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 August 31, 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 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 August 31, 2008, there were 38,745,322 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

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AAR CORP. and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended August 31, 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	8-17
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	25

Part II – OTHER INFORMATION
	Item 1A.	Risk Factors	26
	Item 6.	Exhibits	26

	Signature Page		27
	Exhibit Index		28

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of August 31, 2008 and May 31, 2008

(In thousands)

	August 31,		May 31,
	2008		2008
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	75,988	$	109,391
Accounts receivable, less allowances of $5,802 and $5,977, respectively	202,207		202,472
Inventories	303,212		296,610
Equipment on or available for short-term lease	140,211		138,998
Deposits, prepaids and other	23,789		17,657
Deferred tax assets	18,303		18,303
Total current assets	763,710		783,431

Property, plant and equipment, net of accumulated depreciation of $169,603 and $166,070, respectively	148,844		146,435

Other assets:
Goodwill and other intangible assets, net	129,070		129,719
Equipment on long-term lease	166,947		163,958
Investment in joint ventures	43,731		42,734
Other	98,460		95,733
	438,208		432,144
	$	1,350,762	$	1,362,010

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of August 31, 2008 and May 31, 2008

(In thousands)

	August 31,			May 31,
	2008			2008
	(Unaudited)
Liabilities and stockholders’ equity:
Current liabilities:
Short-term debt	$	1,362		$	1,036
Current maturities of long-term debt	200			200
Current maturities of non-recourse long-term debt	19,893			20,212
Current maturities of long-term capital lease obligations	1,566			1,546
Accounts payable	93,171			99,073
Accrued liabilities	87,235			96,432
Total current liabilities	203,427			218,499

Long-term debt, less current maturities	466,258			478,308
Non-recourse debt	18,594			19,190
Capital lease obligations	9,941			10,420
Deferred tax liabilities	28,625			28,011
Other liabilities and deferred income	20,974			22,327
	544,392			558,256

Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued	—			—
Common stock, $1.00 par value, authorized 100,000 shares; issued 43,963 and 43,932 shares, respectively	43,963			43,932
Capital surplus	325,743			324,074
Retained earnings	349,596			331,196
Treasury stock, 5,218 and 5,159 shares at cost, respectively	(101,745		)	(100,935		)
Accumulated other comprehensive loss	(14,614		)	(13,012		)
	602,943			585,255
	$	1,350,762		$	1,362,010

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months Ended August 31, 2008 and 2007

(Unaudited)

(In thousands, except per share data)

	Three Months Ended
	August 31,
	2008			2007
Sales:
Sales from products	$	295,318		$	250,212
Sales from services	56,822			46,070
Sales from leasing	7,764			9,678
	359,904			305,960

Cost and operating expenses:
Cost of products	240,244			204,888
Cost of services	48,566			38,605
Cost of leasing	3,956			5,927
Selling, general and administrative and other	36,798			30,662
	329,564			280,082

Earnings from joint ventures	1,448			1,020

Operating income	31,788			26,898

Gain on extinguishment of debt	1,110			—

Interest expense	(4,673		)	(4,338		)
Interest income	366			583

Income from continuing operations before provision for income taxes	28,591			23,143

Provision for income taxes	9,860			7,888

Income from continuing operations	18,731			15,255

Discontinued operations:
Operating loss, net of tax	(331		)	(102		)
Net income	$	18,400		$	15,153

Earnings per share – basic:
Earnings from continuing operations	$	0.49		$	0.41
Loss from discontinued operations	(0.01		)	—
Earnings per share – basic	$	0.48		$	0.41

Earnings per share – diluted:
Earnings from continuing operations	$	0.45		$	0.36
Loss from discontinued operations	(0.01		)	—
Earnings per share – diluted	$	0.44		$	0.36

Weighted average common shares outstanding – basic	38,074			36,836
Weighted average common shares outstanding – diluted	42,849			43,789

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended August 31, 2008 and 2007

(Unaudited)

(In thousands)

	Three Months Ended
	August 31,
	2008			2007
Cash flows from operating activities:
Net income	$	18,400		$	15,153
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization	11,001			9,606
Deferred tax provision–continuing operations	956			351
Tax benefits from exercise of stock options	(55		)	(1,909		)
Gain on extinguishment of debt	(1,110		)	—
Earnings from joint ventures	(1,448		)	(1,020		)
Changes in certain assets and liabilities:
Accounts and trade notes receivable	566			13,703
Inventories	(5,623		)	6,393
Equipment on or available for short-term lease	(1,971		)	(5,820		)
Equipment on long-term lease	(6,030		)	(5,502		)
Accounts payable	(5,593		)	(15,343		)
Accrued liabilities and taxes on income	(8,999		)	(2,443		)
Other liabilities	(1,443		)	(5,475		)
Other, deposits and program costs	(9,150		)	(5,634		)
Net cash provided from (used in) operating activities	(10,499		)	2,060
Cash flows from investing activities:
Property, plant and equipment expenditures	(8,734		)	(6,881		)
Proceeds from disposal of assets	16			—
Investment in aircraft joint ventures	(76		)	(22,130		)
Investment in leveraged leases	99			718
Investment in available for sale securities	—			(10,931		)
Other	(829		)	(816		)
Net cash used in investing activities	(9,524		)	(40,040		)
Cash flows from financing activities:
Proceeds from borrowings	405			1,881
Reduction in borrowings	(12,965		)	(770		)
Proceeds from capital lease obligations	—			12,880
Reduction in capital lease obligations	(459		)	—
Financing costs	(10		)	(500		)
Purchase of treasury stock	—			(5,907		)
Stock option exercises	141			3,090
Tax benefits from exercise of stock options	55			1,909
Net cash provided from (used in) financing activities	(12,833		)	12,583
Effect of exchange rate changes on cash	(547		)	101
Decrease in cash and cash equivalents	(33,403		)	(25,296		)
Cash and cash equivalents, beginning of period	109,391			83,317
Cash and cash equivalents, end of period	$	75,988		$	58,021

