AAR CORP (Form: 10-K, Received: 07/22/2004 12:57:55)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
ý		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended May 31, 2004
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

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 ý No o

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 the 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. ý

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

At November 28, 2003, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $301,972,993 (based upon the closing price of the Common Stock at November 28, 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 1, 2004, there were 32,243,868 shares of Common Stock outstanding.

Documents Incorporated by Reference

Portions of the definitive proxy statement relating to the Registrant's 2004 Annual Meeting of Stockholders, to be held October 13, 2004, 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	6
	Item 4.	Submission of Matters to a Vote of Security Holders	6
		Supplemental Item—Executive Officers of the Registrant	7
PART II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
	Item 6.	Selected Financial Data	9
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
	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	54
	Item 9A.	Controls and Procedures	54
PART III
	Item 10.	Directors and Executive Officers of the Registrant	55
	Item 11.	Executive Compensation	55
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
	Item 13.	Certain Relationships and Related Transactions	56
	Item 14.	Principal Accountant Fees and Services	56
PART IV
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	57
SIGNATURES			58
EXHIBIT INDEX

PART I

ITEM 1. BUSINESS (Dollars in thousands)

General

AAR CORP. and its subsidiaries are referred to herein collectively as "AAR," "Company," "we," "us," and "our" unless the context indicates otherwise. We were founded in 1951, organized in 1955 and were reincorporated in Delaware in 1966. We are a leading independent provider of products and services to the worldwide aviation/aerospace industry. We also market and sell certain of our products and services to the U.S. Government, including various branches and agencies within the U.S. Military and their contractors. We conduct our business activities primarily through five principal operating subsidiaries: AAR Parts Trading, Inc., AAR Aircraft & Engine Sales & Leasing, Inc., AAR Services, Inc., AAR Manufacturing, Inc., and AAR International, Inc. Our international business activities are conducted primarily through AAR International, Inc.

We report our activities in four business segments: (i) Inventory and Logistic Services, comprised primarily of business activities conducted through AAR Parts Trading, Inc. and AAR Services, 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 Services, Inc., respectively, and AAR International, Inc., (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.

Inventory and Logistic Services

Activities in our Inventory and Logistic Services segment include the purchase and sale of a wide variety of new, overhauled and repaired engine and airframe parts and components for the aviation aftermarket and military customers. We also provide customized inventory supply and management programs for engine and airframe parts and components in support of customer maintenance activities. We are an authorized distributor for more than 125 leading aviation and aerospace product manufacturers. We acquire 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 our sales are made pursuant to standard commercial purchase orders. In certain inventory supply and management programs, we supply products and services under agreements reflecting negotiated terms and conditions.

Maintenance, Repair and Overhaul

Activities in our Maintenance, Repair and Overhaul segment include the maintenance, repair and overhaul and exchange of a wide variety of airframe and engine parts and components for our 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. We also operate 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. We also operate an aircraft storage facility. In June 2004, we entered into a long-term lease to occupy a portion of an airframe maintenance facility in Indianapolis, Indiana, significantly expanding our maintenance and repair capacity and capabilities. The repair and overhaul of parts and components also support inventory management activities within the Inventory and Logistic Services segment. We also provide turbine engine overhaul and parts supply services to industrial gas and steam turbine operators. In this segment, in addition to sales made under standard commercial purchase orders, a portion of the segment's sales occur

pursuant to contracts under which we agree to maintain, repair and overhaul parts, components and whole aircraft. In this segment, we purchase replacement parts from original equipment manufacturers and suppliers that are used in various maintenance, repair and overhaul operations. We have ongoing arrangements with original equipment manufacturers (OEM) that provide us access to parts, repair manuals and service bulletins in support of parts manufactured by the OEM. Although the terms of each arrangement vary, they typically are made on standard OEM terms as to duration, price and delivery. When possible, we will obtain replacement parts used in repair and overhaul activities from operating units in our Inventory and Logistic Services segment.

Manufacturing

Activities in our Manufacturing segment include the manufacture and repair of a wide array of containers, pallets and shelters in support of military and humanitarian tactical deployment activities. We also design, manufacture and install in-plane cargo loading and handling systems for commercial and military aircraft and helicopters. We also design and manufacture advanced composite materials for commercial, business and military aircraft as well as advanced composite structures for the transportation industry. In this segment, sales are made to customers pursuant to standard commercial purchase orders and contracts. In this segment, we purchase aluminum sheets, extrusions and castings and other necessary supplies from a number of vendors.

Aircraft and Engine Sales and Leasing

Activities in our Aircraft and Engine Sales and Leasing segment include the sale or lease of used commercial jet aircraft and the sale or lease of a wide variety of new and overhauled commercial jet engines. In this segment, each sale or lease is negotiated as a separate agreement which includes term, price, representations, warranties and lease return provisions. Leases are fixed in regard to term; early termination by the lessee is not permitted except in the event of a breach by us. In this segment, we purchase aircraft and engines from domestic and foreign airlines, aircraft and engine leasing companies and original equipment manufacturers. Activities in the Aircraft and Engine Sales and Leasing segment also include the formation and operation of joint ventures with strategic and financial partners. The primary business of these joint ventures is the ownership and lease of aircraft to commercial airlines. Within this segment, we also provide advisory services which consist of assistance in remarketing aircraft and engines, records management and storage maintenance.

Raw Materials

We historically have been able to obtain raw materials and other items for our inventories for each of our segments at competitive prices, terms and conditions from numerous sources, and we expect to be able to continue to do so.

Terms of Sale

In the Inventory and Logistic Services, Maintenance, Repair and Overhaul and Manufacturing segments, we generally sell our 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, we sell our products on a cash due at delivery basis, standard 30-day terms or on an extended term basis.

Customers

For each of our reportable segments, we furnish aviation products and services primarily through our own employees. The principal customers for our 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, our 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 utilization (e.g., frequency of schedules), the number of airline operators and the level of sales of new and used aircraft.

Licenses

We have 14 Federal Aviation Administration (FAA) licensed repair stations in the United States and Europe. Of the 14 FAA repair stations, eight are also Joint Aviation Authorities (JAA) licensed repair stations. Such licenses, which are ongoing in duration, are required in order for us to perform authorized maintenance, repair and overhaul services for our customers and are subject to revocation by the government for non-compliance with applicable regulations. Of the 14 FAA licensed repair stations, one is held in the Inventory and Logistic Services segment, nine are held in the Maintenance, Repair and Overhaul segment, and four are held in the Manufacturing segment. Of the eight JAA licensed repair stations, seven are held in the Maintenance, Repair and Overhaul segment and one is held in the Manufacturing segment. We believe that we possess all licenses and certifications that are material to the conduct of our business.

Competition

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, the service divisions of large commercial airlines and other independent suppliers of parts and services. In our Aircraft and Engine Sales and Leasing segment, we face competition from financial institutions, syndicators, commercial and specialized leasing companies and other entities that provide financing. Our pallet, container and shelter manufacturing activities in our Manufacturing segment compete with several large and small companies, and our cargo systems competitors include a number of divisions of large corporations. Although certain of our competitors have substantially greater financial and other resources than we do, in each of our four reportable segments we believe that we have maintained a satisfactory competitive position through our responsiveness to customer needs, our attention to quality and our unique combination of market expertise and technical and financial capabilities.

Backlog

At May 31, 2004, backlog believed to be firm was approximately $162,400 compared to $102,700 at May 31, 2003. Approximately $148,200 of this backlog is expected to be filled within the next 12 months. The increase in our backlog reflects orders in our Manufacturing segment for products that support the U.S. Military's rapid deployment needs and cargo systems.

Employees

At May 31, 2004, we employed approximately 2,300 persons worldwide.

Sales to U.S. Government

Sales to the U.S. Government, its agencies and its contractors were $222,558 (34.1% of total sales), $170,191 (28.1% of total sales), and $163,173 (25.5% of total sales) in fiscal years 2004, 2003 and 2002, 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 our 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. Our government contracts are subject to termination at the election of the government; in the event of such a termination we would be entitled to recover from the government all allowable costs incurred by us through the date of termination.

Additional Information

For additional information concerning our business segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business Segment Information" in Note 13 of Notes to Consolidated Financial Statements.

Our internet address is www.aarcorp.com . We make available free of charge through our web site our 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 Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to the SEC. Information contained on our web site is not a part of this report.

ITEM 2. PROPERTIES

Our principal activities in the Aircraft and Engine Sales and Leasing and Inventory and Logistic Services segments are conducted from a building owned by us in Wood Dale, Illinois, subject to a mortgage. In addition to warehouse space, this facility includes executive, sales and administrative offices. We also lease 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 us located in 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; Garden City, New York; London, England; Roswell, New Mexico; and Oklahoma City, Oklahoma. In June 2004, we agreed to lease a portion of an aircraft maintenance facility in Indianapolis, Indiana.

Our activities in the Manufacturing segment are conducted at facilities owned by us in Clearwater, Florida (subject to an industrial revenue bond) and Cadillac and Livonia, Michigan.

We believe that our owned and leased facilities are suitable and adequate for our operational requirements.

ITEM 3. LEGAL PROCEEDINGS (Dollars in thousands)

Except as described below, we are not a party to any material, pending legal proceeding (including any governmental or environmental proceedings) other than routine litigation incidental to our 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 our subsidiary's Cadillac, Michigan plant. The Order requires our 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 our subsidiary is performing under a 1985 Consent Decree, operation of a soil vapor extraction system our 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 our 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 our 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.

Our subsidiary advised the MDEQ that it will perform the requirements of the Order to the extent those requirements apply to the allegation by the MDEQ that a release of hazardous substances occurred after the execution of the 1985 Consent Decree. Our subsidiary declined to perform work required under the Order which our subsidiary believes is based on claims resolved in the 1985 Consent Decree. The MDEQ responded to our subsidiary by saying that the MDEQ "will be taking appropriate action to protect public health, safety and welfare and the environment, and gain AAR's compliance with Part 201."

Our subsidiary has spent approximately $100 in performing environmental investigations under the Order. Our subsidiary may conduct work under the Order in addition to the work to be performed noted above. We believe the work performed by our subsidiary since the issuance of the Order supports the positions previously taken by our subsidiary regarding the movement of groundwater in the vicinity of our subsidiary's plant and the ongoing capture of groundwater for treatment by our subsidiary. However, there continues to be disagreement between our subsidiary and the MDEQ concerning the conclusions to be drawn from the data from that work. No action has been taken by the MDEQ to enforce the Order against our subsidiary, although the MDEQ has retained contractors to perform environmental investigations in the vicinity of our subsidiary's plant.

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 of our executive officers is set forth below:

Name	Age	Present Position with the Company
David P. Storch	51	President and Chief Executive Officer, Director
Howard A. Pulsifer	61	Vice President, General Counsel, Secretary
Timothy J. Romenesko	47	Vice President and Chief Financial Officer
James J. Clark	44	Group Vice President, Maintenance, Repair and Overhaul
J. Mark McDonald	44	Group Vice President, Manufacturing

Mr. Storch has served as President of the Company since 1989 and Chief Executive Officer since 1996. Previously, he served as Chief Operating Officer from 1989 to 1996 and as a Vice President of the Company from 1988 to 1989. Mr. Storch joined the Company in 1979 and served as 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 served as 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 served as 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 served as 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. McDonald has served as Group Vice President, Manufacturing since 2003. Previously, he served as General Manager of AAR Mobility Systems from 2000 to 2003 and as Vice President of Operations from 1996 to 2003. He was previously with General Electric in various positions from 1984 to 1996.

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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(Dollars in thousands, except per share amounts)

Our Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. On July 1, 2004 there were approximately 7,000 holders of Common Stock, including participants in security position listings.

Certain of our financing arrangements contain provisions restricting the payment of dividends or repurchase of our shares. See Note 3 of Notes to Consolidated Financial Statements included herein. Under the most restrictive of these provisions, we may not pay dividends (other than stock dividends) or acquire our 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) after June 1, 1994. We are currently prohibited from paying dividends or purchasing our shares pursuant to this provision, and during fiscal 2004 and 2003 we did not purchase any of our equity securities.

The table below sets forth for each quarter of the fiscal year indicated the reported high and low market prices of our Common Stock on the New York Stock Exchange and the quarterly dividends declared. We suspended payment of dividends in October 2002.

	Fiscal 2004						Fiscal 2003
Per Common Share	Market Prices						Market Prices
Per Common Share	Market Prices				Quarterly Dividends		Market Prices				Quarterly Dividends
Quarter	High		Low		Quarterly Dividends		High		Low		Quarterly Dividends
First	$	8.34	$	4.72	$	.000	$	11.15	$	6.00	$	.025
Second		11.38		7.30		.000		6.11		3.20		.000
Third		16.37		10.25		.000		6.09		4.45		.000
Fourth		13.09		8.72		.000		4.50		3.70		.000

					$	.000					$	.025

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

			For the Year Ended May 31,
			2004			2003			2002			2001		2000
RESULTS OF OPERATIONS
	Sales		$	651,958		$	606,337		$	638,721		$	853,659	$	957,525
	Pass through sales ¹			—			—			—			20,596		66,808
	Total sales			651,958			606,337			638,721			874,255		1,024,333
	Gross profit			100,707			77,058			13,848			136,467		172,853
	Operating income (loss)			18,778			(1,787	) ²		(81,289	) ²		40,390		70,658
	Interest expense			18,819			19,539			19,798			21,887		23,431
	Income (loss) before provision for income taxes			1,707			(19,490	)		(98,229	)		20,220		49,526
	Net income (loss)			3,504			(12,410	)		(58,939	)		18,531		35,163

	Share data:
		Earnings (loss) per share—basic	$	0.11		$	(0.39	)	$	(2.08	)	$	0.69	$	1.30
		Earnings (loss) per share—diluted	$	0.11		$	(0.39	)	$	(2.08	)	$	0.69	$	1.28
		Cash dividends per share	$	0.00		$	0.03		$	0.16		$	0.34	$	0.34
		Weighted average common shares outstanding—basic		32,111			31,852			28,282	³		26,913		27,103

		Weighted average common shares outstanding—diluted		32,392			31,852			28,282	³		26,985		27,415

FINANCIAL POSITION
	Cash and cash equivalents		$	41,010		$	29,154		$	34,522		$	13,809	$	1,241
	Working capital			300,943			192,837			286,192			352,731		345,304
	Total assets			709,292			686,621			710,199			701,854		737,977
	Short-term recourse debt			2,656			59,729			42,525			13,652		26,314
	Short-term non-recourse debt			736			32,527			—			—		—
	Long-term recourse debt			217,434	⁴		164,658			217,699			179,987		180,447
	Long-term non-recourse debt			31,232			—			—			—		—
	Total recourse debt			220,090			224,387			260,224			193,639		206,761
	Stockholders' equity			301,684			294,988			310,235			340,212		336,494

	Number of shares outstanding at end of year			32,245			31,850			31,870	³		26,937		26,865

	Book value per share of common stock		$	9.36		$	9.26		$	9.73		$	12.63	$	12.53

Notes:

¹: In connection with certain long-term inventory management programs, we purchased factory-new products on behalf of our customers from original equipment manufacturers. These products were purchased from the manufacturer and "passed through" to our customers at our cost. In December 2000, these inventory management programs were discontinued.
²: See Note 2 of notes to our consolidated financial statements for a discussion regarding impairment and special charges recorded during fiscal 2003 and fiscal 2002.
³: In February 2002, we sold 5,010 shares of common stock for $34,334, net of expenses.
⁴: In February 2004, we sold $75,000 of 2.875% convertible notes due February 1, 2024.

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

General Overview

We report our 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 our four business segments for each of the last three fiscal years ended May 31.

		For the Year Ended May 31,
		2004		2003		2002
Sales:
	Inventory and Logistic Services	$	253,958	$	246,031	$	258,067
	Maintenance, Repair and Overhaul		216,483		205,666		216,727
	Manufacturing		151,310		119,871		99,558
	Aircraft and Engine Sales and Leasing		30,207		34,769		64,369

		$	651,958	$	606,337	$	638,721

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 an economic downturn, 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 our customers had a significant negative effect on our fiscal 2002 sales and operating results as demand declined for our products and services within the Inventory and Logistic Services, Maintenance, Repair and Overhaul and Aircraft and Engine Sales and Leasing segments.

During fiscal 2003, airline traffic began to strengthen and it appeared that the beginning of the airline industry recovery was underway. However, during the third quarter of fiscal 2003, demand for products and services from many of our airline customers weakened as a result of the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome (SARS). During fiscal 2003, sales of products and services to the U.S. Government, its agencies and its contractors increased primarily due to increased U.S. Military activity.

During fiscal 2004, sales of our manufactured products and performance-based logistics and supply chain management services continued to increase as a result of the U.S. Military's buildup and increased demand for supply chain management services. Although it is very difficult for us to predict the extent and duration of the military buildup and its impact on our near-term results, we believe that we are well positioned with our current products and services and growth plans to benefit from longer-term U.S. Military deployment and program-management strategies. Total sales to the U.S. Government and its contractors for fiscal 2004 were $222,558, an increase of 30.8% compared to fiscal 2003, and represented 34.1% of fiscal 2004 consolidated sales.

During fiscal 2004, there have been positive signs the airline industry is improving, such as year-over-year improvement in available seat miles, revenue passenger miles and load factors. However, rising fuel prices and high labor costs continue to threaten the commercial airline industry, and recently certain major U.S. carriers warned they may be forced to file for bankruptcy protection. Low cost carriers with little or no infrastructure to support their maintenance requirements have gained market share from the major U.S. carriers. Certain of these low cost carriers are flying newer aircraft which will generate demand for maintenance in future years. We anticipate a fundamental shift in the way our airline customers manage their business, including intensified focus on cost control and increased use of third-party maintenance providers. We believe we are well positioned with our broad range of products and services as these trends develop.

