UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended February 29, 2008

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 No. 1-6263

AAR CORP.

(Exact name of registrant as specified in its charter)

Delaware

36-2334820

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer Identification No.)

One AAR Place, 1100 N. Wood Dale Road

Wood Dale, Illinois

60191

(Address of principal executive offices)

(Zip Code)

(630) 227-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of March 31, 2008, there were 38,738,059 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

AAR CORP. and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended February 29, 2008

Table of Contents

			Page
Part I — FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	3-4
		Condensed Consolidated Statements of Operations	5
		Condensed Consolidated Statements of Cash Flows	6
		Condensed Consolidated Statements of Comprehensive Income	7
		Notes to Condensed Consolidated Financial Statements	8-20
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-28
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
	Item 4.	Controls and Procedures	28


Part II — OTHER INFORMATION
	Item 1A.	Risk Factors	29
	Item 6.	Exhibits	29

	Signature Page		30
	Exhibit Index		31-32

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 29, 2008 and May 31, 2007

(In thousands)

	February 29,		May 31,
	2008		2007
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	119,157	$	83,317
Accounts receivable, less allowances of $5,001 and $3,886, respectively	218,877		181,691
Inventories	290,511		244,661
Equipment on or available for short-term lease	131,507		97,932
Deposits, prepaids and other	18,329		12,607
Deferred tax assets	25,513		25,513
Total current assets	803,894		645,721

Property, plant and equipment, net of accumulated depreciation of $161,186 and $145,518, respectively	109,720		88,187

Other assets:
Goodwill and other intangible assets, net	117,989		74,267
Equipment on long-term lease	166,543		171,980
Investment in joint ventures	41,743		17,824
Other	93,565		69,654
	419,840		333,725
	$	1,333,454	$	1,067,633

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 29, 2008 and May 31, 2007

(In thousands, except per share data)

	February 29,			May 31,
	2008			2007
	(Unaudited)
Liabilities and stockholders’ equity:
Current liabilities:
Current maturities of long-term debt	$	20,200		$	51,366
Current maturities of non-recourse long-term debt	11,229			22,879
Current maturities of long-term capital lease obligation	1,463			—
Accounts payable and other	112,811			110,239
Accrued liabilities.	89,239			72,022
Total current liabilities	234,942			256,506

Long-term debt, less current maturities	453,358			232,863
Non-recourse debt	29,122			20,748
Capital lease obligation	10,729			—
Deferred tax liabilities	19,426			40,121
Other liabilities and deferred income	21,381			23,152
	534,016			316,884

Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued	—			—
Common stock, $1.00 par value, authorized 100,000 shares; issued 43,897 and 42,230 shares, respectively	43,897			42,230
Capital surplus	322,540			289,673
Retained earnings	309,155			256,052
Treasury stock, 5,159 and 4,501 shares at cost, respectively	(100,935		)	(79,813		)
Accumulated other comprehensive loss	(10,161		)	(13,899		)
	564,496			494,243
	$	1,333,454		$	1,067,633

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended February 29/28, 2008 and 2007

(Unaudited)

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	February 29/28,						February 29/28,
	2008			2007			2008			2007
Sales:
Sales from products	$	319,772		$	226,216		$	823,291		$	629,072
Sales from services	47,561			37,860			140,894			105,746
Sales from leasing	9,293			6,902			29,048			20,674
	376,626			270,978			993,233			755,492
Costs and operating expenses:
Cost of products	262,682			186,330			671,697			516,150
Cost of services	39,406			32,705			116,713			89,787
Cost of leasing	4,233			4,668			17,628			13,354
Cost of sales-impairment charges	—			—			—			7,652
Selling, general and administrative and other	34,007			24,770			95,610			76,509
	340,328			248,473			901,648			703,452
Gain on sale of product line	—			—			—			5,358
Earnings from aircraft joint ventures	1,668			2,983			4,653			9,785
Operating income	37,966			25,488			96,238			67,183
Gain (loss) on extinguishment of debt	(627		)	—			(627		)	2,927
Interest expense	(6,322		)	(3,568		)	(15,686		)	(12,970		)
Interest income and other	184			1,293			1,770			3,932
Income from continuing operations before provision for income taxes	31,201			23,213			81,695			61,072
Provision for income taxes	10,916			7,694			28,267			19,342
Income from continuing operations	20,285			15,519			53,428			41,730
Discontinued operations:
Operating loss, net of tax	(190		)	(258		)	(325		)	(917		)
Net income	$	20,095		$	15,261		$	53,103		$	40,813
Earnings per share-basic:
Earnings from continuing operations	$	0.54		$	0.43		$	1.44		$	1.15
Loss from discontinued operations	—			(0.01		)	—			(0.03		)
Earnings per share - basic	$	0.54		$	0.42		$	1.44		$	1.12
Earnings per share-diluted:
Earnings from continuing operations	$	0.47		$	0.37		$	1.25		$	1.00
Loss from discontinued operations	—			(0.01		)	—			(0.02		)
Earnings per share - diluted	$	0.47		$	0.36		$	1.25		$	0.98
Weighted average common shares outstanding - basic	37,228			36,534			36,991			36,285
Weighted average common shares outstanding - diluted	43,819			43,496			43,757			43,092

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended February 29/28, 2008 and 2007

(Unaudited)

(In thousands)

	Nine Months Ended
	February 29/28,
	2008			2007
Cash flows from operating activities:
Net income	$	53,103		$	40,813
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization	29,802			24,089
Deferred tax provision	2,591			17,657
Tax benefits from exercise of stock options	(4,632		)	—
Gain on sale of product line	—			(5,358		)
Impairment charges	—			7,652
(Gain) loss on extinguishment of debt	627			(2,927		)
Earnings from aircraft joint ventures	(4,653		)	(9,785		)
Gain on sale of investment	(497		)	—
Changes in certain assets and liabilities, net of effects of acquisitions:
Accounts and trade notes receivable	(10,445		)	(18,027		)
Inventories	(38,094		)	3,622
Equipment on or available for short-term lease	(36,767		)	(10,496		)
Equipment on long-term lease	4,884			(16,336		)
Accounts payable	(21,324		)	(4,973		)
Accrued liabilities and taxes on income	15,422			(10,863		)
Other liabilities	(6,674		)	(4,723		)
Other	(10,091		)	(9,445		)
Net cash provided from (used in) operating activities	(26,748		)	900
Cash flows from investing activities:
Property, plant and equipment expenditures	(22,059		)	(20,524		)
Proceeds from sale of product line	—			6,567
Companies acquired	(70,989		)	(11,800		)
Proceeds from sale of available for sale securities	13,392			—
Proceeds from aircraft joint ventures	877			40,172
Investment in aircraft joint ventures	(23,499		)	(22,935		)
Investment in available for sale securities	(18,958		)	—
Other	(761		)	(3,684		)
Net cash used in investing activities	(121,997		)	(12,204		)
Cash flows from financing activities:
Proceeds from borrowings, net	266,509			8,116
Reduction in borrowings	(65,542		)	(19,782		)
Proceeds from capital lease obligation	12,880			—
Reduction in capital lease obligation	(688		)	—
Proceeds from sale of warrants	40,114			—
Purchase of convertible note hedges	(69,676		)	—
Purchase of treasury stock	(9,527		)	—
Stock option exercises	6,165			6,562
Tax benefits from exercise of stock options	4,632			—
Net cash provided from (used in) financing activities	184,867			(5,104		)
Effect of exchange rate changes on cash	(282		)	(219		)
Increase (decrease) in cash and cash equivalents	35,840			(16,627		)
Cash and cash equivalents, beginning of period	83,317			121,738
Cash and cash equivalents, end of period	$	119,157		$	105,111

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended February 29/28, 2008 and 2007

(Unaudited)

(In thousands)

	Three Months Ended						Nine Months Ended
	February 29/28,						February 29/28,
	2008			2007			2008			2007
Net income	$	20,095		$	15,261		$	53,103		$	40,813

Other comprehensive income (loss) -
Cumulative translation adjustments	929			(57		)	4,098			553
Unrealized loss on investment	(360		)	(64		)	(360		)	(64		)
Total comprehensive income	$	20,664		$	15,140		$	56,841		$	41,302

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Note 1 — Basis of Presentation

AAR CORP. and its subsidiaries are referred to herein collectively as “AAR,” “Company,” “we,” “us,” and “our” unless the context indicates otherwise. The accompanying condensed consolidated financial statements include the accounts of AAR and its subsidiaries after elimination of intercompany accounts and transactions.

