10-K

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended May 31, 2002 Commission file number 1-6263

AAR CORP.
(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	36-2334820 (I.R.S. Employer Identification No.)
One AAR Place, 1100 N. Wood Dale Road, Wood Dale, Illinois (Address of Principal Executive Offices)	60191 (Zip Code)

Registrant's telephone number, including area code (630) 227-2000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $1.00 par value	New York Stock Exchange Chicago Stock Exchange
Common Stock Purchase Rights	New York Stock Exchange Chicago Stock Exchange

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

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

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

        At July 31, 2002, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $255,213,698 (based upon the closing price of the Common Stock at July 31, 2002 as reported on the New York Stock Exchange). The calculation of such market value has been made for the purposes of this report only and should not be considered as an admission or conclusion by the Registrant that any person is in fact an affiliate of the Registrant.

        On July 31, 2002, there were 31,866,062 shares of Common Stock outstanding.

Documents Incorporated by Reference

        Portions of the definitive proxy statement relating to the Registrant's 2002 Annual Meeting of Stockholders, to be held October 9, 2002, are incorporated by reference in Part III to the extent described therein.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business	2
	Item 2.	Properties	4
	Item 3.	Legal Proceedings	4
	Item 4.	Submission of Matters to a Vote of Security Holders	5
		Supplemental Item—Executive Officers of the Registrant	5
PART II
	Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	6
	Item 6.	Selected Financial Data	7
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	14
	Item 8.	Financial Statements and Supplementary Data	15
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
PART III
	Item 10.	Directors and Executive Officers of the Registrant	43
	Item 11.	Executive Compensation	43
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	43
	Item 13.	Certain Relationships and Related Transactions	43
PART IV
	Item 14.	Exhibits, Financial Statements, Schedules and Reports on Form 8-K	44
SIGNATURES			45

PART I

ITEM 1.    BUSINESS (Dollars in thousands)

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

        The Company reports its activities in four business segments: (i) Inventory and Logistic Services, (ii) Maintenance, Repair and Overhaul, (iii) Manufacturing and (iv) Aircraft and Engine Sales and Leasing.

        The Company's Inventory and Logistic Services segment activities include the purchase and sale of a wide variety of new, overhauled and repaired engine parts and components and airframe parts and components for the aviation aftermarket. The Company also provides customized inventory supply and management programs for engine and airframe parts and components in support of customer maintenance activities. The Company is also an authorized distributor for more than 150 leading aviation and aerospace product manufacturers. The Company acquires aviation products for the Inventory and Logistic Services segment from domestic and foreign airlines, independent aviation service companies, aircraft leasing companies and original equipment manufacturers.

        The Company's Maintenance, Repair and Overhaul segment activities include the overhaul, repair and exchange of a wide variety of airframe and engine parts and components for its commercial and military customers. Repair and overhaul capabilities include most commercial aircraft landing gear, a wide variety of avionics, instruments, electrical, electronic, fuel, hydraulic and pneumatic components and a broad range of internal airframe components. The Company also operates an aircraft maintenance facility providing airframe maintenance, modification, special equipment installation, painting services and aircraft terminal services for various models of commercial, military, regional, business and general aviation aircraft. AAR also operates an aircraft storage facility. The Company's repair and overhaul of parts and components also support inventory management activities within the Inventory and Logistic Services segment. The Company has 11 Federal Aviation Administration ("FAA") licensed repair stations in the United States and two in Europe to perform airframe and engine component overhaul services. AAR also provides turbine engine overhaul and parts supply services to industrial gas and steam turbine operators. On September 29, 2000 the Company purchased substantially all of the net assets of Hermetic Aircraft International ("Hermetic"), an aircraft component support company providing repair and distribution services to the North American aftermarket primarily on behalf of European aircraft component manufacturers.

        The Company's Manufacturing segment activities include the design, manufacture and installation of in-plane cargo loading and handling systems for commercial and military aircraft and helicopters. The Company also designs and manufactures advanced composite materials for commercial, business and military aircraft as well as advanced composite structures for the transportation industry. In addition, the Company manufactures and repairs a wide array of containers, pallets and shelters in support of military and humanitarian tactical deployment activities.

        The Company's Aircraft and Engine Sales and Leasing segment activities include the sale or lease of used commercial jet aircraft and the sale or lease of a wide variety of new, overhauled and repaired commercial jet engines.

        For each of its reportable segments, the Company furnishes aviation products and services primarily through its own employees. The principal customers for the Company's products and services in the Inventory and Logistic Services and Maintenance, Repair and Overhaul segments are domestic and foreign commercial airlines, regional and commuter airlines, business and general aviation operators, aviation original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies. In the Manufacturing segment, the Company's principal customers include domestic and foreign commercial airlines, aviation original equipment manufacturers and domestic and foreign military organizations. The principal customers in the Aircraft and Engine Sales and Leasing segment include domestic and foreign commercial airlines, aircraft and engine leasing companies and domestic military organizations. Sales of aviation products and services to commercial airlines are generally affected by such factors as the number, type and average age of aircraft in service, the levels of aircraft utilization (e.g.,

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

        Competition in the worldwide aviation/aerospace industry is based on quality, ability to provide a broad range of products and services, speed of delivery and price. Competitors in both the Inventory and Logistic Services and the Maintenance, Repair and Overhaul segments include original equipment manufacturers (including the service divisions of the original equipment manufacturers), commercial airlines (including the maintenance divisions of large commercial airlines), and other independent suppliers of parts and services. In certain activities of the Company's Aircraft and Engine Sales and Leasing segment, the Company faces competition from financial institutions, syndicators, commercial and specialized leasing companies and other entities that provide financing. AAR's pallet, container and shelter manufacturing activities in its Manufacturing segment compete with several modest-sized private companies, and its cargo systems competitors include a number of divisions of large corporations. Although certain of the Company's competitors have substantially greater financial and other resources than the Company, AAR believes that it has maintained a satisfactory competitive position through its responsiveness to customer needs, its attention to quality and its unique combination of market expertise, technical capabilities and financial strength.

        At May 31, 2002, backlog believed to be firm was approximately $93,400 compared to $74,100 at May 31, 2001. An additional $16,300 of unfunded government options on awarded contracts also existed at May 31, 2002. Approximately $91,600 of this backlog is expected to be filled within the next 12 months. The increase in the Company's backlog is due primarily to increased orders in the Manufacturing and Inventory and Logistic Services segments.

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

        At May 31, 2002, the Company employed approximately 2,200 persons worldwide.

        Sales to the U.S. Government, its agencies and its contractors were approximately $163,173 (25.5% of total sales), $139,072 (15.9% of total sales) and $132,048 (12.9% of total sales) in fiscal years 2002, 2001 and 2000, respectively. Because such sales are subject to competitive bidding and government funding, no assurance can be given that such sales will continue at levels previously experienced. The majority of the Company's government contracts are for aviation products and services used for ongoing routine military logistic support activities; unlike weapons systems and other high-technology military requirements, these products and services are less likely to be affected by significant changes in defense spending. The Company's contracts with the U.S. Government and its agencies are typically firm agreements to provide aviation products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the government agency. Although the Company's government contracts are subject to termination at the election of the government, in the event of such a termination the Company would be entitled to recover from the government all allowable costs incurred by the Company through the date of termination.

        For additional information concerning the Company's business segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business Segment Information" in Note 14 of Notes to Consolidated Financial Statements.

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ITEM 2.    PROPERTIES

        The Company's principal activities in the Aircraft and Engine Sales and Leasing segment as well as aftermarket engine and airframe parts distribution activities in the Inventory and Logistic Services segment are conducted from a building owned by the Company in Wood Dale, Illinois. In addition to warehouse space, the facility includes executive, sales and administrative offices. New parts distribution activities in the Inventory and Logistic Services segment are conducted primarily in a building owned by the Company in Elk Grove Village, Illinois.

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

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

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

ITEM 3.    LEGAL PROCEEDINGS

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

        A subsidiary of the Company ("subsidiary") received a letter dated June 14, 2002, from the Michigan Department of Environmental Quality ("MDEQ") relating to environmental conditions at and in the vicinity of the subsidiary's Cadillac, Michigan plant. The MDEQ alleges that the subsidiary's on-site groundwater purge and treatment system has not operated as required by a 1985 Consent Order between the subsidiary and the State of Michigan, thereby allowing contamination to spread and threaten residential drinking water wells to the west of the plant site. The MDEQ also alleges that a solvent was released at the plant site and caused contamination to reach the groundwater where it commingled with pre-existing contamination. The letter demands that the subsidiary perform additional environmental investigatory work, evaluate the effectiveness of the existing groundwater purge and treatment system, upgrade the equipment as needed and prepare and submit to the MDEQ a remedial action plan for the entire contaminated area related to the subsidiary's Cadillac plant. The letter further demands payment of environmental investigative costs already incurred by the MDEQ in the amount of $525 plus interest plus unspecified costs to be incurred in the future by the MDEQ. The letter indicates that the State is prepared to seek civil penalties if the subsidiary does not promptly negotiate an administrative consent order with the State and that the State may file a civil judicial action and place a lien on the subsidiary's plant site for the costs incurred and to be incurred by the State.

        The subsidiary plans to vigorously assert various defenses to the allegations and claims made by the State, including the defense that a 1985 Consent Order entered into with the State previously resolved most of the claims now asserted by the State. The subsidiary plans to bring technical information to the attention of the State to show that any post-Consent Decree release of hazardous substances, as alleged by the State, was de minimis. The subsidiary is in the process of developing its response to the State and will participate in settlement discussions which have been suggested by the State. It is not possible at this stage to determine the expenditures that may be required in connection with this matter. The subsidiary has received some funds from an insurance carrier to reimburse it for work done by the subsidiary under the 1985 Consent Decree and will seek further coverage for the matters in the June 14, 2002 MDEQ letter.

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

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

Supplemental Item:

EXECUTIVE OFFICERS OF THE REGISTRANT

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

Name	Age	Present Position with the Company
David P. Storch	49	President and Chief Executive Officer, Director
Joseph M. Gullion	52	Executive Vice President and Chief Operating Officer
Howard A. Pulsifer	59	Vice President; General Counsel, Secretary
Timothy J. Romenesko	45	Vice President and Chief Financial Officer
James J. Clark	42	Group Vice President, Maintenance, Repair and Overhaul

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

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

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

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

Mr. Clark has been Group Vice President, Maintenance, Repair and Overhaul since 2000. Previously he was General Manager of AAR Aircraft Component Services—Amsterdam from 1995 to 2000 and in various other positions since joining the Company in 1982.

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PART II

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

        The Company's Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. On June 30, 2002 there were approximately 10,000 holders of the Company's Common Stock, including participants in security position listings.

        Certain of the Company's debt agreements contain provisions restricting the payment of dividends or repurchase of its shares. See Note 3 of Notes to Consolidated Financial Statements included herein. Under the most restrictive of these provisions, the Company may not pay dividends (other than stock dividends) or acquire its capital stock if, after giving effect to the aggregate amounts paid on or after June 1, 1995, such amounts exceed the sum of $20,000 plus 50% of Consolidated Net Income (Loss) of the Company after June 1, 1994. At May 31, 2002 unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares totaled approximately $32,413. At June 1, 2002, unrestricted consolidated retained earnings available to pay dividends and purchase the Company's shares decreased to $2,943, due to inclusion of 50% of Consolidated Net Loss of the Company for fiscal 2002.

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

	Fiscal 2002						Fiscal 2001
Per Common Share
	Market Prices						Market Prices
					Quarterly Dividends						Quarterly Dividends
Quarter	High		Low				High		Low
First	$	17.25	$	14.25	$	.085	$	15.19	$	10.31	$	.085
Second		17.25		7.15		.025		13.56		10.00		.085
Third		9.85		7.29		.025		15.19		10.31		.085
Fourth		13.65		7.44		.025		15.25		10.95		.085
					$	.160					$	.340

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

		For the Year Ended May 31,
		2002			2001		2000		1999		1998
RESULTS OF OPERATIONS
	Sales	$	638,721		$	853,659	$	957,525	$	918,036	$	782,123
	Pass through sales(1)		—			20,596		66,808		132,572		74,514
	Total sales		638,721			874,255		1,024,333		1,050,608		856,637
	Gross profit		13,848			136,467		172,853		173,259		148,406
	Operating income (loss)		(81,289	)		40,390		70,658		77,381		64,716
	Interest expense		19,798			21,887		23,431		18,567		14,494
	Income (loss) before provision for income taxes		(98,229	)		20,220		49,526		59,786		51,157
	Net income (loss)		(58,939	)		18,531		35,163		41,671		35,657
Share data:(2)
	Earnings (loss) per share—basic	$	(2.08	)	$	.69	$	1.30	$	1.51	$	1.29
	Earnings (loss) per share—diluted	$	(2.08	)	$	.69	$	1.28	$	1.49	$	1.27
	Cash dividends per share	$	.16		$	.34	$	.34	$	.34	$	.33
	Average common shares outstanding—basic		28,282			26,913		27,103		27,549		27,588
	Average common shares outstanding—diluted		28,282			26,985		27,415		28,006		28,174
FINANCIAL POSITION
	Working capital	$	286,192		$	352,731	$	345,304	$	334,418	$	319,252
	Total assets		710,199			701,854		737,977		723,018		667,039
	Short-term debt		42,525			13,652		26,314		420		237
	Long-term debt		217,699			179,987		180,447		180,939		177,509
	Total debt		260,224			193,639		206,761		181,359		177,746
	Stockholders' equity		310,235			340,212		336,494		322,423		297,330
	Number of shares outstanding at end of year(2)		31,870			26,937		26,865		27,381		27,717
	Book value per share of common stock(2)	$	9.73		$	12.63	$	12.53	$	11.78	$	10.73

Notes:

(1)

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

(2)

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

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

Factors Which May Affect Future Results

        The Company's future operating results and financial position may be adversely affected or fluctuate substantially on a quarterly basis as a result of the difficult commercial aviation environment exacerbated by the September 11, 2001 terrorist attacks and the events that followed, the relatively weak worldwide economic climate and other factors, including: (1) decline in demand for the Company's products and services and the ability of the Company's customers to meet their financial obligations to the Company, particularly in light of the poor financial condition of many of the world's commercial airlines; (2) lack of assurance that sales to the U.S. Government, its agencies and its contractors (which were approximately 25.5% of total sales in fiscal 2002), will continue at levels previously experienced, since such sales are subject to competitive bidding and government funding; (3) access to the debt and equity capital markets to finance growth, which may be limited in light of industry conditions and Company performance; (4) changes in or noncompliance with laws and regulations that may affect certain of the Company's aviation related activities that are subject to licensing, certification and other regulatory requirements imposed by the FAA and other regulatory agencies, both domestic and foreign; (5) competitors, including original equipment manufacturers, in the highly competitive aviation aftermarket industry that have greater financial resources than the Company; (6) exposure to product liability and property claims that may be in excess of the Company's substantial liability insurance coverage; (7) difficulties in being able to successfully integrate future business acquisitions; (8) fluctuating market values for aviation products and equipment in the current aviation environment; (9) difficulty in re-leasing or selling aircraft and engines that are currently being leased on a long or short-term basis and (10) environmental proceedings as described in Item 3.

Critical Accounting Policies

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

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

        Inventories    Inventories are valued at the lower of cost or market. Cost is determined by either the specific identification, average cost or first-in, first-out method. Provisions are made for excess and obsolete inventories and inventories which have been impaired as a result of industry conditions. The Company has utilized certain assumptions in determining the recoverability of excess, obsolete and impaired inventories, such as the historical performance of the inventory, existing and expected future aviation usage trends, estimated market values and expected future demand. Principally as a result of the tragic events of September 11, 2001, the Company recorded a significant charge for impaired inventories during the second quarter ended November 30, 2001 utilizing those assumptions. Further reductions in demand for certain of the Company's inventories or declining market values, as well as differences between actual results and the assumptions utilized by the Company when determining the market value of assets, would result in additional impairment charges in future periods.

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Critical Accounting Policies (continued)

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

        Aviation Equipment Operating Leases    The Company from time to time leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company for up to four years. If the Company elects not to renew a lease, the Company may elect either to (i) direct the lessor to sell the equipment at which time the Company would be required to reimburse the lessor for the shortfall, if any, between the proceeds on the sale and the scheduled purchase option price, or (ii) purchase the equipment from the lessor at its scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price. In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed estimated undiscounted cash inflows related to the equipment, the Company records an accrual for loss.

Results of Operations

        The Company reports its activities in four business segments: Inventory and Logistic Services, Maintenance, Repair and Overhaul, Manufacturing and Aircraft and Engine Sales and Leasing. The table below sets forth consolidated sales for the Company's four business segments for each of the last three fiscal years ended May 31.

	For the Year Ended May 31,
	2002		2001		2000
Sales:
Inventory and Logistic Services	$	258,067	$	366,562	$	406,053
Maintenance, Repair and Overhaul		216,727		257,117		240,274
Manufacturing		99,558		97,154		119,933
Aircraft and Engine Sales and Leasing		64,369		132,826		191,265
	$	638,721	$	853,659	$	957,525

Three-Year Sales Summary

        Over the last three fiscal years, consolidated sales, excluding pass through sales, decreased from $957,525 in fiscal 2000 to $638,721 in fiscal 2002. Total sales, which include pass through sales, declined from $1,024,333 in fiscal 2000 to $638,721 in fiscal 2002.

        During fiscal 2001, the Company experienced lower demand for its products and services from its commercial airline customers as those customers experienced a decline in profitability as a result of an overall economic slowdown and higher fuel prices. Sales were also lower in fiscal 2001 compared to fiscal 2000 due to the mutual agreement with a major customer to unwind an engine parts inventory management program in mid-fiscal 2001.

        As a result of the tragic events of September 11, 2001, which occurred at a time when the worldwide commercial airline environment was already under significant pressure principally due to the aforementioned weak worldwide economic conditions, most of the major U.S. based commercial airlines announced substantial reductions in capacity, some in excess of 20%. Commercial airlines accelerated their older generation aircraft fleet retirement plans. The reduction in capacity and the financial impact of September 11, 2001 on the Company's commercial airline customers had a dramatic effect on the Company's fiscal 2002 operating results when compared to fiscal 2001 and 2000. More recently, three major U.S. commercial airlines have announced restructuring plans as a result of the continuing difficult economic conditions in the airline industry. One has filed bankruptcy as part of its restructuring plans and another has warned that it may have to do so. These

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restructurings are likely to result in further reductions in industry capacity. The Company will review its business lines and capacity and take appropriate actions consistent with changing industry demands.

Fiscal 2002 Compared with Fiscal 2001

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

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

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

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

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

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

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

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

        Operating income, before consideration of impairment and other special charges, decreased $35,679 from the prior year as a result of lower gross profit, partially offset by a reduction in selling, general and administrative expenses. During fiscal 2002, the Company reduced its selling, general and administrative expenses by $11,040 or 11.5% through lower personnel costs and reduced discretionary spending. Interest expense decreased $2,089 over the prior year principally as a result of lower average short-term borrowings outstanding during the year and interest income increased $1,141 over the prior year primarily as a result of an increase in average cash invested.

10

        The Company's effective income tax benefit rate for fiscal 2002 was 40.0% and includes a $2,000 reduction in income tax expense representing the reversal of Federal income tax liabilities.

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

Fiscal 2001 Compared with Fiscal 2000

        Consolidated sales in fiscal 2001, excluding pass through sales, decreased $103,866 or 10.8% compared to the prior year as the Company experienced lower sales in three of its four segments.

        In the Inventory and Logistic Services segment, fiscal 2001 sales declined $39,491 or 9.7% compared to fiscal 2000 primarily as a result of lower sales of engine parts and components. The decline in engine parts sales was primarily the result of reduced demand by a major customer for certain engine parts due principally to fewer engine shop visits to this customer for the engine types the Company supports, and from the impact of converting the Company's exclusive engine parts support agreement with this major customer to preferred status, which occurred in December 2000. The reduction in pass through sales of $46,212 also was attributable to these factors.

        In the Maintenance, Repair and Overhaul segment, fiscal 2001 sales increased over the prior year $16,843 or 7.0%, primarily as a result of the favorable impact of the sales of Hermetic, which the Company acquired on September 29, 2000. Fiscal 2001 revenues for Hermetic included in consolidated sales were approximately $13,100.

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

        In the Aircraft and Engine Sales and Leasing segment, sales declined $58,439 or 30.6% compared to fiscal 2000 primarily as a result of lower revenue in the Company's aircraft sales business. The decline in aircraft sales is mainly due to the type of aircraft sold in fiscal 2001 compared to those sold in fiscal 2000.

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

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

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

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

Liquidity and Capital Resources

        Historically, the Company has funded its growth, met its contractual commitments and paid dividends through the generation of cash from operations, augmented by the periodic issuance of common stock and debt to the public and private markets. The Company also relies on its unsecured bank credit arrangements, an accounts receivable securitization program and finances certain aviation equipment with operating leases to provide additional liquidity. Although the Company successfully completed a private placement of long-term

11

debt in June 2001 and a common stock offering in February 2002, the Company's ability to issue debt, borrow from its lenders or sell equity securities in the future may be negatively affected by a number of factors, including general economic conditions, aviation industry conditions and Company performance. The Company's ability to use the accounts receivable securitization program and aviation equipment operating leases is also dependent on those factors. The Company's ability to generate cash from operations is influenced primarily by the operating performance of the Company.

        At May 31, 2002, the Company's liquidity and capital resources included cash of $34,522 and working capital of $286,192. At May 31, 2002, the Company's ratio of long-term debt to capitalization was 41.2%, up from 34.6% at May 31, 2001 and at May 31, 2002, the Company's ratio of total debt to capitalization was 45.6% compared to 36.3% at May 31, 2001. The increase in the long-term debt to capitalization ratio is primarily attributable to the reduction in stockholders' equity as a result of the impairment and special charges recorded in the second quarter ended November 30, 2001. The Company continues to maintain its external sources of financing, including committed bank lines and a universal shelf registration on file with the Securities and Exchange Commission under which, subject to market conditions, up to $163,675 of common stock, preferred stock or medium- or long-term debt securities may be issued or sold.

        At May 31, 2002, aggregate committed unsecured bank credit arrangements were $117,110. Of this amount, $115,000 was available under revolving credit and term loan agreements with four domestic banks and $2,110 was available under credit agreements with one foreign bank. Borrowings outstanding under these arrangements were $40,500 and $0 at May 31, 2002 and 2001, respectively. Two of the domestic credit agreements have commitment amounts that reduce by $5,000 each every six months, beginning June 29, 2002 until the time of their maturity. The aggregate commitment amounts of the domestic bank credit arrangements are as follows:

Date of Availability	Amount
May 31, 2002	$	115,000
June 30, 2002		105,000
October 31, 2002		95,000
December 31, 2002		85,000
April 11, 2003		30,000
June 30, 2003		25,000
December 31, 2003		20,000

        To permit the Company to finance future growth, the Company is actively considering various financing alternatives which, depending on market conditions and the availability of capital, may include the issuance of debt or equity securities. The Company has an accounts receivable securitization program under which the Company may sell an interest in a defined pool of accounts receivable. Cash proceeds from the sale of accounts receivable, net of retained interest, under this arrangement were $20,100 and $18,984, at May 31, 2002 and May 31, 2001 respectively. This resulted in a reduction of accounts receivable in those amounts on the May 31, 2002 and May 31, 2001 Consolidated Balance Sheets.

        During the twelve-month period ended May 31, 2002, the Company increased its cash position by $20,713. The increase in cash from May 31, 2001 principally reflects the issuance of a $75,000 private placement of long-term debt in June 2001, a common stock offering in February 2002 which provided the Company with net proceeds of $34,334, and an increase in borrowings under its bank lines of $40,500. The increase to cash was partially offset by a final cash payment of $13,251 for the acquisition of Hermetic and the repayment of $65,000 in notes on November 1, 2001. Also contributing to the net change in the Company's cash position were capital expenditures of $12,112, cash dividends of $4,430 and cash used in operating activities of $33,315.

        During the twelve-month period ended May 31, 2002, the Company's operations used $33,315 of cash, principally reflecting investments in equipment on long-term lease and inventories, partially offset by a reduction in accounts receivable.

12

        During the twelve-month period ended May 31, 2002, the Company's investing activities used $24,977 of cash, primarily reflecting capital expenditures of $12,112 and the final cash payment for the Hermetic acquisition of $13,251, which was due and paid on June 1, 2001.

        During the twelve-month period ended May 31, 2002, the Company's financing activities generated $78,895 of cash, primarily reflecting net proceeds from the common stock offering of $34,334, the issuance of $75,000 of long-term notes and an increase in borrowings under the Company's bank lines of $40,500. This was partially offset by the payment of the Company's $65,000 9.5% notes on November 1, 2001 and cash dividends of $4,430.

        A summary of long-term debt, non-cancelable operating lease commitments for aviation equipment, bank borrowings and accounts receivable securitization as of May 31, 2002 is as follows:

		Payments Due by Period
		Total			Within One Year		Within Two Years		Within Three Years		Within Four Years		Within Five Years		Beyond Five Years
On Balance Sheet:
	Long-Term Debt	$	219,724		$	2,025	$	53,037	$	1,915	$	20,817	$	4,615	$	137,315
	Bank Borrowings		40,500	(1)		26,400		14,100		—		—		—		—
Off Balance Sheet:
	Aviation Equipment Operating Leases		39,590			3,264		3,196		3,962		12,622		2,246		14,300
	Facilities and Equipment Operating Leases		13,383			4,545		3,582		2,417		1,628		1,211		—
	Accounts Receivable Securitization Program		20,100	(2)		20,100		—		—		—		—		—

Notes:

(1)

At May 31, 2002, the Company had committed bank lines of $117,110 of which $40,500 had been drawn and $4,330 utilized for letters of credit, leaving unused available committed bank lines of $72,280. The maturity dates for the lines of credit drawn are October 2, 2002, April 10, 2003 and February 4, 2004.

(2)

The accounts receivable securitization program expires on August 30, 2004, however, on an annual basis, the financial institution has the option to not renew funding of the program. The financial institution has informed the Company that it does not wish to renew funding of the program effective November 30, 2002. The Company is in discussions with other financial institutions regarding funding this program.

(3)

The Company routinely issues letters of credit, performance bonds or credit guarantees in the ordinary course of its business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 2002 was approximately $18,287.

13

Forward-Looking Statements

        Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under this Item 7 entitled "Factors Which May Affect Future Results". Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company's exposure to market risk includes fluctuating interest rates under its unsecured bank credit agreements, foreign exchange rates and accounts receivable. See Item 7 "Critical Accounting Policies" for a discussion on accounts receivable exposure. During fiscal 2002 and 2001, the Company did not utilize derivative financial instruments to offset these risks.

        At May 31, 2002, $70,485 was available under credit lines with domestic banks under revolving credit and term loan agreements, and $1,795 was available under credit agreements with foreign banks (credit facilities). Interest on amounts borrowed under the credit facilities is LIBOR based. As of May 31, 2002, the outstanding balance under these agreements was $40,500. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during fiscal 2002 would have reduced the Company's pre-tax income by approximately $108 during fiscal 2002.

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

14

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report

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

        We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAR CORP. and subsidiaries as of May 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Chicago, Illinois
June 26, 2002

15

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended May 31,
		2002			2001			2000
		(In thousands except per share data)
Sales:
	Sales from products and leasing	$	557,813		$	753,104		$	859,214
	Sales from services		80,908			100,555			98,311
	Pass through sales		—			20,596			66,808
			638,721			874,255			1,024,333
Costs and operating expenses:
	Cost of products and leasing		480,415			636,349			706,042
	Cost of services		68,558			80,843			78,630
	Cost of pass through sales		—			20,596			66,808
	Cost of sales—impairment charges		75,900			—			—
	Selling, general and administrative and other		85,037			96,077			102,195
	Special charges		10,100			—			—
			720,010			833,865			953,675
Operating income (loss)			(81,289	)		40,390			70,658
Interest expense			(19,798	)		(21,887	)		(23,431	)
Interest income			2,858			1,717			2,299
Income (loss) before provision for income taxes			(98,229	)		20,220			49,526
Provision (benefit) for income taxes			(39,290	)		1,689			14,363
Net income (loss)		$	(58,939	)	$	18,531		$	35,163
Earnings (loss) per share of common stock—basic		$	(2.08	)	$	.69		$	1.30
Earnings (loss) per share of common stock—diluted		$	(2.08	)	$	.69		$	1.28

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

16

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

		May 31,
		2002			2001
		(In thousands)
Current assets:
	Cash and cash equivalents	$	34,522		$	13,809
	Accounts receivable		77,528			115,187
	Inventories		238,032			263,099
	Equipment on or available for short-term leases		48,556			57,491
	Deposits, prepaids and other		15,357			20,522
	Deferred tax assets		22,661			8,015
Total current assets			436,656			478,123
Property, plant and equipment, at cost:
	Land		6,595			6,893
	Buildings and improvements		70,227			70,258
	Equipment, furniture and fixtures		121,403			125,234
			198,225			202,385
Accumulated depreciation			(95,634	)		(93,478	)
			102,591			108,907
Other assets:
	Investment in leveraged leases		29,088			28,715
	Cost in excess of underlying net assets of acquired companies, net		45,906			45,375
	Equipment on long-term leases		42,910			—
	Other		53,048			40,734
			170,952			114,824
		$	710,199		$	701,854

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

17

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

			May 31,
			2002			2001
			(In thousands)
Current liabilities:
	Short-term debt		$	40,500		$	—
	Current maturities of long-term debt			394			410
	Notes payable			1,631			13,242
	Accounts payable			49,529			73,975
	Accrued liabilities			54,563			35,706
	Accrued taxes on income			3,847			2,059
Total current liabilities				150,464			125,392
Long-term debt, less current maturities				217,699			179,987
Deferred tax liabilities				30,601			55,063
Retirement benefit obligation				1,200			1,200
				249,500			236,250
Stockholders' equity:
	Preferred stock, $1.00 par value, authorized 250 shares; none issued			—			—
	Common stock, $1.00 par value, authorized 100,000 shares; issued 33,568 and 29,371 shares, respectively			33,568			29,371
	Capital surplus			165,188			148,316
	Retained earnings			156,479			219,848
	Treasury stock, 1,698 and 2,434 shares at cost, respectively			(26,986	)		(39,041	)
	Unearned restricted stock awards			(1,138	)		(2,499	)
	Accumulated other comprehensive income (loss):
		Cumulative translation adjustments		(10,224	)		(12,731	)
		Minimum pension liability		(6,652	)		(3,052	)
				310,235			340,212
			$	710,199		$	701,854

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

18

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THREE YEARS ENDED MAY 31, 2002

		Common Stock			Treasury Stock										Unearned Restricted Stock Awards			Accumulated Other Comprehensive Income (Loss)
										Capital Surplus		Retained Earnings									Comprehensive Income (Loss)
		Shares	Amount		Shares		Amount
		(In thousands)
Balance, May 31, 1999		28,998	$	28,998	1,617		$	(25,463	)	$	144,095	$	184,529		$	(3,612	)	$	(6,124	)
	Net income	—		—	—			—			—		35,163			—			—		$	35,163
	Cash dividends	—		—	—			—			—		(9,218	)		—			—			—
	Treasury stock	—		—	686			(11,773	)		—		—			—			—			—
	Exercise of stock options and stock awards	170		170	—			—			2,462		—			—			—			—
	Restricted stock activity	—		—	—			—			—		—			591			—			—
	Adjustment for net translation gain (loss)	—		—	—			—			—		—			—			(3,324	)		(3,324	)
	Comprehensive income for fiscal 2000																				$	31,839
Balance, May 31, 2000		29,168	$	29,168	2,303		$	(37,236	)	$	146,557	$	210,474		$	(3,021	)	$	(9,448	)
	Net income	—		—	—			—			—		18,531			—			—		$	18,531
	Cash dividends	—		—	—			—			—		(9,157	)		—			—			—
	Treasury stock	—		—	131			(1,805	)		—		—			—			—			—
	Exercise of stock options and stock awards	203		203	—			—			1,759		—			—			—			—
	Restricted stock activity	—		—	—			—			—		—			522			—			—
	Adjustment for net translation gain (loss)	—		—	—			—			—		—			—			(3,283	)		(3,283	)
	Minimum pension liability	—		—	—			—			—		—			—			(3,052	)		(3,052	)
	Comprehensive income for fiscal 2001																				$	12,196
Balance, May 31, 2001		29,371	$	29,371	2,434		$	(39,041	)	$	148,316	$	219,848		$	(2,499	)	$	(15,783	)
	Net income	—		—	—			—			—		(58,939	)		—			—		$	(58,939	)
	Cash dividends	—		—	—			—			—		(4,430	)		—			—			—
	Issuance of common stock	4,147		4,147	(863	)		13,783			16,404		—			—			—			—
	Treasury stock	—		—	127			(1,728	)		—
	Exercise of stock options and stock awards Awards	50		50	—			—			468		—			—			—			—
	Restricted stock activity	—		—	—			—			—		—			1,361			—			—
	Adjustment for net translation gain (loss)	—		—	—			—			—		—			—			2,507			2,507
	Minimum pension liability	—		—	—			—			—		—			—			(3,600	)		(3,600	)
	Comprehensive income for fiscal 2002																				$	(60,032	)
Balance, May 31, 2002		33,568	$	33,568	1,698		$	(26,986	)	$	165,188	$	156,479		$	(1,138	)	$	(16,876	)

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

19

AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

					For the Year Ended May 31,
					2002			2001			2000
					(In thousands)
Cash flows from operating activities:
		Net income (loss)			$	(58,939	)	$	18,531		$	35,163
		Adjustments to reconcile net income (loss) to net cash provided from (used in) operating activities:
			Depreciation and amortization			22,496			20,639			20,221
			Deferred taxes			(2,394	)		(312	)		9,570
			Impairment and other special charges, net of tax			51,686			—			—
			Changes in certain assets and liabilities, excluding effects of acquired businesses:
				Accounts receivable		24,363			20,712			31,532
				Inventories		(31,749	)		17,887			(6,644	)
				Equipment on or available for short-term leases		12,229			294			(28,441	)
				Equipment on long-term lease		(30,025	)		—			—
				Accounts and trade notes payable		(25,261	)		(35,034	)		(21,536	)
				Accrued liabilities and taxes on income		5,861			79			(13,786	)
				Other, primarily prepaids		(1,582	)		3,297			(16,028	)
		Net cash provided from (used in) operating activities				(33,315	)		46,093			10,051
Cash flows from investing activities:
	Property, plant and equipment expenditures, net					(12,112	)		(13,134	)		(22,344	)
	Business acquisition					(13,251	)		(3,200	)		—
	Proceeds from sale of business and facility					2,229			—			—
	Investment in leveraged leases					(373	)		5,446			(434	)
	Other					(1,470	)		13,029			(431	)
		Net cash provided from (used in) investing activities				(24,977	)		2,141			(23,209	)
Cash flows from financing activities:
	Proceeds from borrowings					115,504			—			25,885
	Reduction in borrowings					(65,411	)		(26,364	)		(484	)
	Proceeds from stock offering					34,334			—			—
	Cash dividends					(4,430	)		(9,157	)		(9,218	)
	Purchases of treasury stock					(205	)		(211	)		(10,530	)
	Other					(897	)		116			376
		Net cash provided from (used in) financing activities				78,895			(35,616	)		6,029
Effect of exchange rate changes on cash						110			(50	)		120
Increase (decrease) in cash and cash equivalents						20,713			12,568			(7,009	)
Cash and cash equivalents, beginning of year						13,809			1,241			8,250
Cash and cash equivalents, end of year					$	34,522		$	13,809		$	1,241

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

20

AAR CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

1.    Summary of Significant Accounting Policies

Description of Business

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

Principles of Consolidation

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

Revenue Recognition

        Sales and related cost of sales for product sales are recognized upon shipment of the product to the customer. Service revenues and the related cost of services are generally recognized when customer owned material is shipped to the customer. Sales and related cost of sales on long-term manufacturing contracts and on certain large airframe maintenance contracts are recognized by the percentage of completion method, based on the relationship of costs incurred to date to estimated total costs under the respective contracts. Lease revenues are recognized as earned.

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

21

New Accounting Standards

        In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" effective for business combinations after June 30, 2001, and SFAS No. 142 "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires all business combinations to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. Early adoption of SFAS No. 142 was permitted for companies with a fiscal year beginning after March 2001, provided that the first quarter financial statements had not previously been issued. The Company adopted these statements in the first quarter of fiscal 2002. As a result of adoption of SFAS No. 142, the Company did not record any goodwill amortization for the fiscal year ended May 31, 2002. If goodwill amortization not been recorded for the fiscal years ended May 31, 2001 and 2000, net income and earnings per share would have been as follows:

	For the Year Ended May 31,
	2001		2000
Reported net income	$	18,531	$	35,163
Elimination of goodwill, net of income taxes		1,409		1,342
Pro forma net income	$	19,940	$	36,505
Reported earnings per share—basic	$	.69	$	1.30
Elimination of goodwill, net of income taxes		.05		.05
Pro forma earnings per share—basic	$	.74	$	1.35
Reported earnings per share—diluted	$	.69	$	1.28
Elimination of goodwill, net of income taxes		.05		.05
Pro forma earnings per share—diluted	$	.74	$	1.33

Cash and Cash Equivalents

        The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At May 31, 2002 and 2001, cash equivalents of approximately $0 and $139, respectively, represent investments in funds holding U.S. Government agency-issued securities. The carrying amount of cash equivalents approximates fair value at May 31, 2002 and 2001, respectively.

Transfer of Financial Assets

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

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        One of the Company's consolidated subsidiaries, a special purpose entity, has an agreement (securitization) with a major financial institution to sell an undivided interest in its accounts receivable up to $35,000. The agreement involves the sale of accounts receivable by certain of the Company's domestic subsidiaries to the special purpose entity which in turn sells the accounts receivable to the financial institution. Accounts receivable greater than 120 days past due are not eligible to be sold to the financial institution. The Company retains collection and administrative responsibilities for the accounts receivable sold. The accounts receivable securitization program expires on August 30, 2004. However, on an annual basis, the financial institution has the option to not renew funding of the program. The financial institution has informed the Company that it does not wish to renew funding of the program effective November 30, 2002. The Company is in discussions with other financial institutions regarding funding this program.

        At May 31, 2002, accounts receivable sold under the program were $30,918, and the cash proceeds from the transaction were $20,100. This resulted in a $20,100 reduction in accounts receivable on the May 31, 2002 consolidated balance sheet. At May 31, 2001, accounts receivable sold under the program were $30,455 and the cash proceeds were $18,984. This resulted in an $18,984 reduction in accounts receivable on the May 31, 2001 consolidated balance sheet. The retained undivided interest of $10,818 and $11,471 as of May 31, 2002 and 2001, respectively, are included in accounts receivable at fair value, which takes into consideration expected credit losses based on the specific identification of uncollectable accounts. Since substantially all accounts receivable sold carry 30 day payment terms, the retained interest is not discounted.

Foreign Currency

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

Financial Instruments and Concentrations of Market or Credit Risk

        Financial instruments that potentially subject the Company to concentrations of market or credit risk consist principally of trade receivables. While the Company's trade receivables are diverse based on the number of entities and geographic regions, the majority are with the U.S. Government, its agencies and contractors and entities in the aviation/aerospace industry. The Company performs evaluations of customers' financial condition prior to extending credit privileges and performs ongoing credit evaluations of payment experience, current financial condition and risk analysis. The Company typically requires collateral in the form of security interests in assets, letters of credit, and/or obligation guarantees from financial institutions for transactions other than on normal trade terms.

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

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

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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 method.

        The following is a summary of inventories:

	May 31,
	2002		2001
Raw materials and parts	$	54,708	$	55,851
Work-in-process		20,987		20,208
Purchased aircraft, parts, engines and components held for sale		162,337		187,040
	$	238,032	$	263,099

Equipment under Operating Leases

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

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

Property, Plant and Equipment

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

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

Leveraged Leases

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

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

Income Taxes

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

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Statements of Cash Flows

        Supplemental information on cash flows follows:

		For the Year Ended May 31,
		2002		2001		2000
	Interest paid	$	16,817	$	21,700	$	22,800
	Income taxes paid		1,960		3,200		11,300
	Income tax refunds and interest received		4,075		6,900		500
Noncash operating and financing activities:
	Assets acquired with assumption of notes payable	$	29,737	$	—	$	—

Use of Estimates

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

Reclassification

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

2.    Impairment and Special Charges

        Prior to September 11, 2001 the Company was executing its plan to reduce its investment in support of older generation aircraft in line with the commercial airlines' scheduled retirement plans for these aircraft. The events of September 11 caused a severe and sudden disruption in the commercial airline industry, which brought about a rapid acceleration of those retirement plans. System-wide capacity was reduced by approximately 20% and many airlines cancelled or deferred new aircraft deliveries. Based on management's assessment of these and other conditions, the Company reduced the value and provided loss accruals for certain of its inventories and equipment leases which support older generation aircraft by $75,900, of which $57,900 is related to the Inventory and Logistic Services segment and $18,000 is related to the Aircraft and Engine Sales and Leasing segment. This charge was recorded on the Consolidated Statement of Operations during the three-month period ended November 30, 2001 as "Cost of sales—impairment charges".

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

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3.    Financing Arrangements

        Short-term borrowing activity was as follows:

	For the Year Ended May 31,
	2002			2001			2000
Maximum amount borrowed	$	80,000		$	110,500		$	127,600
Average daily borrowings		36,152			71,917			94,881
Average interest rate during the year		2.98	%		6.7	%		5.9	%

        At May 31, 2002, aggregate unsecured bank credit arrangements were $117,110. Of this amount, $115,000 was committed under revolving credit and term loan agreements with domestic banks and $2,110 was committed under credit agreements with a foreign bank. There are no compensating balance requirements in connection with domestic or foreign lines of credit. Two of the domestic credit agreements have commitment amounts that reduce by $5,000 each every six months, beginning June 29, 2002 until the time of maturity. The aggregate commitment amounts of the domestic banks is as follows:

Date of Availability	Amount
May 31, 2002	$	115,000
June 30, 2002		105,000
October 31, 2002		95,000
December 31, 2002		85,000
April 11, 2003		30,000
June 30, 2003		25,000
December 31, 2003		20,000

        Interest on amounts borrowed under the credit facilities is LIBOR based. Borrowings outstanding under these agreements at May 31, 2002 were $40,500. There are no compensating balance requirements on any of the committed lines, but the Company is required to pay a commitment fee. There are no restrictions on the withdrawal or use of these funds.