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the Three Months Ended August 31, 2008 and 2007

(Unaudited)

(In thousands)

	Three Months Ended
	August 31,
	2008			2007
Net income	$	18,400		$	15,153

Other comprehensive income (loss) -
Cumulative translation adjustments	(1,315		)	716
Unrealized gain (loss) on investment.	(287		)	305
Total comprehensive income	$	16,798		$	16,174

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars 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, 2008 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 August 31, 2008, and the condensed consolidated statements of operations, cash flows and comprehensive income for the three-month periods ended August 31, 2008 and 2007. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 – 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.

During the three-month periods ended August 31, 2008 and 2007, we granted stock options representing 184,750 shares and 88,000 shares, respectively, to a group of key leadership track employees.

Effective June 1, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.”

The weighted average fair value of stock options granted during the three-month periods ended August 31, 2008 and 2007 was $8.27 and $13.46, respectively. The fair value of each stock option grant

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended
	August 31,
	2008		2007
Risk-free interest rate	3.3	%	4.9	%
Expected volatility of common stock	38.9	%	43.1	%
Dividend yield	0.0	%	0.0	%
Expected option term in years	6.0		4.0

The following table summarizes stock option activity for the three-month period ended August 31, 2008:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Options		Price		Life (years)	Value
	(in thousands)					(in thousands)
Outstanding at May 31, 2008	1,425		$	21.53
Granted	185		$	19.26
Exercised	(19	)	$	7.71
Cancelled	(9	)	$	24.74
Outstanding at August 31, 2008	1,582		$	21.29	5.4	$	1,890
Exercisable at August 31, 2008	1,287		$	20.40	4.6	$	1,890

The total fair value of stock options that vested during the three-month periods ended August 31, 2008 and 2007 was $434 and $231, respectively. The total intrinsic value of stock options exercised during the three-month periods ended August 31, 2008 and 2007 was $158 and $4,702, respectively. The tax benefit realized from stock options exercised during the three-month periods ended August 31, 2008 and 2007 was $55 and $1,909. As of August 31, 2008, we had $3,007 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 three-month periods ended August 31, 2008 and 2007 was $1,310 and $1,348, respectively.

Restricted share activity during the three-month period ended August 31, 2008 is as follows:

			Weighted Average
	Number of		Fair Value
	Shares		on Grant Date
	(in thousands)
Nonvested at May 31, 2008	940		$	24.44
Granted	23		$	14.03
Vested	(267	)	$	15.98
Forfeited	(9	)	$	33.37
Nonvested at August 31, 2008	687		$	27.31

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

During the three-month period ended August 31, 2008, we granted a total of 22,500 restricted shares to members of the Board of Directors. As of August 31, 2008 we had $10,663 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.7 years.

Note 3 – 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. 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.

Note 4 – Inventory

The summary of inventories is as follows:

	August 31,		May 31,
	2008		2008
Raw materials and parts	$	64,825	$	55,183
Work-in-process	46,370		47,576
Purchased aircraft, parts, engines and components held for sale	192,017		193,851
	$	303,212	$	296,610

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

Note 5 – Supplemental Cash Flow Information

	Three Months Ended
	August 31,
	2008		2007
Interest paid	$	4,394	$	6,630
Income taxes paid	9,771		347
Income tax refunds received	418		25

Note 6 – Financing Arrangements

During the first quarter of fiscal 2009, we retired $12,000 of our 1.75% convertible notes due February 1, 2026 for $10,633. The net gain from this transaction was $1,110, including pro-rata write-off of associated debt issuance costs, and is recorded in gain from extinguishment of debt on the condensed consolidated statements of operations.

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 (together, the “Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as 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 also 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 rank equal in right of payment with all of our existing and future unsecured and unsubordinated expenses. Costs associated with this transaction of approximately $6,028 are being amortized using the effective interest method over a six- and eight-year period.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

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 $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 7,028,000 shares of our common stock at an exercise price of $48.83 per share. We received $40,114 from the sale of these warrants. 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 $214,410 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.

Note 7 – 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 issued in fiscal 2006 because the principal for that issuance can be settled in stock, cash or a combination thereof. 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.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars 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-month periods ended August 31, 2008 and 2007.