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of May 31, 2007 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our latest annual report on Form 10-K.

In the opinion of management, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of February 29, 2008, and the results of operations, cash flows and comprehensive income for the three- and nine-month periods ended February 29, 2008 and February 28, 2007. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 — Marketable Securities

At February 29, 2008, we have invested $4,975 in securities which are classified as available for sale and included in “Deposits, prepaids and other” in the Condensed Consolidated Balance Sheet. As of February 29, 2008, the unrealized loss on investment in available for sale securities was $360 and was recorded as a component of “Other comprehensive income (loss)” on the Condensed Consolidated Statements of Comprehensive Income.

During the nine-month period ended February 29, 2008, we sold investments in securities that were classified as available for sale. Proceeds on the sale were $13,392 and the gain of $497 is reported in “Interest income and other” on the Condensed Consolidated Statements of Operations.

Note 3 — Accounting for Stock-Based Compensation

We provide stock-based awards under the AAR CORP. Stock Benefit Plan (“Stock Benefit Plan”) which has been approved by our stockholders. Under this plan, we are authorized to issue stock options to employees and non-employee directors that allow the grant recipients to purchase shares of common stock at a price not less than the fair market value of the common stock on the date of grant. Generally, stock options awarded expire ten years from the date of grant and are exercisable in either four or five equal annual increments commencing one year after the date of grant. We issue new common stock upon the exercise of stock options. In addition to stock options, the Stock Benefit Plan also provides for the issuance of restricted stock awards and performance based restricted stock awards, as well as for the granting of stock appreciation units; however, to date, no stock appreciation units have been granted.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Effective June 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.”

During the nine-month periods ended February 29, 2008 and February 28, 2007, we granted stock options representing 88 shares and 100 shares, respectively, to a group of key leadership track employees. No executive officers were included in the group that received stock option grants.

The weighted average fair value of stock options granted during the nine-month periods ended February 29, 2008 and February 28, 2007 was $13.46 and $11.93, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions :

	Nine Months Ended
	February 29/28,
	2008		2007
Risk-free interest rate	4.9	%	5.0	%
Expected volatility of common stock	43.1	%	58.7	%
Dividend yield	0.0	%	0.0	%
Expected option term in years	4.0		4.0

The following table summarizes stock option activity for the nine-month period ended February 29, 2008:

					Weighted
			Weighted		Average	Aggregate
	Number of		Average		Remaining	Intrinsic
	Options		Exercise		Contractual	Value
	(in thousands)		Price		Life (years)	(in thousands)
Outstanding at May 31, 2007	2,135		$	18.30
Granted	88		$	33.63
Exercised	(772	)	$	18.29
Cancelled	(15	)	$	28.36
Outstanding at February 29, 2008	1,436		$	19.17	5.1	$	10,323
Exercisable at February 29, 2008	1,279		$	17.96	4.3	$	10,186

The total fair value of stock options that vested during the nine-month periods ended February 29, 2008 and February 28, 2007 was $231 and $0, respectively. The total intrinsic value of stock options exercised during the nine-month periods ended February 29, 2008 and February 28, 2007 was $12,616 and $12,112, respectively. The tax benefits realized from stock options exercised during the nine-month periods ended February 29, 2008 and February 28, 2007 were $4,632 and $0. Expense charged against income for stock options during the nine-month periods ended February 29, 2008 and February 28, 2007 was $346 and $180, respectively. As of February 29, 2008, we had $1,791 of unearned compensation related to stock options that will be amortized over an average period of five years.

The fair value of restricted shares is the market value of our common stock on the date of grant. Amortization expense related to restricted shares during the nine-month periods ended February 29, 2008 and February 28, 2007 was $4,446 and $2,624, respectively.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Restricted share activity during the nine-month period ended February 29, 2008 is as follows:

			Weighted Average
	Number of		Fair Value
	Shares		on Grant Date
Nonvested at May 31, 2007	1,067		$	23.16
Granted	20		$	33.70
Vested	(100	)	$	11.56
Forfeited	(80	)	$	25.11
Nonvested at February 29, 2008	907		$	24.64

During the nine-month period ended February 29, 2008, we granted a total of 20 restricted shares to members of the Board of Directors. As of February 29, 2008 we had $12,733 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.4 years.

Note 4 — 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. Sales of certain defense products are recognized upon customer acceptance, which includes transfer of title and transfer of risk of loss. Sales from services 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, 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, certain large airframe maintenance contracts and certain long-term aircraft component maintenance agreements are recognized by the percentage of completion method, either based on the relationship of costs incurred to date to estimated total costs or the units of delivery method. 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.

Certain supply chain management programs we provide our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Note 5 — Inventory

The summary of inventories is as follows:

	February 29,		May 31,
	2008		2007
Raw materials and parts	$	57,475	$	55,702
Work-in-process	47,756		36,580
Purchased aircraft, parts, engines and components held for sale	185,280		152,379
	$	290,511	$	244,661

Note 6 — Supplemental Cash Flow Information

	Nine Months Ended
	February 29/28,
	2008		2007
Interest paid	$	17,443	$	13,083
Income taxes paid	3,650		1,816
Income tax refunds received	344		1,197

During the third quarter of fiscal 2008, the holders of $16,355 of 2.875% convertible notes redeemed their notes for 880 shares of our common stock. As a result of the redemption, common stock increased $880 and capital surplus increased $15,284.

During the second quarter of fiscal 2008, we purchased an aircraft from a joint venture partner and recorded the related non-recourse debt of $8,264. The debt is included in current maturities of non-recourse long-term debt on the condensed consolidated balance sheet.

During the nine-month period ended February 29, 2008, treasury stock increased $21,122 reflecting the purchase of treasury shares of $9,527 and the impact from the exercise of stock options of $11,595. During the nine-month period ended February 28, 2007, treasury stock increased $10,149 principally reflecting the impact from the exercise of stock options.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Note 7 — Financing Arrangements

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

	February 29,			May 31,
	2008			2007
Recourse debt

Notes payable due December 15, 2007 with interest at 6.875% payable semi-annually on June 15 and December 15	$	—		$	31,166
Notes payable due May 15, 2008 with interest at 7.98% payable semi-annually on June 1 and December 1	20,000			20,000
Notes payable due May 15, 2011 with interest at 8.39% payable semi-annually on June 1 and December 1	42,000			55,000
Mortgage loan (secured by Wood Dale, Illinois facility) due August 1, 2015 with interest at 5.01%	11,000			11,000
Convertible notes payable due March 1, 2014 with interest at 1.625% payable semi-annually on March 1 and September 1	137,500			—
Convertible notes payable due March 1, 2016 with interest at 2.25% payable semi-annually on March 1 and September 1	112,500			—
Convertible notes payable due February 1, 2024 with interest at 2.875% payable semi-annually on February 1 and August 1	—			16,355
Convertible notes payable due February 1, 2026 with interest at 1.75% payable semi-annually on February 1 and August 1	150,000			150,000
Industrial revenue bond, (secured by trust indenture on property, plant and equipment) due December 1, 2010 with floating interest rate, payable quarterly — interest 3.50% at February 29, 2008	558			708
Total recourse debt	473,558			284,229
Current maturities of recourse debt	(20,200		)	(51,366		)
Long-term recourse debt	$	453,358		$	232,863

Non-recourse debt

Non-recourse note payable due December 1, 2007 with interest at 6.00%	$	—		$	22,252
Non-recourse note payable due April 30, 2008 with interest at 7.56%	8,057			—
Non-recourse note payable due March 31, 2009 with interest at 6.18%	10,275			—
Non-recourse note payable due July 19, 2012 with interest at 7.223%	16,120			15,000
Non-recourse note payable due April 3, 2015 with interest at 8.38%	5,899			6,375
Total non-recourse debt	40,351			43,627
Current maturities of non-recourse debt	(11,229		)	(22,879		)
Long-term non-recourse debt	$	29,122		$	20,748

During February 2008, we completed the sale of $250,000 million of convertible notes, consisting of $137,500 aggregate principal amount of 1.625% convertible senior notes due 2014 and $112,500 million aggregate principal amount of 2.25% convertible senior notes due 2016 (together, the “Notes”) in a private offering to qualified buyers pursuant to Rule 144A under the Securities Act of 1933, as

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

amended. Interest under the Notes is payable semiannually on March 1 and September 1, beginning September 1, 2008.

