majority of the Company’s sales are made pursuant to standard commercial purchase orders. In certain inventory supply and management programs, the Company supplies products and services under agreements reflecting negotiated terms and conditions.

The Company’s Maintenance, Repair and Overhaul segment activities include the overhaul, repair and exchange of a wide variety of airframe and engine parts and components for its commercial and military customers. Repair and overhaul 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. The Company also operates an aircraft maintenance facility providing airframe maintenance, modification, special equipment installation, painting services and aircraft terminal services for various models of commercial, military, regional, business and general aviation aircraft. AAR also operates an aircraft storage facility. The Company’s repair and overhaul of parts and components also support inventory management activities within the Inventory and Logistic Services segment. AAR also provides turbine engine overhaul and parts supply services to industrial gas and steam turbine operators. In the Maintenance, Repair and Overhaul segment, in addition to sales made under standard commercial purchase orders, a portion of the segment’s sales occur pursuant to contracts under which the Company agrees to maintain, repair and overhaul parts, components and whole aircraft. In the Maintenance, Repair and Overhaul segment, the Company purchases replacement parts which are used in various repair and overhaul operations primarily from original equipment manufacturers and suppliers. The

Company has ongoing arrangements with certain original equipment manufacturers which provide the Company access to parts, repair manuals and service bulletins in support of the original equipment manufacturers’ parts. Although the terms of each arrangement vary, they typically are made on standard original equipment manufacturer terms as to duration, price and delivery. When possible, the Company will obtain replacement parts used in repair and overhaul activities from operating units in the Inventory and Logistic Services segment.

The Company’s Manufacturing segment activities include the design, manufacture and installation of in-plane cargo loading and handling systems for commercial and military aircraft and helicopters. The Company also designs and manufactures advanced composite materials for commercial, business and military aircraft as well as advanced composite structures for the transportation industry. In addition, the Company manufactures and repairs a wide array of containers, pallets and shelters in support of military and humanitarian tactical deployment activities. In the Manufacturing segment, sales are made to customers pursuant to standard commercial purchase orders and contracts. In the Manufacturing segment, the Company purchases aluminum sheets, extrusions and castings and other necessary supplies from a number of vendors.

The Company’s Aircraft and Engine Sales and Leasing segment activities include the sale or lease of used commercial jet aircraft and the sale or lease of a wide variety of new, overhauled and repaired commercial jet engines. In the Aircraft and Engine Sales and Leasing segment, each sale or lease is negotiated as a separate agreement which includes term, price, representations, warranties and lease return provisions. The Company’s leases are fixed in regard to term; early termination by the lessee is not permitted except in the event of a breach by the Company. In the Aircraft and Engine Sales and Leasing segment, the Company purchases aircraft and engines from domestic and foreign airlines, aircraft and engine leasing companies and original equipment manufacturers. Within the Aircraft and Engine Sales and Leasing segment, the Company also provides advisory services which consists of records management, storage maintenance and assistance in remarketing aircraft and engines.

The Company has historically been able to obtain raw materials and other items for its inventories for each of its segments at competitive prices, terms and conditions from numerous sources and expects to be able to continue to do so.

In the Inventory and Logistic Services, Maintenance, Repair and Overhaul and Manufacturing segments, the Company generally sells its products under standard 30 day terms. On occasion, certain customers (principally foreign customers) will negotiate extended payment terms (60-90 days). Except for customary warranty provisions, customers do not have the right to return products nor do they have the right to extended financing. In the Aircraft and Engine Sales and Leasing segment, the Company sells its products on a cash due at delivery basis, standard 30 day terms or on an extended term basis.

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 Inventory and Logistic Services and Maintenance, Repair and Overhaul segments are domestic and foreign commercial airlines, regional and commuter airlines, business and general aviation operators, aviation original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies. In the Manufacturing segment, the Company’s principal customers include domestic and foreign military organizations, domestic and foreign commercial airlines, aviation original equipment manufacturers and other industrial entities. The principal customers in the Aircraft and Engine Sales and Leasing segment include domestic and foreign commercial airlines and aircraft and engine finance and leasing companies. 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 utili

zation (e.g., frequency of schedules), the number of airline operators and the level of sales of new and used aircraft.

The Company has 13 Federal Aviation Administration (FAA) licensed repair stations in the United States and Europe. Of the 13 FAA repair stations, nine are also Joint Aviation Authorities (JAA) licensed repair stations. Such licenses, which are ongoing in duration, are required in order for the Company to perform authorized maintenance, repair and overhaul services for its customers and are subject to revocation by the government for non-compliance with applicable regulations. Of the 13 FAA licensed repair stations, one is held in the Inventory and Logistics Services segment, eight are held in the Maintenance, Repair and Overhaul segment, and four are held in the Manufacturing segment. Of the nine JAA licensed repair stations, eight are held in the Maintenance, Repair and Overhaul segment and one is held in the Manufacturing segment. The Company believes that it possesses all licenses and certifications that are material to the conduct of its business.

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 the Inventory and Logistic Services and the Maintenance, Repair and Overhaul segments include original equipment manufacturers (including the service divisions of large commercial airlines) and other independent suppliers of parts and services. In certain activities of the Company’s Aircraft and Engine Sales and Leasing segment, the Company faces competition from financial institutions, syndicators, commercial and specialized leasing companies and other entities that provide financing. AAR’s pallet, container and shelter manufacturing activities in its Manufacturing segment compete with several large and small 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, in each of its four reportable segments AAR 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 and technical and financial capabilities.

At May 31, 2003, backlog believed to be firm was approximately $102,700 compared to $93,400 at May 31, 2002. An additional $1,800 of unfunded government options on awarded contracts also existed at May 31, 2003. Approximately $99,100 of this backlog is expected to be filled within the next 12 months. The increase in the Company’s backlog is due to increased orders in the Maintenance, Repair and Overhaul, Manufacturing and Inventory and Logistic Services segments.

At May 31, 2003, the Company employed approximately 2,100 persons worldwide.

Sales to the U.S. Government, its agencies and its contractors were $170,191 (28.1% of total sales), $163,173 (25.5% of total sales), and $139,072 (15.9% of total sales) in fiscal years 2003, 2002 and 2001, 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 significant changes in defense spending. 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.

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 14 of Notes to Consolidated Financial Statements.

The Company’s internet address is www.aarcorp.com. The Company makes available free of charge through its web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Sec

tion 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to the SEC. Information contained on the Company’s web site is not a part of this report.

ITEM 2. PROPERTIES

The Company’s principal activities in the Aircraft and Engine Sales and Leasing and Inventory and Logistic Services segments are conducted from a building owned by the Company in Wood Dale, Illinois, subject to a mortgage after July 1, 2003. In addition to warehouse space, this facility includes executive, sales and administrative offices. The Company also leases facilities in Atlanta and Macon, Georgia and Jacksonville, Florida to support activities in the Inventory and Logistic Services segment.

Maintenance, Repair and Overhaul activities are conducted in buildings owned by the Company located in Garden City and Frankfort, New York; Windsor, Connecticut (subject to an industrial revenue bond) and near Schiphol International Airport in The Netherlands. This segment also conducts overhaul and repair activities in buildings leased by the Company in Miami, Florida; London, England; Roswell, New Mexico; and Oklahoma City, Oklahoma.

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

The Company believes that its owned and leased facilities are suitable and adequate for its operational requirements.

ITEM 3. LEGAL PROCEEDINGS

Except as described below, the Company is not a party to any material, pending legal proceeding (including any governmental or environmental proceedings) other than routine litigation incidental to its existing business.

AAR Manufacturing, Inc., a subsidiary of the Company (“subsidiary”) received an Administrative Order for Response Activity (“Order”) dated August 7, 2003, from the Michigan Department of Environmental Quality (“MDEQ”) relating to environmental conditions at and in the vicinity of the subsidiary’s Cadillac, Michigan plant. The Order requires the subsidiary to perform environmental investigatory work, prepare a feasibility study and a remedial action plan, and perform interim response actions. The interim response actions include continuation of the response activities the subsidiary is performing under a 1985 Consent Decree, operation of a soil vapor extraction system the subsidiary had previously installed and operated, determination of the need to provide alternate water supplies to off-site properties (and if it is so determined then to actually provide it), removal of any free phase liquids encountered in the ground, providing notices of groundwater contamination migration to off-site property owners, and other actions determined by the MDEQ or the subsidiary to be appropriate. A letter dated June 14, 2002 from the MDEQ further demands payment of environmental response costs already incurred by the MDEQ in the amount of $525 plus interest plus unspecified costs to be incurred in the future by the MDEQ. The Order and the letter which accompanies the Order threaten the imposition of civil fines up to $25 for each day of violation of the Order plus exemplary damages up to three times the costs incurred by the MDEQ if the subsidiary does not comply with the Order. The Order may require the implementation of the remedial action plan although it is not clear on that point. The Order requires the implementation of emergency response action if a release of hazardous substances, threat of a release, or exacerbation of existing contamination occurs during the pendency of the Order.

The subsidiary is evaluating its defenses to the allegations in the letter and to the Order, including the defense that the 1985 Consent Decree entered into with the State previously resolved most of the claims now asserted by the State and which are the basis for much of the Order. It is

not possible at this stage to determine the expenditures that may be required in connection with this matter. The subsidiary has received some funds from an insurance carrier to reimburse it for work done by the subsidiary under the 1985 Consent Decree and will seek further coverage for the matters in the June 14, 2002 MDEQ letter and the Order. The subsidiary, prior to the issuance of the Order, sought a Court order to enforce the 1985 Consent Decree but that relief was denied by the Court, primarily on the basis that the action was premature since the State was not pursuing an enforcement action at the time. The subsidiary has sought leave to appeal that decision to the Michigan Court of Appeals.

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	50	President and Chief Executive Officer, Director
Howard A. Pulsifer	60	Vice President, General Counsel, Secretary
Timothy J. Romenesko	46	Vice President and Chief Financial Officer
James J. Clark	43	Group Vice President, Maintenance, Repair and Overhaul
Michael J. Sharp	41	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. 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. Clark has been Group Vice President, Maintenance, Repair and Overhaul since 2000. Previously he was General Manager of AAR Aircraft Component Services — Amsterdam from 1995 to 2000 and in various other positions since joining the Company in 1982.

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.

Each executive officer is elected annually by the Board of Directors at the first meeting of the Board held after the annual meeting of stockholders. Executive officers continue to hold office until their successors are duly elected or until their death, resignation, termination or reassignment.

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 July 31, 2003 there were approximately 7,500 holders of the Company’s Common Stock, including participants in security position listings.

Certain of the Company’s financing arrangements contain provisions restricting the payment of dividends or repurchase of its shares. See Note 3 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 (Loss) of the Company after June 1, 1994. The Company is currently prohibited from paying dividends or purchasing its shares pursuant to this provision.

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. The Company suspended payment of dividends in October 2002.

		Fiscal 2003							Fiscal 2002
Per Common Share		Market Prices				Quarterly			Market Prices				Quarterly
	Quarter	High		Low		Dividends			High		Low		Dividends
First		$	11.15	$	6.00		$	.025	$	17.25	$	14.25		$	.085
Second		6.11		3.20			.000		17.25		7.15			.025
Third		6.09		4.45			.000		9.85		7.29			.025
Fourth		4.50		3.70			.000		13.65		7.44			.025
							$	.025						$	.160

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

	For the Year Ended May 31,
	2003			2002			2001		2000		1999
RESULTS OF OPERATIONS
Sales	$	606,337		$	638,721		$	853,659	$	957,525	$	918,036
Pass through sales ¹	—			—			20,596		66,808		132,572
Total sales	606,337			638,721			874,255		1,024,333		1,050,608
Gross profit	77,058			13,848			136,467		172,853		173,259
Operating income (loss)	(1,787		) ³	(81,289		) ³	40,390		70,658		77,381
Interest expense	19,539			19,798			21,887		23,431		18,567
Income (loss) before provision for income taxes	(19,490		)	(98,229		)	20,220		49,526		59,786
Net income (loss)	(12,410		)	(58,939		)	18,531		35,163		41,671
Share data:
Earnings (loss) per share — basic	$	(0.39	)	$	(2.08	)	$	0.69	$	1.30	$	1.51
Earnings (loss) per share — diluted	$	(0.39	)	$	(2.08	)	$	0.69	$	1.28	$	1.49
Cash dividends per share	$	0.03		$	0.16		$	0.34	$	0.34	$	0.34
Average common shares outstanding — basic	31,852			28,282		²	26,913		27,103		27,549
Average common shares outstanding — diluted	31,852			28,282		²	26,985		27,415		28,006
FINANCIAL POSITION
Cash and cash equivalents	$	29,154		$	34,522		$	13,809	$	1,241	$	8,250
Working capital	192,837			286,192			352,731		345,304		334,418
Total assets	686,621			710,199			701,854		737,977		723,018
Short-term debt	59,729			42,525			13,652		26,314		420
Short-term debt, non-recourse	32,527			—			—		—		—
Long-term debt	164,658			217,699			179,987		180,447		180,939
Total recourse debt	224,387			260,224			193,639		206,761		181,359
Stockholders’ equity	294,988			310,235			340,212		336,494		322,423
Number of share outstanding at end of year	31,850			31,870		²	26,937		26,865		27,381
Book value per share of common stock	$	9.26		$	9.73		$	12.63	$	12.53	$	11.78

Notes:

¹ In connection with certain long-term inventory management programs, the Company purchased factory-new products on behalf of its customers from original equipment manufacturers. These products were purchased from the manufacturer and “passed through” to the Company’s customers at the Company’s cost. In December 2000, these inventory management programs were discontinued.

² In February 2002, the Company sold 5,010 shares of common stock for $34,334, net of expenses.

³ See Note 2 of Notes to Consolidated Financial Statements for a discussion regarding impairment and special charges recorded during fiscal 2003 and fiscal 2002.

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

Factors Which May Affect Future Results

The Company’s future operating results and financial position may be adversely affected or fluctuate substantially on a quarterly basis as a result of continuing difficulties in the commercial aviation environment exacerbated by the September 11, 2001 terrorist attacks and the events that followed, the relatively weak worldwide economic climate and other factors, including: (1) decline in demand for the Company’s products and services and the ability of the Company’s customers to meet their financial obligations to the Company, particularly in light of the weakened financial condition of many of the world’s commercial airlines; (2) the potential risk for declining market values for aviation products and equipment caused by various factors, including the bankruptcies of United Airlines, US Airways, Inc., Air Canada, Avianca, Inc. and Hawaiian Airlines, Inc., possible future airline bankruptcies and other factors within the airline industry; (3) difficulties in re-leasing or selling aircraft and engines that are currently being leased on a long- or short-term basis; (4) lack of assurance that sales to the U.S. Government, its agencies and its contractors (which were 28.1% of total sales in fiscal 2003), will continue at levels previously experienced, since such sales are subject to competitive bidding and government funding; (5) access to the debt and equity capital markets and the ability to draw down under financing agreements, which may be limited in light of industry conditions and Company performance; (6) changes in or noncompliance with laws and regulations that may affect certain of the Company’s aviation related activities that are subject to licensing, certification and other regulatory requirements imposed by the FAA and other regulatory agencies, both domestic and foreign; (7) competition from other companies, including original equipment manufacturers, some of which have greater financial resources than the Company; (8) exposure to product liability and property claims that may be in excess of the Company’s substantial liability insurance coverage; (9) difficulties in being able to successfully integrate business acquisitions and (10) the outcome of any pending or future material litigation or environmental proceedings.

Critical Accounting Policies and Significant Estimates

The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the consolidated financial statements. The most significant estimates made by management of the Company include adjustments to reduce the value of inventories and equipment on or available for lease, allowance for doubtful accounts and loss accruals for aviation equipment operating leases. Accordingly, actual results could differ materially from those estimates. The following is a summary of the accounting policies considered critical by management of the Company.

Allowance for Doubtful Accounts The Company’s allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be collected. In determining the required allowance, the Company considers factors such as general and industry-specific economic conditions, customer credit history, and the customer’s current and expected future financial performance.

Inventories Inventories are valued at the lower of cost or market. Cost is determined by the specific identification, average cost or first-in, first-out methods. Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. The Company has utilized certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement val

ues and expected future demand. Principally as a result of the terrorist attacks of September 11, 2001 and its anticipated impact on the global airline industry’s financial condition, fleet size and aircraft utilization, the Company recorded a significant charge for impaired inventories during the second quarter of fiscal 2002 utilizing those assumptions. During the fourth quarter of fiscal 2003, the Company recorded an additional charge as a result of a further decline in market value for these inventories. Reductions in demand for certain of the Company’s inventories or declining market values, as well as differences between actual results and the assumptions utilized by the Company when determining the market value of its inventories, could result in additional impairment charges in future periods.

Equipment on or Available for Lease Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation is computed using the 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.

In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-lived Assets,” the Company is required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. When applying the provisions of SFAS No. 144 to equipment on or available for lease, the Company has utilized certain assumptions when estimating future undiscounted cash flows, such as current and estimated future lease rates, estimated residual values and expected future demand. Differences between actual results and the assumptions utilized by the Company when determining undiscounted cash flows could result in future impairments of equipment on or available for lease.

Aviation Equipment Operating Leases The Company from time to time leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company. If the Company elects not to renew a lease or the lease term expires, the Company will purchase the equipment from the lessor at its scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price. In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed estimated undiscounted cash flows related to the equipment, the Company records an accrual for loss. The Company has utilized certain assumptions when estimating future undiscounted cash flows, such as current and estimated future lease rates, estimated residual values, and expected future demand. Differences between actual results and the assumptions utilized by the Company when determining undiscounted cash flows could result in future provisions for losses on aviation equipment under operating leases.

Results of Operations

The Company reports its activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

Sales in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and military markets, as well as the distribution of new airframe parts purchased from various original equipment manufacturers and sold to commercial and general aviation customers. Cost of sales consists principally of the cost of product (primarily aircraft and engine parts) and overhead (primarily indirect labor, facility cost and insurance).

Sales in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts, landing gear and components; aircraft maintenance and storage; and the repair, overhaul and sale of parts for industrial gas and steam turbine operators. Cost of sales consists principally of cost of product (primarily replacement aircraft parts), direct labor and overhead.

Sales in the Manufacturing segment are derived from the manufacture and sale of a wide array of containers, pallets and shelters used to support the U.S. Military’s tactical deployment requirements, in-plane cargo loading and handling systems for commercial and military applications and advanced composite materials and components for aerospace and industrial use. Cost of sales consists principally of the cost of product, direct labor and overhead.

Sales in the Aircraft and Engine Sales and Leasing segment are derived from the sale and lease of commercial aircraft and engines and technical and advisory services. Cost of sales consists principally of cost of product (aircraft and engines), labor and the cost of lease revenue (primarily depreciation, lease expense and insurance).

The table below sets forth consolidated sales for the Company’s four business segments for each of the last three fiscal years ended May 31.

	For the Year Ended May 31,
	2003		2002		2001
Sales:
Inventory and Logistic Services	$	246,031	$	258,067	$	366,562
Maintenance, Repair and Overhaul	205,666		216,727		257,117
Manufacturing	119,871		99,558		97,154
Aircraft and Engine Sales and Leasing	34,769		64,369		132,826
	$	606,337	$	638,721	$	853,659

Three-Year Sales Summary

Over the last three fiscal years, consolidated sales, excluding pass through sales, decreased from $853,659 in fiscal 2001 to $638,721 in fiscal 2002 and to $606,337 in fiscal 2003. Total sales, which include pass through sales, declined from $874,255 in fiscal 2001 to $638,721 in fiscal 2002 and to $606,337 in fiscal 2003. The decline in sales over this three-year period principally reflects the depressed state of the commercial airline environment, partially offset by increased sales to the U.S. Government and their contractors.

As a result of the events of September 11, 2001, which occurred at a time when the worldwide commercial airline environment was already under significant pressure principally due to weak worldwide economic conditions, most of the major U.S. based commercial airlines announced substantial reductions in capacity, some in excess of 20%. Commercial airlines accelerated their older generation aircraft fleet retirement plans. The reduction in industry-capacity and the financial impact of the events of September 11, 2001 on the Company’s commercial airline customers had a significant negative effect on the Company’s fiscal 2002 operating results as demand for the Company’s products and services within the Inventory and Logistic Services, Maintenance Repair and Overhaul and Aircraft and Engine Sales and Leasing segments declined dramatically when compared to fiscal 2001.

During the first three quarters of fiscal 2003, the Company experienced sequential sales growth reflecting increased sales to the U.S. Government, its agencies and its contractors, as well as improved sales to commercial airline customers. The increase in sales to the U.S. Government, its agencies and its contractors was driven by increased demand for manufactured products supporting the U.S. Military’s deployment requirements and other spares and logistics support. Sales to many

of the Company’s commercial airline customers improved during the first three quarters of fiscal 2003 as the Company increased its investment in newer generation inventories and developed new repair capabilities. However, during the fourth quarter of fiscal 2003, demand for products and services from certain of the Company’s airline customers declined as a result of the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome (SARS).

Fiscal 2003 Compared with Fiscal 2002

Consolidated sales for fiscal 2003 were $606,337, which represents a decrease of $32,384 or 5.1% compared to fiscal 2002.

In the Inventory and Logistic Services segment, fiscal 2003 sales declined $12,036 or 4.7% compared to fiscal 2002. The decrease in sales compared to the prior year was attributable to a $16,660 reduction in sales to general aviation customers as a result of management’s decision to reduce its investment in the low-margin general aviation market by eliminating most general aviation branch locations and reducing staff levels. In the Inventory and Logistics Services segment, the Company experienced increased sales to the U.S. Military for spares and logistics support and higher sales of serviceable parts to certain program customers.

In the Maintenance, Repair and Overhaul segment, fiscal 2003 sales declined $11,061 or 5.1% compared to fiscal 2002. The decrease in sales compared to the prior year was attributable to lower sales in the U.S., partially offset by increased component overhaul sales in Europe primarily due to favorable changes in currency translation rates.

In the Manufacturing segment, fiscal 2003 sales increased $20,313 or 20.4% as the Company experienced record demand for the Company’s manufactured products which support the U.S. Military deployment activities. Increased shipments of the Company’s non-aviation related composite structure products also contributed to higher sales within this segment.

In the Aircraft and Engine Sales and Leasing segment, fiscal 2003 sales declined $29,600 or 46.0%. Sales in this segment are principally comprised of lease revenues from aircraft and engines on lease to operators, as well as sales of aircraft and engines. Sales in this segment remain historically low, reflecting the lack of sales activity caused by the aviation industry-wide reduction in demand for capital assets post September 11, 2001.

During the fourth quarter of fiscal 2003, the Company recorded impairment charges related to certain engine and airframe parts and whole engines in the amount of $5,360. The fiscal 2003 impairment charge was based upon an updated assessment of the net realizable values for certain engine and airframe parts and future undiscounted cash flows for whole engines. Of the $5,360 impairment charge recorded during fiscal 2003, $2,360 was related to the Inventory and Logistic Services segment and $3,000 related to the Aircraft and Engine Sales and Leasing segment.

Consolidated gross profit, before consideration of impairment charges in fiscal 2003 and 2002, decreased $7,330 or 8.2% as a result of lower sales and a reduction in the consolidated gross profit margin from 14.1% in fiscal 2002 to 13.6% in fiscal 2003. The reduction in the consolidated gross profit margin was primarily attributable to lower margins experienced in the Maintenance, Repair and Overhaul segment, as well as lower volume through most of the facilities within that segment, partially offset by an increase in the gross profit margin in the Manufacturing segment due principally to increased volume and the mix of products sold. Including the effect of the impairment charges recorded in fiscal 2003 and 2002, consolidated gross profit increased $63,210.

Operating income, before consideration of impairment and other special charges, decreased $1,138 as a result of lower sales and a reduction in the consolidated gross profit margin, partially offset by lower selling, general and administrative expenses. During fiscal 2003, the Company reduced its selling, general and administrative expenses by $6,192 or 7.3% principally as a result of

lower personnel costs and reduced discretionary spending. Interest expense decreased $259 compared to the prior year principally due to decreased average borrowings during fiscal 2003. Interest income decreased $1,022 over the prior year due to a decline in average cash invested during the fiscal year and lower interest rates.

The Company’s effective tax benefit rate for fiscal 2003 was 36.3% compared to 40.0% in fiscal 2002. The fiscal 2002 income tax benefit includes a $2,000 reduction in income tax expense representing the reversal of federal income tax liabilities. This adjustment reduced federal and state income tax expense primarily recorded during the fiscal years 1999 through 2001, related to incentives on exports and tax credits. A change in tax law effective in fiscal 2002 regarding the computation of export incentives, combined with previous experience with tax examinations, resulted in the reduction in the tax expense.

The Company recorded a net loss of $12,410 during fiscal 2003 due to the factors discussed above.

Fiscal 2002 Compared with Fiscal 2001

Consolidated sales in fiscal 2002, excluding pass through sales, decreased $214,938 or 25.2% compared to fiscal 2001 as the Company experienced lower sales in three of its four segments.

In the Inventory and Logistic Services segment, fiscal 2002 sales declined $108,495 or 29.6% primarily as a result of lower demand for engine and airframe parts from the Company’s customers due to reduced airline capacity, including the accelerated retirement of older generation aircraft, partially offset by increased sales of spares and logistics support for the U.S. Military and its contractors. The decline in engine parts sales was also due to lower sales to a major program customer for certain engine parts due principally to the impact of the dissolution of the Company’s exclusive engine parts support agreement with this major customer, which occurred in December 2000. The elimination of pass through sales was also attributable to this factor.

In the Maintenance, Repair and Overhaul segment, sales decreased $40,390 or 15.7% primarily due to the reduction in airline capacity, partially offset by the favorable full-year impact of sales of Hermetic, which the Company acquired on September 29, 2000. Fiscal 2002 and 2001 revenues for Hermetic included in consolidated sales were approximately $18,750 and $13,100, respectively.

In the Manufacturing segment, sales increased $2,404 or 2.5% as the Company experienced increased shipments of products supporting the U.S. Military’s tactical deployment requirements, partially offset by lower sales of the Company’s cargo loading systems.

Sales in the Aircraft and Engine Sales and Leasing segment declined $68,457 or 51.5% primarily due to the commercial aviation industry-wide reduction in capital asset investment activity reflecting the difficult commercial airline environment, including lack of available financing and fluctuating market values for aircraft and engines.

Prior to September 11, 2001 the Company was executing its plan to reduce its investment in support of older generation aircraft in line with the commercial airlines’ scheduled retirement plans for these aircraft. The events of September 11 caused a severe and sudden disruption in the commercial airline industry, which brought about a rapid acceleration of those retirement plans. System-wide capacity had been reduced by approximately 20% and many airlines cancelled or deferred new aircraft deliveries. Based on management’s assessment of these and other conditions, the Company reduced the value and provided loss accruals for certain of its inventories and equipment leases that support older generation aircraft by $75,900 during the three-month period ended November 30, 2001. This charge is reflected on the Consolidated Statement of Operations as “Cost of sales — impairment charges”.

In addition, the Company recorded other charges of $10,100 during the three-month period ended November 30, 2001 principally related to an increase in the allowance for doubtful accounts to reflect its inability to recover certain accounts receivable. This charge is reflected on the Consolidated Statement of Operations as “Special charges”.

Consolidated gross profit before consideration of impairment charges decreased $46,719 or 34.2% as a result of lower sales and a reduction in the consolidated gross profit margin. The reduction in the consolidated gross profit margin was principally due to margin pressure experienced in the Inventory and Logistic Services and Maintenance, Repair and Overhaul segments, as well as lower volume through most of the facilities within those two segments. The Aircraft and Engine Sales and Leasing segment’s gross profit percentage increased over the prior year due to the mix of products sold.

Operating income, before consideration of impairment and other special charges, decreased $35,679 from the prior year as a result of lower gross profit, partially offset by a reduction in selling, general and administrative expenses of $11,040 or 11.5% through lower personnel costs and reduced discretionary spending. Interest expense decreased $2,089 over the prior year principally as a result of lower average short-term borrowings outstanding during the year and interest income increased $1,141 over the prior year primarily as a result of an increase in average cash invested.

The Company’s effective income tax benefit rate for fiscal 2002 was 40.0% and includes a $2,000 reduction in income tax expense representing the reversal of federal income tax liabilities. This adjustment reduced federal and state income tax expense primarily recorded during the fiscal years 1999 through 2001, related to incentives on exports and tax credits. A change in tax law effective in fiscal 2002 regarding the computation of export incentives, combined with previous experience with tax examinations, resulted in the reduction in the tax expense.

The Company recorded a net loss of $58,939 during fiscal 2002 due to the factors discussed above.

Liquidity and Capital Resources

Historically, the Company has funded its growth, met its contractual commitments and paid dividends through the generation of cash from operations, augmented by the periodic issuance of common stock and debt to the public and private markets. The Company also relies on its various secured credit arrangements, which include an accounts receivable securitization program and certain aviation equipment operating leases to provide additional liquidity. The Company’s continuing ability to borrow from its lenders and issue debt and equity securities in the future may be negatively affected by a number of factors, including general economic conditions, airline and aviation industry conditions, Company performance and geopolitical events, including the war on terrorism. The Company’s ability to use its accounts receivable securitization program and aviation equipment operating leases is also dependent on those factors. The Company’s ability to generate cash from operations is influenced primarily by the operating performance of the Company and working capital management.

At May 31, 2003, the Company’s liquidity and capital resources included cash of $29,154 and working capital of $192,837. As of May 31, 2003, $5,250 of cash was restricted to support letters of credit. At May 31, 2003, the Company’s ratio of long-term debt to capitalization was 35.8%; down from 41.2% at May 31, 2002 and at May 31, 2003, the Company’s ratio of total debt to capitalization was 46.6% compared to 45.6% at May 31, 2002. The decrease in the long-term debt to capitalization ratio compared to May 31, 2002 is primarily attributable to the classification of certain debt instruments to current during fiscal 2003. The increase in the total debt to capitalization ratio is primarily attributable to the non-recourse debt recorded when the Company purchased the equity interest in a joint venture (See Note 11 of Notes to Consolidated Financial Statements). The Company also

has a universal shelf registration on file with the Securities and Exchange Commission under which, subject to market conditions, up to $163,675 of common stock, preferred stock or medium- or long-term debt securities may be issued or sold.

During the fourth quarter of fiscal 2003, the Company’s unsecured credit arrangements with three domestic banks expired and its previous accounts receivable securitization facility also expired. During the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004, the Company completed four financing transactions to replace the expiring bank credit arrangements, improve its liquidity position and to retire a portion of the Company’s 1993 7¼% Notes due October 15, 2003.

On March 21, 2003, the Company completed a new $35,000 accounts receivable securitization program with LaSalle Business Credit L.L.C. (LaSalle). The amount available under this agreement is based on a formula of qualifying accounts receivable. As of May 31, 2003, the amount available to the Company under the agreement was $26,800. The term of the agreement is one year, renewable annually and bears interest at LIBOR plus 300 basis points. The LaSalle securitization program replaced the previous accounts receivable program and substantially replaced the LaSalle Bank unsecured credit arrangement. The amount outstanding under this agreement was $26,800 at May 31, 2003.

On May 30, 2003, the Company completed a new $30,000 secured revolving credit facility with Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc. The amount available under this agreement is also based on a formula of qualifying assets. As of May 31, 2003, the amount available to the Company under the agreement was $24,800. The term of the facility is three years, bears interest at LIBOR plus 300 basis points and carries a one-percent facility fee on the unused portion of the agreement. Proceeds from this transaction were used primarily to pay down expiring bank lines and to repurchase $10,000 of the Company’s 1993 7¼% Notes due October 15, 2003. The amount outstanding under this agreement was $24,000 at May 31, 2003.

On May 30, 2003, the Company completed the repurchase of $10,000 and the exchange for new notes of $16,900 of the Company’s 1993 7¼% Notes due October 15, 2003 in a privately negotiated transaction with a single holder. The $16,900 of new notes bear interest at 8% and are due ratably over three years commencing October 15, 2004. As of May 31, 2003, the balance outstanding under the Company’s 1993 7¼% Notes, after taking into consideration this transaction, was $22,600.

On July 1, 2003, the Company completed an $11,000 financing secured by a mortgage on its Wood Dale, Illinois facility. The term of the financing is five years utilizing a fifteen-year amortization with a LIBOR-based interest rate of no less than 6.25%.

A summary of long-term debt, bank borrowings, non-cancelable operating lease commitments and accounts receivable securitization as of May 31, 2003 is as follows:

	Payments Due by Period
	Total		Due in Fiscal 2004		Due in Fiscal 2005		Due in Fiscal 2006		Due in Fiscal 2007		Due in Fiscal 2008		After Fiscal 2008
On Balance Sheet:
Recourse Debt	$	200,387	$	35,729	$	7,370	$	14,018	$	5,922	$	80,295	$	57,053
Non-recourse Debt	32,527		32,527		—		—		—		—		—
Bank Borrowings	24,000		—		—		24,000		—		—		—
Off Balance Sheet:
Aviation Equipment Operating Leases	36,548		4,788		10,516		6,801		14,443		—		—
Facilities and Equipment Operating Leases	18,550		4,836		4,077		3,274		2,968		2,377		1,018
Accounts Receivable Securitization Program	26,800		26,800		—		—		—		—		—

Notes:

¹ The term of the accounts receivable securitization program with LaSalle is one year and therefore has been included in the “Within One Year” column. The Company expects to extend this program subject to approval by LaSalle.

² 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, 2003 was approximately $5,754.

The Company continues to evaluate a number of financing alternatives that would allow the Company to expand its liquidity position and to finance future growth on commercially reasonable terms. The Company’s ability to obtain additional financing is dependent upon a number of factors, including the geopolitical environment, general economic conditions, airline industry conditions, the operating performance of the Company and market conditions in the public and private debt and equity markets.

On April 18, 2003, Standard and Poors downgraded the senior unsecured debt rating to BB minus from BBB minus with an outlook rating of negative. On July 18, 2003, Fitch Ratings downgraded the unsecured debt to BB minus from BB plus and revised the outlook rating to negative from stable. On August 5, 2003, Moody’s Investor Service downgraded the senior unsecured debt rating of the Company to B2 from B1. The Company was removed from credit watch following the downgrade actions by each of the respective rating agencies.

In January 2004, the Company’s non-recourse notes in the amount of $32,527 mature and therefore have been classified as current on the May 31, 2003 Consolidated Balance Sheet. In the event of non-payment of the notes, the holders do not have any recourse against the Company, but may receive title to the wide-body aircraft that secures the debt. At May 31, 2003, the Company’s equity interest in this aircraft was $2.6 million.

During the twelve-month period ended May 31, 2003, the Company’s operations generated $34,733 of cash primarily as a result of effective working capital management. During fiscal 2003,

the Company reduced inventories by $17,755 and accounts receivable by $16,517, which includes $6,700 resulting from the new accounts receivable securitization program.

During the twelve-month period ended May 31, 2003, the Company’s investing activities used $6,684 of cash primarily reflecting capital expenditures of $9,930, partially offset by proceeds from the sale of a facility of $2,969 and cash received on leveraged leases of $1,694.

During the twelve-month period ended May 31, 2003, the Company’s financing activities used $33,350 of cash primarily reflecting the reduction in borrowings of $56,643, partially offset by proceeds from new borrowings of $24,000. The $56,643 reduction in borrowings is comprised of the payoff of short-term debt of $40,500, the retirement of $10,500 of the Company’s 1993 7¼% Notes and the reduction of other debt obligations in the amount of $5,643. The $24,000 of new borrowings represents the amount drawn as of May 31, 2003 on the Merrill Lynch revolving credit facility.

On October 9, 2002, the Company’s Board of Directors voted to suspend the quarterly common stock dividend. This action is consistent with other actions taken by the Company to lower costs and preserve cash.

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. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information available to the Company as of the dates such assumptions and estimates are made, 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 those factors discussed under this Item 7 entitled “Factors Which May Affect Future Results”. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in thousands)

The Company’s exposure to market risk includes fluctuating interest rates under its bank credit agreements, foreign exchange rates and accounts receivable. See Part I, Item 7 for a discussion on accounts receivable exposure. During fiscal 2003 and 2002, the Company did not utilize derivative financial instruments to offset these risks.

At May 31, 2003, $800 was available under its secured revolving credit facility with Merrill Lynch Capital. Interest on amounts borrowed under this credit facility is LIBOR based. As of May 31, 2003, the outstanding balance under this agreement was $24,000. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during fiscal 2003 would have reduced the Company’s pre-tax income by approximately $111 during fiscal 2003.

Revenues and expenses of the Company’s foreign operations are translated at average exchange rates during the period, and balance sheet accounts are translated at period-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, 2003 and 2002 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended May 31, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois
July 1, 2003

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AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Year Ended May 31,
	2003			2002			2001
	(In thousands except per share data)
Sales:
Sales from products and leasing	$	519,370		$	557,813		$	753,104
Sales from services	86,967			80,908			100,555
Pass through sales	—			—			20,596
	606,337			638,721			874,255
Costs and operating expenses:
Costs of products and leasing	448,705			480,415			636,349
Cost of services	75,214			68,558			80,843
Cost of pass through sales	—			—			20,596
Cost of sales-impairment charges	5,360			75,900			—
Selling, general and administrative and other	78,845			85,037			96,077
Special charges	—			10,100			—
	608,124			720,010			833,865
Operating income (loss)	(1,787		)	(81,289		)	40,390
Interest expense	(19,539		)	(19,798		)	(21,887		)
Interest income	1,836			2,858			1,717
Income (loss) before provision for income taxes	(19,490		)	(98,229		)	20,220
Provision (benefit) for income taxes	(7,080		)	(39,290		)	1,689
Net income (loss)	$	(12,410	)	$	(58,939	)	$	18,531
Earnings (loss) per share of common stock — basic	$	(0.39	)	$	(2.08	)	$	0.69
Earnings (loss) per share of common stock — diluted	$	(0.39	)	$	(2.08	)	$	0.69

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

AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

	May 31,
	2003			2002
	(In thousands)
Current assets:
Cash and cash equivalents	$	29,154		$	34,522
Accounts receivable	66,322			77,528
Inventories	219,894			238,032
Equipment on or available for short-term lease	40,060			48,556
Deposits, prepaids and other	13,692			15,357
Deferred tax assets	27,290			22,661
Total current assets	396,412			436,656
Property, plant and equipment, at cost:
Land	6,367			6,595
Buildings and improvements	68,040			70,227
Equipment, furniture and fixtures	124,321			121,403
	198,728			198,225
Accumulated depreciation	(104,699		)	(95,634		)
	94,029			102,591
Other assets:
Investments in leveraged leases	27,394			29,088
Goodwill, net	45,951			45,906
Equipment on long-term lease	72,732			42,910
Other	50,103			53,048
	196,180			170,952
	$	686,621		$	710,199

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,
	2003			2002
	(In thousands)
Current liabilities:
Short-term debt	$	24,000		$	40,500
Current maturities of long-term debt	24,000			394
Non-recourse debt	32,527			—
Notes payable	11,729			1,631
Accounts payable	51,485			49,529
Accrued liabilities	59,834			54,563
Accrued taxes on income	—			3,847
Total current liabilities	203,575			150,464
Long-term debt, less current maturities	164,658			217,699
Deferred tax liabilities	22,601			30,601
Retirement benefit obligation	799			1,200
	188,058			249,500
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued	—			—
Common stock, $1.00 par value, authorized 100,000 shares; issued 33,543 and 33,568 shares, respectively	33,543			33,568
Capital surplus	164,651			165,188
Retained earnings	143,272			156,479
Treasury stock, 1,692 and 1,698 shares at cost, respectively	(26,798		)	(26,986		)
Unearned restricted stock awards	(514		)	(1,138		)
Accumulated other comprehensive income (loss) —
Cumulative translation adjustments	(3,244		)	(10,224		)
Minimum pension liability	(15,922		)	(6,652		)
	294,988			310,235
	$	686,621		$	710,199

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, 2003

												Capital Surplus			Retained Earnings			Unearned Restricted Stock Awards				Accumulated Other Comprehensive Income (Loss)				Comprehensive Income (Loss)
	Common Stock					Treasury Stock
	Shares		Amount			Shares			Amount
	(In thousands)
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 gain (loss)	—		—				—		—			—			—				—				(3,283		)		(3,283		)
Minimum pension liability, net of tax	—		—				—		—			—			—				—				(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	)
Net income	—		—				—		—			—			(58,939		)		—				—				$	(58,939	)
Cash dividends	—		—				—		—			—			(4,430		)		—				—				—
Issuance of common stock	4,147		4,147				(863	)	13,783			16,404			—				—				—				—
Treasury stock	—		—				127		(1,728		)	—			—				—				—				—
Exercise of stock options and stock awards	50		50				—		—			468			—				—				—				—
Restricted stock activity	—		—				—		—			—			—				1,361				—				—
Adjustment for net translation gain (loss)	—		—				—		—			—			—				—				2,507				2,507
Minimum pension liability, net of tax	—		—				—		—			—			—				—				(3,600		)		(3,600		)
Comprehensive income for fiscal 2002																											$	(60,032	)
Balance, May 31, 2002	33,568		$	33,568			1,698		$	(26,986	)	$	165,188		$	156,479			$	(1,138	)		$	(16,876	)
Net income	—		—				—		—			—			(12,410		)		—				—				$	(12,410	)
Cash dividends	—		—				—		—			—			(797		)		—				—				—
Treasury stock	—		—				(6	)	188			—			—				—				—				—
Exercise of stock options and stock awards	(25	)	(25		)		—		—			(537		)	—				—				—				—
Restricted stock activity	—		—				—		—			—			—				624				—
Adjustment for net translation gain (loss)	—		—				—		—			—			—				—				6,980				6,980
Minimum pension liability, net of tax	—		—				—		—			—			—				—				(9,270		)		(9,270		)
Comprehensive income for fiscal 2003																											$	(14,700	)
Balance, May 31, 2003	33,543		$	33,543			1,692		$	(26,798	)	$	164,651		$	143,272			$	(514	)		$	(19,166	)

AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year Ended May 31,
	2003			2002				2001
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(12,410	)	$	(58,939	)	$		18,531
Adjustments to reconcile net income (loss) to net cash provided from (used in) operating activities:
Depreciation and amortization	27,172			22,496			20,639
Deferred taxes	(3,376		)	(2,394		)	(312			)
Impairment and other special charges, net of tax	3,484			51,686			—
Changes in certain assets and liabilities, excluding effects of acquired businesses:
Accounts receivable	16,517			24,363			20,712
Inventories	17,755			(31,749		)	17,887
Equipment on or available for short-term lease	5,232			12,229			294
Equipment on long-term lease	(1,796		)	(30,025		)	—
Accounts and trade notes payable	(2,841		)	(25,261		)	(35,034			)
Accrued liabilities and taxes on income	(14,423		)	5,861			79
Other, primarily prepaids	(581		)	(2,171		)	2,919
Net cash provided from (used in) operating activities	34,733			(33,904		)	45,715
Cash flows from investing activities:
Property, plant and equipment expenditures	(9,930		)	(12,112		)	(13,134			)
Proceeds from disposal of assets	113			589			378
Business acquisition	—			(13,251		)	(3,200			)
Proceeds from sale of business and facility	2,969			2,229			—
Investment in leveraged leases	1,694			(373		)	5,446
Other	(1,530		)	(1,470		)	13,029
Net cash provided from (used in) investing activities	(6,684		)	(24,388		)	2,519
Cash flows from financing activities:
Proceeds from borrowings	24,000			115,504			—
Reduction in borrowings	(56,643		)	(65,411		)	(26,364			)
Proceeds from stock offering	—			34,334			—
Cash dividends	(797		)	(4,430		)	(9,157			)
Purchases of treasury stock	—			(205		)	(211			)
Other	90			(897		)	116
Net cash provided from (used in) financing activities	(33,350		)	78,895			(35,616			)
Effect of exchange rate changes on cash	(67		)	110			(50			)
Increase (decrease) in cash and cash equivalents	(5,368		)	20,713			12,568
Cash and cash equivalents, beginning of year	34,522			13,809			1,241
Cash and cash equivalents, end of year	$	29,154		$	34,522		$		13,809

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. supplies a variety of products and services, primarily 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 the product to the customer. The Company’s standard terms and conditions provide that title passes to the customer when the product is shipped to the customer. Service revenues and the related cost of services are generally recognized when customer-owned material is shipped to the customer. The Company has adopted this accounting policy because at the time the customer-owned material is shipped back to the customer, all services related to that material are complete as the Company’s service agreements do not require it to provide services at customer sites. Furthermore, the serviced units are generally shipped to the customer immediately upon completion of the related services. Sales and related cost of sales for certain long-term manufacturing contracts and for certain large airframe maintenance contracts are recognized by the percentage of completion method, based on the relationship of costs incurred to date to estimated total costs under the respective contracts. Lease revenues are recognized as earned. Income from monthly or quarterly rental payments is recorded in the pertinent period according to the lease agreement. However, for leases that provide variable rents, the Company recognizes lease income on a straight-line basis. In addition to a monthly lease rate, some engine leases require an additional rental amount based on the number of hours the engine is used in a particular month. Lease income associated with these contingent rentals is recorded in the period in which actual usage is reported by the lessee to the Company, which is normally the month following the actual usage.

Prior to fiscal 2002, in connection with certain long-term inventory management programs, the Company purchased factory-new products on behalf of customers from original equipment manufacturers. These products were purchased from the manufacturer, included in the Company’s inventory, and “passed through” to the customer at the Company’s cost. These sales are reported as “pass through” sales on the Consolidated Statement of Operations. In fiscal 2001, these inventory management programs were discontinued and as a result the Company no longer has pass through sales.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies — (Continued)

Goodwill

Under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” goodwill and other intangible assets deemed to have indefinite lives no longer are amortized, but are subject to annual impairment tests. The Company adopted the provisions of SFAS No. 142 in the first quarter of fiscal 2002, and as a result did not record any goodwill amortization for the fiscal years ended May 31, 2003 and 2002.

If goodwill amortization had not been recorded for the fiscal year ended May 31, 2001, net earnings and earnings per share would have been as follows:

	For the Year Ended May 31, 2001
Reported net income		$	18,531
Elimination of goodwill amortization, net of income taxes		1,409
Pro forma net income		$	19,940
Reported earnings per share — basic		$	.69
Elimination of goodwill amortization, net of income taxes		.05
Pro forma earnings per share — basic		$	.74
Reported earnings per share — diluted		$	.69
Elimination of goodwill amortization, net of income taxes		.05
Pro forma earnings per share — diluted		$	.74

The amount reported under the caption on the May 31, 2003 consolidated balance sheet “Goodwill, net” is comprised entirely of goodwill associated with acquisitions the Company made, principally since the beginning of fiscal 1998. Each of the acquisitions involved a single business that now comprises or is included in a single operating segment. The Company was not required to allocate goodwill related to specific acquisitions across two or more segments. Upon adoption of SFAS No. 142, and for the fiscal 2003 annual impairment test, the Company compared the fair value of each of its reportable segments to its carrying amount. The fair value of reportable segments was determined utilizing a valuation technique based on a multiple of earnings.

Goodwill by reportable segment is as follows:

	May 31,
	2003		2002
Inventory and Logistic Services	$	13,649	$	13,649
Maintenance, Repair and Overhaul	14,050		14,005
Manufacturing	18,252		18,252
Aircraft and Engine Sales and Leasing	—		—
	$	45,951	$	45,906

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies — (Continued)

Stock Options

The Company has employee stock option plans which are more fully described in Note 5. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost related to the Company’s stock option plans is reflected in net income, as each option granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to the Company’s stock option plans.

		For the Year Ended May 31,
		2003			2002			2001
Net income (loss) as reported		$	(12,410	)	$	(58,939	)	$	18,531
Add (deduct): Stock-based compensation expense (income) included in net income (loss) as reported, net of tax		142			(150		)	688
Deduct: Total compensation expense determined under fair value method for all awards, net of tax		(2,758		)	(2,810		)	(3,218		)
Pro forma net income (loss)		$	(15,026	)	$	(61,899	)	$	16,001
Earnings (loss) per share — basic:	As reported	$	(0.39	)	$	(2.08	)	$	.69
	Pro forma	$	(0.47	)	$	(2.19	)	$	.59
Earnings (loss) per share — diluted:	As reported	$	(0.39	)	$	(2.08	)	$	.69
	Pro forma	$	(0.47	)	$	(2.19	)	$	.59

The fair value weighted average per share of stock options granted during fiscal 2003, 2002 and 2001 was $3.82, $6.25 and $4.43, respectively. 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
	2003		2002		2001
Risk-free interest rate	2.5	%	4.5	%	4.9	%
Expected volatility of common stock	64.0	%	54.8	%	44.8	%
Dividend yield	1.6	%	1.9	%	1.8	%
Expected option term in years	4.0		4.0		4.0

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies — (Continued)

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, 2003 and 2002, cash equivalents of approximately $4,349 and $0, respectively, represent investments in funds holding high-quality commercial paper. The carrying amount of cash equivalents approximates fair value at May 31, 2003 and 2002, respectively. As of May 31, 2003, $5,250 of cash was restricted to support letters of credit.

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.

On March 21, 2003, the Company completed a new $35,000 accounts receivable securitization program with LaSalle Business Credit L.L.C. (LaSalle). The term of the agreement is one year, renewable annually and bears interest at LIBOR plus 300 basis points. Under the program, on each business day certain subsidiaries of the Company sell all new eligible receivables to an entity that is a wholly owned and consolidated subsidiary of the Company. This entity in turn sells an undivided percentage ownership interest in such eligible receivables to LaSalle. Certain classes of receivables are not intended for sale to the entity, including, but not limited to, accounts receivable that are not eligible receivables under the program at the time of sale, receivables related to sales to certain foreign entities and receivables generated by sales to governmental entities other than the federal government.

At May 31, 2003, accounts receivable sold under the program were $44,065 and the cash proceeds from the transaction were $26,800. This resulted in a $26,800 reduction in accounts receivable on the May 31, 2003 consolidated balance sheet. At May 31, 2002, accounts receivable sold under the program were $30,918 and the cash proceeds were $20,100. This resulted in a $20,100 reduction in accounts receivable on the May 31, 2002 consolidated balance sheet. The retained undivided interest of $17,265 and $10,818 as of May 31, 2003 and 2002, 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).

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies — (Continued)

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 with the U.S. Government, its agencies and contractors and entities in the aviation/aerospace industry. The Company performs 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 and accounts payable 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 the specific identification, average cost or first-in, first-out methods.

The following is a summary of inventories:

	May 31,
	2003		2002
Raw materials and parts	$	45,702	$	54,708
Work-in-process	22,604		20,987
Purchased aircraft, parts, engines and components held for sale	151,588		162,337
	$	219,894	$	238,032

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. Equipment on long-term lease consists of aircraft and engines on lease with commercial airlines for more than twelve months.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies — (Continued)

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 is 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 tax deductions for depreciation on the leased assets and for interest on the secured debt financing.

Income taxes

Income taxes are determined in accordance with SFAS No. 109, “Accounting for Income Taxes.”

Statements of Cash Flows

Supplemental information on cash flows follows:

	For the Year Ended May 31,
	2003		2002		2001
Interest paid	$	17,604	$	16,817	$	21,700
Income taxes paid	3,460		1,960		3,200
Income tax refunds and interest received	865		4,075		6,900

Noncash operating and financing activities:

Assets acquired with assumption of notes payable
(see Note 11 for 2003 and Note 8 for 2002)

36,025

29,737

—

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.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

1. Summary of Significant Accounting Policies — (Continued)

New Accounting Standards

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the effects of stock-based compensation. The provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002 and have been adopted by the Company.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company has adopted the provisions of SFAS No. 146 for any exit or disposal activity initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also expands the disclosures required to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees it has issued. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for interim financial statements ending after December 15, 2002. Adoption of FIN 45 did not have an impact on the Company’s disclosures, because it has previously disclosed and continues to disclose its obligations in the event that it does not renew certain aviation equipment operating leases (See Note 8).

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”. FIN 46 addresses the consolidation by business enterprises of variable interest entities and requires enterprises to consolidate a variable interest entity if that enterprise has a variable interest that will absorb a majority of the entity’s expected losses if they occur, or receive a majority of the entity’s expected returns if they occur, or both. FIN 46 became effective for variable interest entities created after January 31, 2003. Public companies with a variable interest in a variable interest entity created before February 1, 2003 shall apply the provisions of FIN 46 no later than the beginning of the first interim period or annual reporting period beginning after June 15, 2003. The adoption of FIN 46 is not expected to have a material effect on the consolidated financial position of the Company.

Reclassification

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

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

2. Impairment and Special Charges

The components of the fiscal 2003 and fiscal 2002 impairment charges were as follows:

	For the Year Ended May 31,
	2003		2002
Engine and airframe parts	$	2,360	$	56,000
Whole engines	3,000		11,400
Loss accruals for engine operating leases	—		8,500
	$	5,360	$	75,900

Prior to September 11, 2001 the Company was executing its plan to reduce its investment in support of older generation aircraft in line with the commercial airlines’ scheduled retirement plans for these aircraft. The events of September 11 caused a severe and sudden disruption in the commercial airline industry, which brought about a rapid acceleration of those retirement plans. System-wide capacity was reduced by approximately 20%, and many airlines cancelled or deferred new aircraft deliveries. Based on management’s assessment of these and other conditions, the Company in the second quarter ended November 30, 2001, reduced the value and provided loss accruals for certain of its inventories and engine leases which support older generation aircraft by $75,900, of which $57,900 was related to the Inventory and Logistic Services segment and $18,000 was related to the Aircraft and Engine Sales and Leasing segment.