Factors Which May Affect Future Results

Our operating results and financial position may be adversely affected or fluctuate on a quarterly basis as a result of general economic conditions, geo-political events, the commercial airline environment and other factors, including: (1) declining demand for our products and services and the ability of our customers to meet their financial obligations; (2) declining market values for aviation products and equipment; (3) difficulties in re-leasing or selling aircraft and engines that are currently being leased; (4) lack of assurance that sales to the U.S. Government, its agencies and its contractors (which were 34.1% of total sales in fiscal 2004), will continue at levels previously experienced; (5) access to the debt and equity capital markets and the ability to draw down funds under financing agreements; (6) non-compliance with restrictive and financial covenants contained in certain of our loan agreements; (7) changes in or non-compliance with laws and regulations that may affect certain of our 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; (8) competition from other companies, including original equipment manufacturers, some of which have greater financial resources than us; (9) exposure to product liability and property claims that may be in excess of our substantial liability insurance coverage; and (10) the outcome of any pending or future material litigation or environmental proceedings.

Results of Operations

Fiscal 2004 Compared with Fiscal 2003

Consolidated sales for fiscal 2004 were $651,958, which represents an increase of $45,621 or 7.5% compared to fiscal 2003.

In the Inventory and Logistic Services segment, fiscal 2004 sales increased $7,927 or 3.2% compared to fiscal 2003. The increase in sales compared to the prior year is primarily attributable to higher sales to the U.S. Military and its contractors for spares and logistics support and increased sales of engine parts. In the Inventory and Logistic Services segment, we experienced lower sales of parts to general aviation customers as a result of our strategic decision to de-emphasize certain lower margin products. Going forward, we will continue our strategy of focusing on the distribution of higher margin products.

In the Maintenance, Repair and Overhaul segment, fiscal 2004 sales increased $10,817 or 5.3% compared with fiscal 2003. The increase in sales compared to the prior year is primarily attributable to higher sales at our aircraft maintenance facility due to an increase in the number of long-term maintenance contracts with certain customers. At certain of our component repair facilities, demand for component repair from our commercial airline customers has not recovered, and as a result we experienced lower sales compared to the prior year.

In the Manufacturing segment, fiscal 2004 sales increased $31,439 or 26.2% compared to fiscal 2003. The increase in sales compared to the prior year is due to record shipments of our manufactured products which support the U.S. Military tactical deployment activities. In the Manufacturing segment, we experienced lower sales of our non-aviation composite structure products as a result of the completion of a major contract in May 2003.

In the Aircraft and Engine Sales and Leasing segment, fiscal 2004 sales decreased $4,562 or 13.1%. Sales in this segment remain at historically low levels.

Consolidated gross profit increased $23,649 or 30.7% compared with the prior year. The increase in our consolidated gross profit is primarily due to the increase in sales and an increase in our consolidated gross profit margin to 15.4% from 12.7% in the prior year. During the fourth quarter of fiscal 2004, we wrote off an investment in a joint venture (see Note 11) and the associated $1,269 pre-tax charge was recorded in Cost of Sales on the Consolidated Statement of Operations. The gross margin percentage increased in the Inventory and Logistic Services segment primarily due to the mix of inventories sold and in the Manufacturing segment primarily due to increased volume at our facilities that manufacture products supporting the U.S. Military's tactical deployment activities. Fiscal 2003 gross profit included the $5,360 impairment reserve recorded in May 2003.

Operating income increased $20,565 compared with the prior year primarily due to the increase in gross profit. During fiscal 2004, our selling, general, administrative and other expenses increased by $3,084 compared with fiscal 2003 primarily as a result of a provision for an unfavorable judgement in the amount of $1,600, a provision for a customer allowance of $1,335 and slightly higher personnel costs, partially offset by a $836 gain recorded from the sale of a facility located in Holtsville, New York. Interest expense decreased $720 compared to the prior year primarily due to decreased average borrowings.

During the third quarter of fiscal 2004, upon completion of our fiscal 2003 Federal income tax return, we determined that we qualified for additional tax benefits of $604 related primarily to higher than estimated margin on export activities. This benefit was recorded in the third quarter. In addition, our effective tax rate for fiscal 2004 reflects increased expected tax benefits related to current year export activities. As a result of these items, we recorded a tax benefit of $1,797 for the fiscal year ended May 31, 2004.

As a result of the factors discussed above, we reported net income of $3,504 for fiscal 2004.

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, we 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 we experienced record demand for our manufactured products which support the U.S. Military deployment activities. Increased shipments of our 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, we 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, we reduced our 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.

Our 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.

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

Liquidity and Capital Resources

Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets. In addition to these cash sources, we also rely on secured credit arrangements, which currently include an accounts receivable securitization program and a secured revolving credit facility. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including general economic conditions, airline and aviation industry conditions, geo-political events, including the war on terrorism, and our operating performance. Our ability to use our accounts receivable securitization program and revolving credit facility is also dependent on these factors. Our ability to generate cash from operations is influenced primarily by our operating performance and working capital management. We also have 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.

At May 31, 2004, our liquidity and capital resources included cash of $41,010 and working capital of $300,943. As of May 31, 2004, $7,313 of cash was restricted to support letters of credit. At May 31, 2004, we had $35,000 available under our accounts receivable securitization program; no accounts receivable were securitized as of that date. The amount available under this agreement is based on a formula of qualifying accounts receivable. At May 31, 2004, we had $22,449 available under our secured revolving credit facility; no amounts were outstanding as of that date. The amount available under the revolving credit facility is also based on a formula of qualifying assets. As of May 31, 2004, unrestricted cash and amounts available to us under our secured credit arrangement and accounts receivable securitization program totaled $91,146.

On February 3, 2004, we issued $75,000 principal amount of 2.875% convertible notes due February 1, 2024. We used a portion of the proceeds to repurchase $35,000 of accounts receivable which had been sold under our accounts receivable securitization facility, to repay $16,900 of 8.0% notes prior to their maturity, to repay $4,000 outstanding under our revolving credit facility, to retire $13,426 of notes payable due in June 2005 and to retire $3,500 of notes payable due in December 2007 (see Note 3).

In January 2004, we refinanced non-recourse notes of $32,132 with the maturity date extended to July 2005. Accordingly, a portion of the non-recourse debt has been classified as long-term on the May 31, 2004 Consolidated Balance Sheet. As of May 31, 2004, our equity investment in the aircraft that secures the non-recourse debt was $2,085.

On October 3, 2003, we entered into a sale-leaseback transaction whereby we sold and leased back a facility in Garden City, New York. Net proceeds from the sale were $13,991 and were used in part to reduce our outstanding borrowings (see Note 9).

On July 1, 2003, we completed an $11,000 financing secured by a mortgage on our 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%.

On April 18, 2003, Standard and Poor's downgraded the senior unsecured debt rating to BB minus from BBB minus with an outlook rating of negative. On July 2, 2004, Standard and Poor's upgraded our outlook rating from negative to stable. On July 18, 2003, Fitch Ratings downgraded the unsecured debt rating to BB minus from BB plus and revised the outlook rating to negative from stable. On August 5,

2003, Moody's Investors Service downgraded our senior unsecured debt rating to B2 from B1. We were removed from credit watch following the downgrade actions by each of the respective rating agencies.

We continue to evaluate financing arrangements on commercially reasonable terms that will allow us to improve our liquidity position and finance future growth. Our ability to obtain additional financing is dependent upon a number of factors, including the geo-political environment, general economic conditions, airline industry conditions, our operating performance and market conditions in the public and private debt and equity markets.

During the twelve-month period ended May 31, 2004, we generated $14,572 of cash from operations primarily due to a reduction in inventories of $15,602 and $26,680 of non-cash depreciation and amortization. However, accounts and trade notes receivables increased $41,374 as a result of an increase in sales and the repurchase for cash of $26,800 of accounts receivable which had been sold under our accounts receivable securitization facility.

During the twelve-month period ended May 31, 2004, cash provided from investing activities was $5,626 consisting primarily of proceeds from the sale and leaseback of our Garden City, New York facility in the amount of $13,991 and proceeds from the sale of the Holtsville, New York facility in the amount of $2,931, partially offset by capital expenditures of $10,286. We expect fiscal 2005 capital expenditures to be $13,000 to $15,000, reflecting increased investments in airframe maintenance and higher-margin manufacturing capabilities.

During the twelve-month period ended May 31, 2004, our financing activities used $8,373 of cash. Proceeds from borrowings during fiscal 2004 were $89,701, which included the issuance of $75,000 of 2.875% convertible notes and $11,000 of financing secured by a mortgage on the Wood Dale, Illinois facility, as well as proceeds from other borrowings of $3,701. Reductions in borrowings during fiscal 2004 were $94,615. During the twelve-month period ended May 31, 2004, we retired 7 ¹ / 4 % Notes in the amount of $22,600 which matured on October, 15, 2003, repaid $24,000 outstanding under the Merrill Lynch secured credit facility, repaid $16,900 of 8.0% notes prior to their maturity, retired $21,291 of notes payable due in June 2005, retired $5,630 of notes payable due in December 2007 and reduced other borrowings by $4,194.

Contractual Obligations and Off-Balance Sheet Arrangements

A summary of contractual obligations and off-balance sheet arrangements as of May 31, 2004 is as follows:

			Payments Due by Period
			Total		Due in Fiscal 2005		Due in Fiscal 2006		Due in Fiscal 2007		Due in Fiscal 2008		Due in Fiscal 2009		After Fiscal 2009
On Balance Sheet:
	Debt		$	218,194	$	760	$	792	$	831	$	75,241	$	8,820	$	131,750
	Non-recourse Debt			31,968		736		31,232		—		—		—		—
	Bank Borrowings			1,896		1,896		—		—		—		—		—
Off Balance Sheet:
	Aviation Equipment
		Operating Leases		31,696		10,471		6,783		14,442		—		—		—
	Facilities and Equipment
		Operating Leases		16,925		4,548		3,832		3,376		2,457		2,000		712
	Garden City Operating Lease			33,137		1,354		1,388		1,423		1,458		1,495		26,019
	Purchase Obligations			47,424		46,030		1,394		—		—		—		—

We routinely issue letters of credit and performance bonds in the ordinary course of business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 2004 was approximately $10,952.

Critical Accounting Policies and Significant Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management 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 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.

Allowance for Doubtful Accounts Our 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, we consider 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. We have utilized certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement values 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, we recorded a significant charge for impaired inventories during the second quarter of fiscal 2002 utilizing those assumptions. During the fourth quarter of fiscal 2003, we recorded an additional charge as a result of a further decline in market value for these inventories. Reductions in demand for certain of our inventories or declining market

values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our 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", we are 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, we have utilized certain assumptions when estimating future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand. Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future impairments of equipment on or available for lease.

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

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 the beliefs of management, as well as assumptions and estimates based on information available to us 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 our control. We assume 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)

Our exposure to market risk includes fluctuating interest rates under our credit agreements, foreign exchange rates and accounts receivable. See Part II, Item 8 for a discussion on accounts receivable exposure. During fiscal 2004 and 2003, we did not utilize derivative financial instruments to offset these risks.

At May 31, 2004, $22,449 was available under our secured revolving credit facility with Merrill Lynch Capital. Interest on amounts borrowed under this credit facility is LIBOR based. As of May 31, 2004, the outstanding balance under this agreement was $0. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during fiscal 2004 would have reduced our pre-tax income by approximately $31 during fiscal 2004.

Revenues and expenses of our 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 our financial position or results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

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, 2004 and 2003 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois
June 28, 2004

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AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended May 31,
		2004			2003			2002
		(In thousands except per share data)
Sales:
	Sales from products and leasing	$	554,079		$	519,370		$	557,813
	Sales from services		97,879			86,967			80,908

			651,958			606,337			638,721

Costs and operating expenses:
	Costs of products and leasing		469,930			448,705			480,415
	Cost of services		81,321			75,214			68,558
	Cost of sales-impairment charge		—			5,360			75,900
	Selling, general and administrative and other		81,929			78,845			85,037
	Special charges		—			—			10,100

			633,180			608,124			720,010
Operating income (loss)			18,778			(1,787	)		(81,289	)
Interest expense			(18,819	)		(19,539	)		(19,798	)
Interest income			1,748			1,836			2,858

Income (loss) before provision for income taxes			1,707			(19,490	)		(98,229	)
Income tax benefit			(1,797	)		(7,080	)		(39,290	)

Net income (loss)		$	3,504		$	(12,410	)	$	(58,939	)

Earnings (loss) per share of common stock — basic		$	0.11		$	(0.39	)	$	(2.08	)

Earnings (loss) per share of common stock — diluted		$	0.11		$	(0.39	)	$	(2.08	)

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

AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

			May 31,
			2004			2003
			(In thousands)
Current assets:
	Cash and cash equivalents		$	41,010		$	29,154
	Accounts receivable			104,661			66,322
	Inventories			206,899			219,894
	Equipment on or available for short-term lease			40,346			40,060
	Deposits, prepaids and other			11,714			13,692
	Deferred tax assets			27,574			27,290

		Total current assets		432,204			396,412

Property, plant and equipment, at cost:
	Land			5,542			6,367
	Buildings and improvements			58,868			68,040
	Equipment, furniture and fixtures			129,793			124,321

				194,203			198,728
Accumulated depreciation				(112,337	)		(104,699	)

				81,866			94,029

Other assets:
	Investments in leveraged leases			9,541			27,394
	Goodwill, net			44,421			45,951
	Equipment on long-term lease			84,271			72,732
	Other			56,989			50,103

				195,222			196,180

			$	709,292		$	686,621

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,
			2004			2003
			(In thousands)
Current liabilities:
	Short-term debt		$	1,896		$	24,000
	Current maturities of long-term debt			760			35,729
	Current maturities of non-recourse long-term debt			736			32,527
	Accounts payable			57,582			51,485
	Accrued liabilities			70,287			59,834

		Total current liabilities		131,261			203,575

Long-term debt, less current maturities				217,434			164,658
Non-recourse debt				31,232			—
Deferred tax liabilities				17,628			22,601
Retirement benefit obligation				683			799
Deferred income and other				9,370			—

				276,347			188,058

Stockholders' equity:
	Preferred stock, $1.00 par value, authorized 250 shares; none issued			—			—
	Common stock, $1.00 par value, authorized 100,000 shares; issued 34,525 and 33,543 shares, respectively			34,525			33,543
	Capital surplus			172,681			164,651
	Retained earnings			146,776			143,272
	Treasury stock, 2,280 and 1,692 shares at cost, respectively			(36,030	)		(26,798	)
	Unearned restricted stock awards			(1,376	)		(514	)
	Accumulated other comprehensive income (loss)—
		Cumulative translation adjustments		(1,647	)		(3,244	)
		Minimum pension liability		(13,245	)		(15,922	)

				301,684			294,988

			$	709,292		$	686,621

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, 2004

		Common Stock					Treasury Stock											Unearned Restricted Stock Awards			Accumulated Other Comprehensive Income (Loss)
		Common Stock					Treasury Stock					Capital Surplus			Retained Earnings									Comprehensive Income (Loss)
		Shares		Amount			Shares		Amount			Capital Surplus			Retained Earnings									Comprehensive Income (Loss)
		(In thousands)
Balance, May 31, 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	)
	Net income	—			—		—			—			—			3,504			—			—		$	3,504
	Cash dividends	—			—		—			—			—			—			—			—			—
	Treasury stock	—			—		588			(9,232	)		—			—			—			—			—
	Exercise of stock options and stock awards	982			982		—			—			8,030			—			—			—			—
	Restricted stock activity	—			—		—			—			—			—			(862	)		—			—
	Adjustment for net translation gain (loss)	—			—		—			—			—			—			—			1,597			1,597
	Minimum pension liability, net of tax	—			—		—			—			—			—			—			2,677		2,677
	Comprehensive income for fiscal 2004																							$	7,778

Balance, May 31, 2004		34,525		$	34,525		2,280		$	(36,030	)	$	172,681		$	146,776		$	(1,376	)	$	(14,892	)

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

AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

					For the Year Ended May 31,
					2004			2003			2002
					(In thousands)
Cash flows from operating activities:
	Net income (loss)				$	3,504		$	(12,410	)	$	(58,939	)
	Adjustments to reconcile net income (loss) to net cash provided from (used in) operating activities:
			Depreciation and amortization			26,680			27,172			22,496
			Deferred taxes			(5,116	)		(3,376	)		(2,394	)
			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		(41,374	)		16,517			24,363
				Inventories		15,602			17,755			(31,749	)
				Equipment on or available for short-term lease		(3,233	)		5,232			12,229
				Equipment on long-term lease		(218	)		(1,796	)		(30,025	)
				Accounts and trade notes payable		6,642			(2,841	)		(25,261	)
				Accrued liabilities and taxes on income		13,143			(14,423	)		5,861
				Other, primarily prepaids		(1,058	)		(581	)		(2,171	)

		Net cash provided from (used in) operating activities				14,572			34,733			(33,904	)

Cash flows from investing activities:
	Property, plant and equipment expenditures					(10,286	)		(9,930	)		(12,112	)
	Proceeds from disposal of assets					92			113			589
	Business acquisition					—			—			(13,251	)
	Proceeds from sale of business and facility					16,922			2,969			2,229
	Investment in leveraged leases					245			1,694			(373	)
	Other					(1,347	)		(815	)		(986	)

		Net cash provided from (used in) investing activities				5,626			(5,969	)		(23,904	)

Cash flows from financing activities:
	Proceeds from borrowings					89,701			24,000			115,504
	Reduction in borrowings					(94,615	)		(56,643	)		(65,411	)
	Financing costs					(3,459	)		(715	)		(484	)
	Proceeds from stock offering					—			—			34,334
	Cash dividends					—			(797	)		(4,430	)
	Purchases of treasury stock					—			—			(205	)
	Other					—			90			(897	)

		Net cash provided from (used in) financing activities				(8,373	)		(34,065	)		78,411

Effect of exchange rate changes on cash						31			(67	)		110

Increase (decrease) in cash and cash equivalents						11,856			(5,368	)		20,713
Cash and cash equivalents, beginning of year						29,154			34,522			13,809

Cash and cash equivalents, end of year					$	41,010		$	29,154		$	34,522

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 to the worldwide aviation/aerospace industry. We also market and sell certain of our products to the U.S. and foreign governments. Products and services are sold primarily to domestic and foreign commercial 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. Our 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 back to the customer. We have 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 our service agreements generally do not require us to provide services at customer sites. Furthermore, the serviced units are typically 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, we recognize 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 to us by the lessee, which is normally the month following the actual usage.