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        Long-term debt was as follows:

	May 31,
	2002			2001
Notes payable due October 15, 2003 with interest of 7.25% payable semi-annually on April 15 and October 15	$	50,000		$	50,000
Notes payable due December 15, 2007 with interest of 6.875% payable semi-annually on June 15 and December 15		60,000			60,000
Notes payable due May 15, 2008 with interest of 7.98% payable semi-annually on June 1 and December 1		20,000			—
Notes payable due May 15, 2011 with interest of 8.39% payable semi-annually on June 1 and December 1		55,000			—
Notes payable due November 1, 2001 with interest of 9.5% payable semi-annually on May 1 and November 1		—			65,000
Notes payable due June 29, 2005 and June 29, 2006 with interest of 1.91% payable monthly (see Note 8)		29,737			—
Other, primarily industrial revenue bonds, (secured by trust indentures on property, plant and equipment) with weighted average interest of approximately 1.60% to 6.5% at May 31, 2002		4,987			5,397
		219,724			180,397
Current maturities		(2,025	)		(410	)
	$	217,699		$	179,987

        The Company is subject to a number of covenants under the revolving credit and term loan agreements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, fixed charge coverage ratio, sales of assets, additional financing, purchase of the Company's shares and other matters. The Company is in compliance with all restrictive financial provisions of the agreements. At May 31, 2002, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares was approximately $32,413. Effective June 1, 2002, unrestricted consolidated retained earnings decreased to $2,943 due to inclusion of 50% of the consolidated net loss of the Company for fiscal 2002. The aggregate amount of long-term debt maturing during each of the next five fiscal years is $2,025 in 2003, $53,037 in 2004, $1,915 in 2005, $20,817 in 2006 and $4,615 in 2007. The Company's long-term debt was estimated to have a fair value of approximately $217,335 at May 31, 2002 and was based on estimates using discounted future cash flows at an assumed rate for borrowings currently prevailing in the marketplace for similar instruments.

        On June 7, 2001, the Company completed a $75,000 private placement of long-term debt, including $55,000 of ten-year Senior Notes at 8.39% due May 15, 2011 and $20,000 of seven-year Senior Notes at 7.98% due May 15, 2008. The Company's $65,000 of 9.5% notes matured and were paid in full on November 1, 2001.

        During the third and fourth quarters of fiscal 2002, the Company completed amendments to certain of its credit agreements. The principal changes were to reduce the term of the agreements and reduce required minimum net worth in the net worth financial covenant. These changes were made to reflect current market terms on similar credit agreements and to provide more flexibility under the covenant calculation, due to the impairment and special charges recorded during the second quarter of fiscal 2002.

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4.    Income Taxes

        The provision for income taxes includes the following components:

		For the Year Ended May 31,
		2002			2001			2000
Current
	Federal	$	(2,832	)	$	1,580		$	4,070
	State		250			421			723
			(2,582	)		2,001			4,793
Deferred			(36,708	)		(312	)		9,570
		$	(39,290	)	$	1,689		$	14,363

        The deferred tax provisions (benefits) result primarily from differences between financial reporting and taxable income arising from carryforwards of alternative minimum tax, net operating loss "NOL" carryforward, foreign tax credit carryforwards, depreciation and leveraged leases.

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

		May 31,
		2002			2001
Deferred tax liabilities attributable to:
	Depreciation	$	49,800		$	34,863
	Leveraged leases		14,730			21,200
	Other		620			630
	Total deferred tax liabilities	$	65,150		$	56,693
Deferred tax assets-current attributable to:
	Inventory costs	$	24,000		$	4,810
	Employee benefits		(1,481	)		100
	Alternative minimum tax		—			3,100
	Other		142			5
	Total deferred tax assets-current	$	22,661		$	8,015
Deferred tax assets-noncurrent attributable to:
	Postretirement benefits	$	4,027		$	1,630
	Alternative minimum tax, NOL carryforward and foreign tax credit carryforward		30,522			—
	Total deferred tax assets-noncurrent	$	34,549		$	1,630
	Total deferred tax assets	$	57,210		$	9,645
Net deferred tax liabilities		$	7,940		$	47,048

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

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        The provision (benefit) for income taxes differs from the amount computed by applying the U.S. Federal statutory income tax rate of 35% for fiscal 2002, 2001 and 2000, for the following reasons:

		For the Year Ended May 31,
		2002			2001			2000
Provision (benefit) for income taxes at the Federal statutory rate		$	(34,380	)	$	7,080		$	17,330
	Tax benefits on exempt earnings from export sales		(1,460	)		(2,700	)		(3,815	)
	State income taxes, net of Federal benefit and refunds		(1,267	)		670			900
	Non-deductible portion of goodwill amortization		—			300			298
	Reduction in income tax accrued liabilities		(2,000	)		(3,300	)		—
	Other, net		(183	)		(361	)		(350	)
Provision (benefit) for income taxes as reported		$	(39,290	)	$	1,689		$	14,363
Effective income tax (benefit) rate			(40.0	)%		8.4	%		29.0	%

        During fiscal 2002 and 2001, the Company recorded reductions in income tax expense of $2,000 and $3,300, respectively. These adjustments represent the reversal of Federal and state income tax liabilities which are no longer required.

5.    Common Stock and Stock Option Plans

        During February 2002, the Company sold 5,010,000 shares of common stock, raising $34,334 in proceeds, net of expenses.

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

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

	Stock Options Granted In Fiscal Year
	2002		2001		2000
Risk-free interest rate	4.5	%	4.9	%	6.6	%
Expected volatility of common stock	54.8	%	44.8	%	38.7	%
Dividend yield	1.9	%	1.8	%	1.6	%
Expected option term in years	4.0		4.0		4.0

        The fair value weighted average per share of stock options granted during fiscal 2002, 2001 and 2000 was $6.25, $4.43 and $7.81, respectively. If compensation cost for stock options awarded under the plans were determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been changed to the following pro forma amounts:

29

		For the Year Ended May 31,
		2002			2001		2000
Net income:	As reported	$	(58,939	)	$	18,531	$	35,163
	Pro forma		(61,899	)		16,001		33,097
Earnings per share—basic:	As reported	$	(2.08	)	$	.69	$	1.30
	Pro forma	$	(2.19	)	$	.59	$	1.22
Earnings per share—diluted:	As reported	$	(2.08	)	$	.69	$	1.28
	Pro forma	$	(2.19	)	$	.59	$	1.21

        A summary of changes in stock options (in thousands) granted to officers, key employees and nonemployee directors under stock option plans for the three years ended May 31, 2002 follows:

		Number of Shares		Weighted Average Exercise Price
Outstanding, May 31, 1999 (1,148 exercisable)		3,176		$	17.36
	Granted	519			22.48
	Exercised	(105	)		12.40
	Surrendered/expired/cancelled	(164	)		20.05
Outstanding, May 31, 2000 (1,508 exercisable)		3,426			18.16
	Granted	946			12.32
	Exercised	(140	)		8.83
	Surrendered/expired/cancelled	(164	)		18.36
Outstanding, May 31, 2001 (2,355 exercisable)		4,068			16.79
	Granted	937			14.95
	Exercised	(129	)		10.15
	Surrendered/expired/cancelled	(628	)		18.10
Outstanding, May 31, 2002 (2,495 exercisable)		4,248		$	16.51

        The following table provides additional information regarding options (in thousands) outstanding as of May 31, 2002:

Option Exercise Price Range	Options Outstanding	Weighted Average Remaining Contractual Life of Options (Years)	Number of Options Exercisable	Weighted Average Exercise Price of Options Exercisable
$  6.13—12.25	1,010	6.3	493	$	10.65
$12.26—18.38	2,001	6.4	1,013	$	15.42
$18.39—24.50	1,185	5.8	940	$	23.20
$24.51—30.63	52	3.6	49	$	27.84
	4,248	6.2	2,495	$	17.65

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        The AAR CORP. Stock Benefit Plan also provides for the grant of restricted stock awards. Restrictions are released at the end of applicable restricted periods. The number of shares and the restricted period, which varies from three to ten years, are determined by the Compensation Committee of the Board of Directors. At the date of grant, the market value of the award (based on the New York Stock Exchange common stock closing price) is recorded in common stock and capital surplus; an offsetting amount is recorded as a component of stockholders' equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. Expense (income) relating to outstanding restricted stock award for the three-year period ended May 31, 2002 follows:

	For the Year Ended May 31,
	2002			2001			2000
Expense	$	571		$	1,141		$	1,654
Forfeitures (income)		(802	)		(86	)		(300	)
Net	$	(231	)	$	1,055		$	1,354

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

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

	May 31, 2002
	Outstanding	Available	Total
Stock Benefit Plan (officers, directors and key employees)	4,721	1,644	6,365
Employee Stock Purchase Plan	—	144	144

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

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

        On September 21, 1990, the Board of Directors authorized the Company to purchase up to 1,500,000 shares (adjusted for a three-for-two stock split) of the Company's common stock on the open market or through privately negotiated transactions. On October 13, 1999, the Board of Directors authorized the Company to purchase up to 1,500,000 additional shares of the Company's common stock. As of May 31, 2002, the Company had purchased 1,745,000 shares of its common stock on the open market under these programs at an average price of $14.00 per share.

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6.    Earnings Per Share

        The computation of basic earnings per share is based on the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is based on the weighted average number of common stock outstanding during the year plus, when their effect is dilutive, potentially issuable common stock consisting of shares subject to stock options. The following table provides a reconciliation of the computations of basic and diluted earnings per share information for each of the years in the three-year period ended May 31, 2002 (in thousands).

		For the Year Ended May 31,
		2002			2001		2000
Basic:
	Net income (loss)	$	(58,939	)	$	18,531	$	35,163
	Average common shares outstanding		28,282			26,913		27,103
	Earnings (loss) per share of common stock-basic	$	(2.08	)	$	.69	$	1.30
Diluted:
	Net income (loss)	$	(58,939	)	$	18,531	$	35,163
	Average shares of common stock outstanding		28,282			26,913		27,103
	Additional shares due to hypothetical exercise of stock options		—			72		312
	Average shares of common stock outstanding-diluted		28,282			26,985		27,415
	Earnings (loss) per share-diluted	$	(2.08	)	$	.69	$	1.28

7.    Employee Benefit Plans

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

Defined Benefit Plans

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

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

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

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

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

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

		May 31,
		2002			2001
Change in benefit obligation:
	Benefit obligation at beginning of year	$	64,835		$	59,268
	Service cost		2,767			2,867
	Interest cost		4,427			4,411
	Plan participants' contributions		193			218
	Amendments		(2,769	)		887
	Net actuarial loss		2,856			1,011
	Benefits paid		(5,045	)		(3,827	)
Benefit obligation at end of year		$	67,264		$	64,835
Change in plan assets:
	Fair value of plan assets at beginning of year	$	49,049		$	46,349
	Actual return on plan assets		(921	)		391
	Employer contributions		6,791			5,918
	Plan participants' contributions		193			218
	Benefits paid		(5,045	)		(3,827	)
Fair value of plan assets at end of year		$	50,067		$	49,049
	Funded status	$	(17,197	)	$	(15,786	)
	Unrecognized actuarial losses		19,333			10,745
	Unrecognized prior service cost		1,819			5,292
	Unrecognized transitional obligation		236			325
Prepaid pension costs		$	4,191		$	576

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        The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 7.25% at May 31, 2002 and 7.75% at May 31, 2001, and an assumed average compensation increase of 4.0% and 4.5% at May 31, 2002 and 2001, respectively. The expected long-term rate of return on assets is 9.0% and 10.0% for fiscal 2002 and 2001, respectively. The unrecognized actuarial losses, prior service cost and transition obligation are amortized on a straight-line basis over the estimated average future service period.

        The projected benefit obligation for non-domestic plans is determined using an assumed weighted average discount rate of 6.0% at May 31, 2002 and 2001, and an assumed average compensation increase of 4.0%. The expected long-term rate of return on assets is 6.5% for fiscal 2002 and 2001.

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

	For the Year Ended May 31,
	2002			2001			2000
Service cost	$	2,767		$	2,867		$	2,785
Interest cost		4,427			4,411			4,035
Expected return on plan assets		(4,901	)		(4,275	)		(3,881	)
Amortization of prior service cost		393			485			266
Recognized net actuarial loss		112			24			460
Transitional obligation		89			89			91
Curtailment		311			—			—
	$	3,198		$	3,601		$	3,756

Defined Contribution Plan

        The defined contribution plan is a profit sharing plan which is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 15.0% of their pretax compensation, subject to applicable regulatory limits. The Company may make matching contributions up to 5.0% of compensation. Participants vest on a pro-rata basis in Company contributions during the first three years of employment. Expense charged to results of operations was $1,391, $1,550 and $1,634 in fiscal 2002, 2001 and 2000, respectively.

Postretirement Benefits Other Than Pensions

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

34

        Postretirement benefit cost for the years ended May 31, 2002, 2001 and 2000, included the following components:

	2002		2001		2000
Service cost	$	—	$	—	$	—
Interest cost		97		105		104
Amortization of prior service cost		16		16		16
	$	113	$	121	$	120

        The funded status of the plans at May 31, 2002 and 2001 was as follows:

		2002			2001
Change in benefit obligations:
	Benefit obligations at beginning of year	$	1,337		$	1,357
	Interest cost		97			105
	Benefits paid		(102	)		(170	)
	Unrecognized actuarial loss		8			45
	Plan participants' contributions		—			—
Benefit obligation at end of year		$	1,340		$	1,337
Change in plan assets:
	Fair value of plan assets at beginning of year	$	—		$	—
	Company contributions		102			170
	Benefits paid		(102	)		(170	)
	Plan participants' contributions		—			—
Fair value of plan assets at end of year		$	—		$	—
	Funded status	$	(1,340	)	$	(1,337	)
	Unrecognized actuarial gains		(22	)		(7	)
	Unrecognized prior service cost		162			144
Accrued postretirement costs		$	(1,200	)	$	(1,200	)

        The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.25% at May 31, 2002 and 7.75% at May 31, 2001. The assumed rate of future increases in healthcare costs was 10.0% and 6.8% in fiscal 2002 and 2001, respectively, declining to 5.0% by the year 2004 and remaining at that rate thereafter. A one percent increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $25 as of May 31, 2002, and would not result in a significant change to the annual postretirement benefit expense.

35

8.    Aviation Equipment Operating Leases

        The Company occasionally leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company for up to four years. If the Company elects not to renew a lease, the Company may elect either to (1) direct the lessor to sell the equipment at which time the Company would be required to reimburse the lessor for the shortfall, if any, between the proceeds on the sale and the scheduled purchase option price, or (2) purchase the equipment from the lessor at its scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price.

        In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed the fair value of such equipment, the Company records an accrual for loss. The scheduled purchase option values amounted to $35,623 at May 31, 2002 and $87,585 at May 31, 2001.

        During the fourth quarter, the Company purchased the equity interest in $31,080 of aviation equipment. As a result, this amount was recorded as an asset on the May 31, 2002 Consolidated Balance Sheets. The lease obligations for these assets converted to term loans in the amount of $29,737, which is also recorded on the May 31, 2002 Consolidated Balance Sheets. (See also Note 3)

9.    Commitments and Contingencies

        In addition to aviation equipment operating leases, the Company leases certain facilities and equipment under agreements which are classified as operating leases that expire at various dates through 2011. Future minimum payments and sublease income under all operating leases at May 31, 2002, are as follows:

	Future Minimum Payments
Year	Facilities and Equipment		Aviation Equipment		Sublease Income
2003	$	4,545	$	3,264	$	2,220
2004		3,582		3,196		2,220
2005		2,417		3,962		2,220
2006		1,628		12,622		2,035
2007 and thereafter		1,211		16,546		—

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

	2002		2001		2000
Facilities and Equipment	$	7,688	$	8,484	$	9,663
Aviation Equipment		6,558		10,199		8,344

        The Company routinely issues letters of credit, performance bonds or credit guarantees in the ordinary course of its business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 2002 was approximately $18,287.

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

36

10.  Investment in Leveraged Leases

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

        During the lease term the Company is required, in accordance with SFAS No. 13, to adjust the elements of the investment in leveraged leases to reflect changes in important economic assumptions, such as the renegotiation of the interest rate on the non-recourse debt or changes in income tax rates. The Company's net investment in leveraged leases is comprised of the following elements:

	May 31,
	2002			2001
Rentals receivable (net of principal and interest on the non-recourse debt)	$	12,307		$	13,415
Estimated residual value of leased assets		25,573			26,615
Unearned and deferred income		(8,792	)		(11,315	)
		29,088			28,715
Deferred taxes		(14,730	)		(21,200	)
Net investment in leveraged leases	$	14,358		$	7,515

        Pretax income from leveraged leases was $2,523, $2,640 and $695 in fiscal 2002, 2001 and 2000, respectively.

11.  Investment in Joint Ventures

        At May 31, 2002 and 2001, the Company owned 50% equity interests in each of two joint ventures. The remaining 50% equity interest in each joint venture was owned by a major U.S. financial institution. Each joint venture owns one wide-body aircraft, currently on lease to foreign carriers. The Company's investment at May 31, 2002 and 2001 in the two joint ventures was $4,038 and $3,784 respectively, and is included in Other Assets on the Consolidated Balance Sheets. Each joint venture financed its purchase of its aircraft primarily with debt that is without recourse to the joint ventures and to the joint venture partners.

        Combined summarized financial information for the two joint ventures at May 31, 2002 and 2001 is as follows:

	May 31,
	2002		2001
Total assets	$	80,270	$	84,783
Total debt		72,194		77,215
Net assets of joint ventures	$	8,076	$	7,568
AAR CORP.'s 50% equity interest in joint ventures	$	4,038	$	3,784

        On June 20, 2002 the Company purchased the equity interest in one of the joint ventures from the joint venture partner for nominal consideration. As a result, the book value of the aircraft and the non-recourse debt will be recorded on the Company's Consolidated Balance Sheets in the first quarter of fiscal 2003. The book value amounts of the aircraft and related non-recourse debt were $35,800 and $33,300, respectively at May 31, 2002.

37

12.  Other Noncurrent Assets

        At May 31, 2002 and 2001, other noncurrent assets consisted of the following:

	May 31,
	2002		2001
Notes receivable	$	13,777	$	6,353
Investment in aviation equipment		11,175		7,733
Cash surrender value of life insurance		4,295		3,538
Licenses and rights		4,136		887
Investment in joint ventures (see Note 11)		4,038		3,784
Debt issuance costs		881		609
Other		14,746		17,830
	$	53,048	$	40,734

13.  Acquisitions

        On September 29, 2000, the Company acquired substantially all the assets and assumed certain liabilities of Hermetic, an aircraft component support company providing repair and distribution services to the North American aftermarket primarily on behalf of European aircraft component manufacturers. The purchase price of $16,442 was paid with a cash payment of $3,200 and a note of $13,251 that was due and paid on June 1, 2001. The transaction was recorded under the purchase method of accounting. The Company has included in its consolidated financial statements the results of Hermetic since the date of acquisition.

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

38

14.  Business Segment Information

Segment Reporting

        The Company is a leading provider of value-added products and services to the global aviation/aerospace industry. In the first quarter of fiscal 2002, the Company changed its reporting segments to reflect changes in the chief decision making officer's approach to evaluating performance. Previously, the Company reported three segments, Aircraft and Engines, Airframe and Accessories, and Manufacturing. The Company now reports its activities in four segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

        Revenues in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial, military, general and business aviation markets.

        Revenues in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts and components; maintenance repair and overhaul of a wide variety of airframes and the repair and overhaul of parts for industrial gas and steam turbine operators.

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

        Revenues in the Aircraft and Engine Sales and Leasing segment are derived from the sale or lease of used commercial aircraft and new, overhauled and repaired commercial aircraft engines.

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

        Selected financial information for each reportable segment is as follows:

		For the Year Ended May 31,
		2002		2001		2000
Net sales, excluding pass through sales:
	Inventory and Logistic Services	$	258,067	$	366,562	$	406,053
	Maintenance, Repair and Overhaul		216,727		257,117		240,274
	Manufacturing		99,558		97,154		119,933
	Aircraft and Engine Sales and Leasing		64,369		132,826		191,265
		$	638,721	$	853,659	$	957,525

39

		For the Year Ended May 31,
		2002		2001		2000
Gross profit, before consideration of impairment charges:
	Inventory and Logistic Services	$	32,135	$	53,614	$	79,412
	Maintenance, Repair and Overhaul		32,417		48,819		44,556
	Manufacturing		12,799		12,673		18,660
	Aircraft and Engine Sales and Leasing		12,397		21,361		30,225
		$	89,748	$	136,467	$	172,853

		May 31,
		2002		2001		2000
Total assets:
	Inventory and Logistic Services	$	252,804	$	278,614	$	354,155
	Maintenance, Repair and Overhaul		190,438		185,354		159,128
	Manufacturing		73,791		84,041		84,811
	Aircraft and Engine Sales and Leasing		158,220		86,981		87,770
	Corporate		34,946		66,864		52,113
		$	710,199	$	701,854	$	737,977

		For the Year Ended May 31,
		2002		2001		2000
Capital expenditures:
	Inventory and Logistic Services	$	627	$	1,616	$	5,483
	Maintenance, Repair and Overhaul		8,316		6,116		8,122
	Manufacturing		1,684		2,554		2,761
	Aircraft and Engine Sales and Leasing		2		17		215
	Corporate		1,483		2,831		5,763
		$	12,112	$	13,134	$	22,344

		For the Year Ended May 31,
		2002		2001		2000
Depreciation and amortization:
	Inventory and Logistic Services	$	2,646	$	3,290	$	3,239
	Maintenance, Repair and Overhaul		7,068		6,432		6,304
	Manufacturing		4,040		4,082		3,747
	Aircraft and Engine Sales and Leasing		4,745		2,165		1,937
	Corporate		3,997		4,670		4,994
		$	22,496	$	20,639	$	20,221

40

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

		For the Year Ended May 31,
		2002			2001			2000
Segment Gross Profit		$	89,748		$	136,467		$	172,853
	Cost of Sales-impairment charges		(75,900	)		—			—
	Selling, general and administrative and other		(85,037	)		(96,077	)		(102,195	)
	Special charges		(10,100	)		—			—
	Interest expense		(19,798	)		(21,887	)		(23,431	)
	Interest income		2,858			1,717			2,299
Income (loss) before provision for income taxes		$	(98,229	)	$	20,220		$	49,526

        Sales to the U.S. Government, its agencies and its contractors were approximately $163,173 (25.5% of total sales), $139,072 (15.9% of total sales) and $132,048 (12.9% of total sales) in fiscal 2002, 2001 and 2000, respectively. No single non-government customer represents 10% or more of total sales in fiscal 2002. During fiscal 2001 and 2000, sales to the Company's largest non-government customer, excluding pass through sales, were $57,400 and $114,000, respectively. Including pass through sales, sales to the largest non-government customer were $78,000 and $180,800 in fiscal 2001 and 2000, respectively.

Geographic Data

		May 31,
		2002		2001
Long-lived assets:
	United States	$	263,232	$	216,706
	Europe		10,156		6,953
	Other		155		72
		$	273,543	$	223,731

        Export sales from the Company's U.S. operations to unaffiliated customers, the majority of which are located in Europe, the Middle East, Canada, Mexico, South America and Asia (including sales through foreign sales offices of domestic subsidiaries), were approximately $134,809 (21.1% of total sales), $213,864 (24.5% of total sales) and $184,718 (18.0% of total sales) in fiscal 2002, 2001 and 2000, respectively.

41

15.  Selected Quarterly Data (Unaudited)

        The unaudited selected quarterly data for fiscal years ended May 31, 2002 and 2001 follows. The sales amounts include pass through sales.

Fiscal 2002

Quarter	Sales		Gross Profit			Net Income			Diluted Earnings (Loss) Per Share
First	$	202,993	$	29,140		$	486		$	.02
Second		144,889		(55,392	)		(54,484	)		(2.03	)
Third		143,457		19,511			(2,290	)		(.08	)
Fourth		147,382		20,589			(2,651	)		(.08	)
	$	638,721	$	13,848		$	(58,939	)	$	(2.08	)

Fiscal 2001

Quarter	Sales		Gross Profit		Net Income		Diluted Earnings Per Share
First	$	241,770	$	34,415	$	3,159	$	.12
Second		211,335		35,337		4,278		.16
Third		200,071		35,746		5,388		.20
Fourth		221,079		30,969		5,706		.21
	$	874,255	$	136,467	$	18,531	$	.69

        The sum of diluted earnings (loss) per share for fiscal 2002 quarters does not equal the full year amount due to the impact of changes in average shares outstanding.

16.  Allowance for Doubtful Accounts

		May 31,
		2002			2001			2000
Balance, beginning of year		$	11,016		$	10,080		$	4,830
	Provision charged to operations		8,397			2,141			5,470
	Deductions for accounts written off, net of recoveries		(8,789	)		(1,205	)		(220	)
Balance, end of year		$	10,624		$	11,016		$	10,080

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

        Not applicable.

42

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item regarding the Directors of the Company is incorporated by reference to the information contained under the caption "Board of Directors" in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders.

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

        The information required by this item regarding the compliance with Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by reference to the information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference to the information contained under the captions "Executive Compensation and Other Information" (but excluding the following sections thereof: "Compensation Committee's Report on Executive Compensation" and "Stockholder Return Performance Graph"); "Employment and Other Agreements" and "Directors' Compensation" in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference to the information contained under the caption "Security Ownership of Management and Others" in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders.

43

PART IV

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

Financial Statements and Financial Statement Disclosures

		Page
Independent Auditors' Report		15
Financial Statements—AAR CORP. and Subsidiaries:
	Consolidated Statements of Operations for the three years ended May 31, 2002	16
	Consolidated Balance Sheets as of May 31, 2002 and 2001	17-18
	Consolidated Statements of Stockholders' Equity for the three years ended May 31, 2002	19
	Consolidated Statements of Cash Flows for the three years ended May 31, 2002	20
	Notes to Consolidated Financial Statements	21-42
	Selected quarterly data (unaudited) for the years ended May 31, 2002 and 2001 (Note 15 to Consolidated Financial Statements)	42
Financial data schedule for the twelve-month period ended May 31, 2002		See Exhibit Index

Exhibits

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

Reports on Form 8-K

        The Company filed no reports on Form 8-K during the three-month period ended May 31, 2002.

44

Signatures

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

	AAR CORP. (Registrant)
Date: August 26, 2002
	By:	/s/  DAVID P. STORCH David P. Storch President and Chief Executive Officer

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

Signature	Title	Date
/s/  IRA A. EICHNER Ira A. Eichner	Chairman of the Board Director	August 26, 2002
/s/  DAVID P. STORCH David P. Storch	President and Chief Executive Officer; Director (Principal Executive Officer)	August 26, 2002
/s/  TIMOTHY J. ROMENESKO Timothy J. Romenesko	Vice President and Chief Financial Officer (Principal Financial Officer)	August 26, 2002
/s/  MICHAEL J. SHARP Michael J. Sharp	Vice President—Controller (Principal Accounting Officer)	August 26, 2002
/s/  A. ROBERT ABBOUD A. Robert Abboud	Director	August 26, 2002
/s/  HOWARD B. BERNICK Howard B. Bernick	Director	August 26, 2002
/s/  JAMES G. BROCKSMITH, JR James G. Brocksmith, Jr	Director	August 26, 2002
/s/  RONALD R. FOGLEMAN Ronald R. Fogleman	Director	August 26, 2002
/s/  JAMES E. GOODWIN James E. Goodwin	Director	August 26, 2002
/s/  EDGAR D. JANNOTTA Edgar D. Jannotta	Director	August 26, 2002
/s/  JOEL D. SPUNGIN Joel D. Spungin	Director	August 26, 2002

45

EXHIBIT INDEX

	Index	Exhibits
3.	Articles of Incorporation and By-Laws	3.1	Restated Certificate of Incorporation(1); Amendments thereto dated November 3, 1987(2), October 19, 1988(2), October 16, 1989(24) and November 3, 1999.(25)
		3.2	By-Laws, as amended.(2) Amendment thereto dated April 12, 1994(12), January 13, 1997(22), July 16, 1992(24) and April 11, 2000(26) and May 13, 2002 (filed herewith).
4.	Instruments defining the rights of security holders	4.1	Restated Certificate of Incorporation and Amendments (see Exhibit 3.1).
		4.2	By-Laws, as amended (See Exhibit 3.2).
		4.3	Second Amended and Restated Credit Agreement dated May 27, 1998 between Registrant and Bank of America National Trust and Savings Association as agent (filed herewith), amended December 28, 1998 (filed herewith), February 5, 2002 (filed herewith) and May 23, 2002 (filed herewith).
		4.4	Rights Agreement between the Registrant and the First National Bank of Chicago dated July 8, 1997(17) and amended October 16, 2001.(28)
		4.5	Indenture dated October 15, 1989 between the Registrant and U.S. Bank Trust National Association (formerly known as First Trust, National Association, as successor in interest to Continental Bank, National Association) as Trustee, relating to debt securities;(5) First Supplemental Indenture thereto dated August 26, 1991;(6) Second Supplemental Indenture thereto dated December 10, 1997.(18)
		4.6	Officers' certificates relating to debt securities dated October 24, 1989(10) and October 12, 1993.(10)
		4.7	Second Amended and Restated Credit Agreement dated February 10, 1998, between the Registrant and The First National Bank of Chicago (now know as Bank One, N. A.)(19) amended August 20, 1998 (filed herewith) and January 25, 2002 (filed herewith).
		4.8	Credit Agreement dated November 1, 1997 between the Registrant and The Northern Trust Company.(20)
		4.9	Revolving Loan Agreement dated April 11, 2001 between Registrant and LaSalle Bank National Association(29) amended November 30, 2001 (filed herewith), April 22, 2002 (filed herewith) and June 6, 2002 (filed herewith).

		4.10	Note Purchase Agreement dated May 1, 2001 between Registrant and various purchasers, relating to the issuance of debt securities to institutional investors.(29)
		4.11	Revolving Loan Agreement dated October 3, 2001 between Registrant and U. S. Bank National Association (filed herewith) and amended November 30, 2001 (filed herewith).
			Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant is not filing certain documents. The Registrant agrees to furnish a copy of each such document upon the request of the Commission.
10.	Material Contracts	10.1	Amended and Restated AAR CORP. Stock Benefit Plan effective October 1, 2001.(28)
		10.2	Death Benefit Agreement dated August 24, 1984 between the Registrant and Ira A. Eichner.(8) Amendments thereto dated August 12, 1988(4), May 25, 1990(24) and October 9, 1996,(24) and his agreement to terminate such Death Benefit Agreement dated May 30, 1999.(24)
		10.3	Further Restated and Amended Employment Agreement dated August 1, 1985 between the Registrant and Ira A. Eichner(3). Amendments thereto dated August 12, 1988,(4) May 25, 1990,(16) July 13, 1994,(16) October 9, 1996(21) and October 31, 1997.(21)
		10.4	Trust Agreement dated August 12, 1988 between the Registrant and Ira A. Eichner(4) and amendments thereto dated May 25, 1990(16), February 4, 1994(12), October 9, 1996(24) and May 31, 1999.(24)
		10.5	AAR CORP Directors' Retirement Plan, dated April 14, 1992,(9) amended May 26, 2000(26) and April 10, 2001.(29)
		10.6	AAR CORP. Amended and Restated Supplemental Key Employee Retirement Plan, dated May 4, 2000,(26) amended April 10, 2001(29) and October 10, 2001 (filed herewith).
		10.7	Amended and Restated Employment Agreement dated July 14, 1998 between the Registrant and David P. Storch(26) and amended July 10, 2001.(27)
		10.8	Amended and Restated Severance and Change in Control agreement dated April 11, 2000 between the Registrant and Philip C. Slapke.(26)
		10.9	Amended and Restated Severance and Change in Control agreement dated April 11, 2000 between the Registrant and Howard A. Pulsifer.(26)
		10.10	Amended and Restated Severance and Change in Control agreement dated August 1, 2000 between the Registrant and Michael J. Sharp.(29)

		10.11	Employment and Severance and Change in Control agreement dated June 1, 2001 between the Registrant and Joseph M. Gullion.(29)
		10.12	Amended and Restated Severance and Change in Control agreement dated April 11, 2000 between the Registrant and Timothy J. Romenesko.(26)
		10.13	Amended and Restated AAR CORP. Nonemployee Directors' Deferred Compensation Plan, dated April 8, 1997, amended May 26, 2000.(26)
21.	Subsidiaries of the Registrant	21.1	Subsidiaries of AAR CORP.(filed herewith).
23.	Consents of experts and counsel	23.1	Consent of KPMG LLP (filed herewith).
99.	Additional Exhibits	99.1	Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).
		99.2	Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)

Notes:

(1)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987.

(2)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989.

(3)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1986.

(4)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988.

(5)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1989.

(6)

Incorporated by reference to Exhibits to Registrant's Registration Statement on Form S-3 filed August 27, 1991.

(7)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991.

(8)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1985.

(9)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.

(10)

Incorporated by reference to Exhibits to the Registrant's Current Reports on Form 8-K dated October 24, 1989 and October 12, 1993, respectively.

(11)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993.

(12)

Incorporated by reference to Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994.

(13)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994.

(14)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1995.

(15)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1996.

(16)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996.

(17)

Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 4, 1997.

(18)

Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed December 10, 1997.

(19)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998.

(20)

Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed May 15, 1998.

(21)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997.

(22)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1998.

(23)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998.

(24)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1999.

(25)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.

(26)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2000.

(27)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 2001.

(28)

Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 2001.

(29)

Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2001.

QuickLinks

TABLE OF CONTENTS
PART I

ITEM 1. BUSINESS (Dollars in thousands)
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (Dollars in thousands, except per share amounts)
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

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

Signatures
EXHIBIT INDEX

EX-3.2

                                                                     EXHIBIT 3.2

                                  AMENDMENT TO
                              THE AAR CORP. BY-LAWS

     WHEREAS, AAR CORP. (the "Company") has adopted a form of by-laws (the
     "By-Laws") and reserves the right to amend the By-Laws; and

     WHEREAS, the Company has amended the By-Laws from time to time in the past,
     and now desires to amend the By-Laws further to change the date of the
     Annual Meeting of Shareholders;

     NOW, THEREFORE, the By-laws are hereby amended, effective January 1, 2003,
     in the following respect:

          Article II, Section 1, of the By-Laws be amended to read as follows:

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

     This Amendment has been executed by the Company by its duly authorized
officer this 13th day of May, 2002 and attested by its Secretary.

                                                AAR CORP.


                                                By /s/ David P. Storch
                                                   -----------------------------
                                                   David P. Storch, President
                                                   and Chief Executive Officer
ATTEST:


/s/ Howard A. Pulsifer
- ----------------------
Howard A. Pulsifer, Secretary

EX-4.3

                                                                     EXHIBIT 4.3

                                                                  EXECUTION COPY


                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT

                                      AMONG

                                   AAR CORP.,

                          VARIOUS LENDING INSTITUTIONS

                                       AND

                            BANK OF AMERICA NATIONAL

                     TRUST AND SAVINGS ASSOCIATION, AS AGENT


                            DATED AS OF MAY 27, 1998



                                TABLE OF CONTENTS


                                                                           PAGE
                                                                           ----
TABLE OF CONTENTS..............................................................2
ARTICLE I......................................................................7
DEFINITIONS....................................................................7
ARTICLE II....................................................................20
THE CREDITS...................................................................20

   2.1.    THE ADVANCES. Subject to the terms of this Agreement, the Borrower
   may borrow, repay and reborrow Advances at any time prior to or on the
   Revolving Credit Termination Date. The Advances may be U.S. Dollar Advances
   made pursuant to SECTION 2.1(a) or Alternate Currency Advances made pursuant
   to SECTION 2.1(b). No Advances may be requested or made subsequent to the
   Revolving Credit Termination Date. Principal payments made after the
   Revolving Credit Termination Date may not be reborrowed....................20
   2.2.    EXTENSION OF REVOLVING CREDIT TERMINATION DATE. The initial Revolving
   Credit Termination Date shall be May 27, 2001. The Borrower may, not earlier
   than 180 days and not later than 60 days prior to each anniversary of the
   Restatement Effective Date execute and deliver to the Agent (who shall
   promptly forward a copy of the same to each of the Lenders) an Extension
   Letter in substantially the form of EXHIBIT "B" hereto, with appropriate
   insertions, requesting that the Revolving Credit Termination Date be extended
   for one year. Such request for an extension of the Revolving Credit
   Termination Date shall become effective if, and only if, each Lender shall,
   in its sole and absolute discretion, execute such Extension Letter and return
   copies thereof to the Agent and the Borrower prior to each such applicable
   anniversary of the Restatement Effective Date..............................21
   2.3.    MANDATORY PAYMENTS. The Borrower shall make the following mandatory
   payments on the Advances:..................................................21
   2.4.    FEES. The Borrower further agrees to pay to the Agent, for the
   ratable benefit of the Lenders, the Facility Fee for the period from the date
   hereof to and including the Revolving Credit Termination Date. The Facility
   Fee shall be payable quarterly in advance on the Restatement Effective Date
   and on each Payment Date thereafter. The obligations of the Borrower under
   this Section 2.4 shall survive the payment of the Advances and the
   termination of this Agreement..............................................21
   2.5.    OPTIONAL REDUCTIONS IN AGGREGATE COMMITMENT. The Borrower may
   permanently reduce the Aggregate Commitment in whole or in part ratably among
   the Lenders in integral multiples of $1,000,000, upon at least 10 days'
   written notice to the Agent, which notice shall specify the amount of any
   such reduction, provided, however, that the amount of the Aggregate
   Commitment may not be reduced below the aggregate principal Dollar Amount of
   the outstanding Advances. All accrued interest and fees shall be payable on
   the effective date of any termination of the obligations of the Lenders to
   make Loans hereunder.......................................................21
   2.6.    RATABLE LOANS. Each Advance hereunder shall consist of Loans made
   from the several Lenders ratably according to their respective
   Percentages................................................................22
   2.7.    TYPES OF ADVANCES. The U.S. Dollar Advances may be Floating Rate
   Advances, Eurodollar Advances or Quoted Rate Advances, or a combination
   thereof, selected by the

                                      - 2 -


   Borrower in accordance with SECTIONS 2.10 and 2.13. All Alternate Currency
   Advances shall be Transaction Rate Advances selected by the Borrower in
   accordance with SECTION 2.11...............................................22
   2.8.    MINIMUM AMOUNT OF EACH ADVANCE. Each Fixed Rate Advance shall be in
   the minimum amount of $1,000,000 (and in multiples of $100,000 if in excess
   thereof), and each Floating Rate Advance shall be in the minimum amount of
   $500,000 (and in multiples of $100,000 if in excess thereof), provided,
   however, that any Floating Rate Advance may be in the amount of the Aggregate
   Commitment.................................................................22
   2.9.    OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time pay,
   without penalty or premium, all outstanding Floating Rate Advances, or, in a
   minimum aggregate amount of $1,000,000 or any integral multiple of $100,000
   in excess thereof, any portion of the outstanding Floating Rate Advances upon
   5 days' prior notice to the Agent. Fixed Rate Advances may be paid prior to
   the last day of the applicable Interest Period, subject to compliance with
   SECTION 3.4; PROVIDED, however, that Quoted Rate Advances may not be repaid
   prior to the last day of their respective Interest Periods. Principal
   payments made after the Revolving Credit Termination Date shall be applied to
   the principal installments payable under SECTION 2.3(d) in the inverse order
   of maturity................................................................22
   2.10.   METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW U.S. DOLLAR
   ADVANCES. The Borrower shall select the Type and, in the case of each
   Eurodollar Advance or Quoted Rate Advance, the Interest Period applicable to
   each new Advance from time to time. The Borrower shall give the Agent
   irrevocable notice in substantially the form of EXHIBIT "C" hereto with
   appropriate insertions (a "BORROWING NOTICE") not later than (a) 1:00 p.m.
   (Chicago time) at least (i) one Business Day before the Borrowing Date of
   each Floating Rate Advance and (ii) two Business Days before the Borrowing
   Date for each Eurodollar Advance and (b) 11:30 a.m. (Chicago time) on the
   Borrowing Date for each Quoted Rate Advance, in each case specifying:......22
   2.11. METHOD OF REQUESTING ALTERNATE CURRENCY ADVANCES. The Borrower may from
   time to time in accordance with this Section 2.11 request the Lenders to make
   one or more Alternate Currency Advances. The Lenders shall have no obligation
   to make any such Alternate Currency Advance so requested by the Borrower. If,
   and only if, each of the Lenders in its sole and absolute discretion agrees,
   in the manner provided for in this Section 2.11, to make its respective Loan
   comprising any such Alternate Currency Advance, will such Alternate Currency
   Advance be made............................................................23
   2.12.   MAKING THE LOANS. Subject to SECTION 2.10, on each Borrowing Date,
   each Lender shall make available its Loan or Loans comprising the Advance or
   Advances to be made on such Borrowing Date (i) in the case of a Loan
   denominated in U.S. Dollars, not later than noon (Chicago time), in
   immediately available funds to the Agent at its address specified pursuant to
   Article XIII and (ii) in the case of a Loan denominated in an Alternate
   Currency, not later than noon (local time), in the city of the Agent's
   Lending Installation for such Alternate Currency, in such funds as may then
   be customary for the settlement of international transactions in such
   currency in the city of and at the address of the Agent's Lending
   Installation for such currency. The Agent will make the funds so received
   from the Lenders available to the Borrower at the Agent's aforesaid
   address....................................................................24
   2.13.   CONVERSION AND CONTINUATION OF OUTSTANDING U.S. DOLLAR ADVANCES.
   Outstanding U.S. Dollar Advances may be continued as or converted into U.S.
   Dollar Advances of the same or

                                      - 3 -


   another Type as provided below in this Section 2.13; PROVIDED, that
   notwithstanding anything else in this Section 2.13 to the contrary, (a)
   outstanding U.S. Dollar Advances may not be converted into Alternate Currency
   Advances pursuant to this Section 2.13 and (b) outstanding Alternate Currency
   Advances may not be continued or converted pursuant to this Section 2.13, but
   must be repaid on or prior to the last day of their respective Interest
   Periods pursuant to SECTION 2.3(a) and may only be reborrowed pursuant to
   SECTIONS 2.1(b) and 2.11...................................................24
   2.14.   RESTRICTIONS ON INTEREST PERIODS. No Interest Period may extend
   beyond a Payment Date on which principal of the Advances shall be payable
   unless outstanding principal of Floating Rate Advances and Fixed Rate
   Advances with Interest Periods ending prior to said Payment Date shall be at
   least equal to the amount so payable. No Interest Period shall extend beyond
   the Facility Termination Date. No more than 10 Interest Periods may be in
   effect at any one time. No more than three Quoted Rate Interest Periods may
   be in effect at any one time...............................................26
   2.15.   CHANGES IN INTEREST RATE, ETC. Changes in the rate of interest on
   that portion of any Advance maintained as a Floating Rate Advance will take
   effect simultaneously with each change in the Alternate Base Rate and each
   change in the Applicable Margin applicable thereto. Each Fixed Rate Advance
   shall bear interest from and including the first day of the Interest 26
   Period applicable thereto to but excluding the last day of such Interest
   Period at the interest rate determined as applicable to such Fixed Rate
   Advance, provided that the rate of interest on each Eurodollar Advance will
   change simultaneously with each change, during the applicable Eurodollar
   Interest Period, of the Applicable Margin..................................26
   2.16.   RATES APPLICABLE AFTER DEFAULT. During the continuance of a Default
   the Required Lenders may, at their option, by notice to the Borrower (which
   notice may be revoked at the option of the Required Lenders notwithstanding
   any provision of SECTION 8.2 requiring unanimous consent of the Lenders to
   changes in interest rates), declare that (i) each Fixed Rate Advance shall
   bear interest for the remainder of the applicable Interest Period at the rate
   otherwise applicable to such Interest Period plus 2% per annum and (ii) each
   Floating Rate Advance shall bear interest at a rate per annum equal to the
   Floating Rate otherwise applicable to the Floating Rate Advance plus 2% per
   annum......................................................................26
   2.17.   METHOD OF PAYMENT. (a) All payments of principal, interest and fees
   to be made by the Borrower hereunder or under the Notes in U.S. Dollars shall
   be made, without setoff, deduction, or counterclaim, in immediately available
   funds to the Agent at the Agent's address specified pursuant to ARTICLE XIII,
   or at any other Lending Installation of the Agent specified in writing by the
   Agent to the Borrower, by noon (local time) on the date when due and shall be
   applied ratably by the Agent among the Lenders. Each payment delivered to the
   Agent for the account of any Lender shall be delivered promptly by the Agent
   to such Lender in the same type of funds which the Agent received at such
   Lender's address specified pursuant to ARTICLE XIII or at any Lending
   Installation specified in a notice received by the Agent from such Lender..26
   2.18.   FOREIGN TAXES. (a) All payments made by the Borrower in respect of
   principal of and interest on the Advances and of all other amounts payable by
   it under this Agreement are payable without deduction for or on account of
   any present or future taxes, duties, withholdings or other charges levied or
   imposed by the government of any jurisdiction outside