Holders may convert their Notes based on a conversion rate of 28.1116 shares of our common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of $35.57 per share, only under the following circumstances: (i) during any calendar quarter beginning after March 31, 2008 (and only during such calendar quarter) if, as of the last day of the preceding calendar quarter, the closing price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 130% of the applicable conversion price per share of common stock on the last day of such preceding calendar quarter; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes of the applicable series for each day of that period was less than 98% of the product of the closing price of our common stock and the then applicable conversion rate; (iii) if a designated event or similar change of control transaction occurs; (iv) upon specified corporate transactions; or (v) beginning on February 1, 2014, in the case of the 2014 notes, or February 1, 2016, in the case of the 2016 notes and ending at the close of business on the business day immediately preceding the applicable maturity date.

Upon conversion, a holder of the Notes will receive, in lieu of common stock, an amount in cash equal to the lesser of (i) $1,000 and (ii) the conversion value of a number of shares of our common stock equal to the conversion rate. If the conversion value exceeds the principal amount, we will deliver at our election, cash or common stock or a combination thereof having a value equal to such excess amount.

The Notes are senior, unsecured obligations and will rank equal in right of payment with all of our existing and future unsecured and unsubordinated expenses. Costs associated with this transaction of approximately $5,677 are being amortized on a pro-rata basis over a six- and eight-year period.

In connection with the issuance of the Notes, we entered into convertible note hedge transactions, (note hedges) with respect to our common stock with Merrill Lynch Financial Markets, Inc. (hedge provider). The note hedges are exercisable solely in connection with any conversion of the Notes and provide for us to receive shares of our common stock from the hedge provider equal to the number of shares issuable to the holders of the Notes upon conversion. We paid approximately $69,676 for the note hedges.

In addition, we entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. whereby we issued warrants to purchase 7,028 shares of our common stock at an exercise price of $48.83 per share. The convertible note hedges and warrant transactions are intended to reduce potential dilution to our common stock upon future conversion of the Notes and generally have the effect of increasing the conversion price of the Notes to approximately $48.83 per share.

Net proceeds from the Notes transaction after paying expenses were approximately $214,813 and were used to repay the balance outstanding under our unsecured revolving credit facility, to pay for the net cost of the note hedges and warrant transactions and for general corporate purposes.

During February 2008, we retired non-recourse debt that was secured by an aircraft which was sold during the third quarter of fiscal 2008. The outstanding principal amount for this non-recourse debt was $19,748 and was retired for $20,375. The net loss from this transaction was $627 and is recorded in gain (loss) on extinguishment of debt on the condensed consolidated statement of operations.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

During the third quarter of fiscal 2008, we retired $31,166 of 6.875% notes payable which were due December 15, 2007. We also agreed to retire $13,000 of our 8.39% notes due May 15, 2011 for $12,578. This transaction settled in March 2008 and was classified in accounts payable and other on the condensed consolidated balance sheet at February 29, 2008.

During the first quarter of fiscal 2008, we completed a sale-leaseback transaction with a financial institution to finance an aircraft under a capital lease. Proceeds were approximately $12,880. We are sub-leasing the aircraft under an operating lease with a remaining period of five years.

On August 31, 2007, we amended our credit agreement dated August 31, 2006 (the “Credit Agreement”) with various financial institutions, as lenders, and LaSalle Bank National Association, as administrative agent for the lenders (the “Amendment”). The Amendment increased our unsecured revolving credit amount to $250,000 from $140,000. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $75,000, not to exceed $325,000 in total. The Amendment extended the term of our Credit Agreement from August 31, 2010 to August 31, 2011. The Amendment also modified the borrowing rate of the Credit Agreement and borrowings now bear interest at the London Interbank Offered Rate (“LIBOR”) plus 100 to 225 basis points based on certain financial measurements. In March 2008, a second amendment to the Credit Agreement modified the borrowing rate to LIBOR plus 100 to 237.5 basis points based on certain financial measurements. There were no borrowings outstanding under this facility at February 29, 2008.

Note 8 — Earnings per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of restricted stock awards and shares to be issued upon conversion of convertible debt.

Under the provisions of Emerging Issues Task Force Issue No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (“EITF No. 04-08”), we are required to use the “if converted” method set forth in SFAS No. 128, “Earnings Per Share,” in calculating the diluted earnings per share effect of the assumed conversion of our contingently convertible debt. Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three- and nine-month periods ended February 29, 2008 and February 28, 2007.

	Three Months Ended						Nine Months Ended
	February 29/28,						February 29/28,
	2008			2007			2008			2007
Income from continuing operations	$	20,285		$	15,519		$	53,428		$	41,730
Loss from discontinued operations, net of tax	(190		)	(258		)	(325		)	(917		)
Net income	$	20,095		$	15,261		$	53,103		$	40,813

Basic shares:
Weighted average common shares outstanding	37,228			36,534			36,991			36,285

Earnings per share — basic:
Earnings from continuing operations	$	0.54		$	0.43		$	1.44		$	1.15
Loss from discontinued operations	—			(0.01		)	—			(0.03		)
Earnings per share - basic	$	0.54		$	0.42		$	1.44		$	1.12

Net income	$	20,095		$	15,261		$	53,103		$	40,813
Add: After-tax interest on convertible debt	466			491			1,449			1,474
Net income for diluted EPS calculation	$	20,561		$	15,752		$	54,552		$	42,287

Diluted shares:
Weighted average common shares outstanding	37,228			36,534			36,991			36,285
Additional shares from the assumed exercise of stock options	360			536			368			405
Additional shares from the assumed vesting of restricted stock	496			449			502			425
Additional shares from the assumed conversion of convertible debt	5,735			5,977			5,896			5,977
Weighted average common shares outstanding — diluted	43,819			43,496			43,757			43,092

Earnings per share — diluted:
Earnings from continuing operations	$	0.47		$	0.37		$	1.25		$	1.00
Loss from discontinued operations	—			(0.01		)	—			(0.02		)
Earnings per share - diluted	$	0.47		$	0.36		$	1.25		$	0.98

At February 29, 2008 and February 28, 2007, respectively, stock options to purchase 81 and 87 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 during the interim periods then ended.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Note 9 —Aircraft Joint Ventures

Our aircraft joint ventures represent investments in limited liability companies that are accounted for under the equity method of accounting. Our membership interest in each of these limited liability companies is 50% and the primary business of these companies is the acquisition, ownership, lease and disposition of certain commercial aircraft. Acquired aircraft are purchased with cash contributions by the members of the companies and debt financing provided to the limited liability companies on a limited recourse basis. Twenty-nine aircraft were held in the joint ventures at February 29, 2008. Under the terms of a servicing agreement with certain of the limited liability companies, we provide administrative services and technical advisory services, including aircraft evaluations, oversight and logistical support of the maintenance process and records management. We also provide remarketing services with respect to the divestiture of aircraft by the limited liability companies. For the nine-month periods ended February 29, 2008 and February 28, 2007, we were paid $232 and $816, respectively, for such services. The income tax benefit or expense related to the operations of the ventures is recorded by the member companies.

Distributions from joint ventures are classified as operating or investing activities in the statement of cash flows based upon an evaluation of the specific facts and circumstances of each distribution to determine its nature.

Summarized financial information for these limited liability companies is as follows:

	Three Months Ended				Nine Months Ended
	February 29/28,				February 29/28,
	2008		2007		2008		2007
Statement of operations information:
Sales	$	14,619	$	6,625	$	40,756	$	44,993
Income before provision for income taxes	3,794		1,935		10,592		10,146

	February 29,		May 31,
	2008		2007
Balance sheet information:
Assets	$	325,846	$	117,185
Debt	240,827		80,425
Members’ capital	78,326		31,603

During the second quarter of fiscal 2008, an aircraft held by a joint venture, which was previously consolidated because we were the primary beneficiary of the joint venture was sold. The minority interest related to the gain on the sale was approximately $2,400 and is recorded as an increase to cost of sales in the condensed consolidated statement of operations.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

Note 10 — Discontinued Operations

During the third quarter of fiscal 2007, we decided to exit our non-core industrial turbine business based in Frankfort, New York. The industrial turbine business is a unit within the Structures and Systems segment and is expected to be sold prior to May 31, 2008. Net assets of the business were approximately $4,400 at February 29, 2008 and consisted of $2,100 of accounts receivable, $800 of inventory, $1,900 of net property, plant and equipment and $400 of accounts payable.