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 are no longer amortized, but are subject to annual impairment tests. We 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, 2004, 2003 and 2002.

The amount reported under the caption on the May 31, 2004 and 2003 consolidated balance sheets "Goodwill, net" is comprised entirely of goodwill associated with acquisitions we 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. We were not required to allocate goodwill related to specific acquisitions across two or more segments. Upon adoption of SFAS No. 142, and for the fiscal 2004 annual impairment test, we compared an estimate for the fair value of each of our reportable segments to its

carrying amount. The estimated fair value of each reportable segment was determined utilizing a valuation technique based on a multiple of earnings.

Goodwill by reportable segment is as follows:

	May 31,
	2004		2003
Inventory and Logistic Services	$	12,444	$	13,649
Maintenance, Repair and Overhaul		13,764		14,050
Manufacturing		18,213		18,252
Aircraft and Engine Sales and Leasing		—		—

	$	44,421	$	45,951

During fiscal year 2004, we reduced goodwill by $1,583 to reflect purchase accounting adjustments to establish deferred taxes primarily for accounts receivable and inventories, for acquisitions made in prior fiscal years.

Stock Options

We have an employee stock option plan which is more fully described in Note 5. We account for this plan 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 our stock option plan is reflected in net income, as each option granted under this plan 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 we had applied the fair value recognition provisions of SFAS No. 123 to our stock option plan.

	For the Year Ended May 31,
	2004			2003			2002
Net income (loss) as reported	$	3,504		$	(12,410	)	$	(58,939	)
Add (deduct): Stock-based compensation expense (income) included in net income (loss) as reported, net of tax		323			142			(150	)
Deduct: Total compensation expense determined under fair value method for all awards, net of tax		(2,188	)		(2,758	)		(2,810	)

Pro forma net income (loss)	$	1,639		$	(15,026	)	$	(61,899	)

Earnings (loss) per share-basic:	As reported	$	0.11	$	(0.39	)	$	(2.08	)
	Pro forma	$	0.05	$	(0.47	)	$	(2.19	)
Earnings (loss) per share-diluted:	As reported	$	0.11	$	(0.39	)	$	(2.08	)
	Pro forma	$	0.05	$	(0.47	)	$	(2.19	)

The fair value weighted average per share of stock options granted during fiscal 2004, 2003 and 2002 was $4.93, $3.82 and $6.25, 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
	2004		2003		2002
Risk-free interest rate	3.1	%	2.5	%	4.5	%
Expected volatility of common stock	67.2	%	64.0	%	54.8	%
Dividend yield	0.0	%	1.6	%	1.9	%
Expected option term in years	4.0		4.0		4.0

Cash and Cash Equivalents

We consider all highly liquid investments with maturities of three months or less to be cash equivalents. At May 31, 2004 and 2003 cash equivalents of approximately $11,317 and $4,349, respectively, represent investments in funds holding high-quality commercial paper. The carrying amount of cash equivalents approximates fair value at May 31, 2004 and 2003, respectively. As of May 31, 2004, $7,313 of cash was restricted to support letters of credit.

Transfer of Financial Assets

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

On March 21, 2003, we completed a $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 of our subsidiaries 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 U.S. government. Costs related to this arrangement are included in interest expense.

At May 31, 2004, accounts receivable sold under the program were $0. At May 31, 2003, accounts receivable sold under the program were $44,065 and the cash proceeds were $26,800. This resulted in a $26,800 reduction in accounts receivable on the May 31, 2003 consolidated balance sheet. The retained undivided interest of $17,265 as of May 31, 2003 is included in accounts receivable at fair value, which takes into consideration expected credit losses based on the specific identification of uncollectable accounts. Because substantially all accounts receivable sold carry 30-day payment terms, the retained interest at May 31, 2003 was not discounted.

Foreign Currency

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

Financial Instruments and Concentrations of Market or Credit Risk

Financial instruments that potentially subject us to concentrations of market or credit risk consist principally of trade receivables. While our 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. We perform evaluations of payment experience, current financial condition and risk analysis. We typically require 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,
	2004		2003
Raw materials and parts	$	45,823	$	45,702
Work-in-process		20,419		22,604
Purchased aircraft, parts, engines and components held for sale		140,657		151,588

	$	206,899	$	219,894

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. 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.

Our aircraft and engine portfolio includes 8 narrow-body and 2 wide-body aircraft and several types of engines, certain of which were acquired prior to September 11, 2001. Demand and lease rates for many of these assets have not returned to pre-September 11, 2001 levels. In accordance with SFAS No. 144, we are required to test for impairment of these assets and previously adjusted the carrying value for certain of these assets (see Note 2). When applying the provisions of SFAS No. 144 to our aircraft and engine portfolio, we have utilized certain assumptions when estimating future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand. Unfavorable differences between actual results and expected results could result in future impairments in our aircraft and engine lease portfolio.

Each of the aircraft in our portfolio are on lease and we expect to re-lease these aircraft as the current lease expires. Future rent due to us under non-cancelable leases for aircraft and engines during each of the next four fiscal years is $12,182 in 2005, $7,329 in 2006, $1,693 in 2007 and $358 in 2008.

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

We are 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 us for nonpayment of the obligations. The third-party debt is collateralized by the lessees' rental obligations and the leased equipment.

We have ownership rights to the leased assets and are 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,
	2004		2003		2002
Interest paid	$	15,246	$	17,604	$	16,817
Income taxes paid		740		3,460		1,960
Income tax refunds and interest received		1,026		865		4,075
Noncash operating and financing activities:
Assets acquired with assumption of notes payable	$	—	$	36,025	$	29,737

During fiscal 2003, we purchased for nominal consideration our partner's 50% equity interest in a joint venture that owned a wide-body aircraft subject to non-recourse debt. As a result of the consolidation of the joint venture, the aircraft owned by the joint venture was recorded in our accounts for $36,025, which represented an amount equal to the historical cost of our 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. See Note 8 for information concerning the assumption of notes payable in fiscal 2002.

Use of Estimates

We have made estimates and utilized certain 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.

New Accounting Standards

In March 2004, the Financial Accounting Standards Board ("FASB") issued an exposure draft of Proposed Statement of Financial Accounting Standards, Share-Based Payment, an amendment of FASB Statement No. 123. This proposed Statement addresses the accounting for transactions in which an enterprise exchanges its equity instruments for employee services. It also addresses transactions in which an enterprise incurs liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of those equity instruments in exchange for employee services. For public entities, the cost of employee services received in exchange for equity instruments, including employee stock options, would be measured based on the grant-date fair value of those instruments. That cost would be recognized as compensation expense over the service period, which would normally be the vesting period.

If the proposed statement were adopted by us as currently proposed, it would require that compensation expense be recorded for employee stock options vesting or granted subsequent to May 31, 2005. The ultimate impact on diluted earnings per share of expensing stock options will be dependent upon the final pronouncement issued by the FASB, the method to be used for valuation of stock options determined by us and the amount of future stock option grants.

Also in March 2004, the FASB issued Proposed FASB Staff Position No. FAS 106-b ("FSP"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." The FSP provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 for employers that sponsor post-retirement health care plans that provide prescription drug benefits. The FSP will not have a material effect on us because we offer prescription drug benefits to approximately 40 retirees at May 31, 2004.

Reclassification

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

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 we were executing our plan to reduce our 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, in the second quarter ended November 30, 2001, we reduced the value and provided loss accruals for certain of our 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, we 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, we 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.

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

		May 31, 2004			May 31, 2003			May 31, 2002			November 30, 2001
Net impaired inventory and engines		$	51,500		$	56,240		$	75,600		$	89,600

Proceeds from sales of impaired inventory and engines for the twelve-month periods ended May 31, 2004 and 2003 were $7,300 and $12,100, respectively, and $15,600 for the six-month period ended May 31, 2002.

In addition, we 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 our assessment of prior estimates of recoveries from certain bankrupt airlines. We 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, we reduced our work force by approximately 150 employees. Affected employees included management and salaried employees, salespersons and hourly employees at certain of our 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, we liquidated our position in this investment; proceeds received approximated net book value after taking into consideration the impairment charge.

3. Financing Arrangements

Short-Term Borrowings

Our short-term borrowings at May 31, 2004 and 2003 were as follows:

	May 31,
	2004		2003
Short-term debt	$	1,896	$	24,000
Current maturities of long-term debt		760		35,729
Current maturities of non-recourse debt		736		32,527

	$	3,392	$	92,256

During the fourth quarter of fiscal 2003, we entered into a secured revolving credit facility with Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services, Inc. This facility replaced, in part, previous unsecured credit arrangements with three domestic banks which expired during the fourth quarter of fiscal 2003. The maximum amount available to us under this agreement is $30,000 and as of May 31, 2004 and 2003, the amount available was $22,449 and $24,800, respectively. This availability is based on a formula of qualifying assets and is secured by substantially all of our inventories and certain other assets. 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. The amount outstanding under this agreement was $0 and $24,000 at May 31, 2004 and 2003, respectively.

Short-term borrowing activity under our revolving credit facilities was as follows:

	For the Year Ended May 31,
	2004			2003			2002
Maximum amount borrowed	$	24,008		$	41,700		$	80,000
Average daily borrowings		7,878			32,661			36,152
Average interest rate during the year		3.98	%		3.4	%		2.98	%

A summary of our recourse and non-recourse long-term debt was as follows:

	May 31,
	2004			2003
Recourse debt:
Notes payable due October 15, 2003 with interest at 7.25% payable semi-annually on April 15 and October 15	$	—		$	22,600
Notes payable with interest at 8.0%, due in equal installments on October 15, 2004, 2005 and 2006		—			16,900
Notes payable due June 29, 2005 with interest at 4.6% payable monthly		—			21,291
Notes payable due December 15, 2007 with interest at 6.875% payable semi-annually on June 15 and December 15		54,370			60,000
Notes payable due May 15, 2008 with interest at 7.98% payable semi-annually on June 1 and December 1		20,000			20,000
Mortgage due July 1, 2008 with interest at 6.25%		10,627			—
Notes payable due May 15, 2011 with interest at 8.39% payable semi-annually on June 1 and December 1		55,000			55,000
Convertible notes payable due February 1, 2024 with interest at 2.875% payable semi-annually on February 1 and August 1		75,000			—
Other, primarily industrial revenue bonds, (secured by trust indentures on property, plant and equipment) with weighted average interest of approximately 1.25% to 6.65% at May 31, 2004		3,197			4,596

Total recourse debt		218,194			200,387
Current maturities of recourse debt		(760	)		(35,729	)

Long-term recourse debt	$	217,434		$	164,658

Non-recourse debt:
Non-recourse note payable due July 2005 with interest at 5.25%	$	31,968		$	32,527
Current maturities of non-recourse debt		(736	)		(32,527	)

Long-term non-recourse debt	$	31,232		$	—

On February 3, 2004 we completed the sale of $75,000 principal amount of convertible senior notes. The notes are due February 1, 2024 unless earlier redeemed, repurchased or converted, and bear interest at 2.875% payable semiannually on February 1 and August 1.

The notes are convertible into shares of AAR common stock based on a conversion rate of 53.7924 shares per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $18.59 per share, under the following circumstances: (i) on any business day up to the maturity date, if the closing sale price of our common stock for at least 20 trading days in the 30 consecutive trading day period ending on the eleventh trading day of any fiscal quarter is greater than

120% of the applicable conversion price on the eleventh trading day of that quarter; (ii) at any time after February 1, 2019, if the closing price of AAR common stock on any trading day after February 1, 2019, is greater than 120% of the then applicable conversion price; (iii) at any time until February 1, 2019, during the five consecutive business day period in which the trading price for a note for each day of that trading period was less than 98% of the closing sale price of our common stock on such corresponding trading day multiplied by the application conversion rate; (iv) we call the notes for redemption; (v) during any period in which the credit rating assigned to our long-term senior debt by Moody's Investor Services is below Caa1 and by Standard & Poor's Rating Services is below B, the credit rating assigned to our long-term senior debt is suspended or withdrawn by both such rating agencies, or neither rating agency is rating our long-term senior debt; or (vi) specified corporate transactions occur.

We may redeem for cash all or a portion of the notes at any time on or after February 1, 2008 at specified redemption prices. Holders of the notes have the right to require us to repurchase in cash all or any portion of the notes on February 1, 2010, 2014 and 2019. In each case, the repurchase price payable will be equal to 100% of the principal amount of the notes to be repurchased, plus accrued interest and unpaid interest and liquidated damages, if any, to, but not including, the date of repurchase.

The notes are senior, unsecured obligations and rank equal in right of payment with all other unsecured and unsubordinated indebtedness. Costs associated with this transaction were $2,585 and are being amortized over a six-year period.

Net proceeds from this transaction were $72,415 and were used in part to repurchase $35,000 of accounts receivable which had been sold under our accounts receivable securitization facility, to repay $16,900 of 8.0% notes prior to their maturity, to repay $4,000 outstanding under our revolving credit facility, to retire $13,426 of notes payable due in June 2005 and to retire $3,500 of notes payable due in December 2007.

We are subject to a number of covenants under our 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 our shares and other matters. We are currently prohibited from paying dividends or purchasing our shares pursuant to the most restrictive financial covenant concerning consolidated retained earnings. We are in compliance with all financial covenants under our financing arrangements. The aggregate amount of long-term recourse debt maturing during each of the next five fiscal years is $760 in 2005, $792 in 2006, $831 in 2007, $75,241 in 2008 and $8,820 in 2009. Our long-term recourse debt was estimated to have a fair value of approximately $208,200 at May 31, 2004. The fair value was determined using available market information.

4. Income Taxes

The provision for income taxes includes the following components:

		For the Year Ended May 31,
		2004			2003			2002
Current:
	Federal	$	1,329		$	293		$	(2,832	)
	State		270			270			250

			1,599			563			(2,582	)
Deferred			(3,396	)		(7,643	)		(36,708	)

		$	(1,797	)	$	(7,080	)	$	(39,290	)

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,
		2004			2003
Deferred tax assets-current attributable to:
	Inventory costs	$	31,129		$	30,594
	Employee benefits (accruals)		(5,109	)		(3,234	)
	Other		1,554			(70	)

	Total deferred tax assets-current	$	27,574		$	27,290

Deferred tax assets-noncurrent attributable to:
	Postretirement benefits (liabilities)	$	7,572		$	9,013
	Alternative minimum tax carryforwards, NOL carryforwards and foreign tax credit carryforwards		34,859			32,785
	Valuation allowance		(1,576	)		(939	)

	Total deferred tax assets-noncurrent	$	40,855		$	40,859

	Total deferred tax assets	$	68,429		$	68,149

Deferred tax liabilities attributable to:
	Depreciation	$	(50,612	)	$	(49,750	)
	Leveraged leases		(7,871	)		(13,710	)

	Total deferred tax liabilities	$	(58,483	)	$	(63,460	)

Net deferred tax assets		$	9,946		$	4,689

During fiscal 2004 and 2003, we established deferred tax valuation allowances of $637 and $939, respectively, related to certain foreign tax credit carryforwards. For the other deferred tax assets, we have determined that the realization of the deferred tax assets is more likely than not, and that a valuation

allowance is not required based upon our prior history of operating earnings, the nature of certain of our deferred tax assets, our expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to depreciation.

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 2004, 2003 and 2002, for the following reasons:

		For the Year Ended May 31,
		2004			2003			2002
Provision (benefit) for income taxes at the federal statutory rate		$	597		$	(6,820	)	$	(34,380	)
	Tax benefits on exempt earnings from export sales		(2,625	)		(1,220	)		(1,460	)
	State income taxes, net of federal benefit and refunds		175			176			(1,267	)
	Reduction in income tax accrued liabilities		(350	)		—			(2,000	)
	Valuation allowance		637			939			—
	Other, net		(231	)		(155	)		(183	)

Provision (benefit) for income taxes as reported		$	(1,797	)	$	(7,080	)	$	(39,290	)

During fiscal 2004 and 2002, we recorded reductions in income tax expense of $350 and $2,000, respectively. These adjustments represent the reversal of federal and state income tax accruals which were no longer considered required. The fiscal 2002 adjustment pertains primarily to amounts 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

We have established stock option plans for our officers and key employees. 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.

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, 2004 follows:

		Number of Shares		Weighted Average Exercise Price
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
	Granted	1,524			9.32
	Exercised	(785	)		9.75
	Surrendered/expired/cancelled	(187	)		15.31

Outstanding, May 31, 2004 (3,390 exercisable)		5,154		$	14.35

The following table provides additional information regarding stock options (in thousands) outstanding as of May 31, 2004:

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
$	3.06 – 12.25	2,090	7.5	731	$	10.55
$	12.26 – 18.38	1,958	5.1	1,607	$	15.58
$	18.39 – 24.50	1,079	4.0	1,025	$	23.19
$	24.51 – 30.63	27	2.0	27	$	27.56

		5,154	5.8	3,390	$	16.90

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 are as follows:

	For the Year Ended May 31,
	2004		2003	2002
Shares of restricted stock granted		202	—		10
Weighted average per share fair value	$	6.96	—	$	8.70

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, 2004 follows:

	For the Year Ended May 31,
	2004			2003			2002
Expense	$	516		$	330		$	571
Forfeitures (income)		(17	)		(111	)		(802	)

Net	$	499		$	219		$	(231	)

The AAR CORP. Employee Stock Purchase Plan is open to our employees (other than officers, directors or participants in our other stock option plans) 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 our stock plans are as follows (in thousands):

	May 31, 2004
	Outstanding	Available	Total
Stock Benefit Plan (officers, directors and key employees)	5,718	1,719	7,437
Employee Stock Purchase Plan	—	144	144

Pursuant to a shareholder rights plan adopted in 1997, each outstanding share of our 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 we are 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 our common stock having a market value of $166.66 (or two times the exercise price), subject to certain exceptions. Similarly, if we are acquired in a merger or other business combination or 50% or more of our 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 us for $.01 per Right under certain circumstances.