	Three Months Ended
	August 31,
	2008			2007
Income from continuing operations	$	18,731		$	15,255
Loss from discontinued operations, net of tax	(331		)	(102		)
Net income	$	18,400		$	15,153

Basic shares:
Weighted average common shares outstanding	38,074			36,836

Earnings per share – basic:
Earnings from continuing operations	$	0.49		$	0.41
Loss from discontinued operations	(0.01		)	—
Earnings per share – basic	$	0.48		$	0.41

Net income	$	18,400		$	15,153
Add: After-tax interest on convertible debt	383			491
Net income for diluted EPS calculation	$	18,783		$	15,644

Diluted shares:
Weighted average common shares outstanding	38,074			36,836
Additional shares from the assumed exercise of stock options	77			510
Additional shares from the assumed vesting of restricted stock	9			466
Additional shares from the assumed conversion of convertible debt	4,689			5,977
Weighted average common shares outstanding – diluted	42,849			43,789

Earnings per share – diluted:
Earnings from continuing operations	$	0.45		$	0.36
Loss from discontinued operations	(0.01		)	—
Earnings per share – diluted	$	0.44		$	0.36

At August 31, 2008 and 2007, respectively, stock options to purchase 1,216,000 and 88,000 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the exercise price of these options was greater than the average market price of the common shares during the interim periods then ended.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

Note 8 – 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. 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 May 31, 2008. Under the terms of servicing agreements 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 three-month periods ended August 31, 2008 and 2007 we were paid $0 and $196, 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 consolidated statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution.

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

	Three Months Ended
	August 31,
	2008		2007
Statement of operations information:
Sales	$	13,212	$	9,861
Income before provision for income taxes	3,286		2,331

	August 31,		May 31,
	2008		2008
Balance sheet information:
Assets	$	315,033	$	320,093
Debt	226,502		233,662
Members’ capital	82,026		80,299

Note 9 – Discontinued Operations

During the third quarter of fiscal 2007, we decided to exit our non-core industrial turbine business based in Frankfort, New York. Net assets of the business were approximately $3,500 at August 31, 2008 and consisted of $1,300 of accounts receivable, $700 of inventory, $1,700 of net property, plant and equipment and $200 of accounts payable.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

Revenues and pre-tax operating loss for the three-month periods ended August 31, 2008 and 2007 for discontinued operations are summarized as follows:

	Three Months Ended
	August 31,
	2008			2007
Revenues	$	386		$	1,525
Pre-tax operating loss	(508		)	(157		)

Note 10 – Acquisitions

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 located in Huntsville, Alabama. Summa operates as part of our Structures and Systems segment. The purchase price was approximately $71,000 and was paid in cash.

On March 5, 2008, we acquired Avborne Heavy Maintenance, Inc. (“Avborne”) and a related entity located in Miami, Florida. 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. 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 operates as part of our Maintenance, Repair and Overhaul segment.

We have made a preliminary purchase price allocation for the Summa and Avborne acquisitions and are in the process of obtaining final valuations for the acquired net assets.

The following unaudited pro forma information is provided for acquisitions assuming the Summa and Avborne acquisitions occurred as of the beginning of fiscal year 2008:

	Three Months Ended
	August 31, 2007

Net sales	$	343,278
Operating income	29,150
Net income	15,685
Earnings per share:
Basic	$	0.43
Diluted	$	0.37

Note 11 – 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.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

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.

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

	August 31,		May 31,		August 31,		November 30,
	2008		2008		2007		2001
Net impaired inventory and engines	$	22,200	$	22,900	$	26,300	$	89,600

Proceeds from sales of impaired inventory and engines for the three-month periods ended August 31, 2008 and 2007 were $600 and $900, respectively.

Note 12 – 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 parts and components. 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 and insurance).

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, 2008. 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.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

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

	Three Months Ended
	August 31,
	2008		2007
Sales:
Aviation Supply Chain	$	153,514	$	142,708
Maintenance, Repair and Overhaul	86,310		62,647
Structures and Systems	116,769		76,498
Aircraft Sales and Leasing	3,311		24,107
	$	359,904	$	305,960

	Three Months Ended
	August 31,
	2008		2007
Gross profit:
Aviation Supply Chain	$	35,397	$	31,964
Maintenance, Repair and Overhaul	12,753		8,040
Structures and Systems	17,454		9,121
Aircraft Sales and Leasing	1,534		7,415
	$	67,138	$	56,540

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AAR CORP. and Subsidiaries
August 31, 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-month periods ended August 31, 2008 and 2007.

	Three Months Ended
	August 31,
	2008		2007
Sales:
Aviation Supply Chain	$	153,514	$	142,708
Maintenance, Repair and Overhaul	86,310		62,647
Structures and Systems	116,769		76,498
Aircraft Sales and Leasing	3,311		24,107
	$	359,904	$	305,960

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AAR CORP. and Subsidiaries

August 31, 2008

Since the early part of calendar year 2008, most U.S. air carriers have announced a new wave of cost reduction initiatives, including staffing reductions, route consolidations and capacity reductions. We believe the announced capacity reductions impact 10-15% of the U.S. fleet and principally impact older-generation narrow-body and certain regional aircraft. The announced fleet reductions are in response to high oil prices and softening economic conditions, and are expected to be mostly implemented beginning in the fall of 2008. In addition, certain air carriers in the U.S. and abroad have filed for bankruptcy protection, and some have ceased operations. A reduction in the global operating fleet of passenger aircraft will result in reduced demand for parts support and maintenance activities for the type of aircraft affected.