Revenues and pre-tax operating loss for the three- and nine-month periods ended February 29, 2008 and February 28, 2007 for discontinued operations are summarized as follows:

	Three Months Ended						Nine Months Ended
	February 29/28,						February 29/28,
	2008			2007			2008			2007

Revenues	$	1,938		$	1,644		$	5,124		$	5,395
Pre-tax operating loss	(292		)	(397		)	(500		)	(1,410		)

Note 11 — Acquisitions

On January 12, 2007, we acquired substantially all of the assets of Reebaire Aircraft, Inc. (“Reebaire”), a regional airframe maintenance, repair and overhaul facility located in Hot Springs, Arkansas. This acquisition increases our regional Maintenance, Repair and Overhaul (“MRO”) capacity in North America. The purchase price was approximately $11,800 and was paid in cash.

Our cost to acquire Reebaire has been allocated to the assets acquired based on estimated fair values. We have allocated the purchase price as follows:

Inventory	$	560
Equipment	660
Identifiable intangibles	1,580
Goodwill	9,000

On April 2, 2007, we acquired Brown International Corporation (“Brown”), a privately held defense contractor that provides engineering, design, manufacturing and systems integration services. Brown operates as part of our Structures and Systems segment. The purchase price was approximately $26,700 and was paid in cash. Our cost to acquire Brown has been preliminarily allocated to assets acquired based on estimated fair values. We will finalize the purchase price allocation for the Brown acquisition in the fourth quarter of fiscal 2008.

On December 3, 2007, we acquired Summa Technology, Inc. (“Summa”), a leading provider of high-end sub-systems and precision machining, fabrication, welding and engineering services. Summa operates as part of our Structures and Systems segment. The purchase price was approximately $71,000 and was paid in cash. We have made a preliminary purchase price allocation for the Summa acquisition and are in the process of obtaining valuation for the acquired net assets.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

The following unaudited pro forma information is provided for acquisitions assuming the Brown and Summa acquisitions occurred as of the beginning of fiscal year 2007:

	Three Months Ended		Nine Months Ended
	February 28,		February 29/28,
	2007		2008		2007

Net sales	$	300,119	$	1,044,919	$	827,922
Operating income	26,939		100,223		70,313
Net income	15,384		54,197		40,353
Earnings per share:
Basic	$	0.42	$	1.47	$	1.11
Diluted	$	0.36	$	1.27	$	0.97

Subsequent Event

On March 5, 2008, we acquired Avborne Heavy Maintenance, Inc. (“Avborne”) and a related entity. Avborne is an independent provider of aircraft heavy maintenance checks, modifications, installations and painting services to commercial airlines, international cargo carriers and major aircraft leasing companies. Avborne performs heavy maintenance on both Boeing and Airbus aircraft at its 226,000 square foot facility, located at Miami International Airport. The purchase price was approximately $40,000 and included a cash payment of $15,000 and the assumption of a $25,000 industrial revenue bond. Avborne will operate as part of our MRO segment.

Note 12 — Gain on Sale of Product Line

During the first quarter of fiscal 2007, we sold substantially all of the assets, subject to certain liabilities, of a product line within our Structures and Systems segment. Proceeds from the sale were $6,567 and the net carrying value of the assets sold was $1,209, resulting in a gain on sale of product line of $5,358. The gain on this transaction has been classified as a component of operating income in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Note 13 — Impairment Charges

During the first quarter of fiscal 2007, we recorded an impairment charge related to certain engine parts in the amount of $4,750. These parts were acquired prior to September 11, 2001. The fiscal 2007 impairment charge was triggered by our decision to pursue the liquidation of this inventory. We made the decision to recognize the impairment due to persistently high fuel costs and reduced demand for these parts, as well as to better align human and physical resources with higher potential opportunities in our Aviation Supply Chain segment. We had previously recorded impairment charges of $5,360 during the fourth quarter of fiscal 2003 and $75,900 during the second quarter of fiscal 2002 related to engine and airframe parts and whole engines.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

A summary of the carrying value of impaired inventory and engines, after giving effect to all impairment charges recorded by us is as follows:

	February 29,		May 31,		November 30,
	2008		2007		2001
Net impaired inventory and engines	$	24,500	$	27,400	$	89,600

Proceeds from sales of impaired inventory and engines for the nine-month period ended February 29, 2008 and the twelve-month period ended May 31, 2007 were $2,600 and $3,800, respectively.

Other Impairment and Gain on Extinguishment of Debt

During the first quarter of fiscal 2007, we restructured the lease and non-recourse debt on a wholly-owned wide-body aircraft. This aircraft was originally purchased prior to September 11, 2001. As a result of the restructuring of the lease and debt, we recorded a $2,927 gain on extinguishment of debt. Further, we decided to offer this aircraft for sale and recorded a $2,902 impairment charge to reduce the carrying value of the aircraft to its estimated net realizable value. The asset was sold and non-recourse debt retired during the third quarter of fiscal 2008.

Note 14 — Business Segment Information

We report our activities in four business segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems; and Aircraft Sales and Leasing.

Sales in the Aviation Supply Chain segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and defense markets, as well as the repair and overhaul of a wide range of commercial and military aircraft airframe parts. We also offer customized programs for inventory supply and management and performance-based logistics. Sales also include the sale and lease of commercial jet engines. Cost of sales consists principally of the cost of product (primarily aircraft and engine parts), direct labor and overhead (primarily indirect labor, facility cost and insurance).

Sales in the Maintenance, Repair and Overhaul segment are principally derived from aircraft maintenance and storage and the repair and overhaul of landing gear. Cost of sales consists principally of the cost of product (primarily replacement aircraft parts), direct labor and overhead.

Sales in the Structures and Systems segment are derived from the engineering, design and manufacture of containers, pallets and shelters used to support the U.S. military’s tactical deployment requirements, complex machined and fabricated parts, components and sub-systems for various aerospace and defense programs and other applications, in-plane cargo loading and handling systems for commercial and military applications and composite products for aviation and industrial use. Cost of sales consists principally of the cost of product, direct labor and overhead.

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

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2008

(Unaudited)

(In thousands, except per share amounts)

The accounting policies for the segments are the same as those described in Note 1 of the notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended May 31, 2007. Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the reportable segments and utilizes gross profit as a primary profitability measure. The expenses and assets related to corporate activities are not allocated to the segments. Our reportable segments are aligned principally around differences in products and services.

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

	Three Months Ended				Nine Months Ended
	February 29/28,				February 29/28,
	2008		2007		2008		2007
Sales:
Aviation Supply Chain	$	151,227	$	135,687	$	438,719	$	397,107
Maintenance, Repair and Overhaul	74,765		52,265		206,091		146,337
Structures and Systems	110,452		62,992		266,733		183,872
Aircraft Sales and Leasing	40,182		20,034		81,690		28,176
	$	376,626	$	270,978	$	993,233	$	755,492

	Three Months Ended				Nine Months Ended
	February 29/28,				February 29/28,
	2008		2007		2008		2007
Gross profit:
Aviation Supply Chain	$	36,330	$	29,862	$	103,264	$	82,013
Maintenance, Repair and Overhaul	11,114		7,260		29,075		20,564
Structures and Systems	16,402		8,921		36,307		25,162
Aircraft Sales and Leasing	6,459		1,232		18,549		810
	$	70,305	$	47,275	$	187,195	$	128,549

	February 29,		May 31,
	2008		2007
Total Assets:
Aviation Supply Chain	$	547,045	$	449,918
Maintenance, Repair and Overhaul	138,630		124,482
Structures and Systems	304,134		190,386
Aircraft Sales and Leasing	147,265		156,357
Corporate	196,380		146,490
	$	1,333,454	$	1,067,633

AAR CORP. and Subsidiaries

February 29, 2008

(In thousands)

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

We report our activities in four business segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems; and Aircraft Sales and Leasing.

The table below sets forth consolidated sales for our four business segments for the three- and nine-month periods ended February 29, 2008 and February 28, 2007.