On September 21, 1990, the Board of Directors authorized us to purchase up to 1,500,000 shares (adjusted for a three-for-two stock split) of our common stock on the open market or through privately negotiated transactions. On October 13, 1999, the Board of Directors authorized us to purchase up to 1,500,000 additional shares of our common stock. As of May 31, 2004, we had purchased 1,745,000 shares of our common stock on the open market under these programs at an average price of $14.00 per share and have 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, 2004 (in thousands).

		For the Year Ended May 31,
		2004		2003			2002
Basic:
	Net income (loss)	$	3,504	$	(12,410	)	$	(58,939	)
	Average shares of common stock outstanding		32,111		31,852			28,282
	Earnings (loss) per share of common stock-basic	$	0.11	$	(0.39	)	$	(2.08	)

Diluted:
	Net income (loss)	$	3,504	$	(12,410	)	$	(58,939	)
	Average shares of common stock outstanding		32,111		31,852			28,282
	Additional shares due to hypothetical exercise of stock options		281		—			—

	Average shares of common stock outstanding-diluted		32,392		31,852			28,282
	Earnings (loss) per share-diluted	$	0.11	$	(0.39	)	$	(2.08	)

At May 31, 2004 and 2003 respectively, stock options to purchase 3,234,000 and 4,571,000 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 31,000 shares for year ended May 31, 2003 were not included in the computation of diluted earnings per share because to do so would have been antidilutive due to the net loss during the period.

7. Employee Benefit Plans

We have defined contribution and defined benefit plans covering substantially all full-time domestic employees and certain employees in The Netherlands. In addition, we provide postretirement health and life insurance benefits to eligible domestic employees.

Defined Benefit Plans

Prior to January 1, 2000, the pension plan for domestic salaried and non-union hourly employees had a benefit formula based primarily on years of service and compensation. Effective January 1, 2000, we converted our 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. Defined pension benefits for certain union hourly employees are based primarily on a fixed amount per year of service.

Certain foreign operations of domestic subsidiaries also have a pension plan which is a defined benefit plan. 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 laws and regulations.

We provide our outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are paid quarterly in cash equal to 25% of the annual retainer fee payable to active outside directors. Payment of benefits commence upon retirement and continues for a period equal to the total number of years of the retired director's service up to a maximum of ten years, or death, whichever occurs first. In the fourth quarter of fiscal 2001, we terminated the plan for any new members of the Board of Directors elected after May 31, 2001.

We also provide supplemental retirement and profit sharing benefits for current and former executives and key employees to supplement benefits provided by our 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 our Board of Directors.

The following table sets forth the change in projected benefit obligations for all of our pension plans:

		May 31,
		2004			2003
Change in benefit obligation:
	Benefit obligation at beginning of year	$	77,425		$	67,264
	Service cost		2,834			2,726
	Interest cost		4,483			4,458
	Plan participants' contributions		223			213
	Amendments		—			688
	Net actuarial (gain) loss		(3,795	)		7,184
	Benefits paid		(4,126	)		(5,108	)

Benefit obligation at end of year		$	77,044		$	77,425

The projected benefit obligation is measured at May 31 of each year using the following weighted average assumptions:

		May 31,
		2004		2003
Domestic plans:
	Discount rate	6.50	%	6.00	%
	Compensation increase rate	3.00		3.00
Non-domestic plans:
	Discount rate	5.50	%	5.25	%
	Compensation increase rate	3.25		3.25

The following table sets forth the change in fair value of plan assets:

		May 31,
		2004			2003
Change in plan assets:
	Fair value of plan assets at beginning of year	$	51,431		$	50,067
	Actual return on plan assets		6,407			(564	)
	Employer contributions		6,899			6,823
	Plan participants' contributions		223			213
	Benefits paid		(4,126	)		(5,108	)

Fair value of plan assets at end of year		$	60,834		$	51,431

The following table sets forth the actual asset allocation and target allocations for our U.S. pension plans:

	May 31,
	May 31,				Target Asset Allocation
	2004		2003		Target Asset Allocation
Equity securities	65	%	48	%	45 – 65	%
Fixed income securities	29		52		25 – 55	%
Other (fund-of funds hedge fund)	6		—		0 – 20	%

	100	%	100	%

The assets of U.S pension plans are invested in compliance with the Employee Retirement Income Security Act of 1974 (ERISA). The investment goals are to provide a total return that, over the long term, optimizes the long-term return on plan assets at an acceptable risk and maintain a broad diversification across asset classes and among investment managers. Direct investments in our securities and the use of derivatives for the purpose of speculation are not permitted. The assets of the U.S. pension plans are invested primarily in equity and fixed income mutual funds and individual common stocks and in fiscal 2004, included an investment in a fund-of funds hedge fund.

The assets of the non-domestic plan are invested in compliance with local laws and regulations and are comprised of insurance contracts and equity and fixed income mutual funds.

To develop our expected long-term rate of return assumption on domestic plans, we use long-term historical return information for our targeted asset mix and current market conditions. The expected long-term rate of return assumption used in computing fiscal 2004 net periodic pension expense was 8.5% for the domestic plans and 6.5% for the non-domestic plan.

Our contribution policy for the 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. We anticipate contributing $4,000 to $7,000 during fiscal 2005.

The following table sets forth all of the defined benefit plan's funded status and the amount recognized in our Consolidated Balance Sheets:

		May 31,
		2004			2003
	Funded status	$	(16,210	)	$	(25,994	)
	Unrecognized actuarial losses		25,886			31,800
	Unrecognized prior service cost		1,773			2,146
	Unrecognized transitional obligation		67			151

Prepaid pension costs		$	11,516		$	8,103

A minimum pension liability adjustment is required when the actuarial present value of accumulated plan benefits exceeds plan assets and accrued pension liabilities. During fiscal 2003, we recorded a $14,334 increase to the minimum pension liability, and $9,270, net of tax, was reported as a component of comprehensive income (loss). During fiscal 2004, we reduced the minimum pension liability by $3,909, and $2,677, net of tax, was reported as a component of comprehensive income.

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

	For the Year Ended May 31,
	2004			2003			2002
Service cost	$	2,834		$	2,726		$	2,767
Interest cost		4,483			4,458			4,427
Expected return on plan assets		(4,886	)		(4,804	)		(4,901	)
Amortization of prior service cost		298			290			393
Recognized net actuarial loss		1,392			504			112
Transitional obligation		89			92			89
Curtailment		—			—			311

	$	4,210		$	3,266		$	3,198

A summary of the weighted average assumptions used to determine net periodic pension expense is as follows:

		For the Year Ended May 31,
		2004		2003		2002
Domestic plans:
	Discount rate	6.00	%	7.25	%	7.75	%
	Rate of compensation increase	3.00		4.00		4.50
	Expected long-term return on plan assets	8.50		9.00		10.00
Non-domestic plans:
	Discount rate	5.25	%	6.00	%	6.00	%
	Rate of compensation increase	3.25		4.00		4.00
	Expected long-term return on plan assets	6.50		6.50		6.50

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 50% of their pretax compensation, subject to applicable regulatory limits. We may make matching contributions up to 5% of compensation. Company contributions vest on a pro-rata basis during the first three years of employment. During fiscal 2003, Company matching contributions to our defined contribution plan were suspended due to the operating performance of the Company. Expense charged to results of operations for Company matching contributions was $0, $457 and $1,391 in fiscal 2004, 2003 and 2002, respectively.

Postretirement Benefits Other Than Pensions

We provide health and life insurance benefits for certain eligible employees and retirees. The postretirement plans are unfunded, and we have the right to modify or terminate any of these plans in the future, in certain cases, subject to union bargaining agreements. In fiscal 1995, we completed termination of postretirement health and life insurance benefits attributable to future services of collective bargaining and other domestic employees.

Postretirement benefit expense for the years ended May 31, 2004, 2003 and 2002 included the following components:

	For the Year Ended May 31,
	2004		2003		2002
Interest cost	$	47	$	58	$	97
Amortization of prior service cost		8		7		16

	$	55	$	65	$	113

The funded status of the plans at May 31, 2004 and 2003 was as follows:

		May 31,
		2004			2003
Change in benefit obligation:
	Benefit obligation at beginning of year	$	847		$	1,340
	Interest cost		47			58
	Benefits paid		(120	)		(116	)
	Unrecognized actuarial loss		476			50
	Amendment		—			(485	)
	Plan participants' contributions		—			—

Benefit obligation at end of year		$	1,250		$	847

Change in plan assets:
	Fair value of plan assets at beginning of year	$	—		$	—
	Company contributions		120			116
	Benefits paid		(120	)		(116	)
	Plan participants' contributions		—			—

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

	Funded status	$	(1,250	)	$	(847	)
	Unrecognized actuarial gain (loss)		504			(22	)
	Unrecognized prior service cost		63			70

Accrued postretirement costs		$	(683	)	$	(799	)

The assumed discount rate used to measure the accumulated postretirement benefit obligation was 6.5% at May 31, 2004 and 6.0% at May 31, 2003. The assumed rate of future increases in healthcare costs was 10.0% and 9.0% in fiscal 2004 and 2003, respectively, declining to 5.0% by the year 2010 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 $46 as of May 31, 2004, and would not result in a significant change to the annual postretirement benefit expense.

8. Aviation Equipment Operating Leases

From time to time we lease aviation equipment (engines and aircraft) from lessors under arrangements that are classified as operating leases. We may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which we are the lessee are one year with options to renew annually at our election. If we elect not to renew a lease or the lease term expires, we will purchase the equipment from the lessor at its scheduled purchase option price. The terms of the lease agreements also allow us to purchase the equipment at any time during a lease at its scheduled purchase option price. The scheduled purchase option values were $30,097 and $33,783 at May 31, 2004 and 2003.

In those instances in which we anticipate that we will purchase aviation equipment and the scheduled purchase option price will exceed the fair value of such equipment, we record an accrual for loss. The accrual for loss was $5,800 at May 31, 2004 and 2003.

During the fourth quarter of fiscal 2002, we purchased the equity interest in $31,080 of aviation equipment which we previously accounted for as operating leases. 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 a term loan upon the purchase in the amount of $29,737, which was also recorded on the May 31, 2002 Consolidated Balance Sheet. During fiscal 2004, this term loan was retired.

9. Commitments and Contingencies

On October 3, 2003, the Company entered into a sale-leaseback transaction whereby the Company sold and leased back a facility located in Garden City, New York. The lease is classified as an operating lease in accordance with SFAS No. 13, "Accounting for Leases". Net proceeds from the sale of the facility were $13,991 and the cost and related accumulated depreciation of the facility of $9,472 and $4,595, respectively, were removed from the balance sheet. The gain realized of $9,114 on the sale has been deferred and is being amortized over the 20-year lease term in accordance with SFAS No. 13. The deferred gain is included in the caption "Deferred income and other" on the Consolidated Balance Sheet.

In addition to the aviation equipment operating leases and the Garden City lease, we lease other facilities and equipment under agreements that are classified as operating leases that expire at various dates through 2023. Future minimum payments under all operating leases at May 31, 2004 are as follows:

	Future Minimum Payments
Year	Facilities and Equipment		Aviation Equipment
2005	$	5,902	$	10,471
2006		5,220		6,783
2007		4,799		14,442
2008		3,915		—
2009 and thereafter		30,226		—

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

	For the Year Ended May 31,
	2004		2003		2002
Facilities and Equipment	$	8,193	$	6,597	$	7,688
Aviation Equipment		3,051		3,117		6,558

We routinely issue letters of credit and performance bonds in the ordinary course of our business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 2004 was approximately $10,952.

We are 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 our consolidated financial condition or results of operations.

10. Investment in Leveraged Leases

Occasionally, we acquire 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 we are 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 we are 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.

During the second quarter of fiscal 2004, three of our leveraged leases expired. At that time, we entered into operating leases with a term of two years with the same carrier for each of the three aircraft. As a result, the remaining asset values of the aircraft were reclassified on the Consolidated Balance Sheet from "Investment in leveraged leases" to "Equipment on long-term lease".

Our net investment in leveraged leases is comprised of the following elements:

	May 31,
	2004			2003
Rentals receivable (net of principal and interest on the non-recourse debt)	$	5,344		$	7,870
Estimated residual value of leased assets		9,000			25,573
Unearned and deferred income		(4,803	)		(6,049	)

		9,541			27,394
Deferred taxes		(7,871	)		(13,710	)

Net investment in leveraged leases	$	1,670		$	13,684

Pretax income from leveraged leases was $1,246, $2,743 and $2,523 in fiscal 2004, 2003 and 2002, respectively.

11. Joint Ventures

Since fiscal 2002, we have owned a 50% equity interest in a joint venture. The remaining 50% equity interest was owned by a major U.S. financial institution. The joint venture owned one wide-body aircraft on lease to a major foreign carrier and financed the purchase of the aircraft primarily with debt that was without recourse to the joint venture and to the joint venture partners. The joint venture was accounted for under the equity method of accounting.

In May 2004, the lease with the carrier expired. Although the joint venture was successful in re-leasing the aircraft to a different carrier, we agreed to assign our rights to the aircraft to the non-recourse debt holder. Accordingly, we recorded a $1,269 pre-tax charge in May 2004 representing the write-off of our equity investment in the joint venture.

The following table provides summarized joint venture financial information at May 31, 2004 and May 31, 2003.

	May 31,
	2004		2003
Total assets	$	—	$	39,244
Total non-recourse debt		—		36,028

Net assets of joint venture	$	—	$	3,216

AAR CORP.'s 50% equity interest in joint venture	$	—	$	1,608

In June 2004, we entered into an agreement with a global financial institution establishing a limited liability company. Our equity interest in this limited liability company is 50% and the primary business of this venture is the acquisition, ownership, lease and disposition of commercial aircraft.

12. Other Noncurrent Assets

At May 31, 2004 and 2003, other noncurrent assets consisted of the following:

	May 31,
	2004		2003
Notes receivable	$	13,259	$	10,156
Investment in aviation equipment		9,123		10,119
Cash surrender value of life insurance		6,146		5,426
Debt issuance costs		4,022		1,491
Licenses and rights		3,349		3,973
Investment in joint ventures		—		1,608
Other		21,090		17,330

	$	56,989	$	50,103

13. Business Segment Information

Segment Reporting

We are a leading provider of value-added products and services to the global aviation/aerospace industry. We report our activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

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 expenses 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.

The accounting policies for the segments are the same as those described in Note 1. Our chief decision making officer (Chief Executive Officer) 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,
		2004		2003		2002
Net sales:
	Inventory and Logistic Services	$	253,958	$	246,031	$	258,067
	Maintenance, Repair and Overhaul		216,483		205,666		216,727
	Manufacturing		151,310		119,871		99,558
	Aircraft and Engine Sales and Leasing		30,207		34,769		64,369

		$	651,958	$	606,337	$	638,721

		For the Year Ended May 31,
		2004		2003		2002
Gross profit, before consideration of impairment charges (see Note 2):
	Inventory and Logistic Services	$	41,577	$	32,756	$	32,135
	Maintenance, Repair and Overhaul		24,980		26,003		32,417
	Manufacturing		29,390		18,775		12,799
	Aircraft and Engine Sales and Leasing		4,760		4,884		12,397

		$	100,707	$	82,418	$	89,748

		May 31,
		2004		2003		2002
Total assets:
	Inventory and Logistic Services	$	162,608	$	190,693	$	208,515
	Maintenance, Repair and Overhaul		172,114		191,097		190,438
	Manufacturing		86,313		63,044		73,791
	Aircraft and Engine Sales and Leasing		165,098		158,103		146,941
	Corporate		123,159		83,684		90,514

		$	709,292	$	686,621	$	710,199

		For the Year Ended May 31,
		2004		2003		2002
Capital expenditures:
	Inventory and Logistic Services	$	1,394	$	572	$	627
	Maintenance, Repair and Overhaul		4,557		6,853		8,316
	Manufacturing		3,855		1,764		1,684
	Aircraft and Engine Sales and Leasing		32		—		2
	Corporate		448		741		1,483

		$	10,286	$	9,930	$	12,112

		For the Year Ended May 31,
		2004		2003		2002
Depreciation and amortization:
	Inventory and Logistic Services	$	2,508	$	2,446	$	2,646
	Maintenance, Repair and Overhaul		7,306		7,568		7,068
	Manufacturing		3,594		3,468		4,040
	Aircraft and Engine Sales and Leasing		8,756		9,580		4,745
	Corporate		4,516		4,110		3,997

		$	26,680	$	27,172	$	22,496

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

		For the Year Ended May 31,
		2004			2003			2002
Segment gross profit		$	100,707		$	82,418		$	89,748
	Cost of sales-impairment charges		—			(5,360	)		(75,900	)
	Selling, general and administrative and other		(81,929	)		(78,845	)		(85,037	)
	Special charges		—			—			(10,100	)
	Interest expense		(18,819	)		(19,539	)		(19,798	)
	Interest income		1,748			1,836			2,858

Income (loss) before provision for income taxes		$	1,707		$	(19,490	)	$	(98,229	)

No single non-government customer represents 10% or more of total sales in any of the last three fiscal years. Sales to the U.S. Government, its agencies and its contractors by segment are as follows:

	For the Year Ended May 31,
	2004			2003			2002
Inventory and Logistic Services	$	60,468		$	40,925		$	28,489
Maintenance, Repair and Overhaul		37,031			44,163			65,832
Manufacturing		125,059			85,103			66,992
Aircraft and Engine Sales and Leasing		—			—			1,860

	$	222,558		$	170,191		$	163,173

Percentage of total sales		34.1	%		28.1	%		25.5	%

Geographic Data

		May 31,
		2004		2003
Long-lived assets:
	United States	$	264,987	$	278,551
	Europe		11,932		11,480
	Other		169		178

		$	277,088	$	290,209

Export sales from our 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 $111,902 (17.2% of total sales), $142,403 (23.5% of total sales) and $134,809 (21.1% of total sales) in fiscal 2004, 2003 and 2002, respectively.