The fiscal 2002 writedown for the engine and airframe parts was determined by comparing the carrying value for inventory parts that support older generation aircraft to their net realizable value. In determining net realizable value, the Company assigned estimated sales prices taking into consideration historical selling prices and demand, as well as anticipated demand. The $11,400 writedown during fiscal 2002 for whole engines related to assets that are reported in the caption “Equipment on or available for short-term lease” and was determined by comparing the carrying value for each engine to an estimate of its undiscounted future cash flows. In those instances where there was a shortfall, the impairment was measured by comparing the carrying value to an estimate of the asset’s fair market value. The loss accruals for engine operating leases were determined by comparing the scheduled purchase option prices to the estimated fair value of such equipment. In those instances where the scheduled purchase option price exceeded the estimated fair value, an accrual for the estimated loss was recorded (See Note 8).

During the fourth quarter of fiscal 2003, the Company recorded additional impairment charges related to certain engine and airframe parts and whole engines in the amount of $5,360. The fiscal 2003 impairment charge was based upon an updated assessment of the net realizable values for certain engine and airframe parts and future undiscounted cash flows for whole engines. Of the $5,360 impairment charge recorded during fiscal 2003, $2,360 related to the Inventory and Logistic Services segment and $3,000 related to the Aircraft and Engine Sales and Leasing segment.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

2. Impairment and Special Charges — (Continued)

A summary of the carrying value of impaired inventory and engines, after giving effect to the impairment charges recorded by the Company during fiscal 2003 and fiscal 2002 are as follows:

	May 31, 2003		May 31, 2002		November 30, 2001
Net impaired inventory and engines	$	56,240	$	75,600		$	89,600

Proceeds from sales of impaired inventory and engines for the twelve-month period ended May 31, 2003 and the six-month period ended May 31, 2002 were $12,100 and $15,600 respectively.

In addition, the Company recorded special charges of $10,100 during the three-month period ended November 30, 2001. Of the $10,100 special charge, $5,700 related to an increase in the allowance for doubtful accounts to reflect the inability to recover certain receivables. The $5,700 charge to increase the allowance for doubtful accounts principally related to an assessment of the Company’s prior estimates of recoveries from certain bankrupt airlines. The Company increased the allowance to give effect to the decline in values of aviation equipment that had been expected to be recovered from the bankrupt airlines. The increase in the allowance was classified as a special charge because the decline in values of the assets was attributable to the events of September 11, 2001.

The remaining balance of the special charge related to a $1,500 severance accrual and a $2,900 other asset impairment charge. During the second quarter ended November 30, 2001 and in connection with overall cost savings initiatives, the Company reduced its work force by approximately 150 employees. Affected employees included management and salaried employees, salespersons and hourly employees at certain of the Company’s facilities. The $2,900 other asset impairment charge relates to an investment in marketable securities, which was written down to fair market value. In February 2002, the Company liquidated its position in this investment; proceeds received approximated net book value after taking into consideration the impairment charge.

3. Financing Arrangements

Short-term borrowing activity was as follows:

	For the Year Ended May 31,
	2003			2002			2001
Maximum amount borrowed	$	41,700		$	80,000		$	110,500
Average daily borrowings	32,661			36,152			71,917
Average interest rate during the year	3.4		%	2.98		%	6.7		%

During the fourth quarter of fiscal 2003, the Company’s unsecured credit arrangements with three domestic banks expired and its previous accounts receivable securitization facility also expired. During the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004, the Company completed four financing transactions to replace the expiring bank credit arrangements, improve its liquidity position and retire a portion of the Company’s 1993 7¼% Notes due October 15, 2003.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

3. Financing Arrangements — (Continued)

On March 21, 2003, the Company completed a new $35,000 accounts receivable securitization program with LaSalle. The amount available under this agreement is based on a formula of qualifying accounts receivable. As of May 31, 2003, the amount available to the Company under the agreement was $26,800. The term of the agreement is one year, renewable annually and bears interest at LIBOR plus 300 points. The LaSalle securitization program replaced the previous accounts receivable program and substantially replaced the LaSalle Bank unsecured credit arrangement. The amount outstanding under this agreement was $26,800 at May 31, 2003.

On May 30, 2003, the Company completed a new $30,000 secured revolving credit facility with Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services, Inc. The amount available under this agreement is also based on a formula of qualifying assets. As of May 31, 2003, the amount available to the Company under the agreement was $24,800. The term of the facility is three years, bears interest at LIBOR plus 300 basis points and carries a one-percent facility fee on the unused portion of the agreement. Proceeds from this transaction were used primarily to pay down expiring bank lines and to repurchase $10,000 of the Company’s 1993 7¼% Notes due October 15, 2003. The amount outstanding under this agreement was $24,000 at May 31, 2003.

On May 30, 2003, the Company also completed the repurchase of $10,000 and the exchange for new notes of $16,900 of the Company’s 1993 7¼% Notes due October 15, 2003 in a privately negotiated transaction with a single holder. The $16,900 of new notes bear interest at 8% and are due ratably over three years commencing October 15, 2004. As of May 31, 2003, the balance outstanding under the Company’s 1993 7¼% Notes, after taking into consideration this transaction, was $22,600.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

3. Financing Arrangements — (Continued)

Long-term debt was as follows:

	May 31,
	2003			2002
Notes payable due October 15, 2003 with interest of 7.25% payable semi-annually on April 15 and October 15	$	22,600		$	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
Notes payable due May 15, 2008 with interest of 7.98% payable semi-annually on June 1 and December 1	20,000			20,000
Notes payable due May 15, 2011 with interest of 8.39% payable semi-annually on June 1 and December 1	55,000			55,000
Notes payable with interest of 8.0%, due in equal installments on October 15, 2004, 2005 and 2006	16,900			—
Notes payable due June 29, 2005 with interest of 3.81% payable monthly (see Note 8)	21,291			29,737
Non-recourse note payable due January 2004 with interest of 6.0%	32,527			—
Other, primarily industrial revenue bonds, (secured by trust indentures on property, plant and equipment) with weighted average interest of approximately 3.0% to 6.65% at May 31, 2003	4,596			4,987
	232,914			219,724
Current maturities	(68,256		)	(2,025		)
	$	164,658		$	217,699

The Company is subject to a number of covenants under its financing arrangements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, fixed charge coverage ratio, sales of assets, additional financing, purchase of the Company’s shares and other matters. The Company is currently prohibited from paying dividends or purchasing its shares pursuant to its most restrictive financial covenant concerning consolidated retained earnings. The Company is in compliance with all financial covenants under its financing arrangements. The aggregate amount of long-term recourse debt maturing during each of the next five fiscal years is $35,729 in 2004, $7,370 in 2005, $14,018 in 2006, $5,922 in 2007 and $80,295 in 2008. The Company’s long-term debt was estimated to have a fair value of approximately $201,806 at May 31, 2003 and was based on estimates using discounted future cash flows at an assumed rate for borrowings currently prevailing in the marketplace for similar instruments.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

4. Income Taxes

The provision for income taxes includes the following components:

	For the Year Ended May 31,
	2003			2002			2001
Current:
Federal	$	293		$	(2,832	)	$	1,580
State	270			250			421
	563			(2,582		)	2,001
Deferred	(7,643		)	(36,708		)	(312		)
	$	(7,080	)	$	(39,290	)	$	1,689

The deferred tax provision (benefit) results primarily from differences between financial reporting and taxable income arising from alternative minimum tax carryforwards, net operating loss (NOL) carryforwards, foreign tax credit carryforwards, 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,
	2003			2002
Deferred tax liabilities attributable to:
Depreciation	$	49,750		$	49,800
Leveraged leases	13,710			14,730
Other	—			620
Total deferred tax liabilities	$	63,460		$	65,150
Deferred tax assets — current attributable to:
Inventory costs	$	30,594		$	24,000
Employee benefits	(3,234		)	(1,481		)
Other	(70		)	142
Total deferred tax assets — current	$	27,290		$	22,661
Deferred tax assets — noncurrent attributable to:
Postretirement benefits	$	9,013		$	4,027
Alternative minimum tax carryforwards, NOL carryforwards and foreign tax credit carryforwards	32,785			30,522
Valuation allowance	(939		)	—
Total deferred tax assets — noncurrent	$	40,859		$	34,549
Total deferred tax assets	$	68,149		$	57,210
Net deferred tax (assets) liabilities	$	(4,689	)	$	7,940

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

4. Income Taxes — (Continued)

During fiscal 2003, the Company established a deferred tax valuation allowance of $939 related to certain foreign tax credit carryforwards. For the other deferred tax assets, the Company has determined that the realization of the deferred tax assets is more likely than not, and that a valuation allowance is not required based upon the Company’s prior history of operating earnings, the nature of certain of its deferred tax assets, its expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to leveraged leases.

The provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory income tax rate of 35% for fiscal 2003, 2002 and 2001, for the following reasons:

	For the Year Ended May 31,
	2003			2002			2001
Provision (benefit) for income taxes at the federal statutory rate	$	(6,820	)	$	(34,380	)	$	7,080
Tax benefits on exempt earnings from export sales	(1,220		)	(1,460		)	(2,700		)
State income taxes, net of federal benefit and refunds	176			(1,267		)	670
Non-deductible portion of goodwill amortization	—			—			300
Reduction in income tax accrued liabilities	—			(2,000		)	(3,300		)
Valuation allowance	939			—			—
Other, net	(155		)	(183		)	(361		)
Provision (benefit) for income taxes as reported	$	(7,080	)	$	(39,290	)	$	1,689
Effective income tax (benefit) rate	(36.3		)%	(40.0		)%	8.4		%

During fiscal 2002 and 2001, the Company recorded reductions in income tax expense of $2,000 and $3,300, respectively. These adjustments represent the reversal of federal and state income tax accruals which were no longer considered required. The fiscal 2001 adjustment in the amount of $3,300 reduced federal and state income tax accruals primarily recorded during the fiscal years 1994 and 1998 related to incentives on exports. The tax returns for all years through fiscal year 1998 closed to assessment during fiscal 2001. The fiscal 2002 adjustment in the amount of $2,000, reduced federal and state income tax expense primarily recorded during the fiscal years 1999 through 2001, related to incentives on exports and tax credits. A change in tax law effective in fiscal 2002 regarding the computation of export incentives, combined with previous experience with tax examinations, resulted in the reduction in the tax expense.

5. Common Stock and Stock Options

The Company has established stock option plans for officers and key employees of the Company. Stock option awards under the AAR Stock Benefit Plan 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 common 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.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

5. Common Stock and Stock Options — (Continued)

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, 2003 follows:

	Number of Shares			Weighted Average Exercise Price
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
Granted		937			14.95
Exercised		(129	)		10.15
Surrendered/expired/cancelled		(628	)		18.10
Outstanding, May 31, 2002 (2,495 exercisable)		4,248			16.51
Granted		943			8.45
Exercised		—			—
Surrendered/expired/cancelled		(589	)		13.28
Outstanding, May 31, 2003 (2,754 exercisable)		4,602			$	15.27

The following table provides additional information regarding options (in thousands) outstanding as of May 31, 2003:

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		1,668		7.2		541		$	11.01
$12.26 – 18.38		1,778		5.4		1,171		$	15.39
$18.39 – 24.50		1,122		4.9		1,008		$	23.19
$24.51 – 30.63		34		2.6		34		$	27.65
		4,602		5.9		2,754		$	17.53

The AAR CORP. Stock Benefit Plan also provides for the grant of restricted stock awards. Restrictions are released at the end of applicable restriction 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 common stock 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. The number (in thousands) of restricted shares awarded to officers and key employees and the weighted average per share fair value of those shares is as follows:

	For the Year Ended May 31,
	2003		2002		2001
Shares granted		—	10		57
Weighted average per share fair value		—	$	8.70	$	13.11

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

5. Common Stock and Stock Options — (Continued)

Compensation cost is included in results of operations over the vesting period. Expense (income) relating to outstanding restricted stock awards for the three-year period ended May 31, 2003 follows:

	For the Year Ended May 31,
	2003			2002			2001
Expense	$	330		$	571		$	1,141
Forfeitures (income)	(111		)	(802		)	(86		)
Net	$	219		$	(231	)	$	1,055

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.

All equity compensation plans have been approved by shareholders. The number of options and awards outstanding and available for grant or issuance for each of the Company’s stock plans are as follows (in thousands):

	May 31, 2003
	Outstanding		Available		Total
Stock Benefit Plan (officers, directors and key employees)		4,990		2,019	7,009
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. 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.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

5. Common Stock and Stock Options — (Continued)

On September 21, 1990, the Board of Directors authorized the Company to purchase up to 1,500,000 shares (adjusted for a 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 1,500,000 additional shares of the Company’s common stock. As of May 31, 2003, the Company had purchased 1,745,000 shares of its common stock on the open market under these programs at an average price of $14.00 per share and has remaining authorization to purchase 1,255,000 shares (See Note 3).

6. Earnings Per Share

The computation of basic earnings per share is based on the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is based on the weighted average number of common stock 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, 2003 (in thousands).

	For the Year Ended May 31,
	2003			2002			2001
Basic:
Net income (loss)	$	(12,410	)	$	(58,939	)	$	18,531
Average shares of common stock outstanding	31,852			28,282			26,913
Earnings (loss) per share of common stock — basic	$	(0.39	)	$	(2.08	)	$	0.69
Diluted:
Net income (loss)	$	(12,410	)	$	(58,939	)	$	18,531
Average shares of common stock outstanding	31,852			28,282			26,913
Additional shares due to hypothetical exercise of stock options	—			—			72
Average shares of common stock outstanding — diluted	31,852			28,282			26,985
Earnings (loss) per share — diluted	$	(0.39	)	$	(2.08	)	$	0.69

At May 31, 2003 and 2002 respectively, stock options to purchase 4,571 and 3,475 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the exercise price of these options was greater than the average market price of the common shares.

Common stock equivalents representing options to purchase 31 and 773 shares for the twelve-month periods ended May 31, 2003 and 2002 were not included in the computations of diluted earnings per share because to do so would have been antidilutive due to the net loss during the respective periods.

On October 9, 2002, the Company’s Board of Directors voted to suspend the quarterly common stock dividend.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

7. Employee Benefit Plans

The Company has defined contribution and 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 and non-union hourly employees had a benefit formula 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 certain union 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 “Employers’ Disclosures about Pensions 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 lease five years of service as a director. Benefits are paid quarterly in cash in an amount equal to 25% 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 the 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 executive and key employees to supplement benefits provided by the Company’s other benefit plans. The plans are not 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.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

7. Employee Benefit Plans — (Continued)

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,
	2003			2002
Change in benefit obligation:
Benefit obligation at beginning of year	$	67,264		$	64,835
Service cost	2,726			2,767
Interest cost	4,458			4,427
Plan participants’ contributions	213			193
Amendments	688			(2,769		)
Net actuarial loss	7,184			2,856
Benefits paid	(5,108		)	(5,045		)
Benefit obligation at end of year	$	77,425		$	67,264
Change in plan assets:
Fair value of plan assets at beginning of year	$	50,067		$	49,049
Actual return on plan assets	(564		)	(921		)
Employer contributions	6,823			6,791
Plan participants’ contributions	213			193
Benefits paid	(5,108		)	(5,045		)
Fair value of plan assets at end of year	$	51,431		$	50,067
Funded status	$	(25,994	)	$	(17,197	)
Unrecognized actuarial losses	31,800			19,333
Unrecognized prior service cost	2,146			1,819
Unrecognized transitional obligation	151			236
Prepaid pension costs	$	8,103		$	4,191

The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 6.0% at May 31, 2003 and 7.25% at May 31, 2002, and an assumed average compensation increase of 3.0% and 4.0% at May 31, 2003 and 2002, respectively. The expected long-term rate of return on assets is 8.5% and 9.0% for fiscal 2003 and 2002, respectively. 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 non-domestic plans is determined using an assumed weighted average discount rate of 5.25% and 6.0% at May 31, 2003 and 2002 respectively, and an assumed average compensation increase of 3.25% and 4.0% at May 31, 2003 and 2002, respectively. The expected long-term rate of return on assets is 6.5% for fiscal 2003 and 2002.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

7. Employee Benefit Plans — (Continued)

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

	For the Year Ended May 31,
	2003			2002			2001
Service cost	$	2,726		$	2,767		$	2,867
Interest cost	4,458			4,427			4,411
Expected return on plan assets	(4,804		)	(4,901		)	(4,275		)
Amortization of prior service cost	290			393			485
Recognized net actuarial loss	504			112			24
Transitional obligation	92			89			89
Curtailment	—			311			—
	$	3,266		$	3,198		$	3,601

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% of their pretax compensation, subject to applicable regulatory limits. The Company may make matching contributions up to 5% 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 for Company matching contributions was $457, $1,391 and $1,550 in fiscal 2003, 2002 and 2001, 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, 2003, 2002 and 2001 included the following components:

	For the Year Ended May 31,
	2003		2002		2001
Service cost	$	—	$	—	$	—
Interest cost	58		97		105
Amortization of prior service cost	7		16		16
	$	65	$	113	$	121

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

7. Employee Benefit Plans — (Continued)

The funded status of the plans at May 31, 2003 and 2002 was as follows:

	May 31,
	2003			2002
Change in benefit obligation:
Benefit obligation at beginning of year	$	1,340		$	1,337
Interest cost	58			97
Benefits paid	(116		)	(102		)
Unrecognized actuarial loss	50			8
Amendment	(485		)	—
Plan participants’ contributions	—			—
Benefit obligation at end of year	$	847		$	1,340
Change in plan assets:
Fair value of plan assets at beginning of year	$	—		$	—
Company contributions	116			102
Benefits paid	(116		)	(102		)
Plan participants’ contributions	—			—
Fair value of plan assets at end of year	$	—		$	—
Funded status	$	(847	)	$	(1,340	)
Unrecognized actuarial gain	(22		)	(22		)
Unrecognized prior service cost	70			162
Accrued postretirement costs	$	(799	)	$	(1,200	)

The assumed discount rate used to measure the accumulated postretirement benefit obligation was 6.0% at May 31, 2003 and 7.25% at May 31, 2002. The assumed rate of future increases in healthcare costs was 9.0% and 10.0% in fiscal 2003 and 2002, respectively, declining to 5.0% by the year 2008 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 $23 as of May 31, 2003, and would not result in a significant change to the annual postretirement benefit expense.

8. Aviation Equipment Operating Leases

The Company from time to time leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company. If the Company elects not to renew a lease or the lease term expires, the Company will purchase the equipment from the lessor at its scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price.

In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed the fair value of such equipment, the Company records an accrual for loss. The scheduled purchase option values amounted to $33,783 at May 31, 2003 and $35,623 at May 31, 2002.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

8. Aviation Equipment Operating Leases — (Continued)

During the fourth quarter ended May 31, 2002, the Company purchased the equity interest in $31,080 of aviation equipment. As a result, the amount was recorded as an asset on the May 31, 2002 Consolidated Balance Sheet. The lease obligations for these assets, owing to the lessor, converted to term loans upon the purchase in the amount of $29,737, which was also recorded on the May 31, 2002 Consolidated Balance Sheet.

As part of the impairment charge recorded during the three month period ended November 30, 2001, the Company recorded an $8,500 accrual for possible losses for those assets in which the scheduled purchase option price exceeded the estimated fair value of such equipment (See Note 2). As of May 31, 2003, the loss accrual was $5,800. The principal reason for the $2,700 reduction in the loss accrual was due to the purchased equity interest in the aviation equipment disclosed above. These amounts were recorded on the May 31, 2002 Consolidated Balance Sheet net of $2,500 of loss accruals that were established for certain of the assets acquired.

The remainder of the reduction in the loss accrual ($200) is attributable to the buyout of a lease and subsequent sale of the underlying aircraft engine. Upon the sale of the engine, the Company included the engine-specific loss accrual in the determination of the gain/loss on sale.

9. Commitments and Contingencies

In addition to aviation equipment operating leases, the Company leases certain facilities and equipment under agreements that are classified as operating leases that expire at various dates through 2011. Future minimum payments and non-cancelable sublease rentals under all operating leases at May 31, 2003 are as follows:

	Future Minimum Payments
Year	Facilities and Equipment			Aviation Equipment			Sublease Rentals
2004		$	4,836		$	4,788		$	2,538
2005		4,077			10,516			2,220
2006		3,274			6,801			2,035
2007		2,968			14,443			—
2008 and thereafter		3,395			—			—

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

	For the Year Ended May 31,
	2003		2002		2001
Facilities and Equipment	$	6,597	$	7,688	$	8,484
Aviation Equipment	3,117		6,558		10,199

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, 2003 was approximately $5,754.

The Company is involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business (See Item 3 Legal Proceedings). 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.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

10. Investment in Leveraged Leases

Occasionally, 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 non-recourse debt for the remaining equipment cost.

During the lease term the Company is required, in accordance with SFAS No. 13, “Accounting for Leases,” 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 non-recourse debt or changes in income tax rates. The Company’s net investment in leveraged leases is comprised of the following elements:

	May 31,
	2003			2002
Rentals receivable (net of principal and interest on the non-recourse debt)	$	7,870		$	12,307
Estimated residual value of leased assets	25,573			25,573
Unearned and deferred income	(6,049		)	(8,792		)
	27,394			29,088
Deferred taxes	(13,710		)	(14,730		)
Net investment in leveraged leases	$	13,684		$	14,358

Pretax income from leveraged leases was $2,743, $2,523 and $2,640 in fiscal 2003, 2002 and 2001, respectively.

11. Investment in Joint Ventures

At May 31, 2002, the Company owned a 50% equity interest in each of two joint ventures. The remaining 50% equity interest in each joint venture was owned by a major U.S. financial institution. Each joint venture owned one wide-body aircraft, on lease to a major foreign carrier. Each joint venture financed the purchase of its aircraft primarily with debt that is without recourse to the joint venture and to the joint venture partners. On June 20, 2002, the Company purchased the other 50% equity interest in one of the joint ventures from the joint venture partner for nominal consideration. As a result of the consolidation of that entity, the aircraft owned by the joint venture has been recorded in the Company’s accounts in an amount equal to the Company’s historical cost of its investment in the joint venture, plus the nominal consideration paid to the other party, plus the amount of the non-recourse debt that was associated with the aircraft. The book value of the aircraft and the non-recourse debt recorded on the Company’s Consolidated Balance Sheet were $35,145 and $32,527, respectively at May 31, 2003. In January 2004, the Company’s non-recourse notes in the amount of $32,527 mature and, therefore, have been classified as current on the May 31, 2003 Consolidated Balance Sheet. In the event of non-payment of the notes, the holders do not have any recourse against the Company, but may receive title to the wide-body aircraft that secures the debt. At May 31, 2003, the Company’s equity interest in this aircraft was $2.6 million.

The Company’s investment in the remaining joint venture at May 31, 2003 was $1,608, and the Company’s investment in the two joint ventures at May 31, 2002 was $4,038. The investment amounts are included in “Other assets” on the Consolidated Balance Sheets.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

11. Investment in Joint Ventures — ( Continued)

The following table provides combined summarized joint venture financial information at May 31, 2003 and May 31, 2002.

	May 31,
	2003		2002
Total assets	$	39,244	$	80,270
Total non-recourse debt	36,028		72,194
Net assets of joint venture(s)	$	3,216	$	8,076
AAR CORP.’s 50% equity interest in joint venture(s)	$	1,608	$	4,038

12. Other Noncurrent Assets

At May 31, 2003 and 2002, other noncurrent assets consisted of the following:

	May 31,
	2003		2002
Notes receivable	$	10,156	$	13,777
Investment in aviation equipment	10,119		11,175
Cash surrender value of life insurance	5,426		4,295
Licenses and rights	3,973		4,136
Investment in joint ventures	1,608		4,038
Debt issuance costs	700		881
Other	18,121		14,746
	$	50,103	$	53,048

13. 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 $16,451 was paid with a cash payment of $3,200 and a note of $13,251 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.

If the acquisition occurred as of the beginning of fiscal 2001, the Company’s results of operations would not have been materially different.

14. 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 reports its activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

14. Business Segment Information — (Continued)

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

Gross profit is calculated by subtracting cost of sales from sales. Selected financial information for each reportable segment is as follows:

	For the Year Ended May 31,
	2003		2002		2001
Net sales, excluding pass through sales:
Inventory and Logistic Services	$	246,031	$	258,067	$	366,562
Maintenance, Repair and Overhaul	205,666		216,727		257,117
Manufacturing	119,871		99,558		97,154
Aircraft and Engine Sales and Leasing	34,769		64,369		132,826
	$	606,337	$	638,721	$	853,659

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

14. Business Segment Information — (Continued)

	For the Year Ended May 31,
	2003		2002		2001
Gross profit, before consideration of impairment charges (See Note 2):
Inventory and Logistic Services	$	32,756	$	32,135	$	53,614
Maintenance, Repair and Overhaul	26,003		32,417		48,819
Manufacturing	18,775		12,799		12,673
Aircraft and Engine Sales and Leasing	4,884		12,397		21,361
	$	82,418	$	89,748	$	136,467

	May 31,
	2003		2002		2001
Total assets:
Inventory and Logistic Services	$	190,693	$	208,515	$	278,614
Maintenance, Repair and Overhaul	191,097		190,438		185,354
Manufacturing	63,044		73,791		84,041
Aircraft and Engine Sales and Leasing	158,103		146,941		86,981
Corporate	83,684		90,514		66,864
	$	686,621	$	710,199	$	701,854

	For the Year Ended May 31,
	2003		2002		2001
Capital expenditures:
Inventory and Logistic Services	$	572	$	627	$	1,616
Maintenance, Repair and Overhaul	6,853		8,316		6,116
Manufacturing	1,764		1,684		2,554
Aircraft and Engine Sales and Leasing	—		2		17
Corporate	741		1,483		2,831
	$	9,930	$	12,112	$	13,134

	For the Year Ended May 31,
	2003		2002		2001
Depreciation and amortization:
Inventory and Logistic Services	$	2,446	$	2,646	$	3,290
Maintenance, Repair and Overhaul	7,568		7,068		6,432
Manufacturing	3,468		4,040		4,082
Aircraft and Engine Sales and Leasing	9,580		4,745		2,165
Corporate	4,110		3,997		4,670
	$	27,172	$	22,496	$	20,639

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

14. Business Segment Information — (Continued)

The following reconciles segment gross profit to consolidated income (loss) before provision for income taxes:

	For the Year Ended May 31,
	2003			2002			2001
Segment gross profit	$	82,418		$	89,748		$	136,467
Cost of sales-impairment charges	(5,360		)	(75,900		)	—
Selling, general and administrative and other	(78,845		)	(85,037		)	(96,077		)
Special charges	—			(10,100		)	—
Interest expense	(19,539		)	(19,798		)	(21,887		)
Interest income	1,836			2,858			1,717
Income (loss) before provision for income taxes	$	(19,490	)	$	(98,229	)	$	20,220

Sales to the U.S. Government, its agencies and its contractors by segment are as follows:

	For the Year Ended May 31,
	2003		2002		2001
Inventory and Logistic Services	$	40,925	$	28,489	$	16,617
Maintenance, Repair and Overhaul	44,163		65,832		67,050
Manufacturing	85,103		66,992		55,405
Aircraft and Engine Sales and Leasing	—		1,860		—
	$	170,191	$	163,173	$	139,072

Geographic Data

	May 31,
	2003		2002
Long-lived assets
United States	$	278,551	$	263,232
Europe	11,480		10,156
Other	178		155
	$	290,209	$	273,543

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 $142,403 (23.5% of total sales), $134,809 (21.1% of total sales) and $213,864 (24.5% of total sales) in fiscal 2003, 2002 and 2001, respectively.

AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share amounts)

15. Selected Quarterly Data (Unaudited)

The unaudited selected quarterly data for fiscal years ended May 31, 2003 and 2002 follows.

	Fiscal 2003
Quarter	Sales		Gross Profit			Net Income (Loss)				Diluted Earnings (Loss) Per Share
First	$	151,165		$	17,765		$	(4,879	)		$	(0.15	)
Second	153,051			22,930			(663		)		(0.02		)
Third	156,992			24,525			651				0.02
Fourth	145,129			11,838			(7,519		)		(0.24		)
	$	606,337		$	77,058		$	(12,410	)		$	(0.39	)

	Fiscal 2002
Quarter	Sales		Gross Profit				Net Income (Loss)				Diluted Earnings (Loss) Per Share
First	$	202,993		$	29,140			$	486			$	0.02
Second	144,889			(55,392		)		(54,484		)		(2.03		)
Third	143,457			19,511				(2,290		)		(0.08		)
Fourth	147,382			20,589				(2,651		)		(0.08		)
	$	638,721		$	13,848			$	(58,939	)		$	(2.08	)

See Note 2 for a description of impairment and special charges recorded during the fourth quarter of fiscal 2003 and the second quarter of fiscal 2002. The sum of diluted earnings (loss) per share for fiscal 2002 quarters does not equal the full year amount due to the impact of changes in average shares outstanding.

16. Allowance for Doubtful Accounts

	May 31,
	2003			2002			2001
Balance, beginning of year	$	10,624		$	11,016		$	10,080
Provision charged to operations	3,140			2,697			2,141
Special charge (see Note 2)	—			5,700			—
Deductions for accounts written off, net of recoveries	(5,101		)	(8,789		)	(1,205		)
Balance, end of year	$	8,663		$	10,624		$	11,016

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 2003 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 2003 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 2003 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The number of shares (in thousands) to be issued upon exercise and the number of shares remaining available for future issuance under the Company’s equity compensation plans at May 31, 2003 were as follows.

	Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)			(c)
Equity compensation plans approved by security holders		4,602		$	15.27		2,019
Equity compensation plans not approved by security holders		—		—			—
Total		4,602		$	15.27		2,019

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 2003 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 2003 Annual Meeting of Stockholders.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the filing of this Annual Report on Form 10-K, the chief executive officer and chief financial officer of the Company evaluated the effectiveness of the Company’s disclosure controls and procedures and have concluded that the Company’s controls and procedures effectively ensure that the information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely manner. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Financial Statements and Financial Statement Disclosures

		Page
Independent Auditors’ Report		19
Financial Statements — AAR CORP. and Subsidiaries:
Consolidated Statements of Operations for the three years ended May 31, 2003		21
Consolidated Balance Sheets as of May 31, 2003 and 2002		22-23
Consolidated Statements of Stockholders’ Equity for the three years ended May 31, 2003		24
Consolidated Statements of Cash Flows for the three years ended May 31, 2003		25
Notes to Consolidated Financial Statements		26-52
Selected quarterly data (unaudited) for the years ended May 31, 2003 and 2002 (Note 15 of Notes to Consolidated Financial Statements)		52

Exhibits

The Exhibits filed as 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 10.15 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, 2003.

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 15, 2003
	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		Chairman of the Board		August 15, 2003
Ira A. Eichner		Director
/s/ David P. Storch		President and Chief Executive
David P. Storch		Officer; Director (Principal Executive Officer)
/s/ Timothy J. Romenesko		Vice President and Chief Financial
Timothy J. Romenesko		Officer (Principal Financial Officer)
/s/ Michael J. Sharp		Vice President and Controller
Michael J. Sharp		(Principal Accounting Officer)
/s/ A. Robert Abboud		Director
A. Robert Abboud
/s/ James G. Brocksmith, Jr.		Director
James G. Brocksmith, Jr.
/s/ Ronald R. Fogleman		Director
Ronald R. Fogleman
/s/ James E. Goodwin		Director
James E. Goodwin
/s/ Joel D. Spungin		Director
Joel D. Spungin
/s/ Marc J. Walfish		Director
Marc J. Walfish

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, 1998, 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 April 11, 2000 ²⁶ and May 13, 2002. ³⁰
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	Second Amended and Restated Credit Agreement dated May 27, 1998 between Registrant and Bank of America National Trust and Savings Association as agent, ³⁰ amended December 28, 1998, ³⁰ February 5, 2002, ³⁰ May 23, 2002, ³⁰ August 31, 2002, ³¹ November 26, 2002 ³² and April 10, 2003. ³³
			4.4	Rights Agreement between the Registrant and the First National Bank of Chicago dated July 8, 1997 ¹⁷ and amended October 16, 2001. ²⁸
			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 October 12, 1993, ¹⁰ December 15, 1997 (filed herewith) and May 31, 2002 (filed herewith).
			4.7	Second Amended and Restated Credit Agreement dated February 10, 1998, between the Registrant and The First National Bank of Chicago (now known as Bank One, N.A.) ¹⁹ amended August 20, 1998, ³⁰ January 25, 2002, ³⁰ September 30, 2002 ³¹ and November 30, 2002. ³²
			4.8	Credit Agreement dated November 1, 1997 between the Registrant and The Northern Trust Company. ²⁰

		Index			Exhibits
			4.9	Revolving Loan Agreement dated April 11, 2001 between Registrant and LaSalle Bank National Association ²⁹ amended November 30, 2001, ³⁰ April 22, 2002, ³⁰ June 6, 2002, ³⁰ March 10, 2003, ³³ March 21, 2003, ³³ May 9, 2003 (filed herewith) and June 26, 2003 (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. ²⁹
			4.11	Revolving Loan Agreement dated October 3, 2001 between Registrant and U.S. Bank National Association ³⁰ and amended November 30, 2001. ³⁰
			4.12	Credit Agreement dated May 29, 2003 between Registrant and various subsidiaries and Merrill Lynch Capital and various additional lenders from time to time who are parties thereto (filed herewith).
			4.13	Loan and Security Agreement dated July 1, 2003 between Registrant’s subsidiary, AAR Wood Dale LLC and Fremont Investment Loan (filed herewith).
				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.
10.	Material Contracts		10.1	Amended and Restated AAR CORP. Stock Benefit Plan effective October 1, 2001, ²⁸ as amended June 27, 2003 (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 ²⁴ and May 31, 1999. ²⁴
			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. ²⁹

		Index			Exhibits
			10.6	AAR CORP. Amended and Restated Supplemental Key Employee Retirement Plan, dated May 4, 2000, ²⁶ amended April 10, 2001, ²⁹ October 10, 2001, ³⁰ October 10, 2002 ³³ and December 18, 2002. ³³
			10.7	Amended and Restated Employment Agreement dated July 14, 1998 between the Registrant and David P. Storch ²⁶ and amended July 10, 2001. ²⁷
			10.8	Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Howard A. Pulsifer. ²⁶
			10.9	Amended and Restated Severance and Change in Control Agreement dated August 1, 2000 between the Registrant and Michael J. Sharp. ²⁹
			10.10	Employment and Severance and Change in Control Agreement dated June 1, 2001 between the Registrant and Joseph M. Gullion. ²⁹
			10.11	Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Timothy J. Romenesko. ²⁶
			10.12	Amended and Restated AAR CORP. Nonemployee Directors’ Deferred Compensation Plan, dated April 8, 1997, amended May 26, 2000 ²⁶ and December 18, 2002. ³³
			10.13	Severance and Change in Control Agreement dated January 14, 2000 between the Registrant and James J. Clark. ³³
			10.14	Purchase and Sale Agreement dated March 21, 2003 between AAR Distribution, Inc., AAR Parts Trading, Inc., AAR Manufacturing, Inc., AAR Engine Services, Inc., AAR Allen Services, Inc., the Registrant as Initial Servicer and AAR Receivables Corporation II. ³³
			10.15	Receivables Purchase Agreement dated March 21, 2003 between AAR Receivables Corporation II, the Registrant individually and as Initial Servicer, the Financial Institutions from time to time Parties hereto and LaSalle Business Credit, LLC. ³³
21.	Subsidiaries of the Registrant		21.1	Subsidiaries of AAR CORP. (filed herewith).

		Index			Exhibits
23.	Consents of experts and counsel		23.1	Consent of KPMG LLP (filed herewith).
31.	Rule 13a-14(a)/15(d)-14(a) Certifications		31.1	Section 302 Certification dated August 15, 2003 of David P. Storch, President and Chief Executive Officer of Registrant (filed herewith).
			31.2	Section 302 Certification dated August 15, 2003 of Timothy J. Romenesko, Vice President and Chief Financial Officer of Registrant (filed herewith).
32.	Rule 13a-14(b)/15d-14(b) Certifications		32.1	Section 906 Certification dated August 15, 2003 of David P. Storch, President and Chief Executive Officer of Registrant (filed herewith).
			32.2	Section 906 Certification dated August 15, 2003 of Timothy J. Romenesko, Vice President and Chief Financial Officer of Registrant (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 the 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 the 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.
²⁷		Incorporated by reference to Exhibits to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2001.
²⁸		Incorporated by reference to Exhibits to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2001.
²⁹		Incorporated by reference to Exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 31, 2001.
³⁰		Incorporated by reference to Exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 31, 2002.
³¹		Incorporated by reference to Exhibits to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2002.
³²		Incorporated by reference to Exhibits to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2002.
³³		Incorporated by reference to Exhibits to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003.

(This page has been left blank intentionally.)

EXHIBIT 4.6

AAR CORP.

OFFICERS' CERTIFICATE PURSUANT TO
SECTION 301 OF THE INDENTURE

Each of the undersigned officers of AAR CORP., a Delaware corporation (the "Company"), does hereby certify as follows:

(A) Each of the undersigned has read the Indenture, dated as of October 15, 1989, as amended by the First Supplemental Indenture, dated as of August 26, 1991 and the Second Supplemental Indenture dated as of December 10, 1997, between the Company and First Trust National Association (as successor in interest to Continental Bank, National Association), as trustee (collectively, the "INDENTURE"), including Section 301 thereof, and the definitions in such Indenture relating thereto and has reviewed such other corporate documents and records relating to the matters referred to herein, and, in the opinion of the undersigned, has made such examination or investigation as is necessary to enable him to express an informed opinion on the matters set forth below.

(B) The terms of the series of Securities of the Company entitled the "6.875% Notes due December 15, 2007" (the "SERIES") to be issued under the indenture have been established by a Board Resolution (as defined in the Indenture) and are set forth in ANNEX A hereto.

(C) All conditions precedent provided for in the Indenture relating to the establishment and original issuance, authentication and delivery of the Series have been complied with.

(D) In the opinion of the undersigned, Section 301 of the Indenture has been complied with in the establishment of the terms of the Securities.

IN WITNESS WHEREOF, each of the undersigned has duly executed this certificate this 15th day of December, 1997.

AAR CORP.

/s/ TIMOTHY J. ROMENESKO
---------------------------------------------
Timothy J. Romenesko,
Vice President, Chief Financial Officer

/s/ HOWARD A. PULSIFER
---------------------------------------------
Howard A. Pulsifer,
Vice President, General Counsel and Secretary

EXHIBIT 4.6

ANNEX A

Capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed to them in the Indenture:

(1) The title of the Notes shall be the "6.875% Notes due December 15, 2007" of the Company.

(2) The aggregate principal amount of the Notes which may be authenticated and delivered under the Indenture is limited to $60,000,000 (except for Notes authenticated and delivered upon registration of, transfer of, or in exchange for, or in lieu of, other Notes pursuant to Sections 304, 305, 306, 906 or 1107 of the Indenture).

(3) The principal of the Notes shall be payable on December 15, 2007.

(4) The Notes shall bear interest at the rate of 6.875% per annum from the date of issuance thereof, payable semiannually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. Each such June 15 or December 15 shall be an "Interest Payment Date" for the Notes. The June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding an Interest Payment Date shall be the "Regular Record Date" for the interest payable on such Interest Payment Date.

(5) The principal of and interest on the Notes shall be payable (and the Notes may be presented for repayment) at the office or agency of the Company maintained for such purposes in Chicago, Illinois.

(6) The Notes shall not be redeemable prior to maturity.

(7) The Notes shall be issuable only in fully registered form and shall be represented by a global certificate registered in the name of a nominee of The Depository Trust Company.

EXHIBIT 4.6

AAR CORP.

OFFICERS' CERTIFICATE PURSUANT TO
SECTION 301 OF THE INDENTURE

Each of the undersigned officers of AAR CORP., a Delaware corporation (the "COMPANY"), does hereby certify as follows:

(A) Each of the undersigned has read the Indenture, dated as of October 15, 1989, as supplemented by the First Supplemental Indenture, dated as of August 26, 1991 and the Second Supplemental Indenture, dated as of December 10, 1997, between the Company and U.S. Bank National Association (as successor trustee), as Trustee (collectively, the "INDENTURE"), including Section 301 thereof, and the definitions in such Indenture relating thereto and has reviewed such other corporate documents and records relating to the matters referred to herein, and, in the opinion of the undersigned, has made such examination or investigation as is necessary to enable him to express an informed opinion on the matters set forth below.

(B) The terms of the series of Securities of the Company entitled the "8% Notes due 2006" (the "NOTES") to be issued under the Indenture have been established by a Board Resolution (as defined in the Indenture) and are set forth in ANNEX A hereto.

(C) All conditions precedent provided for in the Indenture relating to the establishment and original issuance, authentication and delivery of the Notes have been complied with.

(D) In the opinion of the undersigned, Section 301 of the Indenture has been complied with in the establishment of the terms of the Notes.

IN WITNESS WHEREOF, each of the undersigned has duly executed this certificate this 30th day of May 2003.

AAR CORP.

/S/ TIMOTHY J. ROMENESKO
------------------------------------------
Timothy J. Romenesko
Vice President and Chief Financial Officer


/S/ DONALD J. VILIM
------------------------------------------
Donald J. Vilim
Senior Counsel and Assistant Secretary

ANNEX A

RESOLVED, that there be, and there is hereby created, approved and established under the Indenture, dated as of October 15, 1989, as supplemented by the First Supplemental Indenture, dated as of August 26, 1991, and the Second Supplemental Indenture dated as of December 10, 1997 between the Company and U.S. Bank National Association (as successor trustee), as Trustee (collectively, the "Indenture"), a series of Securities (the "Notes"), the terms of which shall be as follows (capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed to them in the Indenture):

(1) The title of the Notes shall be the "8% Notes due October 15, 2006" of the Company.

(2) The aggregate principal amount of the Notes which may be authenticated and delivered under the Indenture is limited to $16,900,000 (except for Notes authenticated and delivered upon registration of, transfer of, or in exchange for, or in lieu of, other Notes pursuant to Sections 304, 305, 306, 906 or 1107 of the Indenture).

(3) The principal of the Notes shall be payable on three principal repayment dates as follows: (i) $5,633,333.33 on October 15, 2004, (ii) $5,633,333.33 on October 15, 2005, and (iii) $5,633,333.34 on October 15, 2006.

(4) The Notes shall bear interest at the rate of 8% per annum from the date of issuance thereof, payable semiannually in arrears on October 15 and April 15 of each year, commencing October 15, 2003. Each such October 15 or April 15 shall be an "Interest Payment Date" for the Notes. The October 1 or April 1 (whether or not a Business Day), as the case may be, next preceding an Interest Payment Date shall be the "Regular Record Date" for the interest payable on such Interest Payment Date.

(6) The Notes shall not be redeemable prior to maturity.

FURTHER RESOLVED, that the form of the Notes shall be substantially the form set forth in Article Two of the Indenture.

EXHIBIT 4.9

SIXTH AMENDMENT TO REVOLVING LOAN AGREEMENT

This SIXTH AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of May 9, 2003 (the "Sixth Amendment"), is entered into by and between AAR CORP., a Delaware corporation ("the Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank").

RECITALS:

A. The Borrower and the Bank entered into that certain Revolving Loan Agreement dated as of April 11, 2001, as modified and amended by that certain First Amendment to Revolving Loan Agreement dated November 30, 2001, a Second Amendment to Revolving Loan Agreement dated April 22, 2002, a Third Amendment to Revolving Loan Agreement dated June 1, 2002 a Fourth Amendment to Revolving Loan Agreement dated as of March 10, 2003 and a Fifth Amendment to Revolving Loan Agreement dated as of March 21, 2003 (collectively, the "Loan Agreement").

B. At the present time the Borrower requests, and the Bank is agreeable to amending the Agreement pursuant to the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower and the Bank hereby agree as follows:

AGREEMENTS:

1. RECITALS. The foregoing Recitals are hereby made a part of this Sixth Amendment.

2. DEFINITIONS. Capitalized words and phrases used herein without definition shall have the respective meanings ascribed to such words and phrases in the Loan Agreement.

3. AMENDMENTS TO THE LOAN AGREEMENT.

3.1 NEGATIVE COVENANTS. Sections 8.1 and 8.3 through 8.9 are each hereby amended and restated in their entirety and each such Section shall read as follows:

"[Intentionally Omitted]"

EXHIBIT 4.9

3.2 FINANCIAL COVENANTS. Section 10 (including all subsections thereunder) is, hereby amended and restated in its entirety and shall read as follows:

"10. [Intentionally Omitted]"

3.3 DEFAULT UNDER RECEIVABLES PURCHASE AGREEMENT. The following new section 11.14 is added to the Loan Agreement:

"11.14 TERMINATION EVENT UNDER RECEIVABLES PURCHASE AGREEMENT. Notwithstanding Section 11.6, the occurrence of any "Termination Event," as that term is defined in Exhibit V of that certain Receivable Purchase Agreement dated March 21, 2003 by and among AAR Receivables Corporation II, AAR Corp., and the financial institutions from time to time parties thereto and LaSalle Business Credit, LLC, as agent, as the same may be amended or modified from time to time."

3.4 OTHER COVENANTS. Notwithstanding any provision of the Loan Agreement, any modification to any covenant therein pursuant to Section 10.6 of the Loan Agreement is hereby deleted and of no further force and effect.

4. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this Sixth Amendment, the Borrower hereby certifies, represents and warrants to the Bank that:

4.1 ORGANIZATION. The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, with full and adequate corporate power to carry on and conduct its business as presently conducted. The Borrower is duly licensed or qualified in all foreign jurisdictions wherein failure to qualify would have a material adverse effect. The Articles of Incorporation and Bylaws, Borrowing Resolutions and Incumbency Certificate of Borrower have not been changed or amended since the most recent date that certified copies thereof were delivered to the Bank. The exact legal name of the Borrower is an set forth in the preamble of this Sixth Amendment, and the Borrower currently does not conduct, not has it during the last five (5) years conducted, business under any other name or trade name. The Borrower will not change its name, its organizational identification number, if it has one, its type of organization, its jurisdiction or organization or other legal structure.

4.2 AUTHORIZATION. The Borrower is duly authorized to execute and delivery this Sixth Amendment and is and will continue to be duly authorized to borrow monies under the Loan Agreement, as amended hereby, and to perform its obligations under the Loan Agreement, as amended hereby.

4.3 NO CONFLICT. The execution and delivery of this Sixth Amendment and the performance by the Borrower of its obligations under the Loan Agreement, as amended hereby, do not and will not conflict with any provision of law or of the articles of incorporation or bylaws of the Borrower or of any material agreement binding upon the Borrower.

EXHIBIT 4.9

4.4 VALIDITY AND BINDING EFFECT. The Loan Agreement, as amended hereby, is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies.

4.5 COMPLIANCE WITH LOAN AGREEMENT. The representation and warranties set forth in Section 6 of the Loan Agreement, as amended hereby, are true and correct with the same effect as if such representations and warranties had been made on the date hereof, with the exception that all references to the financial statements shall mean the financial statements most recently delivered to the Bank and except for such changes as are specifically permitted under the Loan Agreement. In addition, the Borrower has complied with and is in compliance with all of the covenants set forth in the Loan Agreement.

4.6 NO EVENT OF DEFAULT. As of the date hereof, no Event of Default under the Loan Agreement as amended hereby, or event or condition, which with the giving of notice or the passage of time or both, would constitute an Event of Default, has occurred or is continuing.

5. CONDITIONS PRECEDENT. This Sixth Amendment shall become effective as of the date above first written after receipt by the Bank of the following documents:

5.1 SIXTH AMENDMENT. This Sixth Amendment executed by the Borrower and the Bank.

5.2 OTHER DOCUMENTS. Such other documents, certificates and/or opinions of counsel as the Bank may request.

6. GENERAL.

6.1 GOVERNING LAW: SEVERABILITY. This Sixth Amendment shall be construed in accordance with and governed by the laws of Illinois. Wherever possible each provision of the Loan Agreement and this Sixth Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Loan Agreement and this Sixth Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of the Loan Agreement and this Sixth Amendment.

6.2 SUCCESSORS AND ASSIGNS. This Sixth Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and the successors and assigns of the Bank.

6.3 CONTINUING FORCE AND EFFECT OF LOAN DOCUMENTS. Except as specifically modified or amended by the terms of this Sixth Amendment, all other terms and provisions of the Loan Agreement and the other Loan Documents are incorporated by reference herein, and in all respects shall continue in full force and effect. The Borrower, by execution of this Sixth Amendment, hereby reaffirms, assumes and binds itself to all of the obligations, duties, rights, covenants, terms and conditions that are contained in the Loan Agreement and the other Loan Documents.

EXHIBIT 4.9

6.4 REFERENCES TO LOAN AGREEMENT. Each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", or words of like import, and each reference to the Loan Agreement in any and all instruments or documents delivered in connection therewith, shall be deemed to refer to the Loan Agreement, as amended hereby.

6.5 COUNTERPARTS. This Sixth Amendment may be executed in any number of counterparts, all of which shall constitute one and the same agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS]

EXHIBIT 4.9

IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment to Revolving Loan Agreement as of the date first above written.

AAR CORP. LASALLE BANK NATIONAL

ASSOCIATION

By:    /s/ TIMOTHY J. ROMENESKO              By:    /s/ SCOTT M. CARBON
       -------------------------------              ----------------------------
Name:  Timothy J. Romenesko                  Name:  Scott M. Carbon
       -------------------------------              ----------------------------
Title: Vice President                        Title: Vice President
       -------------------------------              ----------------------------

EXHIBIT 4.9

SEVENTH AMENDMENT TO REVOLVING LOAN AGREEMENT

This SEVENTH AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of June 26, 2003 (the "Seventh Amendment"), is entered into by and between AAR CORP., a Delaware corporation (the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank").

RECITALS:

A. The Borrower and the Bank entered into that certain Revolving Loan Agreement dated as of April 11, 2001, as modified and amended by that certain First Amendment to Revolving Loan Agreement dated November 30, 2001, a Second Amendment to Revolving Loan Agreement dated April 22, 2002, a Third Amendment to Revolving Loan Agreement dated June 1, 2002, a Fourth Amendment to Revolving Loan Agreement dated as of March 10, 2003, a Fifth Amendment to Revolving Loan Agreement dated March 21, 2003 and a Sixth Amendment to Revolving Loan Agreement dated May 9, 2003 (collectively, the "Loan Agreement").

B. At the present time the Borrower requests, and the Bank is agreeable to amending the Agreement with regard to the sub-facility for issuance of Letters of Credit, pursuant to the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the premises and other good and available consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower and the Bank hereby agree as follows:

AGREEMENTS:

1. RECITALS. The foregoing Recitals are hereby made a part of this Seventh Amendment.

2. DEFINITIONS. Capitalized words and phrases used herein without definition shall have the respective meanings ascribed to such words and phrases in the Loan Agreement.

3. AMENDMENTS TO THE LOAN AGREEMENT.

3.1 LETTER OF CREDIT MAXIMUM OBLIGATION. The definition of "Letter of Credit Maximum Obligation" in Section 1.1 of the Loan Agreement is amended by deleting the amount "Five Million and 00/100 Dollars ($5,000,000.00)" and inserting in lieu thereof the amount of "Eleven Million and 00/100 Dollars ($11,000,000.00)."

3.2 Letters of Credit. The first paragraph of Section 2.6 of the Loan Agreement is hereby amended to add the following after the phrase "REVOLVING LOAN MATURITY DATE":

"...; provided, however, that, notwithstanding the Revolving Loan Maturity Date, if there is sufficient cash collateral in the Cash Collateral Account as provided in Section 2.7 hereinbelow, up to Eleven Million Dollars ($11,000,000.00) of Letters of Credit may be issued under the Maximum Letter of Credit Obligations, to expire no later than July 31, 2004.

3.3 ERISA. Section 11.12 of the Loan Agreement is hereby amended by the deleting the amounts "$10,000,000" and inserting in lieu thereof the amounts "$16,000,000."

4. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this Seventh Amendment, the Borrower hereby certifies, represents and warrants to the Bank that:

4.1 ORGANIZATION. The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, with full and adequate corporate power to carry on and conduct its business as presently conducted. The Borrower is duly licensed or qualified in all foreign jurisdictions wherein failure to qualify would have a material adverse effect. The Articles of Incorporation and Bylaws, Borrowing Resolutions and Incumbency Certificate of the Borrower have not been changed or amended since the most recent date that certified copies thereof were delivered to the Bank. The exact legal name of the Borrower is as set forth in the preamble of this Seventh Amendment, and the Borrower currently does not conduct, nor has it during the last five (5) years conducted, business under any other name or trade name. The Borrower will not change its name, its organizational identification number, if it has one, its type of organization, its jurisdiction of organization or other legal structure.

4.2 AUTHORIZATION. The Borrower is duly authorized to execute and deliver this Seventh Amendment and is and will continue to be duly authorized to borrow monies under the Loan Agreement, as amended hereby, and to perform its obligations under the Loan Agreement, as amended hereby.

4.3 NO CONFLICTS. The execution and delivery of this Seventh Amendment and the performance by the Borrower of its obligations under the Loan Agreement, as amended hereby, do not and will not conflict with any provision of law or of the articles of incorporation or bylaws of the Borrower or of any material agreement binding upon the Borrower.

5. CONDITIONS PRECEDENT. This Seventh Amendment shall become effective as of the date above first written after receipt by the Bank of the following documents:

5.1 SEVENTH AMENDMENT. This Seventh Amendment executed by the Borrower and the Bank.

5.2 OTHER DOCUMENTS. Such other documents, certificates and/or opinions of counsel as the Bank may request.

6. GENERAL.

6.1 GOVERNING LAW; SEVERABILITY. This Seventh Amendment shall be construed in accordance with and governed by the laws of Illinois. Wherever possible each provision of the Loan Agreement and this Seventh Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Loan Agreement and this Seventh Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of the Loan Agreement and this Seventh Amendment.