	Three Months Ended				Nine Months Ended
	February 29/28,				February 29/28,
	2008		2007		2008		2007
Sales:
Aviation Supply Chain	$	151,227	$	135,687	$	438,719	$	397,107
Maintenance, Repair and Overhaul	74,765		52,265		206,091		146,337
Structures and Systems	110,452		62,992		266,733		183,872
Aircraft Sales and Leasing	40,182		20,034		81,690		28,176
	$	376,626	$	270,978	$	993,233	$	755,492

AAR CORP. and Subsidiaries

February 29, 2008

Over the last several weeks, certain U.S. air carriers have announced a new wave of cost reduction initiatives, including headcount reductions, route consolidations and capacity reductions. These initiatives are principally in response to persistently high fuel costs and softening economic conditions in the U.S. In addition, certain air carriers have ceased operations. These and other factors may have a disproportionate effect on our U.S. regional airline customers given their size and route structure dependence on alliances with major carriers and the major carriers’ initiatives to reduce U.S. domestic capacity. We are closely monitoring the effects of these factors in the industry, particularly on Mesa Airlines, our largest regional airline customer, as it relates to their contract dispute to operate scheduled route service for one of their largest airline partners and other financial pressures they are experiencing.

There has been significant tightening in the credit markets which may affect our ability or our customers’ ability to raise debt or equity capital. There is also uncertainty over the direction of the U.S. economy as a result of slower growth rates, higher unemployment and the weak housing market. We are monitoring economic conditions for their impact on our customers and markets and assessing both risks and opportunities that may affect our business.

We expect certain carriers will continue to seek ways to reduce their cost structure, including outsourcing more of their maintenance and support functions to third parties, while we believe other carriers who have historically outsourced their maintenance requirements will continue to do so. Although we believe we remain well positioned to respond to the market with our broad range of products and services as these trends continue to develop, the factors above may have an adverse impact on our growth rates and our results of operations and financial condition.

We continue to see opportunities to provide performance-based logistics services and mobility products supporting our defense customers’ deployment activities. Although it remains difficult for us to predict long-term demand for these types of products and services, we believe we are well positioned with our current portfolio of products and services and growth plans to benefit from longer-term U.S. military deployment and program management strategies.

Results of Operations

Three-Month Period Ended February 29, 2008

(as compared with the same period of the prior year)

Consolidated sales for the third quarter ended February 29, 2008 increased $105,648 or 39.0% over the third quarter of last year as all four of our reportable segments experienced an increase in sales. Sales in the Aviation Supply Chain segment increased $15,540 or 11.5% over the prior year. The sales increase is attributable to strong demand for parts support from defense-related performance-based logistics programs and aftermarket parts sales to commercial customers. Gross profit in the Aviation Supply Chain segment increased $6,468 or 21.7% and the gross profit margin percentage increased to 24.0% from 22.0% in the prior year quarter due to the favorable mix of inventories sold and solid program execution.

In the Maintenance, Repair and Overhaul segment, sales increased $22,500 or 43.0% from the same quarter last year. The increase in sales is primarily attributable to increased revenues at the Indianapolis heavy maintenance operation, greater volume of landing gear overhauls and the inclusion of revenue from Reebaire (see Note 11 of Notes to Condensed Consolidated Financial Statements) which was acquired in January 2007. Gross profit in the Maintenance, Repair and Overhaul segment increased $3,854 or 53.1% and the gross profit percentage increased to 14.9% from 13.9% due to operating efficiencies associated with certain aircraft maintenance activities and increased volumes.

In the Structures and Systems segment, sales increased $47,460 or 75.3% over the prior year. The sales increase is attributable to sustained high levels of demand and new business wins for specialized mobility products and the inclusion of revenue from Brown and Summa (see Note 11 of Notes to Condensed Consolidated Financial Statements) which contributed $36,542 of revenue and which were acquired in April 2007 and December 2007, respectively. Gross profit in the Structures and Systems segment increased $7,481 or 83.9% compared to the prior year while the gross profit margin percentage increased slightly to 14.8% from 14.2%.

In the Aircraft Sales and Leasing segment, sales increased $20,148 compared with the prior year quarter driven by increased aircraft sales. Our strategy in the Aircraft Sales and Leasing segment is to build an aircraft portfolio through participation in joint ventures and through acquisitions for our own account. At February 29, 2008, the total number of aircraft held in joint venture was 29 (see Note 9 of Notes to Condensed Consolidated Financial Statements). Of the eight aircraft owned by us outside the aircraft

AAR CORP. and Subsidiaries

February 29, 2008

joint ventures, four were acquired prior to September 11, 2001. Current lease rates for our commercial aircraft purchased before September 11 remain at less than pre-September 11 levels.

Operating income increased $12,478 or 49.0% compared with the prior year’s quarter due to increased sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Selling, general and administrative expenses increased $9,237 reflecting the impact of acquisitions, increased spending to support growth and investments in operational improvement initiatives. As a percentage of sales, selling, general and administrative expenses declined to 9.0% compared to 9.1% in the prior year. Net interest expense increased $3,863 or 169.8% principally due to increased borrowings related to investments in the Aviation Supply Chain and Aircraft Sales and Leasing segments. Our effective income tax rate increased to 35.0% compared to 33.1% in the prior year due to the expiration of certain income tax benefits on export activities.

During the third quarter of fiscal 2007, we decided to exit our non-core industrial turbine business, which was part of the Structures and Systems segment, and classified the results as a discontinued operation (see Note 10 of Notes to Condensed Consolidated Financial Statements).

Income from continuing operations was $20,285 for the third quarter of fiscal 2008 compared to $15,519 in the prior year due to the factors discussed above.

Nine-Month Period Ended February 29, 2008

(as compared with the same period of the prior year)

Consolidated sales for the nine months ended February 29, 2008 increased $237,741 or 31.5% over the same period last year as all four of our reportable segments experienced an increase in sales. Sales in the Aviation Supply Chain segment increased $41,612 or 10.5% over the prior year. The sales increase is attributable to strong demand for parts support from defense-related performance-based logistics programs and aftermarket parts sales to commercial customers. Gross profit in the Aviation Supply Chain segment increased $21,251 or 25.9% over the prior year primarily due to increased sales volume and the gross profit margin percentage increased to 23.5% from 20.7% in the prior year due to the favorable mix of products sold and the $7,652 impairment charge recorded during the first quarter of last year (see Note 13 of Notes to Condensed Consolidated Financial Statements).

In the Maintenance, Repair and Overhaul segment, sales increased $59,754 or 40.8% over the prior year. The increase in sales is primarily attributable to increased revenues at the Indianapolis heavy maintenance operation, greater volume of landing gear overhauls and the inclusion of revenue from Reebaire (see Note 11 of Notes to Condensed Consolidated Financial Statements) which was acquired in January 2007. Gross profit in the Maintenance, Repair and Overhaul segment increased $8,511 or 41.4%, and the gross profit percentage remained constant at 14.1%.

In the Structures and Systems segment, sales increased $82,861 or 45.1% over the prior year. The sales increase is attributable to sustained high levels of demand and new business wins for specialized mobility products and the inclusion of revenue from Brown and Summa (see Note 11 of Notes to Condensed Consolidated Financial Statements) which contributed $58,838 of revenues during the nine-month period ended February 29, 2008 and which were acquired in April 2007 and December 2007, respectively. Gross profit in the Structures and Systems segment increased $11,145 or 44.3% compared to the prior year while the gross profit margin percentage decreased slightly to 13.6% from 13.7%.

In the Aircraft Sales and Leasing segment, sales increased $53,514 compared with the same period last year driven by increased aircraft sales. Our strategy in the Aircraft Sales and Leasing segment is to build an aircraft portfolio through participation in joint ventures and through acquisitions for our own account. During the first nine months of fiscal 2008, we purchased 20 aircraft with joint venture

AAR CORP. and Subsidiaries

February 29, 2008

partners, all of which are currently on lease. At February 29, 2008, the total number of aircraft held in joint venture was 29 (see Note 9 of Notes to Condensed Consolidated Financial Statements). We also own eight aircraft outside of the joint ventures. Of the eight aircraft owned by us outside the aircraft joint ventures, four were acquired prior to September 11, 2001. Current lease rates for our commercial aircraft purchased before September 11 remain at less than pre-September 11 levels.

Operating income increased $29,055 or 43.2% compared to the same period last year due to increased sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Selling, general and administrative expenses increased $19,101 reflecting the impact of acquisitions, increased spending to support growth and investments in operational improvement initiatives. As a percentage of sales, selling, general and administrative expenses declined to 9.6% compared to 10.1% in the prior year. Net interest expense increased $4,878 or 54.0% due to decreased interest income as cash was utilized for investments made in the business, including acquisitions and aircraft purchases. Our effective income tax rate increased to 34.6% compared to 31.7% in the prior year due to the expiration of certain income tax benefits on export activities.