14. Selected Quarterly Data (Unaudited)

The unaudited selected quarterly data for fiscal years ended May 31, 2004 and 2003 follows.

	Fiscal 2004
Quarter	Fiscal 2004				Net Income (Loss)			Diluted Earnings (Loss) Per Share
Quarter	Sales		Gross Profit		Net Income (Loss)			Diluted Earnings (Loss) Per Share
First	$	152,114	$	21,116	$	(1,996	)	$	(0.06	)
Second		159,519		25,130		916			0.03
Third		161,151		26,573		2,012			0.06
Fourth		179,174		27,888		2,572			0.08

	$	651,958	$	100,707	$	3,504		$	0.11

	Fiscal 2003
Quarter	Fiscal 2003				Net Income (Loss)			Diluted Earnings (Loss) Per Share
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	)

See Note 2 for a description of impairment charges recorded during the fourth quarter of fiscal 2003.

15. Allowance for Doubtful Accounts

		May 31,
		2004			2003			2002
Balance, beginning of year		$	8,663		$	10,624		$	11,016
	Provision charged to operations		2,771			3,140			2,697
	Special charge (see Note 2)		—			—			5,700
	Deductions for accounts written off, net of recoveries		(5,124	)		(5,101	)		(8,789	)

Balance, end of year		$	6,310		$	8,663		$	10,624

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of May 31, 2004, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures and concluded that our disclosure controls and procedures effectively ensure that information required to be disclosed in the reports that are filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely manner.

There were no changes to internal control over financial reporting during our last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 our definitive proxy statement for the 2004 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 is incorporated by reference to the information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement for the 2004 Annual Meeting of Stockholders.

Information regarding the identification of the Audit Committee as a separately-designated standing committee of the Board is set forth in our definitive proxy statement in the section entitled "Board Committees," and information regarding the status of one or more members of the Audit Committee being an "audit committee financial expert" is set forth in our definitive proxy statement in the section entitled "Board Committees," which information is incorporated herein by reference.

Information regarding our Code of Business Conduct applicable to our directors, officers and employees is incorporated by reference to the information contained under the caption "Corporate Governance Information" in our definitive proxy statement for the 2004 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 our definitive proxy statement for the 2004 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 our equity compensation plans at May 31, 2004 were as follows:

	Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	5,154	$14.35	1,719
Equity compensation plans not approved by security holders	—	—	—

Total	5,154	$14.35	1,719

The information required by this item is incorporated by reference to the information contained under the caption "Security Ownership of Management and Others" in our definitive proxy statement for the 2004 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 our definitive proxy statement for the 2004 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the information contained under the caption "Principal Accountant Fees and Services" in our definitive proxy statement for the 2004 Annual Meeting of Stockholders.

PART IV

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

Financial Statements and Financial Statement Disclosures

		Page
Report of Independent Registered Public Accounting Firm		19
Financial Statements—AAR CORP. and Subsidiaries:
	Consolidated Statements of Operations for the three years ended May 31, 2004	21
	Consolidated Balance Sheets as of May 31, 2004 and 2003	22-23
	Consolidated Statements of Stockholders' Equity for the three years ended May 31, 2004	24
	Consolidated Statements of Cash Flows for the three years ended May 31, 2004	25
	Notes to Consolidated Financial Statements	26-53
	Selected quarterly data (unaudited) for the years ended May 31, 2004 and 2003 (Note 14 of Notes to Consolidated Financial Statements)	53

Exhibits

The Exhibits filed as part of this report are set forth in the Exhibit Index contained elsewhere herein. Management contracts and compensatory arrangements have been marked with an asterisk (*) on the Exhibit Index.

Reports on Form 8-K

On March 17, 2004, we filed a current report on Form 8-K reporting under Item 12 that we had issued a press release announcing financial results for the third fiscal quarter ended February 29, 2004.

On April 12, 2004, we filed a current report on Form 8-K reporting under Item 12 that we had issued a press release announcing that in conjunction with the filing of our Form 10-Q for the quarter ended February 29, 2004, we recorded an additional expense resulting from an unfavorable Court ruling relating to an engine lease transaction.

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: July 21, 2004
	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 below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ IRA A. EICHNER Ira A. Eichner	Chairman of the Board Director	July 21, 2004
/s/ DAVID P. STORCH David P. Storch	President and Chief Executive Officer; Director (Principal Executive Officer)	July 21, 2004
/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko	Vice President and Chief Financial Officer (Principal Financial Officer)	July 21, 2004
/s/ MICHAEL J. SHARP Michael J. Sharp	Vice President and Controller (Principal Accounting Officer)	July 21, 2004
/s/ A. ROBERT ABBOUD A. Robert Abboud	Director	July 21, 2004
/s/ JAMES G. BROCKSMITH, JR. James G. Brocksmith, Jr.	Director	July 21, 2004
/s/ RONALD R. FOGLEMAN Ronald R. Fogleman	Director	July 21, 2004
/s/ JAMES E. GOODWIN James E. Goodwin	Director	July 21, 2004
/s/ JOEL D. SPUNGIN Joel D. Spungin	Director	July 21, 2004
/s/ MARC J. WALFISH Marc J. Walfish	Director	July 21, 2004

EXHIBIT INDEX

	Index		Exhibits

3.	Articles of Incorporation and By-Laws	3.1	Restated Certificate of Incorporation; Amendments thereto dated November 3, 1987, October 19, 1988, October 16, 1989 and November 3, 1999 (filed herewith).
		3.2	By-Laws as amended. Amendment thereto dated April 12, 1994, January 13, 1997, July 16, 1992, April 11, 2000 and May 13, 2002 (filed herewith).
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	Rights Agreement between the Registrant and the First National Bank of Chicago dated July 8, 1997 ¹⁰ and amended October 16, 2001. ¹⁵
		4.4	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; ³ First Supplemental Indenture thereto dated August 26, 1991; ⁴ Second Supplemental Indenture thereto dated December 10, 1997. ¹¹
		4.5	Officers' certificates relating to debt securities dated October 24, 1989, ⁷ October 12, 1993, ⁷ December 15, 1997 ¹⁹ and May 31, 2002. ¹⁹
		4.6	Revolving Loan Agreement dated April 11, 2001 between Registrant and LaSalle Bank National Association ¹⁶ amended November 30, 2001, ¹⁷ April 22, 2002, ¹⁷ June 6, 2002, ¹⁷ March 10, 2003, ¹⁸ March 21, 2003, ¹⁸ May 9, 2003, ¹⁹ June 26, 2003 ¹⁹ and March 2, 2004 (filed herewith).
		4.7	Note Purchase Agreement dated May 1, 2001 between Registrant and various purchasers, relating to the issuance of debt securities to institutional investors. ¹⁶
		4.8	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, ¹⁹ as amended January 23, 2004 (filed herewith).
		4.9	Loan and Security Agreement dated July 1, 2003 between Registrant's subsidiary, AAR Wood Dale LLC and Fremont Investment Loan. ¹⁹
		4.10	Form of 2.875% Senior Convertible Note. ²²
		4.11	Indenture between AAR CORP. as Issuer and U.S. Bank National Association, as Trustee dated February 3, 2004. ²²

		4.12	Registration Rights Agreement between AAR CORP. and Goldman, Sachs & Co., as representative of the several Purchasers, dated February 3, 2004. ²²
			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, ¹⁵ as amended June 27, 2003. ¹⁹
		10.2*	Death Benefit Agreement dated August 24, 1984 between the Registrant and Ira A. Eichner. ⁵ Amendments thereto dated August 12, 1988, ² May 25, 1990 ¹² and October 9, 1996, ¹² and his agreement to terminate such Death Benefit Agreement dated May 30, 1999. ¹²
		10.3*	Further Restated and Amended Employment Agreement dated August 1, 1985 between the Registrant and Ira A. Eichner. ¹ Amendments thereto dated August 12, 1988, ² May 25, 1990, ⁹ July 13, 1994, ⁹ October 9, 1996 ¹² and May 31, 1999. ¹²
		10.4*	Trust Agreement dated August 12, 1988 between the Registrant and Ira A. Eichner ² and amendments thereto dated May 25, 1990, ⁹ February 4, 1994, ⁸ October 9, 1996 ¹² and May 31, 1999. ¹²
		10.5*	AAR CORP. Directors' Retirement Plan, dated April 14, 1992, ⁶ amended May 26, 2000 ¹³ and April 10, 2001. ¹⁶
		10.6*	AAR CORP. Amended and Restated Supplemental Key Employee Retirement Plan, dated May 4, 2000, ¹³ amended April 10, 2001, ¹⁶ October 10, 2001, ¹⁷ October 10, 2002, ¹⁸ December 18, 2002 ¹⁸ and July 1, 2003. ²⁰
		10.7*	Amended and Restated Employment Agreement dated July 14, 1998 between the Registrant and David P. Storch ¹³ and amended July 10, 2001. ¹⁴
		10.8*	Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Howard A. Pulsifer. ¹³
		10.9*	Amended and Restated Severance and Change in Control Agreement dated August 1, 2000 between the Registrant and Michael J. Sharp. ¹⁶
		10.10*	Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Timothy J. Romenesko. ¹³
		10.11*	Amended and Restated AAR CORP. Nonemployee Directors' Deferred Compensation Plan, dated April 8, 1997, amended May 26, 2000, ¹³ December 18, 2002 ¹⁸ and July 1, 2003. ²⁰

		10.12*	Severance and Change in Control Agreement dated January 14, 2000 between the Registrant and James J. Clark. ¹⁸
		10.13	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. ¹⁸
		10.14	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, ¹⁸ amended November 30, 2003 and February 27, 2004 (filed herewith).
		10.15	Indenture dated October 3, 2003 between AAR Distribution, Inc. and iStar Garden City LLC. ²¹
		10.16	Lease Agreement dated October 3, 2003 between AAR Allen Services, Inc., as tenant and iStar Garden City LLC, as Landlord, and related Guaranty dated October 3, 2003 from Registrant to iStar Garden City LLC. ²¹
		10.17*	Consulting Agreement dated June 1, 1999 between the Registrant and Ira A. Eichner amended June 1, 2003. ²³
		10.18*	Severance and Change in Control Agreement dated April 1, 2003 between AAR Manufacturing, Inc. and Mark McDonald. ²³
21.	Subsidiaries of the Registrant	21.1	Subsidiaries of AAR CORP. (filed herewith).
23.	Consents of experts and counsel	23.1	Consent of Independent Registered Public Accounting Firm (filed herewith).
31.	Rule 13a-14(a)/15(d)-14(a) Certifications	31.1	Section 302 Certification dated July 21, 2004 of David P. Storch, President and Chief Executive Officer of Registrant (filed herewith).
		31.2	Section 302 Certification dated July 21, 2004 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 July 21, 2004 of David P. Storch, President and Chief Executive Officer of Registrant (filed herewith).
		32.2	Section 906 Certification dated July 21, 2004 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, 1986.

²: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988.
³: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1989.
⁴: Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed August 27, 1991.
⁵: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1985.
⁶: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.
⁷: Incorporated by reference to Exhibits to the Registrant's Current Reports on Form 8-K dated October 24, 1989 and October 12, 1993, respectively.
⁸: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994.
⁹: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
¹⁰: Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 4, 1997.
¹¹: Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed December 10, 1997.
¹²: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1999.
¹³: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2000.
¹⁴: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 2001.
¹⁵: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 2001.
¹⁶: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2001.
¹⁷: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2002.
¹⁸: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 2003.
¹⁹: Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2003.
²⁰: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 2003.
²¹: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 2003.
²²: Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated February 3, 2004.
²³: Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 29, 2004.

QuickLinks

TABLE OF CONTENTS
PART I

ITEM 1. BUSINESS (Dollars in thousands)

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS (Dollars in thousands)

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

PART II

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

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9A. CONTROLS AND PROCEDURES

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

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

SIGNATURES
EXHIBIT INDEX

Exhibit 3.1

COMPOSITE* OF

RESTATED CERTIFICATE OF INCORPORATION

OF

AAR CORP.

It is hereby certified that:

1. (a) The present name of the corporation (hereinafter called the "Corporation") is AAR CORP.

(b) The name under which the Corporation was originally incorporated is Allen Aircraft Radio, Inc.; and the date of filing the original certificate of incorporation of the Corporation with the Secretary of State of Delaware is April 11, 1966.

2. The provisions of the certificate of incorporation of the Corporation as heretofore amended or supplemented, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of AAR CORP. The Restated Certificate of Incorporation of AAR CORP. only restates and integrates and does not further amend the provisions of the Corporation's certificate of incorporation as theretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of the Restated Certificate of Incorporation of AAR CORP.

3. The Board of Directors of the Corporation has duly adopted this Restated Certificate of Incorporation pursuant to the provisions of Section 245 of the General Corporation Law of the State of Delaware in the form set forth as follows:

Restated Certificate of Incorporation

of

AAR CORP.

FIRST: The name of the corporation (hereinafter called the Corporation) is:

AAR CORP.

SECOND: The respective names of the County and of the City within the County in which the registered office of the Corporation is to be located in the State

*as of 10/13/99 amendment

of Delaware are the County of Kent and the City of Dover. The name of the registered agent of the Corporation is The Prentice-Hall Corporation System , Inc. The street and number of said registered office and the address by street and number of said registered agent is 229 South State Street, Dover, Delaware.

THIRD: The nature of the business of the Corporation and the objects or purposes to be transacted, promoted or carried on by it are as follows:

To acquire, buy, sell, import, export, invent, devise, design, manufacture, make, contract with others for the manufacture of, construct, assemble, service, salvage, overhaul, renovate, recondition, remodel, alter, repair, refinish, recover, develop, use, own, operate, charter, lease as lessor and lessee, license the use of as licensor and licensee, acquire, receive, assign, transfer and grant options, franchises, and rights in respect of, maintain, exchange, distribute and generally deal in and with, at wholesale and retail and as principal, agent, broker, factor, jobber, distributor, and in any other lawful capacity, civilian and military aircraft and spacecraft of any and all kinds, including vertical and short take-off and landing aircraft and experimental models and engines, fuselages, motors, parts, accessories, radios, communication and navigational aids, supplies, appliances, devices, apparatus, fixtures, specialties, appurtenances, sundries and equipment for aircraft of any and all kinds.

To maintain and operate plants, laboratories and establishments for testing, developing and improving the design and construction of any and all kinds of aircraft and aircraft engines, propellers, equipment, instruments and accessories, and any and all kinds of devices, appliances, apparatus and mechanisms used or useful in connection with aerial navigation or transportation, or in aid thereof; to discover and apply new or improved technical principles relating thereto, and generally, to conduct, carry on, and engage in any and all kinds of research and experimental work in or in connection with, any and all branches of the art or science of aeronautics and of aerodynamics and of any and all related arts or sciences; to give, hold, maintain, carry on, manage, and participate in exhibitions and compositions of any and all kinds useful or proper for increasing and developing interest in aeronautics or disseminating information with respect thereto.

To own, design, erect, build, construct, license the use of as licensor and licensee, lease as lessor and lessee, buy, or otherwise acquire, sell, charter, exchange, transfer, assign, convey, or otherwise dispose of, equip, maintain, use, operate, or otherwise manage, aircraft, airports, aircraft landing fields, seadromes, terminals, stations, depots, docks, land and sea lighthouses, landing buoys, mooring facilities, shops, buildings, factories, hangars, garages, shipyards, wharves, warehouses, and all other structures and air and water navigation facilities, ratio and all other types and kinds of communications systems, and any and all facilities, equipment and appurtenances incidental, necessary, useful, auxiliary to, or convenient for, the business and operations conducted, engaged in, and carried on by the corporation.

To acquire by purchase, exchange, concession, easement, contract, lease or otherwise, to hold, own, use, control, manage, improve, maintain and develop, to mortgage, pledge, grant, sell, convey, exchange, assign, divide, lease, sublease, or otherwise encumber and dispose of, and to deal and trade in, real estate improved or unimproved, lands, leaseholds, options, concessions, easements, tenements, hereditaments and interests in real, mixed, and personal property, of every kind and description wheresoever situated, and any and all rights therein.

To manufacture, process, purchase, sell and generally to trade and deal in and with goods, wares and merchandise of every kind, nature and description, and to engage and participate in any mercantile, industrial or trading business of any kind or character whatsoever.

To apply for, register, obtain, purchase, lease, take licenses in respect of or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to account, grant licenses and immunities in respect of, manufacture under and to introduce, sell, assign, mortgage, pledge or otherwise dispose of, and, in any manner deal with and contract with reference to:

(a) inventions, devices, formulae, processes and any improvements and modifications thereof;

(b) letters patent, patent rights, patented processes, copyrights, designs, and similar rights, trademarks, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States of America or of any state or subdivision thereof, or of any foreign country or subdivision thereof, and all rights connected therewith or appertaining thereunto;

To purchase or otherwise acquire, and to hold, mortgage, pledge, sell, exchange or otherwise dispose of, securities (which term, for the purpose of this Article THIRD, includes , without limitation of the generality thereof, any shares of stock, bonds, debentures, notes, mortgages, or other obligations, and any certificates, receipts or other instruments representing rights to receive, purchase or subscribe for the same, or representing any other rights or interests therein or in any property or assets) created or issued by any persons, firms, associations, corporations, or governments or subdivisions thereof; to make payment therefor in any lawful manner; and to exercise, as owner or holder of any securities, any and all rights, powers and privileges in respect thereof.

To make, enter into, perform and carry out contracts of every kind and description with any person, firm, association, corporation or government or subdivision thereof; to enter into general partnerships, limited partnerships (whether the corporation be a limited or general partner) , joint ventures, syndicates, pools, associations and other arrangements for carrying on of one or more of the purposes set forth in this Certificate of Incorporation, jointly or in common with others.