Recent severe disruptions in the financial markets, together with continued tightening in the credit markets, may affect our customers’ ability to raise debt or equity capital. This may reduce the amount of liquidity available to our customers which, in turn, may limit their ability to buy parts, services and aircraft. There is also uncertainty over the direction of the U.S. and global economies as a result of slower growth rates, higher unemployment and weak housing markets. 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 many 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.

During the first quarter of fiscal 2009, sales to defense customers increased 32.2% and represented 40% of consolidated sales. We continue to see opportunities to provide performance-based logistics services and manufactured products supporting our defense customers’ requirements. 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 August 31, 2008

Consolidated sales for the first quarter ended August 31, 2008 increased $53,944 or 17.6% over the prior year period. Sales to commercial customers increased 9.7% compared to the prior year reflecting the favorable impact of the Avborne acquisition, increased demand for airframe maintenance and landing gear overhaul and strength in supply chain programs. Sales to defense customers increased 32.2% reflecting the favorable impact of the Summa acquisition and continued strong demand for performance-based logistics programs and specialized mobility products.

In the Aviation Supply Chain segment, sales increased $10,806 or 7.6% reflecting continued 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 $3,433 or 10.7% primarily due to the increased sales volume and the gross profit margin percentage increased to 23.1% from 22.4% in the prior year due to the favorable mix of inventories sold.

In the Maintenance, Repair and Overhaul segment, sales increased $23,663 or 37.8% over the prior year. The increase in sales is attributable to the inclusion of revenue from Avborne, which was acquired in March 2008 and contributed approximately $13,000 of revenue during the first quarter of fiscal 2009, as well as increased revenues at our landing gear overhaul business and airframe maintenance

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AAR CORP. and Subsidiaries

August 31, 2008

centers. Gross profit in the Maintenance, Repair and Overhaul segment increased $4,713 or 58.6%, and the gross profit margin percentage increased to 14.8% from 12.8% in the prior year due to increased volume and operational improvement initiatives.

In the Structures and Systems segment, sales increased $40,271 or 52.6% over the prior year. The increase in sales is attributable to the inclusion of revenue from Summa, which was acquired in December 2007 and contributed approximately $28,000 of revenue during the first quarter of fiscal 2009, as well as continued strong demand for specialized mobility products. Gross profit in the Structures and Systems segment increased $8,333 or 91.4%, and the gross profit percentage increased to 14.9% from 11.9% in the prior year due to increased volume and increased shipments of higher margin products in our mobility systems business.

In the Aircraft Sales and Leasing segment, sales decreased $20,796 or 86.3% compared with the prior year. During the first quarter of this fiscal year, we did not sell any aircraft from our wholly-owned aircraft portfolio whereas during the first quarter of the prior year, we sold two aircraft from our wholly-owned portfolio. Gross profit in the Aircraft Sales and Leasing segment decreased $5,881 or 79.3% from the prior year as a result of the reduction in aircraft sales. Our recent strategy in the Aircraft Sales and Leasing segment has been to invest in aircraft through participation in joint ventures and for our own account. At August 31, 2008, the total number of aircraft held in joint ventures was 29 (see Note 8 of Notes to Condensed Consolidated Financial Statements). Earnings from joint ventures increased $428 compared to the prior year. 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.

Operating income increased $4,890 or 18.2% 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 $6,136 reflecting the impact of acquisitions and increased spending to support growth as well as investments in operational improvement initiatives. Selling, general and administrative expenses also increased $1,414 due to an increase in the allowance for doubtful accounts and severance expense recognized during the quarter. Net interest expense increased $552 or 14.7% over the prior year principally due to interest on our convertible notes issued in February 2008. Our effective income tax rate increased slightly to 34.5% compared to 34.1% in the prior year.

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 9 of Notes to Condensed Consolidated Financial Statements).

Income from continuing operations was $18,731 for the first quarter of fiscal 2009 compared to $15,255 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. 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 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 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

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AAR CORP. and Subsidiaries

August 31, 2008

to market conditions, up to $163,675 of common stock, preferred stock or medium- or long-term debt securities may be issued or sold before December 1, 2008.

At August 31, 2008, our liquidity and capital resources included cash of $75,988 and working capital of $560,283. Our revolving credit agreement, as amended (the “Credit Agreement”) with various financial institutions, as lenders, and LaSalle Bank National Association, as administrative agent for the lenders, provides us with unsecured revolving borrowing capacity of up to $250,000. 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 term of our Credit Agreement extends to August 31, 2011. Borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”) plus 100 to 237.5 basis points based on certain financial measurements. There were no borrowings outstanding under this facility at August 31, 2008, however, there were approximately $11,500 of outstanding letters of credit which reduced the availability of this facility. In addition to our domestic facility, we also have $1,946 available under a foreign line of credit.