6.2 SUCCESSORS AND ASSIGNS. This Seventh Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and the successors and assigns of the Bank.

6.3 CONTINUING FORCE AND EFFECT OF LOAN DOCUMENTS. Except as specifically modified or amended by the terms of this Seventh Amendment, all other terms and provisions of the Loan Agreement and the other Loan Documents are incorporated by reference herein, and in all respects, shall continue in full force and effect. The Borrower, by execution of this Seventh Amendment, hereby reaffirms, assumes and binds itself to all of the obligations, duties, rights, covenants, terms and conditions that are contained in the Loan Agreement and the other Loan Documents.

6.5 COUNTERPARTS. This Seventh Amendment may be executed in any number of counterparts, all of which shall constitute one and the same agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Seventh Amendment to Revolving Loan Agreement as of the date first above written.

AAR CORP. LASALLE BANK NATIONAL

ASSOCIATION

By:  /s/ MICHAEL K. CARR                       By:   /s/ SCOTT M. CARBON
     ---------------------------------              ----------------------------
Its: Vice President Tax, Assistant             Its:  Vice President
     Treasurer

EXHIBIT 4.12
EXECUTION COPY

CREDIT AGREEMENT

DATED AS OF MAY 29, 2003

AMONG

AAR CORP., AAR DISTRIBUTION, INC.,
AAR PARTS TRADING, INC., AAR MANUFACTURING, INC.,
AAR ENGINE SERVICES, INC. AND AAR ALLEN SERVICES, INC.

AS BORROWERS,

MERRILL LYNCH CAPITAL,
A DIVISION OF MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.,
AS AGENT AND AS A LENDER

AND

THE ADDITIONAL LENDERS
FROM TIME TO TIME PARTY HERETO

[MERRILL LYNCH LOGO]

TABLE OF CONTENTS

                                                                                                     PAGE
ARTICLE 1   DEFINITIONS................................................................................1
     Section 1.1     Certain Defined Terms.............................................................1
     Section 1.2     Accounting Terms and Determinations..............................................19
     Section 1.3     Other Definitional Provisions....................................................20
ARTICLE 2   LOANS AND LETTERS OF CREDIT...............................................................20
     Section 2.1     Revolving Loans..................................................................20
     Section 2.2     Interest, Interest Calculations and Certain Fees.................................22
     Section 2.3     Notes............................................................................26
     Section 2.4     Letters of Credit and Letter of Credit Fees......................................26
     Section 2.5     General Provisions Regarding Payment; Loan Account...............................28
     Section 2.6     Maximum Interest.................................................................29
     Section 2.7     Taxes............................................................................30
     Section 2.8     Ancillary Services...............................................................31
ARTICLE 3   REPRESENTATIONS AND WARRANTIES............................................................31
     Section 3.1     Existence and Power..............................................................31
     Section 3.2     Organization and Governmental Authorization; No Contravention....................31
     Section 3.3     Binding Effect...................................................................31
     Section 3.4     Capitalization...................................................................32
     Section 3.5     Financial Information............................................................32
     Section 3.6     Litigation.......................................................................33
     Section 3.7     Ownership of Property............................................................33
     Section 3.8     No Default.......................................................................33
     Section 3.9     Labor Matters....................................................................33
     Section 3.10    Regulated Entities...............................................................33
     Section 3.11    Margin Regulations...............................................................33
     Section 3.12    Compliance With Laws.............................................................34
     Section 3.13    Taxes............................................................................34
     Section 3.14    Compliance with ERISA............................................................34
     Section 3.15    Brokers..........................................................................35
     Section 3.16    Compliance with Environmental Requirements; No Hazardous Materials...............35
     Section 3.17    Intellectual Property............................................................36
     Section 3.18    Real Property Interests..........................................................36
     Section 3.19    Solvency.........................................................................36
     Section 3.20    Borrowers and Each Other Credit Party............................................36
     Section 3.21    Full Disclosure..................................................................37
     Section 3.22    Representations and Warranties Incorporated from Other Operative Documents.......37
ARTICLE 4   AFFIRMATIVE COVENANTS.....................................................................37
     Section 4.1     Financial Statements and Other Reports...........................................37
     Section 4.2     Payment and Performance of Obligations...........................................41

TABLE OF CONTENTS
(continued)

                                                                                                     PAGE
     Section 4.3     Conduct of Business and Maintenance of Existence.................................41
     Section 4.4     Maintenance of Property; Insurance...............................................42
     Section 4.5     Compliance with Laws.............................................................43
     Section 4.6     Inspection of Property, Books and Records........................................43
     Section 4.7     Use of Proceeds..................................................................43
     Section 4.8     Lenders' Meetings................................................................43
     Section 4.9     Hazardous Materials; Remediation.................................................43
     Section 4.10    Further Assurances...............................................................44
ARTICLE 5   NEGATIVE COVENANTS........................................................................44
     Section 5.1     Debt.............................................................................44
     Section 5.2     Liens............................................................................46
     Section 5.3     Restricted Distributions.........................................................47
     Section 5.4     Restrictive Agreements...........................................................48
     Section 5.5     Payments and Modifications of Other Debt.........................................48
     Section 5.6     Consolidations, Mergers and Sales of Assets......................................49
     Section 5.7     Purchase of Assets, Investments..................................................50
     Section 5.8     Transactions with Affiliates.....................................................50
     Section 5.9     Modification of Organizational Documents.........................................51
     Section 5.10    Fiscal Year......................................................................51
     Section 5.11    Conduct of Business..............................................................51
     Section 5.12    Lease Payments...................................................................51
     Section 5.13    Bank Accounts....................................................................51
ARTICLE 6   ACCOUNTS AND INVENTORY REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS..............52
     Section 6.1     Accounts and Account Collections.................................................52
     Section 6.2     Inventory........................................................................53
ARTICLE 7   FINANCIAL COVENANTS.......................................................................54
     Section 7.1     Capital Expenditures.............................................................54
     Section 7.2     Minimum EBITDA...................................................................55
     Section 7.3     Interest Coverage Ratio..........................................................55
ARTICLE 8   CONDITIONS................................................................................55
     Section 8.1     Conditions to Closing............................................................55
     Section 8.2     Conditions to Each Loan and Support Agreement....................................56
ARTICLE 9   EVENTS OF DEFAULT.........................................................................56
     Section 9.1     Events of Default................................................................56
     Section 9.2     Acceleration and Suspension or Termination of Revolving Loan Commitment..........58
     Section 9.3     Cash Collateral..................................................................59
     Section 9.4     Default Rate of Interest and Suspension of LIBOR Rate Options....................59
     Section 9.5     Setoff Rights....................................................................59
     Section 9.6     Application of Proceeds..........................................................59

TABLE OF CONTENTS
(continued)

                                                                                                     PAGE
     Section 9.7     Non-Recourse Guarantors..........................................................60
ARTICLE 10  EXPENSES, INDEMNITY, TAXES AND RIGHT TO PERFORM...........................................60
     Section 10.1    Expenses.........................................................................60
     Section 10.2    Indemnity........................................................................60
     Section 10.3    Taxes............................................................................61
     Section 10.4    Right to Perform.................................................................61
ARTICLE 11  AGENT.....................................................................................61
     Section 11.1    Appointment and Authorization....................................................61
     Section 11.2    Agent and Affiliates.............................................................62
     Section 11.3    Action by Agent..................................................................62
     Section 11.4    Consultation with Experts........................................................62
     Section 11.5    Liability of Agent...............................................................62
     Section 11.6    Indemnification..................................................................63
     Section 11.7    Right to Request and Act on Instructions.........................................63
     Section 11.8    Credit Decision..................................................................63
     Section 11.9    Collateral Matters...............................................................63
     Section 11.10   Agency for Perfection............................................................64
     Section 11.11   Notice of Default................................................................64
     Section 11.12   Successor Agent..................................................................64
     Section 11.13   Disbursements of Revolving Loans; Payment........................................64
ARTICLE 12  MISCELLANEOUS.............................................................................67
     Section 12.1    Survival.........................................................................67
     Section 12.2    No Waivers.......................................................................67
     Section 12.3    Notices..........................................................................67
     Section 12.4    Severability.....................................................................67
     Section 12.5    Amendments and Waivers...........................................................67
     Section 12.6    Assignments; Participations......................................................68
     Section 12.7    Headings.........................................................................69
     Section 12.8    Confidentiality..................................................................69
     Section 12.9    GOVERNING LAW; SUBMISSION TO JURISDICTION........................................70
     Section 12.10   WAIVER OF JURY TRIAL.............................................................70
     Section 12.11   Publication; Advertisement.......................................................70
     Section 12.12   Counterparts; Integration........................................................71
     Section 12.13   Reimbursement....................................................................71

iii

ANNEXES AND EXHIBITS

ANNEXES

Annex A        -    Commitment Annex
Annex B        -    Closing Checklist


EXHIBITS

Exhibit A      -    Assignment Agreement
Exhibit B      -    Compliance Certificate
Exhibit C      -    Borrowing Base Certificate
Exhibit D      -    Notice of Borrowing

SCHEDULES

Schedule 3.5   -    Financial Statements
Schedule 4.4   -    Insurance Coverage

Schedule 5.1(j)- Permitted Mortgage Debt Terms and Conditions Schedule 5.5 - Terms and Conditions of Extension, Renewal, Replacement or Refinancing of October, 2003 Principal Installments Schedule 5.6 - Permitted Dispositions

CREDIT AGREEMENT

CREDIT AGREEMENT dated as of May 29, 2003 among AAR Corp., a Delaware corporation ("AAR"), AAR Distribution, Inc., an Illinois corporation ("DISTRIBUTION"), AAR Parts Trading, Inc., an Illinois corporation ("PARTS TRADING"), AAR Manufacturing, Inc., an Illinois corporation ("MANUFACTURING"), AAR Engine Services, Inc., an Illinois corporation ("ENGINE SERVICES") and AAR Allen Services, Inc., an Illinois corporation ("ALLEN SERVICES" and together with AAR, Distribution, Parts Trading, Manufacturing, Engine Services and Allen Services, individually a "BORROWER" and collectively "BORROWERS"), the financial institutions from time to time parties hereto, each as a Lender, and MERRILL LYNCH CAPITAL, a division of Merrill Lynch Business Financial Services Inc., individually as a Lender and as Agent.

RECITALS:

WHEREAS, Borrowers desire that Lenders extend certain working capital facilities to Borrowers to provide funds necessary to provide working capital financing for Borrowers and certain of their Subsidiaries and to provide funds for other general business purposes of Borrowers and certain of their Subsidiaries; and

WHEREAS, Borrowers desire to secure all of their Obligations under the Financing Documents by granting to Agent, for the benefit of Agent and Lenders, a security interest in and lien upon certain of their personal and real property;

NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrowers, Lenders and Agent agree as follows:

ARTICLE 1
DEFINITIONS

SECTION 1.1 CERTAIN DEFINED TERMS. The following terms have the following meanings:

"AAR" shall heave the meaning contained in the first paragraph of the Agreement.

"ACCOUNTS" means "accounts" (as defined in Article 9 of the UCC) of Borrowers, including without limitation any and all rights to payment for the sale or lease of goods or rendition of services, whether or not they have been earned by performance, in each case, for purposes of calculating the Borrowing Base, net of any credits, rebates or offsets owed by any Borrower to the respective customer.

"ACCOUNT DEBTOR" means "account debtor", as defined in Article 9 of the
UCC.

"AFFILIATE" means with respect to any Person (i) any Person that directly or indirectly controls such Person, (ii) any Person which is controlled by or is under common control with such controlling Person and (iii) in the case of an individual, the parents, descendants, siblings and spouse of such individual. As used in this definition, the term "CONTROL" of a Person means the possession, directly or indirectly, of the power to vote ten percent (10%) or more of any class

of voting securities of such Person or to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

"AGENT" means Merrill Lynch in its capacity as agent for the Lenders hereunder, as such capacity is established and subject to the provisions of Article 11 and the successors of Merrill Lynch in such capacity.

"AGENT ADVANCES" has the meaning set forth in Section 2.1(a)(ii).

"AGREEMENT" means this Credit Agreement, as the same may be amended, supplemented, restated or otherwise modified from time to time.

"AIRCRAFT LEASE DOCUMENTS" means:

(1) (a) Participation Agreement dated as of June 28, 2000 by and among AAR, as guarantor, certain operating subsidiaries of AAR, as lessee, Bank of America, National Association, as administrator, and the other Persons named therein, (b) Master Aircraft and Engine Lease Agreement dated as of June 28, 2000 among First Security Bank, National Association, as lessor, AAR Aircraft & Engine Group, Inc. (n/k/a AAR Parts Trading, Inc. and herein "A&E"), as lessee, and AAR International, Inc. ("AARI"), as lessee, (c) Security Agreement dated as of June 28, 2000, among First Security Bank, National Association, First Security Trust Company of Nevada, A&E and AARI, and (d) Guaranty dated as of June 28, 2000, made by AAR in favor of First Security Bank, National Association, First Security Trust Company of Nevada, and certain other parties named therein, and all other documents, instruments and certificates executed in connection therewith and all amendments or modifications to, or replacements (whether effected upon termination of any time thereafter) or refinancings of, any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder);

(2) (a) Second Amended and Restated Lease and Security Agreement dated as of June 25, 2001 by and between AARI and Wells Fargo Bank Northwest, N.A., as owner trustee, and (b) Guaranty dated as of June 25, 2001 executed by AAR, and all other documents, instruments and certificates executed in connection therewith and all amendments or modifications to, or replacements (whether effected upon termination or any time thereafter) or refinancings of, any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder);

(3) (a) the Master Engine Lease Agreement dated as of January 1, 1999 by and between A&E and Norlease, Inc., as lessor, and (b) Guaranty dated as of January 1, 1999 executed by AAR, and all other documents, instruments and certificates executed in connection therewith and all amendments or modifications to, or replacements (whether effected upon termination or any time thereafter) or refinancings of, any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder);

(4) (a) Loan Agreement (24358) dated as of July 28, 2000 between Transamerica Equipment Financial Services Corporation, as Lender, ("Transamerica"), and AAR/SSB I, LLC, as Borrower, ("AAR/SSB I"), (b) First Amendment to Loan Agreement (24358) dated as of May 19, 2002 between Transamerica and AAR/SSB I, (c) Amended and Restated Guaranty Agreement
(24358) dated as of May 19, 2002 from AAR Corp. in favor of Transamerica, and all other documents, instruments, and certificates executed in connection therewith, and all amendments or modifications to, or replacements (whether effected upon termination or any time thereafter) or refinancings of, any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder);

(5) (a) Secured Term Loan Agreement in relation to a loan of up to $42,292,895 for the Purchase of One B767-300ER Aircraft MSN 24849 dated 28 February 2001 between AAR/SSB II, LLC, and BTM Capital Corporation, and the Financial Institutions listed in Schedule 1 thereto, (b) the Guarantee of AAR Corp., and State Street Bank & Trust Company, and all other documents, instruments and certificates executed in connection therewith, and all amendments or modifications to, or replacements (whether effected upon termination or any time thereafter) or refinancings of, any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder);

(6) (a) Participation Agreement 609 dated as of May 1, 1994 among Continental Airlines, Inc., as Lessee, AAR Financial Services Corp. (n/k/a AAR Aircraft & Engine Sales & Leasing, Inc.), as Owner Participant, First Security Bank, National Association as Owner Trustee, Wilmington Trust Company, as Mortgagee (the "Participation Agreement"), (b) Amendment No. 1 to the Participation Agreement dated as of January 21, 2000, and all other documents, instruments, and certificates executed in connection therewith, and all amendments or modifications to, or replacements (whether effected upon termination or any time thereafter) or refinancings of, any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder);

"AIR FRANCE PARTS LEASE" shall mean that certain B737NG Aircraft Parts Lease between AAR International, Inc., as lessor, and Societe Air France, as lessee, dated as of May 31, 2002.

"ANCILLARY SERVICES" means any service or facility (other than any Debt and/or Letter of Credit facility) extended to any Borrower or any Domestic Subsidiary by any Designated Lender Affiliate in reliance on the agreement of a Lender to indemnify such Designated Lender Affiliate in respect of such service or facility.

"ASSET DISPOSITION" means any sale, lease, license or other consensual disposition by any Credit Party to a Person other than Borrower of any Inventory, Equipment or Real Property, but excluding sales, leases, licenses or other consensual dispositions of Inventory in the ordinary course of business.

"ASSIGNEE" has the meaning set forth in Section 12.6(a).

"ASSIGNMENT AGREEMENT" means an agreement substantially in the form of Exhibit A hereto.

"AVAILABILITY" means the amount of money which Borrowers are entitled to borrow from time to time as Revolving Loans, such amount being the difference derived when the amount of Revolving Loans Outstanding is subtracted from the Revolving Loan Limit. If the amount outstanding is equal to or greater than the Revolving Loan Limit, Availability is $0.

"BLOCKED ACCOUNT" has the meaning set forth in Section 6.1(d).

"BORROWER" and "BORROWERS" shall have the meanings contained in the first paragraph of the Agreement.

"BORROWERS' ACCOUNT" means the account specified on the signature pages hereof below AAR's name into which Loans (other than Agent Advances, which shall be disbursed by Agent in a manner permitted by Section 2.1(a)(ii)) shall, absent other written instructions, be made, or such other account as AAR, on its behalf and on behalf of each other Borrower, may specify by written notice to Agent.

"BORROWING BASE" means, as of any date of calculation, a dollar amount calculated pursuant to the Borrowing Base Certificate most recently delivered to Agent in accordance with the terms hereof, equal to the lesser of (x) sixty percent (60%) of (i) the Net Orderly Liquidation Value MULTIPLIED by (ii) the value of Eligible Inventory calculated on the basis of the lower of cost or market on a first-in, first-out basis MINUS the sum of $5,000,000 PLUS the amount of any Reserves established by Agent or (y) ten percent (10%) of the Consolidated Adjusted Net Worth MINUS $3,000,000.

"BORROWING BASE CERTIFICATE" means a certificate, duly executed by a Responsible Officer, appropriately completed and substantially in the form of Exhibit D hereto.

"BUSINESS DAY" means any day except a Saturday, Sunday or other day on which either the New York Stock Exchange is closed, or on which commercial banks in Chicago are authorized by law to close and, in the case of a Business Day which relates to a LIBOR Loan, a day on which dealings are carried on in the London interbank eurodollar market.

"CAPITAL EXPENDITURES" has the meaning provided in the Compliance Certificate.

"CAPITAL LEASE" of any Person means any lease of any property by such Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of such Person.

"CASH EQUIVALENTS" means any Investment in (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (ii) commercial paper rated at least A-1 by Standard & Poor's Ratings Service and P-1 by Moody's Investors Services, Inc.,
(iii) time deposits with, including certificates of deposit issued by, any office located in the United States of any bank or trust company which is organized under the laws of the United States or any State thereof and has capital, surplus and undivided profits aggregating at least $500,000,000 and which issues (or the parent of which issues)

certificates of deposit or commercial paper with a rating described in clause
(ii) above, (iv) repurchase agreements with respect to securities described in clause (i) above entered into with an office of a bank or trust company meeting the criteria specified in clause (iii) above, PROVIDED in each case that such Investment matures within one year from the date of acquisition thereof by any Credit Party, or (v) any money market or mutual fund which invests only in the foregoing types of investments. Any of the foregoing, however, which is subject to a Lien (other than Liens in favor of Agent) or is subject to any material restriction on the use thereof shall not be included within the definition of Cash Equivalents.

"CASUALTY PROCEEDS" means (i) the aggregate insurance proceeds received in connection with one or more related events under any Property Insurance Policy or (ii) any award or other compensation with respect to any condemnation of property (or any transfer or disposition of property in lieu of condemnation).

"CHANGE IN CONTROL" means:

(i) any Person (as such term is used in Section 13(d) of the Exchange Act) acquiring 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 AAR entitled to vote for the election of directors;

(ii) the occurrence of either (x) a merger or consolidation or other business combination of AAR with one or more other corporations as a result of which the beneficial owners of the outstanding voting stock of AAR 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 AAR or the surviving or resulting corporation or any parent thereof immediately after such merger or consolidated or business combination, or (y) a transfer of substantially all of the assets of AAR other than to an entity of which AAR owns at least 80% of the voting stock; or

(iii) the election, over any period of time, to the Board of Directors of AAR without the recommendation or approval of the incumbent Board of Directors of AAR, of the lesser of (x) three directors, or (y) directors constituting a majority of the number of directors of AAR then in office.

"CLOSING CHECKLIST" means Annex B to this Agreement.

"CLOSING DATE" means the date of this Agreement.

"CODE" means the Internal Revenue Code of 1986.

"COLLATERAL" means all property, now existing or hereafter acquired, mortgaged or pledged to, or purported to be subjected to a Lien in favor of, Agent, for the benefit of Agent and Lenders, pursuant to the Security Documents.

"COMMITMENT ANNEX" means Annex A to this Agreement.

"COMMITMENT EXPIRY DATE" means the earliest of (i) May 28, 2006, (ii) the date on which a "Termination Event" shall have occurred under the Receivables Purchase Agreement and (iii) as of any date, the remaining period between such date and the "Facility Termination Date" (as defined in the Receivables Purchase Agreement) is 60 days or less, unless as of any date referred to in clauses (ii) or (iii), Borrowers have demonstrated to Required Lenders' reasonable satisfaction that Borrowers shall, after such Termination Event or Facility Termination Date, have adequate liquidity ($20,000,000 of projected Availability and Cash Equivalents) to operate their business, that Borrowers have obtained replacement financing for the Debt outstanding under the Securitization Documents or that Borrowers have identified Person(s) who are reasonably likely to provide such replacement financing, have presented to Agent a term sheet outlining the terms and conditions of such replacement financing and that it is commercially reasonable to expect such replacement financing to close.

"COMPANY NOTE" shall have the meaning contained in the Purchase and Sale Agreement.

"COMPLIANCE CERTIFICATE" means a certificate, duly executed by a Responsible Officer, appropriately completed and substantially in the form of Exhibit B hereto.

"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 AAR and its Restricted Subsidiaries exceeds 20% of Consolidated Net Worth, PLUS (ii) Consolidated Intangible Assets as of such time.

"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 AAR 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 AAR 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 TANGIBLE ASSETS" shall have the meaning contained in the Indenture as of the Closing Date.

"CONSOLIDATED NET WORTH" means, at any time,

(a) the sum of (i) the par value (or value stated on the books of AAR) of the capital stock (but excluding treasury stock and capital stock subscribed and unissued) of AAR and its Restricted Subsidiaries PLUS (ii) the amount of the paid-in capital and retained earnings of AAR and its Restricted Subsidiaries, in each case as such amounts would be shown on a consolidated balance sheet of AAR 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 SUBSIDIARY" means at any date any Subsidiary or other Person the accounts of which would be consolidated with those of AAR in its consolidated financial statements if such statements were prepared as of such date.

"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.

"CONTROLLED GROUP" means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with AAR, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

"CREDIT EXPOSURE" means any period of time during which the Revolving Loan Commitment is outstanding or any Loan, Reimbursement Obligation or other Obligation remains unpaid or any Letter of Credit or Support Agreement remains outstanding; PROVIDED, that no Credit Exposure shall be deemed to exist solely due to the existence of contingent indemnification liability, absent the assertion of a claim with respect thereto.

"CREDIT PARTY" means AAR, each other Borrower and any other Subsidiary of AAR which, after the Closing Date, becomes a Borrower or a guarantor of the Obligations.

"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 becomes 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 AAR 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" and any lease (including operating leases and synthetic leases) that as of the date such lease was entered into was properly classified in accordance with GAAP as an operating lease will, for purposes of this Agreement, always be treated as an operating lease even if any such lease is later classified as a capital lease in accordance with GAAP.

"DEFAULT" means any condition or event which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.

"DEFAULTED LENDER" means, so long as such failure shall remain in existence and uncured, any Lender which shall have failed to make any Loan or other credit accommodation, disbursement or reimbursement required pursuant to the terms of any Financing Documents.

"DEPOSIT ACCOUNT" means a "deposit account" (as defined in Article 9 of the UCC) of Borrower or any of its Subsidiaries.

"DEPOSIT ACCOUNT CONTROL AGREEMENT" means an agreement, in form and substance satisfactory to Agent, among Agent, a Borrower maintaining a Deposit Account into payments in respect of or proceeds of Non-Sold Assets are deposited at any bank, and such bank, which agreement provides that (x) such bank shall comply with instructions originated by Agent directing disposition of the funds in such Deposit Account without further consent by such Borrower, and (y) such bank shall agree that it shall have no Lien on, or right of setoff against, such Deposit Account or the contents thereof, other than in respect of commercially reasonable fees and other items expressly consented to by Agent, and containing such other terms and conditions as Agent may require, including as to any such agreement pertaining to any Blocked Account, providing that all items received or deposited in such Blocked Account are the property of Agent, and that such bank shall wire, or otherwise transfer, in immediately available funds, on a daily basis to the Payment Account all funds received or deposited into such Blocked Account.

"DESIGNATED LENDER AFFILIATES" means any Affiliate of Agent or any Lender that (i) from time to time makes Ancillary Services available to any Borrower or any Domestic Subsidiary and (ii) in the case of an Affiliate of a Lender other than Merrill Lynch, is expressly identified in writing by Agent, in its sole discretion, as a Designated Lender Affiliate.

"DOMESTIC SUBSIDIARY" means any Subsidiary of AAR that is incorporated or organized under the laws of any state of the United States of America or the District of Columbia.

"EBITDA" has the meaning as defined pursuant to the terms of the Compliance Certificate.

"ELIGIBLE INVENTORY" has the meaning provided in the Borrowing Base Certificate. For purposes of this Agreement, the amount of Eligible Inventory shall be determined on a first-in,

first-out, lower of cost or market basis in accordance with GAAP. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral.

"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions, whether now or hereafter in effect, relating to the environment or the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Materials or wastes into the environment, including ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Materials or wastes or the clean-up or other remediation thereof.

"EQUIPMENT" means, collectively, "equipment" and "fixtures" (as each term is defined in Article 9 of the UCC) of each Credit Party.

"ERISA" means the Employee Retirement Income Security Act of 1974.

"EVENT OF DEFAULT" has the meaning set forth in Section 9.1.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute.

"FAA" means the United States Federal Aviation Administration or any successor thereto administering the functions of the Federal Aviation Administration under the Transportation Code.

"FEDERAL FUNDS RATE" means, for any day, the rate of interest per annum
(rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%)
equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, PROVIDED that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (ii) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Agent on such day on such transactions as determined by Agent.

"FINANCING DOCUMENTS" means this Agreement, the Notes, the Security Documents, the Information Certificate, any fee letter between Merrill Lynch and Borrower relating to the transactions contemplated hereby and all other documents, instruments and agreements contemplated herein or thereby and executed concurrently herewith or at any time and from time to time hereafter, as any or all of the same may be amended, supplemented, restated or otherwise modified from time to time.

"FISCAL YEAR" means a fiscal year of AAR, ending on May 31 of each calendar year.

"FOREIGN SUBSIDIARY" means any Subsidiary of AAR that is not a Domestic Subsidiary.

"GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination.

"GUARANTEE" 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 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 or 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 MATERIALS" means (i) any "hazardous substance" as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980,
(ii) asbestos, (iii) polychlorinated biphenyls, (iv) petroleum, its derivatives, by-products and other hydrocarbons, and (v) any other toxic, radioactive, caustic or otherwise hazardous substance regulated under Environmental Laws.

"HAZARDOUS MATERIALS CONTAMINATION" means contamination (whether now existing or hereafter occurring) of the improvements, buildings, facilities, personality, soil, groundwater, air or other elements on or of the relevant property by Hazardous Materials, or any derivatives thereof, or on or of any other property as a result of Hazardous Materials, or any derivatives thereof, generated on, emanating from or disposed of in connection with the relevant property.

"INDEMNITEES" has the meaning set forth in Section 10.2.

"INDENTURE" and "INDENTURE DOCUMENTS" shall mean that certain Indenture (said Indenture as amended prior to the Closing Date, the "Indenture") of AAR Corp. to Continental

Bank, National Association, Trustee dated as of October 15, 1989, together with all exhibits, schedules, instruments, notes and all other documents and agreements executed and/or delivered in connection therewith and all amendments, and modifications, replacements (whether effected upon termination or any time thereafter) or refinancings to or of any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder).

"INFORMATION CERTIFICATE" means that certain Information Certificate of even date herewith executed by Borrowers and delivered to Agent.

"INTELLECTUAL PROPERTY" means, with respect to any Person, all patents, trademarks, trade names, copyrights, technology, know-how and processes, and all applications therefor, used in or necessary for the conduct of business by such Person.

"INTEREST COVERAGE RATIO" has the meaning provided in the Compliance Certificate.

"INTEREST PERIOD" means, as to any LIBOR Loan, the period commencing on the date such Loan is borrowed or continued as, or converted into, a LIBOR Loan and ending on the date one (1), two (2), three (3) or six (6) months thereafter, as selected by AAR, on its behalf and on behalf of each other Borrower, pursuant to
Section 2.3(f); PROVIDED, that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (b) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; and (c) Borrower may not select any Interest Period for a Revolving Loan which would extend beyond the Commitment Expiry Date.

"INVENTORY" means "inventory" (as defined in Article 9 of the UCC) of each Credit Party.

"INVESTMENT" means any investment in any Person, whether by means of acquiring or holding securities, capital contribution, loan, time deposit, advance, Guarantee or otherwise.

"IRB DOCUMENTS" means (x) that certain Loan Agreement between AAR Engine Services, Inc. and Connecticut Development Authority dated as of February 24, 1999 together with all exhibits, schedules, instruments, notes and all other documents and/or agreements executed and/or delivered in connection therewith,
(y) that certain Loan Agreement between Pinellas County Industrial Council and AIR International, Inc. (which has been merged into Manufacturing) dated as of November 1, 1995, together with all exhibits, schedules, instruments, trust indentures, notes and all other documents and/or agreements executed and/or delivered in connection therewith and (z) all amendments and/or modifications to any of the foregoing (to the extent any such amendment or modification is permitted hereunder).

"LASALLE LETTER OF CREDIT REIMBURSEMENT DEBT" means any and all reimbursement obligations of any Borrower to LaSalle Bank National Association with respect to those letters of credit listed on Schedule VII to the Information Certificate.

"LC ISSUER" means Merrill Lynch or a bank or trust company acceptable to Merrill Lynch, as issuer of one or more Letters of Credit outstanding at any time under this Agreement.

"LENDER" means each of (i) Merrill Lynch, (ii) each other financial institution party hereto, (iii) each other Person that becomes a holder of a Note pursuant to Section 12.6, (iv) Agent, to the extent of any Agent Advances and other Revolving Loans made by Agent which have not been settled among the Lenders pursuant to Section 11.13, and (v) the respective successors of all of the foregoing, and Lenders means all of the foregoing. In addition to the foregoing, for the purpose of identifying the Persons entitled to share in the Collateral and the proceeds thereof under, and in accordance with the provisions of, this Agreement and the Security Documents, the term "Lender" shall include Designated Lender Affiliates.

"LETTER OF CREDIT" means a standby letter of credit issued for the account of Borrowers and each other Credit Party under this Agreement by an LC Issuer which expires by its terms within one year after the date of issuance and in any event at least thirty (30) days prior to the Commitment Expiry Date. Notwithstanding the foregoing, a Letter of Credit may provide for automatic extensions of its expiry date for one or more successive one (1) year periods provided that the LC Issuer that issued such Letter of Credit has the right to terminate such Letter of Credit on each such annual expiration date and no renewal term may extend the term of the Letter of Credit to a date that is later than the thirtieth (30th) day prior to the Commitment Expiry Date.

"LETTER OF CREDIT LIABILITIES" means, at any time of calculation, the sum of (i) the amount then available for drawing under all outstanding Letters of Credit (without regard to whether any conditions to drawing thereunder can then be met), to the extent subject to a Support Agreement PLUS (ii) the aggregate unpaid amount of all reimbursement obligations in respect of previous drawings made under such Letters of Credit, to the extent subject to a Support Agreement.

"LIBOR" means, with respect to any LIBOR Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the rate of interest which is identified and normally published by Bloomberg Professional Service Page BBAM 1 as the offered rate for loans in U.S. dollars for the applicable Interest Period under the caption British Bankers Association LIBOR Rates as of 11:00 a.m. (London time), on the second full Business Day next preceding the first day of such Interest Period (unless such date is not a Business Day, in which event the next succeeding Business Day will be used); divided by (ii) the sum of one minus the daily average during such Interest Period of the aggregate maximum reserve requirement (expressed as a decimal) then imposed under Regulation D of the Board of Governors of the Federal Reserve System (or any successor thereto) for "Eurocurrency Liabilities" (as defined therein). If Bloomberg Professional Service no longer reports the LIBOR or Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Agent in the London Interbank Market or if such index no longer exists or if Page BBAM 1 no longer exists or accurately reflects the rate available to Agent in the London Interbank Market, Agent may select a replacement index or replacement page, as the case may be.

"LIBOR LOANS" means any Loans which accrue interest by reference to the LIBOR, in accordance with the terms of this Agreement.

"LIBOR MARGIN" means three percent (3%) per annum with respect to the Revolving Loans and other Obligations.

"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement and the other Financing Documents, each Borrower or any other Domestic Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement relating to such asset.

"LOAN ACCOUNT" has the meaning set forth in Section 2.5(b).

"LOANS" means the Revolving Loans or any other credit accommodation extended by Agent or any Lender to any Borrower or any other Credit Party, or any combination of the foregoing, as the context may require.

"MARGIN STOCK" has the meaning assigned thereto in Regulation U of the Federal Reserve Board.

"MATERIAL ADVERSE EFFECT" means, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of (i) the financial condition, operations, business or properties of the Credit Parties, taken as a whole, (ii) the rights and remedies of Agent or Lenders under any Financing Document, or the ability of any Credit Party to perform any of its obligations under any Financing Document to which it is a party, (iii) the legality, validity or enforceability of any Financing Document, or (iv) the existence, perfection or priority of any security interest granted in any Financing Document with respect to any Collateral with a material value or the value of any material Collateral.

"MAXIMUM LAWFUL RATE" has the meaning set forth in Section 2.6(b).

"MERRILL LYNCH" means Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., and its successors.

"MULTIEMPLOYER PENSION PLAN" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which Borrower or any member of the Controlled Group may have any liability.

"NET BORROWING AVAILABILITY" has the meaning provided in the Borrowing Base Certificate.

"NET CASH PROCEEDS" means, with respect to any transaction or event, an amount equal to the cash proceeds received by the Credit Party from or in respect of such transaction or event (including proceeds of any non-cash proceeds of such transaction), less (i) any out-of-pocket expenses reasonably incurred by such Person in connection therewith and (ii) in the case of an

Asset Disposition, the amount of any Debt secured by a Lien on the related asset and discharged from the proceeds of such Asset Disposition and any taxes or other usual and customarily pro-ratable amounts paid or payable by such Person in respect of such Asset Disposition.

"NET ORDERLY LIQUIDATION VALUE" shall mean a percentage determined from time to time dividing (x) the aggregate value of all Credit Parties' Inventory that is estimated to be recoverable in the orderly liquidation of such Inventory over up to a 9-month period net of liquidation expenses, such amounts to be determined by the most recent appraisal of such Inventory conducted by a qualified appraisal company selected by Agent in its reasonable discretion by
(y) the value of such Inventory as of the date of the appraisal shown on Credit Parties' books and records and calculated on the lower of cost or market on a first-in, first-out basis.

"NON-RECOURSE 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.

"NON-RECOURSE GUARANTOR" shall mean AAR Aircraft & Engine Sales & Leasing, Inc., an Illinois corporation, AAR International, Inc., an Illinois corporation, their successors and assigns and each other guarantor of the Obligations, whose guaranty of the Obligations is limited to the assets pledged as Collateral by such guarantor.

"NON-SOLD ACCOUNTS" shall mean any and all Accounts of Borrowers not sold by any Borrower pursuant to the Purchase and Sale Agreement.

"NOTES" means the Revolving Loan Notes.

"NOTE PURCHASE AGREEMENT" and "NOTE PURCHASE DOCUMENTS" shall mean that certain Note Purchase Agreement ("NOTE PURCHASE Agreement") dated as of May 1, 2001 by and between AAR Corp. and each of the purchasers listed in Schedule A thereto together with all exhibits, schedules, instruments, notes and all other documents and/or agreements executed and/or delivered in connection therewith and all amendments and/or modifications or any replacements (whether effected upon termination or any time thereafter) and/or refinancings to any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder).

"NOTICE OF BORROWING" means a written notice of a Responsible Officer, appropriately completed and substantially in the form of Exhibit E hereto.

"NOTICE OF LC CREDIT EVENT" means a written notice from a Responsible Officer to Agent with respect to any issuance, increase or extension of a Letter of Credit specifying: (i) the date of issuance or increase of a Letter of Credit; (ii) the expiry date of such Letter of Credit; (iii) the proposed terms of such Letter of Credit, including the face amount; and (iv) the transactions or additional transaction or transactions that are to be supported or financed with such Letter of Credit or increase thereof.

"OBLIGATIONS" means all obligations, liabilities and indebtedness (monetary (including post-petition interest, whether or not allowed) or otherwise) of each Credit Party under this

Agreement or any other Financing Document, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due. The Obligations shall include, without limitation, all obligations, liabilities and indebtedness arising from or in connection with all Support Agreements and all Ancillary Services.

"OPERATIVE DOCUMENTS" means the Financing Documents.

"ORGANIZATIONAL DOCUMENTS" means, with respect to any Person other than a natural person, the documents by which such Person was organized (such as a certificate of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of such Person (such as by-laws, a partnership agreement or an operating, limited liability or members agreement).

"PARTICIPANT" has the meaning set forth in Section 12.6(b).

"PAYMENT ACCOUNT" means the account specified on the signature pages hereof into which all payments by or on behalf of any Borrower to Agent under the Financing Documents shall be made, or such other account as Agent shall from time to time specify by notice to Borrowers.

"PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.

"PENSION PLAN" means any "employee benefit pension plan", as such term is defined in Section 3(1) of ERISA, and any "employee welfare benefit plan", as such term is defined in Section 3(2) of ERISA, in each case which is subject to Title IV of ERISA (other than a Multiemployer Pension Plan), and to which Borrower or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.

"PERMITTED CONTEST" means a contest maintained in good faith by appropriate proceedings promptly instituted and diligently conducted and with respect to which such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; PROVIDED that compliance with the obligation that is the subject of such contest is effectively stayed during such challenge.

"PERMITTED LIENS" means Liens permitted pursuant to Section 5.2.

"PERMITTED MORTGAGE DEBT" shall have the meaning assigned such term in
Section 5.1(j).

"PERSON" means any natural person, corporation, limited liability company, professional association, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and any government or agency or political subdivision thereof.

"PRIME RATE" means a variable per annum rate, as of any date of determination, equal to the greater of (i) the Federal Funds Rate PLUS one-half of one percent (0.50%) per annum and (ii) the rate from time to time published in the "Money Rates" section of THE WALL STREET JOURNAL as being the "Prime Rate" (or, if more than one rate is published as the Prime Rate, then the highest of such rates). The Prime Rate will change as of the date of publication in THE WALL STREET JOURNAL of a Prime Rate that is different from that published on the preceding Business Day. In the event that THE WALL STREET JOURNAL shall, for any reason, fail or cease to publish the Prime Rate, Agent shall choose a reasonably comparable index or source to use as the basis for the Prime Rate.

"PRIME RATE LOANS" means Loans which accrue interest by reference to the Prime Rate, in accordance with the terms of this Agreement.

"PRIME RATE MARGIN" means one and one-half percent (1.5%) per annum with respect to the Revolving Loans and other Obligations.

"PROPERTY INSURANCE POLICY" means any insurance policy maintained by any Credit Party covering losses with respect to tangible real or personal property or improvements or losses from business interruption.

"PRO RATA SHARE" means (i) with respect to a Lender's obligation to make Revolving Loans, such Lender's right to receive payments of principal and interest with respect thereto, such Lender's right to receive the unused line fee described in Section 2.2(b), and such Lender's obligation to share in Letter of Credit Liability and to receive the related Letter of Credit fee described in
Section 2.4(b), the Revolving Loan Commitment Percentage of such Lender and (ii) for all other purposes (including without limitation the indemnification obligations arising under Section 11.6) with respect to any Lender, the percentage obtained by dividing (x) the sum of the Revolving Loan Commitment Amount of such Lender (or, in the event the Revolving Loan Commitment shall have been terminated, such Lender's then existing Revolving Loan Outstandings) by (y) the sum of the Revolving Loan Commitment (or, in the event the Revolving Loan Commitment shall have been terminated, the then existing Revolving Loan Outstandings of all Lenders).

"PURCHASE AND SALE AGREEMENT" shall mean the Purchase and Sale Agreement dated as of March 21, 2003 by and among AAR Distribution, Inc., AAR Parts Trading, Inc., AAR Manufacturing, Inc., AAR Engine Services, Inc. and AAR Allen Services, Inc., as Originators, AAR Corp., as initial Servicer and AAR Receivables Corporation II, as the Company, as the same may be amended, modified, replaced or refinanced from time to time (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder).

"REAL PROPERTY" means real property of each Borrower and each Domestic Subsidiary, together with all buildings, structures and other improvements thereon, and all licenses, easements and appurtenances related thereto.

"RECEIVABLES PURCHASE AGREEMENT" shall mean that certain Receivables Purchase Agreement dated as of March 21, 2003 by and among the AAR Receivables Corporation II, as Seller and AAR Corp., Individually and as Initial Servicer and the Financial Institutions from

time to time parties thereto and LaSalle Business Credit, LLC, as Agent, as the same may be amended, modified, replaced or refinanced from time to time (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder).

"REIMBURSEMENT OBLIGATIONS" means, at any date, the obligations of any Borrower or any other Credit Party then outstanding to reimburse Merrill Lynch for payments made by Merrill Lynch under a Support Agreement.

"REQUIRED LENDERS" means at any time Lenders holding (i) sixty-six and two thirds percent (66 2/3%) or more of the sum of the Revolving Loan Commitment or
(ii) if the Revolving Loan Commitment has been terminated, sixty-six and two thirds percent (66 2/3%) or more of the sum of (x) the aggregate outstanding principal balance of the Loans PLUS (y) the aggregate amount of Reimbursement Obligations; PROVIDED that if there are two or fewer Lenders, Required Lenders shall mean all Lenders.

"RESERVES" means such amounts as Agent may from time to time establish and revise, in each case in the exercise of its reasonable credit judgment, reducing the amount of Revolving Loans and Support Agreements which would otherwise be available to Borrowers under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Agent in the exercise of its reasonable credit judgment, adversely affect, or could reasonably be expected to adversely affect, any of: (i) the Eligible Inventory or its value, (ii) the business of any Credit Party or (iii) the Liens and other rights of Agent or any Lender in the Eligible Inventory (including the enforceability, perfection and priority thereof), (b) to reflect Agent's good faith belief that any collateral report or financial information furnished by or on behalf of any Credit Party to Agent is or may have been incomplete, inaccurate or misleading in any material respect, (c) to reflect accrued and unpaid interest and fees or (d) to reflect such other matters, events or contingencies as Agent from time to time in the reasonable exercise of its credit judgment deems appropriate. To the extent Agent may, in accordance with any other terms hereof, revise the lending formula(s) used to determine the Borrowing Base or establish new criteria or revise existing criteria for Eligible Inventory, Agent shall not also establish a Reserve for the same purpose. The amount of any Reserve established by Agent shall have a reasonable relationship to the event, condition or other matter which is the basis for such Reserve as determined by Agent in good faith.

"RESPONSIBLE OFFICER" means any of the Chief Executive Officer, Chief Financial Officer, President, Treasurer or Chief Accounting Officer of AAR.

"RESTRICTED DISTRIBUTION" means as to any Person (i) any dividend or other distribution on any equity interest in such Person (except those payable solely in its equity interests of the same class) or (ii) any payment on account of (a) the purchase, redemption, retirement, defeasance, surrender or acquisition of any equity interests in such Person or any claim respecting the purchase of sale of any equity interest in such Person or (b) any option, warrant or other right to acquire any equity interests in such Person.

"RESTRICTED SUBSIDIARY" means any Subsidiary which (i) at least a majority of the voting securities of such Subsidiary are owned by AAR and/or one or more Wholly-Owned Restricted Subsidiaries, and (ii) has not been designated as an Unrestricted Subsidiary of AAR as reflected

in Schedule 5.4 of the Note Purchase Agreement or by written notice given to the holders of all notes issued pursuant to the Note Purchase Agreement in accordance with Section 10.9 of the Note Purchase Agreement.

"REVOLVING LOAN BORROWING" means a borrowing of a Revolving Loan.

"REVOLVING LOAN COMMITMENT" means the sum of each Lender's Revolving Loan Commitment Amount.

"REVOLVING LOAN COMMITMENT AMOUNT" means, as to any Lender, the dollar amount set forth opposite such Lender's name on the Commitment Annex under the column "Revolving Loan Commitment Amount", or, if different, in the most recent Assignment Agreement to which such Lender is a party.

"REVOLVING LOAN COMMITMENT PERCENTAGE" means, as to any Lender, the percentage set forth opposite such Lender's name on the Commitment Annex under the column "Revolving Loan Commitment Percentage", or, if different, in the most recent Assignment Agreement to which such Lender is a party.

"REVOLVING LOAN LIMIT" means, at any time, the lesser of (i) the Borrowing Base, PLUS any Agent Advances and (ii) the Revolving Loan Commitment.

"REVOLVING LOAN NOTE" has the meaning set forth in Section 2.4.

"REVOLVING LOAN OUTSTANDINGS" means at any time of calculation the sum of the then existing aggregate outstanding principal amount of Revolving Loans and the then existing Letter of Credit Liabilities.

"REVOLVING LOANS" has the meaning set forth in Section 2.2(a), and includes all Agent Advances.

"SECURITIZATION DOCUMENTS" shall mean the Receivables Purchase Agreement, together with all exhibits, schedules, instruments, notes and all other documents and agreements executed and/or delivered in connection therewith, the Purchase and Sale Agreement, together with all exhibits, schedules, instruments, notes and all other documents and agreement executed and/or delivered in connection therewith, and all amendments, modifications, replacements (whether effected upon termination or any time thereafter) or refinancings to any of the foregoing (to the extent any such amendment, modification, replacement or refinancing is permitted hereunder).

"SECURITY DOCUMENTS" means any agreement, document or instrument executed concurrently herewith or at any time hereafter pursuant to which one or more Credit Parties or any other Person either (i) Guarantees payment or performance of all or any portion of the Obligations and/or (ii) provides, as security for all or any portion of the Obligations, a Lien on any of its assets in favor of Agent for its own benefit and the benefit of the Lenders, as any or all of the same may be amended, supplemented, restated or otherwise modified from time to time.

"SETTLEMENT DATE" has the meaning set forth in Section 11.13(b).

"STATED RATE" has the meaning set forth in Section 2.6(b).

"SUBSIDIARY" means, with respect to any Person, any corporation, limited liability company, limited partnership or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. Unless otherwise specified, the term Subsidiary shall refer to a Subsidiary of AAR or any other Borrower.

"SUBORDINATED DEBT" means any Debt of any Borrower that (i) is junior and subordinate in right of payment to the Obligations pursuant to subordination provisions that have been approved in writing by all Lenders and (ii) provides for no scheduled principal payments on any date prior to the Commitment Expiry Date.

"SUPPORT AGREEMENT" has the meaning set forth in Section 2.4(a).

"TAXES" has the meaning set forth in Section 2.7.

"TERMINATION DATE" has the meaning set forth in Section 2.1(c).

"TOTAL DEBT" has the meaning provided in the Compliance Certificate.

"TRANSPORTATION CODE" means Title 49 of the United States Code, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such provision.

"UCC" means the Uniform Commercial Code of the State of Illinois or of any other state the laws of which are required to be applied in connection with the perfection of security interests in any Collateral.

"UNRESTRICTED SUBSIDIARY" means AAR Financial Services Corp., AAR International Financial Services, LLC, AAR Aircraft & Engine Sales & Leasing, Inc. and any other Subsidiary which is so designated pursuant to Section 10.9 of the Note Purchase Agreement.

"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of AAR all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of AAR and AAR's other Wholly-Owned Restricted Subsidiaries.

SECTION 1.2 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder (including without limitation determinations made pursuant to the exhibits hereto) shall be made, and all financial statements required to be delivered hereunder shall be prepared on a consolidated basis in accordance with GAAP applied on a basis consistent (except for changes concurred with by AAR's independent public accountants) with the most recent audited consolidated financial statements of AAR and its Consolidated Subsidiaries delivered to Agent and each of the Lenders; PROVIDED that if (a) Borrowers shall object to determining compliance with the provisions of this Agreement on such basis by written notice delivered to Agent and the Lenders at the time of delivery of required financial statements due to any change in GAAP or

the rules promulgated with respect thereto or (b) Agent or the Required Lenders shall so object in writing by written notice delivered to Borrowers within sixty
(60) days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by Borrowers to the Lenders as to which no such objection shall have been made. All amounts used for purposes of financial calculations required to be made herein shall be without duplication.

SECTION 1.3 OTHER DEFINITIONAL PROVISIONS. References in this Agreement to "Articles", "Sections", "Annexes" or "Exhibits" shall be to Articles, Sections, Annexes or Exhibits of or to this Agreement unless otherwise specifically provided. Any term defined herein may be used in the singular or plural. "Include", "includes" and "including" shall be deemed to be followed by "without limitation". Except as otherwise specified herein, references to any Person include the successors and assigns of such Person. References "from" or "through" any date mean, unless otherwise specified, "from and including" or "through and including", respectively. References to any statute or act shall include all related current regulations and all amendments and any successor statutes, acts and regulations.

ARTICLE 2
LOANS AND LETTERS OF CREDIT

SECTION 2.1 REVOLVING LOANS.

(a) REVOLVING LOANS AND BORROWINGS.

(i) On the terms and subject to the conditions set forth herein, each Lender severally agrees to make Loans to Borrowers from time to time as set forth herein equal to such Lender's Revolving Loan Commitment Percentage of revolving loans ("REVOLVING LOANS") requested by AAR, on its own behalf and on behalf of each other Borrower hereunder, provided that after giving effect thereto, the Revolving Loan Outstandings shall not exceed the Revolving Loan Limit. Within the foregoing limits, Borrowers may borrow under this Section 2.1(a)(i), prepay or repay Revolving Loans as required or permitted under this Section 2.1 and reborrow Revolving Loans pursuant to this Section 2.1(a)(i).

(ii) AGENT ADVANCES. Subject to the limitations set forth in this Section 2.1(a)(ii), Agent is hereby authorized by Borrowers and Lenders, from time to time in Agent's sole discretion, (A) after the occurrence of a Default or an Event of Default, or (B) at any time that any of the other applicable conditions precedent set forth in Section 8.2 have not been satisfied (including without limitation the condition precedent that the Revolving Loan Outstandings not exceed the Borrowing Base PLUS any other then outstanding Agent Advances), to make Revolving Loans to Borrowers on behalf of the Lenders which Agent, in its reasonable business judgment, deems necessary or desirable (1) to preserve or protect the business conducted by any Borrower, the Collateral, or any portion thereof,
(2) to enhance the likelihood of, or maximize the amount of, repayment of the Loans and other Obligations, (3) to pay any amount chargeable to any Borrower pursuant to the terms of this Agreement, including interest payments and costs, fees and expenses as described in Section 10.1 and/or
Section 10.4

or (4) to satisfy payment obligations under Support Agreements (any of the advances described in this Section 2.1(a)(ii) being hereafter referred to as "AGENT ADVANCES"); PROVIDED, that (i) Required Lenders may at any time revoke Agent's authorization to make Agent Advances, except Agent Advances applied in the manner described in the preceding clauses (3) and (4), any such revocation to be in writing and to become effective prospectively upon the Agent's receipt thereof, (ii) Agent Advances shall be made solely as Prime Rate Loans, (iii) the aggregate amount of Agent Advances outstanding at any time, exclusive of those made pursuant to the preceding clauses (3) and (4), shall not exceed ten percent (10%) of the Revolving Loan Commitment and (iv) Agent shall be prohibited from making Agent Advances to the extent the making thereof would cause the Revolving Loan Outstandings (inclusive of Agent Advances) to exceed the Revolving Loan Commitment.

(b) ADVANCING REVOLVING LOANS.

(i) AAR, on its own behalf and on behalf of each other Borrower shall deliver to Agent a Notice of Borrowing with respect to each proposed Revolving Loan Borrowing (other than Agent Advances), such Notice of Borrowing to be delivered no later than noon (Chicago time) (i) on the day of such proposed borrowing, in the case of Prime Rate Loans in an aggregate principal amount equal to or less than $5,000,000, (ii) on the Business Day prior to such proposed borrowing, in the case of Prime Rate Loans in an aggregate principal amount greater than $5,000,000 and (iii) on the third (3rd) Business Day prior to such proposed borrowing, in the case of all LIBOR Loans. Once given, except as provided in Section 2.2(f)(ii), a Notice of Borrowing shall be irrevocable and Borrowers shall be bound thereby.

(ii) Each Borrower hereby authorizes Lenders and Agent to make Revolving Loans (other than LIBOR Loans) based on telephonic notices made by any Person which Agent, in good faith, believes to be acting on behalf of Borrowers or any one of them. AAR, on its own behalf and on behalf of each other Borrower, agrees to deliver to Agent a Notice of Borrowing in respect of each Revolving Loan requested by telephone no later than one Business Day following such request. If the Notice of Borrowing differs in any respect from the action taken by Agent and Lenders, the records of Agent and the Lenders shall govern absent manifest error. Each Borrower further hereby authorizes Lenders and Agent to make Revolving Loans based on electronic notices made by any Person which Agent, in good faith, believes to be acting on behalf of Borrowers, but only after Agent shall have established procedures acceptable to Agent for accepting electronic Notices of Borrowing, as indicated by Agent's written confirmation thereof.