To acquire by purchase, exchange or otherwise, all, or any part of, or any interest in, the properties, assets, business and good will of any one or more persons firms, associations or corporations heretofore or hereafter engaged in any business for which a corporation may now or hereafter be organized under the laws of the State of Delaware; to pay for the same in cash, property or its own or other securities; to hold, operate, reorganize, liquidate, sell or in any manner dispose of the whole or any part thereof; and in connection therewith, to assume or guarantee performance of any liabilities, obligations or contracts of such persons, firms, associations or corporations, and to conduct the whole or any part of any business thus acquired.

To lend its uninvested funds from time to time to such extent, to such persons, firms, associations, corporations, governments or subdivisions thereof, and on such terms and on such security, if any, as the Board of Directors of the corporation may determine.

To endorse or guarantee the payment of principal, interest or dividends upon, and to guarantee the performance of sinking fund or other obligations of, any securities, and to guarantee in any way permitted by law the performance of any of the contracts or other undertakings in which the corporation may otherwise be or become interested, of any person firm, association, corporation, government or subdivision thereof, or of any other combination, organization or entity whatsoever.

To borrow money for any of the purposes of the corporation, from time to time, and without limit as to amount; from time to time to issue and sell its own securities in such amounts, on such terms and conditions, for such purposes and for such prices, now or hereafter permitted by the laws of the State of Delaware and by this Certificate of Incorporation, as the Board of Directors of the Corporation may determine; and to secure such securities by mortgage upon, or the pledge of, or the conveyance or assignment in trust of, the whole or any part of the properties, assets, business and good will of the corporation, then owned or thereafter acquired.

To draw, make, accept, endorse, discount, execute, and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments and evidences of indebtedness whether secured by mortgage or otherwise, as well as to secure the same by mortgage or otherwise, so far as may be permitted by the laws of the State of Delaware.

To purchase, hold, cancel, reissue, sell, exchange, transfer or otherwise deal in its own securities from time to time to such an extent and in such manner and upon such terms as the Board of Directors of the Corporation shall determine; provided that the Corporation shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital, except to the extent permitted by law; and provided further that shares of its own capital stock belonging to the corporation shall not be voted upon directly or indirectly.

To organize or cause to be organized under the laws of the State of Delaware, or of any other State of the United States of America, or of the District of Columbia, or of any territory, dependency, colony or possession of the United States of America, or of any foreign country, a corporation or corporations for the purpose of transacting, promoting or carrying on any or all of the objects or purposes for which corporations may be organized, and to dissolve, wind up, liquidate, merge or consolidate any such corporation or corporations or to cause the same to be dissolved, wound up, liquidated, merged or consolidated.

To conduct its business in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all States of the United States of America, in the District of Columbia, in any or all territories, dependencies, colonies or possessions of the United States of America, and in foreign countries.

To carry out all or any part of the foregoing objects and purposes in any and all parts of the world and to conduct business in all or any of its branches as principal, factor, agent, contractor or otherwise, either alone or through or in conjunction with any corporation, associations, partnerships, firms, trustees, syndicates, individuals, organizations and other entities located in or organized under the laws of any part of the world, either directly or indirectly as a member of any partnership, general or limited, and, in carrying out, conducting or performing its business and attaining or furthering any of its objects and purposes, to maintain offices, branches and agencies in any part of the world, to make and perform any contracts and to do any acts and things, and to carry on any business, and to exercise any powers suitable, convenient or proper for the accomplishment of any of the objects and purposes herein specified or which at any time may appear conducive to or expedient for the accomplishment of any of such objects and purposes and which might be engaged in or carried on by a corporation formed under the General Corporation Law and to have and exercise all of the powers conferred by the laws of the State of Delaware upon corporations formed under the General Corporation Law.

The foregoing provisions of this Article THIRD shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers shall not be held to limit or restrict in any manner the purposes and powers of the Corporation, and the purposes and powers herein specified shall, except when otherwise provided in this Article THIRD, be in no wise limited or restricted by reference to, or inference from, the terms of any provision of this or any other Article of this Certificate of Incorporation; provided, that the Corporation shall not carry on any business or exercise any power in the State of Delaware or in any state, territory, or country which under the laws thereof the Corporation may not lawfully carry on or exercise.

FOURTH: The total number of shares which the Corporation shall have authority to issue is One Hundred Million Two Hundred Fifty Thousand (100,250,000), of which Two Hundred Fifty Thousand (250,000) shares at a par value of $1.00 per share shall be Preferred Stock and One Hundred Million (100,000,000) shares at a par value of $1.00 per share shall be Common Stock. Any and all such shares issued, and for which the full consideration has been paid or delivered, shall be deemed fully paid shares and the holder of such shares shall not be liable for any further call or assessment or any other payment thereon.

The Preferred Stock shall be issued from time to time in one or more series with such distinctive serial designations and (a) may have such voting powers, full or limited, or may be without voting powers; (b) may be subject to redemption at such time or times and at such price or prices; (c) may be entitled to receive dividends (which may be cumulative or noncumulative) at such rate or rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes of stock; (d) may be entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (e) may be made convertible into, or exchangeable for, shares of any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments; and (f) shall have such other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, all as shall hereafter be stated and expressed in the resolution or resolutions providing for the issuance of such Preferred Stock from time to time adopted by the Board of Directors pursuant to authority so to do which is hereby vested in the Board.

No holder of any of the shares of the stock of the corporation, whether now or hereafter authorized and issued, shall be entitled as of preemptive right to purchase or subscribe for (1) any unissued stock of any class, or (2) any additional shares of any class to be issued by reason of any increase of the authorized capital stock of the corporation of any class , or (3) bonds, certificates of indebtedness, debentures or other securities convertible into stock of the corporation, or carrying any right to purchase stock of any class, and any such unissued stock or such additional authorized issue of any stock or of other securities convertible into stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its discretion.

Each share of Common Stock shall entitle the holder thereof to one vote, in person or by proxy, at any and all meetings of the stockholders of the Corporation, on all propositions before such meetings and cumulative voting shall not apply in the election of directors.

FIFTH: The minimum amount of capital with which the corporation will commence business is One Thousand Dollars.

SIXTH: The names and places of residence of each of the incorporators are as follows:

Name		Place of Residence
R. G. Dickerson		Dover, Delaware
J. A. Kent		Dover, Delaware
Z. A. Pool, III		Dover, Delaware

SEVENTH: The corporation is to have perpetual existence.

EIGHTH: The private property of the stockholders of the corporation shall not be subject to the payment of corporate debts to any extent whatever.

NINTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and stockholders, it is further provided:

1. In no event shall the number of directors be less than the minimum number prescribed by law. The election of directors need not be by ballot. Directors need not be stockholders.

2. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered:

(a) To make, alter, amend, and repeal by-laws.

(b) Subject to the applicable provisions of the by-laws then in effect, to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of the corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by the laws of the State of Delaware, unless and until authorized so to do by resolution of the Board of Directors or of the stockholders of the corporation.

(c) Without the assent or vote of the stockholders, to authorize and issue obligations of the corporation, secured or unsecured, to include therein such provisions as to redeemability, convertibility or otherwise, as the Board of Directors, in its sole discretion, may determine, and to authorize the mortgaging or pledging, as security therefor, of any property of the corporation, real or personal, including after-acquired property.

(d) To establish bonus, profit sharing or other types of incentive or compensation plans for the employee (including officers and directors) of the corporation and to fix the amount of profits to be distributed or shared and to determine the persons to participate in any such plans and the amounts of their respective participations.

In addition to the powers and authorities hereinbefore or by statute expressly conferred upon it, the Board of Directors may exercise all such powers and do all such acts and things as may be exercised or done by the corporation, subject, nevertheless, to the provisions of the laws of the State of Delaware, of the Certificate of Incorporation and of the by-laws of the corporation.

3. Any officer elected or appointed by the Board of Directors may be removed at any time in such manner as shall be provided in the by-laws of the Corporation.

4. In the absence of fraud, no contract or other transaction between this corporation and any other corporation or any partnership or association shall be affected or invalidated by the fact that any director or officer of this corporation is pecuniarily or otherwise interested in or is a director, member or officer of such other corporation or of such firm, association or partnership or is a party to or is pecuniarily or otherwise interested in such contract or other transaction or in any way connected with any person or persons, firm, associations partnership or corporation pecuniarily or otherwise interested therein, provided such interest is

either known or made known to the other directors; any director may be counted in determining the existence of a quorum at any meeting of the Board of Directors of this corporation for the purpose of authorizing any such contract or transaction, and may vote thereat to authorize any such contract or transaction with like force and effect as if he were not so interested, or were not an officer, director, member, or partner of such other firm, corporation, association or partnership.

5. Any contract, act or transaction of the corporation or of the directors may be ratified by a vote of a majority of the shares having voting powers at any meeting of stockholders, or at any special meeting called for such purpose, and such ratification shall, so far as permitted by law and by this Certificate of Incorporation, be as valid and as binding as though ratified by every stockholder of the corporation.

TENTH: The business and affairs of this corporation shall be managed by or under the direction of the Board of Directors. Subject to the other provisions of this Article TENTH, the Board of Directors shall determine the rights, powers, duties, rules and procedures that shall affect the power of the Board of Directors to manage and direct the business and affairs of this Corporation.

The Board of Directors shall consist of between three and fifteen directors, with the exact number of directors to be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors then in office. The directors shall be divided into three classes, each to consist, as nearly as may be possible, of one-third of the total number of authorized directors fixed by the Board of Directors. At each annual meeting following the initial classification and election, which occurred in 1970 pursuant to Article III, Section 1 of this corporation's by-laws, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting of stockholders or thereafter when their respective successors in each case are elected and qualified, subject to prior death, resignation, retirement, disqualification, or removal for cause. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class a nearly as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director.

Any one or more directors may be removed from office at a meeting of stockholders called expressly for that purpose but only for cause and only by the affirmative vote of holders of at least 80% of the total voting power of all shares then entitled to vote for the election of directors, considered for purposes of this article TENTH as one class., A director whose removal is proposed shall receive reasonable notice and have a reasonable opportunity to present reasons for his or her retention.

Any vacancy occurring on the Board of Directors, including any vacancy resulting from an increase in the number of directors, may be filled only by a majority of the members of the Board of Directors then in office, although less than a quorum, or by a sole remaining director. Any director so chosen shall hold office for a term that coincides with the remaining term of the class to which he or she has been elected.

The by-laws of this Corporation may be amended, altered or repealed and new by-laws not inconsistent with any provision of the certificate of incorporation may be made (1) by the affirmative vote of a majority of the members of the Board of Directors then in of f ice, or (2) by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this Corporation entitled to vote in the election of directors, considered for purposes of this Article TENTH as one class.

The provisions set forth in this Article TENTH may not be amended, altered or repealed in any respect, unless such action is approved by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this Corporation entitled to vote in the election of directors, considered for purposes of this Article TENTH as one class. The voting requirements contained in this Article TENTH shall be in addition to the voting requirements imposed by law or by any other provisions of this certificate of incorporation.

ELEVENTH: No action shall be taken by the stockholders of this Corporation except at an annual or special meeting of stockholders, and stockholders may not act by written consent. Special meetings of stockholders may be called only by the Chairman of the Board or a majority of the Board of Directors then in office.

The provisions set forth in this Article ELEVENTH may not be amended, altered or repealed in any respect, unless such action is approved by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this Corporation entitled to vote in the election of directors, considered for purposes of this Article ELEVENTH as one class. The voting requirements contained in this Article ELEVENTH shall be in addition to the voting requirements imposed by law or by any other provisions of this certificate of incorporation.

TWELFTH: A. In addition to any affirmative vote which may be otherwise required, and except as otherwise expressly provided in this Article TWELFTH, any Business Transaction shall require the affirmative vote of holders of at least that number of the voting shares which equals the sum of (i) the number of Voting Shares beneficially owned by all Related Parties that have an interest in the Business Transaction, plus (ii) 80% of the remaining number of Voting Shares that are not beneficially owned by all such Related Parties.

B. The provisions of this Article TWELFTH shall not be applicable to any Business Transaction if:

1. The Business Transaction was approved by a majority of the Board of Directors prior to the acquisition of 10% or more of the Voting Shares by any Related Party that has an interest in the Business Transaction; or

2. A majority of those members of the Board of Directors who are not themselves Related Party Directors has approved the Business Transaction.

C. For purposes of this Article TWELFTH:

1. "Business Transaction" shall mean:

(a) any merger or consolidation of this corporation or any Subsidiary with or into any Related Party or any Associate of a Related Party;

(b) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one or a series of transactions) of all or any Substantial Part of the consolidated assets of this Corporation to or with any Related Party or any Associate of a Related Party;

(c) any issuance, sale, exchange, transfer, or other disposition by this Corporation or any Subsidiary (in one or a series of related transactions) of any securities of this Corporation or any Subsidiary to or with any Related Party or any Associate of a Related Party;

(d) any spin-off, split-up, reclassification of securities (including any reverse stock split), recapitalization,, reorganization, liquidation, dissolution, merger, or consolidation of this Corporation with any Subsidiary, or any other transaction (whether or not to or with or otherwise involving a Related Party) which has the effect, directly or indirectly, of increasing the proportionate interest of any Related Party or any Associate of a Related Party in the equity securities or assets of this Corporation or any Subsidiary; or

(e) adoption of any plan or proposal with respect to any of the foregoing.

2. A "person" shall include any individual, firm, corporation, partnership, group, trust, or other entity, organization, or association.

3. "Related Party" shall mean any person (other than this Corporation or a Subsidiary) who or which is the beneficial owner, directly or indirectly, of 10% or more of the Voting Shares: (a) in connection with determining the required vote by stockholders on any Business Transaction, as of any of the following dates: the record date for the determination of stockholders entitled to notice of or to vote on such Business Transaction or immediately prior to the consummation of any such transaction or the adoption of any plan or proposal with respect thereto; (b) in connection with determining the required vote by stockholders on any amendment, alteration or repeal of this Article TWELFTH pursuant to clauses (i) and (ii) of paragraph E, as of the record date for the determination of stockholders entitled to notice and to vote on such amendment, alteration or repeal; and (c) in connection with determining a "Related Party Director" in respect of any approval by the Board of Directors of the amendment, alteration or repeal of this article TWELFTH pursuant to paragraph E or in respect of any determination made by the Board of Directors pursuant to paragraph D, as of the date at which the vote on such recommendation or determination is being taken, or as close as is reasonably practicable to such date.

4. A person shall be the "beneficial owner" of any Voting Shares as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1§34 as in effect on July 26, 1983; provided, however, that a person shall, in any event, also be the beneficial owner of any Voting Shares:

(a) which such person, or any of such person I s Associates, beneficially owns, directly or indirectly;

(b) which such person or any of such person's Associates, directly or indirectly, (i) has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement, or understanding; or upon the exercise of conversion rights, exchange rights,

warrants, or options; or pursuant to the power to revoke a trust, discretionary account, or other arrangement; or otherwise; or (ii) has or shares the power, or has the right to acquire the exclusive or shared power, to vote pursuant to any agreement, arrangement, relationship, or understanding; or pursuant to the power to revoke a trust, discretionary account, or other arrangement; or otherwise; and

(c) which are beneficially owned, directly or indirectly, by any other person with whom or which such first-mentioned person or any of its Associates has any agreement, arrangement, or understanding, or is acting in concert, with respect to acquiring, holding, voting, or disposing of any Voting Shares.

5. An "Associate" of a specified person is (a) a person that, directly or indirectly (i) controls, or is controlled by, or is under common control with, the specified person, (ii) is the beneficial owner of 10% or more of any class of equity securities of the specified person, or (iii) has 10% or more of any class of its equity securities beneficially owned, directly or indirectly, by the specified person; (b) any person (other than this Corporation or a Subsidiary) of which the specified person is an officer, director, or other official and any officer, director, partner, or other official of the specified person; (c) any trust or estate in which the specified person serves as trustee or in a similar fiduciary capacity, or any trustee or similar fiduciary of the specified person; and (d) any relative or spouse of the specified person, or any relative of such spouse, who has the same house as the specified person or is an officer or director of any person (other than this Corporation or a Subsidiary), directly or indirectly, controlling or controlled by the specified person.

6. "Related Party Director" shall mean each director of this Corporation who (a) is a Related Party or an Associate of a Related Party; (b) has an Associate who is a Related Party or an Associate of a Related Party; (c) was nominated or proposed to be elected as a director of this Corporation by a Related Party or an Associate of a Related Party; or (d) is, or has been nominated or proposed to be elected as, an officer, director or employee of a Related Party or of an Associate of a Related Party.

7. "Subsidiary" shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by this Corporation; provided, however, that for the purposes of paragraph C.3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by this Corporation.

8. "Substantial Part" of the consolidated assets of this Corporation shall mean Assets of this Corporation and/or any Subsidiary having a book value (determined in accordance with generally accepted accounting principles) in excess of 10% of the book value (determined in accordance with generally accepted accounting principles) of the total consolidated assets of this Corporation, at the end of its most recent quarterly fiscal period ending prior to the time of the determination is made.

9. "Voting Shares" shall mean the outstanding shares of all classes of stock of this Corporation entitled to vote for the election of directors, considered for purposes of this Article TWELFTH as one class. "Voting Shares" shall include shares deemed owned through application of paragraph C.4 but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise.

D. On the basis of information known to them, a majority of those members of the Board of Directors who are not themselves Related Party Directors shall have the power and duty to make all determinations to be made under this Article TWELFTH, including whether (a) a transaction is a Business Transaction; (b) a person is a Related Party; (c) a person is an Associate of another person; (d) a Related Party or any Associate of a Related Party has an interest in a Business Transaction; (e) the assets subject to any Business Transaction constitute a Substantial Part of the consolidated assets of this Corporation; (f) a transaction has the effect of increasing the proportionate interest of any Related Party or any Associate of a Related Party in the equity securities or assets of this Corporation or any Subsidiary; or (g) a person has an agreement, arrangement, relationship, or understanding, or is acting in concert, with another as to the matters referred to in paragraph C.4. Any such determination shall be conclusive and binding for all purposes of this Article TWELFTH.