During the three-month period ended August 31, 2008, our operating activities used $10,499 of cash principally reflecting an increase in inventories, equipment on short- and long-term lease and inventory deposits (reflected in “other”) to support our continued growth, as well as a reduction in accounts payable and accrued liabilities. Cash used in operating activities benefitted from net income and depreciation and amortization of $29,401.

During the three-month period ended August 31, 2008, our investing activities used $9,524 of cash principally as a result of capital expenditures of $8,734 which reflects capacity expansion and capability improvements in our Structures and Systems and Maintenance, Repair and Overhaul segments.

During the three-month period ended August 31, 2008, our financing activities used $12,833 of cash which reflects $12,965 of reduction in borrowings (see Note 6 to Condensed Consolidated Financial Statements).

Critical Accounting Policies and Significant Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the consolidated financial statements. The most significant estimates made by management include those related to the allowance for doubtful accounts, adjustments to reduce the value of inventories and aviation equipment on or available for lease, revenue recognition, loss accruals for aviation equipment operating leases, program development costs 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

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August 31, 2008

factors such as general and industry-specific economic conditions, customer credit history, and the customer’s current and expected future financial performance.

Inventories

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

Program Development Costs

In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new Airbus A400M Military Transport Aircraft (A400M). We are subcontractor to Pfalz Flugzeugwerke GmbH (PFW) on this Airbus

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August 31, 2008

program. Our portion of the revenue from this program is expected to exceed $300,000 through fiscal 2015, based on sales projections of the A400M. As of August 31, 2008, we have incurred approximately $48,000 of costs associated with the engineering and development of the cargo system and have capitalized these costs in accordance with SOP 81-1 “Accounting for Performance of Construction – Type and Certain Production – Type Contracts”. Sales and related cost of sales will be recognized on the units of delivery method. In determining the recoverability of the capitalized program development costs, we have utilized certain judgments and estimates concerning expected revenues and the cost to manufacture the A400M cargo system. Differences between actual results and the assumptions utilized by us may result in us not fully recovering the value of the program development costs, which would unfavorably impact our financial condition and results of operations.

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 rate of return on plan assets.

Our discount rate is determined based on a review of long-term, high quality corporate bonds as of May 31, 2008 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 plan assets may impact the amount of net periodic pension expense recognized in our consolidated statement of operations.

New Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157 (SFAS 157) “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 was 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 adopted the provisions of SFAS 157 effective June 1, 2008. The adoption did not have an impact on our results of operations and financial position.

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 for us as of June 1, 2009, 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 Financial Accounting Standards Board (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.

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August 31, 2008

In March 2008, the FASB issued SFAS No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and is effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 will have a material impact on our results of operations or financial condition.

In May 2008, the FASB issued Staff Position FSP APB 14-1 (FSP APB 14-1), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 requires companies that have issued convertible debt that may be settled wholly or partly in cash when converted, to account for the debt and equity components separately. The value assigned to the bond liability is the estimated value of a similar bond without the conversion feature as of the issuance date. The difference between the proceeds for the convertible debt and the amount reflected as a bond liability is recorded as additional paid-in-capital. Interest expense is recorded using the issuer’s comparable debt rate. FSP APB 14-1 will be effective for us beginning June 1, 2009 (fiscal 2010) and will require retrospective application. We continue to review the impact of FSP APB 14-1 on our financial statements, however, we are currently estimating, based on the outstanding convertible notes, the implementation of FSP APB 14-1 will result in a reduction of our convertible notes of approximately $95,000, an increase in capital surplus of approximately $62,000 and an increase in deferred taxes of approximately $33,000. In addition, we expect the implementation of FSP APB 14-1 will reduce our diluted earnings per share by $0.12 to $0.15 per share in fiscal 2010.

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 update 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.

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August 31, 2008

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, 2008.

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 August 31, 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 August 31, 2008.

There were no changes in our internal control over financial reporting during the first quarter ended August 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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, 2008.

Item 6 – Exhibits

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

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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:	September 23, 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)

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EXHIBIT INDEX

Exhibit No.	Description		Exhibits

10.	Material Contracts	10.1	Form of Directors’ and Officers’ Indemnification Agreement (filed herewith).

31.	Rule 13a-14(a)/15(d)-14(a) Certifications	31.1	Section 302 Certification dated September 23, 2008 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).

		31.2	Section 302 Certification dated September 23, 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 September 23, 2008 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).

		32.2	Section 906 Certification dated September 23, 2008 of Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer of Registrant (filed herewith).

Exhibit 10.1

INDEMNIFICATION AGREEMENT

(See Article 15 of AAR CORP. Certificate of Incorporation)

THIS AGREEMENT is made as of the «Date» day of«Month», «Year», by and between«Company»., a Delaware corporation (the “Corporation”), and «Name», who currently is serving the Corporation as «Title» (the “Indemnitee”).