                                      - 4 -


   the United States of America or by any political subdivision or taxing
   authority thereof or therein (herein called "FOREIGN TAXES"). If the Borrower
   shall be required by law to deduct or withhold any Foreign Taxes from any
   such amount payable by it hereunder or under any of the Notes to or for the
   account of any Lender, (i) such amount shall be increased as may be necessary
   so that, after making such deductions or withholdings (including any
   deductions or withholdings applicable to additional amounts payable pursuant
   to this Section), such Lender receives an amount equal to the amount it would
   have received had no such deductions or withholdings been made and (ii) the
   Borrower shall make such deductions and withholdings and pay the amount
   thereof to the relevant government, political subdivision or taxing authority
   at or prior to the time required to be paid under applicable law (and shall
   promptly furnish to the Agent, for the benefit of the Lenders, official
   receipts evidencing such payment). In addition, the Borrower will pay any
   present or future stamp or documentary taxes or similar taxes or levies
   imposed by any government, political subdivision or taxing authority referred
   to in the first sentence of this subsection arising from any payment by it
   hereunder or under any of the Notes or from the execution, delivery or
   registration of, or otherwise with respect to, this Agreement or any of the
   Notes (herein called "OTHER TAXES"). The Borrower will indemnify each Lender
   and the Agent for, and hold each Lender and the Agent harmless against, the
   full amount of Foreign Taxes or Other Taxes (including, without limitation,
   any Foreign Taxes or Other Taxes imposed by any jurisdiction on amounts
   payable under this Section) paid or payable by such Lender or the Agent and
   any liability of such Lender or the Agent relating thereto (including,
   without limitation, penalties, interest and expenses)......................27
   2.19.   JUDGMENT CURRENCY. If for the purposes of obtaining judgment in any
   court it is necessary to convert a sum due from the Borrower hereunder or
   under any of the Notes in the currency expressed to be payable herein or
   under the Notes (the "SPECIFIED CURRENCY") into another currency, the parties
   hereto agree, to the fullest extent that they may effectively do so, that the
   rate of exchange used shall be that at which in accordance with normal
   banking procedures the Agent could purchase the specified currency with such
   other currency at the Agent's main Chicago office on the Business Day
   preceding that on which final, nonappealable judgment is given. The
   obligations of the Borrower in respect of any sum due to any Lender or the
   Agent hereunder or under any Note shall, notwithstanding any judgment in a
   currency other than the specified currency, be discharged only to the extent
   that on the Business Day following receipt by such Lender or the Agent (as
   the case may be) of any sum adjudged to be so due in such other currency such
   Lender or the Agent (as the case may be) may in accordance with normal,
   reasonable banking procedures purchase the specified currency with such other
   currency. If the amount of the specified currency so purchased is less than
   the sum originally due to such Lender or the Agent (as the case may be), in
   the specified currency, the Borrower agrees, to the fullest extent that it
   may effectively do so, as a separate obligation and notwithstanding any such
   judgment, to indemnify such Lender or the Agent (as the case may be) against
   such loss, and if the amount of the specified currency so purchased exceeds
   (a) the sum originally due to such Lender or the Agent (as the case may be)
   in the specified currency and (b) any amounts shared with other Lenders as a
   result of allocations of such excess as a disproportionate payment to such
   Lender under SECTION 11.2, such Lender or the Agent (as the case may be)
   agrees to remit such excess to the Borrower................................28

                                      - 5 -


   2.20.   NOTES; TELEPHONIC NOTICES. Each Lender shall, and is hereby
   authorized to, record the principal amount of each of its Loans and each
   repayment on the schedule attached to its Note (or to otherwise record the
   same in its usual practice) provided, however, that the failure to so record
   shall not affect the Borrower's obligations in respect of such Loans. The
   Borrower hereby authorizes the Lenders and the Agent to extend, convert or
   continue U.S. Dollar Advances (it being understood and agreed that Alternate
   Currency Borrowing Requests must be in writing or by facsimile) and to
   transfer funds based on telephonic notices made by any person or persons the
   Agent or any Lender in good faith believes to be acting on behalf of the
   Borrower. The Borrower agrees to deliver promptly to the Agent a written
   confirmation, if such confirmation is requested by the Agent or any Lender,
   of each telephonic notice signed by an Authorized Officer. If the written
   confirmation differs in any material respect from the action taken by the
   Agent and the Lenders, the records of the Agent and the Lenders shall govern
   absent manifest error......................................................29
   2.21.   INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued on
   each Floating Rate Advance shall be payable on each Payment Date, commencing
   with the first such date to occur after the date hereof, on any date on which
   the Floating Rate Advance is prepaid, whether due to acceleration or
   otherwise, and at maturity. Interest accrued on that portion of the
   outstanding principal amount of any Floating Rate Advance converted into a
   Eurodollar Advance or Quoted Rate Advance on a day other than a Payment Date
   shall be payable on the date of conversion. Interest accrued on each Fixed
   Rate Advance shall be payable on the last day of its applicable Interest
   Period, on any date on which the Fixed Rate Advance is prepaid, whether by
   acceleration or otherwise, and at maturity. Interest accrued on each Fixed
   Rate Advance having an Interest Period longer than three months shall also be
   payable on the last day of each three-month interval during such Interest
   Period. Interest and fees shall be calculated for actual days elapsed on the
   basis of a 360-day year. Interest shall be payable for the day an Advance is
   made but not for the day of any payment on the amount paid if payment is
   received prior to noon (local time) at the place of payment. If any payment
   of principal of or interest on an Advance shall become due on a day which is
   not a Business Day, such payment shall be made on the next succeeding
   Business Day and, in the case of a principal payment, such extension of time
   shall be included in computing interest in connection with such payment....29
   2.22.   NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND COMMITMENT
   REDUCTIONS. Promptly after receipt thereof, the Agent will notify each Lender
   of the contents of each Aggregate Commitment reduction notice, Borrowing
   Notice, Alternate Currency Borrowing Request, Continuation/Conversion Notice
   and repayment notice received by it hereunder. The Agent will notify each
   Lender of the interest rate applicable to each Eurodollar Advance promptly
   upon determination of such interest rate and will give each Lender prompt
   notice of each change in the Alternate Reference Rate......................30
   2.23.   LENDING INSTALLATIONS. Each Lender may book its Loans at any one or
   more Lending Installations selected by such Lender and may change its Lending
   Installation(s) from time to time. All terms of this Agreement shall apply to
   any such Lending Installation and the Notes shall be deemed held by each
   Lender for the benefit of such Lending Installation(s). Each Lender may from
   time to time, by written or facsimile notice to the Agent and the Borrower,
   designate a new Lending Installation through which Loans (or Loans in a
   particular currency)

                                      - 6 -


   will be made by it and for whose account Loan payments (or Loan payments in a
   particular currency) are to be made. The Agent may from time to time, by
   written or facsimile notice to the Borrower and each Lender, designate a new
   Lending Installation at which Advances (or Advances in a particular currency)
   will be made available to the Borrower and at which payments on the Advances
   (or payments on Advances in a particular currency) are to be made by the
   Borrower...................................................................30
   2.24.   NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a Lender,
   as the case may be, notifies the Agent prior to the date on which it is
   scheduled to make payment to the Agent of (i) in the case of a Lender, the
   proceeds of a Loan or (ii) in the case of the Borrower, a payment of
   principal, interest or fees to the Agent for the account of the Lenders, that
   it does not intend to make such payment, the Agent may assume that such
   payment has been made. The Agent may, but shall not be obligated to, make the
   amount of such payment available to the intended recipient in reliance upon
   such assumption. If such Lender or the Borrower, as the case may be, has not
   in fact made such payment to the Agent, the recipient of such payment shall,
   on demand by the Agent, repay to the Agent the amount so made available
   together with interest thereon in respect of each day during the period
   commencing on the date such amount was so made available by the Agent until
   the date the Agent recovers such amount at a rate per annum equal to (i) in
   the case of payment by a Lender, the Federal Funds Effective Rate for such
   day or (ii) in the case of payment by the Borrower, the interest rate
   applicable to the relevant Loan............................................30
   2.25.   WITHHOLDING TAX EXEMPTION. At least five Business Days prior to the
   first date on which interest or fees are payable hereunder for the account of
   any Lender, each Lender that is not incorporated under the laws of the United
   States of America, or a state thereof, agrees that it will deliver to each of
   the Borrower and the Agent two duly completed copies of United States
   Internal Revenue Service Form 1001 or 4224, certifying in either case that
   such Lender is entitled to receive payments under this Agreement and the
   Notes without deduction or withholding of any United States federal income
   taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes
   to deliver to each of the Borrower and the Agent two additional copies of
   such form (or a successor form) on or before the date that such form expires
   (currently, three successive calendar years for Form 1001 and one calendar
   year for Form 4224) or becomes obsolete or after the occurrence of any event
   requiring a change in the most recent forms so delivered by it, and such
   amendments thereto or extensions or renewals thereof as may be reasonably
   requested by the Borrower or the Agent, in each case certifying that such
   Lender is entitled to receive payments under this Agreement and the Notes
   without deduction or withholding of any United States federal income taxes,
   unless an event (including without limitation any change in treaty, law or
   regulation) has occurred prior to the date on which any such delivery would
   otherwise be required which renders all such forms inapplicable or which
   would prevent such Lender from duly completing and delivering any such form
   with respect to it and such Lender advises the Borrower and the Agent that it
   is not capable of receiving payments without any deduction or withholding of
   United States federal income tax...........................................31
ARTICLE III...................................................................31
CHANGE IN CIRCUMSTANCES.......................................................31

                                      - 7 -


   3.1.    YIELD PROTECTION. If any law or any governmental or
   quasi-governmental rule, regulation, policy, guideline or directive (whether
   or not having the force of law), or any interpretation thereof, or the
   compliance of any Lender therewith.........................................31
   3.2.    CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines the
   amount of capital required or expected to be maintained by such Lender, any
   Lending Installation of such Lender or any corporation controlling such
   Lender is increased as a result of a Change (as defined below), then, within
   15 days of demand by such Lender, the Borrower shall pay such Lender the
   amount necessary to compensate for any shortfall in the rate of return on the
   portion ...................................................................32
   of such increased capital which such Lender determines is attributable to
   this Agreement, its Loans or its obligation to make Loans hereunder (after
   taking into account such Lender's policies as to capital adequacy). "CHANGE"
   means (i) any change after the date of this Agreement in the Risk-Based
   Capital Guidelines (as defined below) or (ii) any adoption of or change in
   any other law, governmental or quasi-governmental rule, regulation, policy,
   guideline, interpretation, or directive (whether or not having the force of
   law) after the date of this Agreement which affects the amount of capital
   required or expected to be maintained by any Lender or any Lending
   Installation or any corporation controlling any Lender. "RISK-BASED CAPITAL
   GUIDELINES" means (i) the risk-based capital guidelines in effect in the
   United States on the date of this Agreement, including transition rules, and
   (ii) the corresponding capital regulations promulgated by regulatory
   authorities outside the United States implementing the July 1988 report of
   the Basle Committee on Banking Regulation and Supervisory Practices Entitled
   "International Convergence of Capital Measurements and Capital Standards,"
   including transition rules, and any amendments to such regulations adopted
   prior to the date of this Agreement........................................32
   3.3.    AVAILABILITY OF EURODOLLAR ADVANCES. If (i) any Lender determines
   that maintenance of its Eurodollar Loans at a suitable Lending Installation
   would violate any applicable law, rule, regulation, or directive, whether or
   not having the force of law, (ii) the Required Lenders determine that
   deposits of a type and maturity appropriate to match fund Eurodollar Advances
   are not available or (iii) the Required Lenders determine that the interest
   rate applicable to a Eurodollar Advance does not accurately reflect the cost
   of making or maintaining such Eurodollar Advance, then the Agent shall
   suspend the availability of any new Eurodollar Advances (whether pursuant to
   SECTION 2.10 or 2.13)......................................................32
   3.4.    FUNDING INDEMNIFICATION. If any payment of a Fixed Rate Advance
   occurs on a date prior to the last day of the applicable Interest Period,
   whether because of acceleration, prepayment or otherwise, or a Fixed Rate
   Advance is not made on the date specified by the Borrower in its Borrowing
   Notice, Alternate Currency Borrowing Request or Continuation/Conversion
   Notice, as the case may be, as a consequence of any condition precedent to
   such Advance under SECTION 2.1 or ARTICLE IV not being satisfied or as a
   consequence of any failure by the Borrower to borrow such Advance when the
   same has been made available to it pursuant to SECTION 2.12, the Borrower
   will indemnify each Lender for any loss or cost in liquidating or employing
   deposits acquired to fund or maintain the Fixed Rate Advance and, provided
   that such Lender has taken such reasonable action, if any, not
   disadvantageous to it, to mitigate the same, any other loss or cost incurred
   by such Lender resulting therefrom.........................................32

                                      - 8 -


   3.5.    LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
   possible, each Lender shall designate an alternate Lending Installation with
   respect to its Fixed Rate Loans to reduce any liability of the Borrower to
   such Lender under SECTIONS 2.18, 3.1 and 3.2 or to avoid the unavailability
   of Eurodollar Advances under SECTION 3.3, so long as such designation is not
   disadvantageous to such Lender. Each Lender shall deliver a written statement
   of such Lender as to the amount due, if any, under SECTION 2.18, 3.1, 3.2 or
   3.4. Such written statement shall set forth in reasonable detail (and in
   accordance with Agreement Accounting Principles, where applicable) the
   calculations upon which such Lender determined such amount and shall be
   final, conclusive and binding on the Borrower in the absence of manifest
   error. Determination of amounts payable under such Sections in connection
   with a Eurodollar Loan shall be calculated as though each Lender funded its
   Eurodollar Loan through the purchase of a deposit of the type and maturity
   corresponding to the deposit used as a reference in determining the
   Eurodollar Rate applicable to such Eurodollar Loan, whether in fact that is
   the case or not. Unless otherwise provided herein, the amount specified in
   the written statement shall be payable on demand after receipt by the
   Borrower of the written statement. The obligations of the Borrower under
   SECTIONS 2.18, 3.1, 3.2 and 3.4 shall survive payment of the obligations and
   termination of this Agreement..............................................33
   3.6.    REFUND TO BORROWER. If, and to the extent that, any Lender shall
   actually receive a credit against its United States federal income tax
   liability or otherwise receive any rebate or refund from any government or
   governmental agency in respect of any amount paid by the Borrower pursuant to
   SECTION 3.1 or 3.2, such Lender agrees to promptly notify the Borrower
   thereof and make reimbursement of credit, rebate or refund to the Borrower,
   provided that if such Lender reasonably believes that such credit, rebate or
   refund may be subject to challenge, then such Lender shall thereupon enter
   into negotiations in good faith with the Borrower to determine when
   reimbursement of such credit, rebate or refund can be made to the
   Borrower...................................................................33
ARTICLE IV....................................................................33
CONDITIONS PRECEDENT..........................................................33
   4.1.    CONDITIONS PRECEDENT TO THE RESTATEMENT EFFECTIVE DATE. This
   Agreement shall become effective on the date (the "Restatement Effective
   Date") on which the Borrower shall have furnished to the Agent, with
   sufficient copies for the Lenders:.........................................33
   4.2.    EACH ADVANCE. The Lenders shall not be required to make any Advance,
   unless on the applicable Borrowing Date:...................................34
ARTICLE V.....................................................................34
REPRESENTATIONS AND WARRANTIES................................................34
   5.1.    CORPORATE EXISTENCE AND STANDING. Each of the Borrower and its
   Subsidiaries is a corporation duly incorporated, validly existing and in good
   standing under the laws of its jurisdiction of incorporation and has all
   requisite authority to conduct its business in each jurisdiction in which its
   business is conducted......................................................35
   5.2.    AUTHORIZATION AND VALIDITY. The Borrower has the corporate power and
   authority and legal right to execute and deliver the Loan Documents and to
   perform its obligations thereunder. The execution and delivery by the
   Borrower of the Loan Documents and the performance of its obligations
   thereunder have been duly authorized by proper corporate proceedings, and the
   Loan Documents constitute legal, valid and binding obligations of the

                                      - 9 -


   Borrower enforceable against the Borrower in accordance with their terms,
   except as enforceability may be limited by bankruptcy, insolvency or similar
   laws affecting the enforcement of creditors, rights generally..............35
   5.3.    NO CONFLICT; GOVERNMENT CONSENT. Neither the execution and delivery
   by the Borrower of the Loan Documents, nor the consummation of the
   transactions therein contemplated, nor compliance with the provisions thereof
   will violate any law, rule, regulation, order, writ, judgment, injunction,
   decree or award binding on the Borrower or any of its Subsidiaries or the
   Borrower's or any Subsidiary's articles of incorporation or by-laws or the
   provisions of any indenture, instrument or agreement to which the Borrower or
   any of its Subsidiaries is a party or is subject, or by which it, or its
   property, is bound, or conflict with or constitute a default thereunder, or
   result in the creation or imposition of any Lien in, of or on the property of
   the Borrower or a Subsidiary pursuant to the terms of any such indenture,
   instrument or agreement. No order, consent, approval, license, authorization,
   or validation of, or filing, recording or registration with, or exemption by,
   any governmental or public body or authority, or any subdivision thereof, is
   required to authorize, or is required in connection with the execution,
   delivery and performance of, or the legality, validity, binding effect or
   enforceability of, any of the Loan Documents...............................35
   5.4.    FINANCIAL STATEMENTS. The May 31, 1997 consolidated financial
   statements of the Borrower and its Subsidiaries heretofore delivered to the
   Lenders were prepared in accordance with generally accepted accounting
   principles in effect on the date such statements were prepared and fairly
   present the consolidated financial condition and operations of the Borrower
   and its Subsidiaries at such date and the consolidated results of their
   operations for the period then ended.......................................35
   5.5.    MATERIAL ADVERSE CHANGE. Since May 31, 1997, there has been no change
   in the business, properties, prospects, condition (financial or otherwise) or
   results of operations of the Borrower and its Subsidiaries which could
   reasonably be expected to have a Material Adverse Effect...................35
   5.6.    TAXES. The Borrower and its Subsidiaries have filed all United States
   federal tax returns and all other tax returns which are required to be filed
   and have paid all taxes due pursuant to said returns or pursuant to any
   assessment received by the Borrower or any of its Subsidiaries, except for
   the filing of such returns and the payment of such taxes, if any, as (a) are
   being contested in good faith and as to which adequate reserves have been
   provided or (b) do not in the aggregate exceed $4,000,000 and the failure to
   file or pay for which could not reasonably be expected to have a Material
   Adverse Effect. As of the date hereof, the United States income tax returns
   of the Borrower and its Subsidiaries have been audited by the Internal
   Revenue Service through the fiscal year ended 1992. No tax liens have been
   filed other than those permitted pursuant to SECTION 6.16(a). The charges,
   accruals and reserves on the books of the Borrower and its Subsidiaries in
   respect of any taxes or other governmental charges are adequate............36
   5.7.    LITIGATION AND CONTINGENT OBLIGATIONS. Except as set forth in the
   Borrower's Form 10-K filed with the Securities and Exchange Commission for
   its fiscal year ended May 31, 1997, there is no litigation, arbitration,
   governmental investigation, proceeding or inquiry pending or, to the
   knowledge of any of their officers, threatened against or affecting the
   Borrower or any of its Subsidiaries which could reasonably be expected to
   have a Material Adverse Effect.

                                     - 10 -


   Other than any liability incident to such litigation, arbitration or
   proceedings, the Borrower has no material contingent obligations not provided
   for or disclosed in the Borrower's Form 10-K filed with the Securities and
   Exchange Commission for its fiscal year ended May 31, 1997.................36
   5.8.    SUBSIDIARIES. As of the date hereof, Borrower's Form 10-K filed with
   the Securities and Exchange Commission for its fiscal year ended May 31, 1997
   contains an accurate description of all of the Borrower's presently existing
   Significant Subsidiaries (as defined in Regulation S-X of the Securities and
   Exchange Commission). All of the issued and outstanding shares of capital
   stock of all of the Borrower's Subsidiaries have been duly authorized and
   issued and are fully paid and non-assessable...............................36
   5.9.    ERISA. The Unfunded Liabilities of all Single Employer Plans do not
   in the aggregate exceed $10,000,000. Neither the Borrower nor any other
   member of the Controlled Group has incurred, or is reasonably expected to
   incur any withdrawal liability to Multiemployer Plans in an aggregate amount
   which, when added to the aggregate Unfunded Liabilities of all Single
   Employer Plans, would exceed of $10,000,000. Each Plan complies in all
   material respects with all applicable requirements of law and regulations and
   no Reportable Event has occurred with respect to any Plan. Neither the
   Borrower nor any other member of the Controlled Group has withdrawn from any
   Plan or initiated steps to do so, and no steps have been taken to reorganize
   or terminate any Plan......................................................36
   5.10.   ACCURACY OF INFORMATION. No information, exhibit or report furnished
   by the Borrower or any of its Subsidiaries to the Agent or any Lender in
   connection with the negotiation of, or compliance with, the Loan Documents
   contained any material misstatement of fact or omitted to state a material
   fact or any fact necessary to make the statements contained therein not
   misleading.................................................................36
   5.11.   REGULATION U. Margin stock (as defined in Regulation U) constitutes
   less than 25% of those assets of the Borrower and its Subsidiaries which are
   subject to any limitation on sale, pledge, or other restriction hereunder..36
   5.12.   COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries have complied
   in all respects with all applicable statutes, rules, regulations, orders and
   restrictions of any domestic or foreign government or any instrumentality or
   agency thereof, having jurisdiction over the conduct of their respective
   businesses or the ownership of their respective properties, except where
   failure to comply would not reasonably be expected to have a Material Adverse
   Effect. Neither the Borrower nor any Subsidiary has received any notice to
   the effect that its operations are not in material compliance with any of the
   requirements of applicable federal, state and local environmental, health and
   safety statutes and regulations or the subject of any federal or state
   investigation evaluating whether any remedial action is needed to respond to
   a release of any toxic or hazardous waste or substance into the environment,
   which non-compliance or remedial action could reasonably be expected to have
   a Material Adverse Effect..................................................37
   5.13.   INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary
   thereof is an "investment company" or a company "controlled" by an
   "investment company", within the meaning of the Investment Company Act of
   1940, as amended...........................................................37
   5.14.   YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive
   review and assessment of its computer applications and is in the process of
   making inquiry of its material suppliers, vendors and customers with respect
   to the Year 2000 Issue (as such term is defined

                                     - 11 -


   below). Based on the foregoing review, the Borrower reasonably believes that
   the Year 2000 Issue, as it relates to the Borrower's computer applications,
   will not result in a Material Adverse Effect. "Year 2000 Issue" means, with
   respect to any Person, the ability or inability of all computer applications
   material to such Person's business and operations properly to perform
   date-sensitive functions for all dates before and after January 1, 2000. The
   Borrower is unable to determine the ultimate impact, if any, on the
   Borrower's operations resulting from the Year 2000 Issue relating to material
   suppliers, vendors and customers...........................................37
ARTICLE VI....................................................................37
COVENANTS.....................................................................37
   6.1.    FINANCIAL REPORTING. The Borrower will maintain, for itself and each
   Subsidiary, a system of accounting established and administered in accordance
   with generally accepted accounting principles and furnish to the Lenders:..37
   6.2.    USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary
   to, use the proceeds of the Advances for the general corporate needs of the
   Borrower and its Subsidiaries and to repay outstanding Advances. The Borrower
   will not, nor will it permit any Subsidiary to, use any of the proceeds of
   the Advances to (i) purchase or carry any "margin stock" (as defined in
   Regulation U), (ii) acquire any security in any transaction which is subject
   to Sections 13 and 14 of the Securities Exchange Act of 1934 or (iii) make
   any unfriendly Acquisition.................................................39
   6.3.    NOTICE OF DEFAULT. The Borrower will, and will cause each Subsidiary
   to, give prompt notice in writing to the Lenders of (i) the occurrence of any
   Default or Unmatured Default and of any other development, financial or
   otherwise, which would have a Material Adverse Effect, or (ii) any threatened
   or pending litigation or governmental proceeding or labor controversy against
   the Borrower or any Subsidiary which, if adversely determined, would
   reasonably be expected to have a Material Adverse Effect...................39
   6.4.    CONDUCT OF BUSINESS. The Borrower will, and will cause each
   Subsidiary to, carry on and conduct its business in substantially the same
   manner and in substantially the same fields of enterprise as it is presently
   conducted and to do all things necessary to remain duly incorporated, validly
   existing and in good standing as a domestic or foreign corporation, as the
   case may be, in its jurisdiction of incorporation and maintain all requisite
   authority to conduct its business in each jurisdiction in which its business
   is conducted; PROVIDED, that nothing contained in this Section 6.4 shall
   prohibit (a) any Subsidiary from entering into a merger or consolidation
   otherwise permitted by SECTION 6.11 or (b) the liquidation of any Subsidiary
   substantially all of whose assets have been transferred to the Borrower or
   another Subsidiary in compliance with SECTION 6.12.........................39
   6.5.    TAXES. The Borrower will, and will cause each Subsidiary to, pay when
   due all taxes, assessments and governmental charges and levies upon it or its
   income, profits or property, except those which (a) are being contested in
   good faith and as to which adequate reserves have been provided or (b) do not
   in the aggregate exceed $4,000,000 and the failure to pay which could not
   reasonably be expected to have a Material Adverse Effect...................39
   6.6.    INSURANCE. The Borrower will, and will cause each Subsidiary to,
   maintain with financially sound and reputable insurance companies insurance
   on all their property in such amounts and covering such risks as is
   consistent with sound business practice, and the Borrower will furnish to any
   Lender upon request full information as to the insurance carried...........40

                                     - 12 -


   6.7.    COMPLIANCE WITH LAWS. The Borrower will, and will cause each
   Subsidiary to, comply in all material respects with all laws, rules,
   regulations, orders, writs, judgments, injunctions, decrees or awards to
   which it may be subject....................................................40
   6.8.    MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
   Subsidiary to, do all things necessary to maintain, preserve, protect and
   keep its properties in good repair, working order and condition, and make all
   necessary and proper repairs, renewals and replacements so that its business
   carried on in connection therewith may be properly conducted at all times..40
   6.9.    INSPECTION. The Borrower will, and will cause each Subsidiary to,
   permit the Lenders, by their respective representatives and agents, to
   inspect any of the properties, corporate books and financial records of the
   Borrower and each Subsidiary, to examine and make copies of the books of
   accounts and other financial records of the Borrower and each Subsidiary, and
   to discuss the affairs, finances and accounts of the Borrower and each
   Subsidiary with, and to be advised as to the same by, their respective
   officers at such reasonable times and intervals as the Lenders may
   designate..................................................................40
   6.10.   RESTRICTED PAYMENTS. The Borrower will not, nor will it permit any
   Subsidiary to, declare or make any Restricted Payments, which together with
   all Restricted Payments made on or after May 31, 1995 would exceed an amount
   equal to the sum of (i) $20,000,000 plus (ii) 50% of Consolidated Net Income
   for the period commencing June 1, 1994 and extending to and including the
   last day of the fiscal year of the Borrower immediately preceding the date on
   which such Restricted Payment was made, said period to be taken as one
   accounting period, except that:............................................40
   6.11.   MERGER. The Borrower will not, nor will it permit any Subsidiary to,
   merge or consolidate with or into any other Person, except that:...........41
   6.12.   SALE OF ASSETS. The Borrower will not, nor will it permit any
   Subsidiary to, sell, lease, transfer, assign or otherwise dispose of
   (including, for the avoidance of doubt, in connection with a sale leaseback
   transaction), any of its assets (including, for the avoidance of doubt, the
   capital stock of Subsidiaries, but excluding (i) inventory sold in the
   ordinary course of the Borrower's or any Subsidiary's business, (ii) property
   formerly used in the Borrower's or any Subsidiary's business which is worn
   out or obsolete, (iii) assets of any Domestic Subsidiary transferred to the
   Borrower or to another Domestic Subsidiary which is a Wholly-Owned
   Subsidiary, (iv) assets of any Foreign Subsidiary transferred to the Borrower
   or to another Subsidiary which is a Wholly-Owned Subsidiary, (v) assets
   permitted to be sold or otherwise transferred pursuant to SECTION 6.13 and
   (vi) promissory notes ("PAYMENT NOTES") received as partial or full payment
   for assets sold) if, after giving effect thereto, the sum of all such assets
   transferred, assigned or otherwise disposed of during the twelve-month period
   ending with (and including) the month of such disposition either (a)
   represents more than 10% of Consolidated Assets determined as of the date of
   (and after giving effect to) such disposition or (b) were responsible for
   more than 10% of the consolidated net sales or of the consolidated net income
   of the Borrower and its Subsidiaries during such twelve-month period.......41
   6.13.   SALE OF ACCOUNTS. Anything in SECTION 6.12 to the contrary
   notwithstanding, the Borrower will not, nor will it permit any Subsidiary to,
   sell, with or without recourse, transfer, assign, encumber or otherwise
   dispose of any of its notes or accounts receivable, leases or

                                     - 13 -


   chattel paper (collectively referred to in this Section as "ACCOUNTS") to any
   Person, except that:.......................................................41
   6.14.   INVESTMENTS AND ACQUISITIONS. The Borrower will not, nor will it
   permit any Subsidiary to, make or suffer to exist any Investments (including
   without limitation, loans and advances to, and other Investments in,
   Subsidiaries), or commitments therefor, or to create any Subsidiary or to
   become or remain a partner in any partnership or joint venture, or to make
   any Acquisition of any Person, except:.....................................42
   6.15.   LIENS. The Borrower will not, nor will it permit any Subsidiary to,
   create, incur, or suffer to exist any Lien in, of or on the property of the
   Borrower or any of its Subsidiaries, except:...............................43
   6.16. RENTALS. The Borrower will not, nor will it permit any Subsidiary to,
   create, incur or suffer to exist any obligation for Rentals if, as a
   consequence thereof, obligations for Rentals created, incurred or suffered to
   exist in any one fiscal year shall be in an aggregate consolidated amount for
   the Borrower and its Subsidiaries in excess of 5% of Consolidated Revenues
   (as defined below) as at the end of the Borrower's fiscal year immediately
   preceding the date on which such obligation is entered into, on a
   non-cumulative basis from year to year. It is expressly agreed and understood
   that, for the purposes of this Section, any contract between the Borrower or
   any Domestic Subsidiary and the vendor of aircraft fuel shall not be
   considered a lease and any payments made under any such contract by the
   Borrower or any Domestic Subsidiary to such vendor shall not be considered a
   lease payment. "CONSOLIDATED REVENUES" shall mean the amount of "net
   revenues" as shown on the Borrower's consolidated income statement.........46
   6.17.   RETIREMENT AND MODIFICATION OF SUBORDINATED INDEBTEDNESS. The
   Borrower will not, nor will it permit any Subsidiary to, purchase, acquire,
   redeem or retire, or make any payment on account of principal of, any
   Subordinated Debt except at the stated maturity thereof or as required by
   mandatory prepayment provisions or sinking fund provisions relating thereto.
   The Borrower will not, nor will it permit any Subsidiary to, alter, amend,
   modify, rescind, terminate or waive, or permit any breach or event of default
   to exist under, any note or notes evidencing such Subordinated Debt........46
   6.18.   AFFILIATES. The Borrower will not, and will not permit any Subsidiary
   to, enter into any transaction (including, without limitation, the purchase
   or sale of any property or service) with, or make any payment or transfer to,
   any Affiliate except in the ordinary course of business and pursuant to the
   reasonable requirements of the Borrower's or such Subsidiary's business and
   upon fair and reasonable terms no less favorable to the Borrower or such
   Subsidiary than the Borrower or such Subsidiary would obtain in a comparable
   arms-length transaction. The transactions entered into in connection with the
   Receivables Securitization shall be deemed to be arms-length transactions..46
   6.19.   WORKING CAPITAL. The Borrower will maintain at all times a ratio of
   Consolidated Current Assets to Consolidated Current Liabilities of at least
   1.50 to 1.00...............................................................46
   6.20.   CONSOLIDATED NET WORTH. The Borrower will maintain at all times
   Consolidated Net Worth in an amount not less than the sum of (a) $260,000,000
   PLUS (b) the net cash proceeds received by the Borrower from the sale of any
   of its capital stock on or after May 31, 1998 PLUS (c) an amount equal to the
   aggregate of one-third of Consolidated Net Income earned

                                     - 14 -


   during each of its fiscal years beginning with its fiscal year commencing
   June 1, 1998, said fiscal years to be taken as one accounting period MINUS
   (d) amounts (not to exceed $10,000,000 in the aggregate for the purposes of
   this covenant) either used for the purchase or retirement of the Borrower's
   capital stock or representing the after-tax write-down of assets and
   associated costs on or after May 31, 1998..................................46
   6.21.   CONSOLIDATED SECURED LIABILITIES. The Borrower will maintain at all
   times Consolidated Secured Liabilities in an amount not in excess of
   $20,000,000. For purposes of calculating Consolidated Secured Liabilities
   hereunder the obligations of the Borrower not in excess of $10,000,000,
   secured by the real estate located in Wood Dale, Illinois, known as the
   Corporate Headquarters of the Borrower, shall not be included..............46
   6.22.   LIMITATION ON CONSOLIDATED FUNDED DEBT. The Borrower will not permit
   the sum of (i) Consolidated Funded Debt plus (ii) the aggregate amount of
   Contingent Obligations of the Borrower and its Subsidiaries to exceed 60% of
   Consolidated Total Capitalization..........................................47
   6.23.   FIXED CHARGE COVERAGE RATIO. The Borrower will maintain a Fixed
   Charge Coverage Ratio of not less than 1.20:1:00 as of the last day of each
   fiscal quarter of the Borrower commencing on the date immediately preceding
   the Revolving Credit Termination Date and thereafter. The Fixed Charge
   Coverage Ratio shall be determined based on four of the previous five fiscal
   quarters of the Borrower that occurred immediately prior to the calculation
   date, at the Borrower's option.............................................47
ARTICLE VII...................................................................47
DEFAULTS......................................................................47
ARTICLE VIII..................................................................51
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES................................51
   8.1.    ACCELERATION. If any Default described in SECTION 7.6 or 7.7 occurs
   with respect to the Borrower, the obligations of the Lenders to make Loans
   hereunder shall automatically terminate and the Obligations shall immediately
   become due and payable without any election or action on the part of the
   Agent or any Lender. If any other Default occurs, the Required Lenders may
   terminate or suspend the obligations of the Lenders to make Loans hereunder,
   or by written notice to the Borrower declare the Obligations to be due and
   payable, or both, whereupon the Obligations shall become immediately due and
   payable, without presentment, demand, protest or further notice of any kind,
   all of which the Borrower hereby expressly waives. The Required Lenders agree
   to give the Borrower prompt subsequent notice of any termination or
   suspension of the obligations of the Lenders to make Loans hereunder;
   PROVIDED, that the giving of such notice shall not be a condition to the
   effectiveness of any such termination or suspension........................51
   8.2.    AMENDMENTS. Subject to the provisions of this Article VIII, the
   Required Lenders (or the Agent with the consent in writing of the Required
   Lenders) and the Borrower may enter into agreements supplemental hereto for
   the purpose of adding or modifying any provisions to the Loan Documents or
   changing in any manner the rights of the Lenders or the Borrower hereunder or
   waiving any Default hereunder; provided, however, that no such supplemental
   agreement shall, without the consent of each Lender affected thereby:......51
   8.3.    PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
   Agent to exercise any right under the Loan Documents shall impair such right
   or be construed to be a waiver of any Default or an acquiescence therein, and
   the making of a Loan notwithstanding the

                                     - 15 -


   existence of a Default or the inability of the Borrower to satisfy the
   conditions precedent to such Loan shall not constitute any waiver or
   acquiescence. Any single or partial exercise of any such right shall not
   preclude other or further exercise thereof or the exercise of any other
   right, and no waiver, amendment or other variation of the terms, conditions
   or provisions of the Loan Documents whatsoever shall be valid unless in
   writing signed by the Lenders required pursuant to SECTION 8.2, and then only
   to the extent in such writing specifically set forth. All remedies contained
   in the Loan Documents or by law afforded shall be cumulative and all shall be
   available to the Agent and the Lenders until the Obligations have been paid
   in full....................................................................52
ARTICLE IX....................................................................52
GENERAL PROVISIONS............................................................52
   9.1.    SURVIVAL OF REPRESENTATIONS. All representations and warranties of
   the Borrower contained in this Agreement shall survive delivery of the Notes
   and the making of the Loans herein contemplated............................52
   9.2.    GOVERNMENTAL REGULATION. Anything contained in this Agreement to the
   contrary notwithstanding, no Lender shall be obligated to extend credit to
   the Borrower in violation of any limitation or prohibition provided by any
   applicable statute or regulation...........................................52
   9.3.    TAXES. Any taxes (excluding federal income taxes on the overall net
   income of any Lender) or other similar assessments or charges payable or
   ruled payable by any governmental authority in respect of the Loan Documents
   shall be paid by the Borrower, together with interest and penalties, if
   any........................................................................52
   9.4.    HEADINGS. Section headings in the Loan Documents are for convenience
   of reference only, and shall not govern the interpretation of any of the
   provisions of the Loan Documents...........................................52
   9.5.    ENTIRE AGREEMENT. The Loan Documents embody the entire agreement and
   understanding among the Borrower, the Agent and the Lenders and supersede all
   prior agreements and understandings among the Borrower, the Agent and the
   Lenders relating to the subject matter thereof.............................52
   9.6.    SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
   obligations of the Lenders here under are several and not joint and no Lender
   shall be the partner or agent of any other (except to the extent to which the
   Agent is authorized to act as such). The failure of any Lender to perform any
   of its obligations hereunder shall not relieve any other Lender from any of
   its obligations hereunder. This Agreement shall not be construed so as to
   confer any right or benefit upon any Person other than the parties to this
   Agreement and their respective successors and assigns......................53
   9.7.    EXPENSES; INDEMNIFICATION. The Borrower shall reimburse the Agent for
   any and all reasonable costs and out-of-pocket expenses (including attorneys'
   fees and time charges of attorneys for the Agent, which attorneys may be
   employees of the Agent) paid or incurred by the Agent in connection with the
   preparation, negotiation, execution, delivery, review, amendment,
   modification, and administration of the Loan Documents. The Borrower also
   agrees to reimburse the Agent and the Lenders for any and all reasonable
   costs and out-of-pocket expenses (including attorneys' fees and time charges
   of attorneys for the Agent and the Lenders, which attorneys may be employees
   of the Agent or the Lenders) paid or incurred by the Agent or any Lender in
   connection with the collection and enforcement of the

                                     - 16 -


   Loan Documents. The Borrower also agrees to reimburse the Agent and the
   Lenders for any and all reasonable costs and out-of-pocket expenses
   (including attorneys' fees and time charges of attorneys for the Agent and
   the Lenders, which attorneys may be employees of the Agent or the Lenders)
   paid or incurred by the Agent or any Lender in connection with the collection
   and enforcement of the Loan Documents. The Borrower further agrees to
   indemnify the Agent and each Lender, its directors, officers and employees
   against all losses, claims, damages, penalties, judgments, liabilities and
   expenses (including, without limitation, all expenses of litigation or
   preparation therefor whether or not the Agent or any Lender is a party
   thereto) which any of them may pay or incur arising out of any term or
   condition contained in this Agreement or the other Loan Documents, or the
   direct or indirect application or proposed application of the proceeds of any
   Loan hereunder, except to the extent any of the foregoing arises solely from
   the gross negligence or wilful misconduct of the party requesting
   indemnification. The obligations of the Borrower under this Section shall
   survive the termination of this Agreement..................................53
   9.8.    NUMBERS OF DOCUMENTS. All statements, notices, closing documents, and
   requests hereunder shall be furnished to the Agent with sufficient
   counterparts so that the Agent may furnish one to each of the Lenders......53
   9.9.    ACCOUNTING. Except as provided to the contrary herein, all accounting
   terms used herein shall be interpreted and all accounting determinations
   hereunder shall be made in accordance with Agreement Accounting
   Principles.................................................................53
   9.10.   SEVERABILITY OF PROVISIONS. Any provision in any Loan Document that
   is held to be inoperative, unenforceable, or invalid in any jurisdiction
   shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
   without affecting the remaining provisions in that jurisdiction or the
   operation, enforceability, or validity of that provision in any other
   jurisdiction, and to this end the provisions of all Loan Documents are
   declared to be severable...................................................53
   9.11.   NONLIABILITY OF LENDERS. The relationship between the Borrower and
   the Lenders and the Agent shall be solely that of borrower and lender.
   Neither the Agent nor any Lender shall have any fiduciary responsibilities to
   the Borrower. Neither the Agent nor any Lender undertakes any responsibility
   to the Borrower to review or inform the Borrower of any matter in connection
   with any phase of the Borrower's business or operations....................54
   9.12.   CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
   CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE
   WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF
   ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL
   BANKS......................................................................54
   9.13.   CONSENT TO JURISDICTION. THE BORROWER, THE AGENT AND EACH LENDER
   HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED
   STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR
   PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER,
   THE AGENT AND EACH LENDER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
   RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
   COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
   THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR
   THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE
   RIGHT OF THE BORROWER TO BRING PROCEEDINGS AGAINST THE AGENT OR ANY LENDER,