(i) The Revolving Loan Commitment shall terminate upon the earlier to occur of (i) the Commitment Expiry Date and (ii) the date on which Agent or Required Lenders elect to terminate the Revolving Loan Commitment pursuant to Section 9.2 (such earlier date being the "TERMINATION DATE"), and there shall become due and Borrowers shall pay on the Termination Date, the entire outstanding principal amount of

each Revolving Loan, together with accrued and unpaid interest thereon to but excluding the Termination Date.

(ii) If at any time the Revolving Loan Outstandings exceed the Revolving Loan Limit, then, on the next succeeding Business Day, Borrowers shall repay the Revolving Loans or cash collateralize Letter of Credit Liabilities in the manner specified in Section 2.4(e) or cancel outstanding Letters of Credit, or any combination of the foregoing, in an aggregate amount equal to such excess.

(iii) Except with respect to Asset Disposition permitted by
Section 5.6(5), promptly upon receipt by any Credit Party of the proceeds of any Asset Disposition, Borrowers shall either (1) repay Revolving Loans and cash collateralize Letter of Credit Liabilities, in the manner specified in Section 2.4(e) or cancel outstanding Letters of Credit, or any combination of the foregoing, in an aggregate amount equal to one hundred percent (100%) of the Net Cash Proceeds of such Asset Disposition, PROVIDED, that if no Event of Default has occurred and is continuing, no prepayment shall be required pursuant to this Section 2.1(c)(iii) unless and until the aggregate Net Cash Proceeds received during any Fiscal Year from Asset Dispositions of Equipment or Real Property exceeds $5,000,000 (in which case all Net Cash Proceeds in excess of such amount shall be used to make prepayments pursuant to this Section 2.1(c)(iii)) or (2) promptly deliver written notice to Agent signed and certified by a Responsible Officer, that after giving effect to any such Asset Disposition, the Revolving Loan Outstandings does not exceed the Revolving Loan Limit and no Default or Event of Default exists and is continuing or will exist and be continuing after giving effect to any such Asset Disposition. Any such repayment may be reborrowed as new Revolving Loans subject to the terms and provisions of this Agreement.

(iv) Promptly upon receipt by any Credit Party of any Casualty Proceeds, Borrowers shall either (1) repay Revolving Loans or cash collateralize Letter of Credit Liabilities in the manner specified in
Section 2.4(e) or cancel outstanding Letters of Credit, or any combination of the foregoing, in an aggregate amount equal to such Casualty Proceeds LESS (i) any out-of-pocket expenses reasonably incurred by any Credit Party in connection with such event and (ii) the amount of any Debt secured by a prior Lien on the related asset and discharged from such Casualty Proceeds. Any such prepayment may be reborrowed as new Revolving Loans subject to the provisions of this Agreement or (2) promptly deliver written notice to Agent signed and certified by a Responsible Officer, that after giving effect to the event giving rise to such Casualty Proceeds, the Revolving Loan Outstandings does not exceed the Revolving Loan Limit and no Default or Event of Default exists and is continuing or will exist and be continuing after giving effect to any such Asset Disposition. Any such repayment may be reborrowed as new Revolving Loans subject to the terms and provisions of this Agreement.

SECTION 2.2 INTEREST, INTEREST CALCULATIONS AND CERTAIN FEES.

(a) INTEREST. From and following the Closing Date, depending upon AAR's election, on its own behalf and on behalf of each other Borrower, from time to time, subject to

the terms hereof, to have portions of the Loans accrue interest determined by reference to the Prime Rate or the LIBOR, the Loans and the other Obligations shall bear interest at the applicable rates set forth below:

(i) If a Prime Rate Loan, or any other Obligation other than a LIBOR Loan, then at the sum of the Prime Rate PLUS the applicable Prime Rate Margin.

(ii) If a LIBOR Loan, then at the sum of the LIBOR PLUS the applicable LIBOR Margin.

(b) UNUSED LINE FEE. From and following the Closing Date, Borrowers shall pay Agent, for the benefit of all Lenders committed to make Revolving Loans, in accordance with their respective Pro Rata Shares, a fee in an amount equal to (1) (a) the Revolving Loan Commitment LESS (b) the average daily balance of the Revolving Loan Outstandings during the preceding month, MULTIPLIED BY (2) one-half percent (1/2%) per annum if the average daily balance of the Revolving Loans Outstandings during the preceding month exceeds Ten Million Dollars ($10,000,000) or one percent (1%) per annum if the average daily balance of the Revolving Loans Outstandings during the preceding month is Ten Million Dollars ($10,000,000) or less. Such fee is to be paid monthly in arrears on the first day of each month.

(c) COLLATERAL MANAGEMENT FEE. On the Closing Date, and on each anniversary thereof, Borrower shall pay Agent a fully earned and non-refundable collateral management fee in the amount of Thirty-Five Thousand Dollars ($35,000).

(d) PREPAYMENT FEE. If Borrowers voluntarily prepay the Obligations in full and this Agreement and all Revolving Loan Commitments are terminated in accordance with the provisions hereof prior to the third anniversary of the Closing Date, Borrowers shall pay to Agent, for the benefit of Lenders, as compensation for the costs of Lenders being prepared to make funds available to Borrowers under this Agreement, an amount determined by MULTIPLYING the percentage set forth below by the Revolving Loan Commitment: two percent (2.0%) for the first year following the Closing Date; one percent (1.0%) for the second year following the Closing Date; and one-half of one percent (1/2%) for the third year following the Closing Date. No amount will be payable pursuant to this paragraph if Borrowers voluntarily prepay the Obligations in full after the third anniversary of the Closing Date. The foregoing notwithstanding, Agent and Lenders agree to waive any such prepayment fee if such prepayment occurs after the provisions of clauses (ii), (iii) or (v) of
Section 2.2(f) have become applicable.

(e) COMPUTATION OF INTEREST AND RELATED FEES. All interest and fees under each Financing Document shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The date of funding of a Prime Rate Loan and the first day of an Interest Period with respect to a LIBOR Loan shall be included in the calculation of interest. The date of payment of a Prime Rate Loan and the last day of an Interest Period with respect to a LIBOR Loan shall be excluded from the calculation of interest. If a Loan is repaid on the same day that it is made, one (1) days' interest shall be charged. Interest on all Prime Rate Loans is payable in arrears on the first day of each month and on the maturity of such Loans, whether by acceleration or otherwise. Interest on LIBOR Loans shall be payable on the last day of the applicable Interest Period, unless the Interest Period is greater than three (3) months, in which

case interest will be payable on the last day of each three (3) month interval. In addition, interest on LIBOR Loans is due on the maturity of such Loans, whether by acceleration or otherwise.

(f) LIBOR PROVISIONS.

(i) LIBOR ELECTION. All Loans made on the Closing Date shall be Prime Rate Loans and shall remain so until three (3) Business Days after the Closing Date. Thereafter, AAR, on its own behalf and on behalf of each other Borrower, may request that Revolving Loans to be made be LIBOR Loans, that outstanding portions of Revolving Loans be converted to LIBOR Loans and that all or any portion of a LIBOR Loan be continued as a LIBOR Loan upon expiration of the applicable Interest Period. Any such request will be made by submitting a Notice of Borrowing to Agent. Once given, and except as provided in clause (ii) below, a Notice of Borrowing shall be irrevocable and Borrowers shall be bound thereby. Upon the expiration of an Interest Period, in the absence of a new Notice of Borrowing submitted to Agent not less than three (3) Business Days prior to the end of such Interest Period, the LIBOR Loan then maturing shall be automatically converted to a Prime Rate Loan. There may be no more than four (4) LIBOR Loans outstanding at any one time. Loans which are not requested as LIBOR Loans in accordance with this Section 2.2(e)(i) shall be Prime Rate Loans. Agent will notify Lenders, by telephonic or facsimile notice, of each Notice of Borrowing received by Agent not less than two (2) Business Days prior to the first day of the Interest Period of the LIBOR Loan requested thereby.

(ii) INABILITY TO DETERMINE LIBOR. In the event, prior to commencement of any Interest Period relating to a LIBOR Loan, Agent shall determine or be notified in writing by Required Lenders that adequate and reasonable methods do not exist for ascertaining LIBOR, Agent shall promptly provide notice of such determination to Borrowers and Lenders (which shall be conclusive and binding on Borrowers and Lenders). In such event (1) any request for a LIBOR Loan or for a conversion to or continuation of a LIBOR Loan shall be automatically withdrawn and shall be deemed a request for a Prime Rate Loan, (2) each LIBOR Loan will automatically, on the last day of the then current Interest Period relating thereto, become a Prime Rate Loan and (3) the obligations of Lenders to make LIBOR Loans shall be suspended until Agent or Required Lenders determine that the circumstances giving rise to such suspension no longer exist, in which event Agent shall so notify Borrowers and Lenders.

(iii) ILLEGALITY. Notwithstanding any other provisions hereof, if any law, rule, regulation, treaty or directive or interpretation or application thereof shall make it unlawful for any Lender to make, fund or maintain LIBOR Loans, such Lender shall promptly give notice of such circumstances to Agent, Borrower and the other Lenders. In such an event,
(1) the commitment of such Lender to make LIBOR Loans or convert Prime Rate Loans to LIBOR Loans shall be immediately suspended and (2) such Lender's outstanding LIBOR Loans shall be converted automatically to Prime Rate Loans on the last day of the Interest Period thereof or at such earlier time as may be required by law.

(iv) LIBOR BREAKAGE FEE. Upon (i) any default by Borrowers in making any borrowing of, conversion into or continuation of any LIBOR Loan following Borrowers' delivery to Agent of any applicable Notice of Borrowing or (ii) any payment of a LIBOR Loan on any day that is not the last day of the Interest Period applicable thereto (regardless of the source of such prepayment and whether voluntary, by acceleration or otherwise), Borrowers shall pay Agent, for the benefit of all Lenders that funded or were prepared to fund any such LIBOR Loan, an amount equal to the amount of any losses, expenses and liabilities (including, without limitation, any loss (including interest paid) in connection with the re-employment of such funds) that any Lender may sustain as a result of such default or such payment. For purposes of calculating amounts payable to a Lender under this paragraph, each Lender shall be deemed to have actually funded its relevant LIBOR Loan through the purchase of a deposit bearing interest at LIBOR in an amount equal to the amount of that LIBOR Loan and having a maturity and repricing characteristics comparable to the relevant Interest Period; PROVIDED, HOWEVER, that each Lender may fund each of its LIBOR Loans in any manner it sees fit, and the foregoing assumption shall be utilized only for the calculation of amounts payable under this subsection.

(v) INCREASED COSTS. If, after the Closing Date, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the Board of Governors of the Federal Reserve System, or any successor thereto, but excluding any reserve included in the determination of the LIBOR pursuant to the provisions of this Agreement), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Lender; or
(ii) shall impose on any Lender any other condition affecting its LIBOR Loans, its Notes or its obligation to make LIBOR Loans; and the result of anything described in clauses (i) above and (ii) is to increase the cost to (or to impose a cost on) such Lender of making or maintaining any LIBOR Loan, or to reduce the amount of any sum received or receivable by such Lender under this Agreement or under its Notes with respect thereto, then upon demand by such Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to Agent), Borrowers shall pay directly to such Lender such additional amount as will compensate such Lender for such increased cost or such reduction, so long as such amounts have accrued on or after the day which is one hundred eighty (180) days prior to the date on which such Lender first made demand therefor.

(g) CAPITAL ADEQUACY. If any Lender shall reasonably determine that any change in, or the adoption or phase-in of, any applicable law, rule or regulation regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or the compliance by any Lender or any Person controlling such Lender with any request

or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or such controlling Person's capital as a consequence of such Lender's obligations hereunder or under any Support Agreement to a level below that which such Lender or such controlling Person could have achieved but for such change, adoption, phase-in or compliance (taking into consideration such Lender's or such controlling Person's policies with respect to capital adequacy) by an amount deemed by such Lender or such controlling Person to be material, then from time to time, upon demand by such Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to Agent), Borrowers shall pay to such Lender such additional amount as will compensate such Lender or such controlling Person for such reduction, so long as such amounts have accrued on or after the day which is one hundred eighty (180) days prior to the date on which such Lender first made demand therefor.

SECTION 2.3 NOTES. The portion of the Revolving Loans made by each Lender shall be evidenced by a promissory note executed by Borrowers (a "REVOLVING LOAN NOTE") in an original principal amount equal to such Lender's Pro Rata Share of the Revolving Loan Commitment.

SECTION 2.4 LETTERS OF CREDIT AND LETTER OF CREDIT FEES.

(a) LETTER OF CREDIT. On the terms and subject to the conditions set forth herein, Agent will prior to the Termination Date issue letters of credit or guarantees (each, a "SUPPORT AGREEMENT") to induce an LC Issuer to issue or increase the amount of, or extend the expiry date of, a Letter of Credit so long as:

(i) Agent shall have received a Notice of LC Credit Event at least two (2) Business days before the relevant date of issuance or increase; and

(ii) After giving effect to such issuance or increase (x) the aggregate Letter of Credit Liabilities under all Letters of Credit do not exceed Five Million Dollars ($5,000,000) and (y) the Revolving Loan Outstandings do not exceed the Revolving Loan Limit.

(b) LETTER OF CREDIT FEE. Borrowers shall pay to Agent, for the benefit of the Lenders which have committed to make Revolving Loans, a letter of credit fee with respect to the Letter of Credit Liabilities for each Letter of Credit, computed for each day from the date of issuance of such Letter of Credit to the date that is the last day a drawing is available under such Letter of Credit, at a rate per annum equal to the LIBOR Margin then applicable to Revolving Loans. Such fee shall be payable in arrears on the first Business Day of each calendar month prior to the Termination Date and on such date. In addition, Borrower agrees to pay promptly to the LC Issuer any fronting or other fees that it may charge in connection with any Letter of Credit.

(c) REIMBURSEMENT OBLIGATIONS OF BORROWER. If Agent shall make a payment to an LC Issuer pursuant to a Support Agreement, Borrowers shall promptly reimburse Agent for

the amount of such payment and, to the extent that so doing would not, to Agent's knowledge, cause the Revolving Loan Outstandings to exceed the Revolving Loan Limit, Borrowers shall be deemed to have requested a Revolving Loan, the proceeds of which will be used to satisfy such Reimbursement Obligations. Borrowers shall pay interest, on demand, on all amounts so paid by Agent for each day until Borrower reimburses Agent therefor at a rate per annum equal to the sum of two percent (2%) PLUS the interest rate applicable to Revolving Loans (which are Prime Rate Loans) for such day.

(d) REIMBURSEMENT AND OTHER PAYMENTS BY BORROWER. The obligations of Borrowers to reimburse Agent pursuant to Section 2.4(c) shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including the following:

(i) any lack of validity or enforceability of, or any amendment or waiver of or any consent to departure from, any Letter of Credit or any related document;

(ii) the existence of any claim, set-off, defense or other right which any Borrower may have at any time against the beneficiary of any Letter of Credit, the LC Issuer (including any claim for improper payment), Agent, any Lender or any other Person, whether in connection with any Financing Document or any unrelated transaction, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim;

(iii) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever;

(iv) any affiliation between the LC Issuer and Agent; or

(v) to the extent permitted under applicable law, any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.

(e) DEPOSIT OBLIGATIONS OF BORROWERS. In the event any Letters of Credit are outstanding at the time that Borrowers prepay or are required to repay the Obligations or the Revolving Loan Commitment is terminated, Borrowers shall (1) deposit with Agent for the benefit of all Lenders with a portion of the Revolving Loan Commitment cash in an amount equal to one hundred and five percent (105%) of the aggregate outstanding Letter of Credit Liability to be available to Agent to reimburse payments of drafts drawn under such Letters of Credit and pay any fees and expenses related thereto and (2) prepay the fee payable under Section 2.4(b) with respect to such Letters of Credit for the full remaining terms of such Letters of Credit. Upon termination of any such Letter of Credit, the unearned portion of such prepaid fee attributable to such Letter of Credit shall be refunded to Borrowers, together with the deposit described in the preceding clause (1) to the extent not previously applied by Agent in the manner described herein.

(f) PARTICIPATIONS IN SUPPORT AGREEMENTS.

(i) Concurrently with the issuance of each Letter of Credit, Agent shall be deemed to have sold and transferred to each Lender, and each Lender shall be deemed irrevocably and unconditionally to have purchased and received from Agent, without recourse or warranty, an undivided interest and participation in, to the extent of such Lender's Pro Rata Share of the Revolving Loan Commitment, Agent's Support Agreement liabilities and obligations in respect of such Letters of Credit and Borrower's Reimbursement Obligations with respect thereto. If Borrowers do not pay any Reimbursement Obligation when due, then Borrowers shall be deemed to have immediately requested that Lenders make a Revolving Loan which is a Prime Rate Loan in a principal amount equal to such Reimbursement Obligation. Agent shall promptly notify Lenders of such deemed request and each Lender shall make available to Agent its Pro Rata Share of such Loan. The proceeds of such Loan shall be paid over by Agent to the LC Issuer for the account of Borrowers in satisfaction of reimbursement obligations then owing by Borrower to such LC Issuer in respect of outstanding Letters of Credit.

(ii) If Agent makes any payment or disbursement under any Support Agreement and (x) Borrowers have not reimbursed Agent in full for such payment or disbursement in accordance with Section 2.4(c), (y) a Revolving Loan may not be made pursuant to the immediately preceding clause
(i) or (z) any reimbursement received by Agent from Borrowers is or must be returned or rescinded upon or during any bankruptcy or reorganization of any Credit Party or otherwise, each Lender shall be irrevocably and unconditionally obligated to pay to Agent its Pro Rata Share of such payment or disbursement (but no such payment shall diminish the Obligations of Borrowers under Section 2.4(c)). To the extent any Lender shall not have made such amount available to Agent by noon (Chicago time) on the Business Day on which such Lender receives notice from Agent of such payment or disbursement, such Lender agrees to pay interest on such amount to Agent forthwith on demand accruing daily at the Federal Funds Rate, for the first three (3) days following such Lender's receipt of such notice, and thereafter at the Prime Rate PLUS the Prime Rate Margin in respect of Revolving Loans. Any Lender's failure to make available to Agent its Pro Rata Share of any such payment or disbursement shall not relieve any other Lender of its obligation hereunder to make available to Agent such other Lender's Pro Rata Share of such payment, but no Lender shall be responsible for the failure of any other Lender to make available to Agent such other Lender's Pro Rata Share of any such payment or disbursement.

SECTION 2.5 GENERAL PROVISIONS REGARDING PAYMENT; LOAN ACCOUNT.

(a) All payments to be made by Borrowers under any Financing Document, including payments of principal and interest on the Notes, and all fees, expenses, indemnities and reimbursements, shall be made without set-off or counterclaim, in lawful money of the United States of America and in immediately available funds. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Borrower shall make all payments in immediately available funds to the Payment Account before noon (Chicago time) on the date

when due. Notwithstanding anything to the contrary set forth in this Section 2.5(a), Agent shall be permitted, in its sole discretion, but subject to the limitations set forth in Section 2.1(a)(ii), to satisfy any of the payment obligations described in this Section 2.5(a) through the making of Agent Advances.

(b) Agent shall maintain a loan account (the "LOAN ACCOUNT") on its books to record Loans and other extensions of credit made by the Lenders hereunder or under any other Financing Document, and all payments thereon made by Borrowers. All entries in the Loan Account shall be made in accordance with Agent's customary accounting practices as in effect from time to time. The balance in the Loan Account, as recorded on Agent's most recent printout or other written statement, shall be conclusive and binding evidence of the amounts due and owing to Agent by Borrowers absent clear and convincing evidence to the contrary; PROVIDED that any failure to so record or any error in so recording shall not limit or otherwise affect any Borrower's duty to pay all amounts owing hereunder or under any other Financing Document. Unless AAR, on its own behalf and on behalf of each other Borrower, notifies Agent in writing of any objection to any such printout or statement (specifically describing the basis for such objection) within thirty (30) days after the date of receipt thereof, it shall be deemed final, binding and conclusive upon Borrowers in all respects as to all matters reflected therein.

SECTION 2.6 MAXIMUM INTEREST.

(a) In no event shall the interest charged with respect to the Notes or any other obligations of Borrowers under any Financing Document exceed the maximum amount permitted under the laws of the State of Illinois or of any other applicable jurisdiction.

(b) Notwithstanding anything to the contrary herein or elsewhere, if at any time the rate of interest payable hereunder or under any Note or other Financing Document (the "STATED RATE") would exceed the highest rate of interest permitted under any applicable law to be charged (the "MAXIMUM LAWFUL RATE"), then for so long as the Maximum Lawful Rate would be so exceeded, the rate of interest payable shall be equal to the Maximum Lawful Rate; PROVIDED, that if at any time thereafter the Stated Rate is less than the Maximum Lawful Rate, Borrowers shall, to the extent permitted by law, continue to pay interest at the Maximum Lawful Rate until such time as the total interest received is equal to the total interest which would have received had the Stated Rate been (but for the operation of this provision) the interest rate payable. Thereafter, the interest rate payable shall be the Stated Rate unless and until the Stated Rate again would exceed the Maximum Lawful Rate, in which event this provision shall again apply.

(c) In no event shall the total interest received by any Lender exceed the amount which it could lawfully have received had the interest been calculated for the full term hereof at the Maximum Lawful Rate. If, notwithstanding the prior sentence, any Lender has received interest hereunder in excess of the Maximum Lawful Rate, such excess amount shall be applied to the reduction of the principal balance of the Loans or to other amounts (other than interest) payable hereunder, and if no such principal or other amounts are then outstanding, such excess or part thereof remaining shall be paid to Borrowers.

(d) In computing interest payable with reference to the Maximum Lawful Rate applicable to any Lender, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made.

SECTION 2.7 TAXES.

(a) All payments of principal and interest on the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp, documentary, excise, property or franchise taxes and other taxes, fees, duties, levies, withholdings or other charges of any nature whatsoever imposed by any taxing authority, excluding taxes imposed on or measured by Agent's or any Lender's net income by the jurisdiction under which Agent or such Lender is organized or conducts business (all non-excluded items being called "TAXES"). If any withholding or deduction from any payment to be made by any Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then Borrowers will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to Agent an official receipt or other documentation satisfactory to Agent evidencing such payment to such authority; and (c) pay to Agent for the account of Agent and Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by Agent and each Lender will equal the full amount Agent and such Lender would have received had no such withholding or deduction been required. If any Taxes are directly asserted against Agent or any Lender with respect to any payment received by Agent or such Lender hereunder, Agent or such Lender may pay such Taxes and Borrowers will promptly pay such additional amounts (including any penalty, interest or expense) as is necessary in order that the net amount received by such Person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such Person would have received had such Taxes not been asserted so long as such amounts have accrued on or after the day which is one hundred eighty (180) days prior to the date on which Agent or such Lender first made demand therefor.

(b) If any Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to Agent, for the account of Agent and the respective Lenders, the required receipts or other required documentary evidence, Borrowers shall indemnify Agent and Lenders for any incremental Taxes, interest or penalties that may become payable by Agent or any Lender as a result of any such failure.

(c) Each Lender that (i) is organized under the laws of a jurisdiction other than the United States of America and (ii)(A) is a party hereto on the Closing Date or (B) becomes an assignee of an interest under this Agreement under Section 12.6(a) after the Closing Date (unless such Lender was already a Lender hereunder immediately prior to such assignment) shall execute and deliver to Borrowers and Agent one or more (as Borrowers or Agent may reasonably request) Forms W-8ECI, W-8BEN, W-8IMY (as applicable) or other applicable form, certificate or document prescribed by the United States Internal Revenue Service certifying as to such Lender's entitlement to exemption from withholding or deduction of Taxes. Borrowers shall not be required to pay additional amounts to any Lender pursuant to this Section 2.7 to the extent that the obligation to pay such additional amounts would not have arisen but for the failure of such Lender to comply with this paragraph.

SECTION 2.8 ANCILLARY SERVICES. Borrowers may from time to time request, and Agent or any Lender that is an Affiliate of a Designated Lender Affiliate may, in its sole discretion, from time to time arrange for Borrowers, any one or more of them or any other Credit Party to obtain from Agent or any Designated Lender Affiliate, Ancillary Services although Borrowers or any such Credit Party are or is not required to do so. To the extent Ancillary Services are provided, Borrowers agree to indemnify and hold Agent and Lenders harmless from any and all costs and obligations now or hereafter incurred by Agent or any Lenders which arise from the indemnity given by Agent or any Lender to any Designated Lender Affiliates related to such Ancillary Services. The agreement contained in this Section 2.8 shall survive termination of this Agreement. Borrowers acknowledge and agree that the obtaining of Ancillary Services (a) is in the sole and absolute discretion of Agent and each Designated Lender Affiliate, and
(b) is subject to all rules and regulations of Agent and each applicable Designated Lender Affiliate.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES

To induce Agent and Lenders to enter into this Agreement and to make the Loans and other credit accommodations contemplated hereby, each Borrower hereby represents and warrants, on a joint and several basis, to Agent and each Lender that:

SECTION 3.1 EXISTENCE AND POWER. Each Credit Party is an entity as specified on the Information Certificate, duly organized, validly existing and in good standing under the laws of the jurisdiction specified on the Information Certificate, has an organizational identification number (if any) as specified on the Information Certificate, and has all powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to have such licenses, authorizations, consents and approvals could not reasonably be expected to have a Material Adverse Effect. Each Credit Party is qualified to do business as a foreign entity in each jurisdiction in which it is required to be so qualified, which jurisdictions as of the Closing Date are specified on the Information Certificate, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect.

SECTION 3.2 ORGANIZATION AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by each Credit Party of the Operative Documents to which it is a party are within its powers, have been duly authorized by all necessary action pursuant to its Organizational Documents, require no further action by or in respect of, or filing with, any governmental body, agency or official and do not violate, conflict with or cause a breach or a default under any provision of applicable law or regulation or of the Organizational Documents of any Credit Party or of any agreement, judgment, injunction, order, decree or other instrument binding upon it, except for such violations, conflicts, breaches or defaults as could not reasonably be expected to have a Material Adverse Effect.

SECTION 3.3 BINDING EFFECT. Each of the Operative Documents to which any Credit Party is a party constitutes a valid and binding agreement or instrument of such Credit Party, enforceable against such Credit Party in accordance with its respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles.

SECTION 3.4 CAPITALIZATION. The authorized equity securities of each of the Credit Parties as of the Closing Date is as set forth on the Information Certificate. All issued and outstanding equity securities of each of the Credit Parties are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than Liens, if any, on any capital stock of AAR, and such equity securities were issued in compliance with all applicable state, federal and foreign laws concerning the issuance of securities. The identity of the holders of the equity securities of each of the Credit Parties (other than AAR) and the percentage of their fully-diluted ownership of the equity securities of each of the Credit Parties (other than AAR) as of the Closing Date is set forth on the Information Certificate. No shares of the capital stock or other equity securities of any Credit Party, other than those described above, are issued and outstanding. Except as set forth on the Information Certificate, as of the Closing Date there are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Credit Party of any equity securities of any such entity.

SECTION 3.5 FINANCIAL INFORMATION.

(a) The consolidated and consolidating balance sheet of AAR and its Consolidated Subsidiaries as of May 31, 2002 and the related consolidated and consolidating statements of operations, stockholders' equity (or comparable calculation, if such Person is not a corporation) and cash flows for the fiscal year then ended, reported on by KPMG LLP, copies of which have been delivered to Agent, fairly present, in conformity with GAAP (with respect to consolidated financial statements only), the consolidated and consolidating financial position of AAR and its Consolidated Subsidiaries as of such date and their consolidated and consolidating results of operations, changes in stockholders' equity (or comparable calculation) and cash flows for such period. Borrowers represent and warrant to Agent and Lenders that all consolidating financial statements delivered to Agent and Lenders pursuant to this Agreement (including, without limitation, those delivered pursuant to this Section 3.5 and Section 4.1) have been or will be prepared in a manner consistent with the financial statements attached hereto in Schedule 3.5 and in a manner so as to permit the consolidated financial statements of AAR and its Subsidiaries to be prepared in accordance with GAAP.

(b) The unaudited consolidated and consolidating balance sheet of AAR and its Consolidated Subsidiaries as of March 31, 2003 and the related unaudited consolidated and consolidating statements of operations and cash flows for the ten (10) months then ended, copies of which have been delivered to Agent, fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in Section 3.5(a), the consolidated and consolidating financial position of AAR and its Consolidated Subsidiaries as of such date and their consolidated and consolidating results of operations and cash flows for the ten (10) months then ended (subject to normal year-end adjustments and the absence of footnote disclosures).

(c) The information contained in the most recently delivered Borrowing Base Certificate is complete and correct and the amounts shown therein as "Eligible Inventory" have been determined as provided in the Financing Documents.

(d) Since March 31, 2003, there has been no material adverse change in the business, operations, properties or financial condition of AAR and its Consolidated Subsidiaries, taken as a whole.

SECTION 3.6 LITIGATION. Except as set forth in the Information Certificate, as of the Closing Date there is no action, suit or proceeding pending against, or to any Borrower's knowledge threatened against or affecting, any Credit Party or, to any Borrower's knowledge, any party to any Operative Document other than a Credit Party, before any court or arbitrator or any governmental body, agency or official in which an adverse decision could reasonably be expected to have a Material Adverse Effect or which in any manner draws into question the validity of any of the Operative Documents.

SECTION 3.7 OWNERSHIP OF PROPERTY. Each Borrower is the lawful owner of, has good and marketable title to and is in lawful possession of, or has valid leasehold interests in, all properties and other assets (real or personal, tangible, intangible or mixed) purported to be owned or leased (as the case may be) by such Person on the balance sheet referred to in Section 3.5(b), except as disposed of in the ordinary course of business.

SECTION 3.8 NO DEFAULT. No Default or Event of Default has occurred and is continuing and no Credit Party is in breach or default under or with respect to any contract, agreement, lease or other instrument to which it is a party or by which its property is bound or affected, which breach or default could reasonably be expected to have a Material Adverse Effect.

SECTION 3.9 LABOR MATTERS. As of the Closing Date, there are no strikes or other labor disputes pending or, to any Borrower's knowledge, threatened against any Credit Party. Hours worked and payments made to the employees of the Credit Parties have not been in violation of the Fair Labor Standards Act or any other applicable law dealing with such matters. All payments due from the Credit Parties, or for which any claim may be made against any of them, on account of wages and employee and retiree health and welfare insurance and other benefits have been paid or accrued as a liability on their books, as the case may be. The consummation of the transactions contemplated by the Financing Documents and the other Operative Documents will not give rise to a right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which it is a party or by which it is bound.

SECTION 3.10 REGULATED ENTITIES. No Credit Party is an "investment company" or a company "controlled" by an "investment company" or a "subsidiary" of an "investment company," all within the meaning of the Investment Company Act of 1940. No Credit Party is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935.

SECTION 3.11 MARGIN REGULATIONS. None of the proceeds from the Loans have been or will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any Margin Stock or for any other purpose which might cause any of the Loans

to be considered a "purpose credit" within the meaning of Regulation T, U or X of the Federal Reserve Board.

SECTION 3.12 COMPLIANCE WITH LAWS. As of the Closing Date, each Borrower and each Subsidiary is in compliance with the requirements of all applicable laws, ordinances, rules, regulations and requests of governmental authorities, except for such laws, ordinances, rules, regulations and requirements the noncompliance with which could not reasonably be expected to have a Material Adverse Effect.

SECTION 3.13 TAXES. Except to the extent subject to a Permitted Contest or where the failure to file any such Tax return or pay any such Tax could not reasonably be expected to have or evidence a Material Adverse Effect,, all Federal, state and local tax returns, reports and statements required to be filed by or on behalf of each Credit Party have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and all Taxes (including real property Taxes) and other charges shown to be due and payable in respect thereof have been timely paid prior to the date on which any fine, penalty, interest, late charge or loss may be added thereto for nonpayment thereof. Except to the extent subject to a Permitted Contest or where the failure to pay any such Tax could not reasonably be expected to have a Material Adverse Effect, all state and local sales and use Taxes required to be paid by each Credit Party have been paid. Except to the extent subject to a Permitted Contest or where the failure to file any such return or pay any such Tax could not reasonably be expected to have a Material Adverse Effect., all Federal and state returns have been filed by each Credit Party for all periods for which returns were due with respect to employee income tax withholding, social security and unemployment taxes, and the amounts shown thereon to be due and payable have been paid in full or adequate provisions therefor have been made.

SECTION 3.14 COMPLIANCE WITH ERISA.

(a) All required reports and documents with respect to any Pension Plan have been properly filed with the appropriate governmental agencies. All Pension Plans (and related trusts and insurance contracts) comply in form and in operation in all material respects with the current applications of ERISA and the Code. With respect to each Pension Plan, there have been no prohibited transactions as defined in Section 406 of ERISA or Section 4975 of the Code that have not been reported and corrected.

(b) During the twelve (12) month period prior to the Closing Date or the making of any Loan or the issuance of any Letter of Credit, (i) no steps have been taken to terminate any Pension Plan and (ii) no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA or Regulation 2510.3 - 102(b)(1) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which could result in the incurrence by any Credit Party of any material liability, fine or penalty. No Credit Party has incurred liability to the PBGC (other than for current premiums) with respect to any employee Pension Plan. All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by any Credit Party or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; no Credit Party nor any member of the

Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, could result in a withdrawal or partial withdrawal from any such plan, and no Credit Party nor any member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.

SECTION 3.15 BROKERS. Except as set forth in the Information Certificate, no broker, finder or other intermediary has brought about the obtaining, making or closing of the transactions contemplated by the Operative Documents, and no Credit Party has or will have any obligation to any Person in respect of any finder's or brokerage fees in connection herewith or therewith.

SECTION 3.16 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS; NO HAZARDOUS
MATERIALS. Except in each case as set forth on the Information Certificate:

(a) No Hazardous Materials are located on any properties now or previously owned, leased or operated by any Credit Party or have been released into the environment, or deposited, discharged, placed or disposed of at, on, under or near any of such properties in a manner that would require the taking of any action under any Environmental Law or which could reasonably be expected to have a Material Adverse Effect. No portion of any such property is being used, or has been used at any previous time, for the disposal, storage, treatment, processing or other handling of Hazardous Materials in violation of any Environmental Law nor is any such property affected by any Hazardous Materials Contamination.

(b) No underground storage tanks are located on any properties now or previously owned, leased or operated by any Credit Party, or were located on any such property and subsequently removed or filled.

(c) No notice, notification, demand, request for information, complaint, citation, summons, investigation, administrative order, consent order and agreement, litigation or settlement with respect to Hazardous Materials or Hazardous Materials Contamination is in existence or, to any Borrower's knowledge, proposed, threatened or anticipated with respect to or in connection with the operation of any properties now or previously owned, leased or operated by any Credit Party, except where any of the foregoing could not be reasonably expected to have or evidence a Material Adverse Effect. All such properties and their existing and prior uses, and any disposal of Hazardous Materials from any thereof, comply and at all times have complied with all Environmental Laws, except where any such non-compliance could not reasonably be expected to have or evidence a Material Adverse Effect. There is no condition on any of such properties which is in violation of any Environmental Laws and no Credit Party has received any communication from or on behalf of any governmental authority that any such condition exists, except where any such condition could not reasonably be expected to have or evidence a Material Adverse Effect.

(d) AAR has delivered to Agent a true and complete copy of each Phase I (and Phase II, if applicable) environmental assessment performed with respect to any property of any Borrower or their Subsidiaries in the last three
(3) years.

(e) For purposes of this Section 3.16, each Credit Party shall be deemed to include any business or business entity (including a corporation) which is, in whole or in part, a predecessor of such Credit Party.

SECTION 3.17 INTELLECTUAL PROPERTY. Each Credit Party owns, is licensed to use or otherwise has the right to use, all Intellectual Property that is material to the condition (financial or other), business or operations of such Credit Party, except to the extent that such Credit Party's use of the Intellectual Property in breach of the foregoing could not be reasonably expected to result in a Material Adverse Effect. All Intellectual Property of each Credit Party is fully protected and/or duly and properly registered, filed or issued in the appropriate office and jurisdictions for such registrations, filings or issuances, except where the failure to be so protected, registered, filed or issued could not reasonably be expected to have a Material Adverse Effect. To each Borrower's knowledge, each Credit Party conducts its business without infringement or claim of infringement of any Intellectual Property rights of others and there is no infringement or claim of infringement by others of any Intellectual Property rights of any Credit Party, which infringement or claim of infringement could reasonably be expected to have a Material Adverse Effect.

SECTION 3.18 REAL PROPERTY INTERESTS. Except for the ownership, leasehold or other interests set forth in the Information Certificate, no Borrower has, as of the Closing Date, any ownership, leasehold or other interest in real property.

SECTION 3.19 SOLVENCY. After giving effect to all intercompany reimbursement obligations, each Borrower: (a) owns and will own assets the fair saleable value of which are (i) greater than the total amount of its liabilities (including contingent liabilities) and (ii) greater than the amount that will be required to pay the probable liabilities of its then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to it; (b) has capital that is not unreasonably small in relation to its business as presently conducted or after giving effect to any contemplated transaction; and (c) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due.

SECTION 3.20 BORROWERS AND EACH OTHER CREDIT PARTY. As of the Closing Date, Borrowers and the other Credit Parties are engaged in the businesses of the purchase and sale of a wide variety of new, overhauled and repaired aircraft engine parts and components and airframe parts and components for the aviation aftermarket, the overhaul, repair and exchange of a wide variety of airframe and engine parts and components for the aviation aftermarket, the design manufacture and installation of in-plane cargo loading and handling systems for commercial and military aircraft and helicopters and the sale or lease of used commercial jet aircraft and the sale or lease of a wide variety of new, overhauled and repaired commercial jet engines, as well as in certain other businesses. These operations require financing on a basis such that the credit supplied can be made available from time to time to Borrowers and the other Credit Parties, as required for the continued successful operation of Borrowers and the other

Credit Parties taken as a whole. Borrowers and the other Credit Parties have requested the Lenders to make credit available hereunder primarily for the purposes provided for herein and generally for the purposes of financing the operations of Borrowers and the other Credit Parties. Borrowers and other Credit Party expect to derive benefit (and the Board of Directors of each Borrower and each other Credit Party has determined that each Borrower or such other Credit Party may reasonably be expected to derive benefit), directly or indirectly, from a portion of the credit extended by Lenders hereunder, both in its separate capacity and as a member of the group of companies, since the successful operation and condition of Borrowers and each other Credit Party is dependent on the continued successful performance of the functions of the group as a whole. Borrowers acknowledge that, but for the agreement of each Borrower to execute and deliver this Agreement and/or the Loan Documents, Agent and Lenders would not have made available the credit facilities established hereby on the terms set forth herein.

SECTION 3.21 FULL DISCLOSURE. None of the information (financial or otherwise) furnished by or on behalf of any Credit Party to Agent or any Lender in connection with the consummation of the transactions contemplated by the Operative Documents, including without limitation the information set forth in the Information Certificate, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in the light of the circumstances under which such statements were made at the time such statements were made. All financial projections (including, without limitation, projections of Availability) delivered to Agent and the Lenders have been or will be prepared on the basis of the assumptions stated therein. Such projections represented or will represent Borrowers' best estimate of Borrowers' future financial performance as of the date such projections were prepared and such assumptions were or will be believed by Borrowers to be fair in light of current business conditions; provided that Borrowers can give no assurance that such projections will be attained.

SECTION 3.22 REPRESENTATIONS AND WARRANTIES INCORPORATED FROM OTHER OPERATIVE DOCUMENTS. As of the Closing Date, each of the representations and warranties made in the Operative Documents by each of the parties thereto is true and correct in all material respects, and such representations and warranties are hereby incorporated herein by reference with the same effect as though set forth in their entirety herein, as qualified therein, except to the extent that such representation or warranty relates to a specific earlier date, in which case such representation and warranty shall be true as of such earlier date.

ARTICLE 4
AFFIRMATIVE COVENANTS

Each Borrower agrees, on a joint and several basis, that, so long as any Credit Exposure exists:

SECTION 4.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Borrowers will maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of consolidated financial statements in accordance with GAAP and to provide the information required to be delivered to the Lenders hereunder, and will deliver to Agent, and, in the case of the deliveries required by paragraphs (a) through (f) and (l) through (r), each Lender:

(a) as soon as practicable and in any event within thirty (30) days after the end of each month (including the last month of AAR's Fiscal Year), a consolidated and consolidating balance sheet of AAR and its Consolidated Subsidiaries as at the end of such month and the related consolidated statements of operations and cash flows for such month, and for the portion of the Fiscal Year ended at the end of such month setting forth in each case in comparative form the figures for the corresponding periods of the previous Fiscal Year and the figures for such month and for such portion of the Fiscal Year ended at the end of such month set forth in the annual operating and capital expenditure budgets and cash flow forecast delivered pursuant to Section 4.1(l), all in reasonable detail and certified by a Responsible Officer as fairly presenting the financial condition and results of operations of AAR and its Consolidated Subsidiaries and as having been prepared in accordance with GAAP (with respect to consolidated financial statements only) applied on a basis consistent with the audited financial statements of AAR, subject to changes resulting from audit and normal year-end adjustments and the absence of footnote disclosures;

(b) as soon as available and in any event within ninety (90) days after the end of each Fiscal Year, a consolidated and consolidating balance sheet of AAR and its Consolidated Subsidiaries as of the end of such Fiscal Year and the related consolidated and consolidating statements of operations, stockholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year and the figures for such Fiscal Year set forth in the annual operating and capital expenditure budgets and cash flow forecast delivered pursuant to Section 4.1(l), certified (solely with respect to such consolidated statements) without qualification by KPMG LLP or such other independent public accountants acceptable to Agent of nationally recognized standing;

(c) together with each delivery of financial statements pursuant to Sections 4.1(a) and 4.1(b), a Compliance Certificate;

(d) together with each delivery of financial statements pursuant to 4.1(b) above, a written statement by the independent public accountants giving the report thereon stating that their audit examination has included a review of the terms of this Agreement as it relates to accounting matters;

(e) promptly upon receipt thereof, copies of all reports submitted to any Credit Party by independent public accountants in connection with each annual, interim or special audit of the financial statements of any Credit Party made by such accountants, including the comment letter submitted by such accountants to management in connection with their annual audit;

(f) promptly upon their becoming available, copies of (i) all financial statements, reports, notices and proxy statements sent or made available generally by AAR to its security holders, (ii) all regular and periodic reports and all registration statements and prospectuses filed by AAR with any securities exchange or with the Securities and Exchange Commission or any successor and (iii) all press releases and other statements made available generally by AAR concerning material developments in the business of Borrowers;

(g) promptly upon any officer of any Credit Party obtaining knowledge (i) of the existence of any Event of Default or Default, or becoming aware that the holder of any Debt of any Credit Party has given any notice or taken any other action with respect to a claimed default thereunder, (ii) of any change in any Credit Party's certified accountant or any resignation, or decision not to stand for re-election, by any member of any Credit Party's board of directors (or comparable body), (iii) that any Person has given any notice to any Credit Party or taken any other action with respect to a claimed default under any agreement or instrument (other than the Financing Documents) to which any Credit Party is a party or by which any of its assets is bound involving potential liability, loss of revenue or other damages to Borrowers, taken as a whole, in an amount of $3,000,000 or more or (iv) of the institution of any litigation or arbitration involving an alleged liability of any Borrower equal to or greater than $3,000,000 or any adverse determination in any litigation or arbitration involving a potential liability of any Borrower equal to or greater than $3,000,000, a certificate of a Responsible Officer specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default (including any Event of Default or Default), event or condition, and what action the applicable Credit Party has taken, is taking or proposes to take with respect thereto;

(h) promptly upon any officer of any Credit Party obtaining knowledge of (i) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, (ii) the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, (iii) the taking of any action with respect to a Pension Plan which could result in the requirement that any Borrower or any Domestic Subsidiary furnish a bond or other security to the PBGC or such Pension Plan, (iv) the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), (v) any material increase in the contingent liability of any Borrower or any Domestic Subsidiary with respect to any post-retirement welfare plan benefit or (vi) any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent, a certificate of a Responsible Officer specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person, and what action the applicable Credit Party has taken, is taking or proposed to take with respect thereto;

(i) promptly upon any officer of any Credit Party obtaining knowledge of any complaint, order, citation, notice or other written communication from any Person delivered to any Credit Party with respect to, or if any officer of any Credit Party becomes aware of (x) the existence or alleged existence of a violation of any Environmental Law or the incurrence of any liability, obligation, loss, damage, cost, expense, fine, penalty or sanction or the requirement to commence any remedial action resulting from or in connection with any air emission, water discharge, noise emission, Hazardous Material or any other environmental, health or safety matter at, upon, under or within any of the properties now or previously owned, leased or

operated by any Credit Party, or due to the operations or activities of any Credit Party or any other Person on or in connection with any such property or any part thereof in any case which event could reasonably be expected to have a Material Adverse Effect or (y) any release on any of such properties of Hazardous Materials in a quantity that is reportable under any applicable Environmental Law which release could reasonably be expected to have a Material Adverse Effect, a certificate of a Responsible Officer specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person, and what action the applicable Credit Party has taken, is taking or proposes to take with respect thereto;

(j) promptly upon any officer of any Borrower obtaining knowledge that any Borrower has acquired any interest in real property (including leasehold interests (other than leasehold interests for sales offices or locations where less than $25,000 of Inventory is stored) in real property), a certificate of a Responsible Officer describing such real property in such detail as Agent shall reasonably require;

(k) copies of any reports or notices of claimed tax liens or tax disputes related to any material taxes and any other material reports or notices relating to any such dispute or claimed tax lien received by any Credit Party from, or filed by any Credit Party with, any Federal, state or local governmental agency or body;

(l) within thirty (30) days prior to the conclusion of each Fiscal Year, AAR's annual operating plans, operating and capital expenditure budgets, and financial forecasts on a consolidated and consolidating basis, including cash flow projections covering proposed fundings, repayments, additional advances, investments and other cash receipts and disbursements, each for the following three (3) Fiscal Years presented on a monthly basis for the next Fiscal Year and annually for the two (2) subsequent Fiscal Years, all of which shall be in a format reasonably consistent with projections, budgets and forecasts theretofore provided to the Lenders, and promptly following the approval by AAR's Board of Directors or Chief Executive Officer, updates to AAR's annual operating plan from time to time prepared by management of AAR;

(m) as soon as available after the end of each month but within fourteen (14) Business Days (no later than noon Chicago time) after the month end thereof (for monthly reporting requirements) or at another time and in any event no later than noon (Chicago Time) as designated from time to time by Agent, and from time to time upon the request of Agent (which request may be made as frequently as weekly), a Borrowing Base Certificate as of the last day of the month most recently ended (or, in the case of Borrowing Base Certificates requested more frequently than monthly, as of a day each week designated from time to time by Agent);

(n) as soon as available (but in any event on or prior to the delivery dates specified in Section 4.4 of the Receivables Purchase Agreement), each "Settlement Statement" and "Information Package" (as such terms are defined in the Receivables Purchase Agreement) required to be delivered by AAR or AAR Receivables Corporation II pursuant to Section 4.4 of the Receivables Purchase Agreement.

(o) as soon as available after the end of each month (but in any event not later than the 25th day of the next month), on a monthly basis or more frequently as Agent may reasonably request, (i) Inventory summary reports showing the inventory distribution by condition, (ii) Inventory reports by location and category (and including the amounts of Inventory and the value thereof at, any leased locations and at premises of warehouses, consignees, processors or other third parties), (iii) Inventory reconciliation from the perpetual listings to the general ledger to the financial statements, (iv) "home office" accounts receivable agings (in form consistent with that prepared on the Closing Date (Report 449)), (v) a copy of the monthly reporting package required by the Securitization Documents, (vi) such reconciliation reports and other source documents from time to time reasonably requested by Agent with respect to the Borrowing Base Certificate most recently delivered to Agent, the financial statements of Borrowers delivered to Agent, Borrowers' general ledger and/or the reports required pursuant to this paragraph, each in form and substance, and with such supporting detail and documentation, as may be reasonably requested by Agent;

(p) upon Agent's reasonable request, (i) copies of customer statements and credit memos, remittance advices and reports and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by any Borrower;

(q) within two (2) Business Days after any request therefor, such additional information in such detail concerning the amount, composition and manner of calculation of the Borrowing Base as Agent or any Lender may reasonably request;

(r) from time to time, if Agent or any Lender determines that obtaining appraisals is necessary in order for Agent or such Lender to comply with applicable laws or regulations or if an Event of Default has occurred and is continuing, appraisal reports in form and substance and from appraisers satisfactory to Agent stating the then current fair market values of all or any portion of the Real Property or Equipment (other than Equipment included within the Collateral consisting of aircraft and aircraft engines) owned by any Borrower; and

(s) with reasonable promptness, such other information and data with respect to any Credit Party as from time to time may be reasonably requested by Agent or any Lender.

SECTION 4.2 PAYMENT AND PERFORMANCE OF OBLIGATIONS. Each Borrower (i) will pay and discharge, at or before maturity, all of their respective obligations and liabilities, including tax liabilities, except (x) where the same may be the subject of a Permitted Contest and (y) for such obligations and/or liabilities the nonpayment or nondischarge of which could not reasonably be expected to have a Material Adverse Effect, (ii) will maintain, in accordance with GAAP, appropriate reserves for the accrual of all of their respective obligations and liabilities and (iii) will not breach, or permit to exist any default under, the terms of any lease, commitment, contract, instrument or obligation to which it is a party, or by which its properties or assets are bound, except for such breaches or defaults which could not reasonably be expected to have a Material Adverse Effect.

SECTION 4.3 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Each Borrower will continue, to engage in business of the same general type as they now conduct and will

preserve, renew and keep in full force and effect their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business.

SECTION 4.4 MAINTENANCE OF PROPERTY; INSURANCE.

(a) Each Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted.

(b) Each Borrower will maintain, and will cause each Subsidiary to maintain, (i) physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and public liability insurance (including products/completed operations liability coverage) in each case of the kinds customarily carried or maintained by Persons of established reputation engaged in similar businesses and in amounts acceptable to Agent and (ii) such other insurance coverage in such amounts and with respect to such risks as Agent may reasonably request. All such insurance shall be provided by insurers having an
A.M. Best policyholders rating reasonably acceptable to Agent. Agent acknowledges that the insurance coverage described on Schedule 4.4 meets the requirements of this Section 4.4 subject to Agent's future right to review such insurance in light of changing economic and business conditions.

(c) On or prior to the Closing Date, Borrowers will cause Agent to be named as an additional insured, assignee and, only with respect to the Collateral, mortgagee or loss payee, as applicable, on each insurance policy required to be maintained pursuant to this Section 4.4 pursuant to endorsements in form and content acceptable to Agent. Borrowers will deliver to Agent and the Lenders (i) on the Closing Date, a certificate from Borrowers' insurance broker dated such date showing the amount of coverage as of such date, and that such policies will include effective waivers (whether under the terms of any such policy or otherwise) by the insurer of all claims for insurance premiums against all mortgagee or loss payees and additional insureds and all rights of subrogation against all loss payees and additional insureds, and that if all or any part of such policy is canceled, terminated or expires, the insurer will forthwith give notice thereof to each additional insured mortgagee and loss payee and that no cancellation, reduction in amount or material change in coverage thereof shall be effective until at least thirty (30) days after receipt by each additional insured mortgagee and loss payee of written notice thereof, (ii) on an annual basis, and upon the request of any Lender through Agent from time to time, full information as to the insurance carried, (iii) within five (5) days of receipt of notice from any insurer, a copy of any notice of cancellation, nonrenewal or material change in coverage from that existing on the date of this Agreement and (iv) forthwith, notice of any cancellation or nonrenewal of coverage by any Borrower.

(d) In the event Borrowers fail to provide Agent with evidence of the insurance coverage required by this Agreement, Agent may purchase insurance at Borrowers' expense to protect Agent's interests in the Collateral. This insurance may, but need not, protect any Borrower's interests. The coverage purchased by Agent may not pay any claim made by any Borrower or any claim that is made against any Borrower in connection with the Collateral. Borrowers may later cancel any insurance purchased by Agent, but only after providing Agent

with evidence that Borrowers have obtained insurance as required by this Agreement. If Agent purchases insurance for the Collateral, Borrowers will be responsible for the costs of that insurance, including interest and other charges imposed by Agent in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the Obligations. The costs of the insurance may be more than the cost of insurance Borrowers are able to obtain on their own.

SECTION 4.5 COMPLIANCE WITH LAWS. Each Borrower will comply, and cause each Subsidiary to comply, with the requirements of all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including Environmental Laws and ERISA and the rules and regulations thereunder), except for such laws, ordinances, rules, regulations and requirements the noncompliance with which could not reasonably be expected to have a Material Adverse Effect.

SECTION 4.6 INSPECTION OF PROPERTY, BOOKS AND RECORDS. Each Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in accordance with GAAP in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, at the sole cost of Borrowers or any applicable Subsidiary, representatives of Agent and of any Lender (but at such Lender's expense unless such visit or inspection is made concurrently with Agent) to visit and inspect any of their respective properties, to examine and make abstracts or copies from any of their respective books and records, to conduct a collateral audit and analysis of their respective Inventory and Accounts and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants as often as may reasonably be desired. Unless an Event of Default has occurred and is continuing, all such visits and inspections shall be during normal business hours with reasonable advance notice.

SECTION 4.7 USE OF PROCEEDS. Borrowers will use the proceeds of the Revolving Loans solely for transaction fees incurred in connection with the Operative Documents, the refinancing on the Closing Date of Debt owing to a Person not an Affiliate of any Credit Party and for working capital needs of Borrowers and the Subsidiaries.