WHEREAS, the Indemnitee is currently serving in the capacity or capacities described above;

WHEREAS, the Corporation wishes the Indemnitee to continue to serve in such capacity or capacities and the Indemnitee is willing, under certain circumstances, to continue in such capacity or capacities;

WHEREAS, certain interpretations of the law and “public policy” have created uncertainty about activities of corporate directors and officers and the risk of significant personal liability to the Indemnitee;

WHEREAS, damages sought and sometimes paid in many claims made against corporate directors and officers and the expenses required to defend such claims, whether or not the allegations are meritorious, do not bear a reasonable, logical relationship to the amount of compensation received by, and may be beyond the financial resources, of the Indemnitee;

WHEREAS, in addition to the indemnification to which the Indemnitee is entitled under the Delaware General Corporation Law and the Restated Certificate of Incorporation of the Corporation, the Corporation furnishes, at its expense, directors’ and officers’ liability insurance protecting the Indemnitee for certain liabilities which

might arise in connection with his service, but this insurance contains many restrictions and limitations;

WHEREAS, the Indemnitee has indicated that he does not regard the indemnification available under the Delaware General Corporation Law, the Restated Certificate of Incorporation of the Corporation, and the Corporation’s directors’ and officers’ liability insurance to be adequate protection against the risks associated with his service to or at the request of the Corporation;

WHEREAS, the Indemnitee and the Corporation have concluded that the exposure to risk of personal liability and payment of damages out of the Indemnitee’s personal assets may result in overly conservative direction and supervision of the Corporation’s affairs, which is detrimental to the best interests of the Corporation and its stockholders; and

WHEREAS, the Corporation has concluded that additional protection is necessary for its directors and executive officers.

NOW, THEREFORE, in consideration of the Indemnitee’s continued and future service to the Corporation, the parties agree as follows:

1. INDEMNIFICATION. The Corporation agrees to indemnify the Indemnitee to the full extent permitted by the Delaware General Corporation Law, as it exists now or as it may be amended in the future to provide additional indemnification for the Indemnitee.

2. ADDITIONAL INDEMNIFICATION AND PAYMENT OF EXPENSES. Without limiting the indemnification provided in Section 1 and subject to the limitations, terms and conditions of this Agreement, including, but not limited to, the limitations in Section 8, the Corporation agrees to:

(a) indemnify the Indemnitee against all judgments for both compensatory and punitive damages, fines, taxes, penalties and settlements incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, but not limited to, any action by or in the right of the Corporation), to which the Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that the Indemnitee is, was or at any time becomes a director, officer, employee, agent or fiduciary of the Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or with respect to any employee benefit plan (or its participants or beneficiaries) of the Corporation or any such other enterprise, or by reason of any action alledged to have been taken or omitted by the Indemnitee in any such capacity, and

(b) pay all costs, charges and other expenses, including, but not limited to, attorneys’ fees, costs of appearance, attachment and similar bonds (hereinafter referred to as “Expenses”) incurred in connection with the investigation and defense of any action, suit or proceeding described in Section 2(a).

3. MAINTENANCE OF D&O INSURANCE.

(a) The Corporation presently has the following policies of directors’ and officers’ liability insurance in force (the “D&O Policies”):

		Coverage
Insurer	Policy No.	Amounts

Illinois National Insurance	6649517	$10,000,000
		$10,000,000 excess
Twin City	00DA014831107	$20,000,000
		$10,000,000 excess
St. Paul	EC01201197	$30,000,000
		$10,000,000 excess
Zurich	DOC597871204	$40,000,000
		$10,000,000 excess
Illinois National Insurance	6959722	$50,000,000
Company		$10,000,000 excess

So long as the Indemnitee shall continue to serve in any capacity described in Section 2 and thereafter so long as there is any reasonable possibility that the Indemnitee shall be subject to any possible action, suit or proceeding by reason of the fact that the Indemnitee served in any of said other capacities, the Corporation will purchase and maintain in effect for the benefit of the Indemnitee one or more valid, binding and enforceable policies of directors’ and officers’ liability insurance providing coverage amounts of at least $25,000,000; provided, however, that such policy(ies) and coverage amounts may also include other coverages, including, but not limited to, professional liability, fiduciary, fidelity, and employment practice.

(b) Notwithstanding Section 3(a), the Corporation shall not be required to maintain directors’ and officers’ liability insurance in effect if (i) in the reasonable business judgment of the Board of Directors of the Corporation as it may exist from time to time such insurance is not reasonably available or if (ii) the premium cost for such insurance is substantially disproportionate to the amount of insurance or (iii) the coverage is so limited by exclusions that there is insufficient benefit provided by such insurance.

(c) If the Corporation, acting under Section 3(b), does not purchase and maintain in effect directors’ and officers’ liability insurance, the Corporation shall indemnify and hold harmless the Indemnitee to the full extent of the coverage which would otherwise have been provided by the D&O Policies.

4. DEFENSE OF CLAIM. With respect to any action, suit or proceeding described in Section 2, the Corporation may elect to assume the investigation and defense of such action, suit or proceeding with counsel it elects with the consent of the Indemnitee, which consent shall not be unreasonably withheld. After notice to the Indemnitee from the Corporation of its election to assume the investigation and defense, the Corporation shall not be liable to the Indemnitee under this Agreement for any Expenses subsequently incurred by the Indemnitee in connection with the investigation and defense other than for services requested by the Corporation or the counsel it selected. The Indemnitee shall have the right to employ his own counsel, but the Expenses incurred by the Indemnitee after notice from the Corporation of its assumption of the investigation and defense shall be at the expense of the Indemnitee. Notwithstanding the foregoing, however, the Indemnitee shall be entitled to separate counsel in any action, suit or proceeding brought by or on behalf of the Corporation or as to which counsel for the Indemnitee reasonably concludes that there is a conflict of interest between the Corporation and the Indemnitee, provided that the Corporation shall not be required to pay the expenses of more than one such separate counsel for persons it is indemnifying in any one action, suit or proceeding.