                                     - 17 -


   OR THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE
   BORROWER, IN THE COURTS OF ANY OTHER JURISDICTION..........................54
   9.14.   CONFIDENTIALITY. Each Lender agrees to use any confidential
   information which it may receive from the Borrower pursuant to this Agreement
   solely for the purposes of administering and monitoring this Agreement and to
   hold such confidential information in confidence, except for disclosure (i)
   to other Lenders and Affiliates of any Lender, (ii) to legal counsel,
   accountants, and other professional advisors to that Lender who are advised
   of and agree to be bound by this Section 9.14, (iii) to regulatory officials,
   (iv) as requested pursuant to or as required by law, regulation, or legal
   process, (v) in connection with any legal proceeding to which that Lender is
   a party, and (vi) permitted by SECTION 12.4; PROVIDED that in the case of
   each of the preceding CLAUSES (iv) and (v), such Lender agrees, to the extent
   reasonably possible and to the extent that it is legally permitted to do so,
   to give the Borrower prior notice of such disclosure and not resist any
   efforts by the Borrower to obtain confidential treatment
   therefor...................................................................54
   9.15.   WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY
   WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
   INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN
   ANY WAY ARISING OUT OF, RELATED TO,........................................54
   OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED
   THEREUNDER.................................................................54
ARTICLE X.....................................................................55
THE AGENT.....................................................................55
   10.1.   APPOINTMENT. Bank of America NT & SA is hereby appointed Agent
   hereunder and under each other Loan Document, and each of the Lenders
   irrevocably authorizes the Agent to act as the agent of such Lender. The
   Agent agrees to act as such upon the express conditions contained in this
   Article X. The Agent shall not have a fiduciary relationship in respect of
   any Lender by reason of this Agreement.....................................55
   10.2.   POWERS. The Agent shall have and may exercise such powers under the
   Loan Documents as are specifically delegated to the Agent by the terms of
   each thereof, together with such powers as are reasonably incidental thereto.
   The Agent shall have no implied duties to the Lenders, or any obligation to
   the Lenders to take any action thereunder except any action specifically
   provided by the Loan Documents to be taken by the Agent................... 55
   10.3.   GENERAL IMMUNITY. Neither the Agent nor any of its directors,
   officers, agents or employees shall be liable to the Borrower, the Lenders or
   any Lender for any action taken or omitted to be taken by it or them
   hereunder or under any other Loan Document or in connection herewith or
   therewith except for its or their own gross negligence or willful
   misconduct.................................................................55
   10.4.   NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent nor any
   of its directors, officers, agents or employees shall be responsible for or
   have any duty to ascertain, inquire into, or verify (i) any statement,
   warranty or representation made in connection with any Loan Document or any
   borrowing hereunder; (ii) the performance or observance of any of the
   covenants or agreements of any obligor under any Loan Document; (iii) the
   satisfaction of any condition specified in ARTICLE IV, except receipt of
   items required to be delivered to the Agent;

                                     - 18 -


   or (iv) the validity, effectiveness or genuineness of any Loan Document or
   any other instrument or writing furnished in connection therewith..........55
   10.5.   ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all cases be
   fully protected in acting, or in refraining from acting, hereunder and under
   any other Loan Document in accordance with written instructions signed by the
   Required Lenders, and such instructions and any action taken or failure to
   act pursuant thereto shall be binding on all of the Lenders and on all
   holders of Notes. The Agent shall be fully justified in failing or refusing
   to take any action hereunder and under any other Loan Document unless it
   shall first be indemnified to its satisfaction by the Lenders pro rata
   against any and all liability, cost and expense that it may incur by reason
   of taking or continuing to take any such action............................55
   10.6.   EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of its
   duties as Agent hereunder and under any other Loan Document by or through
   employees, agents, and attorneys-in-fact and shall not be answerable to the
   Lenders, except as to money or securities received by it or its authorized
   agents, for the default or misconduct of any such agents or attorneys-in-fact
   selected by it with reasonable care. The Agent shall be entitled to advice of
   counsel concerning all matters pertaining to the agency hereby created and
   its duties hereunder and under any other Loan Document.....................55
   10.7.   RELIANCE ON DOCUMENTS: COUNSEL. The Agent shall be entitled to rely
   upon any Note, notice, consent, certificate, affidavit, letter, telegram,
   statement, paper or document believed by it to be genuine and correct and to
   have been signed or sent by the proper person or persons, and, in respect to
   legal matters, upon the opinion of counsel selected by the Agent, which
   counsel may be employees of the Agent......................................56
   10.8.   AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to
   reimburse and indemnify the Agent ratably according to their respective
   Percentages (i) for any amounts not reimbursed by the Borrower for which the
   Agent is entitled to reimbursement by the Borrower under the Loan Documents,
   (ii) for any other expenses incurred by the Agent on behalf of the Lenders,
   in connection with the preparation, execution, delivery, administration and
   enforcement of the Loan Documents and (iii) for any liabilities, obligations,
   losses, damages, penalties, actions, judgments, suits, costs, expenses or
   disbursements of any kind and nature whatsoever which may be imposed on,
   incurred by or asserted against the Agent in any way relating to or arising
   out of the Loan Documents or any other document delivered in connection
   therewith or the transactions contemplated thereby, or the enforcement of any
   of the terms thereof or of any such other documents, provided that no Lender
   shall be liable for any of the foregoing to the extent they arise from the
   gross negligence or willful misconduct of the Agent........................56
   10.9.   RIGHTS AS A LENDER. With respect to its Commitment, Loans made by it
   and the Note issued to it, the Agent shall have the same rights and powers
   hereunder and under any other Loan Document as any Lender and may exercise
   the same as though it were not the Agent, and the term "Lender" or "Lenders"
   shall, unless the context otherwise indicates, include the Agent in its
   individual capacity. The Agent may accept deposits from, lend money to, and
   generally engage in any kind of trust, debt, equity or other transaction, in
   addition to those contemplated by this Agreement or any other Loan Document,
   with the Borrower or any of its Subsidiaries in which the Borrower or such
   Subsidiary is not restricted hereby from engaging with any other Person....56

                                     - 19 -


   10.10.  LENDER CREDIT DECISION. Each Lender acknowledges that it has,
   independently and without reliance upon the Agent or any other Lender and
   based on the financial statements prepared by the Borrower and such other
   documents and information as it has deemed appropriate, made its own credit
   analysis and decision to enter into this Agreement and the other Loan
   Documents. Each Lender also acknowledges that it will, independently and
   without reliance upon the Agent or any other Lender and based on such
   documents and information as it shall deem appropriate at the time, continue
   to make its own credit decisions in taking or not taking action under this
   Agreement and the other Loan Documents.....................................56
   10.11.  SUCCESSOR AGENT. The Agent may resign at any time by giving written
   notice thereof to the Lenders and the Borrower, and the Agent may be removed
   at any time with or without cause by written notice received by the Agent
   from the Required Lenders. Upon any such resignation or removal, the Required
   Lenders shall have the right to appoint, on behalf of the Borrower and the
   Lenders, a successor Agent. If no successor Agent shall have been so
   appointed by the Required Lenders and shall have accepted such appointment
   within 30 days after the retiring Agent's giving notice of resignation, then
   the retiring Agent may appoint, on behalf of the Borrower and the Lenders, a
   successor Agent. Such successor Agent shall be a commercial bank having
   capital and retained earnings of at least $100,000,000. Upon the acceptance
   of any appointment as Agent hereunder by a successor Agent, such successor
   Agent shall thereupon succeed to and become vested with all the rights,
   powers, privileges and duties of the retiring Agent, and the retiring Agent
   shall be discharged from its duties and obligations hereunder and under the
   other Loan Documents. After any retiring Agent's resignation hereunder as
   Agent, the provisions of this Article X shall continue in effect for its
   benefit in respect of any actions taken or omitted to be taken by it while it
   was acting as the Agent hereunder and under the other Loan Documents.......56
ARTICLE XI....................................................................57
SETOFF; RATABLE PAYMENTS......................................................57
   11.1.   SETOFF. In addition to, and without limitation of, any rights of the
   Lenders under applicable law, so long as any Default has occurred and is
   continuing, any indebtedness from any Lender to the Borrower (including all
   account balances, whether provisional or final and whether or not collected
   or available) may be offset and applied toward the payment of the Obligations
   then due and owing to such Lender..........................................57
   11.2.   RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise, has
   payment made to it upon its Loans (other than payments received pursuant to
   SECTIONS 2.18, 3.1, 3.2 or 3.4) in a greater proportion than that received by
   any other Lender, such Lender agrees, promptly upon demand, to purchase a
   portion of the Loans held by the other Lenders so that after such purchase
   each Lender will hold its Percentage of Loans. If any Lender, whether in
   connection with setoff or amounts which might be subject to setoff or
   otherwise, receives collateral or other protection for its Obligations or
   such amounts which may be subject to setoff, such Lender agrees, promptly
   upon demand, to take such action necessary such that all Lenders share in the
   benefits of such collateral ratably according to their respective
   Percentages. In case any such payment is disturbed by legal process, or
   otherwise, appropriate further adjustments shall be made...................57
ARTICLE XII...................................................................57

                                     - 20 -


BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.............................57
   12.1.   SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
   Documents shall be binding upon and inure to the benefit of the Borrower and
   the Lenders and their respective successors and assigns, except that (i) the
   Borrower shall not have the right to assign its rights or obligations under
   the Loan Documents and (ii) any assignment by any Lender must be made in
   compliance with SECTION 12.3. Notwithstanding CLAUSE (ii) of this Section,
   any Lender may at any time, without the consent of the Borrower or the Agent,
   assign all or any portion of its rights under this Agreement and its Notes to
   a Federal Reserve Bank; provided, however, that no such assignment shall
   release the transferor Lender from its obligations hereunder. The Agent may
   treat the payee of any Note as the owner thereof for all purposes hereof
   unless and until such payee complies with SECTION 12.3 in the case of an
   assignment thereof or, in the case of any other transfer, a written notice of
   the transfer is filed with the Agent. Any assignee or transferee of a Note
   agrees by acceptance thereof to be bound by all the terms and provisions of
   the Loan Documents. Any request, authority or consent of any Person, who at
   the time of making such request or giving such authority or consent is the
   holder of any Note, shall be conclusive and binding on any subsequent holder,
   transferee or assignee of such Note or of any Note or Notes issued in
   exchange therefor..........................................................57
   12.2.   PARTICIPATIONS.....................................................58
     12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the ordinary
     course of its business and in accordance with applicable law, at any time
     sell to one or more banks or other entities ("PARTICIPANTS") participating
     interests in any Loan owing to such Lender, any Note held by such Lender,
     any Commitment of such Lender or any other interest of such Lender under
     the Loan Documents. Any Lender selling such participating interests to a
     Participant agrees to promptly notify the Borrower of such sale and the
     identity of such Participant. In the event of any such sale by a Lender of
     participating interests to a Participant, such Lender's obligations under
     the Loan Documents shall remain unchanged, such Lender shall remain solely
     responsible to the other parties hereto for the performance of such
     obligations, such Lender shall remain the holder of any such Note for all
     purposes under the Loan Documents, all amounts payable by the Borrower
     under this Agreement shall be determined as if such Lender had not sold
     such participating interests, and the Borrower and the Agent shall continue
     to deal solely and directly with such Lender in connection with such
     Lender's rights and obligations under the Loan Documents 12.2.2. VOTING
     RIGHTS. Each Lender shall retain the sole right to approve, without the
     consent of any Participant, any amendment, modification or waiver of any
     provision of the Loan Documents other than any amendment, modification or
     waiver with respect to any Loan or Commitment in which such Participant has
     an interest which forgives principal, interest or fees or reduces the
     interest rate or fees payable with respect to any such Loan or Commitment,
     postpones any date fixed for any regularly-scheduled payment of principal
     of, or interest or fees on, any such Loan or Commitment, releases any
     guarantor of any such Loan or releases any substantial portion of
     collateral, if any, securing any such Loan...............................58
     12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each Participant shall
     be deemed to have the right of setoff provided in SECTION 11.1 in respect
     of its participating interest in amounts owing under the Loan Documents to
     the same extent as if the amount of its

                                     - 21 -


     participating interest were owing directly to it as a Lender under the Loan
     Documents, provided that each Lender shall retain the right of setoff
     provided in SECTION 11.1 with respect to the amount of participating
     interests sold to each Participant. The Lenders agree to share with each
     Participant, and each Participant, by exercising the right of setoff
     provided in SECTION 11.1, agrees to share with each Lender, any amount
     received pursuant to the exercise of its right of setoff, such amounts to
     be shared in accordance with SECTION 11.2 as if each Participant were a
     Lender...................................................................58
   12.3. ASSIGNMENTS..........................................................59
     12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary course of
     its business and in accordance with applicable law, at any time assign to
     one or more banks or other entities ("PURCHASERS") all or any part of its
     rights and obligations under the Loan Documents. Such assignment shall be
     substantially in the form of EXHIBIT "H" hereto. Unless a Default has
     occurred and is continuing, the written consent of the Borrower and the
     Agent shall be required prior to an assignment becoming effective with
     respect to a Purchaser which is not a Lender or an Affiliate thereof. Such
     consent shall be in form and substance satisfactory to the Agent and shall
     not be unreasonably withheld.............................................59
     12.3.2. EFFECT; EFFECTIVE DATE. Upon (i) delivery to the Agent of a notice
     of assignment, substantially in the form attached as EXHIBIT "I" to EXHIBIT
     "H" hereto (a "NOTICE OF ASSIGNMENT"), together with any consents required
     by SECTION 12.3.1, and (ii) payment of a $2,500 fee to the Agent for
     processing such assignment, such assignment shall become effective on the
     effective date specified in such Notice of Assignment. On and after the
     effective date of such assignment, such Purchaser shall for all purposes be
     a Lender party to this Agreement and any other Loan Document executed by
     the Lenders and shall have all the rights and obligations of a Lender under
     the Loan Documents, to the same extent as if it were an original party
     hereto, and no further consent or action by the Borrower, the Lenders or
     the Agent shall be required to release the transferor Lender with respect
     to the percentage of the Aggregate Commitment and Loans assigned to such
     Purchaser. Upon the consummation of any assignment to a Purchaser pursuant
     to this Section 12.3.2, the transferor Lender, the Agent and the Borrower
     shall make appropriate arrangements so that replacement Notes are issued to
     such transferor Lender and new Notes or, as appropriate, replacement Notes,
     are issued to such Purchaser, in each case in principal amounts reflecting
     their respective Commitments, as adjusted pursuant to such assignment....59
   12.4. DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender to
   disclose to any Participant or Purchaser or any other Person acquiring an
   interest in the Loan Documents by operation of law (each a "TRANSFEREE") and
   any prospective Transferee any and all information in such Lender's
   possession concerning the creditworthiness of the Borrower and its
   Subsidiaries; PROVIDED that each Transferee and prospective Transferee agrees
   in writing for the benefit of the Borrower to be bound by SECTION 9.14.....59
   12.5. TAX TREATMENT. If any interest in any Loan Document is transferred to
   any Transferee which is organized under the laws of any jurisdiction other
   than the United States or any State thereof, the transferor Lender shall
   cause such Transferee, concurrently with the effectiveness of such transfer,
   to comply with the provisions of SECTION 2.25..............................60
ARTICLE XIII..................................................................60

                                     - 22 -


NOTICES.......................................................................60
   13.1.   GIVING NOTICE. Except as otherwise permitted by SECTION 2.20 with
   respect to Borrowing Notices and Continuation/Conversion Notices, all notices
   and other communications provided to any party hereto under this Agreement or
   any other Loan Document shall be in writing or by facsimile and addressed or
   delivered to such party at its address set forth below its signature hereto
   or at such other address as may be designated by such party in a notice to
   the other parties. Any notice, if mailed and properly addressed with postage
   prepaid, shall be deemed given when received; any notice, if transmitted by
   facsimile, shall be deemed given when transmitted..........................60
   13.2.   CHANGE OF ADDRESS. The Borrower, the Agent and any Lender may each
   change the address for service of notice upon it by a notice in writing to
   the other parties hereto...................................................60
ARTICLE XIV...................................................................60
AND EFFECTIVENESS.............................................................60
OF ASSIGNMENT.................................................................84

                                     - 23 -


                             SCHEDULES AND EXHIBITS

Schedule "1"  -     Other Investments

Schedule "2"  -     Liens

Exhibit "A"   -     Note

Exhibit "B"   -     Extension Letter

Exhibit "C"   -     Borrowing Notice

Exhibit "D"   -     Alternate Currency Borrowing Request

Exhibit "E"   -     Opinion

Exhibit "F"   -     Transfer Instructions

Exhibit "G"   -     Compliance Certificate

Exhibit "H"   -     Assignment Agreement

Exhibit "I"   -     Notice of Assignment

                                     - 24 -


                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT

     This SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of May 27,
1998, is among AAR CORP., a Delaware corporation, the Lenders listed from time
to time on the signature pages hereof, and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (successor by merger to Bank of America Illinois, formerly
known as Continental Bank N.A.), as Agent.

                              W I T N E S S E T H:

     WHEREAS, the Borrower, the Agent and the Lenders are parties to an Amended
and Restated Credit Agreement, dated as of September 9, 1996 (the "Original
Credit Agreement"), which amended and restated a Credit Agreement, dated as of
June 1, 1993, as amended by a First Amendment thereto, dated as of May 16, 1994
and a Second Amendment thereto, dated as of May 16, 1995; and

     WHEREAS, the parties hereto agree that the Original Credit Agreement shall
be and hereby is amended and restated in its entirety as follows:

                                    ARTICLE I

                                   DEFINITIONS

     As used in this Agreement:

     "ACCOUNTS" has the meaning provided in SECTION 6.13.

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

     "ADVANCE" means a borrowing hereunder consisting of the aggregate amount of
the several Loans made by the Lenders to the Borrower which are (a) denominated
in the same currency, (b) of the same Type and (c) in the case of Fixed Rate
Advances, for the same Interest Period.

     "AFFILIATE" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control

                                      - 7 -


another Person if the controlling Person owns 10% or more of any class of voting
securities (or other ownership interests) of the controlled Person or possesses,
directly or indirectly, the power to direct or cause the direction of the
management or policies of the controlled Person, whether through ownership of
stock, by contract or otherwise.

     "AGENT" means Bank of America National Trust and Savings Association in its
capacity as agent for the Lenders pursuant to ARTICLE X, and not in its
individual capacity as a Lender, and any successor Agent appointed pursuant to
ARTICLE X.

     "AGGREGATE COMMITMENT" means the aggregate of the Commitments of all the
Lenders, as reduced from time to time pursuant to the terms hereof.

     "AGREEMENT" means this second amended and restated credit agreement, as it
may be amended or modified and in effect from time to time.

     "AGREEMENT ACCOUNTING PRINCIPLES" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in SECTION 5.4.

     "ALTERNATE CURRENCY" means, with respect to an Alternate Currency Advance,
such currency (which shall be freely transferable and convertible into U.S.
Dollars) as the Borrower shall have requested in its Alternate Currency
Borrowing Request for such Advance, and in which each of the Banks, in its sole
discretion, shall have agreed to make its Loan comprising such Advance.

     "ALTERNATE CURRENCY ADVANCE" means an Advance bearing interest at a
Transaction Rate and denominated in an Alternate Currency made pursuant to
SECTION 2.1(b).

     "ALTERNATE CURRENCY BORROWING REQUEST" is defined in SECTION 2.11.

     "ALTERNATE CURRENCY LOAN" means, with respect to a Lender, such Lender's
portion of any Alternate Currency Advance.

     "ALTERNATE REFERENCE RATE" means, for any day, a rate of interest per annum
equal to the higher of (i) the Reference Rate for such day and (ii) the sum of
Federal Funds Effective Rate for such day plus 1/2% per annum.

     "APPLICABLE MARGIN" means,

     (i)     with respect to any Eurodollar Advance, (A) at all times prior to
             the Revolving Credit Termination Date, 0.225% when the Borrower has
             an Investment Grade Rating and 0.50% when the Borrower does not
             have an Investment Grade Rating and (B) at all times after the
             Revolving Credit Termination Date, 0.75% when the Borrower has an
             Investment Grade Rating, and 1.50% when the Borrower does not have
             an Investment Grade Rating, or

                                      - 8 -


     (ii)    with respect to any Floating Rate Advance, zero % at all times when
             the Borrower has an Investment Grade Rating and 0.50% at all times
             when the Borrower does not have an Investment Grade Rating;

PROVIDED, that, if after Bank of America NT & SA has made a good faith effort to
market its non-credit-related products to the Borrower, Bank of America NT & SA
is not, in its sole judgment, satisfied with the amount of business the Borrower
is doing with Bank of America NT & SA, the Applicable Margin shall increase to
the margins set forth below effective January 1, 1999:

     (X)     with respect to any Eurodollar Advance, (A) at all times prior to
             the Revolving Credit Termination Date, 0.45% when the Borrower has
             an Investment Grade Rating and 1.075% when the Borrower does not
             have an Investment Grade Rating and (B) at all times after the
             Revolving Credit Termination Date, 1.00% when the Borrower has an
             Investment Grade Rating and 1.825% when the Borrower does not have
             an Investment Grade Rating, or

     (Y)     with respect to any Floating Rate Advance, (A) at all times prior
             to the Revolving Credit Termination Date, zero % at all times when
             the Borrower has an Investment Grade Rating and 0.50% at all times
             when the Borrower does not have an Investment Grade Rating and (B)
             at all times after the Revolving Credit Termination Date, 0.50% at
             all times when the Borrower has an Investment Grade Rating and 1.0%
             at all times when the Borrower does not have an Investment Grade
             Rating.

     "AUTHORIZED OFFICER" means any of the Chairman of the Board, Chief
Executive Officer, President, Chief Operations Officer, Vice President-Finance
or Treasurer of the Borrower.

     "BANK OF AMERICA NT & SA" means Bank of America National Trust and Savings
Association, its successors and assigns.

     "BORROWER" means AAR Corp., a Delaware corporation, and its successors and
assigns.

     "BORROWING DATE" means a date on which an Advance is made hereunder.

     "BORROWING NOTICE" is defined in SECTION 2.10.

     "BUSINESS DAY" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks are open for business in Chicago and on which dealings in U.S.
Dollars may be carried on by the Agent in the interbank Eurodollar market, (ii)
with respect to any borrowing or payment of Alternate Currency Advances, a day
(other than Saturday or Sunday) on which banks are open for business in Chicago
and New York and are open for domestic and international business (including
dealings in such Alternate Currency) in both London and the place where funds
are to be paid or made available, and (iii) for all other purposes, a day (other
than a Saturday or Sunday) on which banks are open for business in Chicago.

                                      - 9 -


     "CAPITALIZED LEASE" of a Person means any lease of property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.

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

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

     "CODE" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.

     "COMMITMENT" means, for each Lender, the obligation of such Lender to make
Loans in an aggregate amount not exceeding the amount set forth opposite its
signature below, as such amount may be modified from time to time pursuant to
the terms hereof.

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

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

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

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

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

     "CONSOLIDATED NET INCOME" shall mean, for any period, the net income (or
loss) of the Borrower and its Subsidiaries on a consolidated basis for such
period taken as a single accounting period determined in accordance with
Agreement Accounting Principles; PROVIDED, that there shall be excluded (i) the
income (or loss) of any Affiliate of the Borrower or other Person (other than a
Subsidiary of the Borrower) in which any Person (other than the Borrower or any
of its Subsidiaries) has a joint interest, except to the extent of the amount of
dividends or other distributions actually paid to the Borrower, or any of its
Subsidiaries by such Affiliate or other Person during such period, (ii) the
income (or loss) of any Person accrued prior to the date

                                     - 10 -


it becomes a Subsidiary of the Borrower or is merged into or consolidated with
the Borrower or any of its Subsidiaries or that Person's assets are acquired by
the Borrower or any of its Subsidiaries, and (iii) the income of any Subsidiary
of the Borrower to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that income is not at the time
permitted by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary.

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

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

     "CONSOLIDATED TANGIBLE NET WORTH" means, as of any date of determination,
the sum of (a) Consolidated Net Worth, less consolidated Intangible Assets of
the Borrower and its Subsidiaries, plus (b) Subordinated Debt. For purposes of
this definition "INTANGIBLE ASSETS" means the amount (to the extent reflected in
determining such consolidated stockholders' equity) of (i) all write-ups (other
than write-ups resulting from foreign currency translations and write-ups of
assets of a going concern business made within twelve months after the
acquisition of such business) subsequent to May 31, 1998 in the book value of
any asset owned by the Borrower or a Consolidated Subsidiary, and (ii) all
unamortized debt discount and expense, unamortized deferred charges, goodwill,
patents, trademarks, service marks, trade names, copyrights, organization or
developmental expenses and other intangible items, for purposes of this clause
(ii), in each case, to the extent such items are disclosed as separate line
items on the Borrower's financial statements required under SECTION 6.1.

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

     "CONTINGENT OBLIGATION" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide

                                     - 11 -


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

     "CONTINUATION/CONVERSION NOTICE" is defined in SECTION 2.13.

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

     "DEFAULT" means an event described in ARTICLE VII.

     "DOLLAR AMOUNT" means, as of any date of determination, (i) with respect to
an Advance denominated in U.S. Dollars, the principal amount of such Advance and
(ii) with respect to an Advance denominated in an Alternate Currency, the Dollar
Equivalent of the principal amount of such Advance.

     "DOLLAR EQUIVALENT" means, with respect to an amount in an Alternate
Currency on a given date, the amount of U.S. Dollars which Bank of America NT &
SA could purchase with such amount at the Exchange Rate.

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

     "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

     "EURODOLLAR ADVANCE" means an Advance which bears interest at a Eurodollar
Rate.

     "EURODOLLAR BASE RATE" means, with respect to a Eurodollar Advance for the
relevant Eurodollar Interest Period, the rate of interest per annum notified to
the Agent by Bank of

                                     - 12 -


America NT & SA as the rate of interest at which U.S. Dollar deposits in the
approximate amount of the Advance to be made or continued as, or converted into,
a Eurodollar Advance and having a maturity comparable to such Eurodollar
Interest Period would be offered by Bank of America NT & SA to major banks in
the interbank market at approximately 10:00 a.m. (Chicago time) two Business
Days prior to the commencement of such Eurodollar Interest Period.

     "EURODOLLAR INTEREST PERIOD" means, with respect to a Eurodollar Advance, a
period of 14 days, or one, two, three, six or 12 months commencing on a Business
Day selected by the Borrower pursuant to this Agreement. Such Eurodollar
Interest Period shall end on (but exclude) the day which corresponds numerically
to such date 14 days, or one, two, three, six or 12 months thereafter, provided,
however, that if there is no such numerically corresponding day in such next,
second, third, sixth or twelfth succeeding month, such Eurodollar Interest
Period shall end on the last Business Day of such next, second, third, sixth or
twelfth succeeding month. If a Eurodollar Interest Period would otherwise end on
a day which is not a Business Day, such Eurodollar Interest Period shall end on
the next succeeding Business Day, provided, however, that if said next
succeeding Business Day falls in a new calendar month, such Eurodollar Interest
Period shall end on the immediately preceding Business Day. No Eurodollar
Interest Period may end after the Revolving Credit Termination Date.

     "EURODOLLAR LOAN" means, with respect to a Lender, such Lender's portion of
any Eurodollar Advance.

     "EURODOLLAR RATE" means, with respect to a Eurodollar Advance for the
relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the
Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by
(b) one minus the Reserve Requirement (expressed as a decimal) applicable to
such Eurodollar Interest Period, plus (ii) the Applicable Margin. The Eurodollar
Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is
not such a multiple.

     "EXCHANGE RATE" means, in relation to the purchase of one currency (the
"first currency") with another currency (the "second currency") on a given date,
Bank of America NT & SA's spot rate of exchange at or about 11:00 a.m. London
time on such date for the purchase of the first currency with the second
currency, including any premium or costs payable in connection with such
purchase.

     "FACILITY FEE" means a facility fee on the Aggregate Commitment in an
amount equal to (a) 0.175% per annum when the Borrower has an Investment Grade
Rating or (b) 0.25% per annum when the Borrower does not have an Investment
Grade Rating; PROVIDED, that, if the Applicable Margin shall increase effective
January 1, 1999 as provided in the definition of "Applicable Margin," the
Facility Fee shall automatically increase effective January 1, 1999 to (x) 0.30%
per annum when the Borrower has an Investment Grade Rating or (y) 0.425% per
annum when the Borrower does not have an Investment Grade Rating.

     "FACILITY TERMINATION DATE" means the twentieth (20th) Payment Date
following the Revolving Credit Termination Date.

                                     - 13 -


     "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.

     "FINANCE CORP." means a special purpose vehicle created in connection with
the Receivables Securitization, and a Subsidiary of the Borrower.

     "FIRST CHICAGO AGREEMENT" means the Second Amended and Restated Credit
Agreement dated as of February 10, 1998 among the Borrower, certain lenders and
the First National Bank of Chicago, as agent, as the same may from time to time
be amended, supplemented or otherwise modified, and including any replacement
credit facility among the Borrower and the lenders party thereto.

     "FIXED RATE ADVANCE" means (a) an Alternate Currency Advance, (b) a
Eurodollar Advance or (c) a Quoted Rate Advance.

     "FIXED RATE LOAN" means, with respect to a Lender, such Lender's portion of
any Fixed Rate Advance.

     "FLOATING RATE" means, for any day, a rate per annum equal to (a) the
Alternate Reference Rate for such day plus (b) the Applicable Margin, changing
when and as the Alternate Reference Rate changes.

     "FLOATING RATE ADVANCE" means an Advance which bears interest at the
Floating Rate.

     "FLOATING RATE LOAN" means, with respect to a Lender, such Lender's portion
of any Floating Rate Advance.

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

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

     "INDEBTEDNESS" of a Person means such Person's (i) obligations for borrowed
money, (ii) obligations representing the deferred purchase price of property or
services (other than accounts payable arising in the ordinary course of such
Person's business payable on terms customary in the trade), (iii) obligations,
whether or not assumed, secured by Liens (other than Liens permitted

                                     - 14 -


pursuant to any of CLAUSES (a), (d), (e), (f), (h) and (k) of SECTION 6.15) or
payable out of the proceeds or production from property now or hereafter owned
or acquired by such Person, (iv) obligations which are evidenced by notes,
acceptances, or other instruments, (v) Capitalized Lease Obligations, and (vi)
net liabilities under currency or interest rate swap, exchange or cap
agreements.

     "INTEREST PERIOD" means a Eurodollar Interest Period, a Transaction Rate
Interest Period and/or a Quoted Rate Interest Period, as the case may be.

     "INVESTMENT" of a Person means any loan, advance (other than commission,
travel and similar advances to its officers, employees, agents and
representatives made in the ordinary course of business), extension of credit
(other than accounts receivable arising in the ordinary course of business on
terms customary in the trade), deposit account or contribution of capital by
such Person to any other Person or any investment in, or purchase or other
acquisition of, the stock, partnership interests, notes, debentures or other
securities of any other Person made by such Person.

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

     "LENDERS" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.

     "LENDING INSTALLATION" means (i) with respect to a Lender, any office,
branch, subsidiary or affiliate of such Lender and (ii) with respect to the
Agent, any office, branch, subsidiary, affiliate or correspondent bank of the
Agent.

     "LETTER OF CREDIT" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.

     "LIEN" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention
agreement).

     "LOAN" means, with respect to a Lender, such Lender's portion of any
Advance.

     "LOAN DOCUMENTS" means this Agreement and the Notes.

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

                                     - 15 -


Loan Documents, or (iii) the validity or enforceability of any of the Loan
Documents or the rights or remedies of the Agent or the Lenders thereunder.

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

     "NOTE" means a promissory note, in substantially the form of EXHIBIT "A"
hereto, duly executed by the Borrower and payable to the order of a Lender in
the amount of its Commitment, including any amendment, modification, renewal or
replacement of such promissory note.

     "NOTICE OF ASSIGNMENT" is defined in SECTION 12.3.2.

     "OBLIGATIONS" means all unpaid principal of and accrued and unpaid interest
on the Notes, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of the Borrower to the Lenders or to any
Lender, the Agent or any indemnified party hereunder arising under the Loan
Documents.

     "ORIGINAL CREDIT AGREEMENT" has the meaning provided in the first WHEREAS
clause of this Agreement.

     "PARTICIPANTS" is defined in SECTION 12.2.1.

     "PAYMENT DATE" means the last day of each March, June, September and
December.

     "PAYMENT NOTES" has the meaning provided in SECTION 6.12.

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

     "PERCENTAGE" means, relative to any Lender, the percentage (expressed as a
decimal, rounded upward to the next 1/100th of 1%), determined by dividing the
Aggregate Commitment by such Lender's Commitment, as such percentage may be
adjusted from time to time pursuant to Assignment Agreement(s) executed by such
Lender and its Purchaser(s) and delivered pursuant to SECTION 12.3.1.

     "PERSON" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.

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

     "PURCHASERS" is defined in SECTION 12.3.1.

                                     - 16 -


     "QUOTED RATE" means the rate of interest quoted by the Agent to the
Borrower pursuant to SECTION 2.10 applicable to a Quoted Rate Advance.

     "QUOTED RATE ADVANCE" means any Advance bearing interest at the Quoted
Rate.

     "QUOTED RATE INTEREST PERIOD" means the period which shall begin on (and
include) the date on which such Quoted Rate Advance is made and, unless the
final maturity of such Quoted Rate Advance is accelerated, shall end on (but
exclude) the subsequent day or any other day up to 90 days thereafter, as the
Borrower may select in its relevant Borrowing Notice pursuant to SECTION 2.10;
PROVIDED, HOWEVER, that:

             (a)    absent such selection, the Borrower shall be deemed to have
     selected Floating Rate Advances in accordance with SECTION 2.10;

             (b)    any such Quoted Rate Interest Period which would otherwise
     end on a day which is not a Business Day shall end on the next following
     Business Day; and

             (c)    no Quoted Rate Interest Period may end after the Revolving
     Credit Termination Date.

     "RECEIVABLES SECURITIZATION" has the meaning provided in SECTION 6.13(f).

     "REFERENCE RATE" means, at any time, the rate of interest then most
recently announced by the Lender at San Francisco, California as its reference
rate.

     "REGULATION D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to member banks of the Federal Reserve System.

     "REGULATION U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.

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

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

                                     - 17 -


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

     "REQUIRED LENDERS" means Lenders in the aggregate having at least 66-K% of
the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66-K% of the aggregate unpaid
principal amount of the outstanding Advances.

     "RESERVE REQUIREMENT" means, with respect to a Eurodollar Interest Period,
the maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.

     "RESTATEMENT EFFECTIVE DATE" has the meaning provided in SECTION 4.1.

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

     "REVOLVING CREDIT TERMINATION BALANCE" means the aggregate principal amount
of Advances outstanding at the close of business on the Revolving Credit
Termination Date after giving effect to any Advances made or repaid on such
date.

     "REVOLVING CREDIT TERMINATION DATE" means May 27, 2001 or such later date
to which the Revolving Credit Termination Date may be extended pursuant to
SECTION 2.2.

     "SECTION" means a numbered section of this Agreement, unless another
document is specifically referenced.

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

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

     "SUBSIDIARY" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, association, joint venture or similar

                                     - 18 -


business organization more than 50% of the ownership interests having ordinary
voting power of which shall at the time be so owned or controlled. Unless
otherwise expressly provided, all references herein to a "Subsidiary" shall mean
a Subsidiary of the Borrower.

     "TERMINATION BALANCE" means the aggregate principal amount of Advances
outstanding on the Revolving Credit Termination Date after giving effect to any
Advances made or paid on such date.

     "TRANSACTION RATE" means, with respect to an Alternate Currency Advance,
such fixed rate per annum as the Borrower shall have requested in its Alternate
Currency Borrowing Request for such Advance, and which each of the Banks, in its
sole discretion, shall have agreed to for its respective Loan comprising such
Advance.

     "TRANSACTION RATE INTEREST PERIOD" means, with respect to an Alternate
Currency Advance, such number of days (not to exceed 180) as the Borrower shall
have requested in its Alternate Currency Borrowing Request for such Advance, and
which each of the Banks, in its sole discretion, shall have agreed to for its
respective Loan comprising such Advance. No Transaction Rate Interest Period may
end after the Revolving Credit Termination Date.

     "TRANSFEREE" is defined in SECTION 12.4.

     "TYPE" means (a) with respect to any U.S. Dollar Advance, its nature as a
Floating Rate Advance, a Eurodollar Advance or a Quoted Rate Advance or (b) with
respect to any Alternate Currency Advance, its nature as a Transaction Rate
Advance.

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

     "UNMATURED DEFAULT" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.

     "U.S. DOLLAR ADVANCE" means an Advance denominated in U.S. Dollars.

     "WHOLLY-OWNED SUBSIDIARY" of a Person means (i) any Subsidiary all of the
outstanding voting securities of which shall at the time be owned or controlled,
directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries
of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of
such Person, or (ii) any partnership, association, joint venture or similar
business organization 100% of the ownership interests having ordinary voting
power of which shall at the time be so owned or controlled.

     The foregoing definitions shall be equally applicable to both the singular
and plural forms of the defined terms.

                                     - 19 -


                                   ARTICLE II

                                   THE CREDITS

     2.1.    THE ADVANCES. Subject to the terms of this Agreement, the Borrower
may borrow, repay and reborrow Advances at any time prior to or on the Revolving
Credit Termination Date. The Advances may be U.S. Dollar Advances made pursuant
to SECTION 2.1(a) or Alternate Currency Advances made pursuant to SECTION
2.1(b). No Advances may be requested or made subsequent to the Revolving Credit
Termination Date. Principal payments made after the Revolving Credit Termination
Date may not be reborrowed.

             (a)    COMMITMENTS TO MAKE U.S. DOLLAR ADVANCES. From and including
     the date of this Agreement and to and including the Revolving Credit
     Termination Date, the Lenders severally agree, on the terms and conditions
     set forth in this Agreement, to make U.S. Dollar Advances to the Borrower
     from time to time in amounts such that, upon giving effect to each such
     U.S. Dollar Advance, the aggregate principal Dollar Amount of all Advances
     then outstanding shall not exceed the Aggregate Commitment then in effect;
     PROVIDED, that no Quoted Rate Advance shall be made (i) on or after the
     Revolving Credit Termination Date and (ii) unless each of the Lenders in
     its sole and absolute discretion has agreed (as provided in SECTION 2.10)
     to make its respective Loan comprising such requested Advance. The
     foregoing commitment to make U.S. Dollar Advances shall expire at the close
     of business on the Revolving Credit Termination Date.

             (b)    DISCRETIONARY ALTERNATE CURRENCY ADVANCES. From and
     including the date of this Agreement and to but excluding the Revolving
     Credit Termination Date, the Lenders may, on the terms and conditions set
     forth in this Agreement, make Alternate Currency Advances to the Borrower
     from time to time; PROVIDED, that (i) any Alternate Currency Advance
     requested by the Borrower pursuant to SECTION 2.11 shall be made if, and
     only if, each of the Lenders in its sole and absolute discretion, has
     agreed in writing (as provided in SECTION 2.11) to make its respective Loan
     comprising such requested Advance and (ii) upon giving effect to each such
     Alternate Currency Advance, the aggregate principal Dollar Amount of all
     Advances then outstanding shall not exceed the Aggregate Commitment then in
     effect.

                                     - 20 -


     2.2.    EXTENSION OF REVOLVING CREDIT TERMINATION DATE. The initial
Revolving Credit Termination Date shall be May 27, 2001. The Borrower may, not
earlier than 180 days and not later than 60 days prior to each anniversary of
the Restatement Effective Date execute and deliver to the Agent (who shall
promptly forward a copy of the same to each of the Lenders) an Extension Letter
in substantially the form of EXHIBIT "B" hereto, with appropriate insertions,
requesting that the Revolving Credit Termination Date be extended for one year.
Such request for an extension of the Revolving Credit Termination Date shall
become effective if, and only if, each Lender shall, in its sole and absolute
discretion, execute such Extension Letter and return copies thereof to the Agent
and the Borrower prior to each such applicable anniversary of the Restatement
Effective Date.

     2.3.    MANDATORY PAYMENTS. The Borrower shall make the following mandatory
payments on the Advances:

             (a)    Each Alternate Currency Advance shall be repaid in full on
     the last day of its respective Transaction Rate Interest Period.

             (b)    Each Advance outstanding on the Revolving Credit Termination
     Date shall be repaid in full on the Revolving Credit Termination Date (it
     being understood and agreed that, subject to the terms and conditions of
     this Agreement, the Borrower shall be entitled to make a final borrowing of
     one or more U.S. Dollar Advances pursuant to SECTION 2.1(a) on the
     Revolving Credit Termination Date).

             (c)    If on the last day of any calendar month, it is determined
     by the Agent that the aggregate Dollar Amount of all outstanding Advances
     exceeds the Aggregate Commitment then in effect, the Borrower shall within
     three Business Days of demand by the Agent make a repayment (in U.S.
     Dollars) of the outstanding Advances in an amount which is at least
     sufficient to eliminate such excess.

             (d)    The Revolving Credit Termination Balance shall be payable in
     twenty (20) equal, consecutive quarterly installments, commencing on the
     first Payment Date following the Revolving Credit Termination Date.

             (e)    Any outstanding Advances and all other unpaid Obligations
     shall be paid in full by the Borrower on the Facility Termination Date.

     2.4.    FEES. The Borrower further agrees to pay to the Agent, for the
ratable benefit of the Lenders, the Facility Fee for the period from the date
hereof to and including the Revolving Credit Termination Date. The Facility Fee
shall be payable quarterly in advance on the Restatement Effective Date and on
each Payment Date thereafter. The obligations of the Borrower under this Section
2.4 shall survive the payment of the Advances and the termination of this
Agreement.

     2.5.    OPTIONAL REDUCTIONS IN AGGREGATE COMMITMENT. The Borrower may
permanently reduce the Aggregate Commitment in whole or in part ratably among
the Lenders in integral multiples of $1,000,000, upon at least 10 days' written
notice to the Agent, which notice shall

                                     - 21 -


specify the amount of any such reduction, provided, however, that the amount of
the Aggregate Commitment may not be reduced below the aggregate principal Dollar
Amount of the outstanding Advances. All accrued interest and fees shall be
payable on the effective date of any termination of the obligations of the
Lenders to make Loans hereunder.

     2.6.    RATABLE LOANS. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably according to their respective Percentages.

     2.7.    TYPES OF ADVANCES. The U.S. Dollar Advances may be Floating Rate
Advances, Eurodollar Advances or Quoted Rate Advances, or a combination thereof,
selected by the Borrower in accordance with SECTIONS 2.10 and 2.13. All
Alternate Currency Advances shall be Transaction Rate Advances selected by the
Borrower in accordance with SECTION 2.11.

     2.8.    MINIMUM AMOUNT OF EACH ADVANCE. Each Fixed Rate Advance shall be in
the minimum amount of $1,000,000 (and in multiples of $100,000 if in excess
thereof), and each Floating Rate Advance shall be in the minimum amount of
$500,000 (and in multiples of $100,000 if in excess thereof), provided, however,
that any Floating Rate Advance may be in the amount of the Aggregate Commitment.

     2.9.    OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time
pay, without penalty or premium, all outstanding Floating Rate Advances, or, in
a minimum aggregate amount of $1,000,000 or any integral multiple of $100,000 in
excess thereof, any portion of the outstanding Floating Rate Advances upon 5
days' prior notice to the Agent. Fixed Rate Advances may be paid prior to the
last day of the applicable Interest Period, subject to compliance with SECTION
3.4; PROVIDED, however, that Quoted Rate Advances may not be repaid prior to the
last day of their respective Interest Periods. Principal payments made after the
Revolving Credit Termination Date shall be applied to the principal installments
payable under SECTION 2.3(d) in the inverse order of maturity.