Income from continuing operations was $53,428 compared to $41,730 in the prior year 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, our current capital resources include our unsecured 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 generate cash from operations is influenced primarily by our operating performance and changes in working capital. We 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 February 29, 2008, our liquidity and capital resources included cash of $119,157 and working capital of $568,952. On August 31, 2007, we amended our credit agreement dated August 31, 2006 (the “Credit Agreement”) with various financial institutions, as lenders, and LaSalle Bank National Association, as administrative agent for the lenders (the “Amendment”). The Amendment increased our unsecured revolving credit amount to $250,000 from $140,000. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $75,000, not to exceed $325,000 in total. The Amendment extended the term of our Credit Agreement from August 31, 2010 to August 31, 2011. The Amendment also modified the borrowing rate of the Credit Agreement and borrowings now bear interest at the London Interbank Offered Rate (“LIBOR”) plus 100 to 225 basis points based on certain financial measurements. There were no borrowings outstanding under this facility at February 29, 2008. In addition to our domestic facility, we also have $3,409 available under a foreign line of credit. During February 2008, we completed the sale of $250,000 of convertible notes, consisting of $137,500 aggregate principal amount of 1.625% convertible senior notes due 2014 and $112,500 aggregate principal amount of 2.25% convertible senior notes due 2016 (see Note 7 of Notes to Condensed Consolidated Financial Statements).

AAR CORP. and Subsidiaries

February 29, 2008

We continually evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. 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 nine-month period ended February 29, 2008, we used $26,748 of cash from operations primarily due to investments of $36,767 made in aircraft and engines on short-term lease as well as $38,094 investment in inventory to support customer requirements. Other uses of cash included a $10,445 increase to accounts receivable, a $21,324 reduction in accounts payable and payment of capitalized program development costs of $14,725 related to the A400M program which is reported in other on the Consolidated Statements of Cash Flows. During the nine-month period ended February 29, 2008, cash flow from operations benefited from an increase in accrued liabilities of $15,422 as well as net income and depreciation and amortization of $82,905.

During the nine month period ended February 29, 2008, our investing activities used $121,997 of cash principally as a result of the acquisition of Summa of $70,989, investments in aircraft joint ventures of $23,499 reflecting the purchase of 20 aircraft with our partners and capital expenditures of $22,059.

During the nine-month period ended February 29, 2008, we generated $184,867 of cash from financing activities primarily due to the net proceeds received from the issuance of the $250,000 convertible senior notes, proceeds from borrowings related to aircraft financings of $22,686, proceeds from a capital lease obligation of $12,880, proceeds from the sale of warrants related to the convertible note offering of $40,114, proceeds from stock option exercises of $6,165 and tax benefits from the exercise of stock options of $4,632. Uses of cash from financing activities included the purchase of note hedges related to the convertible note offering of $69,676, purchase of treasury stock of $9,527, financing costs associated debt issuance of $6,177 and reduction in borrowings of $65,542.

Critical Accounting Policies and Significant Estimates

Our condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the condensed 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, revenue recognition and assumptions used in determining pension plan obligations. 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

AAR CORP. and Subsidiaries

February 29, 2008

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. During the first quarter of fiscal 2007, we recorded an impairment charge related to certain engine parts in the amount of $4,750. These parts were acquired prior to September 11, 2001, and were subject to impairment charges recorded in fiscal 2002 and 2003. The fiscal 2007 impairment charge was triggered by the Company’s decision to aggressively pursue the liquidation of this inventory. The Company made this decision to recognize the impairment due to persistently high fuel costs and fewer operators resulting in reduced demand for these parts, as well as to better align human and physical resources with higher potential opportunities in the rapidly growing Aviation Supply Chain segment. 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.

Revenue Recognition

Certain supply chain management programs that we provide to our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services. In connection with these programs, we are required to make certain judgments and estimates concerning the overall profitability of the program and the relative fair value of each element of the arrangement. Differences may occur between the judgments and estimates made by management and actual program results.

Equipment on or Available for Lease

The cost of assets 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.

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 to estimate 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 aircraft and engines which are currently being leased or are available for lease.

Pension Plans

The liabilities and net periodic cost of our pension plans are determined utilizing several actuarial assumptions, the most significant of which are the discount rate and the expected long-term return on plan assets.

Our discount rate is determined based on a review of long-term, high quality corporate bonds as of May 31, 2007 and models that match projected benefit payments to coupons and maturities from the high quality bonds. The assumption for the expected long-term return on plan assets is developed through analysis of historical asset returns by investment category, our fund’s actual return experience and current market conditions. Changes in the discount rate and differences between expected and actual return on

AAR CORP. and Subsidiaries

February 29, 2008

plan assets will impact the amount of net periodic pension expense recognized in our Consolidated Statement of Operations.

New Accounting Standards

Effective June 1, 2007, we adopted the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides guidance regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. Adoption of SAB 108 had no material impact on our results from operations or financial position.

Effective June 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the recognition threshold and measurement requirements for tax positions taken or expected to be taken in tax returns and provides guidance on the related classification and disclosure. Adoption of FIN 48 did not have an impact on our results from operations or financial position.

In September 2007, the FASB issued SFAS No. 157 (SFAS 157) “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets that are carried at fair value on a recurring basis in financial statements. In November 2007, the FASB provided a one year deferral of the implementation of SFAS 157 for other non-financial assets and liabilities. We are currently reviewing the impact of SFAS 157 on our financial statements.

In February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment to FASB Statement No. 115.” SFAS 159 allows companies, at specified election dates, the option to measure certain financial assets and liabilities at fair value. The election, which is applied on an instrument by instrument basis, is typically irrevocable once made. Subsequent unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the impact of SFAS 159 on our financial statements.

In December 2007, the FASB issued SFAS No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB 51.” This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, effective as of the beginning of the Company’s fiscal 2010, noncontrolling interests will be classified as equity in the Company’s financial statements and income and comprehensive income attributed to the noncontrolling interest will be included in the Company’s income and comprehensive income. The provisions of this standard must be applied retrospectively upon adoption. We are currently evaluating the impact of adopting SFAS 160 on our results of operations and financial position.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141(R)), “Business Combinations”. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. The provisions of SFAS 141(R) are effective for our business combinations occurring on or after June 1, 2009.

AAR CORP. and Subsidiaries

February 29, 2008

Forward-Looking Statements

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information available to the Company as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under Part II, Item 1A under the heading “Risk Factors”. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company’s control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to our market risk as set forth in Item 7A of our Annual Report on Form 10-K for the year ended May 31, 2007.

Item 4 — Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 29, 2008. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of February 29, 2008.

There were no changes in our internal control over financial reporting during the third quarter ended February 29, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1A — Risk Factors

There have been no material changes to our risk factors as set forth in our Annual Report on Form 10-K for the year ended May 31, 2007 and our Quarterly Report on Form 10-Q for the quarter ended November 30, 2007, except as follows:

Regulatory Compliance

Recently, aircraft maintenance and FAA oversight of airline and third party MRO maintenance providers has become a prevalent topic in the media. Additionally, the FAA, the airlines and others in the industry have heightened their sensitivity and scrutiny with respect to compliance with approved maintenance procedures. We believe that our MRO maintenance procedures meet applicable FAA regulatory and original equipment manufacturers’ requirements, and that our demonstrated performance as a high quality maintenance provider positions us well to continue to capture market share. However, our results of operations could be adversely affected as a result of negative publicity associated with recent media activity and increased FAA scrutiny of air carrier and MRO maintenance activities.

Recent Economic Factors

These factors may have an adverse impact on our growth rates and our results of operations and financial condition.

Significant issues may develop associated with the A400M Cargo system.

In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new A400M Military Transport Aircraft (A400M). We are teaming with Pfalz Flugzeugwerke GmbH (PFW) of Speyer, Germany on the program. We have incurred, and are expected to continue to incur, significant development costs in connection with this program. Our portion of revenue to be generated from this program is expected to exceed $300,000 through fiscal 2015, based on sales projections of the A400M. Based on program delays and discussions with our customer, planned first shipments under this program have slipped from the second half of fiscal 2008 to the second half of fiscal 2009. If the A400M experiences significant delivery delays or order cancellations, or if we fail to develop the system according to contract specifications, then our operating results and financial condition could be adversely affected.