5. ADVANCE PAYMENT OF EXPENSES. The Indemnitee’s reasonable Expenses incurred in connection with any action, suit or proceeding described in

Section 2 shall be paid by the Corporation as they accrue, and, in any event, within thirty (30) days after the Corporation has received written request therefor from or on behalf of the Indemnitee. The Corporation shall continue to make such payments unless and until there has been a final adjudication by a court of competent jurisdiction establishing that the Indemnitee is not entitled to be indemnified for such Expenses under this Agreement.

6. INDEMNITEE’S REIMBURSEMENT. The Indemnitee agrees to reimburse the Corporation for all amounts paid by the Corporation pursuant to Sections 1, 2, 3(c), 4 and 5 of this Agreement in the event and to the extent, but only in the event and only to the extent, that there is a final adjudication by a court of competent jurisdiction establishing that the Indemnitee is not entitled to be so indemnified or to have such Expenses paid by the Corporation.

7. CONTRIBUTION. If the indemnification or payments of Expenses provided by this Agreement should be unavailable or insufficient to hold the Indemnitee harmless, then the Corporation agrees that, for purposes of this Section, the Corporation shall be treated as if it were a party to the threatened, pending or completed action, suit or proceeding in which the Indemnitee was involved and that the Corporation shall contribute to the amounts paid or payable by the Indemnitee as a result of Expenses, judgments for both compensatory and punitive damages, fines, penalties and amounts paid in settlement. The amount of contribution provided by this Section shall be determined by (i) the relative benefits accruing to the Corporation on the one hand and the Indemnitee on the other which arose out of the acts or omissions underlying the threatened, pending or completed action, suit or proceeding in which the

Indemnitee was involved, (ii) the relative fault of the Corporation on the one hand and the Indemnitee on the other in connection with such acts or omissions, and (iii) any other equitable considerations appropriate under the circumstances. For purposes of this Section, the relative benefits of the Corporation shall be deemed to be the benefits accruing to it and the relative benefit of the Indemnitee shall be deemed to be an amount not greater than the Indemnitee’s annual base salary or Indemnitee’s compensation from the Corporation plus any personal benefit received from such acts or omissions. The relative fault shall be determined by reference to, among other things, the fault of the Corporation and all of its directors, officers, employees and agents (other than the Indemnitee), as a group and treated as one entity, on the one hand, and the Indemnitee’s and such group’s relative intent, knowledge, access to information and opportunity to have altered or prevented the act or omission on the other hand.

8. LIMITATIONS ON INDEMNIFICATION, ADVANCEMENT AND CONTRIBUTION. Notwithstanding anything in the foregoing to the contrary, the Corporation shall not be liable under this Agreement to make any indemnity payment, advancement of Expenses or contribution in connection with any action, suit or proceeding:

(a) to the extent that payment is actually made, or for which payment is available, to or on behalf of the Indemnitee under an insurance policy, except in respect of any amount in excess of the limits of liability of such policy or any applicable deductible for such policy;

(b) to the extent that payment has or will be made to the Indemnitee by the Corporation otherwise than pursuant to this Agreement;

(c) to the extent that there was a final adjudication by a court of competent jurisdiction that the Indemnitee derived an improper personal benefit or otherwise breached his duty of loyalty to the Corporation or its stockholders; or

(d) to the extent that there was a final adjudication by a court of competent jurisdiction that the Indemnitee committed acts or omissions other than in good faith or which involved intentional misconduct or knowing violation of law.

9. ENFORCEMENT OF INDEMNITEE’S RIGHTS. The Indemnitee shall have the right to enforce this Agreement in any court of competent jurisdiction if the Corporation either fails to indemnify the Indemnitee pursuant to Section l, 2 or 3(c) or fails to advance Expenses pursuant to Section 5 within thirty (30) days of the receipt of written request to do so from or on behalf of the Indemnitee. Notwithstanding any determination to the contrary (or failure to make a determination by the Corporation) by the Corporation, its Board of Directors, independent counsel or stockholders, there shall be a rebuttable presumption that the Indemnitee has met the applicable standard of conduct under the Corporation’s Restated Certificate of Incorporation and otherwise is entitled to indemnification and advance payment of Expenses, and the burden of proof shall be on the Corporation in any such suit to demonstrate by the weight of the evidence that the Indemnitee is not so entitled. The Indemnitee’s Expenses incurred in successfully establishing his right to indemnification or advancement of Expenses, in whole or in part, in any such action (or settlement thereof) shall be paid by the Corporation.