     2.10.   METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW U.S. DOLLAR
ADVANCES. The Borrower shall select the Type and, in the case of each Eurodollar
Advance or Quoted Rate Advance, the Interest Period applicable to each new
Advance from time to time. The Borrower shall give the Agent irrevocable notice
in substantially the form of EXHIBIT "C" hereto with appropriate insertions (a
"BORROWING NOTICE") not later than (a) 1:00 p.m. (Chicago time) at least (i) one
Business Day before the Borrowing Date of each Floating Rate Advance and (ii)
two Business Days before the Borrowing Date for each Eurodollar Advance and (b)
11:30 a.m. (Chicago time) on the Borrowing Date for each Quoted Rate Advance, in
each case specifying:

             (i)    the Borrowing Date of such Advance, which shall be a
                    Business Day, prior to or, in the case of a Eurodollar
                    Advance or Floating Rate Advance, on the Revolving Credit
                    Termination Date,

             (ii)   the aggregate amount of such Advance,

             (iii)  the Type of Advance selected, and

                                     - 22 -


             (iv)   in the case of each Eurodollar Advance or Quoted Rate
                    Advance, the Interest Period applicable thereto.

In the case of any Quoted Rate Advance, the Agent shall promptly inform each
Lender of its receipt of such Borrowing Notice for a Quoted Rate Advance and of
the interest rate it proposes to quote the Borrower therefor. If any Lender
refuses to make the requested Quoted Rate Advance, such Quoted Rate Advance
shall not be made. The Agent shall telephonically notify the Borrower of the
Lenders' acceptance or refusal of such Borrowing Notice for a Quoted Rate
Advance and, if such Borrowing Notice has been accepted, the pricing of such
Quoted Rate Advance. The Borrower shall either accept or reject the Quoted Rate
Advance upon receipt of such notice.

     2.11.   METHOD OF REQUESTING ALTERNATE CURRENCY ADVANCES. The Borrower may
from time to time in accordance with this Section 2.11 request the Lenders to
make one or more Alternate Currency Advances. The Lenders shall have no
obligation to make any such Alternate Currency Advance so requested by the
Borrower. If, and only if, each of the Lenders in its sole and absolute
discretion agrees, in the manner provided for in this Section 2.11, to make its
respective Loan comprising any such Alternate Currency Advance, will such
Alternate Currency Advance be made.

     In order to request an Alternate Currency Advance, the Borrower shall give
the Agent a request in substantially the form of EXHIBIT "D" hereto with
appropriate insertions (an "Alternate Currency Borrowing Request"), which
request shall be irrevocable, not later than 10:00 a.m. (Chicago time) at least
five Business Days before the requested Borrowing Date for such Alternate
Currency Advance, specifying:

             (i)    the Borrowing Date, which shall be a Business Day prior to
                    the Revolving Credit Termination Date, of such Advance,

             (ii)   the aggregate amount of such Advance,

             (iii)  the Alternate Currency in which such Advance is to be
                    denominated,

             (iv)   the Transaction Rate for such Advance, and

             (v)    the Transaction Rate Interest Period for such Advance.

     Upon receipt of any such Alternate Currency Borrowing Request, the Agent
shall promptly forward copies thereof to each of the Lenders. The requested
Alternate Currency Advance will be made as requested if, and only if, each
Lender shall, in its sole and absolute discretion, execute and return a copy of
such Alternate Currency Borrowing Request to the Agent not later than 10:00 a.m.
(Chicago time) at least three Business Days before the requested Borrowing Date
for such Alternate Currency Advance. Upon such receipt of an executed copy of
such Alternate Currency Borrowing Request from each of the Lenders (which copy
may be a facsimile transmittal), the Agent shall promptly notify the Borrower
and each of the Lenders of such acceptance, and thereupon the Lenders shall be
jointly and severally committed to make the

                                     - 23 -


requested Alternate Currency Advance, subject to the terms and conditions of
this Agreement. The making by the Lenders of any one or more Alternate Currency
Advances shall not constitute a consent by the Lenders to make any subsequent
Alternate Currency Advances, whether in the same or a different Alternate
Currency.

     2.12.   MAKING THE LOANS. Subject to SECTION 2.10, on each Borrowing Date,
each Lender shall make available its Loan or Loans comprising the Advance or
Advances to be made on such Borrowing Date (i) in the case of a Loan denominated
in U.S. Dollars, not later than noon (Chicago time), in immediately available
funds to the Agent at its address specified pursuant to Article XIII and (ii) in
the case of a Loan denominated in an Alternate Currency, not later than noon
(local time), in the city of the Agent's Lending Installation for such Alternate
Currency, in such funds as may then be customary for the settlement of
international transactions in such currency in the city of and at the address of
the Agent's Lending Installation for such currency. The Agent will make the
funds so received from the Lenders available to the Borrower at the Agent's
aforesaid address.

     2.13.   CONVERSION AND CONTINUATION OF OUTSTANDING U.S. DOLLAR ADVANCES.
Outstanding U.S. Dollar Advances may be continued as or converted into U.S.
Dollar Advances of the same or another Type as provided below in this Section
2.13; PROVIDED, that notwithstanding anything else in this Section 2.13 to the
contrary, (a) outstanding U.S. Dollar Advances may not be converted into
Alternate Currency Advances pursuant to this Section 2.13 and (b) outstanding
Alternate Currency Advances may not be continued or converted pursuant to this
Section 2.13, but must be repaid on or prior to the last day of their respective
Interest Periods pursuant to SECTION 2.3(a) and may only be reborrowed pursuant
to SECTIONS 2.1(b) and 2.11.

     Each Floating Rate Advance shall continue as Floating Rate Advance unless
and until such Floating Rate Advance is repaid pursuant to SECTION 2.9 or
converted into a Eurodollar Advance or Quoted Rate Advance pursuant to this
Section 2.13. Each Eurodollar Advance shall continue as a Eurodollar Advance
until the end of its respective Eurodollar Interest Period, at which time such
Eurodollar Advance shall automatically be converted into a Floating Rate Advance
unless the Borrower shall have given the Agent a Continuation/Conversion Notice
requesting that, at the end of such Eurodollar Interest Period, such Eurodollar
Advance be continued as a Eurodollar Advance for a new Eurodollar Interest
Period or converted into a Quoted Rate Advance. Each Quoted Rate Advance shall
continue as a Quoted Rate Advance until the end of its respective Quoted Rate
Interest Period, at which time such Quoted Rate Advance shall automatically be
converted into a Floating Rate Advance unless the Borrower shall have given the
Agent a Continuation/Conversion Notice requesting that, at the end of such
Quoted Rate Interest Period, such Quoted Rate Advance be continued as a Quoted
Rate Advance for a new Quoted Rate Interest Period or converted into a
Eurodollar Advance. Subject to the terms of SECTION 2.8, the Borrower may from
time to time elect to convert all or any part of any Floating Rate Advance into
a Eurodollar Advance or Quoted Rate Advance, to continue all or any part of any
Eurodollar Advance as a Eurodollar Advance for a new Eurodollar Interest Period,
to convert all or any part of any Eurodollar Advance into a Quoted Rate Advance,
to continue all or any part of any Quoted Rate Advance as a Quoted Rate Advance
for a new Quoted Rate Interest Period or to convert all or any part of any
Quoted Rate Advance into a

                                     - 24 -


Eurodollar Advance; PROVIDED, that any such continuation or conversion of an
existing Eurodollar Advance or Quoted Rate Advance shall be made on, and only
on, the last day of its respective Interest Period. The Borrower shall give the
Agent irrevocable notice (a "CONTINUATION/CONVERSION NOTICE") of each
continuation or conversion of an outstanding U.S. Dollar Advance as or into (a)
a Eurodollar Advance not later than 1:00 p.m. (Chicago time) at least two
Business Days prior to the date of or (b) not later than 11:30 a.m. (Chicago
time) on the date of the requested continuation or conversion, specifying:

               (i)  the requested date of such continuation or conversion, which
                    date shall be a Business Day;

              (ii)  the aggregate amount and Type of the U.S. Dollar Advance
                    which is to be continued or converted; and

             (iii)  the amount and Interest Period applicable to each Eurodollar
                    Advance or Quoted Rate Advance which such U.S. Dollar
                    Advance is to be continued as or converted into.

Notwithstanding anything to the contrary contained in this Section 2.13, (a) no
U.S. Dollar Advance may be converted into or continued as a Eurodollar Advance
at any time within 30 days of the Facility Termination Date, (b) no U.S. Dollar
Advance may be continued as or converted into a Quoted Rate Advance (I) at any
time on or after the Revolving Credit Termination Date and (II) unless the
Borrower and each Lender have agreed upon a Quoted Rate for the applicable
Quoted Rate Interest Period in accordance with the procedures set forth in
SECTION 2.10 applicable to new Quoted Rate Advances and (c) except with the
consent of the Required Lenders, no U.S. Dollar Advance may be continued as or
converted into a Eurodollar Advance or Quoted Rate Advance at any time when any
Default or Unmatured Default has occurred and is continuing.

                                     - 25 -


     2.14.   RESTRICTIONS ON INTEREST PERIODS. No Interest Period may extend
beyond a Payment Date on which principal of the Advances shall be payable unless
outstanding principal of Floating Rate Advances and Fixed Rate Advances with
Interest Periods ending prior to said Payment Date shall be at least equal to
the amount so payable. No Interest Period shall extend beyond the Facility
Termination Date. No more than 10 Interest Periods may be in effect at any one
time. No more than three Quoted Rate Interest Periods may be in effect at any
one time.

     2.15.   CHANGES IN INTEREST RATE, ETC. Changes in the rate of interest on
that portion of any Advance maintained as a Floating Rate Advance will take
effect simultaneously with each change in the Alternate Base Rate and each
change in the Applicable Margin applicable thereto. Each Fixed Rate Advance
shall bear interest from and including the first day of the Interest Period
applicable thereto to but excluding the last day of such Interest Period at the
interest rate determined as applicable to such Fixed Rate Advance, provided that
the rate of interest on each Eurodollar Advance will change simultaneously with
each change, during the applicable Eurodollar Interest Period, of the Applicable
Margin.

     2.16.   RATES APPLICABLE AFTER DEFAULT. During the continuance of a Default
the Required Lenders may, at their option, by notice to the Borrower (which
notice may be revoked at the option of the Required Lenders notwithstanding any
provision of SECTION 8.2 requiring unanimous consent of the Lenders to changes
in interest rates), declare that (i) each Fixed Rate Advance shall bear interest
for the remainder of the applicable Interest Period at the rate otherwise
applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate
Advance shall bear interest at a rate per annum equal to the Floating Rate
otherwise applicable to the Floating Rate Advance plus 2% per annum.

     2.17.   METHOD OF PAYMENT. (a) All payments of principal, interest and fees
to be made by the Borrower hereunder or under the Notes in U.S. Dollars shall be
made, without setoff, deduction, or counterclaim, in immediately available funds
to the Agent at the Agent's address specified pursuant to ARTICLE XIII, or at
any other Lending Installation of the Agent specified in writing by the Agent to
the Borrower, by noon (local time) on the date when due and shall be applied
ratably by the Agent among the Lenders. Each payment delivered to the Agent for
the account of any Lender shall be delivered promptly by the Agent to such
Lender in the same type of funds which the Agent received at such Lender's
address specified pursuant to ARTICLE XIII or at any Lending Installation
specified in a notice received by the Agent from such Lender.

     (b)     Each Advance shall be repaid or prepaid in the currency in which it
was made in the amount borrowed and interest payable thereon shall be paid in
such currency. All payments to be made by the Borrower hereunder or under the
Notes in any Alternate Currency shall be made in such Alternate Currency on the
date due in such funds as may then be customary for the settlement of
international transactions in such Alternate Currency for the account of the
Agent, at its Lending Installation for such Alternate Currency. The Agent will
promptly cause such payments to be distributed to each Lender in like funds and
currency at such Lender's address specified pursuant to ARTICLE XIII or at any
Lending Installation specified in a notice received by the Agent from such
Lender. Notwithstanding the foregoing provisions of this Section, if, after the
making of any Advance in any Alternate Currency, currency control or exchange
regulations

                                     - 26 -


are imposed in the country which issues such Alternate Currency with the result
that different types of such Alternate Currency (the "New Currency") are
introduced and the type of Alternate Currency in which the Advance was made (the
"Original Currency") no longer exists or the Borrower is not able to make
payment to the Agent for the account of the Lenders in such Original Currency,
then all payments to be made by the Borrower hereunder or under the Notes in
such Alternate Currency shall be made in such amount and such type of the New
Currency as shall be equivalent to the amount of such payment otherwise due
hereunder or under the Notes in the Original Currency, it being the intention of
the Borrower and the Lenders that the Borrower take all risks of the imposition
of any such currency control or exchange regulations.

     (c)     On or before the time a principal payment is made on any of the
Advances, the Borrower shall inform the Agent as to the proportionate
application of such payment among the Floating Rate Advances, the Eurodollar
Advances, the Quoted Rate Advances and the Alternate Currency Advances. In the
absence of such instructions, the Agent shall apply such payment first to the
outstanding Floating Rate Advances and then apply any remainder to the
outstanding Eurodollar Advances, Quoted Rate Advances and Alternate Currency
Advances in whatever proportion it shall determine in its sole discretion;
PROVIDED, that as between Eurodollar Advances, as between Quoted Rate Advances
and as between Alternate Currency Advances of the same Alternate Currency, the
Agent shall endeavor to make such application (not otherwise disadvantageous to
the Agent or the Lenders) as will mitigate the Borrower's liability to the
Lenders under SECTION 3.4 as a consequence of such application.

     2.18.   FOREIGN TAXES. (a) All payments made by the Borrower in respect of
principal of and interest on the Advances and of all other amounts payable by it
under this Agreement are payable without deduction for or on account of any
present or future taxes, duties, withholdings or other charges levied or imposed
by the government of any jurisdiction outside the United States of America or by
any political subdivision or taxing authority thereof or therein (herein called
"FOREIGN TAXES"). If the Borrower shall be required by law to deduct or withhold
any Foreign Taxes from any such amount payable by it hereunder or under any of
the Notes to or for the account of any Lender, (i) such amount shall be
increased as may be necessary so that, after making such deductions or
withholdings (including any deductions or withholdings applicable to additional
amounts payable pursuant to this Section), such Lender receives an amount equal
to the amount it would have received had no such deductions or withholdings been
made and (ii) the Borrower shall make such deductions and withholdings and pay
the amount thereof to the relevant government, political subdivision or taxing
authority at or prior to the time required to be paid under applicable law (and
shall promptly furnish to the Agent, for the benefit of the Lenders, official
receipts evidencing such payment). In addition, the Borrower will pay any
present or future stamp or documentary taxes or similar taxes or levies imposed
by any government, political subdivision or taxing authority referred to in the
first sentence of this subsection arising from any payment by it hereunder or
under any of the Notes or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any of the Notes (herein called
"OTHER TAXES"). The Borrower will indemnify each Lender and the Agent for, and
hold each Lender and the Agent harmless against, the full amount of Foreign
Taxes or Other Taxes (including, without limitation, any Foreign Taxes or Other
Taxes imposed by any jurisdiction on amounts payable under this Section) paid or
payable by such Lender or the Agent

                                     - 27 -


and any liability of such Lender or the Agent relating thereto (including,
without limitation, penalties, interest and expenses).

     (b)     If the cost to any Lender of making or maintaining any Loan to the
Borrower is increased, or the amount of any sum received or receivable by any
Lender (or its applicable Lending Installation) is reduced, by an amount deemed
by such Lender to be material, which increase or reduction (i) is due to any law
or any governmental or quasi-governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law), or any interpretation
thereof, or the compliance of any Lender therewith, and (ii) would not have
occurred but for the fact that the Borrower (or one or more of its Subsidiaries)
conducts business in a jurisdiction outside the United States of America, the
Borrower shall indemnify such Lender for such increased cost or reduction within
15 days after demand by such Lender (with a copy to the Agent).

     (c)     If, and to the extent that, any Lender shall actually receive a
credit against its United States federal income tax liability for any Foreign
Taxes or Other Taxes indemnified or paid by the Borrower pursuant to this
Section, such Lender agrees to promptly notify the Borrower thereof and make
reimbursement of such credit to the Borrower, provided that if such Lender
reasonably believes that such credit may be subject to challenge, then such
Lender shall thereupon enter into negotiations in good faith with the Borrower
to determine when reimbursement of such credit can be made to the Borrower.

     (d)     All tax receipts required to be delivered under this Section shall
be originals, duplicate originals or duly certified or authenticated copies
within the meaning of Treasury Regulation Section 1.905-2(a)(2).

     2.19.   JUDGMENT CURRENCY. If for the purposes of obtaining judgment in any
court it is necessary to convert a sum due from the Borrower hereunder or under
any of the Notes in the currency expressed to be payable herein or under the
Notes (the "SPECIFIED CURRENCY") into another currency, the parties hereto
agree, to the fullest extent that they may effectively do so, that the rate of
exchange used shall be that at which in accordance with normal banking
procedures the Agent could purchase the specified currency with such other
currency at the Agent's main Chicago office on the Business Day preceding that
on which final, nonappealable judgment is given. The obligations of the Borrower
in respect of any sum due to any Lender or the Agent hereunder or under any Note
shall, notwithstanding any judgment in a currency other than the specified
currency, be discharged only to the extent that on the Business Day following
receipt by such Lender or the Agent (as the case may be) of any sum adjudged to
be so due in such other currency such Lender or the Agent (as the case may be)
may in accordance with normal, reasonable banking procedures purchase the
specified currency with such other currency. If the amount of the specified
currency so purchased is less than the sum originally due to such Lender or the
Agent (as the case may be), in the specified currency, the Borrower agrees, to
the fullest extent that it may effectively do so, as a separate obligation and
notwithstanding any such judgment, to indemnify such Lender or the Agent (as the
case may be) against such loss, and if the amount of the specified currency so
purchased exceeds (a) the sum originally due to such Lender or the Agent (as the
case may be) in the specified currency and (b)

                                     - 28 -


any amounts shared with other Lenders as a result of allocations of such excess
as a disproportionate payment to such Lender under SECTION 11.2, such Lender or
the Agent (as the case may be) agrees to remit such excess to the Borrower.

     2.20.   NOTES; TELEPHONIC NOTICES. Each Lender shall, and is hereby
authorized to, record the principal amount of each of its Loans and each
repayment on the schedule attached to its Note (or to otherwise record the same
in its usual practice) provided, however, that the failure to so record shall
not affect the Borrower's obligations in respect of such Loans. The Borrower
hereby authorizes the Lenders and the Agent to extend, convert or continue U.S.
Dollar Advances (it being understood and agreed that Alternate Currency
Borrowing Requests must be in writing or by facsimile) and to transfer funds
based on telephonic notices made by any person or persons the Agent or any
Lender in good faith believes to be acting on behalf of the Borrower. The
Borrower agrees to deliver promptly to the Agent a written confirmation, if such
confirmation is requested by the Agent or any Lender, of each telephonic notice
signed by an Authorized Officer. If the written confirmation differs in any
material respect from the action taken by the Agent and the Lenders, the records
of the Agent and the Lenders shall govern absent manifest error.

     Upon receipt of its Note, each Lender will: (i) record the aggregate unpaid
principal amount of the note dated September 9, 1996 (the "Original Note")
issued under the Original Agreement in its records or, at its option, on the
schedule attached to the Note as the aggregate unpaid principal amount of the
Note; (ii) mark the Original Note as replaced by the Note; and (iii) promptly
return the Original Note to the Borrower. Thereafter, all references in this
Agreement and any and all instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith to the Original
Note shall be deemed references to the Note. The replacement of the Original
Note with the Note shall not be construed to deem paid or forgiven the unpaid
principal amount of, or unpaid accrued interest on, the Original Note
outstanding at the time of replacement.

     2.21.   INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued on
each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof, on any date on which
the Floating Rate Advance is prepaid, whether due to acceleration or otherwise,
and at maturity. Interest accrued on that portion of the outstanding principal
amount of any Floating Rate Advance converted into a Eurodollar Advance or
Quoted Rate Advance on a day other than a Payment Date shall be payable on the
date of conversion. Interest accrued on each Fixed Rate Advance shall be payable
on the last day of its applicable Interest Period, on any date on which the
Fixed Rate Advance is prepaid, whether by acceleration or otherwise, and at
maturity. Interest accrued on each Fixed Rate Advance having an Interest Period
longer than three months shall also be payable on the last day of each
three-month interval during such Interest Period. Interest and fees shall be
calculated for actual days elapsed on the basis of a 360-day year. Interest
shall be payable for the day an Advance is made but not for the day of any
payment on the amount paid if payment is received prior to noon (local time) at
the place of payment. If any payment of principal of or interest on an Advance
shall become due on a day which is not a Business Day, such payment shall be
made on the next

                                     - 29 -


succeeding Business Day and, in the case of a principal payment, such extension
of time shall be included in computing interest in connection with such payment.

     2.22.   NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Alternate Currency Borrowing Request, Continuation/Conversion
Notice and repayment notice received by it hereunder. The Agent will notify each
Lender of the interest rate applicable to each Eurodollar Advance promptly upon
determination of such interest rate and will give each Lender prompt notice of
each change in the Alternate Reference Rate.

     2.23.   LENDING INSTALLATIONS. Each Lender may book its Loans at any one or
more Lending Installations selected by such Lender and may change its Lending
Installation(s) from time to time. All terms of this Agreement shall apply to
any such Lending Installation and the Notes shall be deemed held by each Lender
for the benefit of such Lending Installation(s). Each Lender may from time to
time, by written or facsimile notice to the Agent and the Borrower, designate a
new Lending Installation through which Loans (or Loans in a particular currency)
will be made by it and for whose account Loan payments (or Loan payments in a
particular currency) are to be made. The Agent may from time to time, by written
or facsimile notice to the Borrower and each Lender, designate a new Lending
Installation at which Advances (or Advances in a particular currency) will be
made available to the Borrower and at which payments on the Advances (or
payments on Advances in a particular currency) are to be made by the Borrower.

     2.24.   NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a Lender,
as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (i) in the case of a Lender, the
proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
such Lender or the Borrower, as the case may be, has not in fact made such
payment to the Agent, the recipient of such payment shall, on demand by the
Agent, repay to the Agent the amount so made available together with interest
thereon in respect of each day during the period commencing on the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to (i) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day or (ii) in the case of payment by the
Borrower, the interest rate applicable to the relevant Loan.

     2.25.   WITHHOLDING TAX EXEMPTION. At least five Business Days prior to the
first date on which interest or fees are payable hereunder for the account of
any Lender, each Lender that is not incorporated under the laws of the United
States of America, or a state thereof, agrees that it will deliver to each of
the Borrower and the Agent two duly completed copies of United States Internal
Revenue Service Form 1001 or 4224, certifying in either case that such Lender is
entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes. Each Lender
which so delivers a Form

                                     - 30 -


1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent
two additional copies of such form (or a successor form) on or before the date
that such form expires (currently, three successive calendar years for Form 1001
and one calendar year for Form 4224) or becomes obsolete or after the occurrence
of any event requiring a change in the most recent forms so delivered by it, and
such amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent, in each case certifying that such Lender
is entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes, unless an
event (including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form with respect to it and
such Lender advises the Borrower and the Agent that it is not capable of
receiving payments without any deduction or withholding of United States federal
income tax.

                                   ARTICLE III

                             CHANGE IN CIRCUMSTANCES

     3.1.    YIELD PROTECTION. If any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive (whether or
not having the force of law), or any interpretation thereof, or the compliance
of any Lender therewith,

             (i)    subjects any Lender or any applicable Lending Installation
     to any tax, duty, charge or withholding on or from payments due from the
     Borrower (excluding federal taxation of the overall net income of any
     Lender or applicable Lending Installation), or changes the basis of
     taxation of payments to any Lender in respect of its Loans or other amounts
     due it hereunder, or

             (ii)   imposes or increases or deems applicable any reserve,
     assessment, insurance charge, special deposit or similar requirement
     against assets of, deposits with or for the account of, or credit extended
     by, any Lender or any applicable Lending Installation (other than reserves
     and assessments taken into account in determining the interest rate
     applicable to Eurodollar Advances), or

             (iii)  imposes any other condition the result of which is to
     increase the cost to any Lender or any applicable Lending Installation of
     making, funding or maintaining loans or reduce any amount receivable by any
     Lender or any applicable Lending Installation in connection with loans, or
     requires any Lender or any applicable Lending Installation to make any
     payment calculated by reference to the amount of loans held or interest
     received by it, by an amount deemed material by such Lender,

then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitment.

                                     - 31 -


     3.2.    CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines the
amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change (as defined below), then, within 15 days of
demand by such Lender, the Borrower shall pay such Lender the amount necessary
to compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "CHANGE" means (i)
any change after the date of this Agreement in the Risk-Based Capital Guidelines
(as defined below) or (ii) any adoption of or change in any other law,
governmental or quasi-governmental rule, regulation, policy, guideline,
interpretation, or directive (whether or not having the force of law) after the
date of this Agreement which affects the amount of capital required or expected
to be maintained by any Lender or any Lending Installation or any corporation
controlling any Lender. "RISK-BASED CAPITAL GUIDELINES" means (i) the risk-based
capital guidelines in effect in the United States on the date of this Agreement,
including transition rules, and (ii) the corresponding capital regulations
promulgated by regulatory authorities outside the United States implementing the
July 1988 report of the Basle Committee on Banking Regulation and Supervisory
Practices Entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the date of this Agreement.

     3.3.    AVAILABILITY OF EURODOLLAR ADVANCES. If (i) any Lender determines
that maintenance of its Eurodollar Loans at a suitable Lending Installation
would violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, (ii) the Required Lenders determine that deposits of a
type and maturity appropriate to match fund Eurodollar Advances are not
available or (iii) the Required Lenders determine that the interest rate
applicable to a Eurodollar Advance does not accurately reflect the cost of
making or maintaining such Eurodollar Advance, then the Agent shall suspend the
availability of any new Eurodollar Advances (whether pursuant to SECTION 2.10 or
2.13).

     3.4.    FUNDING INDEMNIFICATION. If any payment of a Fixed Rate Advance
occurs on a date prior to the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Fixed Rate
Advance is not made on the date specified by the Borrower in its Borrowing
Notice, Alternate Currency Borrowing Request or Continuation/Conversion Notice,
as the case may be, as a consequence of any condition precedent to such Advance
under SECTION 2.1 or ARTICLE IV not being satisfied or as a consequence of any
failure by the Borrower to borrow such Advance when the same has been made
available to it pursuant to SECTION 2.12, the Borrower will indemnify each
Lender for any loss or cost in liquidating or employing deposits acquired to
fund or maintain the Fixed Rate Advance and, provided that such Lender has taken
such reasonable action, if any, not disadvantageous to it, to mitigate the same,
any other loss or cost incurred by such Lender resulting therefrom.

     3.5.    LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Fixed Rate Loans to reduce any liability of the Borrower to such
Lender under SECTIONS 2.18, 3.1 and 3.2 or to

                                     - 32 -


avoid the unavailability of Eurodollar Advances under SECTION 3.3, so long as
such designation is not disadvantageous to such Lender. Each Lender shall
deliver a written statement of such Lender as to the amount due, if any, under
SECTION 2.18, 3.1, 3.2 or 3.4. Such written statement shall set forth in
reasonable detail (and in accordance with Agreement Accounting Principles, where
applicable) the calculations upon which such Lender determined such amount and
shall be final, conclusive and binding on the Borrower in the absence of
manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Loan shall be calculated as though each Lender
funded its Eurodollar Loan through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Eurodollar Loan, whether in fact that is the
case or not. Unless otherwise provided herein, the amount specified in the
written statement shall be payable on demand after receipt by the Borrower of
the written statement. The obligations of the Borrower under SECTIONS 2.18, 3.1,
3.2 and 3.4 shall survive payment of the obligations and termination of this
Agreement.

     3.6.    REFUND TO BORROWER. If, and to the extent that, any Lender shall
actually receive a credit against its United States federal income tax liability
or otherwise receive any rebate or refund from any government or governmental
agency in respect of any amount paid by the Borrower pursuant to SECTION 3.1 or
3.2, such Lender agrees to promptly notify the Borrower thereof and make
reimbursement of credit, rebate or refund to the Borrower, provided that if such
Lender reasonably believes that such credit, rebate or refund may be subject to
challenge, then such Lender shall thereupon enter into negotiations in good
faith with the Borrower to determine when reimbursement of such credit, rebate
or refund can be made to the Borrower.

                                   ARTICLE IV

                              CONDITIONS PRECEDENT

     4.1.    CONDITIONS PRECEDENT TO THE RESTATEMENT EFFECTIVE DATE. This
Agreement shall become effective on the date (the "Restatement Effective Date")
on which the Borrower shall have furnished to the Agent, with sufficient copies
for the Lenders:

      (i)    Copies, certified by the Secretary or Assistant Secretary of the
             Borrower, of its Board of Directors' resolutions (and resolutions
             of other bodies, if any are deemed necessary by counsel for any
             Lender) authorizing the execution of the Loan Documents.

     (ii)    An incumbency certificate, executed by the Secretary or Assistant
             Secretary of the Borrower, which shall identify by name and title
             and bear the signature of the officers of the Borrower authorized
             to sign the Loan Documents and to make borrowings hereunder, upon
             which certificate the Lenders shall be entitled to rely until
             informed of any change in writing by the Borrower.

                                     - 33 -


    (iii)    A certificate, signed by the chief financial officer of the
             Borrower stating that on the Restatement Effective Date no Default
             or Unmatured Default has occurred and is continuing.

     (iv)    A written opinion of the Borrower's counsel, addressed to the
             Lenders in substantially the form of EXHIBIT "E" hereto.

      (v)    Note payable to the order of each of the Lenders.

     (vi)    Such other documents as any Lender or its counsel may have
             reasonably requested.

     4.2.    EACH ADVANCE.  The Lenders shall not be required to make any
Advance, unless on the applicable Borrowing Date:

      (i)    There exists no Default or Unmatured Default.

     (ii)    The representations and warranties contained in ARTICLE V are true
             and correct as of such Borrowing Date except for changes in the
             Schedules hereto reflecting transactions permitted by this
             Agreement.

    (iii)    If such Advance is a U.S. Dollar Advance, the Agent shall have
             received a duly completed Borrowing Notice from the Borrower
             pursuant to SECTION 2.10 and, in the case of any Quoted Rate
             Advance, such Borrowing Notice shall have been accepted by the
             Lenders pursuant to SECTION 2.10.

     (iv)    If such Advance is an Alternate Currency Advance, the Agent shall
             have received a duly completed Alternate Currency Borrowing Request
             from the Borrower pursuant to SECTION 2.11, and such Alternate
             Currency Borrowing Request shall have been agreed to in writing by
             each of the Lenders pursuant to SECTION 2.11.

      (v)    All legal matters incident to the making of such Advance shall be
             in accordance with this Agreement in the reasonable judgment of the
             Lenders and their counsel.

     Each Borrowing Notice or Alternate Currency Borrowing Request with respect
to each such Advance shall constitute a representation and warranty by the
Borrower that the conditions contained in paragraphs (i) and (ii) above and have
been satisfied. Any Lender may require a duly completed compliance certificate
in substantially the form of EXHIBIT "G" hereto as a condition to making an
Advance.

                                    ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

     The Borrower represents and warrants to the Lenders that:

                                     - 34 -


     5.1.    CORPORATE EXISTENCE AND STANDING. Each of the Borrower and its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite authority to conduct its business in each jurisdiction in which its
business is conducted.

     5.2.    AUTHORIZATION AND VALIDITY. The Borrower has the corporate power
and authority and legal right to execute and deliver the Loan Documents and to
perform its obligations thereunder. The execution and delivery by the Borrower
of the Loan Documents and the performance of its obligations thereunder have
been duly authorized by proper corporate proceedings, and the Loan Documents
constitute legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their terms, except as enforceability
may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors, rights generally.

     5.3.    NO CONFLICT; GOVERNMENT CONSENT. Neither the execution and delivery
by the Borrower of the Loan Documents, nor the consummation of the transactions
therein contemplated, nor compliance with the provisions thereof will violate
any law, rule, regulation, order, writ, judgment, injunction, decree or award
binding on the Borrower or any of its Subsidiaries or the Borrower's or any
Subsidiary's articles of incorporation or by-laws or the provisions of any
indenture, instrument or agreement to which the Borrower or any of its
Subsidiaries is a party or is subject, or by which it, or its property, is
bound, or conflict with or constitute a default thereunder, or result in the
creation or imposition of any Lien in, of or on the property of the Borrower or
a Subsidiary pursuant to the terms of any such indenture, instrument or
agreement. No order, consent, approval, license, authorization, or validation
of, or filing, recording or registration with, or exemption by, any governmental
or public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with the execution, delivery and
performance of, or the legality, validity, binding effect or enforceability of,
any of the Loan Documents.

     5.4.    FINANCIAL STATEMENTS. The May 31, 1997 consolidated financial
statements of the Borrower and its Subsidiaries heretofore delivered to the
Lenders were prepared in accordance with generally accepted accounting
principles in effect on the date such statements were prepared and fairly
present the consolidated financial condition and operations of the Borrower and
its Subsidiaries at such date and the consolidated results of their operations
for the period then ended.

     5.5.    MATERIAL ADVERSE CHANGE. Since May 31, 1997, there has been no
change in the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect.

     5.6.    TAXES. The Borrower and its Subsidiaries have filed all United
States federal tax returns and all other tax returns which are required to be
filed and have paid all taxes due pursuant to said returns or pursuant to any
assessment received by the Borrower or any of its Subsidiaries, except for the
filing of such returns and the payment of such taxes, if any, as (a) are

                                     - 35 -


being contested in good faith and as to which adequate reserves have been
provided or (b) do not in the aggregate exceed $4,000,000 and the failure to
file or pay for which could not reasonably be expected to have a Material
Adverse Effect. As of the date hereof, the United States income tax returns of
the Borrower and its Subsidiaries have been audited by the Internal Revenue
Service through the fiscal year ended 1992. No tax liens have been filed other
than those permitted pursuant to SECTION 6.16(a). The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are adequate.

     5.7.    LITIGATION AND CONTINGENT OBLIGATIONS. Except as set forth in the
Borrower's Form 10-K filed with the Securities and Exchange Commission for its
fiscal year ended May 31, 1997, there is no litigation, arbitration,
governmental investigation, proceeding or inquiry pending or, to the knowledge
of any of their officers, threatened against or affecting the Borrower or any of
its Subsidiaries which could reasonably be expected to have a Material Adverse
Effect. Other than any liability incident to such litigation, arbitration or
proceedings, the Borrower has no material contingent obligations not provided
for or disclosed in the Borrower's Form 10-K filed with the Securities and
Exchange Commission for its fiscal year ended May 31, 1997.

     5.8.    SUBSIDIARIES. As of the date hereof, Borrower's Form 10-K filed
with the Securities and Exchange Commission for its fiscal year ended May 31,
1997 contains an accurate description of all of the Borrower's presently
existing Significant Subsidiaries (as defined in Regulation S-X of the
Securities and Exchange Commission). All of the issued and outstanding shares of
capital stock of all of the Borrower's Subsidiaries have been duly authorized
and issued and are fully paid and non-assessable.

     5.9.    ERISA. The Unfunded Liabilities of all Single Employer Plans do not
in the aggregate exceed $10,000,000. Neither the Borrower nor any other member
of the Controlled Group has incurred, or is reasonably expected to incur any
withdrawal liability to Multiemployer Plans in an aggregate amount which, when
added to the aggregate Unfunded Liabilities of all Single Employer Plans, would
exceed of $10,000,000. Each Plan complies in all material respects with all
applicable requirements of law and regulations and no Reportable Event has
occurred with respect to any Plan. Neither the Borrower nor any other member of
the Controlled Group has withdrawn from any Plan or initiated steps to do so,
and no steps have been taken to reorganize or terminate any Plan.

     5.10.   ACCURACY OF INFORMATION. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Agent or any Lender
in connection with the negotiation of, or compliance with, the Loan Documents
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statements contained therein not misleading.

     5.11.   REGULATION U. Margin stock (as defined in Regulation U) constitutes
less than 25% of those assets of the Borrower and its Subsidiaries which are
subject to any limitation on sale, pledge, or other restriction hereunder.

                                     - 36 -


     5.12.   COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries have
complied in all respects with all applicable statutes, rules, regulations,
orders and restrictions of any domestic or foreign government or any
instrumentality or agency thereof, having jurisdiction over the conduct of their
respective businesses or the ownership of their respective properties, except
where failure to comply would not reasonably be expected to have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice
to the effect that its operations are not in material compliance with any of the
requirements of applicable federal, state and local environmental, health and
safety statutes and regulations or the subject of any federal or state
investigation evaluating whether any remedial action is needed to respond to a
release of any toxic or hazardous waste or substance into the environment, which
non-compliance or remedial action could reasonably be expected to have a
Material Adverse Effect.

     5.13.   INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary
thereof is an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.

     5.14.   YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive
review and assessment of its computer applications and is in the process of
making inquiry of its material suppliers, vendors and customers with respect to
the Year 2000 Issue (as such term is defined below). Based on the foregoing
review, the Borrower reasonably believes that the Year 2000 Issue, as it relates
to the Borrower's computer applications, will not result in a Material Adverse
Effect. "Year 2000 Issue" means, with respect to any Person, the ability or
inability of all computer applications material to such Person's business and
operations properly to perform date-sensitive functions for all dates before and
after January 1, 2000. The Borrower is unable to determine the ultimate impact,
if any, on the Borrower's operations resulting from the Year 2000 Issue relating
to material suppliers, vendors and customers.

                                   ARTICLE VI

                                    COVENANTS

     During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:

     6.1.    FINANCIAL REPORTING. The Borrower will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles and furnish to the
Lenders:

      (i)    Within 90 days after the close of each of its fiscal years, an
             unqualified audit report certified by independent certified public
             accountants, acceptable to the Lenders, prepared in accordance with
             generally accepted accounting principles on a consolidated basis
             for itself and the Subsidiaries, including balance sheets as of the
             end of such period, related profit and loss and reconciliation of
             surplus statements, and a statement of cash flows, accompanied by
             (a) any management letter prepared by said accountants, at the
             request of the Lenders, and (b) a

                                     - 37 -


             certificate of said accountants that, in the course of their
             examination necessary for their certification of the foregoing,
             they have obtained no knowledge of any Default or Unmatured
             Default, or if, in the opinion of such accountants, any Default or
             Unmatured Default shall exist, stating the nature and status
             thereof.

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

    (iii)    Within 60 days after the close of the first three quarterly periods
             of each of its fiscal years, for itself and the Subsidiaries,
             consolidated unaudited balance sheets as at the close of each such
             period and consolidated profit and loss and reconciliation of
             surplus statements and a statement of cash flows for the period
             from the beginning of such fiscal year to the end of such quarter,
             all certified by the Borrower's chief financial officer or
             Treasurer.

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

      (v)    Together with the financial statements required hereunder, a
             compliance certificate in substantially the form of EXHIBIT "G"
             hereto signed by the Borrower's chief financial officer or
             Treasurer showing the calculations necessary to determine
             compliance with this Agreement and stating that no Default or
             Unmatured Default exists, or if any Default or Unmatured Default
             exists, stating the nature and status thereof.

     (vi)    Within 270 days after the close of each fiscal year, a statement of
             the Unfunded Liabilities of each Single Employer Plan, certified as
             correct by an actuary enrolled under ERISA, except that the
             Borrower shall not be required to deliver such statement for any
             such fiscal year to the extent that such information is
             specifically set forth in the audit report for such fiscal year
             delivered to the Agent pursuant to CLAUSE (i) of this Section 6.1.

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

   (viii)    As soon as possible and in any event within 10 days after receipt
             by the Borrower, a copy of (a) any notice or claim to the effect
             that the Borrower or any of its

                                     - 38 -


             Subsidiaries is or may be liable to any Person as a result of the
             release by the Borrower, any of its Subsidiaries, or any other
             Person of any toxic or hazardous waste or substance into the
             environment, and (b) any notice alleging any violation of any
             federal, state or local environmental, health or safety law or
             regulation by the Borrower or any of its Subsidiaries which, in the
             case of either clause (a) or clause (b), could reasonably be
             expected to have a Material Adverse Effect.

     (ix)    Promptly upon the furnishing thereof to the shareholders of the
             Borrower, copies of all financial statements, reports and proxy
             statements so furnished.

      (x)    Promptly upon the filing thereof, copies of all registration
             statements and annual, quarterly, monthly or other regular reports
             which the Borrower or any of its Subsidiaries files with the
             Securities and Exchange Commission.

     (xi)    Such other information (including non-financial information) as the
             Agent or any Lender may from time to time reasonably request.

     6.2.    USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Advances for the general corporate needs of the
Borrower and its Subsidiaries and to repay outstanding Advances. The Borrower
will not, nor will it permit any Subsidiary to, use any of the proceeds of the
Advances to (i) purchase or carry any "margin stock" (as defined in Regulation
U), (ii) acquire any security in any transaction which is subject to Sections 13
and 14 of the Securities Exchange Act of 1934 or (iii) make any unfriendly
Acquisition.

     6.3.    NOTICE OF DEFAULT. The Borrower will, and will cause each
Subsidiary to, give prompt notice in writing to the Lenders of (i) the
occurrence of any Default or Unmatured Default and of any other development,
financial or otherwise, which would have a Material Adverse Effect, or (ii) any
threatened or pending litigation or governmental proceeding or labor controversy
against the Borrower or any Subsidiary which, if adversely determined, would
reasonably be expected to have a Material Adverse Effect.

     6.4.    CONDUCT OF BUSINESS. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted and to do all things necessary to remain duly incorporated, validly
existing and in good standing as a domestic or foreign corporation, as the case
may be, in its jurisdiction of incorporation and maintain all requisite
authority to conduct its business in each jurisdiction in which its business is
conducted; PROVIDED, that nothing contained in this Section 6.4 shall prohibit
(a) any Subsidiary from entering into a merger or consolidation otherwise
permitted by SECTION 6.11 or (b) the liquidation of any Subsidiary substantially
all of whose assets have been transferred to the Borrower or another Subsidiary
in compliance with SECTION 6.12.

     6.5.    TAXES. The Borrower will, and will cause each Subsidiary to, pay
when due all taxes, assessments and governmental charges and levies upon it or
its income, profits or property, except those which (a) are being contested in
good faith and as to which adequate

                                     - 39 -


reserves have been provided or (b) do not in the aggregate exceed $4,000,000 and
the failure to pay which could not reasonably be expected to have a Material
Adverse Effect.

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

     6.7.    COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply in all material respects with all laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to which
it may be subject.

     6.8.    MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its properties in good repair, working order and condition, and make all
necessary and proper repairs, renewals and replacements so that its business
carried on in connection therewith may be properly conducted at all times.