SECTION 4.8 LENDERS' MEETINGS. At the request of Agent, within forty-five (45) days after the end of each fiscal quarter, Borrowers will conduct a meeting of Agent and the Lenders to discuss such fiscal quarter's results and the financial condition of Borrowers and the Subsidiaries at which shall be present a Responsible Officer and such officers of the Credit Parties as may be reasonably requested to attend by Agent or any Lender, such request or requests to be made within a reasonable time prior to the scheduled date of such meeting. Such meetings shall be held at a time and place convenient to the Lenders and to Borrowers.

SECTION 4.9 HAZARDOUS MATERIALS; REMEDIATION. Borrowers will provide Agent within thirty (30) days after demand therefor with a bond, letter of credit or similar financial assurance evidencing to the satisfaction of Agent that sufficient funds are available to pay the cost of removing, treating and disposing of any Hazardous Materials or Hazardous Materials Contamination and discharging any assessment which may be established on any Real Property as a result thereof, such demand to be made, if at all, upon Agent's reasonable business

determination that the failure to remove, treat or dispose of any Hazardous Materials or Hazardous Materials Contamination, or the failure to discharge any such assessment could reasonably be expected to have a Material Adverse Effect. At Agent's option, in lieu of any such bond, letter of credit or similar financial assurance, Agent may create a Reserve to insure the payment of any such cost or assessment.

SECTION 4.10 FURTHER ASSURANCES. Each Borrower will, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as may from time to time be necessary or as Agent or the Required Lenders may from time to time reasonably request in order to carry out the intent and purposes of the Financing Documents and the transactions contemplated thereby, including all such actions to establish, preserve, protect and perfect a first priority Lien (subject only to Permitted Liens) in favor of Agent for the benefit of the Lenders on the Collateral (including Collateral acquired after the date hereof), including on any and all assets of each Borrower, whether now owned or hereafter acquired. In addition, upon request by Agent, Borrowers shall deliver or shall cause a Subsidiary to deliver to Agent mortgages or deeds of trust and mortgagee title insurance policies, all in form and substance reasonably acceptable to Agent, for Borrowers' Real Property in Wood Dale, Illinois or Garden City, New York, if any Permitted Mortgage Debt is not closed with respect to either facility by the date which is four months after the Closing Date.

ARTICLE 5
NEGATIVE COVENANTS

Each Borrower agrees on a joint and several basis, that, so long as any Credit Exposure exists:

SECTION 5.1 DEBT. Borrowers will not, directly or indirectly, create, incur, assume, guarantee or otherwise become or remain directly or indirectly liable with respect to, any Debt, or any contingent obligations which would be Debt hereunder if they were non-contingent, except for:

(a) Debt and Letter of Credit Liabilities under the Financing Documents;

(b) Debt or such contingent obligations outstanding on the date of this Agreement as set forth in the Information Certificate; (c) Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring any fixed asset (including through Capital Leases), in an aggregate principal amount at any time outstanding not greater than $5,000,000;

(c) Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring any fixed asset (including through Capital Leases), in an aggregate principal amount at any time outstanding not greater than $5,000,000;

(d) intercompany Debt (which shall not include intercompany corporate charges) arising from loans made by (i) a Borrower to another Borrower or (ii) by a Borrower to a Subsidiary (not a Borrower) to fund capital requirements of such Subsidiaries in the ordinary course of business in an aggregate net amount not to exceed Five Million Dollars ($5,000,000) at any time outstanding; PROVIDED, HOWEVER, that upon the request of Agent at any time, such Debt shall be evidenced by promissory notes having terms reasonably satisfactory to Agent, the sole

originally executed counterparts of which shall be pledged and delivered to Agent, for the benefit of Agent and Lenders, as security for the Obligations; and

(e) Debt of AAR Receivables Corporation II outstanding pursuant to the Securitization Documents;

(f) Debt outstanding pursuant to the Note Purchase Documents;

(g) Debt outstanding pursuant to the Indenture Documents;

(h) Debt outstanding pursuant to Aircraft Lease Documents;

(i) Any extension, renewal, replacement (whether effected upon termination or any time thereafter) or refinancing of Debt outstanding pursuant to the Securitization Documents, the Note Purchase Documents, the Indenture Documents or the Aircraft Lease Documents PROVIDED; that (i) after giving effect to any such extension, renewal, replacement or refinancing no Event of Default has occurred and is continuing and (ii) Agent shall have determined in the reasonable exercise of its discretion, that the terms and conditions of any such extension, renewal, replacement or refinancing will not materially and adversely affect Borrowers' ability to repay the Obligations or Agent's Lien on the Collateral. Agent acknowledges that the extension, renewal, replacement or refinancing of the principal installments of Debt outstanding pursuant to the Indenture Documents due in October, 2003, to be effected pursuant to the terms and conditions outlined in Schedule 5.5, does not materially and adversely affect Borrowers' ability to repay the Debt or Agent's Lien on the Collateral;

(j) Debt incurred after the Closing Date secured by a first priority mortgage on Borrowers' Real Property located in Wood Dale, Illinois and/or Garden City, New York or incurred in connection with a sale or leaseback transaction PROVIDED that the terms and conditions of such Debt, including without limitation, interest rates and principal amortizations schedules are reasonably acceptable to Agent ("Permitted Mortgage Debt"); for purposes of the foregoing, Agent acknowledges and agrees that any Debt any of the Borrowers proposes to incur or any sale or leaseback any of the Borrowers proposes to enter into that is consistent with the proposed terms and conditions for such Permitted Mortgage Debt set forth on Schedule 5.1(j) attached hereto shall be considered Permitted Mortgage Debt and for purposes of this Section 5.1(j) and shall not require the consent of Agent;

(k) Debt outstanding pursuant to the IRB Documents;

(l) Non-Recourse Debt secured by a Lien permitted by
Section 5.2(j);

(m) LaSalle Letter of Credit Reimbursement Debt;

(n) Unsecured Debt not to exceed Ten Million Dollars ($10,000,000) in the aggregate at any time outstanding; and

(o) Unsecured Debt not to exceed, when aggregated with all outstanding Debt permitted pursuant to Section 5.1(n) above, Seventy-Five Million Dollars ($75,000,000) in the aggregate outstanding, if the proceeds are used to finance capital requirements of a Credit Party.

SECTION 5.2 LIENS. Borrower will not, directly or indirectly, create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except:

(a) Liens created by the Security Documents;

(b) Liens existing on the date of this Agreement as set forth in the Information Certificate or securing any Debt extending, renewing, replacing (whether effected upon termination or any time thereafter) or refinancing the Debt secured thereby to the extent the replacement or refinancing is permitted pursuant to the terms hereof including, without limitation, Liens on AAR Receivables Corporation II's (or any other single purpose Subsidiary of AAR formed to facilitate a securitization transaction) Accounts granted pursuant to the Securitization Documents;

(c) any Lien on any asset (including all replacements and accessions thereto and proceeds thereof) securing Debt permitted under Section 5.1(c) incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, PROVIDED that such Lien attaches to such asset concurrently with or within ninety (90) days after the acquisition thereof;

(d) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or the subject of a Permitted Contest;

(e) statutory Liens of landlords, processors and bailees, to the extent not waived, Liens arising in the ordinary course of business (i) in favor of carriers, warehousemen, mechanics and materialmen, and other similar Liens imposed by law and (ii) in connection with worker's compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or the subject of a Permitted Contest and not involving any deposits or advances or borrowed money or the deferred purchase price of property or services and, in each case, for which it maintains adequate reserves;

(f) attachments, appeal bonds, judgments and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are the subject of a Permitted Contest;

(g) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of Borrower or any Subsidiary;

(h) Liens on aircraft and aircraft engines securing Debt and other obligations outstanding under the Aircraft Lease Documents;

(i) Liens on Borrowers' Real Property, fixtures and other property customarily pledged to secure mortgage Debt located in Wood Dale, Illinois and/or Garden City, New York securing Permitted Mortgage Debt;

(j) Liens securing Nonrecourse Debt incurred by AAR or any Restricted Subsidiary (or any Person in which AAR or any Restricted Subsidiary shall be the beneficial

owner), PROVIDED that such Lien is restricted to aircraft and engines acquired after the Closing Date and the lease thereof to a Person other than AAR or a Restricted Subsidiary;

(k) Liens on property or assets of AAR or any of its Restricted Subsidiaries securing Debt owing to AAR or to another Restricted Subsidiary;

(l) 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 AAR or any of its Restricted Subsidiaries, PROVIDED that such Liens do not, in the aggregate, materially detract from the value of such property;

(m) any Liens on cash collateral pledged to secure LaSalle Letter of Credit Reimbursement Debt; and

(n) any Lien existing on property of a Person immediately prior to its being consolidated with or merged into AAR or a Restricted Subsidiary or its becoming a Restricted Subsidiary, or any Lien existing on any property acquired by AAR 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.

SECTION 5.3 RESTRICTED DISTRIBUTIONS. Borrowers will not, and will not permit any Subsidiary to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Distribution; PROVIDED that the foregoing shall not restrict or prohibit any Subsidiary from making dividends or distributions and shall not restrict or prohibit dividends or distributions to AAR or purchases of shares of (or options to purchase shares of) equity interests in AAR or options therefor (a) on the open market for use in its employee incentive equity program, (b) from employees of any Borrower or any Subsidiary upon their death, termination or retirement or (c) on the open market pursuant to a stock buy-back program approved by AAR's Board of Directors so long as (x) before and after giving effect to any such dividend or distribution for such purpose, (i) no Event of Default shall have occurred and be continuing and (ii) Borrowers are in compliance on a pro forma basis with the covenants set forth in Article 7 recomputed for the most recently ended quarter for which information is available and are in compliance with all other terms and conditions of this Agreement, (y) such purchases or payments described in clause
(a) above after the date hereof do not exceed $2,000,000 in any Fiscal Year and do not exceed $6,000,000 in the aggregate, (z) such purchases or payments described in clause (b) above after the date hereof do not exceed $1,000,000 in any Fiscal Year and do not exceed $3,000,000 in the aggregate, (aa) such purchases or payments described in clause (c) above after the date hereof are made or effected after Borrowers have made all principal payments due under the Indenture Documents in October, 2003, (bb) such purchases or payments described in clause (c) above after the date hereof do not exceed $5,000,000 in any Fiscal Year and do not exceed $15,000,000 in the aggregate and (cc) after giving effect to any

such purchase or payment described in clause (c) above, the sum of average Availability and Cash Equivalents, computed on a proforma or projected basis after giving effect to any such purchase or payment for the 60 days immediately prior to the date of any such purchase or payment and for the 180 days immediately after the date of any such purchase or payment, equals or exceeds $30,000,000.

SECTION 5.4 RESTRICTIVE AGREEMENTS. Borrowers will not, and will not permit any Subsidiary to, directly or indirectly (i) enter into or assume any agreement (other than the Financing Documents and, as in effect on the Closing Date, the Indenture Documents, the Note Purchase Documents and the Securitization Documents) prohibiting the creation or assumption of any Lien upon the Collateral, whether now owned or hereafter acquired or (ii) create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to: (1) pay or make Restricted Distributions to any Borrower or any other Wholly-Owned Restricted Subsidiary; (2) pay any Debt owed to any Borrower or any other Wholly-Owned Restricted Subsidiary; (3) make loans or advances to Borrower or any other Wholly-Owned Restricted Subsidiary; or (4) transfer any of its property or assets to any Borrower or any other Wholly-Owned Restricted Subsidiary; PROVIDED that the provisions of this clause (ii) shall not apply to
(a) restrictions and conditions imposed by law, the Financing Documents, the Indenture Documents, the Note Purchase Documents, the Securitization Documents, the IRB Documents, the Aircraft Lease Documents and any agreement, instrument or document evidencing (A) Permitted Mortgage Debt, (B) the transactions contemplated on Schedule 5.5 and (C) the sale, factoring or other financing of the Air France Parts Lease, (b) customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary or line of business (including without limitation those transactions listed on Schedule 5.6) pending such sale, PROVIDED such restrictions and conditions apply only to the Subsidiary or line of business that is to be sold and such sale is permitted hereunder, and (c) customary provisions in leases and other contracts restricting the assignment thereof.

SECTION 5.5 PAYMENTS AND MODIFICATIONS OF OTHER DEBT. Borrower will, and will not permit any Subsidiary to, directly or indirectly (i) declare, pay, make or set aside any amount for payment in respect of any Permitted Mortgage Debt, any Debt outstanding under the Indenture Documents, the Aircraft Lease Documents, the IRB Documents, the Note Purchase Documents or the Securitization Documents, except for regularly scheduled payments of principal and interest (but no voluntary prepayments) or other amounts in respect of such Debt; and
(ii) amend or otherwise modify the terms of the documents or agreements evidencing the Permitted Mortgage Debt or the Indenture Documents, the Aircraft Lease Documents, the IRB Documents, the Note Purchase Documents or the Securitization Documents if Agent has determined in the reasonable exercise of its discretion that the effect of such amendment or modification is to affect materially and adversely Borrower's ability to repay the Obligations or Agent's Lien on the Collateral, except for instruments, amendments, modifications or other documents entered into to effect the transactions described in Schedule
5.5. The foregoing notwithstanding, Borrowers may prepay or repurchase any Debt outstanding under the Indenture Documents or the Note Purchase Documents and up to $2,300,000 of Debt outstanding under the Aircraft Lease Documents owing to SMBC Leasing and Finance, Inc. or an Affiliate thereof, if, after giving effect to any such repurchase, (i) no Default or Event of Default has occurred and is continuing; (ii) Borrowers are in compliance on a proforma basis with the covenants set forth in

Article 7 recomputed for the most recently ended quarter for which information is available and are in compliance with all other terms and conditions of this Agreement; (iii) the amount of such prepayments or repurchases does not exceed $25,000,000 in any Fiscal Year or $75,000,000 in the aggregate and (iv) prior to the date of any such repurchase or prepayment, a Responsible Officer shall have delivered to Agent a written certificate in reasonable detail with supporting calculations evidencing or stating that (a) average Availability PLUS Cash Equivalents, computed on a pro forma basis after giving effect to any such prepayment or repurchase, for the 60 days immediately prior to the date of any such prepayment or repurchase equals or exceeds (1) $10,000,000 with respect to prepayments or repurchases of principal payments of Debt outstanding under the Indenture Documents due in October, 2003, up to $1,000,000 per annum of all other such prepayments or repurchases or permitted repayments or repurchases of Debt outstanding under the Aircraft Lease Documents owed to SMBC Leasing and Finance, Inc. or an Affiliate thereof, or (2) $30,000,000 with respect to all other such prepayments or repurchases, (b) average projected Availability PLUS Cash Equivalents, computed on a pro forma basis after giving effect to any such prepayment or repurchase for the 180 days immediately after the date of such prepayment or repurchase equals or exceeds (1) $10,000,000 with respect to prepayments or repurchases of Debt outstanding under the Indenture Documents due in October, 2003, up to $1,000,000 per annum of all other such prepayments or repurchases or permitted repayments or repurchases of Debt outstanding under the Aircraft Lease Documents owed to SMBC Leasing and Finance, Inc. or an Affiliate thereof, or (2) $30,000,000 with respect to all other such prepayments or repurchases, and (c) such projected pro forma average Availability PLUS Cash Equivalents represents Borrowers' best estimate of Borrowers' future financial performance as of the date of such projections were made, based on assumption, believed by Borrowers on the applicable date to be fair in light of current business conditions.

SECTION 5.6 CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. No Borrower will, and no Borrower will permit any Subsidiary to, directly or indirectly (i) consolidate or merge with or into any other Person or (ii) sell, lease, license or otherwise transfer, directly or indirectly, any of its or their assets, other than (1) sales, leases, licenses or transfers of Inventory in the ordinary course of their respective businesses, (2) dispositions of Cash Equivalents, (3) so long as no Event of Default exists and is continuing, or if an Event of Default exists and is continuing, all of the proceeds of any such sale of Accounts are applied to the Obligations, sales of Accounts by Borrowers to AAR Receivables Corporation II (or any other sole purpose Subsidiary formed to facilitate a securitization) and sales of Accounts by AAR Receivables Corporation II (or any other sole purpose Subsidiary formed to facilitate a securitization), in each case pursuant to the Securitization Documents, (4) dispositions (including, without limitations, sales and leasebacks) of Equipment and Real Property for cash, or other consideration reasonably acceptable to Agent, and fair value that the board of directors (or comparable body) of the applicable Borrower determines in good faith is no longer used or useful in the business of such Borrower and its Subsidiaries if all of the following conditions are met: (a) the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $10,000,000 and the aggregate market value of assets sold or otherwise disposed of in any Fiscal Year of AAR does not exceed $25,000,000; (b) the Net Cash Proceeds of such Asset Disposition are applied as required by 2.1(c); (c) after giving effect to the Asset Disposition and the repayment of Debt with the proceeds thereof, Borrowers are in compliance on a pro forma basis with the covenants set forth in Article 7 recomputed for the most recently ended quarter for which information is available and is in compliance with all other terms and conditions of this

Agreement; (d) no Default or Event of Default then exists or would result from such Asset Disposition; (5) such dispositions as are set forth on Schedule 5.6 to the Agreement for cash or other consideration reasonably acceptable to Agent and fair value if all of the following conditions precedent are met: (a) simultaneously with the closing of any such sale or other disposition, Borrowers prepay the Revolving Loans in an amount equal to the amount the Borrowing Base is reduced as a result of such sale or disposition; (b) after giving effect to such sale or disposition and the repayment of Debt with the proceeds thereof, Borrowers are in compliance on a pro forma basis with the covenants set forth in Article 7 recomputed for the most recently ended quarter for which information is available and is in compliance with all other terms and conditions of this Agreement; and (c) no Default or Event of Default then exists or would result from such sale or disposition; (6) the sale, factoring or other financing of the Air France Parts Lease; and (7) transfers to any sole purpose Subsidiary formed to facilitate a transaction in which such Subsidiary will incur Permitted Mortgage Debt. Borrowers agree to give Agent fourteen (14) Business Days written notice of any disposition of the assets set forth on Schedule 5.6, which notice shall in reasonable detail describe the proposed disposition.

SECTION 5.7 PURCHASE OF ASSETS, INVESTMENTS. No Borrower will, and no Borrower will permit any Subsidiary to, directly or indirectly acquire any assets other than (x) in the ordinary course of business, (y) with respect to intercompany Debt permitted hereunder or (z) to facilitate a transaction in which such Borrower or Subsidiary will incur Permitted Mortgage Debt. No Borrower will and no Borrower will not permit any Subsidiary to, directly or indirectly make, acquire or own any Investment in any Person other than (a) Investments set forth on the Information Certificate; (b) Cash Equivalents; (c) Investments in Domestic Subsidiaries, so long as any such Domestic Subsidiary has Guaranteed the Obligations and secured such Guarantee by granting in favor of Agent, for its benefit and the benefit of the Lenders, a Lien on all or substantially all of that portion of such Domestic Subsidiary's assets which, if owed by a Borrower, would constitute Collateral; (d) bank deposits established in accordance with Section 5.14; (e) Investments in securities of Account Debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such Account Debtors; (f) loans to officers and employees in an aggregate principal amount not to exceed $1,000,000 at any time outstanding; (g) Investments in Subsidiaries formed after the Closing in order to facilitate any refinancing or replacement of Debt outstanding under the Securitization Documents; (h) Investments in Subsidiaries formed to facilitate the incurrence of the Permitted Mortgage Debt, which Investments consist of Borrowers' Real Property in Wood Dale, Illinois or Garden City, New Jersey; (i) intercompany Debt permitted pursuant to Section 5.1; and (j) other Investments not exceeding $3,000,000 in any Fiscal Year and $9,000,000 in the aggregate so long as at the time of any such Investment, no Event of Default exists and is continuing. Without limiting the generality of the foregoing, no Borrower will, and no Borrower will permit any Subsidiary (except to facilitate a transaction in which such Subsidiary will incur Permitted Mortgage Debt) to, (i) acquire or create any Subsidiary or (ii) engage, outside of the ordinary course of business, in any joint venture or partnership with any other Person.

SECTION 5.8 TRANSACTIONS WITH AFFILIATES. Except (i) for transactions among Borrowers, (ii) as permitted by Section 5.12 or in connection with Permitted Mortgage Debt, (iii) as otherwise disclosed in the Information Certificate, and (iv) for transactions that are disclosed to Agent in writing in advance of being entered into and which contain terms that are no less favorable to any Borrower or any Subsidiary, as the case may be, than those which might

be obtained from a third party, no Borrower will, and no Borrower will permit any Subsidiary to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of any Borrower.

SECTION 5.9 MODIFICATION OF ORGANIZATIONAL DOCUMENTS. No Borrower will, directly or indirectly amend or otherwise change its state of incorporation, type of organization or organization I.D. Number, nor change its legal name.

SECTION 5.10 FISCAL YEAR. No Borrower will, and no Borrower will permit any Subsidiary to, change its Fiscal Year.

SECTION 5.11 CONDUCT OF BUSINESS. No Borrower will, and no Borrower will permit any Subsidiary to, directly or indirectly, engage in any line of business other than those businesses engaged in on the Closing Date and businesses reasonably related thereto (including creation of sole purpose Subsidiaries to facilitate a securitization or to facilitate a transaction in which such Subsidiary will incur Permitted Mortgage Debt).

SECTION 5.12 LEASE PAYMENTS. No Borrower will, and no Borrower will permit any Subsidiary to, directly or indirectly, incur or assume (whether pursuant to a Guarantee or otherwise) any liability for rental payments under a lease (excluding leases in effect on the Closing Date or replacements thereof and excluding lease payments made with respect to Borrowers' Garden City, New York and/or Wood Dale, Illinois facility pursuant to a sale and leaseback transaction permitted by Section 5.1(j)) with a lease term of one year or more if, after giving effect thereto, the aggregate amount of minimum lease payments under such lease that AAR and its Consolidated Subsidiaries have so incurred or assumed will exceed, on a consolidated basis, $500,000 for any Fiscal Year under all such leases (excluding Capital Leases), except for lease-in, lease-out transactions in the ordinary course of business.

SECTION 5.13 BANK ACCOUNTS. Without limiting the provisions of Section 6.1(a), except as otherwise provided by or in the Securitization Documents, no Borrower will, directly or indirectly, establish any new bank account into which Account Debtors are instructed to make payments or Borrowers deposit payments on Non-Sold Accounts without prior written notice to Agent and unless Agent, the applicable Borrower, and the bank at which the account is to be opened enter into a control agreement regarding such bank account pursuant to which such bank acknowledges the security interest of Agent in such bank account, agrees to comply with instructions originated by Agent directing disposition of the funds in the bank account without further consent from the applicable Borrower, and agrees to subordinate and limit any security interest the bank may have in the bank account on terms satisfactory to Agent. The foregoing notwithstanding, Borrowers shall not be required to put into effect any control agreement with respect to any disbursement account formed by AAR or another Credit Party from sources other than direct proceeds of Collateral.

ARTICLE 6
ACCOUNTS AND INVENTORY REPRESENTATIONS,
WARRANTIES, COVENANTS AND AGREEMENTS

To induce Agent and Lenders to enter into this Agreement and to make the Loans and other credit accommodations contemplated hereby, each Borrower hereby, on a joint and several basis, represents and warrants to Agent and each Lender, and further agrees with Agent and each Lender, that:

SECTION 6.1 ACCOUNTS AND ACCOUNT COLLECTIONS.

(a) Upon request by Agent, after an Event of Default has occurred and is continuing, each Borrower shall establish and maintain, at its sole expense, and shall cause each Domestic Subsidiary to establish and maintain, at its sole expense blocked accounts or lockboxes and related blocked accounts (in either case, "BLOCKED ACCOUNTS"), as Agent may specify, with such banks as are acceptable to Agent into which each Borrower and its Domestic Subsidiaries shall promptly deposit and direct their respective Account Debtors to directly remit all payments on Accounts (other than Accounts sold by AAR Receivables Corporation II pursuant to the Securitization Documents to the extent such Accounts have not been reconveyed to the applicable Borrower pursuant to Section 3.4 of the Purchase and Sale Agreement) or the Company Note and all payments constituting proceeds of Inventory or other Collateral in the identical form in which such payments are made, whether by cash, check or other manner; PROVIDED, HOWEVER, that any payments which constitute proceeds of property not included in the Collateral shall be excluded from the Blocked Accounts and the requirements of this Section. Each Borrower shall deliver, or cause to be delivered, to Agent a Deposit Account Control Agreement duly authorized, executed and delivered by each bank where a Blocked Account for the benefit of such Borrower or any of its Domestic Subsidiaries is maintained, and by each bank where any other Deposit Account is from time to time maintained. Each Borrower shall further execute and deliver, and shall cause each of its Domestic Subsidiaries to execute and deliver, such agreements and documents as Agent may require in connection with such Blocked Accounts, Deposit Accounts and such Deposit Account Control Agreements. Without limiting the provisions of
Section 5.13, after the occurrence and during the continuance of an Event of Default, no Borrower shall establish, and each Borrower shall cause each of its Domestic Subsidiaries not to establish, any Deposit Accounts not existing as of the Closing Date, unless such Borrower or its Domestic Subsidiaries (as applicable) have complied in full with the provisions of this Section 6.1 with respect to such Deposit Accounts. Each Borrower agrees that all payments made to such Blocked Accounts or other funds received and collected by Agent or any Lender, whether in respect of the Accounts, as proceeds of Inventory or other Collateral or otherwise shall be treated as payments to Agent and Lenders in respect of the Obligations and therefore shall constitute the property of Agent and Lenders to the extent of the then outstanding Obligations.

(b) For purposes of calculating the amount of the Loans available to Borrower, payments made to a Blocked Account will be applied (conditional upon final collection) to the Obligations on the Business Day of receipt by Agent of immediately available funds in the Payment Account provided such payments and notice thereof are received in accordance with Agent's usual and customary practices as in effect from time to time and with

sufficient time to credit the Loan Account on such day, and if not, then on the next Business Day. For the purposes of calculating interest on the Obligations, such payments or other funds received shall be deemed applied (conditional upon final collection) to the Obligations following the date of receipt of immediately available funds by Agent in the Payment Account provided such payments or other funds and notice thereof are received in accordance with Agent's usual and customary practices as in effect from time to time and with sufficient time to credit the Loan Account on such day, and if not, then on the next Business Day.

(c) After an Event of Default has occurred and is continuing, each Borrower and its directors, employees, agents, Subsidiaries and other Affiliates shall, acting as trustee for Agent, receive, as the property of Agent, any monies, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts (other than Accounts sold by AAR Receivables Corporation II pursuant to the Securitization Documents), Inventory or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Agent. In no event shall the same be commingled with any Borrower's own funds. Each Borrower agrees to reimburse Agent on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or Person involved in the transfer of funds to or from the Blocked Accounts arising out of Agent's payments to or indemnification of such bank or Person.

(d) No Borrower or other Credit Party shall commingle any proceeds of any of its Accounts with the proceeds of any Account sold to AAR Receivables Corporation II (or any other single purpose Subsidiary formed for the purpose of facilitating a securitization), except temporary commingling as permitted by the Receivables Purchase Agreement, unless any such sold Account is subsequently reconveyed to a Borrower or other Credit Party pursuant to Section 3.4 of the Purchase and Sale Agreement. Each Borrower and each other Credit Party shall diligently maintain for its Accounts Deposit Accounts and books, records and accounts thereof for its Accounts separate from the Accounts, the Deposit Accounts and books and records and accounts therefor of AAR Receivables Corporation II.

SECTION 6.2 INVENTORY. (a) With respect to the Inventory: (i) each Borrower shall at all times maintain, and cause each of its Subsidiaries to maintain, records of Inventory reasonably satisfactory to Agent, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, the cost therefor and daily withdrawals therefrom and additions thereto; (ii) each Borrower shall conduct, and cause each of its Subsidiaries to conduct, a physical count of the Inventory at least once each year but at any time or times as Agent may request on or after an Event of Default, and promptly following such physical inventory shall supply Agent with a report in the form and with such specificity as may be satisfactory to Agent concerning such physical count; (iii) except as otherwise provided on a Borrowing Base Certificate, no Borrower shall sell, and no Borrower shall permit any of its Subsidiaries to sell, Inventory to any customer on approval, or any other basis which entitles the customer to return (except for the right of customers for Inventory which is defective or non-conforming) or may obligate any Credit Party to repurchase such Inventory; (iv) except as otherwise provided on a Borrowing Base Certificate, each Borrower shall keep, and shall cause each of its Subsidiaries to keep, the Inventory in good and marketable condition; and
(v) except as otherwise provided on a Borrowing Base Certificate, no Borrower shall acquire or accept, and

no Borrower shall permit any of its Subsidiaries to acquire or accept, without prior written notice to Agent, any Inventory on consignment or approval. Each Borrower shall and shall cause each of its Subsidiaries to maintain all of its Inventory, in all material respects, in compliance with such Borrower's or Subsidiary's FAA approved maintenance program and all other applicable FAA and other governmental laws, rules and regulations. Without limiting the generality of the foregoing, all FAA Airworthiness Directives and amendments or changes to the Federal Aviation Regulations applicable to any such Inventory and Equipment, as well as all mandatory service bulletins applicable to any such Inventory and Equipment, shall have been accomplished, in all material respects, by terminating action in compliance with the issuing agency's or the manufacturer's specific instructions. No Inventory shall be included in Eligible Inventory if any such Inventory has become an accession to any airplane, airplane engine or other personal property other than Inventory that is subject to first priority Liens in favor of Agent for its benefit and the ratable benefit of Lenders.

(b) Borrowers acknowledge and agree that Agent shall from time to time obtain, at Borrowers' expense, appraisals from appraisers (who may be personnel of an Agent), stating the then current Net Orderly Liquidation Value of Inventory or the value of Equipment included within the Collateral consisting of aircraft and aircraft engines. Such appraisals shall be in form, scope and methodology acceptable to Agent. Each Borrower shall, and shall cause each of its Domestic Subsidiaries to assist Agent or any such appraiser in the preparation of any such appraisals.

(c) None of the inventory or equipment subject to the Air France Parts Lease shall be included as Eligible Inventory or was included in the SH&E appraisal delivered to Agent prior to the Closing Date.

ARTICLE 7
FINANCIAL COVENANTS

Each Borrower agrees, on a joint and several basis, that, so long as any Credit Exposure exists:

SECTION 7.1 CAPITAL EXPENDITURES. Borrowers will not permit the aggregate amount of Capital Expenditures for any period set forth below to exceed the amount set forth below for such period:

              Period                               Amount
              ------                               ------
June 1, 2003 to May 31, 2004 and each           $ 12,000,000
Fiscal Year thereafter

If Borrowers do not utilize the entire amount of Capital Expenditures permitted in any period set forth above, Borrowers may carry forward to the immediately succeeding period only

seventy-five percent (75%) of such unutilized amount (with Capital Expenditures made by Borrowers in such succeeding period applied last to such carried forward amount).

SECTION 7.2 MINIMUM EBITDA. Borrowers will not permit EBITDA for the twelve (12) month period ending on any date set forth below to be less than the amount set forth below for such date:

              Period                               Amount
              ------                               ------
Twelve month period ending August 31,           $ 33,000,000
2003 and each November 30, February 28
(or 29 as applicable), May 31 and
August 31 thereafter

SECTION 7.3 INTEREST COVERAGE RATIO. Borrowers will not permit the Interest Coverage Ratio for the twelve (12) month period ending on any date set forth below to be less than the ratio set forth below for such date.

              Period                             Amount
              ------                             ------
Twelve month period ending August 31,           1.4 to 1
2003 and each November 30, February 28
(or 29 as applicable), May 31 and
August 31 thereafter

ARTICLE 8
CONDITIONS

SECTION 8.1 CONDITIONS TO CLOSING. The obligation of each Lender to make the initial Loans and of Agent to issue any Support Agreements on the Closing Date shall be subject to the receipt by Agent of each agreement, document and instrument set forth on the Closing Checklist, each in form and substance satisfactory to Agent, and to the consummation of the following conditions precedent, each to the satisfaction of Agent and Lenders in their sole discretion:

(a) the payment of all fees, expenses and other amounts due and payable under each Financing Document;

(b) the satisfaction of Agent as to the absence, since May 31, 2002, of any material adverse change in any aspect of the business, operations, properties or financial

condition of AAR and its Subsidiaries, or any event or condition which could reasonably be expected to result in such a material adverse change; and

SECTION 8.2 CONDITIONS TO EACH LOAN AND SUPPORT AGREEMENT. The obligation of the Lenders to make a Loan or of Agent to issue any Support Agreement (including on the Closing Date) is subject to the satisfaction of the following additional conditions:

(a) in the case of a Revolving Loan Borrowing, receipt by Agent of a Notice of Borrowing in accordance with Section 2.2(b);

(b) the fact that, immediately after such borrowing and after application of the proceeds thereof or after such issuance, the Revolving Loan Outstandings will not exceed the Revolving Loan Limit;

(c) the fact that, immediately before and after such borrowing or issuance, no Default or Event of Default shall have occurred and be continuing;

(d) the fact that the representations and warranties of each Credit Party contained in the Financing Documents shall be true and correct on and as of the date of such borrowing or issuance, except to the extent that any such representation or warranty relates to a specific date in which case such representation or warranty shall be true and correct as of such earlier date; and

(e) the fact that, immediately after such borrowing and after the application of the proceeds thereof or after such issuance, AAR's "Debt" (as defined in the Indenture), other than secured "Debt" referenced in Section 1007 of the Indenture is less than the limitations (15% of Consolidated Net Tangible Assets) contained in Section 1011 of the Indenture (or any equivalent section of any replacement for the Indenture) by $3,000,000 or more.

Each borrowing, each giving of a Notice of LC Credit Event hereunder and each giving of a Notice of Borrowing hereunder shall be deemed to be a representation and warranty by Borrower on the date of such borrowing or notice as to the facts specified in Sections 8.2(b), 8.2(c) and 8.2(d).

ARTICLE 9
EVENTS OF DEFAULT

SECTION 9.1 EVENTS OF DEFAULT. For purposes of the Financing Documents, the occurrence of any of the following conditions and/or events, whether voluntary or involuntary, by operation of law or otherwise, shall constitute an "EVENT OF DEFAULT":

(a) Borrowers shall fail to pay when due any principal, interest, premium or fee under any Financing Document or any other amount payable under any Financing Document;

(b) Borrowers shall fail to observe or perform any covenant contained in Section 4.1 (Financial Statements and Other Reports), Section 4.4 (Maintenance of Property; Insurance), Section 4.7 (Use of Proceeds), Section 4.9 (Hazardous Materials; Remediation), Article 5, Article 6 or Article 7; PROVIDED with respect to the covenants contained in Section 4.1, Borrowers shall be entitled to one five (5)-day grace period per Fiscal Year;

(c) any Credit Party defaults in the performance of or compliance with any term contained in this Agreement, in any other Financing Document or in any document, agreement or instrument entered into in connection with Ancillary Services (other than occurrences described in other provisions of this Section 9.1 for which a different grace or cure period is specified or which constitute immediate Events of Default) and such default is not remedied or waived within fifteen (15) days after the earlier of (1) receipt by Borrowers of notice from Agent or Required Lenders of such default or (2) actual knowledge of any Borrower or any other Credit Party of such default;

(d) any representation, warranty, certification or statement made by any Credit Party or any other Person in any Financing Document or in any certificate, financial statement or other document delivered pursuant to any Financing Document is incorrect in any respect (or in any material respect if such representation, warranty, certification or statement is not by its terms already qualified as to materiality) when made (or deemed made);

(e) (1) failure of any Borrower to pay when due or within any applicable grace period any principal, interest or other amount on Debt (other than the Loans), or the occurrence of any breach, default, condition or event with respect to any Debt (other than the Loans), if the effect of such failure or occurrence is to cause or to permit the holder or holders thereof to cause, Debt having an individual principal amount in excess of $3,000,000 or having an aggregate principal amount in excess of $3,000,000 to become or be declared due prior to its stated maturity or (2) the occurrence of any breach or default under any terms or provisions of any of the Indenture Documents, the Note Purchase Documents or the Securitization Documents;

(f) any Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing;

(g) an involuntary case or other proceeding shall be commenced against any Borrower seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against any Credit Party under the federal bankruptcy laws as now or hereafter in effect;

(h) (1) institution of any steps by any Person to terminate a Pension Plan if as a result of such termination any Credit Party or any member of the Controlled Group could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $3,000,000, (2) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA, or (3) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that any Credit Party or any member of the Controlled Group have incurred on the date of such withdrawal) exceeds $3,000,000;

(i) one or more judgments or orders for the payment of money aggregating in excess of $1,000,000 shall be rendered against any or all Borrowers and such judgments or orders shall continue unsatisfied and unstayed for a period of thirty (30) days;

(j) (i) a Change of Control shall have occurred or (ii) except in connection with a disposition permitted pursuant to Section 5.6, AAR shall cease to, directly or indirectly, own and control one hundred percent (100%) of each class of the outstanding equity interests of each of its Subsidiaries;

(k) the accountant's report or reports on the audited statements delivered pursuant to Section 4.1(b) shall include any material qualification (including with respect to the scope of audit) or exception;

(l) any Lien on Collateral with a value of $1,000,00 or more created by any of the Security Documents shall at any time fail to constitute a valid and perfected Lien, subject to no prior or equal Lien except Permitted Liens, or any Credit Party shall so assert in writing; or

(m) Borrowers shall be prohibited or otherwise restrained, in any manner evidencing or having a Material Adverse Effect, from conducting the business theretofore conducted by them by virtue of any casualty, any labor strike, any determination, ruling, decision, decree or order of any court or regulatory authority of competent jurisdiction or any other event, such casualty, labor strike, determination, ruling, decision, decree, order or other event remains unstayed and in effect for any period of ten (10) days.

SECTION 9.2 ACCELERATION AND SUSPENSION OR TERMINATION OF REVOLVING LOAN COMMITMENT. Upon the occurrence and during the continuance of an Event of Default, Agent may, and shall if requested by Required Lenders, (i) by notice to Borrowers suspend or terminate the Revolving Loan Commitment, in whole or in part (and, if in part, such reduction shall be pro rata among the Lenders having a Revolving Loan Commitment Percentage) and/or (ii) by notice to Borrowers declare the Obligations to be, and the Obligations shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by Borrowers and Borrowers will pay the same; provided that in the case of any of the Events of Default specified in
Section 9.1(f) or 9.1(g) above, without any notice to Borrowers or any other act by Agent or the Lenders, the Revolving Loan Commitment shall thereupon terminate and all of the Obligations shall become immediately due and payable

without presentment, demand, protest or other notice of any kind, all of which are hereby waived by Borrowers and Borrowers will pay the same.

SECTION 9.3 CASH COLLATERAL. If (i) any Event of Default specified in
Section 9.1(f) or 9.1(g) shall occur, (ii) the Obligations shall have otherwise been accelerated pursuant to Section 9.2 or (iii) the Revolving Loan Commitment shall have been terminated pursuant to Section 9.2, then without any request or the taking of any other action by Agent or the Lenders, Borrowers shall immediately comply with the provisions of Section 2.4(e) with respect to the deposit of cash collateral to secure the existing Letter of Credit Liability and future payment of related fees.

SECTION 9.4 DEFAULT RATE OF INTEREST AND SUSPENSION OF LIBOR RATE OPTIONS. At the election of Agent or Required Lenders, after the occurrence of an Event of Default and for so long as it continues, the Loans and other Obligations shall bear interest at rates that are two percent (2.0%) in excess of the rates otherwise payable under this Agreement. Furthermore, at the election of Agent or Required Lenders during any period in which any Event of Default is continuing (x) as the Interest Periods for LIBOR Loans then in effect expire, such Loans shall be converted into Prime Rate Loans and (y) the LIBOR election will not be available to Borrowers.

SECTION 9.5 SETOFF RIGHTS. During the continuance of any Event of Default, each Lender is hereby authorized by each Borrower at any time or from time to time, with reasonably prompt subsequent notice to Borrowers (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (A) balances held by such Lender at any of its offices for the account of any Borrower or any of its Subsidiaries (regardless of whether such balances are then due to any Borrower or its Subsidiaries), and (B) other property (unless such property secures Debt (other than the Obligations) permitted hereby) at any time held or owing by such Lender to or for the credit or for the account of any Borrower or any of its Subsidiaries, against and on account of any of the Obligations; except that no Lender shall exercise any such right without the prior written consent of Agent. Any Lender exercising a right to set off shall purchase for cash (and the other Lenders shall sell) interests in each of such other Lender's Pro Rata Share of the Obligations as would be necessary to cause all Lenders to share the amount so set off with each other Lender in accordance with their respective Pro Rata Share of the Obligations. Each Borrower agrees, to the fullest extent permitted by law, that any Lender may exercise its right to set off with respect to the Obligations as provided in this Section 9.5.

SECTION 9.6 APPLICATION OF PROCEEDS. Notwithstanding anything to the contrary contained in this Agreement, upon the occurrence and during the continuance of an Event of Default, (a) each Borrower irrevocably waives the right to direct the application of any and all payments at any time or times thereafter received by Agent from or on behalf of any Borrower or any guarantor of all or any part of the Obligations, and Agent shall have the continuing and exclusive right to apply and to reapply any and all payments received at any time or times after the occurrence and during the continuance of an Event of Default against the Obligations in such manner as Agent may deem advisable notwithstanding any previous application by Agent and (b) in the absence of a specific determination by Agent with respect thereto, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied: FIRST, to all fees, costs, indemnities and expenses incurred by or owing to Agent and any Designated Lender

Affiliate that is an Affiliate of Agent, with respect to this Agreement, the other Financing Documents, any Ancillary Services or the Collateral; SECOND, to all fees, costs, indemnities and expenses incurred by or owing to any Lender and any Designated Lender Affiliate that is an Affiliate of any Lender, with respect to this Agreement, the other Financing Documents, any Ancillary Services or the Collateral; THIRD, to accrued and unpaid interest on the Obligations (including any interest which but for the provisions of the U.S. Bankruptcy Code, would have accrued on such amounts); FOURTH, to the principal amount of the Obligations outstanding; and FIFTH to any other indebtedness or obligations of any Borrower owing to Agent, any Lender or any Designated Lender Affiliate under the Financing Documents or with respect to Ancillary Services. Any balance remaining shall be delivered to Borrowers or to whomever may be lawfully entitled to receive such balance or as a court of competent jurisdiction may direct.

SECTION 9.7 NON-RECOURSE GUARANTORS. Notwithstanding any other provision of this Agreement or any of the other Financing Documents, Lenders' and Agent's sole right to recover from each Non-Recourse Guarantor shall be limited to the Collateral pledged by such Non-Recourse Guarantor and no Lender or Agent, acting on behalf of Lenders, shall have any right of recourse against any other asset of such Non-Recourse Guarantor nor against such Non-Recourse Guarantor individually.

ARTICLE 10
EXPENSES, INDEMNITY, TAXES AND RIGHT TO PERFORM

SECTION 10.1 EXPENSES. Borrowers hereby agree to promptly pay (i) all reasonable costs and expenses of Agent (including without limitation the fees, costs and expenses of counsel to, and independent appraisers and consultants retained by Agent) in connection with the examination, review, due diligence investigation, documentation, negotiation and closing of the transactions contemplated by the Financing Documents, in connection with the performance by Agent of its rights and remedies under the Financing Documents and in connection with the continued administration of the Financing Documents including any amendments, modifications, consents and waivers to and/or under any and all Financing Documents, (ii) without limitation of the preceding clause (i), all reasonable costs and expenses of Agent in connection with the creation, perfection and maintenance of Liens pursuant to the Financing Documents, including title investigations, (iii) without limitation of the preceding clause
(i), expenses of Agent in connection with protecting, storing, insuring, handling, maintaining or selling any Collateral and in connection with any workout, collection, bankruptcy, insolvency and other enforcement proceedings under any and all of the Financing Documents, and (iv) all costs and expenses incurred by Lenders in connection with any workout, collection, bankruptcy, insolvency and other enforcement proceedings under any and all Financing Documents, provided, that to the extent that the costs and expenses referred to in this clause (iv) consist of fees, costs and expenses of counsel, Borrowers shall be obligated to pay such reasonable fees, costs and expenses for only one counsel acting for all Lenders (including Agent).

SECTION 10.2 INDEMNITY. Borrowers hereby agree to indemnify, pay and hold harmless Agent and Lenders and the officers, directors, employees and counsel of Agent and Lenders (collectively called the "INDEMNITEES") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the fees and disbursements of counsel for such

Indemnitee) in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitee shall be designated a party thereto and including any such proceeding initiated by or on behalf of a Borrower, and the reasonable expenses of investigation by engineers, environmental consultants and similar technical personnel and any commission, fee or compensation claimed by any broker (other than any broker retained by Agent or Lenders) asserting any right to payment for the transactions contemplated hereby, which may be imposed on, incurred by or asserted against such Indemnitee as a result of or in connection with the transactions contemplated hereby or by the other Operative Documents (including (i)(A) as a direct or indirect result of the presence on or under, or escape, seepage, leakage, spillage, discharge, emission or release from, any Real Property now or previously owned, leased or operated by any Borrower, any Subsidiary or any other Person of any Hazardous Materials or any Hazardous Materials Contamination, (B) arising out of or relating to the offsite disposal of any materials generated or present on any such Real Property or (C) arising out of or resulting from the environmental condition of any such Real Property or the applicability of any governmental requirements relating to Hazardous Materials, whether or not occasioned wholly or in part by any condition, accident or event caused by any act or omission of any Borrower or any Subsidiary, and (ii) proposed and actual extensions of credit under this Agreement) and the use or intended use of the proceeds of the Notes and Letters of Credit, except that Borrowers shall have no obligation hereunder to an Indemnitee with respect to any liability resulting from the gross negligence or willful misconduct of such Indemnitee, as determined by a court of competent jurisdiction. To the extent that the undertaking set forth in the immediately preceding sentence may be unenforceable, Borrowers shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all such indemnified liabilities incurred by the Indemnitees or any of them.

SECTION 10.3 TAXES. Borrowers agree to pay all governmental assessments, charges or taxes (except income or other similar taxes imposed on Agent or Lenders), including any interest or penalties thereon, at any time payable or ruled to be payable in respect of the existence, execution or delivery of this Agreement or the other Financing Documents or the issuance of the Notes or Letters of Credit and to indemnify and hold Agent and Lenders harmless against liability in connection with any such assessments, charges or taxes.

SECTION 10.4 RIGHT TO PERFORM. If any Credit Party fails to perform any obligation hereunder or under any other Financing Document, Agent itself may, but shall not be obligated to, cause such obligation to be performed at Borrowers' expense and Borrowers agree to reimburse Agent therefor on demand. All amounts owing hereunder or under any other Financing Document may be satisfied in full, subject to the provisions of Section 2.2(a)(ii), through the making of Agent Advances.

ARTICLE 11
AGENT

SECTION 11.1 APPOINTMENT AND AUTHORIZATION. Each Lender hereby irrevocably appoints and authorizes Agent to enter into each of the Security Documents on its behalf and to take such actions as Agent on its behalf and to exercise such powers under the Financing Documents as are delegated to Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. Except as otherwise expressly provided in Section 12.5 or by the

terms of the Financing Documents, Agent is authorized and empowered to amend, modify, or waive any provisions of this Agreement or the other Financing Documents on behalf of Lenders. The provisions of this Article 11 are solely for the benefit of Agent and Lenders and neither any Borrower nor any other Credit Party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, Agent shall act solely as agent of Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for any Borrower or any other Credit Party. Agent may perform any of its duties hereunder, or under the Financing Documents, by or through its agents or employees.

SECTION 11.2 AGENT AND AFFILIATES. Agent shall have the same rights and powers under the Financing Documents as any other Lender and may exercise or refrain from exercising the same as though it were not Agent, and Agent and its Affiliates may lend money to, invest in and generally engage in any kind of business with each Credit Party or Affiliate of any Credit Party as if it were not Agent hereunder.

SECTION 11.3 ACTION BY AGENT. The duties of Agent shall be mechanical and administrative in nature. Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender. Nothing in this Agreement or any of the Financing Documents, express or implied, is intended to or shall be construed to impose upon Agent any obligations in respect of this Agreement or any of the Financing Documents except as expressly set forth herein or therein.

SECTION 11.4 CONSULTATION WITH EXPERTS. Agent may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.

SECTION 11.5 LIABILITY OF AGENT. Neither Agent nor any of its directors, officers, agents or employees shall be liable to any Lender for any action taken or not taken by it in connection with the Financing Documents, except that Agent shall be liable to the extent of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Neither Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with any Financing Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements specified in any Financing Agreement; (iii) the satisfaction of any condition specified in any Financing Document, except receipt of items required to be delivered to Agent; (iv) the validity, effectiveness, sufficiency or genuineness of any Financing Document, any Lien purported to be created or perfected thereby or any other instrument or writing furnished in connection therewith; (v) the existence or non-existence of any Default or Event of Default; or (vi) the financial condition of any Credit Party. Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile or electronic transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Agent shall not be liable for any apportionment or distribution of payments made by it in good faith and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Lender to whom payment was due but not made, shall be to recover

from other Lenders any payment in excess of the amount to which they are determined to be entitled (and such other Lenders hereby agree to return to such Lender any such erroneous payments received by them).

SECTION 11.6 INDEMNIFICATION. Each Lender shall, in accordance with its Pro Rata Share, indemnify Agent (to the extent not reimbursed by Borrowers) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from Agent's gross negligence or willful misconduct as determined by a court of competent jurisdiction) that Agent may suffer or incur in connection with the Financing Documents or any action taken or omitted by Agent hereunder or thereunder. If any indemnity furnished to Agent for any purpose shall, in the opinion of Agent, be insufficient or become impaired, Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against even if so directed by Required Lenders until such additional indemnity is furnished. The obligations of Lenders under this Section 11.6 shall survive the payment in full of the Obligations and the termination of this Agreement.

SECTION 11.7 RIGHT TO REQUEST AND ACT ON INSTRUCTIONS. Agent may at any time request instructions from Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Financing Documents Agent is permitted or desires to take or to grant, and if such instructions are promptly requested, Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Financing Documents until it shall have received such instructions from Required Lenders or all or such other portion of the Lenders as shall be prescribed by this Agreement. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting under this Agreement or any of the other Financing Documents in accordance with the instructions of Required Lenders and, notwithstanding the instructions of Required Lenders, Agent shall have no obligation to take any action if it believes, in good faith, that such action exposes Agent to any liability for which it has not received satisfactory indemnification in accordance with the provisions of Section 11.6.

SECTION 11.8 CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Financing Documents.

SECTION 11.9 COLLATERAL MATTERS. Lenders irrevocably authorize Agent, at its option and in its discretion, to release any Lien granted to or held by Agent under any Security Document (i) upon termination of the Revolving Loan Commitment and payment in full of all Obligations and the expiration, termination or cash collateralization (to the satisfaction of Agent) of all Letters of Credit; or (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted under any Financing Document (it being understood and agreed that Agent may conclusively rely without further inquiry on a certificate of a Responsible Officer as to the sale or other disposition of property being made in full

compliance with the provisions of the Financing Documents). Upon request by Agent at any time, Lenders will confirm in writing Agent's authority to release particular types or items of Collateral pursuant to this Section 11.9.

SECTION 11.10 AGENCY FOR PERFECTION. Agent and each Lender hereby appoint each other Lender as agent for the purpose of perfecting Agent's security interest in assets which, in accordance with the Uniform Commercial Code in any applicable jurisdiction, can be perfected by possession or control. Should any Lender (other than Agent) obtain possession or control of any such assets, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefore, shall deliver such assets to Agent or in accordance with Agent's instructions or transfer control to Agent in accordance with Agent's instructions. Each Lender agrees that it will not have any right individually to enforce or seek to enforce any Security Document or to realize upon any Collateral for the Loans unless instructed to do so by Agent, it being understood and agreed that such rights and remedies may be exercised only by Agent.

SECTION 11.11 NOTICE OF DEFAULT. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to Agent for the account of Lenders, unless Agent shall have received written notice from a Lender or Borrowers referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". Agent will notify each Lender of its receipt of any such notice. Agent shall take such action with respect to such Default or Event of Default as may be requested by Required Lenders in accordance with the terms hereof. Unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interests of Lenders.

SECTION 11.12 SUCCESSOR AGENT. Agent may resign at any time by giving written notice thereof to the Lenders and Borrowers. Upon any such resignation, Required Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by Required Lenders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of Lenders, appoint a successor Agent, which shall be an institution organized or licensed under the laws of the United States of America or of any State thereof. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.

SECTION 11.13 DISBURSEMENTS OF REVOLVING LOANS; PAYMENT.

(a) REVOLVING LOAN ADVANCES, PAYMENTS AND SETTLEMENTS; INTEREST AND FEE PAYMENTS.