10. CHANGE IN CONTROL. The Corporation agrees that if there is a Change in Control, as defined below, of the Corporation (other than a Change in Control which has been approved by a majority of the Corporation’s Board of Directors who were directors immediately prior to such Change in Control), then with respect to all matters thereafter arising concerning the rights of the Indemnitee to indemnity payments and payments of Expenses under this Aqreement, the Corporation shall seek legal advice only from special, independent counsel selected by the Indemnitee with the consent of the Corporation (which consent shall not be unreasonably withheld), and who has not otherwise performed services for the Corporation within the last five (5) years (other than in connection with such matters) or the Indemnitee. Such counsel, among other things, shall render a written opinion to the Corporation and the Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under this Agreement and applicable law. The Corporation agrees to pay the reasonable fees of the special, independent counsel and to indemnify such counsel fully against any and all expenses (including attorneys’ fees), claims, liabilities and damages arising out of or relating to this Agreement or counsel’s engagement pursuant hereto.

“Change in Control” for purposes of this Agreement shall be deemed to have occurred if (a) any “person” (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations hereunder), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership

of stock of the Corporation, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Corporation representing 20% or more of the total voting power represented by the Corporation’s then outstanding voting securities, except that a person who as of the date of this Agreement owns 20% or more of the total voting power represented by the Corporation’s outstanding voting securities shall not be deemed to have caused a Change in Control, or (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation and any new director whose election by the Board of Directors or nomination for election by the Corporation’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (c) the stockholders of the Corporation approve a merger, a plan of complete liquidation of the Corporation, an agreement for the sale or disposition by the Corporation of all or any substantial part of the Corporation’s assets, or other business combination of the Corporation with any other corporation, other than a business combination which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of the Corporation or such surviving entity outstanding immediately after such business combination.

11. SETTLEMENT. The Corporation shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any action, suit

or proceeding without its written consent, which consent shall not be unreasonably withheld. The Corporation shall not settle any action, suit or proceeding which would impose any penalty or limitation on the Indemnitee without the Indemnitee’s written consent, which consent shall not be unreasonably withheld. In the event that consent is not given and the parties hereto are unable to agree on a proposed settlement, independent legal counsel shall be retained by the Corporation, at its expense, with the consent of the Indemnitee, which consent shall not be unreasonably withheld, for the purpose of determining whether or not the proposed settlement is reasonable under all the circumstances, and if independent legal counsel determines the proposed settlement is reasonable, the settlement may be consummated without the consent of the other party.

12. CORPORATE SUBROGATION RIGHTS. In the event of any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee against any person or organization and the Indemnitee shall execute all papers required and shall do everything that may be reasonably necessary to secure such rights.

13. NON-EXCLUSIVE. Nothing in this Agreement shall diminish or otherwise restrict, and this Agreement shall not be deemed exclusive of, the Indemnitee’s rights to indemnification under any provision of the Delaware General Corporation Law or the Restated Certificate of Incorporation or By-laws of the Corporation or otherwise.

14. NOTICE TO THE CORPORATION. The Indemnitee will promptly notify the Corporation of any threatened, pending or completed action, suit or proceeding against the Indemnitee described in Section 2. The failure to notify or promptly notify

the Corporation shall not relieve the Corporation from any liability that it may have to the Indemnitee otherwise than under this Agreement, and shall relieve the Corporation from liability hereunder only to the extent the Corporation has been prejudiced.

15. NOTICES. Any notice that is required or permitted to be given under this Agreement shall be in writing and shall be personally delivered or deposited in the United States mail, certified or registered mail with proper postage prepaid and addressed:

if to the Corporation:

AAR CORP.

1100 N. Wood Dale Road

Wood Dale, Illinois 60191

Attention: Chairman of the Board

if to the Indemnitee:

«Name»

«Address1»

«Address2»

«City» , «State» «PostalCode»

or at such other address as a party may furnish to the other party by ten (10) days’ prior written notice.

16. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions.

17. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.

18. BINDING EFFECT. This Agreement shall be binding upon the Indemnitee and upon the Corporation, its successors and assigns, and shall inure to the benefit of the Indemnitee, his heirs, personal representatives and assigns and to the benefit of the Corporation, its successors and assigns, notwithstanding subsequent repeal or amendment of relevant provisions of the Delaware General Corporation Law or other applicable law or of the Restated Certificate of Incorporation of the Corporation.

19. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties.

20. CONSENT TO JURISDICTION. The Corporation and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware and the Corporation irrevocably consents to the jurisdiction of any court in which an Indemnitee brings action pursuant to Section 9 hereof, for all purposes in connection with any action or proceeding which arises out of or is related to this Agreement. The Corporation agrees not to initiate any such action or proceeding in any state other than Delaware.

IN WITNESS WHEREOF, the parties have executed this Agreement.

		AAR CORP.


		By
			Vice President


		«Name»
		Indemnitee


		Signature of the Indemnitee

Exhibit 31.1

SECTION 302

CERTIFICATION

I, David P. Storch, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AAR CORP. (the “Registrant”) for the quarterly period ending August 31, 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: September 23, 2008

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

Exhibit 31.2

SECTION 302

CERTIFICATION

I, Richard J. Poulton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AAR CORP. (the “Registrant”) for the quarterly period ending August 31, 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: September 23, 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 August 31, 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: September 23, 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 August 31, 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: September 23, 2008

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