Item 6 — Exhibits

The exhibits to this report are listed on the Exhibit Index included elsewhere herein.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AAR CORP.
		(Registrant)









Date:	April 4, 2008	/s/ RICHARD J. POULTON
		Richard J. Poulton
		Vice President, Chief Financial Officer and Treasurer
		(Principal Financial Officer and officer duly
		authorized to sign on behalf of registrant)


		/s/ MICHAEL J. SHARP
		Michael J. Sharp
		Vice President, Controller and Chief Accounting Officer
		(Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.	Description		Exhibits

4.	Instruments defining the rights of security holders	4.1	Amendment No. 2 to Credit Agreement dated as of March 14, 2008 among AAR CORP., LaSalle Bank National Association, as administrative agent, and the various financial institutions party hereto (filed herewith).

		4.2	Purchase Agreement between AAR CORP. and Merrill Lynch & Co., for itself and as representative of the other Initial Purchasers, dated February 5, 2008.(1)

		4.3	Form of 1.625% Convertible Senior Note due 2014.(2)

		4.4	Form of 2.25% Convertible Senior Note due 2016.(2)

		4.5	Indenture for 1.625% Convertible Senior Notes due 2014 between AAR CORP. and U.S. Bank National Association, as trustee, dated as of February 11, 2008.(2)

		4.6	Indenture for 2.25% Convertible Senior Notes due 2016 between AAR CORP. and U.S. Bank National Association, as trustee, dated as of February 11, 2008.(2)

		4.7	Registration Rights Agreement for 2014 Notes between AAR CORP. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the initial purchasers, dated February 11, 2008.(2)

		4.8	Registration Rights Agreement for 2016 Notes between AAR CORP. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the initial purchasers, dated February 11, 2008.(2)

10.	Material contracts	10.1	Sixth Amendment to Amended and Restated AAR CORP. Stock Benefit Plan dated as of January 27, 2007 (filed herewith).

		10.2	Second Amendment to AAR CORP. Supplemental Key Employee Retirement Plan dated as of October 17, 2007 (filed herewith).

		10.3	Confirmation of OTC Convertible Note Hedge Transaction for 2014 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.(1)

EXHIBIT INDEX

Exhibit No.	Description		Exhibits

		10.4	Confirmation of OTC Convertible Note Hedge Transaction for 2016 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.(1)

		10.5	Confirmation of OTC Warrant Transaction for 2014 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.(1)

		10.6	Confirmation of OTC Warrant Transaction for 2016 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.(1)

31.	Rule 13a-14(a)/15(d)-14(a) Certifications	31.1	Section 302 Certification dated April 4, 2008 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).

		31.2	Section 302 Certification dated April 4, 2008 of Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer of Registrant (filed herewith).

32.	Section 1350 Certifications	32.1	Section 906 Certification dated April 4, 2008 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).

		32.2	Section 906 Certification dated April 4, 2008 of Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer of Registrant (filed herewith).

Notes:

(1) Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K filed February 11, 2008.

(2) Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K filed February 14, 2008.

Exhibit 4.1

AMENDMENT NO. 2

CREDIT AGREEMENT

This AMENDMENT NO. 2 to CREDIT AGREEMENT (this “ Amendment ”), dated as of March 14, 2008, is entered into by and among AAR Corp. (the “ Company ”), the financial institutions party hereto (the “ Lenders ”), and LaSalle Bank National Association, as Administrative Agent (the “ Administrative Agent ”). Each capitalized term used herein and not otherwise defined herein shall have the meaning given to it in the below-defined Credit Agreement.

WITNESSETH

WHEREAS, the Company, certain Lenders and the Administrative Agent are parties to that certain Credit Agreement dated as of August 31, 2006 (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”); and

WHEREAS, the Company wishes to amend the Credit Agreement in certain respects and the Required Lenders and the Administrative Agent are willing to amend the Credit Agreement on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Administrative Agent and the Required Lenders hereby agree as follows:

SECTION 1. Amendment to Credit Agreement . Effective as of the date first above written, and subject to the satisfaction of the conditions to effectiveness set forth in Section 2 below, the Credit Agreement shall be and hereby is amended as follows:

(a) The definition of “ EBITDA ” in Section 1.1 of the Credit Agreement is hereby amended by adding the following sentence at the end thereof:

“EBITDA shall be calculated on a pro forma basis to give effect to any Acquisition consummated at any time on or after the first day of a Computation Period as if such Acquisition had been consummated on the first day of such Computation Period.”

(b) Section 1.1 of the Credit Agreement is hereby amended to insert the following definitions in the appropriate alphabetical order:

“ Avborne Acquisition means the acquisition of the stock of Avborne Heavy Maintenance, Inc. and Aviation Maintenance Staffing, Inc. pursuant to and as contemplated by the Avborne Acquisition Documents.”

“ Avborne Acquisition Documents means the Stock Purchase Agreement dated February 5, 2008 by and among AAR Aircraft Services, Inc., AHM Holding Corp. and certain other parties and all schedules, exhibits, annexes and amendments thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith.”

“ Avborne IRB Documents ” means (i) that certain Reimbursement Agreement dated as of October 3, 2005 between Avborne Heavy Maintenance, Inc., a Florida corporation (formerly known as Professional Modification Services, Inc.) and iStar Financial, Inc., a Maryland corporation, as modified by that certain Assignment and Assumption of Lender’s Interest in Reimbursement Agreement and Amendment to Reimbursement Agreement dated as of March 5, 2008 with iStar Financial Inc., a Maryland corporation (as Assignor), and JPMorgan Chase Bank, N.A., a national banking association (as Assignee); (ii) that certain Loan Agreement dated as of August 1, 1998, between the Miami-Dade Industrial Development Authority, a public body corporate and politic created and existing under the laws of the State of Florida (particularly Chapter 159, Part III, Florida Statutes), and Avborne Heavy Maintenance, Inc., a Florida corporation (formerly known as Professional Modification Services, Inc.), as amended by that certain First Amendment and Supplement to Loan Agreement, dated as of May 1, 2000 and (iii) that certain Guaranty of Payment and Performance dated as of March 5, 2008 by AAR Corp. to and for the benefit of JPMorgan Chase Bank, N.A., a national banking association (as Lender).

“ Supplemental LIBOR Premium ” means with respect to interest which is calculated based on the LIBOR Rate and accrues between March , 2008 and February 28, 2010, a rate per annum equal to 0.125% per annum.”

“ Summa Acquisition means the acquisition of Summa Technology, Inc. pursuant to and as contemplated by the Summa Acquisition Documents.”

“ Summa Acquisition Documents means the Agreement and Plan of Merger dated November 8, 2007 by and among the Company, AAR Manufacturing, Inc., Kingfisher Acquisition Subsidiary, Inc., Summit Technology, Inc. and certain other parties and all schedules, exhibits, annexes and amendments thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith.”

(c) Section 1.1 of the Credit Agreement is hereby further amended to insert the following in the definition of “Fixed Charge Coverage Ratio” immediately after the reference to “$20,000,000”:

“and (D) required principal payments under the Company’s notes due May 15, 2011, the aggregate initial principal amount of which is $55,000,000”.

(d) Section 4.1(b) of the Credit Agreement is hereby amended to insert the following immediately after the phrase “plus the LIBOR Margin from time to time in effect”:

“plus, to the extent interest is calculated based on Level I status, the Supplemental LIBOR Premium”.

(e) Section 11.1(h) of the Credit Agreement is hereby amended by adding the following at the end thereof:

“and the Acquired Debt assumed in connection with the Avborne Acquisition”.

(f) Section 11.1(j) of the Credit Agreement is hereby amended by adding the following at the end thereof:

“and the Debt evidenced by the Avborne IRB Documents”.

(g) Section 11.2(g) of the Credit Agreement is hereby amended by adding the following at the end of the thereof:

“and the Liens evidenced by the Avborne IRB Documents”.

(h) Section 11.6(c) of the Credit Agreement is hereby amended to insert the following after the phrase “made by the Company and its Restricted Subsidiaries during the preceding twelve months”:

“(excluding the aggregate consideration paid by the Company pursuant to the Brown International Acquisition Documents, the Reebaire Aircraft Acquisition Documents, the Avborne Acquisition Documents and the Summa Acquisition Documents)”

(i) Section 11.13.3 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“11.13.3 Adjusted Total Debt to EBITDA Ratio . Not permit the Adjusted Total Debt to EBITDA Ratio as of the last day of any Computation Period to exceed the applicable ratio set forth below for such Computation Period:

Computation Period Ending		Adjusted Total Debt to EBITDA Ratio
February 29, 2008 and May 31, 2008		4.10 to 1.00

August 31, 2008 and November 30, 2008		4.00 to 1.00

February 28, 2009, May 31, 2009, August 31, 2009, November 30, 2009 and February 28, 2010		3.85 to 1.00

May 31, 2010 and August 31, 2010		3.50 to 1.00

November 30, 2010 and thereafter		3.25 to 1.00”

(j) Avborne Heavy Maintenance, Inc., a Florida corporation, is and hereafter shall be deemed a Restricted Subsidiary for all purposes under the Credit Agreement.