(i) Agent shall have the right, on behalf of Lenders, to disburse funds to Borrowers for all Revolving Loans requested by AAR, on its own behalf and on behalf

of each other Borrower pursuant to the terms of this Agreement. Absent the prior receipt by Agent of a written notice from any Lender pursuant to which such Lender notifies Agent that such Lender shall cease making Revolving Loans (whether due to the existence of a Default or Event of Default or otherwise), Agent shall be conclusively entitled to assume, for purposes of the preceding sentence, that each Lender will fund its Pro Rata Share of all Revolving Loans requested by Borrower. Each Lender shall reimburse Agent on demand, in accordance with the provisions of the immediately following paragraph, for all funds disbursed on its behalf by Agent pursuant to the preceding sentence, or if Agent so requests, each Lender will remit to Agent its Pro Rata Share of any Revolving Loan before Agent disburses the same to Borrowers. If Agent elects to require that each Lender make funds available to Agent, prior to a disbursement by Agent to Borrowers, Agent shall advise each Lender by telephone, facsimile or e-mail of the amount of such Lender's Pro Rata Share of the Revolving Loan requested by AAR on its own behalf and on behalf of each other Borrower no later than noon (Chicago time) on the date of funding of such Revolving Loan, and each such Lender shall pay Agent on such date such Lender's Pro Rata Share of such requested Revolving Loan, in same day funds, by wire transfer to the Payment Account, or such other account as may be identified in writing by Agent to Lenders from time to time. If any Lender fails to pay the amount of its Pro Rata Share within one (1) Business Day after Agent's demand, Agent shall promptly notify Borrowers, and Borrowers shall immediately repay such amount to Agent. Any repayment required pursuant to this Section 11.13 shall be without premium or penalty. Nothing in this
Section 11.13 or elsewhere in this Agreement or the other Financing Documents shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Agent or Borrowers may have against any Lender as a result of any default by such Lender hereunder.

(ii) On a Business Day of each week as selected from time to time by Agent, or more frequently (including daily), if Agent so elects (each such day being a "SETTLEMENT DATE"), Agent will advise each Lender by telephone, facsimile or e-mail of the amount of each such Lender's Pro Rata Share of the Revolving Loan balance (including any Agent Advances) as of the close of business of the Business Day immediately preceding the Settlement Date. In the event that payments are necessary to adjust the amount of such Lender's actual Pro Rata Share of the Revolving Loan balance to such Lender's required Pro Rata Share of the Revolving Loan balance as of any Settlement Date, the party from which such payment is due (i) shall be deemed, irrevocably and unconditionally, to have purchased, without recourse or warranty, an undivided interest and participation in the Revolving Loans sufficient to equate such Lender's actual Pro Rata Share of the Revolving Loan balance as of such Settlement Date with such Lender's required Pro Rata Share of the Revolving Loans as of such date and (ii) shall pay Agent, without setoff or discount, in same day funds, by wire transfer to the Payment Account not later than noon (Chicago time) on the Business Day following the Settlement Date the full purchase price for such interest and participation, equal to one hundred percent (100%) of the principal amount of the Revolving Loans being purchased and sold. In the event settlement shall not have occurred by the date and time specified in the immediately preceding sentence, interest shall accrue on the unsettled amount at the

Federal Funds Rate, for the first three (3) days following the scheduled date of settlement, and thereafter at the Prime Rate PLUS the Prime Rate Margin.

(iii) On each Settlement Date, Agent shall advise each Lender by telephone, facsimile or e-mail of the amount of such Lender's Pro Rata Share of principal, interest and fees paid for the benefit of Lenders with respect to each applicable Loan, to the extent of such Lender's credit exposure with respect thereto, and shall make payment to such Lender not later than noon (Chicago time) on the Business Day following the Settlement Date of such amounts in accordance with wire instructions delivered by such Lender to Agent, as the same may be modified from time to time by written notice to Agent; provided, that, in the case such Lender is a Defaulted Lender, Agent shall be entitled to set off the funding short-fall against that Defaulted Lender's respective share of all payments received from Borrowers.

(iv) The provisions of this Section 11.13(a) shall be deemed to be binding upon Agent and Lenders notwithstanding the occurrence of any Default or Event of Default, or any insolvency or bankruptcy proceeding pertaining to any Borrower or any other Credit Party.

(b) RETURN OF PAYMENTS.

(i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from any Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender on demand without setoff, counterclaim or deduction of any kind, together with interest accruing on a daily basis at the Federal Funds Rate.

(ii) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to any Borrower or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Financing Document, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to such Borrower or such other Person, without setoff, counterclaim or deduction of any kind.

(c) DEFAULTED LENDERS. The failure of any Defaulted Lender to make any Revolving Loan or any payment required by it hereunder shall not relieve any other Lender of its obligations to make such Revolving Loan or payment, but neither any Lender nor Agent shall be responsible for the failure of any Defaulted Lender to make a Revolving Loan or make any other payment required hereunder. Notwithstanding anything set forth herein to the contrary, a Defaulted Lender shall not have any voting or consent rights under or with respect to any Financing Document or constitute a "Lender" (or be included in the calculation of "Required Lenders" hereunder) for any voting or consent rights under or with respect to any Financing Document. At Borrowers' request, Agent or a Person reasonably acceptable to Agent shall have the right with Agent's consent and in Agent's sole discretion (but shall have no obligation) to

purchase from any Defaulted Lender, and each Defaulted Lender agrees that it shall, at Agent's request, sell and assign to Agent or such Person, all of the lending commitments and commitment interests of that Defaulted Lender for an amount equal to the principal balance of all Loans held by such Defaulted Lender and all accrued interest and fees with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment Agreement.

ARTICLE 12
MISCELLANEOUS

SECTION 12.1 SURVIVAL. All agreements, representations and warranties made herein and in every other Financing Document shall survive the execution and delivery of this Agreement and the other Financing Documents and the other Operative Documents and the execution, sale and delivery of the Notes. The indemnities and agreements set forth in Article 6 and Article 10 shall survive the payment of the Obligations and any termination of this Agreement.

SECTION 12.2 NO WAIVERS. No failure or delay by Agent or any Lender in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein and therein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

SECTION 12.3 NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including hand delivery, prepaid overnight courier, facsimile transmission, e-mail or similar writing) and shall be given to such party at its address, facsimile number or e-mail address set forth on the signature pages hereof (or, in the case of any such Lender who becomes a Lender after the date hereof, in an Assignment Agreement or in a notice delivered to Borrowers and Agent by the assignee Lender forthwith upon such assignment) or at such other address, facsimile number or e-mail address as such party may hereafter specify for the purpose by notice to Agent and Borrowers; PROVIDED, that notices, requests or other communications shall be permitted by e-mail only where expressly provided in the Financing Documents. Each such notice, request or other communication shall be effective (i) if given by facsimile or e-mail, when such notice is transmitted to the facsimile number or e-mail address specified by this Section or (ii) if given by mail, e-mail, hand delivery, prepaid overnight courier or any other means, when received at the applicable address specified by this Section.

SECTION 12.4 SEVERABILITY. In case any provision of or obligation under this Agreement or the Notes or any other Financing Document shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.

SECTION 12.5 AMENDMENTS AND WAIVERS. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by Borrowers and the Required Lenders (and, if (x) any amendment would increase either such Lender's Revolving Loan Commitment Amount by such Lender and (y) the rights or duties of Agent or LC Issuer are affected thereby, by Agent or the LC Issuer, as the case may be);

provided that no such amendment or waiver shall, unless signed by all the Lenders; (i) reduce the principal of, rate of interest on or any fees with respect to any Loan or Reimbursement Obligation; (ii) postpone the date fixed for any payment (other than a payment pursuant to Section 2.1(c)) of principal of any Loan, or of any Reimbursement Obligation or of interest on any Loan or any Reimbursement Obligation or any fees hereunder or for any termination of any commitment; (iii) change the definition of the term Required Lenders or the percentage of Lenders which shall be required for Lenders to take any action hereunder; (iv) amend or waive this Section 11.5 or the definitions of the terms used in this Section 11.5 insofar as the definitions affect the substance of this Section 11.5; (v) consent to the assignment, delegation or other transfer by any Credit Party of any of its rights and obligations under any Financing Document; or (vi) increase any of the advance rates by more than five (5) percentage points each in the aggregate or decrease the dollar amounts set forth in the definition of Borrowing Base by more than $1,000,000 set forth in the Borrowing Base Certificate.

SECTION 12.6 ASSIGNMENTS; PARTICIPATIONS.

(a) ASSIGNMENTS.

(i) Any Lender may at any time assign to one or more Persons (any such Person, an "ASSIGNEE") all or any portion of such Lender's Loans and interest in the Revolving Loan Commitment, with the prior written consent of Agent and, so long as no Event of Default exists, Borrowers (which consent shall not be unreasonably withheld or delayed and shall not be required for an assignment by a Lender to a Lender or to an Affiliate of a Lender). Except as Agent may otherwise agree, any such assignment shall be in a minimum aggregate amount equal to $5,000,000 or, if less, the assignor's entire interests in the Revolving Loan Commitment and outstanding Loans. Borrowers and Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned to an Assignee until Agent shall have received and accepted an effective Assignment Agreement executed, delivered and fully completed by the applicable parties thereto and a processing fee of $3,500. Any attempted assignment not made in accordance with this Section 12.6(a) shall be treated as the sale of a participation under Section 12.6(b). Borrowers shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless Borrowers have expressly objected to such assignment within three (3) Business Days after notice thereof.

(ii) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (ii) the assigning Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, the assigning Lender) pursuant to an effective Assignment Agreement, Borrowers shall execute and deliver to Agent for delivery to the Assignee (and, as applicable, the assigning Lender) Notes in the aggregate principal amount of the Assignee's percentage interest in the Revolving Loan

Commitment (and, as applicable, Notes in the principal amount of that portion of the Revolving Loan Commitment retained by the assigning Lender). Upon receipt by the assigning Lender of such Note, the assigning Lender shall return to Borrowers any prior Note held by it.

(iii) Agent shall maintain at one of its offices a copy of each Assignment Agreement delivered to it and a register for the recordation of the names and addresses of each Lender, and the commitments of, and principal amount of the Loans owing to, such Lender pursuant to the terms hereof. The entries in such register shall be conclusive, and Borrowers, Agent and Lenders may treat each Person whose name is recorded therein pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. Such register shall be available for inspection by Borrowers and any Lender, at any reasonable time upon reasonable prior notice to Agent.

(iv) Notwithstanding the foregoing provisions of this
Section 12.6(a) or any other provision of this Agreement, any Lender may at any time assign all or any portion of its Loans and its Note as collateral security to a Federal Reserve Bank or, as applicable, to such Lender's trustee for the benefit of its investors (but no such assignment shall release any Lender from any of its obligations hereunder).

(b) PARTICIPATIONS. Any Lender may at any time sell to one or more Persons participating interests in its Loans, commitments or other interests hereunder (any such Person, a "PARTICIPANT"). In the event of a sale by a Lender of a participating interest to a Participant, (a) such Lender's obligations hereunder shall remain unchanged for all purposes, (b) Borrowers and Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations hereunder and (c) all amounts payable by Borrowers shall be determined as if such Lender had not sold such participation and shall be paid directly to such Lender. No Participant shall have any direct or indirect voting rights hereunder except with respect to any event described in Section 12.5 expressly requiring the unanimous vote of all Lenders or, as applicable, all affected Lenders. Each Lender agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Lender enters into with any Participant. Borrowers agree that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement and with respect to any Letter of Credit to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with Lenders, and Lenders agree to share with each Participant, as provided in Section 9.5.

SECTION 12.7 HEADINGS. Headings and captions used in the Financing Documents (including the Exhibits, Schedules and Annexes hereto and thereto) are included for convenience of reference only and shall not be given any substantive effect.

SECTION 12.8 CONFIDENTIALITY. In handling any confidential information of any Credit Party, Agent and each Lender shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public

information thereby received or received pursuant to this Agreement, except that disclosure of such information may be made (i) to agents, employees, Subsidiaries, Affiliates, attorneys and advisors of such Person in connection with its present or prospective business relations with the Credit Parties arising out of the Financing Documents, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have agreed to be bound by the provision of this Section 12.8, (iii) as required by law, regulation, rule, request or order, subpoena, judicial order or similar order and in connection with any litigation and (iv) as may be required in connection with the examination, audit or similar investigation of such Person. Confidential information shall include only such information identified as such at the time provided to Agent and shall not include information that either: (i) is in the public domain, or becomes part of the public domain after disclosure to such Person through no fault of such Person, or (ii) is disclosed to such Person by a third party, provided Agent does not have actual knowledge that such third party is prohibited from disclosing such information.

SECTION 12.9 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT, EACH NOTE AND EACH OTHER FINANCING DOCUMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. EACH BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER FINANCING DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON SUCH BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

SECTION 12.10 WAIVER OF JURY TRIAL. EACH OF EACH BORROWER, AGENT AND THE LENDERS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

SECTION 12.11 PUBLICATION; ADVERTISEMENT.

(a) PUBLICATION. No Credit Party will directly or indirectly publish, disclose or otherwise use in any public disclosure, advertising material, promotional material, press release or interview, any reference to the name, logo or any trademark of Merrill Lynch or any of its

Affiliates or any reference to this Agreement or the financing evidenced hereby, in any case without Merrill Lynch's prior written consent.

(b) ADVERTISEMENT. Each Credit Party hereby authorizes Merrill Lynch to publish the name of such Credit Party and the amount of the financing evidenced hereby in any "tombstone" or comparable advertisement which Merrill Lynch elects to publish. In addition, each Credit Party agrees that Merrill Lynch may provide lending industry trade organizations with information necessary and customary for inclusion in league table measurements after the Closing Date. With respect to any of the foregoing, Merrill Lynch shall provide Borrowers with an opportunity to review and confer with Merrill Lynch regarding the contents of any such tombstone, advertisement or information, as applicable, prior to its publication.

SECTION 12.12 COUNTERPARTS; INTEGRATION. This Agreement and the other Financing Documents may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement and the other Financing Documents constitute the entire agreement and understanding among the parties hereto and supersede any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.

SECTION 12.13 REIMBURSEMENT. The undertaking by Borrowers to repay the Obligations and each representation, warranty or covenant of each Borrower are and shall be joint and several. To the extent that any Borrower shall be required to pay a portion of the Obligations which shall exceed the amount of loans, advances or other extensions of credit received by any such Borrower and all interest, costs, fees and expenses attributable to such loans, advances or other extensions of credit, then such Borrower shall be reimbursed by the other Borrower for the amount of such excess. This Section 12.13 is intended only to define the relative rights of Borrowers, and nothing set forth in Section 12.13 is intended or shall impair the obligations of each Borrower, jointly and severally, to pay to Agent and Lenders the Obligations as and when the same shall become due and payable in accordance with the terms hereof.

(SIGNATURE PAGE FOLLOWS)

(SIGNATURE PAGE TO CREDIT AGREEMENT)

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

AAR CORP.

By:/s/ TIMOTHY J. ROMENESKO
   --------------------------------
   Name: Timothy J. Romenesko
   Title: Vice President

Address: c/o AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, IL 60191
Attn: Chief Financial Officer

Facsimile number: 630-227-2101

AAR DISTRIBUTION, INC.

By:/s/ TIMOTHY J. ROMENESKO
   --------------------------------
   Name: Timothy J. Romenesko
   Title: Vice President

Address: c/o AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, IL 60191
Attn: Chief Financial Officer

Facsimile number: 630-227-2101

AAR PARTS TRADING, INC.

By:/s/ TIMOTHY J. ROMENESKO
   ------------------------------------
   Name: Timothy J. Romenesko
   Title: Vice President

Address: c/o AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, IL 60191
Attn: Chief Financial Officer

Facsimile number: 630-227-2101

AAR MANUFACTURING, INC.

By:/s/ TIMOTHY J. ROMENESKO
   ------------------------------------
   Name: Timothy J. Romenesko
   Title: Vice President

Address: c/o AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, IL 60191
Attn: Chief Financial Officer

Facsimile number: 630-227-2101

AAR ENGINE SERVICES, INC.

By:/s/ TIMOTHY J. ROMENESKO
   ------------------------------------
   Name: Timothy J. Romenesko
   Title: Vice President

Address: c/o AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, IL 60191
Attn: Chief Financial Officer

Facsimile number: 630-227-2101

AAR ALLEN SERVICES, INC.

By:/s/ TIMOTHY J. ROMENESKO
   ------------------------------------
   Name: Timothy J. Romenesko
   Title: Vice President

Address: c/o AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, IL 60191
Attn: Chief Financial Officer

Facsimile number: 630-227-2101

BORROWER'S ACCOUNT DESIGNATION:

LASALLE BANK NATIONAL ASSOCIATION
Chicago, Illinois
ABA No.: 071000505
Account No.: 5800415597
Account Name: AAR Corp. Concentration
Account
Reference: AAR Corp.
ACH Telephone number: 312-904-5454
Bank Official: Scott Carbon
Telephone number: 312-904-4818

MERRILL LYNCH CAPITAL, a division of
Merrill Lynch Business Financial Services Inc., as
Agent and a Lender

By:/s/ MARK K. GERTZOF
   ------------------------------------
   Name: Mark K. Gertzof
   Title: Director

Address:222 North LaSalle Street, 17th Floor Chicago, Illinois 60601 Attn: Legal Department

Facsimile number: 312-499-3245 E-Mail Address: dhollowell@exchange.ml.com

PAYMENT ACCOUNT DESIGNATION:

LASALLE BANK NATIONAL ASSOCIATION
Chicago, Illinois
ABA No.: 071000505
Account No.: 5800393182
Account Name: MLBFS - Corporate Finance
Reference: AAR Corp.

ANNEX A

COMMITMENT ANNEX

                   Revolving Loan      Revolving Loan
                     Commitment          Commitment
     Lender            Amount            Percentage
-----------------------------------------------------
Merrill Lynch
Capital              $ 30,000,000           100%

TOTALS               $ 30,000,000           100%

ANNEX B

CLOSING CHECKLIST

[MERRILL LYNCH LOGO] Exhibit A to Credit Agreement (Assignment Agreement)

This Assignment Agreement (this "ASSIGNMENT AGREEMENT") is entered into as of __________ by and between the Assignor named on the signature page hereto ("ASSIGNOR") and the Assignee named on the signature page hereto ("ASSIGNEE"). Reference is made to the Credit Agreement dated as of May 29, 2003 (as amended or otherwise modified from time to time, the "CREDIT AGREEMENT") among AAR Corp., AAR Distribution, Inc., AAR Parts Trading, Inc., AAR Manufacturing, Inc., AAR Engine Services, Inc. and AAR Allen Services, Inc. (individually, a "BORROWER" and collectively "BORROWERS"), the financial institutions party thereto from time to time, as Lenders, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Agent. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement.

Assignor and Assignee hereby agree as follows:

1. Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor the interests set forth on the schedule attached hereto (the "SCHEDULE"), in and to Assignor's rights and obligations under the Credit Agreement as of the effective date set forth on the Schedule (the "EFFECTIVE DATE"). Such purchase and sale is made without recourse, representation or warranty except as expressly set forth herein. On the Effective Date, Assignee shall pay to Assignor an amount equal to the aggregate amounts assigned pursuant to the Schedule (exclusive of unfunded portions of the Revolving Loan Commitment) and Assignor shall pay to Assignee a closing fee in respect of the transactions contemplated hereby in the amount specified on the Schedule.

2. Assignor (i) represents that as of the Effective Date, that it is the legal and beneficial owner of the interests assigned hereunder free and clear of any adverse claim, (ii) makes no other representation or warranty and assumes no responsibility with respect to any statement, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Financing Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any other Credit Party or any other Person or the performance or observance by any Credit Party of its Obligations under the Credit Agreement or any other Financing Documents or any other instrument or document furnished pursuant thereto.

3. Assignee (i) confirms that it has received a copy of the Credit Agreement and the other Financing Documents, together with copies of the most recent financial statements delivered pursuant thereto and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (ii) agrees that it will, independently and without reliance upon Agent, Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement and the other Financing Documents as are

Exhibit A - Page 1

delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (iv) agrees that it will perform in accordance with their terms all obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (v) represents that on the date of this Assignment Agreement it is not presently aware of any facts that would cause it to make a claim under the Credit Agreement; (vi) represents and warrants that Assignee is not a foreign person (i.e., a person other than a United States person for United States Federal income tax purposes) or, if it is a foreign person, that it has delivered to Agent the documentation required to be delivered to Agent by Section 13 below; and (vii) represents and warrants that it has experience and expertise in the making or the purchasing of loans such as the Loans, and that it has acquired the interests described herein for its own account and without any present intention of selling all or any portion of such interests.

4. Each of Assignor and Assignee represents and warrants to the other party hereto that it has full power and authority to enter into this Assignment Agreement and to perform its obligations hereunder in accordance with the provisions hereof, that this Assignment Agreement has been duly authorized, executed and delivered by such party and that this Assignment Agreement constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity.

5. Upon the effectiveness of this Assignment Agreement pursuant to Section 13 below, (i) Agent shall register Assignee as a Lender, pursuant to the terms of the Credit Agreement, (ii) Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment Agreement, have the rights and obligations of a Lender thereunder, (iii) Assignor shall, to the extent provided in this Assignment Agreement, relinquish its rights and be released from its obligations under the Credit Agreement and (iv) Agent shall thereafter make all payments in respect of the interest assigned hereby (including payments of principal, interest, fees and other amounts) to Assignee. Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to the Effective Date by Agent or with respect to the making of this assignment directly between themselves.

6. Each of Assignor and Assignee hereby agrees from time to time, upon request of the other such party hereto, to take such additional actions and to execute and deliver such additional documents and instruments as such other party may reasonably request to effect the transactions contemplated by, and to carry out the intent of, this Assignment Agreement.

7. Neither this Assignment Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party (including, if applicable, any party required to evidence its consent to or acceptance of this Assignment Agreement) against whom enforcement of such change, waiver, discharge or termination is sought.

8. For the purposes hereof and for purposes of the Credit Agreement, the notice address of Assignee shall be as set forth on the Schedule. Any notice or other communication herein required or permitted to be given shall be in writing and delivered in accordance with the notice provisions of the Credit Agreement.

Exhibit A - Page 2

9. In case any provision in or obligation under this Assignment Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.

10. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.

11. This Assignment Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

12. This Assignment Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures hereto were upon the same agreement.

13. This Assignment Agreement shall become effective as of the Effective Date upon the satisfaction of each of the following conditions: (i) the execution of a counterpart hereof by each of Assignor and Assignee, (ii) the execution of a counterpart hereof by each of Agent and Borrowers as evidence of its consent hereto to the extent required pursuant to Section 12.6(a) of the Credit Agreement, (iii) the receipt by Agent of the administrative fee referred to in Section 12.6(a) of the Credit Agreement, (iv) in the event Assignee is a foreign person (i.e., a person other than a United States person for United States Federal income tax purposes), the receipt by Agent of Internal Revenue Service Form W-8BEN or Form W-8ECI or such other forms, certificates or other evidence with respect to United States Federal income tax withholding matters that are required under the Internal Revenue Code to establish that Assignee shall be entitled to receive payments of principal, interest and fees under the Credit Agreement free from or at a reduced rate of withholding of United States Federal income tax properly completed and executed by Assignee, and (v) the receipt by Agent of originals or telecopies of the counterparts described above.

Exhibit A - Page 3

The parties hereto have caused this Assignment Agreement to be executed and delivered as of the date first written above.

ASSIGNOR:

By:
Name:
Title:

ASSIGNEE:

By:
Name:
Title:

Consented to:

Merrill Lynch Capital, a division of Merrill
Lynch Business Financial Services Inc., as Agent

By:

Title:

AAR CORP.

By:

Name:
Title:

AAR DISTRIBUTION, INC.

By:

Name:
Title:

AAR PARTS TRADING, INC.

By:

Name:
Title:

Exhibit A - Page 4

AAR MANUFACTURING, INC.

By:

Name:
Title:

AAR ENGINE SERVICES, INC.

By:

Name:
Title:

AAR ALLEN SERVICES, INC.

By:

Name:
Title:

Exhibit A - Page 5

SCHEDULE TO ASSIGNMENT AGREEMENT

Assignor:          ________________

Assignee:          ________________

Effective Date:    ________________

                    Credit Agreement dated as of May 29, 2003 among AAR Corp.,
                    AAR Distribution, Inc., AAR Parts Trading, Inc., AAR
                    Manufacturing, Inc., AAR Engine Services, Inc. and AAR Allen
                    Services, Inc., as Borrowers, the financial institutions
                    party thereto from time to time, as Lenders, and Merrill
                    Lynch Capital, a division of Merrill Lynch Business
                    Financial Services Inc., as Agent

Interests Assigned:

                                     Revolving Loan
         Commitment/Loan               Commitment
--------------------------------------------------------
Assignor Amounts                   $__________________

Amounts Assigned                   $__________________

Assignor Amounts
(post-assignment)                  $__________________


Closing Fee:                       $__________________

Assignee Information:

Address for Notices:                Address for Payments:
___________________________
___________________________         Bank: _____________________
Attention:  _______________         ABA #:   _________________________
Telephone:  _______________         Account #:   _____________________
Facsimile:  _______________         Reference:   _____________________

                               Exhibit A - Page 6

[MERRILL LYNCH LOGO] Exhibit B to Credit Agreement (Compliance Certificate)

COMPLIANCE CERTIFICATE

AAR CORP.

DATE: __________, _____

This certificate is given by _____________________, a Responsible Officer of AAR Corp. ("AAR"), pursuant to Section 4.1(c) of that certain Credit Agreement dated as of May 29, 2003 among AAR, AAR Distribution, Inc., AAR Parts Trading, Inc., AAR Manufacturing, Inc., AAR Engine Services, Inc. and AAR Allen Services, Inc. (individually a "BORROWER" and collectively, "BORROWERS"), the Lenders from time to time party thereto and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Agent for Lenders (as such agreement may have been amended, restated, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.

The undersigned Responsible Officer hereby certifies to Agent and Lenders that:

(a) the financial statements delivered with this certificate in accordance with Section 4.1(a) and/or 4.1(b) of the Credit Agreement fairly present in all material respects the results of operations and financial condition of AAR and its Consolidated Subsidiaries as of the dates of such financial statements;

(b) I have reviewed the terms of the Credit Agreement and have made, or caused to be made under my supervision, a review in reasonable detail of the transactions and conditions of AAR and its Consolidated Subsidiaries during the accounting period covered by such financial statements;

(c) such review has not disclosed the existence during or at the end of such accounting period, and I have no knowledge of the existence as of the date hereof, of any condition or event that constitutes a Default or an Event of Default, except as set forth in Schedule 1 hereto, which includes a description of the nature and period of existence of such Default or an Event of Default and what action Borrower has taken, is undertaking and proposes to take with respect thereto; and

(d) Borrowers are in compliance with the covenants contained in Article 7 of the Credit Agreement, as demonstrated by the calculation of such covenants below, except as set forth in Schedule 1 hereto.

Exhibit B - Page 1

IN WITNESS WHEREOF, the undersigned officer has executed and delivered this certificate this ____ day of ___________, ____.

Name
Title of AAR Corp.

Exhibit B - Page 2

CAPITAL EXPENDITURES
(SECTION 7.1)

Capital Expenditures for the applicable measurement period (the "DEFINED PERIOD") are defined as follows:

Amount capitalized during the Defined Period by AAR Corp. and its Consolidated
Subsidiaries as capital expenditures for property, plant, and equipment or
similar fixed asset accounts, including any such expenditures by way of
acquisition of a Person or by way of assumption of Debt or other obligations, to
the extent reflected as plant, property and equipment                                       $
                                                                                             -----------


Plus:  deposits made in the Defined Period in connection with property, plant,
       and equipment; less deposits of a prior period included above
                                                                                            ------------

Less:  Net Cash Proceeds of Asset Dispositions received during the Defined
       Period which (i) Borrowers or a Subsidiary is or are permitted to
       reinvest pursuant to the terms of the Credit Agreement and (ii) are
       included in capital expenditures above

                                                                                            ------------

       Proceeds of Property Insurance Policies received during the Defined
       Period which (i) Borrower or a Subsidiary is permitted to reinvest
       pursuant to the terms of the Credit Agreement and (ii) are included in
       capital expenditures above

                                                                                            ------------

Capital Expenditures                                                                        $
                                                                                             ===========

Less:  Portion of Capital Expenditures financed during the Defined Period under
       Capital Leases or other Debt (Debt, for this purpose, does not include
       drawings under the Revolving Loan Commitment)
                                                                                            ------------

Unfinanced Capital Expenditures                                                             $
                                                                                             ===========

Permitted Capital Expenditures (including carry forward of $____________ from prior
fiscal year)                                                                                $
                                                                                             ===========

In Compliance                                                                               Yes/No

Exhibit B - Page 3

EBITDA
(SECTION 7.2)

EBITDA for the applicable measurement period (the "DEFINED PERIOD") is defined as follows:

Net income (or loss) for the Defined Period of AAR Corp. and its Consolidated
Subsidiaries, but excluding:  (a) the income (or loss) of any Person (other than
Subsidiaries of AAR Corp.) in which AAR Corp. or any of its Subsidiaries has an
ownership interest unless received by AAR Corp. or its Subsidiary in a cash
distribution; and (b) the income (or loss) of any Person accrued prior to the date
it became a Subsidiary of AAR Corp. or is merged into or consolidated with AAR Corp.        $
                                                                                             -----------

Plus:  Any provision for (or less any benefit from) income and franchise taxes              ------------
       included in the determination of net income for the Defined Period

       Interest expense, net of interest income, deducted in the determination
       of net income for the Defined Period                                                 ------------

       Amortization and depreciation deducted in the determination of net income
       for the Defined Period                                                               ------------

       Losses (or less gains) from Asset Dispositions included in the
       determination of net income for the Defined Period (excluding sales,
       expenses or losses related to current assets)                                        ------------

       Other non-cash losses (or less gains) included in the determination of
       net income for the Defined Period and for which no cash outlay (or cash
       receipt) is foreseeable                                                              ------------

       Expenses and fees included in the determination of net income and
       incurred during the Defined Period to consummate the transactions
       contemplated by the Operative Documents                                              ------------

       Non-Cash special (extraordinary) losses included in the determination of
       net income during the Defined Period, net of related tax effects                     ------------

Less:  Cash and Non-Cash special (extraordinary) gains included in the
       determination of net income during the defined period, net of related tax
       effects                                                                              ------------

Exhibit B - Page 4

EBITDA for the Defined Period                                                               $
                                                                                             -----------

Required EBITDA for the Defined Period                                                      $ 33,000,000

In Compliance                                                                               Yes/No

Exhibit B - Page 5

INTEREST COVERAGE RATIO
(SECTION 7.3)

Total Interest Expense for the applicable measurement period (the "Defined Period") is defined as follows:

Interest expense ($_______), net of interest income ($_____), interest paid in
kind ($_____) and amortization of capitalized fees and expenses incurred to
consummate the transactions contemplated by the Operative Documents and included
in interest expense ($_____), included in the determination of net income of AAR
and its Consolidated Subsidiaries for the Defined Period                                    ------------

Plus:  Any "off balance" sheet interest expense ($_____) of AAR or any of its
       Subsidiaries for the Defined Period not included in interest expense in
       the Defined Period or otherwise deducted in the computation of EBITDA for
       the Defined Period                                                                   ------------

Interest Expense:                                                                           ------------

Operating Cash Flow:

EBITDA for the Defined Period (calculated in the manner required by Section 7.2 of
the Compliance Certificate)                                                                 ------------

Operating Cash Flow                                                                         ------------

Interest Coverage Ratio (Ratio of Operating Cash Flow to Interest Expense) for the
Defined Period                                                                              ___ to 1.0

Minimum Required Interest Coverage Ratio for the Defined Period                             1.4 to 1.0

In Compliance                                                                               Yes/No

Exhibit B - Page 6

[MERRILL LYNCH LOGO]  Exhibit C to Credit Agreement (Borrowing Base Certificate)

                                   [BORROWER]

                            DATE: ___________, ______

This certificate is given by ____________________, a Responsible Officer of AAR Corp. ("AAR"), pursuant to Section 4.1(m) of that certain Credit Agreement dated as of May 29, 2003 among AAR Corp., AAR Distribution, Inc., AAR Parts Trading, Inc., AAR Manufacturing, Inc., AAR Engine Services, Inc. and AAR Allen Services, Inc. and the Lenders from time to time party thereto and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Agent for Lenders (as such agreement may have been amended, restated, supplemented or otherwise modified from time to time the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.

The undersigned Responsible Officer hereby certifies to Agent and Lenders that:

(a) Attached hereto as Schedule 1 is a calculation of the Borrowing Base for Borrower as of the above date;

(b) based on such schedule, the Borrowing Base as the above date is:

$__________________

IN WITNESS WHEREOF, the undersigned officer has executed and delivered this certificate this ____ day of ___________, ____.

Name

Title ---------------------------of AAR Corp.

Exhibit C - Page 1

BORROWING BASE CALCULATION

AAR CORP. CONSOLIDATED

1.   INVENTORY OF BORROWERS AND OTHER CREDIT PARTIES                               $
                                                                                    -----------

2.   LESS ANY INVENTORY:                                                           $
                                                                                    -----------

     that is not owned by any Borrower or any other Credit Party free and clear    ------------
     of all Liens and rights of any other Person (including the rights of a
     purchaser that has made progress payments and the rights of a surety that
     has issued a bond to assure performance with respect to that Inventory),
     except the Liens in favor of Agent, on behalf of itself and Lenders

     adjustments where the inventory general ledger balance is lower than the      ------------
     inventory perpetual balance

     adjustments that represent timing differences, system errors, unreconciled    ------------
     differences, physical count adjustments, misc. accruals, etc.

     that is not of a type held for sale in the ordinary course of a Borrower's    ------------
     or other Credit Party's business

     that consists of work-in-process                                              ------------

     that is placed on consignment or is in transit                                ------------

     that in Agent's reasonable determination or in the determination of           ------------
     Borrowers' management is excess, obsolete, unsaleable, shopworn, seconds,
     damaged or unfit for sale

     that consists of consumable parts (nuts, screws, bolts, etc.), display        ------------
     items, samples or packing or shipping materials or manufacturing supplies

     that consists of goods which have been returned by the buyer                  ------------

     that consists of goods which requires repair/re-work (condition codes         ------------
     S,B,A,R.X)

     value that represents Inter-company profits                                   ------------

Exhibit C - Page 2

     that is not covered by casualty insurance meeting the requirements of         ------------
     Section 4.4(b) of the Credit Agreement

     that is bill and hold Inventory                                               ------------

     that is located outside the U.S.                                              ------------

     that is (a) not located on premises owned by a Borrower or a Credit Party     ------------
     or (b) is located on premises leased by Borrower or a Credit Party, or
     stored with a bailee, warehouseman, processor or similar Person, unless
     Agent has given its prior consent thereto and unless (i) a Lien waiver and
     collateral access agreement, in form and substance satisfactory to Agent
     has been delivered to Agent, together, with respect to consignments, with
     any and all duly authorized UCC financing statements required by Agent
     naming such Person as debtor, the applicable Borrower or other Credit Party
     as secured creditor and Agent as assignee or (ii) Reserves satisfactory to
     Agent have been established with respect thereto

     as to which Agent's Lien therein, on behalf of itself and Lenders, is not a   ------------
     first priority perfected Lien

     as to which any of the representations or warranties pertaining to such       ------------
     Inventory set forth in any Financing Document is untrue

     that consists of Hazardous Materials or goods that can be transported or      ------------
     sold only with licenses that are not readily available

     that is covered by a negotiable document of title, unless such document has   ------------
     been delivered to Agent

     that is otherwise unacceptable to Agent in its reasonable credit judgment     ------------

3.   TOTAL ELIGIBLE INVENTORY BEFORE APPRAISAL COMPANY AND MLC ADVANCE RATES       ------------
     (Line 1 less Line 2)

Exhibit C - Page 3

4. NET FORCED PARTS LIQUIDATION PERCENTAGE PER APPRAISAL (To be ------------
updated quarterly by SH&E or appraisal firm acceptable Agent)

5. TOTAL ELIGIBLE PARTS INVENTORY AFTER LIQUIDATION PERCENTAGE (Line 3 ------------
multiplied by Line 4)

6. SIXTY PERCENT OF LINE 5 ------------

7. TOTAL ELIGIBLE AIRCRAFT AND ENGINE INVENTORY (FLV) BEFORE MAXIMUM CAP (To ------------
be updated quarterly by SH&E or appraisal firm acceptable to Agent)

8. MAXIMUM CAP - TOTAL ELIGIBLE AIRCRAFT AND ENGINE INVENTORY (FLV - To be ------------
updated quarterly by SH&E or appraisal firm acceptable to Agent)

9. SIXTY PERCENT OF THE LESSER OF LINE 7 OR LINE 8 ------------

10. TOTAL AVAILABLE PARTS INVENTORY AND AIRCRAFT AND ENGINES INVENTORY PRIOR TO ------------
APPLICATION OF EXCLUSIONS AND RESERVES ESTABLISHED BY AGENT PURSUANT TO THE
CREDIT AGREEMENT (LINES 6 PLUS LINE 9)

11. LESS: AT ALL TIMES COLLATERAL AVAILABILITY RESERVE ($5,000,000) ------------

12. LESS: RENT RESERVES (IF APPLICABLE) ------------

13. COLLATERAL PORTION OF BORROWING BASE (Line 10 less Line 11 and Line 12) ------------

14. CONSOLIDATED NET WORTH COVENANT (AS CALCULATED BELOW) MINUS $3,000,000 ------------

15. REVOLVING LOAN COMMITMENT ------------

16. OUTSTANDING REVOLVING LOANS ------------

Exhibit C - Page 4

17.  OUTSTANDING LETTER OF CREDIT LIABILITIES                                      ------------

18.  REVOLVING LOAN OUTSTANDINGS (sum of Lines 16 and 17)                          ------------

19.  NET BORROWING AVAILABILITY (the least of (a) Line 13 less Line 18, (b) Line   ------------
     14 less Line 18, (c) Line 15 less Line 18

CONSOLIDATED NET WORTH COVENANT CALCULATION:*

$75MM BANK OF AMERICA PRIVATE PLACEMENT
"LIMITATIONS ON DEBT" COVENANT TEST (SEC. 10.3)

MAINTENANCE OF CONSOLIDATED DEBT (SEC. B)
CONSOLIDATED NET WORTH TO TOTAL SENIOR DEBT COVENANT CALCULATION:

CONSOLIDATED NET WORTH:

TOTAL SENIOR DEBT CALCULATION:
1. Senior Bank Debt
2. Plus: Senior Other
3. Equals: Total Senior Debt

Requirement: Total Senior Debt less than or equal to 10% of Consolidated Net Worth

* Any or all of the following computations shall be appropriately modified to reflect any amendment, modification, replacement or refinancing of the Note Purchase Documents.

Exhibit C - Page 5

[MERRILL LYNCH LOGO]         Exhibit D to Credit Agreement (Notice of Borrowing)

                                   [BORROWER]

                            DATE: ___________, ______

This certificate is given by ____________________, a Responsible Officer of ___________, pursuant to Section 2.1(b) of that certain Credit Agreement dated as of May 29, 2003 among AAR Corp., AAR Distribution, Inc., AAR Parts Trading, Inc., AAR Manufacturing, Inc., AAR Engines Services, Inc., AAR Allen Services, Inc., AAR Aircraft & Engine Sales & Leasing, Inc. and AAR Powerboss, Inc. (individually a "BORROWER" and collectively "BORROWERS"), the Lenders from time to time party thereto and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Agent for Lenders (as such agreement may have been amended, restated, supplemented or otherwise modified from time to time the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.

The undersigned Responsible Officer hereby gives notice to Agent of AAR's request, on its own behalf and on behalf of each other Borrower, to: [COMPLETE AS APPROPRIATE]

(a) on [ DATE ] borrow $[__________] of Revolving Loans, which Revolving Loans shall be [PRIME RATE LOANS/LIBOR LOANS HAVING AN INTEREST PERIOD OF ______ MONTH(s)];

(b) on [ DATE ] convert $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the [________] Rate, into a(n) [________] Loan [AND, IN THE CASE OF A LIBOR LOAN, HAVING AN INTEREST PERIOD OF [_____] MONTH(s)];

(c) on [ DATE ] continue $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the LIBOR, as a LIBOR Loan having an Interest Period of [_____] month(s).

The undersigned officer hereby certifies that, both before and after giving effect to the request above (i) each of the conditions precedent set forth in
Section 8.2(b), 8.2(c), 8.2(d) and 8.2(e) have been satisfied, (ii) all of the representations and warranties contained in the Credit Agreement and the other Financing Documents are true, correct and complete in all material respects as of the date hereof, and (iii) no Default or Event of Default has occurred and is continuing on the date hereof.

Exhibit D - Page 1

IN WITNESS WHEREOF, the undersigned officer has executed and delivered this certificate this ____ day of ___________, ____.

Name

Title ---------------------------of AAR Corp.

Exhibit D - Page 2

EXHIBIT 4.13

Loan No. 950114501

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT"), dated as of July 1, 2003, is made by and between FREMONT INVESTMENT & LOAN, a California industrial bank ("LENDER"), and AAR WOOD DALE LLC, an Illinois limited liability company ("BORROWER").

R E C I T A L S

A. Borrower is the owner of that certain real property described on EXHIBIT A attached hereto (the "PROPERTY"), together with the Improvements (as hereinafter defined).

B. Borrower desires to borrow from Lender, and Lender is willing to loan to Borrower, a loan (the "LOAN") in the maximum principal amount of the Loan Amount (as hereinafter defined), for the purposes and upon the terms set forth herein.

NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

When used herein, the following initially-capitalized terms shall have the following meanings:

"AFFILIATE" means, with respect to any Person, any other Person which controls, is controlled by, or is under common control with the Person in question. For the purposes of the foregoing definition, "controls" (and the correlative terms "controlled by" and "under common control with") means possession by the applicable Person of the power to direct or cause the direction of the management and policies thereof, whether through the ownership of voting securities, by contract, or otherwise, including, without limitation, the power to elect or appoint a majority of the directors of a corporation or the trustees of a trust. "AFFILIATE" shall also include, without limitation, relatives of any natural person.

"AGREEMENT" means this Loan and Security Agreement, together with all supplements, amendments, modifications, extensions, renewals and replacements hereto.

"AMORTIZATION PERIOD" is defined in the Note.

"APPLICATION INFORMATION" means all financial information and statements and other information submitted to Lender in connection with the Loan, including, without limitation, information relating to the tenants, Leases and rent payment history and the information set forth on the Borrower Questionnaire delivered to Lender.

"APPROVED LEASE" means that certain Lease Agreement between Borrower and Guarantor comprising the entire Net Rentable Square Feet for a term of fifteen
(15) years with lease rent of $6.00 per square foot triple net, with annual two percent (2%) increases and other fair market terms.

"ASSIGNMENT OF RENTS" means that certain Assignment of Rents (and Leases) of even date herewith executed by Borrower, as assignor, in favor of Lender, as assignee, to be recorded in the Recording Location, together with all supplements, amendments, modifications, extensions, renewals and replacements thereto.

EXHIBIT 4.13

"ATTORNEYS' FEES," "ATTORNEYS' FEES AND COSTS," "ATTORNEYS' FEES" and "ATTORNEYS' FEES AND COSTS" mean the reasonable fees and expenses of counsel to the applicable parties to the Loan Documents, which may include printing, photostating, duplicating, facsimilating, messengering, filing and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. The terms "ATTORNEYS' FEES" or "ATTORNEYS' FEES AND COSTS" shall also include, without limitation, all such reasonable fees and expenses incurred with respect to appeals, arbitrations, bankruptcy proceedings (including, without limitation, any adversary proceeding, contested motion or motion) and any post-judgment proceedings to collect any judgment, and whether or not any action or proceeding is brought with respect to the matter for which such fees and expenses were incurred. The recovery of post-judgment fees, costs and expenses under this Agreement or any of the other Loan Documents is separate and several and shall survive the merger of the applicable Loan Documents into any judgment.

"BANKRUPTCY CODE" means Title 11 of the U.S. Code, as applicable, or any similar federal or state laws for the relief of debtors, each as hereafter amended.

"BORROWER GROUP" means Borrower, Borrower's Members, the Limited Recourse Parties, the Principal Parties and the Exculpated Persons.

"BUSINESS DAY" means any day other than a Saturday, a Sunday, a legal holiday under the laws of the State in which the Project is located, or a day on which commercial banks in said State are authorized or required by law or other governmental action to be closed.

"CLOSING DATE" means July 1, 2003.

"COLLATERAL" means the collateral now or hereafter pledged to Lender under the Security Instrument or any other Loan Document as security for any of the Loan Obligations, including, without limitation, the Project and the Personal Property.

"COMMITMENT LETTER" means the Commitment Letter dated June 10, 2003, issued by Lender in connection with the Loan.

"CONTRACTUAL OBLIGATION" as applied to any Person means any provision of any instrument, document or security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which any of its properties is bound or to which it or any of its properties is subject.

"CONTROL GROUP" means Borrower, Borrower's Control Members and constituent Control Members, as applicable.

"CONTROL MEMBERS" means for any Managed LLC, the manager of such limited liability company and the members of such limited liability company, and for any Member Managed LLC, the managing members of such limited liability company.

"DEFAULT INTEREST RATE" is defined in the Note.

"ENVIRONMENTAL INDEMNITY" means that certain Environmental Indemnity of even date herewith executed by Borrower and the other parties named therein, if any, together with all supplements, amendments, modifications, extensions, renewals and replacements thereto.

"ENVIRONMENTAL LAWS" means any and all present and future federal, state and local laws, ordinances, regulations, policies and any other requirements of any Governmental Agency relating to health, safety, the environment or to any Hazardous Substances, including without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Resource Conservation Recovery Act (RCRA), the Hazardous Materials Transportation Act, the Toxic

EXHIBIT 4.13

Substance Control Act, the Endangered Species Act, the Clean Water Act, the Clean Air Act, the Occupational Safety and Health Act (to the extent the same relates to Hazardous Substances), those substances included within the definitions of "hazardous substances", "hazardous material", "toxic substances", "toxic materials", "toxic waste" or "solid waste" in the Illinois Environmental Protection Act, 415 ILCS Section 5/1 ET SEQ., each as hereafter amended from time to time, and the present and future rules, regulations and guidance documents promulgated under any of the foregoing, or under similar laws, ordinances, regulations, policies or requirements of other states or localities.

"ENVIRONMENTAL OBLIGATIONS" means all terms, conditions, covenants and obligations under SECTION 7.5 of this Agreement.

"EQUITY DISTRIBUTIONS" means any sums or other consideration directly or indirectly distributed (or paid as a dividend, return of capital or similar payment, as payment on account of indebtedness, as return of capital, or as a redemption of any equity interest in Borrower) by Borrower to (or to any Affiliate, subsidiary or relative of) any Principal Party or any partner, member, shareholder, principal or other equity owner of Borrower or any Principal Party, or paid as above-market management, asset management, development, leasing or other fees or commissions to any of the foregoing.

"EVENT OF DEFAULT" means any of the events specified in SECTION 8.1.

"EXCULPATED PERSONS" means any (a) Person that owns, directly or indirectly, any legal or beneficial interest in Borrower or the Project; (b) other Affiliate, beneficiary, controlling person, director, employee, investor, manager, member, officer, owner, parent company, partner (general or limited, or a subpartner at any level), principal, real estate investment advisor or other similar fiduciary, shareholder, or trustee of any Person described in clause (a) above; or (c) successor or assign of any Person described in clauses (a) or (b) and the Limited Recourse Parties.

"FINANCIAL REPORTING METHOD" means generally accepted accounting principles (GAAP), consistently applied.

"FINANCIAL STATEMENT DELIVERY DATE" means (a) with respect to the annual financial statements and information required by Section 7.8(A); ninety (90) days after the end of each fiscal year, and with respect to the quarterly financial statements, sixty (60) days after the end of each fiscal quarter.

"FLOOD INSURANCE ACTS" means the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994, and any other flood insurance act, each as may be amended.

"FORMATION DOCUMENTS" means (a) as to any corporation, its articles of incorporation and bylaws, (b) as to any limited partnership, its Certificate of Limited Partnership and partnership agreement, (c) as to any general partnership or joint venture, its Statement of Partnership and partnership agreement, (d) as to any limited liability company, its articles or certificate of organization and operating agreement, and (e) as to any trust, its trust agreement and a certification of the current trustees thereof, each of the foregoing together with all supplements, amendments and modifications thereto.

"FORMATION DOCUMENTS CERTIFICATES" means such certificates in connection with the Formation Documents of the Signature Parties as may be required by Lender from Borrower and the other Signature Parties.

"FURTHER ASSURANCES CLAUSES" means the provisions of the Loan Documents requiring Borrower or Guarantor to deliver additional documents or instruments to Lender upon Lender's written request, including, without limitation, SECTION 5.4, SECTION 7.10 and SECTION 9.1 of this Agreement, SECTION 8 of the Assignment of Rents, and SECTIONS 11 and 12 of the Guaranty.

"GOVERNING STATE" means Illinois.

EXHIBIT 4.13

"GOVERNMENTAL AGENCY" means any federal, state, municipal or other governmental or quasi-governmental court, agency, authority or district.

"GUARANTOR" means AAR Corp., a Delaware corporation.

"GUARANTY" means that certain Guaranty of even date herewith executed by Guarantor in favor of Lender, together with all supplements, amendments, modifications, extensions, renewals and replacements thereto.

"HAZARDOUS SUBSTANCES" means (a) any chemical, compound, material, mixture or substance that is now or hereafter defined or listed in, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance", "hazardous material", "hazardous waste", "extremely hazardous waste", "acutely hazardous waste", "radioactive waste", "infectious waste", "biohazardous waste", "toxic substance", "pollutant", "toxic pollutant", "contaminant", or any formulation not mentioned herein intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "EP toxicity", or "TCLP toxicity"; (b) petroleum, natural gas, natural gas liquids, liquefied natural gas, synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas) and ash produced by a resource recovery facility utilizing a municipal solid waste stream, and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas, or geothermal resources; those substances included within the definitions of "hazardous substances", "hazardous material", "toxic substances", "toxic materials", "toxic waste" or "solid waste" in the Illinois Environmental Protection Act, 415 ILCS Section 5/1 ET SEQ.; (c) asbestos in any form; (d) urea formaldehyde foam insulation; (e) polychlorinated biphenyls (PCBs); (f) radon; and (g) any other chemical, material, or substance exposure to which is limited or regulated by any Governmental Agency because of its quantity, concentration, or physical or chemical characteristics, or which poses a significant present or potential hazard to human health or safety or to the environment if released into the workplace or the environment. "Hazardous Substances" shall not include ordinary office supplies and repair, maintenance and cleaning supplies maintained in de minimis, reasonable and necessary quantities or substances stored, used or maintained in the ordinary course of Borrower's, Guarantor's or one of their Affiliate's business in accordance with all Environmental Laws.

"IMPROVEMENTS" means the improvements and fixtures now or hereafter located on the Property.

"IMPOUND EXPENSES" means premiums for insurance required by this Agreement, and all real estate and personal property taxes and other taxes and assessments, and water, sewer, electrical and other utility charges relating to the Project or any portion thereof.

"INDEBTEDNESS" means, with respect to any Person, (a) all indebtedness of such Person for borrowed money; (b) all obligations issued, undertaken or assumed by such Person as the deferred purchase price of property or services;
(c) all non-contingent reimbursement or payment obligations; (d) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments; (e) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations of such Person with respect to capital leases; (g) all indebtedness referred to in clauses (a) through (f), inclusive, above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all guaranty obligations of such Person in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g), inclusive, above.

"INDEMNITEES" means, collectively and individually, Lender, its Affiliates and its and their respective directors, officers, agents, attorneys, employees, successors and assigns.

EXHIBIT 4.13

"INSOLVENCY LAWS" means the Bankruptcy Code and any and all present and future federal, state and local laws, ordinances, regulations, rules and any other requirements of any Governmental Agency relating to the bankruptcy, insolvency, appointment of a receiver, reorganization, arrangement, readjustment of debt, dissolution or liquidation of, for or relating to, any Person, each as hereafter amended from time to time and the present and future rules, regulations and guidance documents promulgated under any of the foregoing.

"INSURANCE/CONDEMNATION PROCEEDS" means insurance proceeds, condemnation awards (including, without limitation, payments arising from change in grade of streets and awards for severance damages), and payments in lieu of the foregoing, arising from the Project or relating to Borrower's ownership of the Project, or any other sums payable by any Person to or for the benefit of any member of the Borrower Group on account of any loss, condemnation or taking of, or damage to, the Project or any portion thereof.

"INFORMATION DELIVERY DATE" is defined in SECTION 7.8.

"LAWS" means all of the following in effect at any time: (a) all orders of any court, all federal, state, county, municipal and other governmental and quasi-governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions, whether now or hereafter enacted and in force, including, without limitation, the Americans with Disabilities Act, 42 U.S.C. Sections 12101-12213 (1991), all Terrorism Laws and all Environmental Laws, any zoning or other land use entitlements and any requirements which may require repairs, modifications or alterations in or to the Project, (b) all foreign country (non-United States) statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions, whether now or hereafter enacted and in force, (c) all Permits at any time in force affecting the Project or the occupancy, operation, ownership, transfer or use thereof, and (d) all covenants, agreements, restrictions and encumbrances running in favor of any Person, contained in any instruments, either of record or known to Borrower, at any time in force affecting the Project or the occupancy, operation, ownership, transfer or use thereof.

"LEASE DEPOSITS" means all security deposits, letters of credit, escrow deposits and similar sums at any time received by or delivered to any member of the Borrower Group under or in connection with any Lease.

"LEASE" or "LEASES" is defined in the Assignment of Rents.

"LEASE TERMINATION PAYMENTS" means all sums, however denominated, paid or payable to or for the benefit of any member of the Borrower Group in connection with, as a result of, or as consideration for, the termination or expiration of any Lease (including, without limitation, holdover rent and damage and other awards), or any reduction of the space covered by any Lease or any reduction in the term of any Lease.

"LETTER OF CREDIT" means an irrevocable, unconditional, transferable, direct draw letter of credit issued by a financial institution acceptable to Lender, in its sole discretion, in the face amount of $1,500,000 (or less as provided in SECTION 5.5 hereof) in Lender's favor as "beneficiary" and having an initial term of not less than twelve (12) months, which shall be renewed annually, in form and substance satisfactory to Lender in its sole discretion.

"LIEN" means any mortgage, deed of trust, deed to secure debt, pledge, security interest, encumbrance, lien, charge or claim of any kind (including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and/or the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) with respect to the Project or the other Collateral or any portion thereof or interest therein.