     6.9.    INSPECTION. The Borrower will, and will cause each Subsidiary to,
permit the Lenders, by their respective representatives and agents, to inspect
any of the properties, corporate books and financial records of the Borrower and
each Subsidiary, to examine and make copies of the books of accounts and other
financial records of the Borrower and each Subsidiary, and to discuss the
affairs, finances and accounts of the Borrower and each Subsidiary with, and to
be advised as to the same by, their respective officers at such reasonable times
and intervals as the Lenders may designate.

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

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

             (b)    The Borrower may purchase, redeem or otherwise acquire or
     retire any class of its stock out of the proceeds of, or in exchange for, a
     substantially concurrent issue and sale of the same class of such stock in
     addition to that now issued and outstanding.

             (c)    Any Subsidiary may declare and pay dividends to the
     Borrower.

                                     - 40 -


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

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

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

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

     6.12.   SALE OF ASSETS. The Borrower will not, nor will it permit any
Subsidiary to, sell, lease, transfer, assign or otherwise dispose of (including,
for the avoidance of doubt, in connection with a sale leaseback transaction),
any of its assets (including, for the avoidance of doubt, the capital stock of
Subsidiaries, but excluding (i) inventory sold in the ordinary course of the
Borrower's or any Subsidiary's business, (ii) property formerly used in the
Borrower's or any Subsidiary's business which is worn out or obsolete, (iii)
assets of any Domestic Subsidiary transferred to the Borrower or to another
Domestic Subsidiary which is a Wholly-Owned Subsidiary, (iv) assets of any
Foreign Subsidiary transferred to the Borrower or to another Subsidiary which is
a Wholly-Owned Subsidiary, (v) assets permitted to be sold or otherwise
transferred pursuant to SECTION 6.13 and (vi) promissory notes ("PAYMENT NOTES")
received as partial or full payment for assets sold) if, after giving effect
thereto, the sum of all such assets transferred, assigned or otherwise disposed
of during the twelve-month period ending with (and including) the month of such
disposition either (a) represents more than 10% of Consolidated Assets
determined as of the date of (and after giving effect to) such disposition or
(b) were responsible for more than 10% of the consolidated net sales or of the
consolidated net income of the Borrower and its Subsidiaries during such
twelve-month period.

     6.13.   SALE OF ACCOUNTS. Anything in SECTION 6.12 to the contrary
notwithstanding, the Borrower will not, nor will it permit any Subsidiary to,
sell, with or without recourse, transfer, assign, encumber or otherwise dispose
of any of its notes or accounts receivable, leases or chattel paper
(collectively referred to in this Section as "ACCOUNTS") to any Person, except
that:

             (a)    The Borrower or any Subsidiary may sell or otherwise dispose
     of any of its Accounts to the Borrower or any Subsidiary on terms and
     conditions which are in compliance with SECTION 6.19.

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

                                     - 41 -


             (c)    The Borrower or any Subsidiary may sell or otherwise dispose
     of its Foreign Accounts to any Person for the purposes of collection,
     provided that the aggregate face amount of all such Foreign Accounts so
     transferred by the Borrower and its Subsidiaries during any fiscal year of
     the Borrower shall not exceed an amount equal to 20% of the gross Accounts
     of the Borrower and its Subsidiaries as of the last day of the Borrower's
     immediately preceding fiscal year and determined from the Borrower's
     consolidated balance sheet delivered pursuant to SECTION 6.1(i).

             (d)    The Borrower or any Subsidiary may sell or otherwise dispose
     of its Accounts which arise from the sale of machinery and equipment and
     have payment terms longer than 90 days and payable in installments.

             (e)    The Borrower or any Subsidiary may sell or otherwise dispose
     of Payment Notes as permitted under SECTION 6.12.

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

     6.14.   INVESTMENTS AND ACQUISITIONS. The Borrower will not, nor will it
permit any Subsidiary to, make or suffer to exist any Investments (including
without limitation, loans and advances to, and other Investments in,
Subsidiaries), or commitments therefor, or to create any Subsidiary or to become
or remain a partner in any partnership or joint venture, or to make any
Acquisition of any Person, except:

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

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

             (c)    Demand deposit accounts maintained in the ordinary course of
     business.

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

             (e)    Existing Investments in Subsidiaries and other Investments
     in existence on the date hereof and described in SCHEDULE "1" hereto.

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

                                     - 42 -


             (g)    Equity Investments by AAR Financial Services Corp. in
     leveraged leases of aircraft, aircraft engines and related products.

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

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

             (j)    Investments evidenced by Payment Notes.

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

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

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

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

             (a)    Liens for taxes, assessments or governmental charges or
     levies on its property if the same shall not at the time be delinquent or
     thereafter can be paid without penalty, or are being contested in good
     faith and by appropriate proceedings and for

                                     - 43 -


     which adequate reserves in accordance with Agreement Accounting Principles
     shall have been set aside on its books.

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

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

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

             (e)    Liens imposed by law, such as carriers', warehousemen's and
     mechanics' liens and other similar liens arising in the ordinary course of
     business which secure payment of obligations not more than 60 days past due
     or which are being contested in good faith by appropriate proceedings and
     for which adequate reserves shall have been set aside on its books.

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

             (g)    Liens existing on the date hereof and described in
     SCHEDULE "2" hereto.

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

             (i)    Subject to SECTION 6.14(c), Liens on property the purchase
     of which is being financed by the Borrower or any Domestic Subsidiary, as
     the case may be, by Letters of Credit issued for the account of the
     Borrower or any Domestic Subsidiary, as the case may be, provided such
     Liens secure only the Letter of Credit which is being used to finance the
     purchase of such property and provided further such Liens attach only to
     such property.

             (j)    Liens incurred by the Borrower in connection with the real
     estate located in Wood Dale, Illinois, known as the Corporate Headquarters
     of the Borrower.

                                     - 44 -


             (k)    Liens incurred by the Borrower and its Subsidiaries in
     connection with the Receivables Securitization.





















                                     - 45 -


     6.16.   RENTALS. The Borrower will not, nor will it permit any Subsidiary
to, create, incur or suffer to exist any obligation for Rentals if, as a
consequence thereof, obligations for Rentals created, incurred or suffered to
exist in any one fiscal year shall be in an aggregate consolidated amount for
the Borrower and its Subsidiaries in excess of 5% of Consolidated Revenues (as
defined below) as at the end of the Borrower's fiscal year immediately preceding
the date on which such obligation is entered into, on a non-cumulative basis
from year to year. It is expressly agreed and understood that, for the purposes
of this Section, any contract between the Borrower or any Domestic Subsidiary
and the vendor of aircraft fuel shall not be considered a lease and any payments
made under any such contract by the Borrower or any Domestic Subsidiary to such
vendor shall not be considered a lease payment. "CONSOLIDATED REVENUES" shall
mean the amount of "net revenues" as shown on the Borrower's consolidated income
statement.

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

     6.18.   AFFILIATES. The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any property or service) with, or make any payment or
transfer to, any Affiliate except in the ordinary course of business and
pursuant to the reasonable requirements of the Borrower's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower or
such Subsidiary than the Borrower or such Subsidiary would obtain in a
comparable arms-length transaction. The transactions entered into in connection
with the Receivables Securitization shall be deemed to be arms-length
transactions.

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

     6.20.   CONSOLIDATED NET WORTH. The Borrower will maintain at all times
Consolidated Net Worth in an amount not less than the sum of (a) $260,000,000
PLUS (b) the net cash proceeds received by the Borrower from the sale of any of
its capital stock on or after May 31, 1998 PLUS (c) an amount equal to the
aggregate of one-third of Consolidated Net Income earned during each of its
fiscal years beginning with its fiscal year commencing June 1, 1998, said fiscal
years to be taken as one accounting period MINUS (d) amounts (not to exceed
$10,000,000 in the aggregate for the purposes of this covenant) either used for
the purchase or retirement of the Borrower's capital stock or representing the
after-tax write-down of assets and associated costs on or after May 31, 1998.

     6.21.   CONSOLIDATED SECURED LIABILITIES. The Borrower will maintain at all
times Consolidated Secured Liabilities in an amount not in excess of
$20,000,000. For purposes of

                                     - 46 -


calculating Consolidated Secured Liabilities hereunder the obligations of the
Borrower not in excess of $10,000,000, secured by the real estate located in
Wood Dale, Illinois, known as the Corporate Headquarters of the Borrower, shall
not be included.

     6.22.   LIMITATION ON CONSOLIDATED FUNDED DEBT. The Borrower will not
permit the sum of (i) Consolidated Funded Debt plus (ii) the aggregate amount of
Contingent Obligations of the Borrower and its Subsidiaries to exceed 60% of
Consolidated Total Capitalization.

     6.23.   FIXED CHARGE COVERAGE RATIO. The Borrower will maintain a Fixed
Charge Coverage Ratio of not less than 1.20:1:00 as of the last day of each
fiscal quarter of the Borrower commencing on the date immediately preceding the
Revolving Credit Termination Date and thereafter. The Fixed Charge Coverage
Ratio shall be determined based on four of the previous five fiscal quarters of
the Borrower that occurred immediately prior to the calculation date, at the
Borrower's option.

     As used herein the following terms have the following meanings:

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

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

     "CONSOLIDATED FIXED CHARGES" means, without duplication, for any period,
the sum of (i) current maturities for such period, (ii) interest expense on
indebtedness (excluding capitalized leases) for such period, PLUS (iii) total
rental expense under all leases other than capitalized leases, and PLUS (iv)
imputed interest expense under capitalized leases for the Borrower and its
Subsidiaries for such period.

     6.24.   FIRST CHICAGO AGREEMENT. The Borrower will give the Lenders a copy
of each amendment, supplement or other modification of the First Chicago
Agreement within thirty (30) days, following execution thereof.

                                   ARTICLE VII

                                    DEFAULTS

     The occurrence of any one or more of the following events shall constitute
a Default:

                                     - 47 -


     7.1.    Any representation or warranty made (or deemed made pursuant to
SECTION 4.2) by or on behalf of the Borrower or any of its Subsidiaries to the
Lenders or the Agent under or in connection with this Agreement, any Loan or any
certificate or information delivered in connection with this Agreement or any
other Loan Document shall be materially false on the date as of which made.

     7.2.    Nonpayment of principal of any Note when due or nonpayment of
interest upon any Note or of any fees or other obligations under any of the Loan
Documents within five Business Days after the same becomes due.

     7.3.    The breach by the Borrower of any of the terms or provisions of
SECTION 6.2, 6.3, 6.10 or 6.18; or the breach by the Borrower of any of the
terms or provisions of SECTION 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17, or 6.19
which is not remedied within 10 days after written notice from the Agent or any
Lender.

     7.4.    The breach by the Borrower (other than a breach which constitutes a
Default under SECTION 7.1, 7.2 or 7.3) of any of the terms or provisions of this
Agreement which is not remedied within 30 days after written notice from the
Agent or any Lender.

     7.5.    Failure of the Borrower or any of its Subsidiaries to pay any
Indebtedness (other than the Obligations), including, without limitation, with
respect to the Receivables Securitization, in an aggregate principal amount
exceeding $2,000,000 when due; or the default by the Borrower or any of its
Subsidiaries in the performance of any term, provision or condition contained in
any agreement or agreements under which any Indebtedness (other than the
Obligations), including, without limitation, with respect to the Receivables
Securitization, in an aggregate principal amount exceeding $2,000,000 was
created or is governed, or any other event shall occur or condition exist, the
effect of which is to cause, or to permit the holder or holders of such
Indebtedness to cause, such Indebtedness to become due prior to its stated
maturity; or any Indebtedness of the Borrower or any of its Subsidiaries (other
than the Obligations), including, without limitation, with respect to the
Receivables Securitization, in an aggregate principal amount exceeding
$2,000,000 shall be declared to be due and payable or required to be prepaid
(other than by a regularly scheduled payment) prior to the stated maturity
thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in
writing its inability to pay, its debts generally as they become due.

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

                                     - 48 -


effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail
to contest in good faith any appointment or proceeding described in SECTION 7.7.

     7.7.    Without the application, approval or consent of the Borrower or any
of its Domestic Subsidiaries, a receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Borrower or any of its Domestic
Subsidiaries or any substantial part of its property, or a proceeding described
in SECTION 7.6(iv) shall be instituted against the Borrower or any of its
Domestic Subsidiaries and such appointment continues undischarged or such
proceeding continues undismissed or unstayed for a period of 30 consecutive
days.

     7.8.    Any Foreign Subsidiary shall have taken or instituted or permitted
to be taken or instituted any action or proceeding, or any such action or
proceeding is instituted against such Foreign Subsidiary, whereby a substantial
amount of its property shall or may be assigned or in any manner transferred or
delivered to any receiver, assignee, liquidator or other Person, whether
appointed by such Foreign Subsidiary or by a court or by any governmental
authority or any law, whereby such property shall or may be distributed among
the creditors of such Foreign Subsidiary, provided the aggregate claims of all
such creditors against such Foreign Subsidiary or against all such Foreign
Subsidiaries shall exceed $1,000,000 and such action or proceeding remains
undismissed or unstayed on appeal for a period of 90 days; or any governmental
authority having jurisdiction shall have taken or instituted any action or
proceeding for the dissolution or disestablishment of any Foreign Subsidiary or
for the suspension of its operations, provided the assets of any such Foreign
Subsidiary or the aggregate assets of all such Foreign Subsidiaries shall exceed
$500,000 and such action or proceeding remains undismissed or unstayed on appeal
for a period of 90 days; or all of the property of any Foreign Subsidiary shall
have been condemned, seized or appropriated, provided the net assets of any such
Foreign Subsidiary or the aggregate net assets of all such Foreign Subsidiaries
shall exceed $1,000,000; or the total of all claims against any Foreign
Subsidiary or all Foreign Subsidiaries resulting from any action or proceeding
described in this Section 7.8 and the amount of assets or net assets, as the
case may be, of any Foreign Subsidiary or all Foreign Subsidiaries which are
subject to any action, proceeding, condemnation, seizure or appropriation
described in this Section 7.8 shall exceed $1,000,000.

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

     7.10.   The Borrower or any of its Subsidiaries shall fail within 30 days
to pay, bond or otherwise discharge any judgment or order for the payment of
money in excess of $1,000,000, which is not stayed on appeal or otherwise being
appropriately contested in good faith.

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

                                     - 49 -


and all other amounts required to be paid to Multiemployer Plans by the Borrower
or any other member of the Controlled Group as withdrawal liability, exceeds
$10,000,000.

     7.12.   Any court, government or governmental agency shall find or hold, or
formally notify the Borrower or any Subsidiary, that the Borrower or any
Subsidiary (i) has violated any federal, state or local environmental, health or
safety law or regulation, or (ii) bears responsibility for any removal or
remedial or similar action in connection with the release by the Borrower or any
other Person of any toxic or hazardous waste or substance into the environment,
or is otherwise liable in any manner in connection with any such release; and
such finding, holding or notification could reasonably be expected (taking into
account the expected outcome of any legal appeals available to the Borrower or
such Subsidiary, as well as the likelihood and extent of contribution from any
other Persons who may be jointly and severally liable with the Borrower or such
Subsidiary) to have a material adverse effect on the ability of the Borrower to
perform its obligations under the Loan Documents.

     7.13.   Any Change in Control shall occur.

     7.14.   [Intentionally omitted.]

                                     - 50 -


                                  ARTICLE VIII

                 ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

     8.1.    ACCELERATION. If any Default described in SECTION 7.6 or 7.7 occurs
with respect to the Borrower, the obligations of the Lenders to make Loans
hereunder shall automatically terminate and the Obligations shall immediately
become due and payable without any election or action on the part of the Agent
or any Lender. If any other Default occurs, the Required Lenders may terminate
or suspend the obligations of the Lenders to make Loans hereunder, or by written
notice to the Borrower declare the Obligations to be due and payable, or both,
whereupon the Obligations shall become immediately due and payable, without
presentment, demand, protest or further notice of any kind, all of which the
Borrower hereby expressly waives. The Required Lenders agree to give the
Borrower prompt subsequent notice of any termination or suspension of the
obligations of the Lenders to make Loans hereunder; PROVIDED, that the giving of
such notice shall not be a condition to the effectiveness of any such
termination or suspension.

     If, within 30 days after acceleration of the maturity of the Obligations or
termination of the obligations of the Lenders to make Loans hereunder as a
result of any Default (other than any Default as described in SECTION 7.6 or 7.7
with respect to the Borrower) and before any judgment or decree for the payment
of the Obligations due shall have been obtained or entered, the Required Lenders
(in their sole discretion) shall so direct, the Agent shall, by notice to the
Borrower, rescind and annul such acceleration and/or termination.

     8.2.    AMENDMENTS. Subject to the provisions of this Article VIII, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental agreement shall,
without the consent of each Lender affected thereby:

               (i)  Extend the maturity of any Loan or Note or reduce the
                    principal amount thereof, or reduce the rate or extend the
                    time of payment of interest or fees thereon.

              (ii)  Reduce the percentage specified in the definition of
                    Required Lenders.

             (iii)  Extend the Revolving Credit Termination Date, or reduce the
                    amount or extend the payment date for, the mandatory
                    payments required under SECTION 2.3, or increase the amount
                    of the Commitment of any Lender hereunder, or permit the
                    Borrower to assign its rights under this Agreement.

              (iv)  Amend this Section 8.2.

                                     - 51 -


               (v)  Release any guarantor of any Advance or release all or
                    substantially all of any collateral, if any, supporting the
                    Obligations.

No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under SECTION 12.3.2 without obtaining the consent of any
other party to this Agreement.

     8.3.    PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to SECTION 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.

                                   ARTICLE IX

                               GENERAL PROVISIONS

     9.1.    SURVIVAL OF REPRESENTATIONS. All representations and warranties of
the Borrower contained in this Agreement shall survive delivery of the Notes and
the making of the Loans herein contemplated.

     9.2.    GOVERNMENTAL REGULATION. Anything contained in this Agreement to
the contrary notwithstanding, no Lender shall be obligated to extend credit to
the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.

     9.3.    TAXES. Any taxes (excluding federal income taxes on the overall net
income of any Lender) or other similar assessments or charges payable or ruled
payable by any governmental authority in respect of the Loan Documents shall be
paid by the Borrower, together with interest and penalties, if any.

     9.4.    HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.

     9.5.    ENTIRE AGREEMENT. The Loan Documents embody the entire agreement
and understanding among the Borrower, the Agent and the Lenders and supersede
all prior

                                     - 52 -


agreements and understandings among the Borrower, the Agent and the Lenders
relating to the subject matter thereof.

     9.6.    SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns.

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

     9.8.    NUMBERS OF DOCUMENTS. All statements, notices, closing documents,
and requests hereunder shall be furnished to the Agent with sufficient
counterparts so that the Agent may furnish one to each of the Lenders.

     9.9.    ACCOUNTING. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.

     9.10.   SEVERABILITY OF PROVISIONS. Any provision in any Loan Document that
is held to be inoperative, unenforceable, or invalid in any jurisdiction shall,
as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.

                                     - 53 -


     9.11.   NONLIABILITY OF LENDERS. The relationship between the Borrower and
the Lenders and the Agent shall be solely that of borrower and lender. Neither
the Agent nor any Lender shall have any fiduciary responsibilities to the
Borrower. Neither the Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in connection with any
phase of the Borrower's business or operations.

     9.12.   CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

     9.13.   CONSENT TO JURISDICTION. THE BORROWER, THE AGENT AND EACH LENDER
HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED
STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER,
THE AGENT AND EACH LENDER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT
IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE BORROWER
TO BRING PROCEEDINGS AGAINST THE AGENT OR ANY LENDER, OR THE RIGHT OF THE AGENT
OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER, IN THE COURTS OF ANY
OTHER JURISDICTION.

     9.14.   CONFIDENTIALITY. Each Lender agrees to use any confidential
information which it may receive from the Borrower pursuant to this Agreement
solely for the purposes of administering and monitoring this Agreement and to
hold such confidential information in confidence, except for disclosure (i) to
other Lenders and Affiliates of any Lender, (ii) to legal counsel, accountants,
and other professional advisors to that Lender who are advised of and agree to
be bound by this Section 9.14, (iii) to regulatory officials, (iv) as requested
pursuant to or as required by law, regulation, or legal process, (v) in
connection with any legal proceeding to which that Lender is a party, and (vi)
permitted by SECTION 12.4; PROVIDED that in the case of each of the preceding
CLAUSES (iv) and (v), such Lender agrees, to the extent reasonably possible and
to the extent that it is legally permitted to do so, to give the Borrower prior
notice of such disclosure and not resist any efforts by the Borrower to obtain
confidential treatment therefor.

     9.15.   WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.

                                     - 54 -


                                    ARTICLE X

                                    THE AGENT

     10.1.   APPOINTMENT. Bank of America NT & SA is hereby appointed Agent
hereunder and under each other Loan Document, and each of the Lenders
irrevocably authorizes the Agent to act as the agent of such Lender. The Agent
agrees to act as such upon the express conditions contained in this Article X.
The Agent shall not have a fiduciary relationship in respect of any Lender by
reason of this Agreement.

     10.2.   POWERS. The Agent shall have and may exercise such powers under the
Loan Documents as are specifically delegated to the Agent by the terms of each
thereof, together with such powers as are reasonably incidental thereto. The
Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder except any action specifically provided by
the Loan Documents to be taken by the Agent.

     10.3.   GENERAL IMMUNITY. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower, the Lenders or
any Lender for any action taken or omitted to be taken by it or them hereunder
or under any other Loan Document or in connection herewith or therewith except
for its or their own gross negligence or willful misconduct.

     10.4.   NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent nor
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (i) any statement, warranty
or representation made in connection with any Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document; (iii) the satisfaction of any
condition specified in ARTICLE IV, except receipt of items required to be
delivered to the Agent; or (iv) the validity, effectiveness or genuineness of
any Loan Document or any other instrument or writing furnished in connection
therewith.

     10.5.   ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, hereunder and under any
other Loan Document in accordance with written instructions signed by the
Required Lenders, and such instructions and any action taken or failure to act
pursuant thereto shall be binding on all of the Lenders and on all holders of
Notes. The Agent shall be fully justified in failing or refusing to take any
action hereunder and under any other Loan Document unless it shall first be
indemnified to its satisfaction by the Lenders pro rata against any and all
liability, cost and expense that it may incur by reason of taking or continuing
to take any such action.

     10.6.   EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of its
duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of

                                     - 55 -


counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.

     10.7.   RELIANCE ON DOCUMENTS: COUNSEL. The Agent shall be entitled to rely
upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.

     10.8.   AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to
reimburse and indemnify the Agent ratably according to their respective
Percentages (i) for any amounts not reimbursed by the Borrower for which the
Agent is entitled to reimbursement by the Borrower under the Loan Documents,
(ii) for any other expenses incurred by the Agent on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents and (iii) for any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Agent in any way relating to or arising out
of the Loan Documents or any other document delivered in connection therewith or
the transactions contemplated thereby, or the enforcement of any of the terms
thereof or of any such other documents, provided that no Lender shall be liable
for any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the Agent.

     10.9.   RIGHTS AS A LENDER. With respect to its Commitment, Loans made by
it and the Note issued to it, the Agent shall have the same rights and powers
hereunder and under any other Loan Document as any Lender and may exercise the
same as though it were not the Agent, and the term "Lender" or "Lenders" shall,
unless the context otherwise indicates, include the Agent in its individual
capacity. The Agent may accept deposits from, lend money to, and generally
engage in any kind of trust, debt, equity or other transaction, in addition to
those contemplated by this Agreement or any other Loan Document, with the
Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is
not restricted hereby from engaging with any other Person.

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

     10.11.  SUCCESSOR AGENT. The Agent may resign at any time by giving written
notice thereof to the Lenders and the Borrower, and the Agent may be removed at
any time with or without cause by written notice received by the Agent from the
Required Lenders. Upon any such resignation or removal, the Required Lenders
shall have the right to appoint, on behalf of

                                     - 56 -


the Borrower and the Lenders, a successor Agent. If no successor Agent shall
have been so appointed by the Required Lenders and shall have accepted such
appointment within 30 days after the retiring Agent's giving notice of
resignation, then the retiring Agent may appoint, on behalf of the Borrower and
the Lenders, a successor Agent. Such successor Agent shall be a commercial bank
having capital and retained earnings of at least $100,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder and under
the other Loan Documents. After any retiring Agent's resignation hereunder as
Agent, the provisions of this Article X shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as the Agent hereunder and under the other Loan Documents.

                                   ARTICLE XI

                            SETOFF; RATABLE PAYMENTS

     11.1.   SETOFF. In addition to, and without limitation of, any rights of
the Lenders under applicable law, so long as any Default has occurred and is
continuing, any indebtedness from any Lender to the Borrower (including all
account balances, whether provisional or final and whether or not collected or
available) may be offset and applied toward the payment of the Obligations then
due and owing to such Lender.

     11.2.   RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
SECTIONS 2.18, 3.1, 3.2 or 3.4) in a greater proportion than that received by
any other Lender, such Lender agrees, promptly upon demand, to purchase a
portion of the Loans held by the other Lenders so that after such purchase each
Lender will hold its Percentage of Loans. If any Lender, whether in connection
with setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
according to their respective Percentages. In case any such payment is disturbed
by legal process, or otherwise, appropriate further adjustments shall be made.

                                   ARTICLE XII

                BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

     12.1.   SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or

                                     - 57 -


obligations under the Loan Documents and (ii) any assignment by any Lender must
be made in compliance with SECTION 12.3. Notwithstanding CLAUSE (ii) of this
Section, any Lender may at any time, without the consent of the Borrower or the
Agent, assign all or any portion of its rights under this Agreement and its
Notes to a Federal Reserve Bank; provided, however, that no such assignment
shall release the transferor Lender from its obligations hereunder. The Agent
may treat the payee of any Note as the owner thereof for all purposes hereof
unless and until such payee complies with SECTION 12.3 in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Agent. Any assignee or transferee of a Note
agrees by acceptance thereof to be bound by all the terms and provisions of the
Loan Documents. Any request, authority or consent of any Person, who at the time
of making such request or giving such authority or consent is the holder of any
Note, shall be conclusive and binding on any subsequent holder, transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.

     12.2.   PARTICIPATIONS.

             12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the
     ordinary course of its business and in accordance with applicable law, at
     any time sell to one or more banks or other entities ("PARTICIPANTS")
     participating interests in any Loan owing to such Lender, any Note held by
     such Lender, any Commitment of such Lender or any other interest of such
     Lender under the Loan Documents. Any Lender selling such participating
     interests to a Participant agrees to promptly notify the Borrower of such
     sale and the identity of such Participant. In the event of any such sale by
     a Lender of participating interests to a Participant, such Lender's
     obligations under the Loan Documents shall remain unchanged, such Lender
     shall remain solely responsible to the other parties hereto for the
     performance of such obligations, such Lender shall remain the holder of any
     such Note for all purposes under the Loan Documents, all amounts payable by
     the Borrower under this Agreement shall be determined as if such Lender had
     not sold such participating interests, and the Borrower and the Agent shall
     continue to deal solely and directly with such Lender in connection with
     such Lender's rights and obligations under the Loan Documents.

             12.2.2. VOTING RIGHTS. Each Lender shall retain the sole right to
     approve, without the consent of any Participant, any amendment,
     modification or waiver of any provision of the Loan Documents other than
     any amendment, modification or waiver with respect to any Loan or
     Commitment in which such Participant has an interest which forgives
     principal, interest or fees or reduces the interest rate or fees payable
     with respect to any such Loan or Commitment, postpones any date fixed for
     any regularly-scheduled payment of principal of, or interest or fees on,
     any such Loan or Commitment, releases any guarantor of any such Loan or
     releases any substantial portion of collateral, if any, securing any such
     Loan.

             12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each
     Participant shall be deemed to have the right of setoff provided in
     SECTION 11.1 in respect of its participating interest in amounts owing
     under the Loan Documents to the same extent as if the amount

                                     - 58 -


     of its participating interest were owing directly to it as a Lender under
     the Loan Documents, provided that each Lender shall retain the right of
     setoff provided in SECTION 11.1 with respect to the amount of participating
     interests sold to each Participant. The Lenders agree to share with each
     Participant, and each Participant, by exercising the right of setoff
     provided in SECTION 11.1, agrees to share with each Lender, any amount
     received pursuant to the exercise of its right of setoff, such amounts to
     be shared in accordance with SECTION 11.2 as if each Participant were a
     Lender.

     12.3.   ASSIGNMENTS.

             12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary
     course of its business and in accordance with applicable law, at any time
     assign to one or more banks or other entities ("PURCHASERS") all or any
     part of its rights and obligations under the Loan Documents. Such
     assignment shall be substantially in the form of EXHIBIT "H" hereto. Unless
     a Default has occurred and is continuing, the written consent of the
     Borrower and the Agent shall be required prior to an assignment becoming
     effective with respect to a Purchaser which is not a Lender or an Affiliate
     thereof. Such consent shall be in form and substance satisfactory to the
     Agent and shall not be unreasonably withheld.

             12.3.2. EFFECT; EFFECTIVE DATE. Upon (i) delivery to the Agent of a
     notice of assignment, substantially in the form attached as EXHIBIT "I" to
     EXHIBIT "H" hereto (a "NOTICE OF ASSIGNMENT"), together with any consents
     required by SECTION 12.3.1, and (ii) payment of a $2,500 fee to the Agent
     for processing such assignment, such assignment shall become effective on
     the effective date specified in such Notice of Assignment. On and after the
     effective date of such assignment, such Purchaser shall for all purposes be
     a Lender party to this Agreement and any other Loan Document executed by
     the Lenders and shall have all the rights and obligations of a Lender under
     the Loan Documents, to the same extent as if it were an original party
     hereto, and no further consent or action by the Borrower, the Lenders or
     the Agent shall be required to release the transferor Lender with respect
     to the percentage of the Aggregate Commitment and Loans assigned to such
     Purchaser. Upon the consummation of any assignment to a Purchaser pursuant
     to this Section 12.3.2, the transferor Lender, the Agent and the Borrower
     shall make appropriate arrangements so that replacement Notes are issued to
     such transferor Lender and new Notes or, as appropriate, replacement Notes,
     are issued to such Purchaser, in each case in principal amounts reflecting
     their respective Commitments, as adjusted pursuant to such assignment.

     12.4.   DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender
to disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "TRANSFEREE") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries; PROVIDED
that each Transferee and prospective Transferee agrees in writing for the
benefit of the Borrower to be bound by SECTION 9.14.

                                     - 59 -


     12.5.   TAX TREATMENT. If any interest in any Loan Document is transferred
to any Transferee which is organized under the laws of any jurisdiction other
than the United States or any State thereof, the transferor Lender shall cause
such Transferee, concurrently with the effectiveness of such transfer, to comply
with the provisions of SECTION 2.25.

                                  ARTICLE XIII

                                     NOTICES

     13.1.   GIVING NOTICE. Except as otherwise permitted by SECTION 2.20 with
respect to Borrowing Notices and Continuation/Conversion Notices, all notices
and other communications provided to any party hereto under this Agreement or
any other Loan Document shall be in writing or by facsimile and addressed or
delivered to such party at its address set forth below its signature hereto or
at such other address as may be designated by such party in a notice to the
other parties. Any notice, if mailed and properly addressed with postage
prepaid, shall be deemed given when received; any notice, if transmitted by
facsimile, shall be deemed given when transmitted.

     13.2.   CHANGE OF ADDRESS. The Borrower, the Agent and any Lender may each
change the address for service of notice upon it by a notice in writing to the
other parties hereto.

                                   ARTICLE XIV

             COUNTERPARTS, TERMINATION OF ORIGINAL CREDIT AGREEMENT

                                AND EFFECTIVENESS

     This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. By their execution of
this Agreement, each of the Borrower and the Lenders hereby agree that as of the
Restatement Effective Date the Original Credit Agreement shall be terminated and
of no further force and effect, except for the terms and provisions of the
Original Credit Agreement which expressly survive the termination thereof and
except for the Borrower's obligation to repay all accrued and unpaid fees
thereunder in accordance with the terms thereof. This Agreement shall be
effective when it has been executed by the Borrower, the Agent and the Lenders
and each party has notified the Agent by telex, facsimile or telephone, that it
has taken such action.

                                     - 60 -


     IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed
this Agreement as of the date first above written.

                             AAR CORP.


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

                             Title: Vice President
                                    -----------------------------------------
                                      1100 North Wood Dale Road
                                      Wood Dale, Illinois 60191

                             Attention: Timothy J. Romenesko
                                        Vice President - Chief Financial Officer

Commitment:                  BANK OF AMERICA NATIONAL TRUST AND
$50,000,000                    SAVINGS ASSOCIATION, as a Lender and as
                               the Issuer

                             By: /s/ Steven J. Standbridge
                                 --------------------------------------------

                             Title: Vice President
                                    -----------------------------------------
                                      231 South La Salle Street
                                      Chicago, Illinois 60697

                             Attention:

                             BANK OF AMERICA NATIONAL TRUST AND
                                SAVINGS ASSOCIATION, as the Agent

                             By: /s/ David A. Johanson
                                 --------------------------------------------

                             Title: Vice President
                                    -----------------------------------------
                                      231 South LaSalle Street
                                      Chicago, Illinois 60697

                             Attention:


DOCUMENT NUMBER:

                                     - 61 -


                                  SCHEDULE "l"

                                OTHER INVESTMENTS
                               (See Section 6.14)

INVESTMENT                      INVESTMENT                      AMOUNT OF
   IN                              BY                          INVESTMENT

                                      NONE

                                     - 62 -


                                  SCHEDULE "2"

                                      LIENS
                               (See Section 6.15)

Mortgage lien on facilities located in Frankfort, New York to secure
indebtedness of Subsidiary AAR Engine Component Services, Inc. to Norstar Bank
in connection with Industrial Revenue Bond financing of such facilities.

Mortgage lien on facilities located in Aberdeen, North Carolina to secure
indebtedness of Subsidiary AAR Brooks and Perkins Corp. to North Carolina
National Bank in connection with Industrial Revenue Bond financing of such
facilities.

Security interest in aircraft and related equipment to secure indebtedness of
AAR Financial Services Corp. in connection with ownership of such aircraft and
related equipment.

                                     - 63 -


                                   EXHIBIT "A"

                        SECOND AMENDED AND RESTATED NOTE

$___________________                                          as of May 27, 1998

     For value received, AAR Corp., a Delaware corporation (the "BORROWER"),
promises to pay to the order of _______________ (the "LENDER"), for the account
of its applicable Lending Installation, the lesser of the principal sum of
_________________ or the aggregate unpaid principal amount of all Loans made by
the Lender to the Borrower pursuant to Article II of the Credit Agreement
referred to below, together with interest on the unpaid principal amount hereof
at the rates and on the dates set forth in the Credit Agreement. The Borrower
shall pay the principal of and accrued and unpaid interest on the Advances in
full on the Facility Termination Date and shall make such other mandatory
payments as are required to be made pursuant to Section 2.3 of the Credit
Agreement. All such payments of principal and interest shall be made (i) if in
U.S. Dollars, in lawful money of the United States in immediately available
funds at the main office of Bank of America National Trust and Savings
Association, as Agent, in Chicago, Illinois or (ii) if in any other currency, in
such funds as may then be customary for the settlement of international
transactions in such other currency at the place specified for payment thereof
pursuant to the Credit Agreement.

     The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan and the date and amount of each principal
payment hereunder; PROVIDED, that the failure of the Lender to make any such
recordation shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.

     This Note is issued pursuant to, and is entitled to the benefits of, the
Second Amended and Restated Credit Agreement, dated as of May 27, 1998, as it
may be amended, supplemented, extended or otherwise modified from time to time,
among the Borrower, Bank of America National Trust and Savings Association,
individually and as Agent, and the lenders named therein, including the Lender
(the "CREDIT AGREEMENT"). Reference is hereby made to the Credit Agreement for a
statement of the terms and conditions governing this Note, including the terms
and conditions under which this Note may be prepaid or its maturity date
accelerated. Capitalized terms used herein and not otherwise defined herein are
used with the meanings attributed to them in the Credit Agreement.

     This Note is a restatement of the indebtedness evidenced by, and is a
replacement of, that certain Note of the Borrower dated September 9, 1996 in the
face principal amount of $_________ payable to the order of the Lender, and
nothing contained herein or in the Credit Agreement shall be construed to deem
paid or forgiven the unpaid principal amount of, or unpaid accrued interest on,
said Note outstanding at the time of its replacement by this Note.

                                     - 64 -


     THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT
THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL
LAWS APPLICABLE TO NATIONAL BANK.

                                              AAR CORP.


                                              By:
                                                 -------------------------------

                                              Title:
                                                    ----------------------------






                                     - 65 -


                   SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
                                       TO
                  SECOND AMENDED AND RESTATED NOTE OF AAR CORP.
                            Dated as of May 27, 1998



                            PRINCIPAL       CURRENCY        MATURITY       PRINCIPAL
                 TYPE OF    AMOUNT OF          OF         OF INTEREST       AMOUNT           UNPAID
      DATE         LOAN       LOAN           PERIOD          PAID            PAID           BALANCE
      ----       -------    ---------       --------      -----------      ---------        -------
                                                                          





                                     - 66 -


                                   EXHIBIT "B"

                                EXTENSION LETTER


                                                               ___________, ____


To:  Bank of America NT & SA, as Agent for the Lenders party to the Credit
     Agreement referred to below

      Re: PROPOSED EXTENSION OF THE REVOLVING CREDIT TERMINATION DATE

Ladies/Gentlemen:

     We make reference to that certain Second Amended and Restated Credit
Agreement dated as of May 27, 1998, among AAR Corp., the Lenders party thereto
and Bank of America National Trust and Savings Association, as Agent for the
Lenders, as it may from time to time be amended, modified, renewed or extended
(the "Credit Agreement"). All capitalized terms used herein shall have the
meanings attributed to them in the Credit Agreement.

     The Revolving Credit Termination Date currently in effect under the Credit
Agreement is __________, ____.

     The Borrower desires to extend the Revolving Credit Termination Date by one
year and accordingly requests hereby that the Lenders agree to extend the
Revolving Credit Termination Date to __________, 20__.

     If the foregoing proposed extension of the Revolving Credit Termination
Date meets with your approval, please so indicate by executing and returning to
both the Agent and the Borrower the accompanying copy of this letter. Upon
receipt by both the Agent and the Borrower of counterparts of this letter
executed by each of the Lenders, the Revolving Credit Termination Date under the
Credit Agreement shall henceforth be __________, 20__.

                                               Sincerely yours,


                                               AAR CORP.

     By:
        --------------------------------

     Title:
           -----------------------------

ACCEPTED AND AGREED TO:

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION

                                     - 67 -


By:
   ----------------------------

Title:
      -------------------------

[Add Signature Lines for all Lenders]



















                                     - 68 -


                                   EXHIBIT "C"

                                BORROWING NOTICE

                                                            ______________, ____

To:  Bank of America NT & SA, as Agent for the Lenders party to the Credit
     Agreement referred to below

      Re: U.S. DOLLAR BORROWING NOTICE

Ladies/Gentlemen:

     We make reference to that certain Second Amended and Restated Credit
Agreement dated as of May 27, 1998, among AAR Corp., the Lenders party thereto
and Bank of America National Trust and Savings Association, as Agent for the
Lenders, as it may from time to time be amended, modified, renewed or extended
(the "Credit Agreement"). All capitalized terms used herein shall have the
meanings attributed to them in the Credit Agreement.

     The Borrower hereby gives irrevocable notice pursuant to Section 2.10 of
the Credit Agreement for the following U.S. Dollar Advance(s)(1):

Borrowing Date: ______________, ____(2)




PRINCIPAL AMOUNT(3)             TYPE OF ADVANCE(4)         INTEREST PERIOD(5)
- -------------------             ------------------         ------------------
                                                     




                                       Sincerely yours,

                                       AAR CORP.

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

- ----------
(1)  No Quoted Rate Advance will be made unless the provisions of Section 2.10
     of the Credit Agreement applicable thereto are met.

(2)  Borrowing Date must be a Business Day prior to or on the Revolving Credit
     Termination Date.

(3)  Subject to the minimum amount requirements set forth in Section 2.8.

(4)  Specify Floating Rate Advance, Eurodollar Advance or Quoted Rate Advance.

(5)  Applicable to Eurodollar Advances and Quoted Rate Advances only.  See
     definitions of "Eurodollar Interest Period" and "Quoted Rate Interest
     Period" and Section 2.14 (Restrictions on Interest Periods).

                                     - 69 -


                                   EXHIBIT "D"

                      ALTERNATE CURRENCY BORROWING REQUEST

                                                             _____________, ____


To:  Bank of America NT & SA,
     as Agent for the Lenders party to the
     Credit Agreement referred to below

     Re: ALTERNATE CURRENCY BORROWING REQUEST

Ladies/Gentlemen:

     We make reference to that certain Second Amended and Restated Credit
Agreement dated as of May 27, 1998, among AAR Corp., the Lenders party thereto
and Bank of America National Trust and Savings Association, as Agent for the
Lenders, as it may from time to be amended, modified, renewed or extended (the
"Credit Agreement"). All capitalized terms used herein shall have the meanings
attributed to them in the Credit Agreement.

     The Borrower hereby gives its irrevocable request, pursuant to Section 2.11
of the Credit Agreement, for the following Alternate Currency Advance(s):

Borrowing Date: _______________, 19__(1)



PRINCIPAL           ALTERNATE          TRANSACTION         TRANSACTION RATE
AMOUNT(2)           CURRENCY           RATE(3)             INTEREST PERIOD(4)
- ---------           ---------          -----------         ------------------
                                                  




     If the foregoing requested Alternate Currency Advance(s) meets with your
approval, please so indicate by executing and returning to the Agent the
accompanying copy of this Request. Upon receipt by the Agent prior to the time
specified in Section 2.11 of Credit Agreement of counterparts of this Request
executed by each of the Lenders, the Lenders shall be severally committed to
make the Alternate Currency Advance(s) requested hereby, subject to the terms
and conditions of the Credit Agreement.

                                        Sincerely yours,

                                        AAR CORP.

     By:
        ----------------------------------

     Title:
           -------------------------------

                                     - 70 -


ACCEPTED AND AGREED TO:

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION

By:
   ----------------------------------

Title:
      -------------------------------

[Add Signature Lines for all Lenders]


- ----------
     (1)  Borrowing Date must be a Business Day prior to the Revolving Credit
          Termination Date.

     (2)  Subject to the minimum amount requirements set forth in Section 2.8.

     (3)  Specify an absolute fixed rate of interest per annum.

     (4)  Insert a fixed number of days (not to exceed 180 days).

                                     - 71 -


                                   EXHIBIT "E"


                                                                    May 27, 1998


The Lenders who are parties to the
Credit Agreement described below:

Gentlemen/Ladies:

     We are counsel for AAR Corp., a Delaware corporation (the "Borrower"), and
have represented the Borrower in connection with its execution and delivery of a
Second Amended and Restated Credit Agreement among the Borrower, Bank of America
National Trust and Savings Association, individually and as Agent, and the
Lenders named therein, providing for Advances in an aggregate principal amount
not exceeding $50,000,000 at any one time outstanding and dated as of May 27,
1998 (the "Agreement"). All capitalized terms used in this opinion and not
otherwise defined shall have the meanings attributed to them in the Agreement.