SECTION 2. Condition of Effectiveness . This Amendment shall become effective and be deemed effective as of the date hereof, subject to the satisfaction of the conditions precedent that the Administrative Agent shall have received each of the following:

(a) counterparts of this Amendment, executed by each of the parties hereto;

(b) such other documents as the Administrative Agent may reasonably request, including such documents, instruments and other agreements, all in form and substance reasonably satisfactory to the Administrative Agent.

SECTION 3. Representations and Warranties of the Company . The Company hereby represents and warrants as follows:

(a) The Credit Agreement, as amended by this Amendment constitutes the legal, valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.

(b) Upon the effectiveness of this Amendment, the Company hereby (i) represents that no Event of Default or Unmatured Event of Default exists under the terms of the Credit Agreement, (ii) reaffirms all covenants, representations and warranties made in the Credit Agreement, and (iii) agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power, or remedy of the Lenders or the Administrative Agent under the Credit Agreement or any related document, instrument or agreement. The Administrative Agent and the Lenders expressly reserve all of their rights and remedies, including the right to institute enforcement actions in consequence of any existing Events of Default or Unmatured Events of Default not waived hereunder or otherwise at any time without

further notice, under the Credit Agreement, all other documents, instruments and agreements executed in connection therewith, and applicable law.

SECTION 4. Effect on the Credit Agreement .

(a) Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Credit Agreement, as amended and modified hereby.

(b) Except as specifically amended and modified above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect, and are hereby ratified and confirmed.

(c) The execution, delivery and effectiveness of this Amendment shall neither, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lenders or the Administrative Agent, nor constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith.

SECTION 5. Costs and Expenses . The Company agrees to pay on demand all reasonable costs, fees and out-of-pocket expenses (including attorneys’ fees, costs and expenses charged to the Administrative Agent) incurred by the Administrative Agent and the Lenders in connection with the preparation, arrangement, execution and enforcement of this Amendment.

SECTION 6. Amendment Fee . The Company hereby agrees to pay, on the date hereof, to the Administrative Agent for the ratable account of the Lenders, an amendment fee in the aggregate amount of $100,000.

SECTION 7. Governing Law . This Amendment shall be governed by and construed in accordance with the internal laws of the State of Illinois without regard to conflicts of law provisions of the State of Illinois.

SECTION 8. Headings . Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

SECTION 9. Counterparts . This Amendment may be executed by one or more of the parties to the Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A facsimile copy of a signature hereto shall have the same effect as the original thereof.

SECTION 10. No Strict Construction . The parties hereto have participated jointly in the negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Amendment.

[Remainder of page intentionally blank.]

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written.

	AAR CORP.

	By:	/s/ Michael K. Carr
	Name:	Michael K. Carr
	Title:	Vice President & Assistant Treasurer

	LASALLE BANK NATIONAL ASSOCIATION ,
	as Administrative Agent, Issuing Lender and as a Lender


	By:	/s/ Scott M. Carbon
	Name:	Scott M. Carbon
	Title:	First Vice President

	WELLS FARGO BANK, N.A., as a Lender


	By:	/s/ Andrew T. Cavallari
	Name:	Andrew T. Cavallari
	Title:	Vice President

	NATIONAL CITY BANK, as a Lender


	By:	/s/ Brandon S. Norder
	Name:	Brandon S. Norder
	Title:	Officer

	RBS CITIZENS, N.A. (formerly known as CHARTER
	ONE BANK, N.A.), as a Lender


	By:	/s/ Kathleen D. Schurr
	Name:	Kathleen D. Schurr
	Title:	Vice President

	U.S. BANK, NATIONAL ASSOCIATION, as Syndication Agent and as a Lender


	By:	/s/ John Zimmerman
	Name:	John Zimmerman
	Title:	Assistant Vice President

	MERRILL LYNCH CAPITAL CORPORATION, as a
	Lender


	By:	/s/ John C. Rowland
	Name:	John C. Rowland
	Title:	Vice President

	ASSOCIATED BANK, N.A., as a Lender


	By:	/s/ Daniel Holzhauer
	Name:	Daniel Holzhauer
	Title:	Vice President

Exhibit 10.1

SIXTH AMENDMENT TO THE

AAR CORP. STOCK BENEFIT PLAN

WHEREAS, AAR CORP. (the “Company”), maintains the AAR CORP. Stock Benefit Plan, amended and restated effective October 1, 2001 and further amended from time to time (the “Plan”); and

WHEREAS, the Company has reserved the right to amend the Plan and now deems it appropriate to do so.

NOW, THEREFORE, the Company hereby amends Section 3.2 of the Plan as follows, effective as of January 27, 2007:

“3.2 The Committee shall have plenary authority with respect to Key Employees, subject to the provisions of the Plan, to determine when and to whom Awards shall be granted, the Term of each Award, the number of Shares covered by it, the effect of participation by the Grantee in other plans, and any other terms and conditions of each such Award. The number of Shares, the Term and other terms and conditions of a particular kind of Award need not be the same even as to Awards made at the same time. The Committee’s actions in making Awards and fixing their size, Term, and other terms and conditions shall be conclusive on all persons.”

IN WITNESS WHEREOF, this Sixth Amendment has been executed as of the 18 ^th day of October, 2007.

	AAR CORP.



	By:	/s/ Timothy O. Skelly

Exhibit 10.2

SECOND AMENDMENT TO

AAR CORP. SUPPLEMENTAL KEY EMPLOYEE RETIREMENT PLAN

(As Amended and Restated Effective January 1, 2005)

WHEREAS, AAR CORP., a Delaware corporation (the “Company”), maintains the AAR CORP. Supplemental Key Employee Retirement Plan, as amended and restated effective January 1, 2005 (the “Plan”); and

WHEREAS, pursuant to Section 7.1, the Company has reserved the right to amend the Plan and now deems it appropriate to do so.

NOW, THEREFORE, the Plan is hereby amended, effective as of October 17, 2007, as follows:

1. By amending Section 1.11 to read as follows:

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

2. By amending the Vesting provision in the Appendix to the Plan to read as follows:

With respect to Additional Supplemental Company Contributions made prior to October 17, 2007:

“ Vesting

An applicable Participant shall fully vest in the balance of his Additional Supplemental Company Account upon the earlier of (i) the date the Participant attains age 65 or (ii) the date the Participant attains age 57 with 15 years of Vested Service (as defined in the Qualified Profit Sharing Plan).

With respect to Additional Supplemental Company Contributions made after October 17, 2007:

“ Vesting

An applicable Participant shall fully vest in the balance of his Additional Supplemental Company Account upon the earlier of (i) the date the Participant attains age 65 or (ii) the date Participant attains age 55 and the Participant’s age (measured in full years) plus Years of Vested Service (as defined in the Qualified Profit Sharing Plan) equal 75.”

IN WITNESS WHEREOF, the Company has caused this Second Amendment to be executed on its behalf, by its officers, duly authorized, on this 18 ^th day of October 2007.

	AAR CORP.


	By:	/s/ Timothy O. Skelly
		Timothy O. Skelly, Vice President

Exhibit 31.1

SECTION 302

CERTIFICATION

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

1. I have reviewed this quarterly report on Form 10-Q of AAR CORP. for the quarterly period ending February 29, 2008;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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: April 4, 2008

	/s/ DAVID P. STORCH
	David P. Storch
	Chairman and Chief Executive Officer

Exhibit 31.2

SECTION 302

CERTIFICATION

I, Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer of AAR CORP. (the “Registrant”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of AAR CORP. for the quarterly period ending February 29, 2008;

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: April 4, 2008

	/s/ RICHARD J. POULTON
	Richard J. Poulton
	Vice President, Chief Financial Officer and Treasurer

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”) quarterly report on Form 10-Q for the period ending February 29, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Storch, Chairman and 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: April 4, 2008

	/s/ DAVID P. STORCH
	David P. Storch
	Chairman and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the “Company”) quarterly report on Form 10-Q for the period ending February 29, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer 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: April 4, 2008

	/s/ RICHARD J. POULTON
	Richard J. Poulton
	Vice President, Chief Financial Officer and Treasurer