"LIEN ENFORCEMENT ACTION" means (a) any action in which Lender exercises any rights or remedies against Borrower (and/or Guarantor) pursuant to the Loan Documents or under applicable law

EXHIBIT 4.13

or at equity against or with respect to the Project or the Collateral, including, without limitation: appointment and maintenance of a receiver; any action to prevent waste or otherwise to protect the Project or the Collateral from material physical damage or material physical deterioration; commencement and prosecution of a judicial foreclosure sale, or similar proceeding or other judicial process; prosecution of any and all rights available to Lender relating to Borrower or the Project and the Collateral in any bankruptcy, insolvency or similar proceeding (including Lender's rights under the Bankruptcy Code to file a claim for the full amount of all Loan Obligations, to require that all collateral held by Lender continue to secure all Loan Obligations, and to elect treatment under 11 U.S.C. Section 1111(b)(2)); consummation of a U.C.C. sale; and (b) any other action or proceeding relating to the Project or the Collateral (including, without limitation, an action for specific performance as to Borrower's express nonmonetary obligations under the Loan Documents), or relating to any other collateral held by Lender for the Loan, which action or proceeding does not seek a personal judgment against the assets of any Exculpated Person (beyond the direct or indirect interest of such Exculpated Person in the Project and the Collateral or as contemplated by any guaranty or indemnity).

"LIMITED RECOURSE PARTIES" means the Guarantor.

"LOAN AMOUNT" means an amount of Eleven Million Dollars ($11,000,000).

"LOAN DOCUMENTS" means the documents described in SECTION 3.1 and all other documents now or hereafter securing, or executed in connection with, the Loan, together with all supplements, amendments, modifications, extensions, renewals and replacements thereto, but excluding the Environmental Indemnity.

"LOAN FEE" means a fee in the amount of one percent (1%) of the Loan Amount.

"LOAN OBLIGATIONS" means all obligations of Borrower with respect to : (a) payment of principal, interest, and any other sums payable under the Loan Documents; (b) performance of all nonmonetary obligations of Borrower under the Loan Documents; (c) payment of damages for breach of any representation, warranty, or covenant in any Loan Document; (d) any obligation to indemnify any party under any Loan Document; and (e) payment of any monetary judgment obtained by Lender under the Loan Documents or in connection with the Loan.

"LOAN YEAR" means the twelve (12) month period commencing on the Closing Date, if the Closing Date occurs on the first day of a calendar month, or on the first day of the calendar month following the Closing Date if the Closing Date does not occur on the first day of a calendar month, and each twelve (12) months thereafter. If the Closing Date does not occur on the first day of a calendar month, the first Loan Year shall in addition include any period from the Closing Date to the first day of the calendar month following the Closing Date.

"LOSSES" means any and all liabilities, claims and actual, out-pocket losses, damages, costs, and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred, paid or suffered by Lender or any Affiliate, subsidiary or nominee of Lender: (a) as a direct result of the specified matter; (b) to cure or remedy such matter; and/or (c) in enforcing Lender's claims against any Person with respect to such matter.

"MANAGED LLC" means a limited liability company managed by a third party non-member manager.

"MATERIAL LEASE PROVISIONS" is defined in SECTION 7.4(E).

"MATURITY DATE" is defined in the Note.

"MEMBER" or "MEMBER" means the members of the limited liability company in question, together with any constituent members of such members.

EXHIBIT 4.13

"MEMBER MANAGED LLC" means a limited liability company managed by one or more of its members.

"MONTHLY INSTALLMENT" is defined in the Note.

"NET RENTABLE SQUARE FEET" and "NET RENTABLE SQUARE FEET" means the net rentable square feet of the Project (245, 650 s.f.), or applicable portion thereof, calculated in the same manner as in the appraisal of the Project obtained by Lender in connection with the closing of the Loan.

"NONFOREIGN STATUS STATUTES" means Section 1445 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and any successor Laws.

"NOTE" means that certain Secured Promissory Note of even date herewith in the Loan Amount executed by Borrower as maker, in favor of Lender, as payee, together with all supplements, amendments, modifications, extensions, renewals and replacements thereto.

"PERMITS" means all permits, licenses, franchises, approvals, variances and land use entitlements necessary for the occupancy, operation, lease, ownership and use of the Project.

"PERMITTED INDEBTEDNESS" means (a) trade payables entered into, and accrued expenses arising, in the ordinary course of business on reasonable and customary terms; (b) obligations under Leases entered into in accordance with this Agreement; (c) non-delinquent Impositions (as defined in the Security Instrument) relating to the Project; and (d) the Loan.

"PERSON" means and includes natural persons, corporations, limited liability companies, limited liability partnerships, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, real estate investment trusts or other organizations, whether or not legal entities, and governments, agencies and countries and political subdivisions thereof.

"PERSONAL PROPERTY" means all personal property in which Borrower now or hereafter owns or acquires any interest or right, together with all present and future attachments, accessions, replacements, substitutions, additions and renovations thereto or therefor, and together with all products and proceeds thereof, including, without limitation, all insurance proceeds from any policy of insurance covering any of the foregoing property now or hereafter acquired by Borrower. "Personal Property" shall include, without limitation, the personal property described in EXHIBIT B attached hereto and any leased personal property.

"POTENTIAL DEFAULT" means a monetary default, or material nonmonetary default, in either case which, with the giving of notice or the passage of time, or both, would constitute an Event of Default under any of the Loan Documents.

"PREPAID PROPERTY INCOME" means any Property Income delivered to or received by any member of the Borrower Group more than thirty (30) days before the date such amount was first required to be paid under the applicable Lease or other agreement.

"PRINCIPAL PARTIES" means individually and collectively Borrower, Guarantor, the Limited Recourse Parties and each member of the Control Group.

"PROJECT" means the Property and the Improvements.

"PROJECT DOCUMENTS" means (a) all agreements now or hereafter in effect with any contractor, architect or engineer, including, without limitation, any design architect, landscape architect, civil engineer, electrical engineer, environmental engineer, soils engineer or mechanical engineer, in connection with the Project; (b) all other agreements now or hereafter in effect with any property manager or broker with respect to the management, leasing, or operation of the Project; (c) all as-built plans and

EXHIBIT 4.13

specifications and surveys for the Project; (d) all Permits; and (e) all renewals, substitutions, extensions, modifications or replacements of any of the foregoing.

"PROPERTY INCOME" means any and all: (a) sums payable to or for the benefit of Borrower under any Lease, including, without limitation, rent, additional rent, escalations, termination payments and any and all other payments and charges of any kind; (b) other issues, profits, royalties, revenues, income, and other benefits of the Project; (c) all insurance proceeds with respect to any Lease including, without limitation, rent loss coverage and business interruption coverage; (d) damages or claims of Borrower against lessees or others on account of or with respect to the foregoing; and (e) sums paid in settlement of any of the foregoing.

"RECORDING LOCATION" means the official records of Du Page County, Illinois.

"REPLACEMENT COST" means the full replacement cost, new without deduction for depreciation, of the Project, or applicable portion thereof, as determined by Lender in its good faith sole discretion.

"SECURED OBLIGATIONS" is defined in the Security Instrument.

"SECURITY INSTRUMENT" means that certain Mortgage and Fixture Filing of even date herewith executed by Borrower, in favor of Lender, to be recorded in the Recording Location, together with all supplements, amendments, modifications, extensions, renewals and replacements thereto.

"SIGNATURE PARTIES" means, individually and collectively, Borrower, Guarantor and each member, manager or trustee executing the Loan Documents on behalf of Borrower or Guarantor.

"TAX IDENTIFICATION NUMBER" means Borrower's employer identification number or social security number, which is 20-0055141.

"TERMINATION DATE" means July 22, 2003.

"TERRORISM LAWS" means Executive Order 13224 issued by the President of the United States of America, the Terrorism Sanctions Regulations (Title 31 Part 595 of the U.S. Code of Federal Regulations), the Terrorism List Governments Sanctions Regulations (Title 31 Part 596 of the U.S. Code of Federal Regulations), and the Foreign Terrorist Organizations Sanctions Regulations (Title 31 Part 597 of the U.S. Code of Federal Regulations), and all other present and future federal, state and local laws, ordinances, regulations, policies and any other requirements of any Governmental Agency (including, without limitation, the United States Department of the Treasury Office of Foreign Assets Control) addressing, relating to, or attempting to eliminate, terrorist acts and acts of war, each as hereafter supplemented, amended or modified from time to time, and the present and future rules, regulations and guidance documents promulgated under any of the foregoing, or under similar laws, ordinances, regulations, policies or requirements of other States or localities.

"TITLE COMPANY" means Chicago Title Insurance Company or another title insurance company selected by Borrower and approved by Lender in Lender's sole discretion to provide the Title Policy.

"TITLE POLICY" means an ALTA extended coverage policy of title insurance (1970 version, amended 10/17/70 only) (or such other form as approved by Lender in its discretion if the ALTA 1970 form is unavailable in the jurisdiction where the Property is located), with a liability limit equal to the Loan Amount, issued by the Title Company, insuring Lender that on the Closing Date Borrower owns fee simple title to the Project and that the Security Instrument is a valid first lien on the Project. The Title Policy shall contain such endorsements as Lender requires in its good faith sole discretion and shall be subject only to non-delinquent real estate taxes and assessments and such other exceptions to coverage as approved by Lender in writing, in its good faith sole discretion, prior to the Closing Date. To the extent permitted in the jurisdiction in which the Project is located, the Title Policy shall expressly insure against all mechanics' liens and shall not contain any bankruptcy, fraudulent conveyance or other creditors' rights

EXHIBIT 4.13

exclusion from coverage. The Title Policy shall also insure against matters which would be shown by a current survey of the Property and the rights of any tenants, occupants, or parties in possession not specifically approved by Lender in writing in its good faith sole discretion.

"TRANSFER" is defined in the Security Instrument.

ARTICLE 2

LOAN TERMS

2.1 LOAN AND DISBURSEMENTS OF LOAN PROCEEDS.

Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties of Borrower set forth in the Loan Documents, Lender agrees to make to Borrower, and Borrower agrees to accept from Lender, the Loan. The Loan proceeds shall be disbursed by Lender as provided in the Note.

2.2 EVIDENCE OF INDEBTEDNESS AND MATURITY.

Borrower shall execute and deliver to Lender, on or before the Closing Date, the Note evidencing the Loan. Borrower agrees to repay the indebtedness evidenced by the Note in accordance with the terms thereof and the terms hereof. The outstanding principal balance of the Loan, together with accrued and unpaid interest thereon and all other amounts payable by Borrower under the Loan Documents shall be due and payable on the Maturity Date provided in the Note, as the same may be accelerated as provided in the Note or the other Loan Documents.

2.3 INTEREST RATE.

The Loan shall bear interest at the rate per annum specified in the Note.

2.4 LOAN FEE AND PAYMENT OF CLOSING EXPENSES.

Whether or not the Loan closes, Borrower shall promptly pay all expenses in connection with the making and closing of the Loan, including, without limitation, all charges for environmental assessments, all report fees (including property condition, structural, engineering and termite), title examination, title insurance and survey, appraisal, recording and filing fees, inspection fees, travel expenses of Lender's personnel related to the making of the Loan, mortgage and documentary stamp taxes and mortgage recording taxes and fees, if any, note intangible taxes, if any, costs of tax lien searches, brokerage fees and commissions, the reasonable fees and costs charged by Lender's counsel (including Lender's local counsel, if any), all of Lender's out-of-pocket expenses in connection with the Commitment Letter, the Project and the Loan, and the nonrefundable Processing Fee (as defined in the Commitment Letter) payable to Lender. Borrower acknowledges and agrees that the Loan Fee has been fully earned by Lender, and the unpaid portion of the Loan Fee is due and payable, upon the Closing of the Loan, and the Loan Fee is nonrefundable except as expressly provided in the Commitment Letter. Borrower hereby authorizes Lender to disburse proceeds of the Loan to Lender or to any other party to pay the Loan Fee, interest for any partial calendar month in which the Closing Date occurs, and the fees and expenses described in this SECTION 2.4, notwithstanding that Borrower may not have requested a disbursement of such amounts. Borrower covenants to pay all amounts required to be paid by Borrower under this SECTION 2.4 within ten (10) days after written demand by Lender, if and to the extent not covered by the Expense Deposit (as defined in the Commitment Letter) or disbursed by Lender from proceeds of the Loan. Borrower's payment of the Loan Fee is in addition to Borrower's obligation to pay (a) the expenses, the brokers' commissions and any and all other sums described in this
SECTION 2.4, and (b) all other sums required to be paid by Borrower in the Commitment Letter or in any of the Loan Documents.

EXHIBIT 4.13

2.5 PREPAYMENT.

Borrower may not prepay the outstanding principal balance of the Note in whole or in part at any time except as provided in, and upon the satisfaction of all of the conditions and requirements set out in, the Note, including, without limitation, the payment to Lender of any Prepayment Charge set forth therein.

2.6 LIMITATIONS ON RECOURSE.

The provisions of SECTION 4.11 of the Note, regarding certain limitations on Lender's recourse under the Loan Documents, are incorporated herein by this reference as if set forth in full herein.

ARTICLE 3

CONDITIONS TO LOAN CLOSING

3.1 CONDITIONS PRECEDENT TO CLOSING OF THE LOAN.

As a condition precedent to Lender's obligation to close the Loan and disburse any Loan proceeds, on or before the Closing Date Borrower must satisfy and fulfill each of the following conditions precedent to closing, to the satisfaction of Lender in its good faith sole discretion:

A. LOAN DOCUMENTS AND ENVIRONMENTAL INDEMNITY. Borrower shall deliver to Lender the following documents, each duly executed and acknowledged by a notary public where necessary, and in form and substance satisfactory to Lender in its good faith sole discretion:

(i) This Agreement;

(ii) The Note;

(iii) The Security Instrument;

(iv) The Assignment of Rents;

(v) UCC-1 Financing Statements relating to the Personal Property for such States as are required by Lender;

(vi) The Environmental Indemnity;

(vii) The Guaranty;

(viii) The Formation Documents Certificates;

(ix) The Letter of Credit; and

(x) Borrower counsel's authority and enforceability opinion in form and substance satisfactory to Lender.

B. COMMITMENT LETTER CONDITIONS. Borrower shall have satisfied all of the closing conditions set forth in the Commitment Letter.

C. TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on the Closing Date.

EXHIBIT 4.13

D. NO DEFAULT. As of the Closing Date, no event or condition shall have occurred or shall exist that constitutes, and there shall be no event or condition that would result from the funding of the Loan that would constitute, an Event of Default under any of the Loan Documents or a Potential Default under any of the Loan Documents.

3.2 TERMINATION OF AGREEMENT. Lender's obligation to make the Loan and perform any of its other obligations under the Loan Documents shall terminate unless all of the conditions precedent set forth in SECTION 3.1 have been satisfied, and the Closing Date has occurred, on or before the Termination Date.

ARTICLE 4

ASSIGNMENT OF PROJECT DOCUMENTS

4.1 ASSIGNMENT OF PROJECT DOCUMENTS.

A. As security for the payment and performance of the Secured Obligations, Borrower hereby grants, conveys, assigns and transfers to Lender the Project Documents, and all rights of Borrower thereunder, together with the immediate and continuing right to collect and receive all sums which are now or hereafter due to Borrower thereunder or in connection therewith, and all of Borrower's rights to receive the proceeds of any insurance, indemnity, warranty or guaranty with respect to any of the Project Documents. The parties expressly acknowledge and agree that Lender does not hereby assume any of Borrower's obligations with respect to any of the Project Documents, including, without limitation, any obligation to pay for any work done pursuant thereto, unless Lender expressly assumes such obligations in accordance with SECTION 4.1(B). At Lender's request from time to time, Borrower shall deliver copies of any previously undelivered Project Documents to Lender.

B. Lender shall not exercise its rights under this SECTION 4.1 until the occurrence of an Event of Default under any of the Loan Documents. From and after the occurrence of an Event of Default under any of the Loan Documents, Lender may, at its option in its sole discretion and without any obligation, exercise any or all of its rights and remedies under SECTION 8.4, at law or in equity, and/or upon written notice to Borrower and the other parties to any or all of the Project Documents, exercise or enforce any or all of the rights and remedies granted to Borrower under any or all of such Project Documents as if Lender had been a party to or recipient of such Project Documents (and Borrower hereby irrevocably constitutes and appoints Lender as its attorney-in-fact, which power is coupled with an interest, and is deemed to be non-cancelable, with full power of substitution, to do so). Upon giving such notice Lender may (but shall have no obligation to) elect to assume the obligations of Borrower thereafter accruing under any or all of the Project Documents; provided that in no event shall Lender be responsible for any default by Borrower or any other party occurring prior to any election by Lender to assume such obligations under such Project Documents.

C. The acceptance by Lender of the assignment contained in this
SECTION 4.1 and the rights granted to Lender hereunder and under SECTION 8.4 shall not, prior to Lender's assumption of the obligations under specific Project Documents as provided in SECTION 4.1(B), obligate Lender to assume any obligations or liability under any of the Project Documents, to expend any money or incur any expense in connection with any of the Project Documents or to perform any obligation under any of the Project Documents.

4.2 PERFORMANCE UNDER PROJECT DOCUMENTS.

Borrower shall at all times perform and discharge each of its obligations under the Project Documents, diligently enforce its rights under the Project Documents unless otherwise agreed by Lender, in Lender's reasonable discretion and, at Borrower's sole cost and expense, appear in and defend Lender in any action or proceeding in any way related to any of the Project Documents. Borrower shall, within

EXHIBIT 4.13

ten (10) days after written demand by Lender, pay all reasonable out of pocket costs and expenses incurred by Lender in connection with any such action or proceeding, including, without limitation, reasonable attorneys' fees and costs.

4.3 INDEMNIFICATION.

Borrower hereby indemnifies and agrees to defend and hold the Indemnitees harmless for, from and against all expenses, loss, claims, damage or liability which the Indemnitees incur under any of the Project Documents or under or by reason of the assignment set forth in SECTION 4.1 or by reason of any actual or alleged obligation or undertaking on Lender's part to perform or discharge any covenants or agreements contained in any of the Project Documents; provided that such indemnity shall not extend to expenses, loss, claims, damage or liability arising from an Indemnitee's gross negligence or willful misconduct or, with respect to any Project Documents assumed by Lender as provided in SECTION 4.1(B) relating to the period after the date, if ever, that Lender assumes the obligations under such Project Documents as provided in SECTION 4.1(B).

ARTICLE 5

SECURITY AGREEMENT

5.1 GRANT OF SECURITY INTEREST.

As security for the payment and performance of the Secured Obligations, Borrower hereby assigns, transfers and grants to Lender, and there is hereby created in favor of Lender, a security interest under the Uniform Commercial Code in effect in the Governing State in and to the Personal Property, whether now owned or hereafter acquired, and in all proceeds thereof (and proceeds of proceeds) in whatever form. This Agreement shall constitute a security agreement pursuant to the Governing State Uniform Commercial Code with respect to the Personal Property and proceeds thereof, with Borrower the "Debtor" and Lender the "Secured Party" as such terms are used therein. Borrower agrees that Lender may, in such manner, on such terms and at such times as may be elected by Lender, and without demand or notice to, or the consent or signature of, Borrower, file and/or record such UCC financing statements, fixture filings, and/or amendments to or continuations of any financing statements or fixture filings to evidence, perfect and/or continue the perfection of, any security interests created or to be created pursuant to this Agreement or any of the other Loan Documents, in any or all of the Collateral.

5.2 REPRESENTATIONS, AGREEMENTS AND COVENANTS REGARDING PERSONAL PROPERTY.

As an inducement to Lender to execute this Agreement and make the Loan, Borrower represents and warrants to Lender, and covenants and agrees, as follows:

A. Except for the security interest in favor of Lender, Borrower is, and as to any of the Personal Property acquired after the date hereof shall be, the sole owner of the Personal Property, free from any adverse Lien of any kind whatsoever. Borrower shall promptly notify Lender of, and will defend the Personal Property against, all claims and demands of all persons at any time claiming any interest therein.

B. Borrower shall keep the Personal Property in good condition and repair, and shall not misuse, abuse, allow to deteriorate, waste or destroy the Personal Property or any part thereof, except for ordinary wear and tear resulting from normal and expected use in the ordinary course of Borrower's business, which shall be promptly replaced by Borrower with property of similar nature and of equal or greater value, unless such Personal Property is obsolete.

C. Borrower shall not, without the prior written consent of Lender, which consent shall not be unreasonably withheld, sell, offer to sell or otherwise transfer, exchange, hypothecate or dispose of the Personal Property or any interest therein, unless in the normal course of business the Personal Property

EXHIBIT 4.13

is being replaced by collateral of similar nature and of equal or greater value, or such Personal Property is obsolete. If the Personal Property or any part thereof is sold, transferred, exchanged, or otherwise disposed of (either with or without the written consent of Lender), the security interest of Lender shall extend to the proceeds of such sale, transfer, exchange or other disposition and, if the proceeds thereof are in excess of One Hundred Thousand Dollars ($100,000) individually or in the aggregate, at Lender's written request, Borrower shall hold such proceeds in a separate account for Lender's benefit and shall, at Lender's written request, transfer such proceeds into a cash collateral account with Lender as additional collateral for the Loan.

D. The tangible Personal Property shall be kept on or at the Project and Borrower shall not, without the prior written consent of Lender, which may be withheld in Lender's good faith sole discretion, remove the Personal Property therefrom except such portions or items of Personal Property which are consumed or worn out in ordinary usage, all of which shall be promptly replaced by Borrower as provided in SECTION 5.2(B).

E. Borrower shall immediately notify Lender in writing of any change in its state of incorporation or organization or in its place of business, any change in Borrower's name or organizational number or the adoption or change of any trade name or fictitious business name used by Borrower.

F. The Personal Property is not and shall not be used or bought for personal, family or household purposes.

G. Lender may examine and inspect the Personal Property at any reasonable time, wherever located upon reasonable prior notice to Borrower (except in the event of an emergency or from and after the occurrence of any Event of Default under the Loan Documents, or at any time during which an uncured Potential Default exists under the Loan Documents, in which event prior notice shall not be required).

5.3 AFFIXED COLLATERAL.

The inclusion in SECTION 5.1 of any Personal Property which may now be or hereafter become affixed or in any manner attached to the Project shall be without prejudice to any claim at any time made by Lender that such Personal Property is or has become a part of or an accession to the Project.

5.4 FURTHER SECURITY AGREEMENTS.

Borrower agrees to take such actions and, within ten (10) days after Lender's written request, to execute, deliver and file and/or record such documents, agreements and financing statements, as may be reasonably necessary to evidence the security interest set forth in SECTION 5.1, to establish the priority thereof, to carry out the intent and purpose of this ARTICLE 5 and/or reflect any change in Borrower's state of incorporation or organization, name, organizational number or place of business.

EXHIBIT 4.13

5.5 LETTER OF CREDIT. Borrower shall provide to Lender the Letter of Credit payable on demand. Borrower shall provide to Lender notice of renewal of the Letter of Credit no later than sixty (60) days prior to the expiration date and shall provide Lender evidence of the renewed the Letter of Credit no later than thirty (30) days prior to the expiration date. If Borrower fails to provide notice of renewal of the Letter of Credit or evidence of renewal as required by this SECTION 5.5, Borrower's failure shall constitute an Event of Default under
Section 8.1 (A) hereof. The Letter of Credit may be drawn down by Lender in multiple drawings at Lender's sole discretion. All proceeds from the Letter of Credit will be applied to pay down the outstanding Loan indebtedness. At such time as Standard & Poors and Moodys shall have upgraded their Debt Rating for the Guarantor to BB or Ba2 or higher, as applicable, the face amount of the Letter of Credit shall be reduced to $1,000,000. In the event that the Debt Rating for the Guarantor is increased to investment grade or higher by both rating agencies, then the Letter of Credit shall no longer be required.

ARTICLE 6

BORROWER'S REPRESENTATIONS AND WARRANTIES

As an inducement to Lender to execute this Agreement and make the Loan, Borrower represents and warrants to Lender the truth and accuracy of the matters set forth in this ARTICLE 6.

6.1 ORGANIZATION, POWER, GOOD STANDING, AND BUSINESS.

A. Borrower is a limited liability company duly formed, validly existing and in good standing under the Laws of the State of Illinois. Borrower has the full power and authority to own and operate its properties, to carry on its business as now conducted, to enter into each Loan Document and the Environmental Indemnity, and to carry out the transactions contemplated hereby and thereby. Borrower does not do business under any trade name or fictitious business name. Borrower has duly registered in compliance with all applicable Laws in all applicable jurisdictions, and has the lawful right to use, the name set forth in the definition of "Borrower" herein. Borrower has delivered to Lender true, correct and complete copies of its Formation Documents and such Formation Documents have not been amended or modified except pursuant to agreements delivered to Lender prior to the date hereof.

B. Each Signature Party other than Borrower is duly formed, validly existing and in good standing under the Laws of the State of its formation and, if formed under the Laws of a jurisdiction other than the Governing State, has registered to do business and is in good standing under the Laws of the Governing State. Each such Signature Party has the full power and authority to own and operate its properties, to carry on its business as now conducted, to act as a general partner, member, manager or trustee of Borrower or Guarantor, as applicable, to enter into each Loan Document and the Environmental Indemnity as a general partner, member, manager or trustee of Borrower or Guarantor, as applicable, to enter into the Guaranty and/or Environmental Indemnity on its own behalf, if applicable, and to carry out the transactions contemplated in the Loan Documents and the Environmental Indemnity. Borrower has delivered to Lender true, correct and complete copies of the Formation Documents for each such Signature Party and such Formation Documents have not been amended or modified except pursuant to agreements delivered to Lender prior to the date hereof.

6.2 AUTHORIZATION OF BORROWING, ETC.

A. AUTHORIZATION OF BORROWING. The execution, delivery and performance of the Loan Documents and the Environmental Indemnity, and the issuance, delivery and payment of the Note, have been duly authorized by all necessary action of each Signature Party.

B. NO CONFLICT. The execution, delivery and performance by each Signature Party of each applicable Loan Document and the Environmental Indemnity do not and will not (i) violate any Law applicable to any such Signature Party, the Formation Documents of any such Signature Party, or any order, judgment or decree of any court or other Governmental Agency binding on any such Signature Party; (ii) conflict with, result in a breach of, or constitute (with the giving of notice or the passage of time

EXHIBIT 4.13

or both), a default under any Contractual Obligation of any such Signature Party; (iii) result in or require the creation or imposition of any Lien of any nature on Borrower's properties or assets other than the Liens in favor of Lender under the Loan Documents; or (iv) require any approval or consent of any Person under any Contractual Obligation of any Signature Party.

C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by each Signature Party of each applicable Loan Document and the Environmental Indemnity does not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Governmental Agency or other Person.

D. BINDING OBLIGATION. The Note and the other Loan Documents are the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by the application of equitable principles. The Environmental Indemnity is the legally valid and binding obligation of each of the parties thereto, enforceable against such parties in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by the application of equitable principles. The Guaranty is the legally valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by the application of equitable principles.

6.3 ACTIONS.

Except for that certain letter, dated June 14, 2002, from the Michigan Department of Environmental Quality to an Affiliate, relating to environmental conditions at and in the vicinity of the Affiliate's Cadillac, Michigan plant, there is no action, suit, proceeding or arbitration, before or by any Governmental Agency or other Person, pending or, to Borrower's best knowledge, threatened in writing against or affecting Borrower, any of the Principal Parties or any properties or rights of Borrower or any of the Principal Parties, which might materially and adversely affect Lender's rights or remedies under the Loan Documents or the Environmental Indemnity, the business, assets, operations or financial condition of any such party or its ability to perform its obligations under the Loan Documents or the Environmental Indemnity. There are no outstanding judgments against Borrower, the Project, any other Collateral or any of Borrower's assets. There are no outstanding judgments against any of the Principal Parties, any Affiliate of any of the Principal Parties, any partnership of which any Principal Party is a general partner, or any limited liability company of which any Principal Party is a manager or managing member, in each case excluding Borrower, or any of their assets in excess of One Hundred Thousand Dollars ($100,000) as to any individual judgment or Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate. Except as set forth in this
SECTION 6.3, as to any of the Principal Parties or any Affiliate of any of the Principal Parties, the representations and warranties set forth above shall in each case be except as otherwise disclosed from time to time in AAR Corp.'s Securities and Exchange Commission filings.

6.4 FINANCIAL POSITION.

A. FINANCIAL INFORMATION. The Application Information and all financial statements and financial data delivered to Lender in connection with the Loan and/or relating to Borrower and the Principal Parties are true, correct and complete in all material respects and accurately present the financial position of such parties as of the date thereof. No material adverse change has occurred in the financial position disclosed by the Application Information or in any other financial statements or financial data delivered to Lender or in Borrower's or any Principal Party's assets, liabilities, financial position or business.

B. BANKRUPTCY AND INSOLVENCY. Neither Borrower nor any of the Principal Parties nor any Affiliate of any of the Principal Parties, any partnership of which any Principal Party is a general partner, or any limited liability company of which any Principal Party is a manager or managing member, in each case excluding Borrower, has filed or been the subject of any bankruptcy, insolvency, reorganization,

EXHIBIT 4.13

dissolution or similar proceeding or any proceeding for the appointment of a receiver or trustee for all or any substantial part of their respective property. Neither Borrower nor any of the Principal Parties nor any of the Related Parties has admitted in writing its inability to pay its debts when due, made an assignment for the benefit of creditors or taken other similar action.

C. OTHER BORROWING. Except for the Loan, no borrowings have been made by Borrower which are secured by the Project or any other assets of Borrower, or which might give rise to any Lien, other than the Liens created by the Loan Documents.

6.5 LIENS.

Borrower is the sole owner of the Project, the Personal Property and any other Collateral free from any adverse Liens, except for Liens in favor of Lender and

(i) Real estate taxes, not yet due and payable.

(ii) Covenants, conditions, restrictions, and easements contained in declaration recorded July 30, 1984 as Document R84-59903, together with amendments thereto and plat recorded July 30, 1984 as Document R84-59904, relating to the Hamilton Lakes Business Park Property Owners' Association, relating to architectural control, easements, maintenance of the common area, and assessments and special assessments (but excluding any assessments or charges due and payable thereunder for which a Lien is attached to the Property).

(iii) Building line as shown on the plat of Chancellory Business Park Resubdivision No. 2, aforesaid, as follows:

35 feet along the west and north lines, 50 feet along the east line, and the south 20 feet of the east 299.89 feet of lot 1.

(iv) Utility easement as shown and set forth on the plat of Chancellory Business Park Resubdivision No. 2, aforesaid, as follows:

25 feet along the north line and proposed 25 feet along the west line of lot 1.

(v) That certain lease dated as of the date hereof by and between Borrower and Guarantor.

Borrower has paid or will pay in full all contractors, materialmen, laborers, architects or other such Persons hired by Borrower to perform services or work with respect to the Project and all statutory lien periods have expired with respect to any such services or work performed prior to the date hereof. No previous assignment, sale, pledge, encumbrance or other hypothecation of the Leases or the Project Documents has been made (except for pledges and encumbrances which have been released in full prior to the date hereof or will be released in full concurrently with the funding of the Loan).

6.6 COMPLIANCE WITH LAWS.

The Project and the Personal Property and the use thereof are in material compliance with all Laws. The Property consists of legal and separate lot(s) for tax assessment purposes and under and in compliance with all applicable subdivision Laws. All Permits, easements and rights of way necessary for the occupancy, operation, lease, ownership and use of the Project have been obtained by Borrower and are in full force and effect.

EXHIBIT 4.13

6.7 DEFECTS.

There are no defects, facts or conditions affecting the Project or the Personal Property or any portion thereof which would make the Project unsuitable for the occupancy, operation, lease, use or sale thereof. There are no surface or subsurface soils conditions adversely affecting the Property, including, without limitation, unstable soil or landfills.

6.8 UTILITIES.

All utilities necessary for the full enjoyment of the Project, including, without limitation, trash collection, police and fire protection, sewer and storm drain, water, telephone, gas and electricity, are available to the Project and are not subject to any conditions which would limit the use of such utilities, other than the payment of normal charges to the utility supplier.

6.9 NO CONDEMNATION.

No Condemnation Event (as defined in the Security Instrument) is pending against the Project or any portion thereof. To Borrower's best knowledge, as of the date hereof no Condemnation Event has been threatened in writing against the Project or any portion thereof.

6.10 HAZARDOUS SUBSTANCES.

There are no Hazardous Substances on, in, under or at the Project except as used in the ordinary course of Borrower's and Guarantor's or one of their Affiliate's business which Hazardous Substances are stored and used in compliance with Environmental Laws. The Project and each portion thereof is in full compliance with all Environmental Laws. There are no above or below ground storage tanks located at the Project. Borrower has not received written notice from any Governmental Agency or any tenant, property manager or any other third party alleging that the Project or any portion thereof does not comply with any Environmental Laws or that evidence exists of a release, disposal of, or other contamination from, any Hazardous Substance at, on, in, from, under or about the Project.

6.11 NO DEFAULTS.

No Event of Default has occurred under this Agreement or any of the other Loan Documents, and no Potential Default exists under this Agreement or any of the other Loan Documents. No default by Borrower exists under any Contractual Obligation which would have a material adverse effect on Borrower's ability to repay the Loan or to perform its obligations under any of the Loan Documents or under the Environmental Indemnity.

6.12 DISCLOSURE.

No representation or warranty of Borrower contained in this Agreement, any Loan Document, or any Application Information contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

6.13 ENTITY REQUIREMENTS.

Borrower (a) has not engaged, does not engage and is not authorized to engage in any business unrelated to the Project, (b) has not had and does not have assets other than those related to its interest in the Project, (c) has not had and does not have any Indebtedness other than the Permitted Indebtedness,
(d) has its own books and records separate and apart from any other Person, (e) holds itself out as being, and conducts all business as, a legal entity, separate and apart from any other Person, with separate stationery, invoices and checks, (f) has not guarantied the debts or obligations of any other Person, and
(g) has not commingled its assets or funds with those of any other Person. Borrower's

EXHIBIT 4.13

Formation Documents provide that any dissolution and winding up or insolvency filing for Borrower requires the unanimous consent of all partners, directors or members, as applicable.

6.14 VIOLATIONS OF GOVERNMENTAL PROHIBITIONS.

Neither the making of the Loan, nor the receipt of Loan proceeds by Borrower, violates any Law applicable to Borrower, including, without limitation, any of the Terrorism Laws. Neither the making of the Loan, nor the receipt of Loan proceeds by Borrower or any Principal Party, violates any of the Terrorism Laws applicable to any of the Principal Parties. To Borrower's best knowledge, no holder of any direct or indirect equitable, legal or beneficial interest in Borrower or any Principal Party is the subject of any of the Terrorism Laws. No portion of the Loan proceeds will be used, disbursed or distributed by Borrower for any purpose, or to any Person, directly or indirectly, in violation of any Law including, without limitation, any of the Terrorism Laws.

ARTICLE 7

BORROWER'S COVENANTS

Borrower covenants and agrees that, until the Loan and all other amounts owing to Lender under the Loan Documents have been paid in full and all Secured Obligations have been satisfied, Borrower shall perform all of the covenants in this ARTICLE 7.

7.1 NO LIENS.

Except as expressly provided in SECTION 1.12 of the Security Instrument, Borrower shall not permit any Lien to be created or filed. Borrower shall be the sole owner of the Project, Personal Property and all other Collateral, free from any adverse Liens, except for Liens in favor of Lender. Borrower shall not assign, sell, pledge, encumber or otherwise hypothecate all or any portion of the Leases or the Project Documents.

7.2 COMPLIANCE WITH LAWS; CORRECTION OF DEFECTS.

Borrower will comply with all Laws applicable to Borrower, its property, the Project, the Personal Property, the other Collateral and/or the occupancy, operation, ownership or use thereof, including, without limitation, all applicable subdivision Laws. The Property shall consist of legal and separate lot(s) for tax assessment purposes. Borrower shall comply with, and maintain in full force and effect, all Permits, easements and rights of way necessary for the occupancy , operation, lease, ownership or use of the Project. If at any time Borrower becomes aware of (a) any defects, facts or conditions affecting the Project or any portion thereof or any of the Personal Property or other Collateral which would make the Project unsuitable for the occupancy, operation, lease, use or sale thereof, or (b) any surface or subsurface soils conditions adversely affecting the Property, or (c) any fact, event, occurrence or condition that would render or cause any of Borrower's representations or warranties in the Loan Documents to be then incorrect or incomplete if such representation or warranty were remade as of such date, Borrower will promptly notify Lender in writing and shall promptly and diligently cause the same to be fully remedied and cured at Borrower's cost and expense.

7.3 INSPECTION.

Subject to the rights of tenants at the Project, during normal business hours and upon reasonable advance notice (except in the event of an emergency or from and after the occurrence of an Event of Default under the Loan Documents, or at any time during which an uncured Potential Default exists under the Loan Documents, in which event entry shall not be limited to normal business hours and no advance notice shall be necessary), Borrower shall permit Lender and any Person designated by Lender to visit and inspect the Project.

EXHIBIT 4.13

7.4 LEASING OF SPACE.

A. Unless otherwise approved by Lender in writing in advance (which approval may be withheld in Lender's good faith sole discretion), the Approved Lease shall reflect an arms-length transaction at the then current market rate for comparable space. The Approved Lease shall comply with all applicable Laws, including, without limitation, all subdivision requirements, if any. Borrower shall perform all obligations required to be performed by it as landlord under the Approved Lease. Borrower shall not accept any Prepaid Property Income (however denominated).

B. Borrower shall not enter into, or modify, amend, terminate or accept a surrender or cancellation of the Approved Lease, or consent to any assignment or subletting under the Approved Lease, or enter into any other Lease, without Lender's prior written approval of any sublease, assignment, or other Lease, and the tenant's financial condition (including, without limitation, financial statements, operating history and business prospects), which shall not be unreasonably withheld. Lender's prior written consent shall not be required for any amendment or modification of the Approved Lease or any other Lease if the amendment or modification does not alter a Material Lease Provision. Lender's prior written consent, which may be withheld in Lender's good faith sole discretion, shall be required if (a) any proposed tenant's operations at, on or about the Project will or are reasonably likely to at any time involve the use, generation, storage, handling or disposal of Hazardous Substances, or (b) the tenant's use of the Project or applicable portion thereof is not consistent with the use of the remainder of the Project.

C. Promptly after the execution of any modification, amendment or termination of the Approved Lease, or any other Lease previously approved by Lender, Borrower shall deliver to Lender copies of such modification, amendment or termination, and all other documents executed in connection therewith, whether or not Lender's approval is required in connection therewith pursuant to this SECTION 7.4. In the event that Borrower enters into any other Lease or executes an assignment or sublease under the terms of the Approved Lease, Borrower shall promptly prepare and deliver to Lender a rent roll, operating statements or other leasing information as Lender may from time to time reasonably request. Borrower shall promptly take such steps as shall be reasonably necessary to prevent any set-off against rent or other amounts payable under any Lease including, without limitation, the payment or reimbursement of any costs incurred or losses suffered which gave rise to the claim for set-off.

D. If requested by Lender with respect to the Approved Lease, Borrower shall, within twenty (20) days after Lender's written request, execute and deliver to Lender, and use commercially reasonable efforts to cause the tenant under any Lease (and any other party to, or guarantor of, such Lease) to execute and deliver to Lender, a nondisturbance and attornment agreement in form and substance reasonably satisfactory to Lender. If requested by Lender with respect to any Lease, Borrower shall, within twenty (20) days after Lender's written request, execute and deliver, and use commercially reasonable efforts to cause the tenant under such Lease to execute and deliver, to Lender, an estoppel certificate in form and substance reasonably satisfactory to Lender.

E. As used herein, "MATERIAL LEASE PROVISION" means a provision which materially increases the landlord's obligations under any Lease, including, but not limited to the Approved Lease, or any other Lease, which provides the tenant with material rights or recourse against the landlord or with the right to terminate the Lease, or which adversely affects Lender's security in the Lease. Without limiting the generality of the foregoing, each of the following shall constitute a Material Lease Provision: (i) any provision which affects Lender's rights with respect to the Lease, which affects the relative priority of the Lease and the Security Instrument without Lender's consent, or which requires Lender to agree to or provide any nondisturbance agreement to the tenant; (ii) the grant of an option, right of first offer or refusal or other right to purchase all or any portion of the Project, (iii) the grant of an option, right of first offer or refusal or other right to lease any additional space in the Project at a rent less than market rent, (iv) the grant of any early termination option (except in the event of a major casualty or substantial condemnation),
(v) any provision which provides for the application of insurance or condemnation proceeds in a manner contrary to the Loan Documents, (vi) any reduction in the rent payable under such Lease, (vii) the grant of any offsets, or the agreement for the payment of any amounts by the landlord, other than tenant improvement allowances at then current market levels, if such offset or payment

EXHIBIT 4.13

obligation would be applicable to any subsequent owner of the Project, including, without limitation any owner succeeding to the landlord's interest by foreclosure or a deed in lieu or in aid thereof, (viii) a limit to the expense reimbursements due from the tenant for increases in taxes or expenses, (ix) an environmental, hazardous substance or other indemnification binding on the landlord that would be applicable to any subsequent owner of the Project, including, without limitation, any owner succeeding to landlord's interest by foreclosure or a deed in lieu or in aid thereof, (x) any direct or indirect restriction or limitation in favor of the tenant on the use or leasing of any portion of the Project not covered by such Lease, including, without limitation, any provision entitling the tenant to the exclusive operation of any business in the Project, or (xi) any direct or indirect restriction or limitation in favor of the tenant on the use or leasing of any property other than the Project, including, without limitation, any provision entitling the tenant to the exclusive operation of any business within a specified radius of the Project.

F. Prior to the commencement of any work at the Project by or on behalf of any tenant under any Lease (or, if Borrower does not have knowledge of such work prior to the commencement thereof, as soon as Borrower learns of such work), Borrower shall post and record, in compliance with applicable law, notices of non-responsibility, or the local equivalent thereof, with respect to such tenant work.

G. Without limiting the terms of the Assignment of Rents, within ten (10) days after Lender's written demand at any time (after and during the continuance of an Event of Default under any of the Loan Documents), Borrower shall deliver to Lender any or all security deposits then or thereafter held by Borrower, if any. If any of such security deposits are in the form of letter(s) of credit, Borrower shall deliver to Lender the original letter of credit, together with original transfer documents in the form required by such letter of credit, transferring such letter of credit to Lender. All such security deposits delivered to Lender shall be held by Lender in accordance with the terms of the applicable Lease and any then remaining security deposits held by Lender upon the payment in full of the Loan and all amounts owing to Lender under the Loan Documents shall be delivered and re-assigned, if applicable, to Borrower. Within ten (10) days after Lender's written request, Borrower and Guarantor shall execute and deliver to Lender such documents as may be reasonably requested by Lender in connection with the delivery of such security deposits to Lender.

H. Immediately upon the payment of any Lease Termination Payments, Borrower shall deliver such Lease Termination Payments to Lender. Such Lease Termination Payments shall be deposited into a cash collateral account and pledged to Lender as additional collateral for the Loan. Such funds shall be disbursed by Lender, subject to such terms and conditions as may be reasonably imposed by Lender, to pay such tenant improvement costs and leasing commissions for the applicable vacated space in the Project as may be approved by Lender, which approval shall not be unreasonably withheld. Within ten (10) days after Lender's written request, Borrower and Guarantor shall execute and deliver to Lender such documents as may be reasonably requested by Lender in connection with the delivery of any Lease Termination Payments to Lender, including, without limitation, a pledge agreement setting forth the terms under which funds in such cash collateral account shall be disbursed.

7.5 ENVIRONMENTAL MATTERS.

A. Borrower shall, at its own expense, comply and cause all persons entering the Project to comply with all Environmental Laws applicable thereto and Borrower shall not use, store, process, manufacture, transport, dispose or release any Hazardous Substances on, in or adjacent to any part of the Project or permit any of the foregoing to occur except as used in the ordinary course of Borrower's or Guarantor's or one of their Affiliate's business which Hazardous Substance shall be used and stored in compliance with Environmental Laws. Borrower shall immediately advise Lender in writing of any (i) discovery of Hazardous Substances on, at, from or under the Project or any portion thereof in violation of Environmental Laws; or (ii) any claim, action or order threatened or instituted by any third party (including, without limitation, any Governmental Agency) against the Project or Borrower relating to damages, cost recovery, liability, loss or injury resulting from any Hazardous Substances, including those used or stored in the ordinary course of Borrower's, Guarantor's or one of their Affiliate's business. Borrower shall provide Lender with copies of all communications with any third party (including, without

EXHIBIT 4.13

limitation, any Governmental Agency) relating to any Environmental Law or any claim, action, notice of violation, inquiry, investigation or order relating to Hazardous Substances at, on, under or in the Project or any portion thereof. Borrower shall promptly and diligently remediate any Hazardous Substances contamination at, under, from or attributable by joint and several liability to the Project to a level required by Environmental Laws. Without limiting the foregoing, if any remedial action is required by any Environmental Laws, Borrower shall immediately notify Lender of such situation and shall prepare a written plan setting forth a description of such situation (and all environmental reports relating thereto) and the remedial action that Borrower proposes to implement in connection therewith. Borrower shall, at its own expense, thereafter diligently and continuously pursue the remediation of the condition necessary to bring the Project into compliance with this SECTION 7.5(A) and shall, at its own expense, promptly cause all liens or encumbrances against the Project in connection therewith to be removed and satisfied.

B. Lender shall have the right at any time to retain a professional environmental consultant to conduct tests and investigations of the Project (including, without limitation, ground water and soils testing) with respect to Hazardous Substances or the Project's compliance with Environmental Laws. Borrower hereby grants to Lender, its agents, employees, consultants and contractors, an irrevocable license and authorization to enter upon and inspect the Project and to conduct such tests and investigations on the Project or any portion thereof as Lender, in its sole discretion, determines necessary. Such tests shall be conducted at reasonable times, upon reasonable prior notice and so as not to unreasonably interfere with the tenant's business. Such tests and investigations shall be at Lender's expense unless (i) a breach of the provisions of SECTION 6.10 or SECTION 7.4(B) has occurred, or a breach of, or release or contamination governed by, this SECTION 7.5 has in fact occurred, or
(iii) an Event of Default has occurred under any of the Loan Documents or an uncured Potential Default exists under any of the Loan Documents. Borrower acknowledges and agrees that, as between it and Lender, only Borrower owns and operates the Project and only Borrower has the responsibility for compliance with this SECTION 7.5 and neither Lender's enforcement of, or failure to enforce, any of the provisions of SECTION 7.5 shall be deemed to affect the obligations or provisions of this SECTION 7.5.

C. To the fullest extent permitted by law, Borrower hereby indemnifies and agrees to defend, and hold harmless the Indemnitees for, from and against any and all loss, claim, damage or liability of any kind or nature and from any suits, actions, claims or demands, including without limitation, all amounts described in SECTION 7.5(D), arising directly or indirectly, in whole or in part, out of (i) the existence or alleged existence of any Hazardous Substances at, on, under, from or in the Project or any portion thereof, (ii) the removal of or failure to remove any Hazardous Substances from the Project or any portion thereof or from neighboring property, including, without limitation, from the groundwater of the Project or any neighboring property (in the case of neighboring property, only to the extent caused by Borrower or otherwise migrating from the Project), (iii) any activity involving Hazardous Substances with respect to the Project carried on or undertaken on or off the Project, (iv) any residual contamination on or under the Project or on or under any neighboring property (in the case of neighboring property, only to the extent caused by Borrower or otherwise migrating from the Project), or (v) any contamination of any property or natural resources arising by, through or under Borrower or any tenant of Borrower in connection with any activity involving Hazardous Substances, in each case whether prior to or during the term of the Loan, and whether by Borrower or any other party, provided that such indemnity shall not extend to damage or liability incurred by an Indemnitee to the extent such damage or liability is caused directly by such Indemnitee's gross negligence or willful misconduct. Upon receiving knowledge of any suit, action, claim or demand asserted by a third party that Lender believes is covered by this indemnity, Lender shall give Borrower written notice of the matter and an opportunity to defend it, at Borrower's sole cost and expense, with legal counsel reasonably satisfactory to Lender. Lender may also require Borrower to so defend the matter. The obligations of Borrower under this SECTION 7.5(C) are, without limitation, intended to operate as a binding valid indemnity agreement under 42 U.S.C. Section 9607(e)(1) and shall survive the closing of the Loan and the repayment of the Loan and the satisfaction of all other Secured Obligations.

D. The indemnity set forth in SECTION 7.5(C) shall include, without limitation, (i) loss, claims, damage or liability for, or arising from, personal injury and property damage, including, without limitation, diminution in marketability or value of property, (ii) compensation for lost wages, rents, business income, profits or other economic loss, (iii) all consequential damages; (iv) all damages to any natural resources

EXHIBIT 4.13

and the environment, the costs of any repair, clean up, response cost, or remediation of the Property, the Project, and, to the extent required or necessary, the neighboring property (in the case of neighboring property, only to the extent caused by Borrower or otherwise migrating from the Project), and the investigation, preparation and implementation of any closure, remedial or other required plans; and (v) all costs and expenses incurred in connection with any of the foregoing, including, without limitation, reasonable attorneys' fees and costs and reasonable consultants' fees and costs.

7.6 INSURANCE REQUIREMENTS.

A. Borrower shall procure and maintain, or cause to be procured and maintained, at all times until the repayment of the Loan and the satisfaction of the Secured Obligations, policies of insurance in form and amounts as set forth in Section 7.6B and issued by companies qualified to do business in the state where the Project is located and having a Best's rating of at least A:VIII. All policies shall expressly protect Lender's interest as required by Lender. If Borrower fails to maintain any insurance coverage required under this SECTION 7.6, Lender may, but shall have no obligation to, obtain such insurance, and Borrower shall pay all amounts expended by Lender for such insurance, together with interest thereon at the Default Interest Rate, within ten (10) days after written demand by Lender. In the event of any foreclosure of the Security Instrument or a deed in lieu or in aid thereof or other transfer of title to the Project in extinguishment in whole or in part of the Secured Obligations, all right, title and interest of Borrower in and to all proceeds payable under the insurance policies required by this SECTION 7.6 and then in force shall vest in and pass to the new owner of the Project.

B. Without limiting the generality of SECTION 7.6(A), Borrower shall maintain or cause to be maintained the following insurance coverages:

(i) PROPERTY INSURANCE. Property insurance for:

(a) The Project; and

(b) Borrower's furniture, furnishings, fixtures, equipment and the other items of property (whether personalty or fixtures) in, at or about the Project.

Borrower's property insurance must satisfy the following requirements, without limitation:

(1) It must be written on the broadest available all-risk (special causes of loss) policy form or an equivalent form reasonably acceptable to Lender;

(2) It must include an agreed-amount endorsement for no less than one hundred percent (100%) of the full Replacement Cost of the covered property;

(3) Borrower's property insurance coverage shall include, without limitation, coverage for theft, fire, extended coverage, debris removal, vandalism and malicious mischief and sprinkler leakage.

(4) Borrower's property insurance coverage shall include an Ordinance or Law Coverage endorsement (CP 04 05 06 95 or equivalent reasonably satisfactory to Lender), providing coverage A (loss to the undamaged portion of the building), Coverage B (demolition cost) and Coverage C (increased cost of construction) and an Ordinance or Law - Increased Period of Restoration endorsement (CP 15 31, 1988 edition, or equivalent reasonably acceptable to Lender).

(ii) BUSINESS INCOME AND OTHER TIME ELEMENT INSURANCE. Business income, extra expense insurance coverages, with an extended period of indemnity as set forth herein (including, without limitation, business interruption and/or loss of rental income insurance) in an amount sufficient to avoid any co-insurance penalty and providing proceeds which will cover actual loss sustained (a) during a

EXHIBIT 4.13

period of not less than eighteen (18) months from the date of casualty or loss, or (b) until that date on which the Project is fully reconstructed or repaired, put to its intended use, fully occupied, and generating the amount of income/rents originally contemplated, but for the casualty or loss, whichever is later. For all perils the coverage required by this SECTION 7.6(B)(ii) shall be provided by the insurer issuing the property coverage. The coverage required by this SECTION 7.6(B)(ii) shall include a waiting period of not more than five (5) days and must be endorsed to provide ordinance or law coverage no less broad than that required by SECTION 7.6(B)(i)(5).

(iii) BOILER AND MACHINERY INSURANCE. Broad form boiler and machinery insurance (without exclusion for explosion) covering all boilers or other pressure vessels, machinery and equipment located in, at or about Project, including, without limitation, system breakdown coverage and insurance against loss of occupancy or use arising from any breakdown, in an amount equal to the Replacement Cost of the improvements housing the boilers, machinery and equipment or such other amount reasonably acceptable to Lender.

(iv) COMMERCIAL GENERAL LIABILITY INSURANCE. Commercial general liability insurance, written on an Insurance Services Office occurrence policy form (1986 or more recent edition), covering bodily injury, property damage, personal injury and advertising injury arising out of or relating directly or indirectly to the possession, use, leasing, operation, construction, maintenance or condition of the Project, including without limitation premises/operations coverage, products/completed operations coverage and contractual liability coverage, with limits of liability not less than Two Million Dollars ($2,000,000) bodily injury and property damage per occurrence limit, Two Million Dollars ($2,000,000) personal injury and advertising injury limit, Four Million Dollars ($4,000,000) general aggregate limit (provided, by endorsement reasonably satisfactory to Lender, on a per location basis), and Two Million Dollars ($2,000,000) products/completed operations aggregate limit. The liability insurance limits may be provided by a combination of primary, umbrella and/or excess policies, but any umbrella or excess policy must be at least as broad in coverage as the primary policy and satisfy all the requirements of this
SECTION 7.6. Lender shall be named as an additional insured on the liability insurance policy or policies by endorsement CG 20 26 11 85 or equivalent reasonably acceptable to Lender.