     We have examined the Borrower's articles of incorporation, by-laws,
resolutions, the Loan Documents and such other matters of fact and law which we
deem necessary in order to render this opinion. Based upon the foregoing, it is
our opinion that:

     1.      The Borrower and each Subsidiary are corporations duly
incorporated, validly existing and in good standing under the laws of their
states of incorporation and have all requisite authority to conduct their
business in each jurisdiction in which their business is conducted.

     2.      The execution and delivery of the Loan Documents by the Borrower
and the performance by the Borrower of the Obligations have been duly authorized
by all necessary corporate action and proceedings on the part of the Borrower
and will not:

             (a)    require any consent of the Borrower's shareholders;

             (b)    violate any law, rule, regulation, order, writ, judgment,
     injunction, decree or award binding on the Borrower or any of its
     Subsidiaries or the Borrower's or any Subsidiary's articles of
     incorporation or by-laws or any indenture, instrument or agreement binding
     upon the Borrower or any of its Subsidiaries; or

             (c)    result in, or require, the creation or imposition of any
     Lien pursuant to the provisions of any indenture, instrument or agreement
     binding upon the Borrower or any of its Subsidiaries.

     3.      The Loan Documents have been duly executed and delivered by the
Borrower and constitute legal, valid and binding obligations of the Borrower
enforceable in accordance with their terms except to the extent the enforcement
thereof may be limited by bankruptcy,

                                     - 72 -


insolvency or similar laws affecting the enforcement of creditors' rights
generally and subject also to the availability of equitable remedies if
equitable remedies are sought.

     4.      Except as set forth in the Borrower's Form 10-K filed with the
Securities and Exchange Commission for its fiscal year ended _______________,
199_, there is no litigation or proceeding against the Borrower or any of its
Subsidiaries which, if adversely determined, could have a Material Adverse
Effect.

     5.      No approval, authorization, consent, adjudication or order of any
governmental authority, which has not been obtained by the Borrower or any of
its Subsidiaries, is required to be obtained by the Borrower or any of its
Subsidiaries in connection with the execution and delivery of the Loan
Documents, the borrowings under the Agreement or in connection with the payment
by the Borrower of the Obligations.

     This opinion may be relied upon by the Lenders and their participants,
assignees and other transferees. No opinion is expressed herein as to the
relation between the Agent and the Lenders or the relation between the Lenders.

                                                Very truly yours,


     -----------------------------------

                                     - 73 -


                                   EXHIBIT "F"

                 LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION

To:  Bank of America NT & SA
     231 S. LaSalle Street
     Chicago, Illinois 60697
     as Agent (the "Agent")
     under the Credit Agreement
     described below

Re:  Second Amended and Restated Credit Agreement, dated May 27, 1998 (as the
     same may be amended or modified, the "Credit Agreement"), among AAR Corp.
     (the "Borrower"), the Agent, and the Lenders named therein

     Terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Credit Agreement.

     The Agent is specifically authorized and directed to act upon the following
standing money transfer instructions with respect to the proceeds of Advances or
other extensions of credit from time to time until receipt by the Agent of a
specific written revocation of such instructions by the Borrower, provided,
however, that the Agent may otherwise transfer funds as hereafter directed in
writing by the Borrower in accordance with Section 13.1 of the Credit Agreement
or based on any telephonic notice made in accordance with Section 2.20 of the
Credit Agreement.

Facility Identification Number(s)                                       ________

Customer/Account Name                                                   ________

Transfer Funds To                                                       ________


For Account No.                                                         ________


Reference/Attention To                                                  ________


Authorized Officer (Customer Representative)               Date_________________


- ---------------------------------                    ----------------------

       (Please Print)                                      Signature

                                     - 74 -


Bank Officer Name                                    Date__________________


- ---------------------------------                    ----------------------

       (Please Print)                                      Signature


     (Deliver Completed Form to Credit Support Staff For Immediate Processing)

                                     - 75 -


                                   EXHIBIT "G"

                             COMPLIANCE CERTIFICATE


To:  The Lenders parties to the
     Credit Agreement Described Below

     This Compliance Certificate is furnished pursuant to that certain Second
Amended and Restated Credit Agreement dated as of May 27, 1998 (as amended,
modified, renewed or extended from time to time, the "Agreement") among the
Borrower, the lenders party thereto and Bank of America National Trust and
Savings Association, as Agent for the Lenders. Unless otherwise defined herein,
capitalized terms used in this Compliance Certificate have the meanings ascribed
thereto in the Agreement.

     THE UNDERSIGNED HEREBY CERTIFY THAT:

     1.      I am the duly elected ___________________ of the Borrower;

     2.      I have reviewed the terms of the Agreement and I have made, or have
caused to be made under my supervision, a detailed review of the transactions
and conditions of the Borrower and its Subsidiaries during the accounting period
covered by the attached financial statements;

     3.      The examinations described in PARAGRAPH 2 did not disclose, and I
have no knowledge of, the existence of any condition or event which constitutes
a Default or Unmatured Default during or at the end of the accounting period
covered by the attached financial statements or as of the date of this
Certificate, except as set forth below; and

     4.      SCHEDULE I attached hereto sets forth financial data and
computations evidencing the Borrower's compliance with certain covenants of the
Agreement, all of which data and computations are true, complete and correct.

     Described below are the exceptions, if any, to PARAGRAPH 3 by listing, in
detail, the nature of the condition or event, the period during which it has
existed and the action which the Borrower has taken, is taking, or proposes to
take with respect to each such condition or event:

         ------------------------------------------------------

         ------------------------------------------------------

         ------------------------------------------------------

                                     - 76 -


     The foregoing certifications, together with the computations set forth in
SCHEDULE I hereto and the financial statements delivered with this Certificate
in support hereof, are made and delivered this _____ day of _______________,
____.


     -------------------------

                                     - 77 -


                                    [SAMPLE]

                      SCHEDULE I TO COMPLIANCE CERTIFICATE

          Schedule Of Compliance as of __________, ____ with Provisions
          of Sections 6.19, 6.20, 6.21, 6.22 and 6.23 of the Agreement














                                     - 78 -


                                   EXHIBIT "H"

                              ASSIGNMENT AGREEMENT

     This Assignment Agreement (this "Assignment Agreement") between
____________________ (the "Assignor") and _________________ (the "Purchaser") is
dated as of ______________, ____. The parties hereto agree as follows:

     1.      PRELIMINARY STATEMENT. The Assignor is a party to a Second Amended
and Restated Credit Agreement, dated as of May 27, 1998 (which, as it may be
amended, modified, renewed or extended from time to time, is herein called the
"Credit Agreement"), among AAR Corp. (the "Borrower"), certain lenders party
thereto and Bank of America National Trust and Savings Association, as agent for
such lenders. Capitalized terms used herein and not otherwise defined herein
shall have the meanings attributed to them in the Credit Agreement. The Assignor
desires to assign to the Purchaser, and the Purchaser desires to assume from the
Assignor, an undivided interest (the "Purchased Percentage") in the Commitment
of the Assignor such that after giving effect to the assignment and assumption
hereinafter provided, the Commitment of the Purchaser shall equal
$_______________ and its Percentage shall equal _____%.

     2.      ASSIGNMENT. For and in consideration of the assumption of
obligations by the Purchaser set forth in SECTION 3 hereof and the other
consideration set forth herein, and effective as of the Effective Date (as
hereinafter defined), the Assignor does hereby sell, assign, transfer and
convey all of its right, title and interest in and to the Purchased Percentage
of (i) the Commitment of the Assignor (as in effect on the Effective Date), (ii)
any Loan outstanding on the Effective Date and (iii) the Credit Agreement and
the other Loan Documents. Pursuant to Section 12.3.2 of the Credit Agreement, on
and after the Effective Date the Purchaser shall have the same rights, benefits
and obligations as the Assignor had under the Loan Documents with respect to the
Purchased Percentage of the Loan Documents, all determined as if the Purchaser
were a "Lender" under the Credit Agreement with _____% of the Aggregate
Commitment. The Effective Date shall be the later of _______________, ____ or
two Business Days (or such shorter period agreed to by the Agent) after a Notice
of Assignment substantially in the form of EXHIBIT "I" attached hereto and any
consents required to be delivered to the Agent by Section 12.3.1 of the Credit
Agreement have been delivered to the Agent. In no event will the Effective Date
occur if the payments required to be made by the Purchaser to the Assignor on
the Effective Date under SECTIONS 4 and 5 hereof are not made on the proposed
Effective Date. The Assignor will notify the Purchaser of the proposed Effective
Date on the Business Day prior to the proposed Effective Date.

     3.      ASSUMPTION. For and in consideration of the assignment of rights by
the Assignor set forth in SECTION 2 hereof and the other consideration set forth
herein, and effective as of the Effective Date, the Purchaser does hereby accept
that assignment, and assume and covenant and agree fully, completely and timely
to perform, comply with and discharge, each and all of the obligations, duties
and liabilities of the Assignor under the Credit Agreement which are assigned to
the Purchaser hereunder, which assumption includes, without limitation,

                                     - 79 -


the obligation to fund the unfunded portion of the Aggregate Commitment in
accordance with the provisions set forth in the Credit Agreement as if the
Purchaser were a "Lender" under the Credit Agreement with _____% of the
Aggregate Commitment. The Purchaser agrees to be bound by all provisions
relating to "Lenders" under and as defined in the Credit Agreement, including,
without limitation, provisions relating to the dissemination of information and
the payment of indemnification.

     4.      PAYMENTS OBLIGATIONS. On and after the Effective Date, the
Purchaser shall be entitled to receive from the Agent all payments of principal,
interest and fees with respect to the Purchased Percentage of the Assignor's
Commitment and Loans. The Purchaser shall advance funds directly to the Agent
with respect to all Loans and reimbursement payments made on or after the
Effective Date. In consideration for the transfer to the Purchaser of the
Purchased Percentage of the Loans made by the Assignor which are outstanding on
the Effective Date, (i) with respect to all Floating Rate Loans made by the
Assignor outstanding on the Effective Date, the Purchaser shall pay the
Assignor, on the Effective Date, an amount equal to the Purchased Percentage of
all such Floating Rate Loans; and (ii) with respect to each Fixed Rate Loan made
by the Assignor outstanding on the Effective Date, (a) on the last day of the
Interest Period therefor or (b) on such earlier date agreed to by the Assignor
and the Purchaser or (c) on the date on which any such Fixed Rate Loan either
becomes due (by acceleration or otherwise) or is prepaid (the date as described
in the foregoing clauses (a), (b) or (c) being hereinafter referred to as the
"PAYMENT DATE"), the Purchaser shall pay the Assignor an amount equal to the
Purchased Percentage of such Fixed Rate Loan. On and after the Effective Date,
the Purchaser will also remit to the Assignor any amounts of interest on Loans
and fees received from the Agent which relate to the Purchased Percentage of
Loans made by the Assignor accrued for periods prior to the Effective Date, in
the case of Floating Rate Loans, or the Payment Date, in the case of Fixed Rate
Loans, and not heretofore paid by the Purchaser to the Assignor. In the event
interest for the period from the Effective Date to but not including the Payment
Date is not paid by the Borrower with respect to any Fixed Rate Loan sold by the
Assignor to the Purchaser hereunder, the Purchaser shall pay to the Assignor
interest for such period on such Fixed Rate Loan at the applicable rate provided
by the Credit Agreement. In the event that either party hereto receives any
payment to which the other is entitled under this Assignment Agreement, then the
party receiving such amount shall promptly remit it to the other party hereto.

     [5.     FEES PAYABLE BY PURCHASER. On each day on which the Purchaser
receives a payment of interest or fees under the Credit Agreement (other than a
payment of interest or fees which the Purchaser is obligated to deliver to the
Assignor pursuant to SECTION 4 hereof, which shall be excluded in determining
fees payable to the Assignor pursuant to this Section) the Purchaser shall pay
to the Assignor a fee. The amount of such fee shall be the difference between
(i) the amount of such interest or fee, as applicable, received by the Purchaser
and (ii) the amount of the interest or fee, as applicable, which would have been
received by the Purchaser if each interest rate was _____of 1% less than the
interest rate paid by the Borrower or if the fee was _____ of 1% less than the
fee paid by the Borrower, as applicable. In addition, the Purchaser agrees to
pay _____% of the fee required to be paid to the Agent pursuant to Section
__________ of the Credit Agreement.]

                                     - 80 -


     6.      CREDIT DETERMINATION; LIMITATIONS ON ASSIGNOR'S LIABILITY. The
Purchaser represents and warrants to the Assignor that it is capable of making
and has made and shall continue to make its own credit determinations and
analysis based upon such information as the Purchaser deemed sufficient to enter
into the transaction contemplated hereby and not based on any statements or
representations by the Assignor. It is understood and agreed that the assignment
and assumption hereunder are made without recourse to the Assignor and that the
Assignor makes no representation or warranty of any kind to the Purchaser and
shall not be responsible for (i) the due execution, legality, validity,
enforceability, genuineness, sufficiency or collectibility of the Credit
Agreement, any other Loan Document, including without limitation, documents
granting the Assignor and the other Lenders a security interest in assets of the
Borrower or any guarantor, (ii) any representation, warranty or statement made
in or in connection with any of the Loan Documents, (iii) the financial
condition or creditworthiness of the Borrower or any guarantor, (iv) the
performance of or compliance with any of the terms or provisions of any of the
Loan Documents, (v) inspecting any of the property, books or records of the
Borrower or (vi) the validity, enforceability, perfection, priority, condition,
value or sufficiency of any collateral securing or purporting to secure the
Loans. Neither the Assignor nor any of its officers, directors, employees,
agents or attorneys shall be liable for any mistake, error of judgment, or
action taken or omitted to be taken in connection with the Loans or the Loan
Documents, except for its or their own bad faith or willful misconduct.

     7.      INDEMNITY. The Purchaser agrees to indemnify and hold the Assignor
harmless against any and all losses, costs and expenses (including, without
limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor
in connection with or arising in any manner from the Purchaser's performance or
non-performance of obligations assumed under this Assignment Agreement.

     8.      SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Purchaser
shall have the right pursuant to Section 12.3.1 of the Credit Agreement to
assign the rights which are assigned to the Purchaser hereunder to any entity or
person, provided that (i) any such subsequent assignment does not violate any of
the terms and conditions of the Loan Documents or any law, rule, regulation,
order, writ, judgment, injunction or decree and that any consent required under
the terms of the Loan Documents has been obtained, (ii) the assignee under such
assignment from the Purchaser shall agree to assume all of the Purchaser's
obligations hereunder in a manner satisfactory to the Assignor and (iii) the
Purchaser is not thereby released from any of its obligations to the Assignor
hereunder.

     9.      REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the
Aggregate Commitment occurs between the date of this Assignment Agreement and
the Effective Date, the percentage of the Aggregate Commitment assigned to the
Purchaser shall remain the percentage specified in SECTION 1 hereof and the
dollar amount of the Commitment of the Purchaser shall be recalculated based on
the reduced Aggregate Commitment.

     10.     ENTIRE AGREEMENT. This Assignment Agreement and the attached
consent embody the entire agreement and understanding between the parties hereto
and supersede all

                                     - 81 -


prior agreements and understandings between the parties hereto relating to the
subject matter hereof.

     11.     GOVERNING LAW. This Assignment Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of Illinois.

     12.     NOTICES. Notices shall be given under this Assignment Agreement in
the manner set forth in the Credit Agreement. For the purpose hereof, the
addresses of the parties hereto (until notice of a change is delivered) shall be
the address set forth under each party's name on the signature pages hereof.















                                     - 82 -


     IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement by their duly authorized officers as of the date first above written.

                                              [NAME OF ASSIGNOR]

     By:
        ---------------------------------

     Title:
           ------------------------------

     ------------------------------------

     ------------------------------------


                                              [NAME OF PURCHASER]

     By:
        ---------------------------------

     Title:
           ------------------------------

     ------------------------------------

     ------------------------------------


                                     - 83 -


                           EXHIBIT "I" TO EXHIBIT "H"

                                     NOTICE

                                  OF ASSIGNMENT

To:   AAR CORP.

      ---------------

      ---------------

      BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
      as Agent under the Credit Agreement
      Described Below.

From: [NAME OF ASSIGNOR]

      [NAME OF PURCHASER]

                              ______________, ____


     1.      We refer to that Second Amended and Restated Credit Agreement,
dated as of March 10, 1998 (which, as it may be amended, modified, renewed or
extended from time to time, is herein called the "Credit Agreement") among AAR
Corp. (the "Borrower"), certain lenders party thereto (each a "Lender"),
including _____________ (the "Assignor") and Bank of America National Trust and
Savings Association, as agent for the Lenders (as such, the "Agent").
Capitalized terms used herein and in any consent delivered in connection
herewith and not otherwise defined herein or in such consent shall have the
meanings attributed to them in the Credit Agreement.

     2.      This Notice of Assignment (this "Notice") is given and delivered to
the Borrower and the Agent pursuant to Section 12.3.2 of the Credit Agreement.

     3.      The Assignor and ________________ (the "Purchaser") have entered
into an Assignment Agreement, dated as of __________, ____, pursuant to which,
among other things, the Assignor has sold, assigned, delegated and transferred
to the Purchaser, and the Purchaser has purchased, accepted and assumed from the
Assignor, an undivided interest in and to all of the Assignor's rights and
obligations under the Credit Agreement such that Purchaser's Percentage shall
equal _____%, effective as of the "Effective Date" (as hereinafter defined). The
"EFFECTIVE DATE" shall be the later of __________, ____ or two Business Days (or
such shorter period as agreed to by he Agent) after this Notice of Assignment
and any consents and fees required by Sections 12.3.1 and 12.3.2 of the Credit
Agreement have been delivered to the Agent, provided that the Effective Date
shall not occur if any condition precedent agreed to by the Assignor and the
Purchaser has not been satisfied.

                                     - 84 -


     4.      As of this date, the percentage of the Assignor in the Aggregate
Commitment and Advances is _____%. As of the Effective Date, the Percentage of
the Assignor will be _____% (as such Percentage may be reduced or increased by
assignments which become effective prior to the assignment to the Purchaser
becoming effective) and the Percentage of the Purchaser will be _____%.

     5.      The Assignor and the Purchaser hereby give to the Borrower and the
Agent notice of the assignment and delegation referred to herein. The Assignor
will confer with the Agent before __________, ____ to determine if the
Assignment Agreement will become effective on such date pursuant to SECTION 3
hereof, and will confer with the Agent to determine the Effective Date pursuant
to SECTION 3 hereof if it occurs thereafter. The Assignor shall notify the Agent
if the Assignment Agreement does not become effective on any proposed Effective
Date as a result of the failure to satisfy the conditions precedent agreed to by
the Assignor and the Purchaser. At the request of the Agent, the Assignor will
give the Agent written confirmation of the occurrence of the Effective Date.

     6.      The Purchaser hereby accepts and assumes the assignment and
delegation referred to herein and agrees as of the Effective Date (i) to perform
fully all of the obligations under the Credit Agreement which it has hereby
assumed and (ii) to be bound by the terms and conditions of the Credit Agreement
as if it were a "Lender".

     7.      The Assignor and the Purchaser request and agree that any payments
to be made by the Agent to the Assignor on and after the Effective Date shall,
to the extent of the assignment referred to herein, be made entirely to the
Purchaser, it being understood that the Assignor and the Purchaser shall make
between themselves any desired allocations.

     8.      The Assignor or the Purchaser shall pay to the Agent on or before
the Effective Date the processing fee of $2,500 required by Section 12.3.2 of
the Credit Agreement.

     9.      The Assignor and the Purchaser request and direct that the Agent
prepare and cause the Borrower to execute and deliver new Notes or, as
appropriate, replacement Notes, to the Assignor and the Purchaser in accordance
with Section 12.3.2 of the Credit Agreement. The Assignor agrees to deliver to
the Agent the original Note received by it from the Borrower upon its receipt of
a new Note in the amount set forth above.

     10.     The Purchaser advises the Agent that the address listed below is
its address for notices under the Credit Agreement:


                         ------------------------------

                         ------------------------------

                         ------------------------------


ASSIGNOR                                             PURCHASER

By:                                         By:
   -------------------------------             -----------------------------

                                     - 85 -


Title:                                      Title:
      ----------------------------                --------------------------


DOCUMENT NUMBER:














                                     - 86 -


                              FIRST AMENDMENT DATED
                             AS OF DECEMBER 28, 1998
                 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT
                            DATED AS OF MAY 27, 1998

     THIS AMENDMENT, dated as of December 28, 1998 is entered into among AAR
CORP., a Delaware corporation (the "BORROWER"), the Lenders listed from time to
time on the signature pages of the Agreement (as hereinafter defined), and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (successor by merger to Bank
of America Illinois, formerly known as Continental Bank N.A.) (the "AGENT").

                                    RECITALS:

     A.      The Borrower, the Agent and the Lenders have entered into a Second
Amended and Restated Credit Agreement dated as of May 27, 1998 (said Second
Amended and Restated Credit Agreement shall hereinafter be referred to as the
"AGREEMENT"; the terms defined in the Agreement and not otherwise defined herein
shall be used herein in the Agreement).

     B.      The Borrower, the Agent and the Lenders wish to amend certain
provisions of the Agreement.

     C.      Therefore, the parties hereto agree as follows:

     1.      AMENDMENTS TO THE AGREEMENT.

             1.1 ARTICLE I OF THE AGREEMENT. ARTICLE I, DEFINITIONS, of the
Agreement is hereby amended as of the date hereof by deleting the defined terms,
"Applicable Margin" and "Facility Fee" and inserting the following in lieu
thereof, respectively:

             "APPLICABLE MARGIN" means,

             (i)    with respect to any Eurodollar Advance, (A) at all times
                    prior to the Revolving Credit Termination Date, 0.225% when
                    the Borrower has an Investment Grade Rating and 0.50% when
                    the Borrower does not have an Investment Grade Rating and
                    (B) at all times after the Revolving Credit Termination
                    Date, 0.75% when the Borrower has an Investment Grade
                    Rating, and 1.50% when the Borrower does not have an
                    Investment Grade Rating, or

             (ii)   with respect to any Floating Rate Advance, zero % at all
                    times when the Borrower has an Investment Grade Rating and
                    0.50% at all times when the Borrower does not have an
                    Investment Grade Rating.



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

     2.      WARRANTIES. To induce the Lenders and the Agent to enter into this
Amendment, the Borrower warrants that:

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

             2.2   NO CONFLICTS. The execution and delivery of this Amendment,
and the performance by the Borrower of its obligations under the Agreement, as
amended hereby, do not and will not conflict with any provision of law of the
charter or by-laws of the Borrower or of any agreement binding upon the
Borrower.

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

     3.      GENERAL.

             3.1   EXPENSES. The Borrower agrees to pay the Agent upon demand
for all reasonable expenses, including reasonable attorneys' fees, incurred by
the Agent in connection with the preparation, negotiation and execution of this
Amendment.

             3.2   LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS.

             3.3   SUCCESSORS. This Amendment shall be binding upon the
Borrower, the Lenders and the Agent and their respective successors and assigns,
and shall inure to the benefit of the Borrower, the Lenders and the Agent and
the respective successors and assigns of the Lenders and the Agent.

             3.4   CONFIRMATION OF THE AGREEMENT. Except as amended hereby, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects.

             3.5   REFERENCES TO THE AGREEMENT. Each reference in the Agreement
to "this Agreement," "hereunder," "hereof," or words of like import, and each
reference to the Agreement in any and all instruments or documents provided for
in the Agreement or delivered or to be

                                       -2-


delivered thereunder or in connection therewith, shall, except where the context
otherwise requires, be deemed a reference to the Agreement as amended hereby.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Chicago, Illinois by their respective officers thereunto duly
authorized as of the date first written above.

                                             AAR CORP.


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

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

                                             BANK OF AMERICA NATIONAL TRUST AND
                                              SAVINGS ASSOCIATION, as a Lender
                                              and as the Issuer


                                             By: /s/ J. Gates Jr.
                                                --------------------------------

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

                                             BANK OF AMERICA NATIONAL TRUST AND
                                              SAVINGS ASSOCIATION, as the Agent


                                             By: /s/ David A. Johanson
                                                --------------------------------
                                             Title:  David A. Johanson
                                                   -----------------------------
                                                     Vice President

                                       -3-


                                                                  EXECUTION COPY

                               SECOND AMENDMENT TO
                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT

     THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this
"SECOND AMENDMENT"), is made and dated as of February 5, 2002 among AAR Corp., a
Delaware corporation ("BORROWER"), the Lenders party hereto ("LENDERS"), and
BANK OF AMERICA, N.A., as Agent (in such capacity, "AGENT").

                                    RECITALS

     1.      The Borrower, the Lenders and the Agent are parties to that certain
Second Amended and Restated Credit Agreement, dated as of May 27, 1998, as
amended by that certain First Amendment to Second Amended and Restated Credit
Agreement, dated as of December 28, 1998 (as heretofore amended, the "EXISTING
CREDIT AGREEMENT").

     2.      The Borrower, the Lenders, and the Agent have agreed to certain
amendments to the Existing Credit Agreement, including changes in pricing and
covenants, extension of the Revolving Credit Termination Date, and elimination
of the term-out option on the terms and conditions specified herein.

     NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:

                                     PART I

                                   DEFINITIONS

     SECTION 1.1.  CERTAIN DEFINITIONS. Unless otherwise defined herein or the
context otherwise requires, terms used in this Second Amendment have the
following meanings:

             "AMENDED CREDIT AGREEMENT" means the Existing Credit Agreement as
     amended hereby.

             "SECOND AMENDMENT EFFECTIVE DATE" shall mean the date upon which
     each of the conditions set forth in Part 4 have been satisfied.

     SECTION 1.2.  OTHER DEFINITIONS. Unless otherwise defined herein or the
context otherwise requires, terms used in this Second Amendment have the
meanings provided in the Amended Credit Agreement.



                                     PART 2

                     AMENDMENTS TO EXISTING CREDIT AGREEMENT

     Effective on (and subject to the occurrence of) the Second Amendment
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Part 2. Except as so amended, the Existing Credit Agreement shall
continue in full force and effect.

     SECTION 2.1.  ADDITION OF NEW DEFINITIONS IN ARTICLE I. Article I of the
Existing Credit Agreement (Definitions) is amended by inserting the following
new definitions in the proper alphabetical order:

             "ADJUSTMENT DATE" means February 19, 2002.

             "BANK ONE AGREEMENT" means that certain Second Amended and Restated
     Credit Agreement, dated as of February 10, 1998, among the Borrower, the
     lenders from time to time party thereto, and Bank One, N.A., as agent, as
     amended, restated, extended, supplemented or otherwise modified in writing
     from time to time and including any replacement credit facility.

             "LASALLE AGREEMENT" means that certain Revolving Loan Agreement,
     dated as of April 11, 2001, between the Borrower and LaSalle Bank National
     Association, as amended (including the first amendment dated as of November
     30, 2001), restated, extended, supplemented or otherwise modified in
     writing from time to time and including any replacement credit facility.

             "PARALLEL AGREEMENTS" means (a) the Bank One Agreement, (b) the
     LaSalle Agreement, and (c) the U.S. Bank Agreement, and (d) any unsecured
     revolving or unsecured term credit facility, entered into from time to time
     by the Borrower or any of its Subsidiaries providing for loans, letters of
     credit and/or other credit equal to or greater than $10,000,000 which is
     not subordinated to the Obligations, including, in each case, all
     instruments or agreements evidencing or relating thereto, and as the same
     may from time to time be amended, extended, supplemented or otherwise
     modified, and including any replacement credit facility (each, a "PARALLEL
     AGREEMENT").

             "PARALLEL AGREEMENT COMMITMENTS" means the sum of the aggregate
     outstanding commitments of each of the lenders under the Parallel
     Agreements and this Agreement as of the Adjustment Date, whether drawn or
     undrawn, as adjusted, when and as appropriate to give effect to (i) the
     termination in the commitments under the U.S. Bank Agreement upon the
     scheduled maturity thereof in August 2002, (ii) the scheduled reductions in
     the Aggregate Commitment and the commitment under the Bank One Agreement
     occurring on or about the Reduction Dates, and (iii) any increases in the
     commitments of any lenders under any Parallel Agreements from time to time.

             "RATABLE AMOUNT" means the proportion that the Aggregate Commitment
     bears to the Parallel Agreement Commitments at any time and from time to
     time.

                                        2


             "REDUCTION DATE" has the meaning ascribed to such term in Section
     2.5(b) hereof.

             "SECOND AMENDMENT EFFECTIVE DATE" means the date upon which the
     Second Amendment to Second Amended and Restated Credit Agreement among the
     Borrower, the Lenders and the Agent becomes effective according to the
     terms thereof.

             "SYNTHETIC LEASE DOCUMENTS" means the 'Operative Documents' as
     defined in Appendix A to that certain Participation Agreement (AAR Trust
     No. 2000-1) dated as of June 28, 2000 (as amended, modified, supplemented,
     restated and/or replaced from time to time) among Borrower, as guarantor,
     AAR International, Inc. and AAR Parts Trading, Inc., (formerly AAR Aircraft
     & Engine Group, Inc.), as lessees, Wells Fargo Bank Northwest, National
     Association (formerly First Security Bank, National Association), not in
     its individual capacity, except as expressly provided therein, but solely
     as certificate trustee under the AAF Trust 2000-1, as certificate trustee,
     Wells Fargo Bank Nevada, National Association (formerly First Security
     Trust Company of Nevada), not in its individual capacity, except as
     expressly provided therein, but solely as administrative agent, the persons
     named on Schedule I thereto as certificate holders, Hatteras Funding
     Corporation, the persons named on the Schedule II thereto as facility
     lenders and liquidity banks, and Bank of America, N.A., not in its
     individual capacity but solely as administrator, as amended, restated,
     extended, supplemented or otherwise modified in writing from time to time
     and including any replacement credit facility."

             "U.S. BANK AGREEMENT" means that certain Revolving Loan Agreement,
     dated as of October 3, 2001, between the Borrower and U.S. Bank, National
     Association, as amended (including the first amendment dated November 30,
     2001), restated, extended, supplemented o otherwise modified in writing
     from time to time and including any replacement credit facility."

     SECTION 2.2.  AMENDMENT OF CERTAIN DEFINITIONS IN ARTICLE I. Article I of
the Existing Credit Agreement is amended by revising the definitions of each of
the following terms to read in their entirety respectively as follows:

             "AGGREGATE COMMITMENT" means $40,000,000, constituting the
     aggregate of the Commitments of all the Lenders, as reduced from time to
     time pursuant to the terms hereof.

             "APPLICABLE MARGIN" means

                   (a)   When the Borrower has an Investment Grade Rating,
             1.25% at all times when the Obligations are less than or equal to
             60% of the Aggregate Commitment, and 2.00% at all times when the
             Obligations exceed 60% of the Aggregate Commitment (in each case,
             as the Aggregate Commitment may be reduced from time to time in
             accordance herewith); and

                   (b)   When the Borrower does not have an Investment Grade
             Rating, 1.525% at all times when the Obligations are less than or
             equal to 60% of the Aggregate Commitment, and 2.275% at all times
             when the Obligations exceed

                                        3


             60% of the Aggregate Commitment (in each case, as the Aggregate
             Commitment may be reduced from time to time in accordance
             herewith).

             "BANK OF AMERICA" means Bank of America, N.A., its successor and
     assigns. All references to "Bank of America NT&SA" shall be deemed
     references to Bank of America.

             "FACILITY FEE" means a facility fee on the amount of the Aggregate
     Commitment, (i) for the period prior to the Second Amendment Effective
     Date, in an amount equal to (A) 0.175% per annum when the Borrower has an
     Investment Grade Rating or (b) 0.25% per annum when the Borrower does not
     have an Investment Grade Rating; and (ii) for the period from the Second
     Amendment Effective Date to and including the Revolving Credit Termination
     Date, in an amount equal to (A) 0.35% per annum when the Borrower has an
     Investment Grade Rating and (B) 0.425% when the Borrower does not have and
     Investment Grade Rating.

             "FACILITY TERMINATION DATE" means the Revolving Credit Termination
     date."

             "REVOLVING CREDIT TERMINATION DATE" means the earliest of (a)
     February 9, 2004, (b) the "maturity date" under the LaSalle Agreement, as
     defined therein, and (c) the "revolving credit termination date" under the
     Bank One Agreement, as defined therein; PROVIDED, HOWEVER, that if from
     time to time such "maturity date," such "revolving credit termination
     date," or other comparable facility termination dates (if any) in such
     foregoing Parallel Agreements is earlier, by amendment or otherwise, or
     either such respective Parallel Agreement is terminated and/or the
     commitment thereunder is terminated, then "Revolving Credit Termination
     Date" shall mean such earlier date of termination.

     SECTION 2.3.  MODIFICATION OF CERTAIN DEFINITIONS REGARDING INTEREST
PERIODS. Each of the definitions of "Eurodollar Interest Period," "Transaction
Rate Interest Period," and "Quoted Rate Interest Period" in Article I of the
Existing Credit Agreement is amended by inserting the following at the end
thereof:

     "No such period shall extend beyond any Reduction Date unless, on such
     Reduction Date, either (i) the aggregate principal amount of all
     outstanding Advances shall not exceed the Aggregate Commitment after giving
     effect to the reduction scheduled to take effect as of such Reduction Date
     or (ii) the sum of (A) the aggregate principal amount of all Floating Rate
     Advances PLUS (B) the aggregate principal amount of all Advances other than
     Floating Rate Advances with a Interest Period ending on or prior to that
     Reduction Date is at least equal to the amount by which the Aggregate
     Commitment is scheduled to be reduced on that Reduction Date."

     SECTION 2.4.  DELETION OF CERTAIN DEFINITIONS. The definitions of
"Revolving Credit Termination Balance" and "Termination Balance" in Article I of
the Existing Credit Agreement (Definitions) are deleted in their entirety.

                                        4


     SECTION 2.5.  AMENDMENT TO SECTION 2.1. The first paragraph of Section 2.1
of the Existing Credit Agreement is amended by deleting the last two sentences
thereof.

     SECTION 2.6.  AMENDMENT TO SECTION 2.3. Section 2.3 of the Existing Credit
Agreement (Mandatory Payments) is amended and restated in its entirety as
follows:

             2.3   REPAYMENT OF ADVANCES.

             (a)   The Borrower shall repay to the Lenders on the Revolving
     Credit Termination Date the aggregate principal amount of all Advances and
     other unpaid Obligations outstanding on such date.

             (b)   The Borrower shall repay each Alternate Currency Advance in
     full on the last day of its respective Transaction Rate Interest Period.

             (c)   From and after the Second Amendment Effective Date until the
     Adjustment Date, if the Borrower (or any Subsidiary) makes any scheduled,
     mandatory, or optional prepayments or repayments under any Parallel
     Agreement which would result in the aggregate of such payments under any
     such Parallel Agreement being greater than (as a percentage of the
     outstanding commitments thereunder) the aggregate of such payments since
     the Second Amendment Effective Date hereunder, then the Borrower shall
     concurrently prepay the Advances hereunder in an amount necessary to result
     in the aggregate of such payments hereunder since the Second Amendment
     Effective Date being not less than the aggregate of such payments (as a
     percentage of the outstanding commitments) under any such Parallel
     Agreement, subject to compliance with Section 3.4.

             (d)   On the Adjustment Date, the Borrower shall repay and adjust
     the outstanding borrowings and advances under the Parallel Agreements,
     including the Advances under this Agreement, in such a manner so that the
     aggregate outstanding borrowings and advances under the Parallel Agreements
     (including this Agreement) shall not exceed $60,000,000 as of the
     Adjustment Date. The foregoing limitation shall only apply on the
     Adjustment Date and shall not apply to subsequent borrowings.

             (e)   From and after the Adjustment Date, the outstanding Advances
     shall not at any time exceed the Ratable Amount of the total outstanding
     borrowings and advances under the Parallel Agreements (including this
     Agreement). If, at any time or from time to time, the aggregate amount of
     the outstanding Advances exceeds the Ratable Amount of the total
     outstanding borrowings and advances under the Parallel Agreements
     (including this Agreement), then the Borrower shall make an immediate
     repayment of the Advances to cause the Advances not to exceed such Ratable
     Amount.

     SECTION 2.7.  AMENDMENT TO SECTION 2.5. Section 2.5 of the Existing Credit
Agreement (Optional Reductions in Aggregate Commitment) is amended as follows:

     (a)     The word "Optional" in the heading is deleted.

                                        5


     (b)     The existing wording in Section 2.5 is re-lettered as subsection
             (a), and the following sentence is added at the end thereof:

             "Any optional reduction in the Aggregate Commitments shall be
             applied against future scheduled reductions in the Aggregate
             Commitment in inverse order of scheduled occurrence."

     (c)     The following new subsections are inserted after such subsection
             (a) reading as follows:

                    (b)   The Aggregate Commitment shall automatically be
             reduced by $5,000,000 on each of June 30, 2002, December 31, 2002,
             and June 30, 2003 (each a "REDUCTION DATE").

                    (c)   No later than the Adjustment Date, the Borrower shall
             have arranged or implemented amendments or other modifications to
             the Parallel Agreements to provide that (i) the aggregate
             outstanding commitments under the Bank One Agreement shall be
             $40,000,000, (ii) the aggregate outstanding commitments under the
             LaSalle Agreement shall be $25,000,000, and (iii) the aggregate
             outstanding commitments under the U.S. Bank Agreement shall be
             $10,000,000. From and after the Adjustment Date, the Aggregate
             Commitment shall not exceed at any time the Ratable Amount of the
             Parallel Agreement Commitments. To the extent that the Borrower
             does not take any necessary steps to reduce the Aggregate
             Commitment in accordance with the requirements of this section,
             then the Aggregate Commitment shall automatically and concurrently,
             without notice or demand, reduce hereunder to an amount equal to
             the Ratable Amount of the Parallel Agreement Commitments.

                    (d)   Notwithstanding any provision herein to the contrary,
             for the avoidance of doubt, the Aggregate Commitment shall not
             automatically be reduced due to the reduction in the commitment
             under the Bank One Agreement scheduled to take effect on and after
             December 31, 2003, such scheduled reduction occurring on and after
             December 31, 2003 being in an amount not to exceed $5,000,000 in
             the aggregate.

     SECTION 2.8.  AMENDMENTS TO SECTION 2.9. Section 2.9 of the Existing Credit
Agreement (Optional Principal Payments) is amended as follows:

     (a)     The section heading is amended to read "Prepayments."

     (b)     The existing Section 2.9 is re-lettered as Subsection (a), and the
last sentence is deleted in its entirety.

     (c)     The following new subsections are inserted after subsection (a) as
follows:

                    "(b)   If, upon any reduction in the Aggregate Commitment,
             including, without limitation, through the operation of Section
             2.5(b) hereof, the aggregate

                                        6


             Dollar Amount of all outstanding Advances exceeds the Aggregate
             Commitment as so reduced, Borrower shall immediately prepay the
             Advances in an aggregate amount equal to such excess, subject to
             compliance with Section 3.4.

                    "(c)   In addition to any prepayment required under
             subsection (b), if, as of the last day of any calendar month, the
             Agent determines that the aggregate Dollar Amount of all
             outstanding Advances exceeds the Aggregate Commitment then in
             effect by reason of currency fluctuations or otherwise, the
             Borrower shall, within three Business Days of demand by the Agent,
             prepay (in U.S. Dollars) the Advances in an aggregate amount equal
             to such excess, subject to compliance with Section 3.4."

     SECTION 2.9.  AMENDMENTS TO SECTION 2.14. Section 2.14 of the Existing
Credit Agreement (Restrictions on Interest Period) is amended by deleting the
last sentence and inserting the following as the last sentence thereof: "No more
than five Quoted Rate Interest Periods may be in effect at any one time."

     SECTION 2.10. AMENDMENTS TO SECTION 4.2. Section 4.2 of the Existing Credit
Agreement (Each Advance) is amended by inserting a new subsection (vi) after
subsection (v) as follows:

     "(vi)   Concurrent with each Borrowing Notice, (A) prior to the Adjustment
             Date, the Borrower has made or is making ratable borrowings under
             the Parallel Agreements as a percentage of the Parallel Agreement
             Commitments, except with respect to any Parallel Agreement where
             the Borrower has exhausted the available aggregate commitment
             thereunder; and (B) from and after the Adjustment Date, the
             Borrower has made or is making ratable borrowings under each of the
             Parallel Agreements (including this Agreement) so that the amount
             of the outstanding Advances, as a proportion of all borrowings and
             advances outstanding at any time under the Parallel Agreements
             (including this Agreement), does not at any time exceed the Ratable
             Amount. In addition, the Borrower shall have delivered to the Agent
             with each such Borrowing Notice (for delivery to the Lenders)
             copies of the borrowing notices delivered under such Parallel
             Agreements.

     SECTION 2.11. AMENDMENTS TO SECTION 6.1. Section 6.1 of the Existing Credit
Agreement (Financial Reporting) is amended by re-lettering subsection (xi) as
subsection (xii) and inserting new subsection (xi) which read in their entirety
as follows:

             "(xi) Copies of all amendments and waivers proposed in connection
     with any Parallel Agreement at least three Business Days' prior to the date
     of their effectiveness, copies of all such amendments and waivers as
     finally executed and delivered, and copies of all notices of default from
     lenders, agents or trustees under any Parallel Agreement.

     SECTION 2.12. AMENDMENTS TO SECTION 6.20. Section 6.20(d) of the Existing
Credit Agreement (Consolidated Net Worth) is amended by deleting the reference
to "$10,000,000" in clause (d) thereof and replacing it with the amount of
"$30,000,000".

                                        7


     SECTION 2.13. AMENDMENTS TO SECTION 6.23. Section 6.23 of the Existing
Credit Agreement (Fixed Charge Coverage Ratio) is amended and restated in its
entirety as follows:

             6.23  FIXED CHARGE COVERAGE RATIO. The Borrower will maintain a
     Fixed Charge Coverage Ratio of not less than 1.20:1.00 as of the last day
     of each fiscal quarter of the Borrower commencing on the quarter ended
     August 31, 2002 and thereafter. The Fixed Charge Coverage Ratio shall be
     determined based on four of the previous five fiscal quarters of the
     Borrower that occurred immediately prior to the calculation date, at the
     Borrower's option, except that for the quarter ended August 31, 2002, the
     Fixed Charge Coverage Ratio may be determined solely on that quarter's
     results if the result is greater than four of the previous five fiscal
     quarters results.

     SECTION 2.14. ADDITION OF A NEW SECTION 6.25. Article VI of the Existing
Credit Agreement (Covenants) is further amended by inserting a new Section 6.25,
immediately following Section 6.24, which reads in its entirety as follows:

             6.25  COVENANT TO MAINTAIN COMPARABLE TERMS AMONG LENDERS. Unless
     the Required Banks otherwise agree in each instance, this Agreement shall
     be deemed automatically amended from time to time MUTATIS MUTANDIS without
     further action on the part of the parties hereto so that (a) the effective
     interest rates, Applicable Margins, and Facility Fees hereunder are not
     less than the comparable effective interest rates, margins and fees under
     any Parallel Agreement; and (b) the affirmative and negative covenants
     hereunder are not materially less burdensome on the Borrower or materially
     less favorable to the Lender than comparable affirmative and negative
     covenants contained in any Parallel Agreement.