E. In addition to any affirmative vote which may be otherwise required, any amendment, alteration, or repeal of this Article TWELFTH shall require the affirmative vote of the holders of at least that number of the Voting Shares which equals the sum of (i) the number of Voting Shares beneficially owned by any Related Party, plus (ii) 80% of the remaining number of Voting Shares that are not beneficially owned by any Related Party; provided that this paragraph E shall not apply to, and such vote shall not be required for, any amendment, alteration or repeal approved by at least 80% of those members of the Board of Directors who are not themselves Related Party Directors.

F. Nothing contained in this Article TWELFTH shall be construed to relieve any Related Party from any fiduciary obligation imposed by law.

THIRTEENTH: From time to time, any of the provisions of this certificate of incorporation may be amended, altered or repealed, and other provisions authorized by this certificate of incorporation and by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by this certificate of incorporation and by said laws. All rights at any time conferred upon the stockholders of this Corporation by this certificate of incorporation are granted subject to the provisions of this Article THIRTEENTH. Notwithstanding the foregoing, the provisions set forth in Articles TENTH, ELEVENTH and TWELFTH may not be amended, altered or repealed in any respect unless such amendment, alteration or repeal is approved as specified in each such respective Article.

FOURTEENTH: No person who was or is a director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for breach of the duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after the effective date of this Article to further eliminate or limit, or to authorize further elimination or limitation of, the personal liability of directors for breach of fiduciary duty as a director, then the personal liability of a director to this Corporation or its stockholders shall be eliminated or limited to the full extent permitted by the Delaware General Corporation Law, as so amended.

Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect the elimination or limitation of the personal liability of a director for any act or omission occurring prior to the effective date of such repeal or modification. This provision shall not eliminate or limit the liability of a director for any act or omission occurring prior to the effective date of this Article.

FIFTEENTH: A. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer (or, while serving as a director or officer of the Corporation, as an employee, agent or fiduciary) of another corporation, partnership, joint venture, trust or other enterprise, or with respect to any employee benefit plan (or its participants or beneficiaries), or by reason of any action alleged to have been taken or omitted by such person in any such capacity, against costs, charges and other expenses (including attorneys I fees) ("Expenses"), judgments, fines, taxes, penalties and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding and any appeal thereof if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding and any appeal thereof by judgment, order, settlement, conviction, or plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

B. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer (or, while serving as a director or officer of the Corporation, as an employee, agent or fiduciary) of another corporation, partnership, joint venture, trust or other enterprise, or with respect to any employee benefit plan (or its participants or beneficiaries), or by reason of any action alleged to have been taken or omitted by such person in any such capacity against Expenses actually and reasonably incurred by him in connection with the investigation, defense or settlement of such action or suit and any appeal thereof if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication

of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity f or such Expenses which the Court of Chancery of Delaware or such other court shall deem proper.

C. Notwithstanding any other provision of this Article FIFTEENTH, the Corporation shall indemnify and make advancement of Expenses to any person referred to in paragraph A or B of this Article FIFTEENTH to the full extent permitted under the laws of Delaware and any other applicable laws, as they now exist or as they may be amended in the future.

D. To the extent that any person referred to in paragraph A or B of this Article FIFTEENTH has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding and any appeal thereof referred to therein or in defense of any claim, issue or matter therein, he shall be indemnified against Expenses actually and reasonably incurred by him in connection therewith.

E. Any indemnification under paragraph A, B, C or D of this Article FIFTEENTH (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of any person referred to in paragraph A or B of this Article FIFTEENTH is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraph A or B of this Article FIFTEENTH. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.

F. Expenses incurred by any person referred to in paragraph A or B of this Article FIFTEENTH in defending a civil or criminal action, suit or proceeding and any appeal thereof shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding and any appeal thereof upon receipt by the Corporation of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation.

G. The determination of the entitlement of any person to indemnification under paragraph A, B, C or D of this Article FIFTEENTH or to advancement of Expenses under paragraph F of this Article FIFTEENTH shall be made promptly, and in any event within sixty (60) days after the Corporation has received a written request for payment from or on behalf of a director or officer and payment of amounts due under such paragraphs shall be made immediately after such determination. If payment in full has not been made within sixty (60) days, the right to indemnification or advancement of Expenses provided by this Article. FIFTEENTH shall be enforceable by or on behalf of any person referred to in paragraph A or B of this Article FIFTEENTH in any court of competent jurisdiction. In addition to the other amounts due under this Article FIFTEENTH, Expenses incurred by or on behalf of any person referred to in paragraph A or B of this Article FIFTEENTH in successfully establishing his right to indemnification or advancement of Expenses, in whole or in part, in any such action (or settlement thereof) shall be paid by the Corporation.

H. The indemnification and advancement of Expenses provided by this Article FIFTEENTH (1) shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of Expenses may be entitled under any law (common or statutory), by-law, agreement, vote of stockholders or disinterested directors or otherwise, and (2) shall continue as to a person referred to in paragraph A or B of this Article FIFTEENTH and shall inure to the benefit of the heirs, executors and administrators of such a person.

I. All rights to indemnification and advancement of Expenses provided by this Article FIFTEENTH shall be deemed to be a contract between the Corporation and each person referred to in paragraph A or B of this Article FIFTEENTH at any time while this Article FIFTEENTH is in effect. Any repeal or modification of this Article FIFTEENTH or any repeal or modification of the relevant provisions of the Delaware General Corporation Law or any other applicable law shall not in any way diminish any rights to indemnification of or advance payments of Expenses to such person or the obligation of the Corporation.

J. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director or officer of the Corporation or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise or with respect to any employee benefit plan (or its participants or beneficiaries), against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability.

K. The Board of Directors may, by resolution, extend the indemnification and advancement of Expenses provisions of this Article FIFTEENTH to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was or has agreed to become an employee, agent or fiduciary of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise or with respect to any employee benefit plan (or its participants or beneficiaries) of the Corporation or any such other enterprise, or by reason of any action alleged to have been taken or omitted by such person in any such capacity.

L. For purposes of this Article FIFTEENTH, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries so that any person who is or was or has agreed to become a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving or has agreed to serve at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article FIFTEENTH with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

M. The invalidity or unenforceability of any provision of this Article FIFTEENTH shall not affect the validity or enforceability of the remaining provisions of this Article FIFTEENTH.

Signed and attested to on January 9, 1985.

President

ATTEST:

Secretary

(CORPORATE SEAL)

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Exhibit 3.2

AMENDED BY-LAWS*

OF

AAR CORP.
A Delaware Corporation

ARTICLE I

OFFICES

SECTION 1. PRINCIPAL OFFICE. The principal office shall be at 229 South State Street, in the City of Dover, County of Kent, State of Delaware, and the name of the resident agent in charge thereof is THE PRENTICE-HALL CORPORATION SYSTEM, INC.

SECTION 2. OTHER OFFICES. The corporation may also have an office or offices at such other place or places, within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the corporation require.

ARTICLE II

STOCKHOLDERS' MEETINGS

SECTION 1. TIME. The annual meeting of the stock-holders of the corporation for the election of directors and the transaction of such other business as may properly come before such meeting shall be held each year on the fourth Wednesday in September at 10:00 a.m. (Chicago time), or if said day be a legal holiday, then on the next succeeding day not a legal holiday, or shall be held on such other time and date as shall be determined by the Board of Directors. A special meeting of the stockholders shall be held on the date and at the time fixed by those persons

*: as of January 1, 2003

authorized by the Certificate of Incorporation to call such meeting.

SECTION 2. PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware.

SECTION 3. CALL. Annual meetings may be called by the directors or by any officer instructed by the directors to call the meeting.

SECTION 4. NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date and hour of the meeting. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting), state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. If any action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares of stock, the notice shall include a statement of that purpose and to that effect. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice by him before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice.

SECTION 5. STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders.

SECTION 6. CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting—the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, Executive Vice President, a Vice President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The person presiding over the meeting shall have authority to prescribe the agenda for the meeting and to control the length and order of discussion. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as Secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the Chairman of the meeting shall appoint a secretary of the meeting.

SECTION 7. PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. A stockholder, or a stockholder's attorney-in-fact, may validly grant such authority by (a) executing a writing authorizing another person to act for such stockholder as proxy, or (b) by transmitting or authorizing the transmission of such authority by a telegram, cablegram, or other means of electronic or telephonic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service

organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram, or other means of electronic or telephonic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic or telephonic transmission was authorized by the stockholder or stockholders' attorney-in-fact, or (c) any other means permitted under the Delaware General Corporation Law. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly granted proxy authorization shall be irrevocable if it states that it is irrevocable and, if, and as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A power may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally.

SECTION 8. INSPECTORS AND JUDGES. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. If an inspector or inspectors or judge or judges are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors or judges. In case any person who may be appointed as an inspector or judge fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector or judge, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector or judges at such meeting with strict impartiality and according to the best of his ability. The inspectors or judges, if any, shall determine the shares of stock represented at the meeting, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them.

SECTION 9. QUORUM. The holders of a majority of the outstanding shares of stock present or represented by proxy at any such meeting of stockholders shall constitute a quorum at such meeting for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum.

SECTION 10. VOTING. Each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power. In determining whether a proposal has been approved, shares abstaining or not voting but otherwise present at the meeting will not be counted as having been voted on the proposal. All elections of directors shall be written ballots. Voting by ballot shall not be required for any other corporate action except as otherwise provided by the General Corporation Law.

ARTICLE III

DIRECTORS

SECTION 1. NUMBER AND QUORUM. a. The Board of Directors shall consist of between three and fifteen directors, with the exact number of directors to be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors then in office.

b. A majority of the members of the Board of Directors acting at a meeting duly assembled, shall constitute a quorum for the transaction of business; provided, however, that, whenever the corporation is permitted by law to have only one director, then, and, in that event only, one director shall constitute a quorum. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting, without further notice from time to time until a quorum shall have been obtained. Except as otherwise provided by law, by the Certificate of Incorporation, or these by-laws, the act of the directors at a meeting at which a quorum is present shall be the act of the Board. Member or members of the Board of Directors shall be deemed present at a meeting if such person or persons are participating in the meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.

SECTION 2. MEETINGS. Meetings of the Board of Directors shall be held at such place within or outside the State of Delaware as may from time to time be fixed by resolution of the Board of Directors, or as may be specified in the notice of the meeting. Regular meetings of the Board of Directors shall be held at such times as may from time to time be fixed by resolution of the Board of Directors, and special meetings may be held at any time upon the call of the Chairman of the Board or, in the absence of the Chairman of the Board, the President or any Vice President or the Secretary or any two directors by oral, telegraphic or written notice duly served on or sent or mailed to each director not less than two days before such meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of stockholders. Notice need not be given of regular meetings of the Board of Directors. The notice of any meeting need not specify the purpose of the meeting. Any requirement of furnishing a notice shall be waived by any director who signs a written waiver of such notice before or after the time stated therein. Further, the attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

SECTION 3. COMMITTEES. a. The Board of Directors shall appoint from among its members the following committees: audit, compensation, nominating and executive. These committees shall consist of such number, shall have such powers and duties, and the members thereof shall otherwise serve as shall from time to time be prescribed by the Board of Directors.

b. The Board of Directors may, in its discretion, by the affirmative vote of a majority of the whole Board of Directors, appoint other committees which shall have and may exercise such powers and duties as shall be conferred or authorized by the resolutions appointing them.

c. A majority of any committee appointed pursuant to the provisions of a. and b. above, if such committee be composed of more than two members, may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to discharge any such committee.

d. Any and all actions by any committee shall be reported to the Board of Directors at the board meeting succeeding such action.

SECTION 4. DIVIDENDS. Subject always to the provisions of the law and the Certificate of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of any, funds legally available for the payment of dividends shall be declared in dividends and paid to stockholders; the division of the whole or any part of such funds of the corporation shall rest wholly within the lawful discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise; and the Board of Directors may fix a sum which may be set aside or reserved over and above the capital paid in of the corporation as working capital for the corporation or as a reserve for any proper purpose, and from time to time may increase, diminish, and vary the same in its absolute judgment and discretion.

SECTION 5. INTENTIONALLY OMITTED.

SECTION 6. INFORMAL ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes or proceedings of the board or committee.

ARTICLE IV

OFFICERS

SECTION 1. NUMBER. The Board of Directors, as soon as may be after the election thereof held in each year, shall elect a Chairman of the Board, President, Secretary, Chief Financial Officer, and Treasurer, and from time to time may appoint a Vice Chairman of the Board, one or more Vice Presidents and such Assistant Secretaries, Assistant Treasurers and such other officers, agents and employees as it may deem proper. Any two offices may be held by the same person. More than two offices other than the offices of Chairman of the Board or President and Secretary may be held by the same person. The Chairman, the Vice Chairman and the President may, but need not, be chosen from among the directors. The Treasurer shall report to the Chief Financial Officer if not also elected to the position of Chief Financial Officer.

SECTION 2. TERM AND REMOVAL. The term of office of all officers shall be one year and until their respective successors are elected and qualify, but any officer may be removed from office, either with or without cause, at any time by the affirmative vote of a majority of the members of the Board of Directors then in office. A vacancy in any office arising from any cause may be filled for the unexpired portion of the term by the Board of Directors.

SECTION 3. POWERS AND DUTIES. The Chairman of the Board shall preside at all meetings of the Board of Directors, shall have such powers and perform such duties as are assigned to him by these by-laws, and shall have such other powers and perform such other duties as generally pertains to his office. In the absence or disability of the Chairman of the Board, the Vice Chairman of the Board, if one has been appointed, shall assume the duties, powers and position of the said Chairman. The President shall be the Chief Executive Officer of the corporation and, in the absence or disability of the Chairman of the Board and the Vice Chairman of the Board, if the latter has been appointed, the President shall assume the duties, powers and position of the said Chairman. The remaining officers of the corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors. The Vice President or Vice Presidents, the Assistant Secretary or Assistant Secretaries and the Assistant Treasurer or Assistant Treasurers shall, in the order of their respective seniorities, in the absence or disability of the President, Secretary or Treasurer, respectively, perform the duties of such officer and shall generally assist the President, Secretary or Treasurer, respectively; provided, however, and notwithstanding anything hereinabove to the contrary, that if the Board of Directors designates a Vice President as an Executive Vice President, he shall perform the duties of the President in his absence or disability, regardless of the order of seniority of said Executive Vice President to the other Vice Presidents.

SECTION 4. VOTING CORPORATION'S SECURITIES. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, or in the event of his inability to act, the President, or in the event of his inability to act, the Vice President designated by the Board of Directors to act in the absence of the President, shall have full power and authority on behalf of the corporation to attend and to act and to vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which as the owner thereof the corporation might have possessed and exercised, if present. The Board of Directors, by resolution from time to time, may confer like powers upon any other person or persons.

ARTICLE V

CERTIFICATES OF STOCK

SECTION 1. FORM AND TRANSFERS. The interest of each stockholder of the corporation shall be evidenced by certificates for shares of stock, certifying the number of shares represented thereby and in such form not inconsistent with the Certificate of Incorporation as the Board of Directors may from time to time prescribe.

Upon compliance with any provisions restricting the transferability of shares that may be set forth in the Certificate of Incorporation, these by-laws, or any written agreement in respect thereof, transfers of shares of the capital stock of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, or with a transfer clerk or a transfer agent appointed as in Section 4 of this Article provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the corporation, shall be so expressed in the entry of transfer. The Board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these by-laws, concerning the issue, transfer, and registration of certificates for shares of the capital stock of the corporation.

The certificates of stock shall be signed by or in the name of the company by the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by such named holder, and sealed with the seal of the corporation. Such seal may be a facsimile, engraved or printed. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the company with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

SECTION 2. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (3) the record date for determining stockholders for any other purpose shall be the close of business on the day on which the Board of Directors adopts the resolution relating thereto. When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided in this paragraph, such determination shall apply to any adjournment thereof; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

SECTION 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. No certificates for shares of stock in the corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require.

SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them.

SECTION 5. EXAMINATION OF BOOKS BY STOCKHOLDERS. The Board shall have power to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and documents of the corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the corporation.

ARTICLE VI

FISCAL YEAR

The fiscal year of the corporation shall begin on the first day of June in each year and shall end on the last day of May next following, unless otherwise determined by the Board of Directors.

ARTICLE VII

CORPORATE SEAL

The corporate seal of the corporation shall be in such form as the Board of Directors shall prescribe.

ARTICLE VIII

AMENDMENTS

The by-laws of this corporation may be amended, altered or repealed and new by-laws not inconsistent with any provision of the Certificate of Incorporation, as amended, may be made (i) by the affirmative vote of a majority of the members of the Board of Directors then in office, or (ii) by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this corporation entitled to vote in the election of directors, considered for purposes of this Article VIII as one class.

ARTICLE IX

Notice of Shareholder Nominations for Director and Other Shareholder Proposals

Written notice of shareholder nominations for Director or any other shareholder proposal for vote of the shareholders at any annual or special meeting of the shareholders called for the election of directors or for any other action by vote of shareholders, shall be given personally or by mail to the Secretary of the Corporation not less than 180 days before the date of the meeting. With respect to a proposed nominee for election as a director, to be effective such notice must state the full name and address of each proposed nominee and a brief biographical history setting forth past and present directorships, employment, and occupations and any other qualifications, together with a statement that the proposed nominee(s) has consented to being nominated and to serve if elected; with respect to any other proposed action for vote of shareholders, to be effective such notice must clearly state the proposal, the reasons for the proposal and a brief description of how the proposed action, if adopted, would benefit the Company and/or it shareholders. Notice by mail shall be deemed given upon receipt thereof by the Secretary of the Corporation. If a meeting is adjourned to another time or place, it shall not be necessary for a shareholder to give further notice. Unless such notice is given, the shareholder nomination or other shareholder proposal for shareholder vote, shall not be included in the Corporation's proxy statement nor put for a vote of the shareholders until such notice requirements are met.