(v) INTENTIONALLY DELETED.

(vi) FLOOD INSURANCE. Flood insurance (including business interruption and/or loss of rental income coverage meeting the requirements of SECTION 7.6.B(ii), above), with limit sufficient to cover one hundred percent (100%) of the full Replacement Cost of the Project (excluding the Property), if either (a) any portion of the improvements located at the Property is located in an area now or hereafter designated as having special flood hazards under any Flood Insurance Acts or any other Law, or interpretations or regulations thereunder, or (b) flood insurance is required by any Law, or interpretations or regulations thereunder, applicable to Borrower, Lender or the Project or by any federal or state regulatory agency having jurisdiction over Lender.

C. The original of all certificates and all endorsements required by this
SECTION 7.6, shall be delivered to and retained by Lender unless Lender agrees otherwise. Borrower shall deliver renewal or replacement policies, certificates and endorsements to Lender not less than thirty (30) days prior to the expiration of existing coverages. All certificates and endorsements to be furnished hereunder shall be in form reasonably satisfactory to Lender. All policies: (i) shall have a deductible of (a) not more than Fifty Thousand Dollars ($50,000) per occurrence with respect to the commercial general liability insurance and (b) not more than One Hundred Thousand Dollars ($100,000) with respect to any other insurance; (ii) with respect to the property, business income and time element, shall include Lender as an additional insured and loss payee, including, without limitation, a standard mortgagee clause/lender's loss payable endorsement and chattel mortgage clause in favor of, and in form reasonably satisfactory to, Lender (providing, without limitation, that Lender's right of recovery shall not be prejudiced or impaired by any act, error or omission (whether negligent, willful or otherwise) of Borrower, any other insured or any other person or entity); (iii) shall provide that the coverage afforded thereby shall not be non-renewed, terminated, cancelled, materially reduced or materially modified without thirty (30) days' prior written notice to Lender (with the exception of a ten (10) day cancellation upon written notice for failure to pay

EXHIBIT 4.13

premiums); (iv) shall include a waiver of subrogation as to Lender with respect to the Property Insurance and provide that such waiver shall not invalidate or prejudice the coverage available to Borrower or Lender; (v) may be in the form of blanket policies, in amount, form and content reasonably satisfactory to Lender, provided that any such blanket policy or policies shall specify the address of the Project and the Property, the portion of the total coverage of such blanket policies that is allocated to the Property and the Project, and any sublimits in such blanket policies applicable to the Property and the Project, and provided further that all other requirements of this SECTION 7.6 are satisfied; (vi) shall provide that the coverage afforded is primary and that any other insurance available to Borrower or Lender is secondary, excess and noncontributing; (vii) shall provide for severability of interests (separation of insureds) such that Lender's rights under the policies are separate from and independent of Borrower's; and (viii) shall contain no insured vs. insured exclusions. Borrower shall not obtain or maintain separate insurance or additional insurance concurrent in form or contributing in the event of loss with that required to be maintained hereunder without the prior written consent of Lender, which consent shall not be unreasonably withheld, provided that such policies satisfy all of the requirements of this SECTION 7.6.

D. Notwithstanding anything to the contrary contained in the Loan Documents, Borrower waives any and all right of action or recovery against Lender, and its Affiliates, predecessors, successors, assigns, directors, officers, employees, agents and representatives, for any loss, liability, claim, expense, injury or damage, including without limitation to, or arising out of or relating directly or indirectly to, the Project, Collateral, Borrower, Borrower's property, or the property of others under Borrower's control, to the extent such loss, liability, claim, expense, injury or damage is insured against or required to be insured against under this SECTION 7.6 or is coverable by insurance.

E. At Lender's election at any time not more frequently than once per calendar year, the Replacement Cost amount of Borrower's property insurance shall be adjusted. In connection therewith, Borrower shall, at its sole expense, provide at the written request of Lender evidence reasonably satisfactory to Lender of the Replacement Cost of the Project. Such evidence may be in the form of an insurance appraisal or valuation report prepared by an insurance company, appraiser or other consultant reasonably acceptable to Lender.

F. Borrower shall, at Borrower's sole expense, comply with all requirements, guidelines, rules and orders and similar mandates and directives relating to the Project and the Property imposed by any insurer and shall not cause or permit any condition to exist in, at or about Project or the Property which would invalidate or impair the insurance coverage required by this SECTION 7.6, which would result in a material increase in hazard or which would constitute grounds for cancellation or non-renewal of any policy referred to in this SECTION 7.6.

G. Delivery to Lender of the certificates and endorsements referred to in this SECTION 7.6 shall constitute an assignment of all proceeds payable under such insurance as relating to the Project or the Property by Borrower to Lender as further security for the Secured Obligations.

H. Notwithstanding any receipt, review, approval or consent to any insurance referred in this SECTION 7.6, Lender shall incur no liability as a result of the insolvency of any insurer, failure of any insurer to perform, deductibles, inadequacy of limits of any policy, limitations or exclusions from coverage or failure of any insurer to pay any claim, even where Lender has caused insurance to be placed with an insurer after failure by Borrower to comply with the requirements of this SECTION 7.6.

I. The insurance requirements set forth in this SECTION 7.6 are independent of Borrower's indemnification obligations and other obligations to Lender hereunder and under the other Loan Documents, and shall not be construed or interpreted to restrict, limit or modify Borrower's indemnification obligations or any other obligations to Lender hereunder or under any of the Loan Documents.

7.7 NOTICE OF PROCEEDING.

Borrower will promptly notify Lender of any notice of violation, action, suit, proceeding or arbitration (including, without limitation, any judicial or nonjudicial foreclosure proceeding, any voluntary or

EXHIBIT 4.13

involuntary bankruptcy proceeding or any proceeding for the appointment of a receiver), commenced or threatened in writing against Borrower, any of the Principal Parties, or the Project or the other Collateral or any portion thereof or interest therein. Borrower shall deliver to Lender copies of all notices and other information in connection with any such action, suit, proceeding or arbitration promptly upon receipt or transmittal thereof.

7.8 FINANCIAL AND OTHER INFORMATION.

Borrower shall maintain full and complete books of account and other records reflecting the results of operations of the Project in accordance with the Financial Reporting Method. Borrower shall furnish or cause to be furnished to Lender such financial information concerning Borrower, the Principal Parties and the Project and the other Collateral as Lender may reasonably request from time to time. Lender shall also have access to such books and records and Borrower's corporate or organizational books, during regular business hours and upon reasonable advance notice to Borrower, and shall have the right to make copies thereof or extracts therefrom and to discuss the finances and accounts of Borrower with Borrower, its partners or members, as applicable, and its independent public accountants, all as Lender may reasonably request. Without limiting the generality of the foregoing, Borrower shall furnish to Lender, without prior request or demand:

A. ENTITY FINANCIAL STATEMENTS. If Borrower and/or any Principal Party is not a natural person or a trust, on or before each Financial Statement Delivery Date, Borrower shall provide Lender with financial statements
(including, without limitation, a balance sheet and a profit and loss statement) for the previous fiscal year and the current fiscal year-to-date, each of which shall (i) be prepared in accordance with the Financial Reporting Method and otherwise in form reasonably acceptable to Lender, and (ii) contain comparative information for the two (2) previous fiscal years, (iii) be certified as true, correct and complete by Borrower or such Principal Party, and (iv) at Lender's election after the occurrence of an Event of Default under any of the Loan Documents or while any uncured Potential Default exists under any of the Loan Documents, be certified by a certified public accountant acceptable to Lender. Within fifteen (15) days after the end of each fiscal Year, Borrower shall provide Lender with a written certification, in form reasonably satisfactory to Lender, that there has been no material adverse change in the financial condition of Borrower and each such Principal Party from the financial statements for such party most recently delivered to Lender (or, if there has been a material adverse change, explaining such material adverse change in reasonable detail).

B. INTENTIONALLY DELETED.

C. PROJECT FINANCIAL STATEMENTS. In the event that the Project shall have two or more tenants or subtenants, Borrower shall provide Lender with operating statements for the Project on or before each Financial Statement Delivery Date in reasonably acceptable form to Lender, (2) contain comparative information for the two (2) previous calendar years, (3) be certified as true, correct and complete by Borrower, and (4) at Lender's election after the occurrence of an Event of Default under any of the Loan Documents or while any uncured Potential Default exists under any of the Loan Documents, be certified by a certified public accountant acceptable to Lender.

D. FAILURE TO DELIVER FINANCIAL STATEMENTS. Without limiting any of Lender's rights or remedies in the event of any failure by Borrower to comply with the provisions of this SECTION 7.8, if Borrower fails to deliver to Lender any of the financial statements or other information required herein on or before the applicable date required in this SECTION 7.8 (the "Information Delivery Date"), and if Borrower continues to fail to deliver any such financial statements or other information within fifteen (15) days after written notice from Lender given on or after the Information Delivery Date, then, commencing on the first day after the Information Delivery Date, the Variable Interest Rate (as defined in the Note) shall be increased by one-half percent (.50%) until such time as Borrower has delivered all of the financial statements or other information required to be delivered by Borrower pursuant to, and in the form required by, this SECTION 7.8. In addition to such increase in the Variable Interest Rate during the Amortization Period, the Monthly Installments shall be adjusted effective with the Monthly Installment due immediately following the Information Delivery Date to reflect such increase. Once Borrower has delivered all of the

EXHIBIT 4.13

financial statements and other information required to be delivered by Borrower pursuant to, and in the form required by, this SECTION 7.8, the Variable Interest Rate and the Monthly Installments shall be readjusted effective with the Monthly Installment due immediately thereafter.

7.9 OTHER CONTRACTUAL OBLIGATIONS.

Borrower shall perform all of its obligations under (a) any Contractual Obligation if the failure to perform any such obligation would have a material adverse effect on Borrower's ability to repay the Loan or to perform any of its obligations under any of the Loan Documents or under the Environmental Indemnity, and (b) all Permitted Indebtedness.

7.10 FURTHER ASSURANCES.

Borrower shall execute and deliver, and shall cause Guarantor to execute and deliver, from time to time, within ten (10) days after written any request by Lender, any and all instruments, agreements and documents, and shall take such other action, as may be reasonably necessary or desirable in the opinion of Lender to maintain, perfect or insure Lender's security provided for herein and in the other Loan Documents, including, without limitation, the execution of UCC-1 renewal statements, the execution of such amendments to the Security Instrument and the other Loan Documents and the delivery of such endorsements to the Title Policy, all as Lender shall reasonably require, and shall pay all reasonable fees and expenses (including, without limitation, reasonable attorney's fees and costs) related thereto.

7.11 EQUITY DISTRIBUTIONS.

Borrower shall not make any direct or indirect Equity Distributions (a) from and after the occurrence of an Event of Default under any of the Loan Documents or (b) so long as any uncured Potential Default exists under any of the Loan Documents, including, without limitation, at any time during which any Impound Expenses are delinquent.

7.12 ENTITY REQUIREMENTS.

Borrower (a) shall not engage or be authorized to engage in any business unrelated to the Project, (b) shall not have assets other than those related to its interest in the Project, (c) shall not have any Indebtedness other than the Permitted Indebtedness, (d) shall have its own books and records separate and apart from any other Person, (e) shall hold itself out as being, and shall conduct all business as, a legal entity, separate and apart from any other Person, with separate stationary, invoices and checks, (f) shall not guaranty the debts or obligations of any other Person, and (g) shall not commingle its assets or funds with those of any other Person. Borrower's Formation Documents shall at all times provide that any dissolution and winding up or insolvency filing for Borrower requires the unanimous consent of all partners, directors or members, as applicable. Borrower and the Principal Parties shall maintain and preserve their existence and all rights and franchises material to their respective businesses and shall be, at all times, validly existing and in good standing in the state of their formation. Borrower shall be, at all times, validly existing and in good standing in the Governing State. Borrower shall not at any time be a foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Nonforeign Status Statutes. Without limiting the provisions of SECTION 1.10 of the Security Instrument, neither Borrower nor any of the Principal Parties shall amend or modify any of their respective Formation Documents without Lender's prior written consent, which shall not be unreasonably withheld unless such amendment or modification relates to a Transfer (in which event Lender's consent may be withheld in Lender's good faith sole discretion). Promptly after Lender's written request from time to time, but not more frequently than once in any calendar year, Borrower shall deliver to Lender evidence reasonably satisfactory to Lender that Borrower and the Principal Parties are in compliance with the provisions of this
SECTION 7.12.

EXHIBIT 4.13

7.13 MANAGEMENT OF THE PROJECT.

The Project shall be managed by Borrower or an Affiliate of Borrower approved by Lender for so long as no Event of Default has occurred under the Loan Documents and so long as Borrower or such Affiliate is managing the Project in a first class manner. In the event that Borrower hires a Project property manager, such property manager shall not be entitled to payment of any fees or costs for services rendered for the benefit of Borrower until such time as the property manager executes a written agreement. Such written agreement shall be approved in advance in writing by Lender if (a) any Event of Default has occurred under any of the Loan Documents or an uncured Potential Default exists under any of the Loan Documents or (b) such agreement is not terminable with or without cause and without penalty, upon not more than thirty (30) days' notice to the manager thereunder. In no event shall any manager be removed or replaced or any management agreement modified, amended, or terminated without the prior written consent of Lender if any Event of Default has occurred under any of the Loan Documents or an uncured Potential Default exists under any of the Loan Documents. At Lender's election, within ten (10) days after Lender's written request, Borrower and any such manager of the Project shall execute and deliver to Lender an assignment of such management agreement in form reasonably satisfactory to Lender and, at Lender's election in its sole discretion, allowing Lender either to terminate such management agreement immediately upon the transfer of title to the Project as a result of the exercise of its remedies under the Loan Documents, or to keep such management agreement in effect after such transfer of title. Lender's consent and approval under this SECTION 7.13 shall not be unreasonably withheld.

7.14 COMPLIANCE WITH GOVERNMENTAL PROHIBITIONS.

No portion of the Loan proceeds will be used, disbursed or distributed by Borrower or any Principal Party for any purpose, or to any Person, in violation of any Law including, without limitation, any of the Terrorism Laws. Borrower shall provide Lender with immediate written notice (a) of any failure of any of the representations and warranties set forth in SECTION 6.14 of this Agreement or in SECTION 4(M) of the Guaranty to be true, correct and complete in all respects at any time, or (b) if Borrower obtains knowledge that Borrower, any of the Principal Parties, or any holder at any time of any direct or indirect equitable, legal or beneficial interest in Borrower or any of the Principal Parties is the subject of any of the Terrorism Laws. Borrower shall immediately and diligently take, or cause to be immediately and diligently taken, all necessary action to comply with all Terrorism Laws and to cause the representations and warranties set forth in SECTION 6.14 of this Agreement and in SECTION 4(M) of the Guaranty to be true, correct and complete in all respects.

7.15 BORROWER ESTOPPEL CERTIFICATES.

A. Within ten (10) days after Lender's written request from time to time, but not more frequently than once in any calendar year, Borrower shall execute and deliver, and shall cause Guarantor to execute and deliver to Lender, an estoppel certificate in the form reasonably requested by Lender, stating that the Loan Documents and the Environmental Indemnity are in full force and effect, the amount of Loan proceeds advanced by Lender, and such other matters relating to the Loan and the Loan Documents as may be reasonably requested by Lender.

ARTICLE 8

EVENTS OF DEFAULT; REMEDIES

8.1 EVENTS OF DEFAULT.

A. EVENTS OF DEFAULT ON NOTICE TO BORROWER. The occurrence of any of the following events shall constitute an Event of Default under this Agreement and the other Loan Documents upon written notice by Lender to Borrower given at any time on or after the occurrence of any such event; provided that upon such notice from Lender, such Event of Default shall be deemed to have occurred as of the occurrence of such event, irrespective of the date of such notice; and provided further that Lender's

EXHIBIT 4.13

giving of or failure to give such notice shall not affect, in any manner whatsoever, the imposition of any late charge or interest at the Default Interest Rate pursuant to the provisions of the Note or the other Loan Documents:

(i) FAILURE TO MAKE PAYMENTS WHEN DUE. Borrower's or Guarantor's failure to pay any principal, interest or other monies due under this Agreement or any of the other Loan Documents within ten (10) days after such amount is due.

(ii) BREACH OF CERTAIN COVENANTS. Borrower's or Guarantor's failure to perform or comply with any term, obligation or condition contained in this Agreement or any of the other Loan Documents, other than those terms, obligations and conditions otherwise referred to in this SECTION 8.1(A) and other than Borrower's obligations under SECTION 1.10 of the Security Instrument, within thirty (30) days after the delivery of written notice from Lender of such failure; provided that if such default is not reasonably capable of being cured (without taking into account financial capability) within such thirty (30) day period, such failure shall not constitute an Event of Default so long as Borrower or Guarantor, as applicable, commences the cure of such default within such thirty (30) day period and diligently prosecutes such cure to completion within one hundred eighty (180) days after such written notice from Lender.

(iii) BREACH OF WARRANTY. Any representation, warranty, certification or other statement made by Borrower or any of the Principal Parties herein or in any Application Information, or in any other Loan Document or in any statement or certificate at any time given by Borrower or any of the Principal Parties to Lender in writing in connection with the Loan shall be materially false or misleading.

(iv) LIEN PRIORITY. Lender fails to have a legal, valid, binding and enforceable first priority Lien on the Project or any portion thereof or on any material portion of the Personal Property or other Collateral.

(v) UNAPPROVED TRANSFERS. Any Transfer which requires Lender's consent under SECTION 1.10 of the Security Instrument occurs without Lender's prior written consent in accordance with SECTION 1.10 of the Security Instrument.

(vi) FAILURE TO MAINTAIN INSURANCE/FAILURE OF INSURANCE COVERAGE TO REMAIN IN EFFECT. Borrower fails to maintain or cause to be maintained the insurance coverage required by SECTION 7.6, or there is any rescission or cancellation of any insurance required by SECTION 7.6, or any carrier of any insurance required by SECTION 7.6 denies coverage as a result of any act or omission of Borrower, any Limited Recourse Party or any Exculpated Person, or any of their agents.

(vii) OTHER LIENS. Without limiting the provisions of SECTION 7.1 of this Agreement or SECTION 1.10 of the Security Instrument, Borrower defaults under any Lien (other than the Liens created by the Loan Documents) or foreclosure or other proceedings are commenced to enforce any Lien (other than the Liens created by the Loan Documents).

(viii) MATERIAL LITIGATION. The commencement or filing of any action, suit, proceeding or arbitration against or involving Borrower or any of the Principal Parties which, if determined adversely to Borrower or such Principal Party, would not be covered in whole or in part by insurance and for which Borrower or such Principal Party would have liability in excess of Five Hundred Thousand Dollars ($500,000).

(ix) GOVERNMENTAL PROHIBITIONS. Borrower's or Guarantor's failure to perform or comply with any of the terms, obligations or provisions of SECTION 7.14 of this Agreement or SECTION 5(B) of the Guaranty.

EXHIBIT 4.13

(x) ACTIONS ADVERSELY AFFECTING LIEN PRIORITY. Borrower, any Limited Recourse Party or any Exculpated Person, or any of their agents, takes any action which causes Lender to fail to have a valid first priority lien on the Project or any portion thereof, or on any material portion of the Personal Property or other Collateral.

(xi) OTHER LOAN DOCUMENTS. The occurrence of an Event of Default under any of the other Loan Documents (as "Event of Default" is defined therein).

(xii) LETTER OF CREDIT. In the event the Letter of Credit is not renewed in accordance with SECTION 5.5 hereof.

B. AUTOMATIC EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an Event of Default under this Agreement and the other Loan Documents automatically and with no notice from Lender required:

(i) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.

(a) A court having proper jurisdiction shall enter a decree or order for relief with respect to Borrower or any of the Principal Parties in an involuntary case under any of the Insolvency Laws, which decree or order is not stayed within seven (7) days after entry and dismissed within ninety (90) days after the entry of such order; or any other similar relief shall be granted under any applicable Insolvency Law; or

(b) An involuntary case is commenced against Borrower or any of the Principal Parties, under any Insolvency Law; or a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Borrower or any of the Principal Parties or over all or a substantial part of their respective property, shall be entered; or the involuntary appointment of an interim receiver, trustee or other custodian of Borrower or any of the Principal Parties, for all or a substantial part of their respective property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the respective property of Borrower or any of the Principal Parties, and the continuance of any such event in this clause (b) for ninety (90) days unless dismissed or discharged.

(ii) VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.

(a) Borrower or any of the Principal Parties shall have an order for relief entered with respect to them or commence a voluntary case under any of the Insolvency Laws, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any Insolvency Law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of their respective property; the making by Borrower or any of the Principal Parties of any assignment for the benefit of creditors; or

(b) The inability or failure of Borrower to pay its debts as such debts become due, the inability or failure of any of the Principal Parties to pay any of its debts in excess of Two Hundred Fifty Thousand Dollars ($250,000) as such debts become due, or the admission by Borrower or any of the Principal Parties in writing of its inability to pay its respective debts as such debts become due.

8.2 GENERAL REMEDIES.

Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, from and after the occurrence of any Event of Default, (a) the unpaid principal amount of the Loan, all accrued and unpaid interest and all other Secured Obligations shall become immediately due and

EXHIBIT 4.13

payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration, notice or other requirements of any kind, all of which are hereby expressly waived by Borrower, (b) Lender shall have the rights and remedies of a secured party under the Governing State Uniform Commercial Code, and under any other applicable law, (c) Lender may pursue all of its rights and remedies hereunder, under the other Loan Documents, at law, in equity or otherwise, including without limitation, obtaining the appointment of a receiver to perform any act of Lender permitted in this Agreement and to perform such other duties as permitted by applicable Law, and (d) Lender shall have no further obligation to disburse Loan proceeds to Borrower. Further, from and after the occurrence of any Event of Default all outstanding indebtedness and all other amounts owing to Lender under the Loan Documents shall bear interest at the Default Interest Rate.

8.3 SPECIFIC PERFORMANCE.

From and after the occurrence of an Event of Default, Lender may commence and maintain an action in any court of competent jurisdiction for specific performance of any of the covenants and agreements contained herein or in any of the other Loan Documents, may obtain the aid and direction of the court in the performance of any of the covenants and agreements contained herein or therein, and may obtain orders or decrees directing the same and, in the case of any sale under the Security Instrument, directing, confirming or approving Lender's actions or, if applicable, the trustee's actions.

8.4 REMEDIES AS TO PROJECT DOCUMENTS.

From and after the occurrence of an Event of Default, Lender shall have the right (and Borrower hereby irrevocably constitutes and appoints Lender as its attorney-in-fact, which power is coupled with an interest and is deemed to be non-cancelable, with full power of substitution, to do so), but not the obligation, to (a) demand, receive and enforce Borrower's rights with respect to any or all the Project Documents, (b) give appropriate receipts, releases and satisfactions for and on behalf of Borrower with respect to any of the Project Documents, (c) do any and all acts with respect to any of the Project Documents in the name of Borrower or in the name of Lender with the same force and effect as Borrower could do if the assignment in ARTICLE 4 had not been made, (d) take such action as Lender may from time to time deem necessary in its sole discretion to cure any default by Borrower under any of the Project Documents or to protect the rights of Borrower thereunder or the rights of Lender thereunder as the assignee of Borrower, and (e) perform and discharge any obligation, covenant, condition and agreement of Borrower under any of the Project Documents.

ARTICLE 9

MISCELLANEOUS PROVISIONS

9.1 NONFOREIGN STATUS.

The Nonforeign Status Statutes provide that a transferee of a U.S. real property interest, or Governing State property interest, as the case may be, must withhold tax under the circumstances described therein. To inform Lender that the withholding of tax will not be required in the event of the disposition of the Project pursuant to the terms of the Security Instrument, Borrower hereby certifies, under penalty of perjury, that: (a) Borrower is not a foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Nonforeign Status Statutes; and (b) Borrower's U.S. employer identification number is the Tax Identification Number; (c) Borrower's principal place of business is at the address set forth in SECTION 9.10, and (d) Borrower is qualified to do business in the Governing State. Lender may disclose the contents of this SECTION 9.1 to the Internal Revenue Service or any other Governmental Agency and Borrower acknowledges that any false statement contained herein could be punished by fine, imprisonment or both. Within ten (10) days after Lender's written request, Borrower shall execute and deliver to Lender further certificates, which shall be signed under penalty of perjury, as Lender shall reasonably require in connection with the certifications set forth herein. The covenant set forth herein shall survive the foreclosure of the lien of the Security Instrument or acceptance of a deed in lieu or in aid thereof.

EXHIBIT 4.13

9.2 ASSIGNMENTS AND PARTICIPATIONS IN LOAN AND NOTE.

Lender may assign its rights and delegate its obligations under this Agreement or any of the other Loan Documents and/or the Environmental Indemnity and further may assign, or sell participations in, all or any part of the Loan, the Loan Documents and/or the Environmental Indemnity, or any other interest herein or in the Note to any Person, all without notice to or the consent of Borrower. To the extent of any such assignment, Lender shall be relieved of its obligations with respect to the Loan and the assignee shall have the same rights, benefits and obligations as it would if it were Lender hereunder and a holder of the Note. Lender may furnish any information (including, without limitation, financial information) concerning the Project, the Collateral, Borrower, the Principal Parties and any of their assets to third parties from time to time for legitimate business purposes.

9.3 EXPENSES.

Borrower agrees to pay, within ten (10) days after written demand by Lender, all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and costs, fees of any consultants, and fees for any environmental audits, appraisal, inspections or other review required by Lender) incurred by Lender in connection with the Loan or the Loan Documents, the enforcement of any of the Secured Obligations, the enforcement of any of Lender's rights and remedies under the Loan Documents, the collection of any payments owing to Lender hereunder or under any of the other Loan Documents, whether or not such enforcement and collection includes the filing of a lawsuit, or the retaking, holding, preparing for sale or selling the Project or the Collateral or any portion thereof or any interest therein. Such costs and expenses shall include, without limitation, Lender's reasonable attorneys' fees and costs, including without limitation reasonable attorneys' fees and costs incurred by Lender in connection with any insolvency, bankruptcy, reorganization, arrangement or other similar proceedings involving Borrower or any of the Principal Parties which in any way affect the exercise by Lender of its rights and remedies hereunder, under any of the other Loan Documents, at law or in equity.

9.4 INTENTIONALLY DELETED.

9.5 INDEMNITY.

Without limiting any other provision of the Loan Documents, Borrower hereby indemnifies and agrees to defend and hold harmless the Indemnitees for, from and against any and all expenses, loss, claims, damage or liability, including, without limitation, reasonable consultants', architects', engineers' and attorneys' fees and costs by reason of: (a) the construction of any improvements on the Project, (b) any capital improvements, other work or things done in, on or about the Project or any part thereof, (c) any use, nonuse, misuse, possession, occupation, alteration, operation, maintenance or management of the Project or any part thereof or any street, drive, sidewalk, curb passageway or space comprising a part thereof or adjacent thereto, (d) any negligence or willful act or omission on the part of Borrower or any of the Principal Parties or their respective agents, contractors, servants, employees, licensees or invitees, (e) any accident, injury (including death) or damage to any person or property occurring in, on or about the Project or any part thereof, (f) any Lien or claim which may be alleged to have arisen on or against the Project or any part thereof or any liability asserted against Lender with respect thereto, (g) any tax attributable to the execution, delivery, filing or recording of the Security Instrument, the Note or the other Loan Documents, (h) any contest due to Borrower's actions or failure to act, (i) any default under the Note or the other Loan Documents, or (j) any claim by or liability to any contractor or subcontractor performing work or any party supplying materials in connection with the Project.

9.6 WAIVER OF OFFSET.

All sums payable by Borrower pursuant to any of the Loan Documents shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Borrower under the Loan Documents shall in no way be released, discharged or otherwise affected (except as expressly provided in the Loan Documents) by reason of: (a) any Casualty Event (as defined in the Security Instrument) or

EXHIBIT 4.13

any Condemnation Event (as defined in the Security Instrument) affecting the Project or any part thereof; (b) any restriction or prevention of or interference by any third party with any use of the Project or any part thereof;
(c) any title defect or encumbrance or any eviction from the Project or any part thereof by title paramount or otherwise; (d) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to Lender, or any action taken with respect to any of the Loan Documents by any trustee or receiver of Lender, or by any court, in any such proceeding; (e) any claim which Borrower has or might have against Lender;
(f) any default or failure on the part of Lender to perform or comply with any of the terms hereof or of any other agreement with Borrower or any of the Principal Parties; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing; whether or not Borrower shall have notice or knowledge of any of the foregoing. Except as expressly provided herein, Borrower waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction of any of the Secured Obligations.

9.7 APPROVALS, AMENDMENTS AND WAIVERS.

All approvals and consents required or allowed to be given by Lender under this Agreement and the other Loan Documents must be in writing to be effective. This Agreement and the other Loan Documents may only be modified in writing signed by all of the parties hereto or thereto or their respective successors and assigns. No waiver of any provision of this Agreement or of any of the other Loan Documents, or consent to any departure by Borrower therefrom, shall in any event be effective without the written agreement of Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. Except as expressly required by the terms of the Loan Documents, no notice to or demand on Borrower or any of the Principal Parties in any case shall entitle Borrower or any of the Principal Parties to any other or further notice or demand in similar or other circumstances.

9.8 WAIVER OF JURY TRIAL.

BORROWER AND LENDER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY CONTROVERSY OR CLAIM, WHETHER ARISING IN TORT OR CONTRACT OR BY STATUTE OR LAW, BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS (INCLUDING, WITHOUT LIMITATION, THE VALIDITY, INTERPRETATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF), OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY IN CONNECTION HEREWITH OR THEREWITH. EACH PARTY ACKNOWLEDGES AND AGREES THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BORROWER'S AND LENDER'S ENTERING INTO THE LOAN DOCUMENTS AND THE PARTIES WOULD NOT HAVE ENTERED INTO THE LOAN DOCUMENTS WITHOUT THIS WAIVER. LENDER AND BORROWER ARE EACH HEREBY AUTHORIZED TO FILE A COPY OF THIS SECTION 9.8 IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER OF JURY TRIAL.

9.9 SUBMISSION OF LOAN DOCUMENTS.

The submission of this Agreement, any of the other Loan Documents or the Environmental Indemnity to Borrower, Guarantor or any of the other Signature Parties or their agents or attorneys for review or signature does not constitute a commitment by Lender to make the Loan to Borrower, and the Loan Documents and the Environmental Indemnity shall have no binding force or effect unless and until they are executed and delivered by each Signature Party and Lender and all of the conditions set forth in SECTION 3.1 have been satisfied.

EXHIBIT 4.13

9.10 NOTICES.

Any notice, or other document or demand, required or permitted under this Agreement or any of the other Loan Documents shall be in writing addressed to the appropriate address set forth below and shall be deemed delivered upon the earliest of (a) actual receipt, (b) the next Business Day after the date when sent by recognized overnight courier for next Business Day delivery, or (c) the second Business Day after the date when sent by certified mail, postage prepaid. Any party may, from time to time, change the address at which such written notice or other documents or demands are to be sent, by giving the other party written notice of such change in the manner hereinabove provided.

To Borrower:   AAR Wood Dale LLC,
               1100 North Wood Dale Road
               Wood Dale, Illinois  60191
               Attn:  Mr. Timothy J. Romenesko

To Lender:     Fremont Investment & Loan
               175 N. Riverview Drive
               Anaheim, California  92808
               Attention:  Commercial Real Estate Asset Management
               Loan No. 950114501

9.11 SURVIVAL OF WARRANTIES AND CERTAIN AGREEMENTS.

All agreements, indemnities, representations and warranties made herein and in the other Loan Documents shall survive the execution and delivery of this Agreement, the making of the Loan hereunder and the execution and delivery of the Note. All representations and warranties made in this Agreement or in any of the other Loan Documents shall further survive any and all investigations and inquiries made by Lender. Notwithstanding anything in this Agreement or the other Loan Documents or implied by law to the contrary, any indemnities made by Borrower in the Loan Documents shall survive the payment of the Loan, the satisfaction of the Secured Obligations, and/or the termination of this Agreement or the other Loan Documents.

9.12 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.

No failure or delay on the part of Lender or any holder of the Note or portion thereof in the exercise of any power, right or privilege hereunder or under the Note or any of the other Loan Documents shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are separate, distinct and cumulative to, and not exclusive of, any rights or remedies otherwise available at law or in equity. No act of Lender under any of the Loan Documents shall be construed as an election to proceed under any one provision to the exclusion of any other provision, notwithstanding anything in the Loan Documents to the contrary. Borrower expressly waives all right to the benefit of any statute of limitations and any moratorium, reinstatement, marshaling, forbearance, extension, redemption, valuation, or appraisement now or hereafter provided by federal or state law, as a defense to any demand against Borrower to the fullest extent permitted by law.

9.13 SURVIVAL OF OBLIGATIONS UPON TERMINATION OF AGREEMENT.

No termination or cancellation (regardless of cause or procedure) of this Agreement or any of the other Loan Documents shall in any way affect or impair the powers, obligations, duties, rights, and liabilities of Borrower or Lender relating to (a) any transaction or event occurring prior to such termination or cancellation, or (b) any of the undertakings, agreements, covenants, indemnities, warranties and representations of Borrower or Lender contained in this Agreement or any of the other Loan Documents.

EXHIBIT 4.13

9.14 DISBURSEMENTS IN EXCESS OF LOAN AMOUNT.

In the event the total disbursements by Lender exceed the amount of the Loan set forth herein, the total of all disbursements shall, to the extent permitted by the laws of the Governing State, constitute part of the Secured Obligations and be secured by the Security Instrument and other Loan Documents. All other sums expended by Lender pursuant to this Agreement or any of the other Loan Documents shall be deemed to have been disbursed to Borrower and shall be secured by the Loan Documents.

9.15 SEVERABILITY.

If any term of this Agreement or any of the other Loan Documents or the application thereof to any Person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or other Loan Document or the application of such term to Persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Agreement or other Loan Document shall be valid and enforceable to the fullest extent.

9.16 RULES OF CONSTRUCTION.

Where the identity of the parties to this Agreement or any of the other Loan Documents or the circumstances make it appropriate, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. Article and Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and shall not constitute a part of this Agreement or such other Loan Documents for any other purpose or be given any substantive effect. The recitals to this Agreement and to each of the other Loan Documents are incorporated herein and therein and made a part hereof and thereof. All exhibits to each of the Loan Documents shall constitute a part of the applicable Loan Documents. Borrower and Lender have each had an opportunity to review and negotiate the terms of this Agreement and the other Loan Documents; accordingly, the rule requiring that language be construed against drafting party shall not be applicable to this Agreement or the other Loan Documents.

9.17 APPLICABLE LAW.

This Agreement and the other Loan Documents shall be governed by, and construed and enforced in accordance with, the laws of the Governing State.

9.18 SUCCESSORS AND ASSIGNS.

This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Borrower's rights and obligations or any interest hereunder or under any of the other Loan Documents may not be assigned, including, without limitation, assigned for security purposes, and any purported assignment shall be null and void AB INITIO. As used herein, and in the other Loan Documents, "Lender" (or similar references to the lender) shall include all holders of the Note, including, without limitation, pledgees of the Note, whether or not named herein or therein. In exercising any rights hereunder or under any of the other Loan Documents or taking any actions provided for herein or therein, Lender may act through its employees, agents or independent contractors authorized by Lender.

9.19 DISCLOSURE OF INFORMATION.

Borrower hereby acknowledges and agrees that upon the request of any partner, member or shareholder or other owner of Borrower, as applicable, Lender may disclose to such party any information (including, without limitation, financial information) relating to the Loan and Borrower's performance of its obligations under the Loan Documents. Borrower hereby indemnifies and agrees to defend and hold harmless the Indemnitees for, from and against any and all expenses, loss, claims, damage or liability,

EXHIBIT 4.13

including, without limitation, reasonable attorneys' fees and costs, arising by reason of any disclosure of information by Lender under this SECTION 9.19.

9.20 DISCLAIMER BY LENDER.

Except for obligations expressly assumed by Lender in writing, in its sole discretion and without any obligation, after the occurrence of an Event of Default, Lender shall not be liable to any contractor, subcontractor, supplier, laborer, architect, engineer or any other party for services performed or materials supplied in connection with the Project. Lender shall not be liable for any debts or claims accruing in favor of any such parties against Borrower or others or against the Property or the Project. No disbursement of Loan proceeds directly to any contractor, subcontractor, supplier, laborer, architect, engineer or any other party for services performed or materials supplied shall create, or shall be deemed or construed to create, any third-party beneficiary status in favor of such party or recognition of the same by Lender. Borrower is not and shall not be an agent of Lender for any purpose. Lender is not a joint venture partner with Borrower, Guarantor or any of the Principal Parties.

9.21 COUNTERPARTS.

This Agreement and the other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. Signature and, if applicable, acknowledgment pages, may be detached from the counterparts and attached to a single copy of the applicable document to physically form one document, which may be recorded if applicable.

9.22 ENTIRE AGREEMENT.

The Loan Documents and the Environmental Indemnity set forth the entire understanding between Borrower and Lender relative to the Loan and the same supersede all prior agreements and understandings relating to the subject matter hereof or thereof.

9.23 TIME IS OF THE ESSENCE.

Time is strictly of the essence of this Agreement and the other Loan Documents.

9.24 NO THIRD PARTY BENEFICIARIES.

This Agreement and the other Loan Documents are made and entered into for the sole protection and benefit of the parties hereto and thereto, and, except as provided in SECTION 9.18 of this Agreement and in SECTION 5 of the Assignment of Rents, no other person or entity shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim as a beneficiary in connection with, this Agreement or any of the other Loan Documents.

9.25 CONSENT TO JURISDICTION.

Borrower and Lender each hereby consent to the jurisdiction of any state or federal court located within the Governing State in any suit, action or proceeding based hereon or arising out of, under or in connection with this Agreement or any of the other Loan Documents (and further agree not to assert or claim that such venue is inconvenient or otherwise inappropriate or unsuitable), and waive personal service of any and all process upon them and consent that all service of process be made by certified mail to the applicable address set forth herein.

9.26 BROKERAGE COMMISSION.

Borrower hereby indemnifies and agrees to defend and hold the Indemnitees harmless for, from and against any and all expenses, loss, claims, damage or liability for any commissions, fees, charges or

EXHIBIT 4.13

other compensation claimed to be due by any mortgage or real estate broker, Realtor, agent or finder with whom it, or any of its Affiliates, agents, employees or representatives have had or have allegedly had any dealings in connection with the Commitment Letter or the making of the Loan.

9.27 CREDIT AGREEMENT.

Borrower expressly agrees that for purposes of this Agreement and each and every other Loan Document: (a) this Agreement and each and every other Loan Document shall be a "credit agreement" under the Illinois Credit Agreements Act, 815 ILCS 160/0.01 ET SEQ. (the "Act"); (b) the Act applies to this transaction including, but not limited to, the execution of this Agreement and each and every other Loan Document; and (c) any action on or in any way related to this Agreement and each and every other Loan Document shall be governed by the Act.

9.28 REPRESENTATION BY COUNSEL.

Borrower hereby represents that it has been represented by competent counsel of its choice in the negotiation and execution of this Agreement and the other Loan Documents; that it has read and fully understood the terms hereof; that Borrower and its counsel have been afforded an opportunity to review, negotiate and modify the terms of this Agreement, and that it intends to be bound hereby. In accordance with the foregoing, the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement or any other Loan Document.

[remainder of page intentionally left blank]

EXHIBIT 4.13

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by Borrower and Lender.

BORROWER:

AAR WOOD DALE LLC,
an Illinois limited liability company

By: AAR Corp., a Delaware corporation
its sole member and Manager

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

LENDER:

FREMONT INVESTMENT & LOAN,
a California industrial bank

By: /s/ JOHN BERGHORST
    -----------------------------
Its: Vice President
     ----------------------------

EXHIBIT 4.13

EXHIBIT A

DESCRIPTION OF PROPERTY

LOT 1 IN CHANCELLORY BUSINESS PARK RESUBDIVISION NO. 2, BEING A RESUBDIVISION IN
SECTION 4, TOWNSHIP 40 NORTH, RANGE 11, EAST OF THE THIRD PRINCIPAL MERIDIAN, ACCORDING TO THE PLAT THEREOF RECORDED JANUARY 26, 1989 AS DOCUMENT R89-0010291, IN DU PAGE COUNTY, ILLINOIS.

A-1

EXHIBIT 4.13

EXHIBIT B

DESCRIPTION OF PERSONAL PROPERTY

All of Borrower's right, title and interest, now or hereafter acquired, in and to the following:

(a) All personal property, wherever located, including, without limitation, all goods, supplies, equipment, furniture, furnishings, fixtures, machinery, inventory, farm products and construction materials which Borrower now or hereafter owns or in which Borrower now or hereafter acquires an interest or right, including, without limitation, those which are now or hereafter located on or affixed to the Project or used or useful in the operation, use or occupancy thereof or the construction of any improvements thereon, including, without limitation, any interest of Borrower in and to personal property which is leased or subject to any superior security interest, or which is being manufactured or assembled for later installation into the improvements now or hereafter located at the Project, and all books, records, leases and other documents, of whatever kind or character, relating to the Project;

(b) All fees, income, rents, issues, profits, earnings, receipts, royalties and revenues which, after the date hereof and while any portion of the Secured Obligations remains unpaid, may accrue from such goods, fixtures, furnishings, equipment and building materials or any part thereof or from the Project or any part thereof, or which may be received or receivable by Borrower from any hiring, using, letting, leasing, subhiring, subletting, or subleasing therefor;

(c) All of Borrower's present and future rights to receive payments of money, services or property, including, without limitation, rights to all deposits from tenants of the Project, deposits from prospective purchasers of the Project, capital contributions from the shareholders or constituent partners or members of Borrower, as applicable, amounts payable on account of the sale of partnership or membership interests or stock of Borrower, as applicable, accounts, accounts receivable, deposit accounts, chattel paper, notes, drafts, contract rights, instruments, financial assets, investment property, general intangibles, documents, letter of credit rights, payment intangibles, money, and principal, interest and payments due on account of goods sold, services rendered, loans made or credit extended, together with title or interest in all documents evidencing or securing the same.

(d) All other intangible property and rights relating to the Project or the operation thereof, or used in connection therewith, including but not limited to all governmental permits relating to construction or other activities on the Project, all names under or by which the Project may at any time be operated or known, all rights to carry on business under any such names, or any variant thereof, all trade names and trademarks relating in any way to the Project, goodwill in any way relating to the Project, and all permits, licenses, franchises, approvals, variances and land use entitlements relating in any way to, or to the occupancy, operation, ownership and use of, the Project;

(e) All (i) agreements now or hereafter in effect with any contractor, architect or engineer, including, without limitation, any design architect, landscape architect, civil engineer, electrical engineer, environmental engineer, soils engineer or mechanical engineer, in connection with the Project;
(ii) other agreements now or hereafter in effect with any property manager or broker with respect to the management, leasing, or operation of the Project;
(iii) as-built plans and specifications and surveys for the Project; (iv) Permits; and (v) renewals, substitutions, extensions, modifications or replacements of any of the foregoing.

(f) All judgments, commercial tort claims, other claims, settlements of claims and causes of action under any legal proceeding relating to the Project or the ownership, use, occupancy or operation thereof;

(g) All proceeds from sale or disposition of the Personal Property;

B-1

EXHIBIT 4.13

(h) Borrower's rights under all insurance policies covering the Project or any of the Personal Property (whether or not Borrower is required to maintain such insurance under the terms of the Loan Documents), and all proceeds, loss payments and premium refunds payable regarding the same;

(i) All reserves, deferred payments, deposits, refunds, cost savings and payments of any kind relating to the construction of any improvements on the Project;

(j) All water stock relating to the Project;

(k) All causes of action, commercial tort claims, other claims, compensation and recoveries for any damage to or condemnation or taking of the Project or the Personal Property, or for any conveyance in lieu thereof, whether direct or consequential, or for any damage or injury to the Project or the Personal Property, or for any loss or diminution in value of the Project or the Personal Property;

(l) All architectural, structural, mechanical, electrical, civil and other engineering plans and specifications prepared for construction of improvements or extraction of minerals or gravel from the Project and all studies, data and drawings related thereto, and all contracts and agreements of Borrower relating to such plans and specifications or such studies, data and drawings or to the construction of improvements on or extraction of minerals or gravel from the Project;

(m) All of Borrower's present and future rights in and to all refunds, rebates, reimbursements, reserves, deferred payments, deposits, cost savings, governmental subsidy payments, governmentally-registered credits (such as emissions reduction credits), other credits, waivers and payments, whether in cash or kind, due from or payable by any Governmental Agency or any insurance or utility company relating to any or all of the Project, any improvements thereon or any of the collateral described herein or arising out of satisfaction of any condition imposed upon or the obtaining of any approvals for the development of the Project or the improvements thereon;

(n) All of Borrower's present and future rights in and to all refunds, rebates, reimbursements, credits and payments of any kind due from or payable by any Governmental Agency or other entity for any taxes, special taxes, assessments, or similar governmental or quasi-governmental charges or levies imposed upon Borrower with respect to the Project, any improvements thereon or any of the collateral described herein or arising out of the satisfaction of any condition imposed upon or the obtaining of any approvals for the development of the Project or the improvements thereon;

(o) All Borrower's rights in proceeds of the Loan;

(p) All Borrower's rights to receive the proceeds of any "take-out" or permanent financing or commitment to provide such financing;

(q) All of Borrower's present and future books and records of every kind or nature, including without limitation, statements, correspondence, memoranda, files and other data relating to the foregoing, together with the tapes, disks, diskettes and other data and software, computers, storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person); and

(r) All proceeds and products of any of the foregoing (and proceeds and products of proceeds and products).

All terms used herein which are defined in the Governing State Uniform Commercial Code shall have the same meanings when used herein, unless the context requires otherwise.

B-2

EXHIBIT 10.1

FIRST AMENDMENT TO
AAR CORP. STOCK BENEFIT PLAN

WHEREAS, AAR CORP., a Delaware corporation (the "Company") maintains the AAR CORP. Stock Benefit Plan as amended and restated effective October 1, 2001 (the "Plan"); and

WHEREAS, the Company has reserved the right to amend the Plan and now deems it desirable to do so to discontinue the automatic, non-discretionary award of non-qualified stock options to Non-Employee Directors and replace it with a discretionary award.

NOW THEREFORE, the Plan is hereby amended, effective June 26, 2003, as follows:

1. The second paragraph of Section 1 shall be amended to read as follows:

"Non-Employee Directors shall participate in the Plan through discretionary grants of NSOs pursuant to Section 5 hereof. Key Employees who have been selected by the Committee to receive an Award shall participate in the Plan. The Committee shall determine, within the limits of the express provisions of the Plan, those Key Employees and Non-Employee Directors whom, and the time or times at which, Awards shall be granted. In making a determination concerning the granting of Awards, the Committee may take into account the nature of the services the Key Employees and Non-Employee Directors have rendered or that the Committee expects they will render, their present and potential contributions to the success of the business, the number of years of effective service they are expected to have and such other factors as the Committee in its sole discretion shall deem relevant. The Committee shall also determine, with respect to Awards to Non-Employee Directors and Key Employees, the number of Shares to be subject to each Award; with respect to Key Employees, the type of Awards (Restricted Stock, Options or Stock Appreciation Rights (SAR)); the type of Options for Key Employees (ISO or NSO); the duration of each Option; the exercise price under each Option; the time or times within which (during the Term of the Option) all or portions of each Option may be exercised; whether cash, Shares, Options or other property may be accepted in full or partial payment upon exercise of an Option; the restrictions to be imposed on shares of Restricted Stock; and any other terms and conditions of such Awards."

2. Section 5 shall be deleted and Sections 6 through 29 renumbered accordingly.

3. Current Section 6, renumbered as new Section 5, shall be amended to read as follows:

"5. Grants of Options

5.1 Subject to the terms of the Plan, the Committee may from time to time grant Options, which may be Non-Qualified Stock Options, or Incentive Stock Options if granted to Key Employees, and must be Non-Qualified Stock Options if granted to Non-Employee Directors. Unless otherwise expressly provided at the time of the grant, Options granted to Key Employees under the Plan will not be ISOs. Notwithstanding the foregoing, outstanding NSOs granted to Key Employees may be converted to ISOs at the discretion of the Committee in accordance with, and to the extent, allowed by law.

5.2 Each Option shall be evidenced by a written Option Agreement specifying the type of Option granted, the Option exercise price, the terms for payment of the exercise price, the duration of the Option, the number of Shares to which the Option pertains and, in the case of grants to Key Employees, the terms of any related Stock Appreciation Right Award or Restricted Stock Award. An Option Agreement may, in the sole discretion of the Committee, also contain a vesting schedule, a non-competition agreement, a confidentiality provision, provisions for forfeiture and such restrictions, conditions and other terms as the Committee shall determine in its sold discretion. Option Agreements need not be identical.

5.3 Each Option shall expire and all rights to purchase Shares thereunder shall cease on the date fixed by the Committee in the Option Agreement, which shall not be later than the tenth anniversary of the date on which the Option was granted, except as otherwise required under Section 6.4 hereof. Further, if provided in the Option Agreement, any Option granted pursuant to the Plan shall expire and all rights to purchase Shares thereunder shall cease, if (a) the Non-Employee Director or the Key Employee violates a non-competition or confidentiality agreement, any Company policy, or any other conditions set forth in the Option Agreement or in a separate document, (b) the Key Employee violates an employment agreement, (c) the Non-Employee Director's service on the Board terminates as provided in Section 12, or (d) the Key Employee's employment terminates as provided in Section 12.

5.4 Each Option shall become exercisable at the time, and for the number of Shares, fixed by the Committee in the Option Agreement. Except to the extent otherwise provided in or pursuant to Section 13, or in the proviso to this sentence, no Option shall become exercisable as to any Shares prior to the first anniversary of the date on which the Option was granted; provided that (a) the Committee may provide, at the time of grant or subsequently that an Option granted to a person who is or becomes subject to taxation under any applicable law that would tax such person upon the grant of such Option, shall be exercisable from and after the date of grant or (b) the Committee, in its discretion, shall have the power at any time to accelerate the dates for exercise of any or all Options, or any part thereof, granted to a Non-Employee Director or a Key Employee under the Plan."

4. The first sentence of current Section 8, renumbered as new
Section 7, shall be amended to read as follows:

"Each NSO granted to a Grantee shall be in such form and subject to such restrictions and conditions and other terms as the Committee may determine at the time of grant, subject to the general provisions of the Plan, the applicable Option Agreement, and the following specific rules:"

5. Clause (e) of current Section 15.2, renumbered 14.2, shall be amended to read as follows:

"(e) in the case of a Grantee, by such other medium of payment as the Committee, in its discretion, shall authorize at the time of grant, or"

IN WITNESS WHEREOF, this First Amendment has been executed on this 27th day of June, 2003.

AAR CORP.

By: /s/ DAVID P. STORCH
    --------------------------------
    David P. Storch, President

EXHIBIT 21.1

SUBSIDIARIES OF AAR CORP. (1)

                                                                    State of
                        Name of Corporation                      Incorporation
                        -------------------                      -------------
AAR Distribution, Inc. (2)                                          Illinois
AAR Allen Services, Inc. (3)                                        Illinois
AAR Parts Trading, Inc. (4)                                         Illinois
AAR Engine Services, Inc. (5)                                       Illinois
AAR Aircraft & Engine Sales & Leasing (6)                           Illinois
AAR International, Inc. (7)                                         Illinois
AAR Manufacturing Group, Inc. (8)                                   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 Airframe Services.

(3) Also does business under the names AAR Landing Gear, AAR Tempco, AAR Component Services, Mars Aircraft Radio and AAR Hermetic.

(4) Also does business under the names AAR Aircraft Turbine Center, AAR Allen Aircraft, AAR Defense Systems and AAR Expendables.

(5) Also does business under the name AAR Engine Component Services, AAR Power Services, and AAR Energy Services.

(6) Also does business under the names AAR Engine Sales & Leasing, AAR Aircraft Sales & Leasing, AAR Advisory Services and AAR Financial Services Corp.

(7) Also does business under the names AAR Distribution, AAR Aircraft Component Services, AAR Engine Group International, and AAR Allen Group International.

(8) Also does business under the names AAR Cargo Systems, AAR Mobility Systems, AAR Composites, AAR Craig Systems and AAR ATICS.

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, 333-102416, 333-81790, 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 July 1, 2003 relating to the consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 2003, which report appears in the May 31, 2003 annual report on Form 10-K of AAR CORP.

/s/ KPMG LLP

Chicago, Illinois
August 12, 2003

Exhibit 31.1

CERTIFICATION

I, David P. Storch, President and Chief Executive Officer of AAR CORP., certify that:

1. I have reviewed this Annual Report on Form 10-K of AAR CORP. (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d - 15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

DATE: August 15, 2003

		/s/ David P. Storch
		David P. Storch
		President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Timothy J. Romenesko, Vice President and Chief Financial Officer of AAR CORP., certify that:

1. I have reviewed this Annual Report on Form 10-K of AAR CORP. (the registrant);

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

DATE: August 15, 2003

		/s/ Timothy J. Romenesko
		Timothy J. Romenesko
		Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the “Company”) Annual Report on Form 10-K for the period ending May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Storch, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 15, 2003		/s/ David P. Storch
		David P. Storch
		President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the “Company”) Annual Report on Form 10-K for the period ending May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy J. Romenesko, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 15, 2003		/s/ Timothy J. Romenesko
		Timothy J. Romenesko
		Vice President, Treasurer and Chief Financial Officer