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Exhibit 3.2

EXHIBIT 4.6

EIGHTH AMENDMENT TO REVOLVING LOAN AGREEMENT

This EIGHTH AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of March 2, 2004 (the `Eighth 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").

R E C I T A L S:

A. The Borrower and the, Bank entered into that certain Revolving Loan Agreement dated as of April 11, 2001, as modified, amended and extended from time to time (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 condition 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:

A G R E E M E N T S:

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

3.2 Letters of Credit. The first paragraph of Section 2.6 of the Loan Agreement is hereby amended by deleting the date "July 31, 2004" and inserting in lieu thereof the date of "July 31, 2005".

4. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this Eighth 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 Stake o f 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 Eighth 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 Eighth 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 Eighth 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.

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. Event of Default. As of the date hereof, no Event of Default under the Loan Agreement as mended 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 Eighth Amendment shall become effective as of the date above firs written after receipt by the Bank of the following documents:

5.1. Eighth Amendment. This Eighth 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 Eighth Amendment shall be construed in accordance with and governed by the laws of Illinois. Wherever possible each provision of the Loan Agreement and this Eighth 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 Eighth Amend ent 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 Eighth Amendment

6.2. Successors and Assigns. This Eighth 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 Eighth 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 Eighth 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.

6.4. 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 Eighth 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 Eighth Amendment to Revolving Loan Agreement as of the date first above written.

AAR CORP.		LASALLE BANK NATIONAL ASSOCIATION
By:	/s/ TIMOTHY J. ROMENESKO TIMOTHY J. ROMENESKO	By:	/s/ SCOTT M. CARBON SCOTT M. CARBON
Its:	Vice President	Its:	Vice President

EXHIBIT 4.8

FIRST AMENDMENT TO
CREDIT AGREEMENT

THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First Amendment") is made as of the 23rd day of January, 2004 by and 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 Service") and together with AAR, Distribution, Parts Trading, Manufacturing and Engine Services, individually a "Borrow" and collectively "Borrowers", the financial institutions, party 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.

W I T N E S S E T H:

WHEREAS, Borrowers, Agent and Lenders entered into a certain Credit Agreement dated as of May 29, 2003 (said Credit Agreement is hereinafter referred to as the "Credit Agreement"); and

WHEREAS, Borrowers desire to amend and modify certain provisions of the Credit Agreement and, subject to the terms hereof, Agent and Lenders are willing to agree to such amendments and modifications;

NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements herein contained, and any extension of credit heretofore, now or hereafter made by Agent and Lenders to Borrowers, the parties hereto hereby agree as follows:

1.: Definitions . All capitalized terms used herein without definition shall have the meaning given to them in the Loan Agreement.
2.: Additional Definitions . The following definitions of "Convertible Debt Financing", "Convertible Debt Financing Documents", "Crane Joint Venture" and "Crane Joint Venture Debt Documents" are hereby inserted into Section 1.1 of the Credit Agreement:

"Convertible Debt Financing" means the issuance by AAR CORP. of convertible unsecured Debt up to the principal amount of $100,000,000, which Debt (i) shall be convertible into shares of AAR CORP.'s common stock; (ii) shall bear interest at a per annum rate not to exceed 45%; and (iii) shall have a maturity date of not earlier than July l, 2006.

"Convertible Debt Financing Documents" means any agreement, documents, instruments, notes, schedules, and exhibits to be executed and/or delivered in connection with the Convertible Debt Financing and all amendments and/or modifications or any replacements (whether affected upon termination or any time thereafter) and/or refinancings to any of the foregoing (to the extent of any such amendment, modification, replacement or refinancing is permitted hereunder).

"Crane Joint Venture" means the joint venture relationship to be created by that certain Operating Agreement to be entered into between Crane Aircraft No. 3, LLC and AAR CORP., pursuant to that certain Operating Agreement of Crane Aircraft No. 3, LLC by and among the parties identified in Exhibit A thereto as Members and AAR CORP., as Manager, which Operating Agreement shall be in substantially the form delivered by AAR CORP. to Agent on January 16, 2004.

"Crane Joint Venture Debt Documents" means any agreement, instrument, note, schedules and exhibits to be executed and/or delivered in connection with any Debt incurred by the "Crane Joint Venture" 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).

3.: Additional Debt . The following Sections (p) and (q) are inserted into Section 5.1:

"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:

(p): Convertible Debt Financing; provided that the proceeds thereof are used for the prepayment of outstanding Debt, other working capital or general corporate purposes or as otherwise agreed to by Agent in its reasonable discretion; and
(q): a guaranty of Debt incurred by the Crane Joint Venture pursuant to the Crane Joint Venture Debt Documents; provided that the principal amount of such Debt so guaranteed does not exceed Seven Million Five Hundred Thousand Dollars ($7,500,000)."

4.: Restrictive Agreements . Section 5.4 of the Credit Agreement is hereby deleted and the following is inserted in its stead (new language is underscored):

"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 and the Convertible Debt Financing 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, the Convertible Debt Financing 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, (c) customary provisions in leases and other contracts restricting the assignment thereof, and (d) restrictions on the Crane Aircraft No. 3, L.L.C. under the Crane Joint Venture Debt Documents ."

5.: Payments and Modifications of Other Debt . Section 5.5 of the Credit Agreement is hereby deleted and the following is inserted in its stead (new language is underscored):

"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 Secuntization Documents, except for regularly scheduled payments of principal and interest (but no voluntary prepayments) or other amounts in respect of such Debt; or (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. In addition to and notwithstanding, any of the foregoing, Borrowers mqy prepay or purchase any outstanding Debt in any amount from the proceeds of the Convertible Debt Financing and no such prepayment or purchase shall be limited by, or shall operate to reduce any of the maximum amounts set forth above ."

6.: Purchase of Assets, Investments . Section 5.7 of the Credit Agreement is hereby deleted and the following is inserted in its stead (new language is underscored):

"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; (j) Investments in the Crane Joint Venture so long as the amount of any such Investment does not exceed One Million Five Hundred Thousand Dollars ($1,500,000) plus any amount paid by Borrowers pursuant to Borrowers' guarantee of the Debt incurred by the Crane Joint Venture under the Crane Joint Venture Debt Documents and (k) 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, except as otherwise provided above , 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.

7.: Execution in Counterparts . This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

8.: Continuing Effect . Except as otherwise specifically set out herein, the provisions of the Credit Agreement shall remain in full force and effect.

(Signature Page to First Amendment to Loan Agreement)

IN WITNESS WHEREOF, this First Amendment has been duly executed as of the day and year specified at the beginning hereof.

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

MERRILL LYNCH CAPITAL, A
DIVISION OF MERRILL LYNCH
BUSINESS FINANCIAL SERVICES, INC.,
as Agent and Lender

By:	/s/ TIMOTHY J. ROMENESKO	By:	/s/ MIKE MEYER
Name;	TIMOTHY J. ROMENESKO	Name:	MIKE MEYER
Title	Vice President	Title:	Assistant Vice President

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EXHIBIT 10.14

February 27, 2004

LaSalle Business Credit, LLC, as Agent
135 South LaSalle Street
Chicago, Illinois 60603

Ladies and Gentlemen:

Reference is made to (i) the Receivables Purchase Agreement dated as of March 21, 2003 (the "RPA") among AAR Receivables Corporation II, an Illinois corporation (the "ARC II"), AAR CORP., a Delaware corporation, as initial servicer, ("AAR"), and LaSalle Business Credit, LLC, a Delaware limited liability company, as agent (the "Agent") and (ii) the Purchase and Sale Agreement dated as of March 21, 2003 (the "PSA") among AAR Distribution, Inc., an Illinois corporation ("Distribution"), AAR Parts Trading, Inc., an Illinois corporation ("Parts"), AAR Manufacturing, Inc., an Illinois corporation ("Manufacturing"), AAR Engine Services, Inc., an Illinois corporation ("Engine") and AAR Allen Services, Inc., an Illinois corporation ("Allen", and together with Distribution, Parts, Manufacturing and Engine, being hereinafter referred to, individually as a "Originator, and collectively, as the "Originators"), ARC II and AAR. Capitalized terms used herein and not otherwise defined have the meaning given in RPA.

Upon the acceptance hereof by the Agent, ARC II, AAR, the Agent and the Originators agree as follows:

1. Effective on February 27, 2004 and until five (5) Business Days after ARC II, AAR and the Originators give the Agent the notice described in Section 2 of this letter, the Purchase Limit shall be reduced to zero. Concurrently therewith (and as a condition thereto), ARC II shall pay to Agent, in immediately available funds by wire transfer as provided in the RPA, the aggregate outstanding Capital of the Purchased Interests, together with all accrued and unpaid Discount thereon and any unpaid expenses through such date. The parties hereto agree that such reduction to the Purchase Limit shall be effective notwithstanding the provisions of Section 1.1(b) of the RPA.

2. Effective five (5) Business Days after ARC II, AAR and the Originators provide notice to the Agent of the restoration of the Purchase Limit pursuant to this Section 2 and subject to (i) the other terms and conditions herein or in the RPA, the PSA and/or the other Transaction Documents and (ii) no Termination Event or Unmatured Termination Date shall have occurred, be continuing or would result therefrom, the Purchase Limit shall be restored to an amount not less than the amount of the Purchase Limit as in effect on February 27, 2004. No restoration pursuant to this Section 2 shall be effective if it were to occur after the Termination Day.

3. Until such time as the Purchase Limit has been restored pursuant to Section 2 of this letter (the "Restoration Date"), no Receivables created by any Originator from and including February 27, 2004 to and including the Restoration Date (the "Interim Liquidation Period"), nor any other Purchased Assets related thereto, shall be sold by any Originator to ARC II pursuant to Section 1.1(b) of the PSA (such Receivables are herein called the "Interim Receivables"). Effective upon the Restoration Date, each Originator agrees that all of such Originator's right, title and interest in each Interim Receivable then existing and owing to such Originator or thereafter arising (until the Termination Day), and all other Purchased Assets related thereto, shall thereupon commence being sold to and purchased by ARC II pursuant to and in accordance with the terms of the PSA. During the Interim Liquidation Period, ARC II shall continue to be the owner of all Purchased Assets acquired prior to February 27, 2004, and any purchases to be made by ARC II on or subsequent to the Restoration Date shall be made pursuant to true sales for good and equivalent consideration. Agent shall have the right, as a condition to the Restoration Date, to review the purchase and reinstatement procedures relating to the restoration of the Purchase Limit and the resumption of purchases under the RPA and the PSA and, to the extent Agent determines they are inconsistent with those procedures and limitations described in the opinion of counsel relating to "true sale" and "non-consolidation" matters delivered at the time of closing of the RPA, to require an updated opinion of counsel relating to such matters, in form and substance and from such counsel as shall be satisfactory to it.

4. Notwithstanding anything contained in the Transaction Documents to the contrary, the reduction of the Purchase Limit and the other transactions contemplated hereunder shall not constitute a Termination Event. Except as otherwise set forth herein, the RPA, the PSA and the other Transaction Documents shall remain in full force and effect and are hereby ratified and confirmed by each of the Originators, the Servicer and ARC II, including, without limitation, the obligation of ARC II to pay to the Agent the Unused Line Fee in accordance

with the terms of the RPA and to maintain its corporate existence. ARC II agrees to maintain sufficient net worth to continue to pay its obligations as they become due.

		Very truly yours,
		AAR DISTRIBUTION, INC. AAR PARTS TRADING INC. AAR MANUFACTURING, NC. AAR ALLEN SERVICES, INC. AAR ENGINE SERVICES, INC.
		By:	/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President
		AAR RECEIVABLES CORPORATION II
		By:	/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President
		AAR CORP.
		By:	/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President
Accepted and Agreed:
LASALLE BUSINESS CREDIT, LLC, as Agent
By:	/s/ JOHN MOSTOFI John Mostofi Senior Vice President

November 30, 2004

AAR Receivables Corporation II and AAR Corp.
1100 North Wood Dale Road
Wood Dale, IL. 60191

Gentlemen:

AAR Receivables Corporation II , an Illinois corporation ( "Seller" ), AAR CORP ., a Delaware corporation, individually ( "AAR" ) and as initial servicer (in such capacity, together with its successors and permitted assigns in such capacity, the "Servicer" ), LaSalle Business Credit, LLC , a Delaware limited liability company ( "LaSalle" ), as agent for itself and the Purchasers referred to below (in such capacity, together with its successors and assigns in such capacity, the "Agent" ), and The Financial Institutions From Time to Time Parties Thereto as "Purchasers" have entered into that certain Receivables Purchase Agreement dated as of March 21, 2003 (the "Purchase Agreement" ; capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement). The Seller, the Servicer and the Agent now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth.

In addition, AAR executed and delivered a certain Performance Guaranty dated as of March 21, 2003 (the "Performance Guaranty" ), which the Agent and Purchasers require to be reaffirmed as a condition to the effectiveness hereof.

NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. The Agreement hereby is amended as follows:

(a): Exhibit 1 of the Purchase Agreement is hereby amended by amending and restating the existing definition of "Facility Termination Date" in its entirety to read as follows:

"'Facility Termination Date' means the earlier to occur of: (a) November 29, 2004 (b) the date determined pursuant to Section 2.2 of the Agreement, and (c) the date the Purchase Limit reduces to zero pursuant to Section 1.1(b) of the Agreement."

2. AAR expressly reaffirms, ratifies and assumes all of its obligations and liabilities to the Agent as set forth in the Performance Guaranty. AAR further agrees to be bound by and abide by and operate and perform under and pursuant to and comply fully with all of the terms, conditions, provisions, agreements, representations, undertakings, warranties, obligations and covenants contained in the Performance Guaranty, in so far as such obligations and liabilities may be modified by this Amendment, as though such Performance Guaranty were being re-executed on the date hereof, except to the.extent that such terms expressly relate to an earlier date.

3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement, the Exhibits thereto and other Transaction Documents are hereby reaffirmed, ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. The Seller and the Servicer expressly ratify, confirm and reaffirm without condition, all liens and security interests granted to the Agent pursuant to the Purchase Agreement and the other Transaction Documents and to all extensions, renewals, refinancings, amendments or modifications of any of the foregoing.

4. This Amendment shall not become effective until fully executed by all parties hereto.

5. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which taken together shall be one and the same instrument. This Amendment may also be executed by facsimile and each facsimile signature hereto shall be deemed for all purposes to be an original signatory page.

6. This Amendment shall be construed in accordance with and governed by the internal laws (as distinguished from the conflicts of law provisions) of the State of Illinois.

7. The Seller and the Servicer agree to reimburse the Agent for all of its out-of-pocket legal fees and expenses incurred in the preparation and documentation of this Amendment and related documents.

		LASALLE BUSINESS CREDIT, LLC, as agent as sole Purchaser and as Agent
		By:	/s/ JOHN MOSTOFI John Mostofi Senior Vice President
ACKNOWLEDGED AND AGREED TO THIS 30TH DAY OF NOVEMBER, 2003:
AAR RECEIVABLES CORPORATION II, as seller
By:	/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President
Consented and agreed to by the Following guarantor of the Obligations of AAR Receivables Corporation II to LaSalle Business Credit, LLC
AAR CORP., as Servicer and Performance Guarantor
By:	/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President Date: November 30, 2003

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EXHIBIT 10.14

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Exhibit 21.1

SUBSIDIARIES OF AAR CORP.(1)

Name of Corporation		State of Incorporation
AAR Services, 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
AAR Aircraft Services, Inc.(9)		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 Aircraft Services-Oklahoma and AAR Airframe Services-Roswell.
(3): Also does business under the names AAR Landing Gear Services, 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 & Logistics and AAR PMA Products.
(5): Also does business under the name AAR Engine Component Services and AAR Power Services.
(6): Also does business under the names AAR Engine Sales & Leasing, AAR Aircraft Sales & Leasing, AAR Aircraft Advisory Services and AAR Financial Services Corp.
(7): Also does business under the names AAR Distribution International, 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 and AAR ATICS.
(9): Also does business under the name AAR Aircraft Services-Indianapolis.

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Exhibit 21.1

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Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
AAR CORP.:

We consent to the incorporation by reference in Registration Statements Nos. 333-112654, 33-19767, 333-102416, 333-81790, 333-54178, 333-95433, 333-71067, 333-44693, 333-38671, 33-26783, 33-38042, 33-43839, 33-58456, 33-56023, 33-57753, 333-15327, 333-22175, 333-26093, 333-00205, 002-89735 and 002-95635 on Form S-8 and in Registration Statement Nos. 333-114855 and 333-52853 on Form S-3 of AAR CORP. of our report dated June 28, 2004 relating to the consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 2004 and 2003 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, 2004, which report appears in the May 31, 2004 annual report on Form 10-K of AAR CORP.

KPMG LLP

Chicago, Illinois
July 20, 2004

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Exhibit 23.1

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Exhibit 31.1

CERTIFICATION

I, David P. Storch, President and Chief Executive Officer of AAR CORP. (the "Registrant"), certify that:

1.

I have reviewed this Annual Report on Form 10-K of AAR CORP.;

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: July 21, 2004

/s/ DAVID P. STORCH

David P. Storch
President and Chief Executive Officer

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Exhibit 31.1

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Exhibit 31.2

CERTIFICATION

I, Timothy J. Romenesko, Vice President and Chief Financial Officer of AAR CORP. (the "Registrant"), certify that:

1.

I have reviewed this Annual Report on Form 10-K of AAR CORP.;

2.

3.

4.

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.

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: July 21, 2004

/s/ TIMOTHY J. ROMENESKO

Timothy J. Romenesko
Vice President and Chief Financial Officer

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Exhibit 31.2

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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, 2004 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: July 21, 2004

/s/ DAVID P. STORCH

David P. Storch
President and Chief Executive Officer

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Exhibit 32.1

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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, 2004 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: July 21, 2004

/s/ TIMOTHY J. ROMENESKO

Timothy J. Romenesko
Vice President, Treasurer and Chief Financial Officer

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Exhibit 32.2