     SECTION 2.15. ADDITION OF A NEW SECTION 6.26. Article VI of the Existing
Credit Agreement (Covenants) is further amended by inserting a new Section 6.26,
immediately following new Section 6.25, which reads in its entirety as follows:

             6.26  SYNTHETIC LEASE BORROWINGS AND AGGREGATE COMMITMENT.

             (a)   The Borrower will not and will cause its Subsidiaries and
     Affiliates not to deliver any Notice of Delivery which would cause the
     aggregate of (w) the amounts requested to be funded in such Notice of
     Delivery, (x) the amounts requested to be funded in all other Notices of
     Delivery which have neither been funded nor revoked, (y) all outstanding
     Loans with respect to all Aircraft and Engines, and (z) all outstanding
     Certificate Amounts with respect to all Aircraft and Engines to exceed
     $40,000,000. The Borrower covenants to cause, at all times, the aggregate
     Loans and Certificate Amounts not to exceed $40,000,000.

             (b)   The Borrower covenants and agrees that, on or before February
     28, 2002, it will, and shall cause its Subsidiaries and/or Affiliates as
     appropriate to, use commercially reasonable best efforts, to cause the
     implementation and effectiveness of an amendment to the Synthetic Lease
     Documents which (i) effects a reduction in the Maximum Revolving Commitment
     Amount and a pro rata reduction in each Participant's Commitment to cause
     the aggregate of all Participants' Revolving Commitments to be

                                        8


     equal to $40,000,000, and (ii) amends the net worth and fixed charged
     coverage ratios therein to conform to the same ratios in the Amended Credit
     Agreement. The failure of any other party to the Synthetic Lease Documents
     to agree to such amendments for whatever reasons on or before February 28,
     2002 or thereafter, or the failure of such amendments to occur because they
     would effectively cause, a default under the Synthetic Lease Documents, a
     termination of the synthetic lease program, or a Liquidity Purchase
     thereunder, shall not constitute a default under this covenant. In
     addition, the Borrower's covenant and agreement under this paragraph (b) is
     subject to the Agent complying with its agreement under Section 5.3 of the
     Second Amendment. Capitalized terms used in this Section 6.26 and not
     otherwise defined herein shall have the meaning set forth therefor in the
     Synthetic Lease Documents.

     SECTION 2.16. AMENDMENTS TO SECTION 7.3.Section 7.3 of the Existing Credit
Agreement is amended to read in its entirety as follows:

             7.3.  The breach by the Borrower of any of the terms or provisions
     of SECTIONS 6.2, 6.3, 6.10, 6.18, or 6.26(a); or the breach by the
     Borrower of any of the terms or provisions of SECTIONS 6.1, 6.11, 6.12,
     613, 614, 615, 6.16, 6.17, 6.19 or 6.26(b) which is not remedied within 10
     days after written notice from the Agent or any Lender; or the breach by
     the Borrower of any of the terms or provisions made applicable hereunder
     pursuant to SECTION 6.25 hereof which is not remedied with any cure or
     grace period applicable thereto under the respective Parallel Agreement.

     SECTION 2.17. AMENDMENTS TO SECTION 12.3. Section 12.3.1 of the Existing
Credit Agreement is amended by deleting the last two sentences thereof in their
entirety.

                                     PART 3

                         REPRESENTATIONS AND WARRANTIES

     The Borrower represents and warrants to the Lenders and the Agent that, on
and as of the Second Amendment Effective Date, and after giving effect to this
Second Amendment:

     SECTION 3.1.  AUTHORITY. The Borrower has all the necessary corporate power
to make, execute, deliver, and perform this Second Amendment, and this Second
Amendment constitutes the legal, valid and enforceable obligation of the
Borrower, enforceable against the Borrower in accordance with its terms.

     SECTION 3.2.  NO LEGAL OBSTACLE TO AGREEMENT. Neither the execution of this
Second Amendment, the making by the Borrower of any borrowings under the Amended
Credit Agreement, nor the performance of the Amended Credit Agreement has
constituted or resulted in or will constitute or result in a breach of the
provisions of any contract to which Borrower is a party, or the violation of any
law, judgment, decree or governmental order, rule or regulation applicable to
the Borrower, or result in the creation under any agreement or instrument of any
security interest, lien, charge, or encumbrance upon any of the assets of the
Borrower. No approval or authorization of any governmental authority is required
to permit the execution, delivery or performance by the Borrower of this Second
Amendment, the Amended Credit

                                        9


Agreement, or the transactions contemplated hereby or thereby, or the making of
any borrowings by the Borrower under the Amended Credit Agreement.

     Section 3.3.  INCORPORATION OF CERTAIN REPRESENTATIONS. The representations
and warranties set forth in Article V of the Amended Credit Agreement are true
and correct in all material respects on and as of the Second Amendment Effective
Date as though made on and as of the date hereof except for any representations
and warranties that expressly relate solely to an earlier date, which
representations and warranties were true and accurate in all material respects
on and as of such earlier date.

     Section 3.4.  DEFAULT. No Default or Unmatured default has occurred and is
continuing under the Amended Credit Agreement.

                                     PART 4

                           CONDITIONS TO EFFECTIVENESS

     This Second Amendment shall be and become effective on the Second Amendment
Effective Date when (i) each of the following conditions set forth in this Part
4 shall have been satisfied, and (ii) the Required Lenders and the Borrower
shall have duly executed counterparts of this Second Amendment and provided
original copies thereof to the Agent:

             SECTION 4.1. CORPORATE RESOLUTIONS. The Agent shall have received a
     copy of the resolution or resolutions passed by the Board of Directors of
     the Borrower, certified by the Secretary or an Assistant Secretary of
     Borrower as being in full force and effect on the date hereof, authorizing
     the amendments to the Existing Credit Agreement herein provided for and the
     execution, delivery and performance of this Second Amendment and any note
     or other instrument or agreement required hereunder.

             SECTION 4.2. AUTHORIZED SIGNATORIES. The Agent shall have received
     a certificate, signed by the Secretary or an Assistant Secretary of the
     Borrower, dated as of the date hereof, as to the incumbency of the person
     or persons authorized to execute and deliver this Second Amendment and any
     instrument or agreement required hereunder on behalf of the Borrower.

             SECTION 4.3. CLOSING CERTIFICATE. The Agent shall have received an
     officer's certificate from the Borrower, executed by either the Chief
     Executive Officer or the Chief Financial Officer of the Borrower,
     certifying that after giving effect to this Second Amendment, no Default or
     Unmatured Default will be in existence, such certificate being in form
     reasonably satisfactory to the Agent.

             SECTION 4.4. LEGAL OPINION. The Agent shall have received a legal
     opinion of senior counsel to the Borrower, in form and content reasonably
     satisfactory to the Agent, opining that this Second Amendment has been duly
     authorized, executed and delivered by the Borrower and constitutes the
     valid, binding, and enforceable obligation of the

                                       10


     Borrower, except as such enforceability may be subject to (i) bankruptcy,
     insolvency, moratorium or similar laws affecting creditors' rights
     generally and (ii) general principles of equity.

             SECTION 4.5. PARALLEL AGREEMENTS. The Borrower shall have delivered
     to the Agent true, correct and complete copies of all existing Parallel
     Agreements, including all existing and currently proposed amendments and
     waivers thereto.

                                     PART 5

                                  MISCELLANEOUS

     SECTION 5.1.  REFERENCES TO THE CREDIT AGREEMENT. Each reference to the
Credit Agreement in the Amended Credit Agreement, the Notes or any other
instruments, agreements, certificates or other documents executed in connection
therewith (collectively, the "Loan Documents"), shall be deemed to be a
reference to the Amended Credit Agreement, and as the same may be further
amended, restated, supplemented or otherwise modified from time to time in
accordance therewith.

     SECTION 5.2.  REAFFIRMATION: RELEASE OF CLAIMS. The Borrower acknowledges
and confirms that (a) the Borrower's obligations to repay the Advances and the
other Obligations arising under the Amended Credit Agreement is unconditional
and, as of the Second Amendment Effective Date, not subject to any offsets,
defenses or counterclaims, (b) the Agent and the Lenders have fully performed
all of their respective obligations under the Existing Credit Agreement and the
other Loan Documents, and (c) by entering into this Second Amendment, the
Lenders do not waive or release any term or condition of the Amendment credit
Agreement or any of the other Loan Documents or any of their rights or remedies
under such Loan Documents or applicable law or any of the Obligations of the
Borrower, except as expressly set forth herein or modified hereby. To induce the
Agent and the Lenders to enter into this Second Amendment, the Borrower hereby
releases, acquits and forever discharges the Agent, the Lenders, and all
officers, directors, agents, employees, successors and assigns of the Agent and
any of the Lenders, from any and all liabilities, claims, demands, actions or
causes of actions of any kind or nature (if there by any), whether absolute or
contingent, disputed or undisputed, at law or in equity, or known or unknown,
that the Borrower now has or ever had against such Persons arising under or in
connection with, directly or indirectly, any of the Loan Documents on or prior
to the Second Amendment Effective Date.

     SECTION 5.3.  AMENDMENT OF SYNTHETIC LEASE DOCUMENTS. The Agent shall, or
shall cause its Affiliates, to us its commercially reasonable best efforts to
arrange and coordinate an amendment of the Synthetic Lease Documents with the
participants thereunder, effective on or before February 28, 2002, which (i)
reduces the Maximum Revolving Commitment Amount (as defined in the Synthetic
Lease Documents) to an amount equal to $40,000,000 and (ii) amends the net worth
and fixed charge coverage ratios therein to conform to the same ratios in the
Amended Credit Agreement.

     SECTION 5.4.  EXPENSES OF AGENT. Within seven (7) Business Days of the
receipt from the Agent of a detailed bill, the Borrower shall pay all reasonable
costs and expenses incurred by

                                       11


the Agent in connection with the preparation, negotiation and execution of this
Second Amendment and any other Loan Documents executed pursuant hereto and any
and all modifications, and supplements thereto, including, without limitation,
the reasonable costs and fees of the Agent's legal counsel and any taxes or
expenses associated with or incurred in connection with any instrument or
agreement referred to herein or contemplated hereby.

     SECTION 5.5   BENEFITS. This Second Amendment shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and assigns.

     SECTION 5.6.  GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT
GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES.

     SECTION 5.7.  EFFECT. Except as expressly herein amended, the terms and
conditions of the Existing Credit Agreement shall remain in full force and
effect without amendment or modification, express or implied. The entering into
this Second Amendment by the Lenders shall not be construed or interpreted as an
agreement by the Lenders to enter into any future amendment or modification of
the Amended Credit Agreement or any of the other Loan Documents.

     SECTION 5.8.  COUNTERPARTS; TELECOPIED SIGNATURES. This Second Amendment
may be executed in any number of counterparts and by different parties to this
Second Amendment on separate counterparts, each of which when so executed shall
be deemed to be an original and shall be binding upon all parties, their
successors and assigns, and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. Any signature delivered or
transmitted by a party by facsimile transmission shall be deemed to be an
original signature hereto.

     SECTION 5.9   INTEGRATION. This Second Amendment, together with the Loan
Documents, contains the entire and exclusive agreement of the parties hereto
with reference to the matters discussed herein and therein. This Second
Amendment supersedes all prior drafts and communications with respect thereto.
This Second Amendment may not be amended except in a writing.

     SECTION 5.10. FURTHER ASSURANCES. The Borrower agrees to take such further
actions as the Agent shall reasonably request from time to time in connection
herewith to evidence or give effect to the amendments set forth herein or any of
the transactions contemplated hereby.

     SECTION 5.11. SECTION TITLES. Section titles and references used in this
Second Amendment shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreements among the parties hereto.

                                       12


     IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and delivered as of the date first written above

                                     AAR CORP.

                                     By   /s/ Timothy J. Romenesko
                                       ----------------------------------
                                              Timothy J. Romenesko
                                                 Vice President

                                     BANK OF AMERICA, N.A., AS AGENT AND LENDER

                                     By   /s/ Wayne R. Porritt
                                       ----------------------------------
                                              Wayne R. Porritt
                                              Managing Director

                                                   [SEAL]

                                       13


     IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and delivered as of the date first written above

                                     AAR CORP.

                                     By
                                       ----------------------------------
                                              Timothy J. Romenesko
                                                 Vice President

                                     BANK OF AMERICA, N.A., AS AGENT AND LENDER

                                     By   /s/ Wayne R. Porritt
                                       ----------------------------------
                                              Wayne R. Porritt
                                              Managing Director

                                       13

EX-4.7

                                                                     EXHIBIT 4.7

                                 AMENDMENT NO. 1
                           DATED AS OF AUGUST 20, 1998
                                       to
                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT
                          DATED AS OF FEBRUARY 10, 1998

       This Amendment No. 1 (this "Amendment"), dated as of August 20, 1998, is
among AAR CORP. (the "Borrower"), the Lenders party to the Credit Agreement
(defined below) and The First National Bank of Chicago, as Agent.

                              W I T N E S S E T H:

       WHEREAS, the Borrower, the Lenders and the Agent are parties to that
certain Second Amended and Restated Credit Agreement dated as of February 10,
1998 (as heretofore amended, the "Credit Agreement") and the other Loan
Documents referred to therein; and

       WHEREAS, the Borrower, the Lenders and the Agent desire to amend the
Credit Agreement in order to amend certain provisions thereof;

       NOW, THEREFORE, in consideration of the premises and the undertakings set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

       1.     DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein shall have the meanings attributed to them in the Credit
Agreement.

       2.     AMENDMENT. The Credit Agreement is hereby amended as follows:

              (a) The following new definition of "Consolidated Net Worth" is
       hereby added to Article I of the Credit Agreement in the appropriate
       alphabetical order:

                     "Consolidated Net Worth" means, as of any date of
              determination, the consolidated stockholders' equity of the
              Borrower and its Subsidiaries determined in accordance with
              Agreement Accounting Principles.

              (b) The definition of "Consolidated Secured Liabilities" contained
       in Article I of the Credit Agreement is hereby amended by deleting the
       phrase "clauses (a), (d), (e), (f) and (h)" contained therein and
       inserting in lieu thereof the phrase "clauses (a), (d), (e), (f), (h) and
       (k)"

              (c) The definition of "Consolidated Tangible Net Worth" contained
       in Article I of the Credit Agreement is hereby amended by deleting it in
       its entirety and inserting in lieu thereof the following:

                     "Consolidated Tangible Net Worth" means, as of any date of
              determination, the sum of (a) Consolidated Net Worth, less
              consolidated Intangible Assets, plus (b) Subordinated Debt. For
              purposes of this definition "Intangible Assets" means the amount
              (to the extent reflected in determining such consolidated
              stockholders' equity) of (i) all write-ups (other than write-ups
              resulting from foreign currency translations and write-ups of
              assets of a going concern business made within twelve months after



              the acquisition of such business) subsequent to May 31, 1998 in
              the book value of any asset owned by the Borrower or a
              Consolidated Subsidiary and (ii) all unamortized debt discount and
              expense, unamortized deferred charges, goodwill, patents,
              trademarks, service marks, trade names, copyrights, organization
              or developmental expenses and other intangible items, for purposes
              of this clause (ii), in each case, to the extent such items are
              disclosed as separate line items on the Borrower's financial
              statements required under Section 6.1

              (d) The definition of "Contingent Obligation" contained in
       Article I of the Credit Agreement is hereby amended by inserting the
       following at the end of such definition (prior to the period):

                     "; but does not include: (a) Contingent Obligations
              resulting from endorsement of negotiable instruments for deposit
              or collection or similar transactions in the ordinary course of
              the Borrower's and each Subsidiary's business, (b) Contingent
              Obligations by the Borrower of any Subsidiary's Indebtedness
              (including, for the avoidance of doubt, obligations arising out of
              overdraft and similar cash management facilities) permitted to
              exist pursuant to this Agreement and any Subsidiary's obligations
              for Rentals permitted by Section 6.18, and (c) any obligations in
              connection with transactions described in Section 6.13(f)."

              (e) The definition of "Indebtedness" contained in Article I of the
       Credit Agreement is hereby amended by deleting the phrase "clauses (a),
       (d), (e), (f) and (h)" contained therein and inserting in lieu thereof
       the phrase "clauses (a), (d), (e), (f), (h) and (k)"

              (f) Section 6.13 of the Credit Agreement is hereby amended by
       adding a new clause (f) as follows:

                     "(f) Any transfer of an interest in accounts or notes
              receivable on a limited recourse basis, PROVIDED that such
              transfer qualifies as a sale under Agreement Accounting Principles
              and that the amount of such financing does not exceed $50,000,000
              at any one time outstanding."

              (g) Section 6.14 of the Credit Agreement is hereby amended by
       (i) renumbering clause (k) thereof as clause (l); (ii) deleting from such
       clause (l) the phrase "clauses (a) through (j)" and inserting in lieu
       thereof the phrase "clauses (a) through (k)"; and (iii) adding a new
       clause (k) as follows:

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

              (h) Section 6.15 of the Credit Agreement is hereby amended by
       deleting it in its entirety and inserting in lieu thereof the phrase
       "Intentionally Omitted."

              (i) Section 6.16 of the Credit Agreement is hereby amended by
       adding a new clause (k) as follows:

                                     Page 2


                     "(k) Liens incurred in connection with any transfer of an
              interest in accounts or notes receivable which is permitted
              pursuant to Section 6.13(f)."

              (j) Section 6.22 of the Credit Agreement is hereby amended by
       deleting it in its entirety and inserting in lieu thereof the following:

                     6.22. CONSOLIDATED NET WORTH. The Borrower will maintain at
              all times Consolidated Net Worth in an amount not less than the
              sum of (a) $260,000,000 plus (b) the net cash proceeds received by
              the Borrower from the sale of any of its capital stock on or after
              May 31, 1998 plus (c) an amount equal to the aggregate of
              one-third of Consolidated Net Income earned during each of its
              fiscal years beginning with its fiscal year commencing June 1,
              1998, said fiscal years to be taken as one accounting period minus
              (d) amounts (not to exceed $10,000,000 in the aggregate for the
              purposes of this covenant) either used for the purchase or
              retirement of the Borrower's capital stock or representing the
              after tax write-down of assets and associated costs on or after
              May 31, 1998.

              (k) Section 6.23 of the Credit Agreement is hereby amended by
       deleting it in its entirety and inserting in lieu thereof the phrase
       "Intentionally Omitted."

              (l) Section 6.25 of the Credit Agreement is hereby amended by
       deleting the percentage "50%" contained therein and inserting in lieu
       thereof the percentage "60%."

       3.     REPRESENTATIONS AND WARRANTIES. In order to induce the Agent and
the Lenders to enter into this Amendment, the Borrower hereby represents and
warrants to the Agent and the Lenders as of the date of this Amendment that:

              (a) There exists no Default or Unmatured Default and the execution
       of this Amendment shall not create a Default or Unmatured Default.

              (b) The representations and warranties contained in Article V of
       the Credit Agreement are true and correct as of the date of this
       Amendment.

       4.     LEGAL EXPENSES. The Borrower agrees to reimburse the Agent for
reasonable legal fees and expenses incurred by attorneys for the Agent (who may
be employees of the Agent) in connection with the preparation, negotiation and
consummation of this Amendment and the transactions contemplated herein.

       5.     RATIFICATION OF CREDIT AGREEMENT. Except as specifically provided
herein, all of the terms and conditions of the Credit Agreement shall remain in
full force and effect and the Credit Agreement as amended hereby is agreed to,
ratified and confirmed by the Borrower, the Agent and the Lenders in all
respects.

       6.     MISCELLANEOUS.

              (a) This Amendment may be executed in counterparts and by the
       different parties hereto on separate counterparts each of which, when so
       executed and delivered, shall be deemed an original, and all of which
       taken together shall constitute one and the same agreement.

                                     Page 3


              (b) This Amendment shall be effective as of the date first above
       written: PROVIDED, THAT, the Agent has received executed counterparts of
       this Amendment from the Borrower, the Agent and the Lenders.

       IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have executed
this Amendment as of the date first above written.

                                           AAR CORP.


                                           By: /s/ Timothy J. Romenesko
                                              ----------------------------
                                           Title: VICE PRESIDENT
                                                 -------------------------

                                           THE FIRST NATIONAL BANK OF CHICAGO,
                                           INDIVIDUALLY AND AS AGENT

                                           By: /s/ Ronald Edwards
                                              ----------------------------
                                           Title: Vice President
                                                 -------------------------

                                     Page 4


                               SECOND AMENDMENT TO
                              THE CREDIT AGREEMENT

            THIS SECOND AMENDMENT TO THE SECOND AMENDED AND RESTATED
            CREDIT AGREEMENT (THIS "AMENDMENT") IS MADE AND DATED AS
            OF JANUARY 25, 2002 AMONG AAR CORP., A DELAWARE
            CORPORATION ("BORROWER"), THE LENDERS PARTY HERETO
            ("LENDERS"), AND BANK ONE, NA, (F.K.A., THE FIRST
            NATIONAL BANK OF CHICAGO) AS AGENT (IN SUCH CAPACITY,
            "AGENT"), AND AMENDS THAT CERTAIN SECOND AMENDED AND
            RESTATED CREDIT AGREEMENT DATED AS OF FEBRUARY 10, 1998
            AMONG THE BORROWER, THE LENDERS AND THE AGENT, AS
            AMENDED BY A FIRST AMENDMENT TO SECOND AMENDED AND
            RESTATED CREDIT AGREEMENT DATED AS OF AUGUST 20, 1998
            (AS SO AMENDED, THE "CREDIT AGREEMENT").

WHEREAS, AAR, the Lenders and the Agent are parties to the Credit Agreement and
the other Loan Documents referred to therein; and

WHEREAS, AAR, the Lenders and the Agent desire to amend the Credit Agreement in
order to amend certain provisions thereof.

NOW, THEREFORE, in consideration of the premises and the undertakings set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree that effective as of the date
hereof, the Credit Agreement is amended as follows:

1.   DEFINITIONS. Capitalized terms used herein and not otherwise defined herein
shall have the meanings attributed to them in the Credit Agreement.

1.   AMENDMENT. The Credit Agreement is hereby amended as follows:

       (a)  Section 2.4, Fees shall be amended and read as follows:

       2.4 FEES. The Borrower agrees to pay to the Agent, for the ratable
       account of the Lenders, a facility fee on the amount of the Aggregate
       Commitment, for the period from the date hereof to and including the
       Revolving Credit Termination Date, payable quarterly in advance on the
       date of this Agreement and on each Payment Date hereafter, equal to
       (x) 0.35% per annum at all times when the Borrower has an Investment
       Grade Rating and (y) 0.425% at all times when the Borrower does not have
       an Investment Grade Rating.

                                        1


       (b)  Section 6.22, Consolidated Net Worth shall be amended and read as
       follows:

       6.22 CONSOLIDATED NET WORTH. The Borrower will maintain at all times
       Consolidated Net Worth in an amount not less than the sum of (a)
       $260,000,000 plus (b) the net cash proceeds received by the Borrower from
       the sale of any of its capital stock on or after May 31, 1998 plus (c) an
       amount equal to the aggregate of one-third of Consolidated Net Income
       earned during each of its fiscal years beginning with its fiscal year
       commencing June 1, 1998, said fiscal years to be taken as one accounting
       period minus (d) amounts (not to exceed $30,000,000 in the aggregate for
       the purposes of this covenant) either used for the purchase or retirement
       of the Borrower's capital stock or representing the after tax write-down
       of assets and associated costs on or after May 31, 1998.

       (c)  Section 6.26, Fixed Charge Coverage Ratio shall be amended and read
       as follows:

              6.26. FIXED CHARGE COVERAGE RATIO. The Borrower will maintain a
       Fixed Charge Coverage Ratio of not less than 1.20:1.00 as of the last day
       of each fiscal quarter of the Borrower commencing on the quarter ended
       August 31, 2002 and thereafter. The Fixed Charge Coverage Ratio shall be
       determined based on four of the previous five fiscal quarters of the
       Borrower that occurred immediately prior to the calculation date, at the
       Borrower's option, except that for the quarter ended August 31, 2002, the
       Fixed Charge Coverage Ratio may be determined solely on that quarter's
       results if the result is greater than four of the previous five fiscal
       quarters results.

       (d)  The Revolving Credit Termination Date will be extended to
       February 9, 2004.

       (e)  The definition of Revolving Credit Termination Balance shall be
       amended and read as follows:

              "Revolving Credit Termination Balance" means zero at the close of
              business on the Revolving Credit Termination Date.

       (f)  The definition of Eurodollar Rate shall be amended and read as
       follows:

              "Eurodollar Rate" means, with respect to a Eurodollar Advance for
              the relevant Eurodollar Interest Period, the sum of (i) the
              quotient of (a) the Eurodollar Base Rate applicable to such
              Eurodollar Interest Period, divided by (b) one minus the Reserve
              Requirement (expressed as a decimal) applicable to such Eurodollar
              Interest Period, plus (ii) the Applicable Margin. As used in this
              definition, "Applicable Margin" means (x) when the Borrower has an
              Investment Grade Rating, 1.25% at all times when the Obligations
              are less than or equal to 60% of the Aggregate Commitment, and
              2.00% at all times when the Obligations exceed 60% of the
              Aggregate Commitment, and (y) when the Borrower does not have an
              Investment Grade Rating, 1.525% at all times when the Obligations
              are less than

                                        2


              or equal to 60% of the Aggregate Commitment, and 2.275% at all
              times when the Obligations exceed 60% of the Aggregate Commitment.
              The Eurodollar Rate shall be rounded to the next higher multiple
              of 1/16 of 1% if the rate is not such a multiple.

       (g)  The definition of Facility Termination Date shall be amended and
       read as follows:

              "Facility Termination Date" means the Revolving Credit Termination
              Date.

       (h)  The definition of Aggregate Commitment shall be amended and read as
       follows:

              "Aggregate Commitment" means (i) $40,000,000 through the end of
       business on June 29, 2002, (ii) $35,000,000 from June 30, 2002 through
       the end of business on December 30, 2002, (iii) $30,000,000 from December
       31, 2002 through the end of business on June 29, 2003, (iv) $25,000,000
       from June 30, 2003 through the end of business on December 30, 2003, and
       (v) $20,000,000 thereafter; provided, however, that in the event the
       Borrower's total aggregate committed credit facilities from all lenders
       (including the Lenders) exceeds $125 million, the Aggregate Commitment
       will be reduced such that the Borrower's total aggregate committed credit
       facilities from all lenders (including the Lenders) shall not exceed $125
       million.

       (i)  Section 2.6 shall be amended and read as follows:

              2.6. RATABLE LOANS. Each Advance hereunder shall consist of Loans
       from the several Lenders ratably in proportion to the ratio that their
       respective Commitments bear to the Aggregate Commitment. In the event the
       Borrower desires an advance that brings the aggregate principal Dollar
       Amount of all Advances then outstanding in excess of $5 million at any
       time after November 30, 2001, the Advance hereunder related to such
       desired amount shall be in proportion to the ratio that the Aggregate
       Commitment bears to the total aggregate commitments (including the
       Aggregate Commitment) from all lenders providing Borrower an unsecured
       committed credit facility equal to or greater than $20 million (but in
       all cases including the unsecured committed amount provided under the
       Bank of America Agreement, and the LaSalle Agreement), and Borrower shall
       obtain pro-rata borrowings from such other lenders to obtain the total
       desired advance.

       (j)  Insert a new definition to read as follows:

              "LaSalle Agreement" means the Revolving Loan Agreement dated as of
       April 11, 2001 between the Borrower and LaSalle Bank National
       Association, as the same may from time to time be amended, supplemented
       or otherwise modified, and including any replacement unsecured credit
       facility between the Borrower and LaSalle Bank National Association.

                                        3


       (k)  Insert a Section 9.16 to read as follows:

              9.16. MOST FAVORED PRICING/COVENANT PROVISION. The Borrower
       agrees that the Facility Fee, interest rates, and covenants hereunder
       shall be automatically modified to reflect any similar facility fee,
       interest rate or covenant set forth in the Bank of America Agreement, the
       LaSalle Agreement or any other unsecured credit facility entered into
       with another lender, but only to the extent that said fee or interest
       rate is higher or said covenant is more restrictive than as set forth in
       this Agreement.

2.   REPRESENTATIONS AND WARRANTIES. In order to induce the Agent and the
     Lenders to enter into this Amendment, AAR hereby represents and warrants to
     the Agent and the Lenders as of the date of this Amendment that:

       (a) There exists no Default or Unmatured Default and the execution of
       this Amendment shall not create a Default or Unmatured Default.

       (b) The representations and warranties contained in Article V of the
       Credit Agreement are true and correct as of the date of this Amendment.

4.   LEGAL EXPENSES. AAR agrees to reimburse the Agent for reasonable legal fees
and expenses incurred by attorneys for the Agent (who may be employees of the
Agent) in connection with the preparation, negotiation and consummation of this
Amendment and the transactions contemplated herein.

5.   RATIFICATION OF CREDIT AGREEMENT. Except as specifically provided herein,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and the Credit Agreement as amended hereby is agreed to,
ratified and confirmed by AAR, the Agent and the Lenders in all respects.

6.   MISCELLANEOUS.

       (a) This Amendment may be executed in counterparts and by the different
       parties hereto on separate counterparts each of which, when so executed
       and delivered, shall be deemed an original, and all of which taken
       together shall constitute one and the same agreement.

       (b) This Amendment shall be effective as of the date first above written;
       provided, that, the Agent has received executed counterparts of this
       Amendment from AAR, the Agent and the Lenders.

IN WITNESS WHEREOF, the parties have executed and delivered this Amendment to
the Credit Agreement as of the date first written above.

                                        4


AAR CORP.

By: /s/ Timothy J. Romenesko                                              [SEAL]
   ---------------------------
Name: Timothy J. Romenesko
Title:  Vice President

BANK ONE, NA

By: /s/ Thomas T. Bower
   --------------------------
Name:  THOMAS T. BOWER
     ------------------------
Title: Senior Vice President
      -----------------------

                                        5

EX-4.9

                                                                     EXHIBIT 4.9

                 FIRST AMENDMENT TO THE REVOLVING LOAN AGREEMENT

     THIS FIRST AMENDMENT TO THE REVOLVING LOAN AGREEMENT dated as of April 11,
2001 (the "Credit Agreement") is made as of the 30th day of November, 2001,
between AAR CORP. ("AAR"), and LASALLE BANK NATIONAL ASSOCIATION, a national
banking association (the "Bank").

     WHEREAS, AAR and the Bank entered into the Credit Agreement dated April 11,
2001.

     WHEREAS, AAR, and the Bank desire to amend the Credit Agreement as set
forth herein.

     NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree that effective as of the date hereof, the Credit Agreement is
amended as follows:

     1.   Section 10.2, Consolidated Tangible Net Worth shall be amended and
read as follows:

          "10.2 CONSOLIDATED TANGIBLE NET WORTH. The Borrower will maintain at
     all times Consolidated Tangible Net Worth in an amount not less than the
     sum of (a) $210,000,000 plus (b) the net cash proceeds received by the
     Borrower from the sale of any of its capital stock on or after May 31, 2000
     plus (c) an amount equal to the aggregate of one-third of Consolidated Net
     Income earned during each of its fiscal years beginning with its fiscal
     year commencing June 1, 2000, said fiscal years to be taken as one
     accounting period."

     2.   The definition of "Facility Fee" shall be amended and read as follows:

          "FACILITY FEE means a facility fee on the Commitment in an amount
     equal to (a) 0.35% per annum, payable quarterly in advance, when the
     Borrower has an Investment Grade Rating or (b) 0.425% per annum, payable
     quarterly in advance, when the Borrower does not have an Investment Grade
     Rating."

     3.   The definition of "Interest Rate" shall be amended and read as
follows:

          "INTEREST RATE shall mean the Borrower's option of,
          (i)  LIBOR for the relevant Interest Period (rounded upward if
               necessary, to the nearest 1/16 of 1.00%) plus (1) when the
               Borrower has an Investment Grade Rating, 1.25% at all times when
               the Obligations are less than or equal to 60% of the Revolving
               Loan Commitment, and 2.00% at all times when the Obligations
               exceed 60% of the Revolving Loan Commitment; and (2) when the
               Borrower does not have an Investment Grade Rating, 1.525% at all
               times when the Obligations are less than or equal to 60% of the
               Revolving Loan Commitment, and 2.275% at all times



               when the Obligations exceed 60% of the Revolving Loan Commitment.
               The LIBOR Rate shall be fixed for each Interest Period; or

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

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

     4.   The definition of "Maturity Date" shall be amended and read as
          follows:

          "MATURITY DATE shall mean April 10, 2003."

     5.   REPRESENTATIONS AND WARRANTIES.

          5.1. AUTHORIZATION. AAR is duly authorized to execute and deliver this
     First Amendment and is and will continue to be duly authorized to borrow
     monies under the Credit Agreement, as amended hereby, and to perform its
     obligations under the Credit Agreement, as amended hereby.

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

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

          5.4. COMPLIANCE WITH CREDIT AGREEMENT. The representation and
     warranties set forth in Section 7 of the Credit Agreement, as amended
     hereby, are true and correct with the same effect as if such
     representations and warranties had been made on the date hereof, with the
     exception that all references to the financial statements shall mean the
     financial statements most recently delivered to the Bank and except for
     such changes as are specifically permitted under the Credit Agreement. In
     addition, AAR has complied with and is in compliance with all of the
     covenants set forth in the Credit Agreement, as amended hereby.

          5.5. NO EVENT OF DEFAULT. As of the date hereof, no Event of Default
     under Section 11 of the Credit Agreement, as amended hereby, or event or
     condition which, with the giving of notice or the passage of time, or both,
     would constitute an Event of Default, has occurred or is continuing.

                                        2


     6.   Except as specifically amended hereby, the Credit Agreement is and
shall remain in full force and effect.

     IN WITNESS WHEREOF, the parties have executed and delivered this amendment
to the Credit Agreement as of the date first written above.


                                                 AAR CORP.


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


                                                 LASALLE BANK NATIONAL
                                                  ASSOCIATION


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

                                        3


                  SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT

     This SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of April 22,
2002 (the "Second Amendment"), is entered into by and between AAR CORP., a
Delaware corporation (the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, a
national banking association (the "Bank").

                                    RECITALS:

     A.   The Borrower and the Bank entered into that certain Revolving Loan
Agreement dated as of April 11, 2001, as modified and amended by that certain
First Amendment to Revolving Loan Agreement dated November 30, 2001
(collectively, the "Loan Agreement").

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

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

                                   AGREEMENTS:

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

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

3.   AMENDMENTS TO THE LOAN AGREEMENT.

     3.1. DEFINITIONS. The following new definitions are hereby added to Section
1.1 of the Loan Agreement in their respective alphabetical order:

          "LETTER OF CREDIT" and "LETTERS OF CREDIT" shall mean, respectively, a
     letter of credit and all such letters of credit issued by the Bank, in its
     sole discretion, upon the execution and delivery by the Borrower and the
     acceptance by the Bank of a Master Letter of Credit Agreement and an
     application for Letter of Credit, as set forth in SECTION 2(b) of this
     Agreement.

          "LETTER OF CREDIT MAXIMUM OBLIGATION" shall mean Five Million Dollars
     ($5,000,000).

          "LETTER OF CREDIT OBLIGATIONS" shall mean, at any time, an amount
     equal to the aggregate of the original face amounts of all Letters of
     Credit minus the sum of (i) the amount of any reductions in the original
     face amount of any Letter of



     Credit which did not result from a draw thereunder, (ii) the amount of any
     payments made by the Bank with respect to any draws made under a Letter of
     Credit for which the Borrower has reimbursed the Bank, (iii) the amount of
     any payments made by the Bank with respect to any draws made under a Letter
     of Credit which have been converted to a Revolving Loan as set forth in
     SECTION 2.6, and (iv) the portion of any issued but expired Letter of
     Credit which has not been drawn by the beneficiary thereunder. For purposes
     of determining the outstanding Letter of Credit Obligations at any time,
     the Bank's acceptance of a draft drawn on the Bank pursuant to a Letter of
     Credit shall constitute a draw on the applicable Letter of Credit at the
     time of such acceptance.

          "REVOLVING LOAN AVAILABILITY" shall mean at any time the Revolving
     Loan Commitment LESS the Letter of Credit Obligations.

     3.2. LOANS. The definition of "LOANS" and "REVOLVING LOANS" in SECTION 1.1
of the Loan Agreement are hereby deleted in their entirety and the following is
inserted in lieu thereof:

          "LOANS" shall mean, collectively, all Revolving Loans (whether Prime
     Loans or LIBOR Loans) made by the Bank to the Borrower and all Letter of
     Credit Obligations, under and pursuant to this Agreement.

          "REVOLVING LOAN" or "REVOLVING LOANS" shall mean, respectively, each
     direct advance and the aggregate advances or Letters of Credit outstanding
     as set forth in Section 2.1 and 2.6 of this Agreement.

     3.3. LETTERS OF CREDIT. The following new SECTION 2.6 entitled "Letters of
Credit" is hereby added to the Loan Agreement as follows:

          "2.6 LETTERS OF CREDIT. Subject to the terms and conditions of this
     Agreement and upon the execution by the Borrower and the Bank of a Master
     Letter of Credit Agreement and the execution and delivery by the Borrower,
     and the acceptance by the Bank, in its sole and absolute discretion, of an
     application for letter of credit, and the payment by the Borrower of the
     Bank's fees charged in connection therewith, the Bank agrees to issue for
     the account of the Borrower out of the Revolving Loan Availability, such
     Letters of Credit in the standard form of the Bank and otherwise in form
     and substance acceptable to the Bank, from time to time during the term of
     this Agreement, provided that the Letter of Credit Obligations may not at
     any time exceed the Letter of Credit Maximum Obligation and provided,
     further, that no Letter of Credit shall have an expiration date later than
     the Revolving Loan Maturity Date. The amount of any payments made by the
     Bank with respect to draws made by a beneficiary under a Letter of Credit
     for which the Borrower has failed to reimburse the Bank upon the earlier of
     (i) the Bank's demand for repayment, or (ii) five (5) days from the date of
     such payment to such beneficiary by the Bank, shall be deemed to have been
     converted to a Revolving Loan as of the date such payment was made by the
     Bank to such beneficiary. Upon the occurrence of an Event of a Default and
     at the option of the

                                        2


     Bank, all Letter of Credit Obligations shall be converted to Revolving
     Loans at the Prime Rate, all without demand, presentment, protest or notice
     of any kind, all of which are hereby waived by the Borrower. In the event
     of a conflict between the Master Letter of Credit Agreement and the Loan
     Agreement, the Loan Agreement shall govern.

          In addition to all other applicable fees, charges and/or interest
     payable by the Borrower pursuant to the Master Letter of Credit Agreement
     or otherwise payable in accordance with the Bank's standard letter of
     credit fee schedule, all standby Letters of Credit issued under and
     pursuant to this Agreement shall bear an annual fee calculated as follows:



                                                                       Credit Rating (S & P or Moodys)
                                                                   --------------------------------------
                                                                      Investment         Non-investment
                                                                         grade               grade
                                                                   ----------------   -------------------
                                                                                  
     Per Annum fee           Loans LESS THAN OR EQUAL TO 60%
                             of Revolving Loan Commitment               125 bp             152.5 bp
                             Loans GREATER THAN 60% of Revolving
                             Loan Commitment                            200 bp             227.5 bp


     of the face amount of such standby Letter of Credit, payable by the
     Borrower on or before the issuance of such Letter of Credit by the Bank and
     annually thereafter on the same date unless and until (i) such Letter of
     Credit has expired or has been returned to the Bank, or (ii) the Bank has
     paid the beneficiary thereunder the full face amount of such Letter of
     Credit. All Letters of Credit other than standby Letters of Credit shall
     bear such fees, costs and interest as charged by the Bank and shall contain
     such other terms as set forth in the Master Letter of Credit Agreement and
     the Bank's standard letter of credit fee schedule."

     3.4. REVOLVING NOTE. SECTION 4 of the Loan Agreement entitled "NOTE
EVIDENCING LOANS" is hereby deleted in its entirety and the following is
inserted in lieu thereof:

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

                                        3


     obligations of the Borrower under the Revolving Note to repay the principal
     amount of the Revolving Loans, together with all interest accruing
     thereon."

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

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

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

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

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

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

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

                                        4


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

     5.1. SECOND AMENDMENT. This Second Amendment executed by the Borrower and
the Bank.

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

6.   GENERAL.

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

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

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

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

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

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

                                                              AAR CORP.

                                        5


                                                   By:  /s/ Timothy J. Romenesko
                                                        ------------------------
                                                   Its: Vice President
                                                        ------------------------


                                                   LASALLE BANK NATIONAL
                                                    ASSOCIATION


                                                   By:  /s/ Scott M. Carbon
                                                        ------------------------
                                                   Its: Assistant Vice President
                                                        ------------------------

                                        6


                   THIRD AMENDMENT TO REVOLVING LOAN AGREEMENT

     This THIRD AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of June 1, 2002
(the "Third Amendment"), is entered into by and between AAR CORP., a Delaware
corporation (the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, a national
banking association (the "Bank").

                                    RECITALS:

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

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

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

                                   AGREEMENTS:

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

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

3.   AMENDMENTS TO THE LOAN AGREEMENT.

     3.1. LETTERS OF CREDIT. The first paragraph of Section 2.6 of the Loan
Agreement is hereby amended to add the following after the phrase "REVOLVING
LOAN MATURITY DATE":

          "...; provided, however, that up to Two Million Dollars
          ($2,000,000.00) of letters of credit issued under the Maximum Letter
          of Credit Obligations may expire no later than October 10, 2003."

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

     4.1. ORGANIZATION. The Borrower is a corporation duly organized, existing
and in good standing under the laws of the State of Delaware, with full and
adequate corporate power to carry on and conduct its business as presently
conducted. The Borrower is duly licensed or qualified in all foreign
jurisdictions wherein failure to qualify would have a material adverse effect.
The



Articles of Incorporation and Bylaws, Borrowing Resolutions and Incumbency
Certificate of the Borrower have not been changed or amended since the most
recent date that certified copies thereof were delivered to the Bank. The exact
legal name of the Borrower is as set forth in the preamble of this Third
Amendment, and the Borrower currently does not conduct, nor has it during the
last five (5) years conducted, business under any other name or trade name. The
Borrower will not change its name, its organizational identification number, if
it has one, its type of organization, its jurisdiction of organization or other
legal structure.

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

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

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

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

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

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

     5.1. THIRD AMENDMENT. This Third Amendment executed by the Borrower and the
Bank.

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

                                        2


6.   GENERAL.

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

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

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

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

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

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

AAR CORP.                                          LASALLE BANK NATIONAL
                                                     ASSOCIATION


By:  /s/ Timothy J. Romenesko                      By:  /s/ Scott M. Carbon
     ----------------------------                       ------------------------
Its: Treasurer                                     Its: Assistant Vice President
     ----------------------------                       ------------------------

                                        3

EX-4.11

                                                                    EXHIBIT 4.11

                            REVOLVING LOAN AGREEMENT

     This REVOLVING LOAN AGREEMENT dated as of October 3, 2001 (the
"Agreement"), is entered into by and between AAR CORP., a Delaware corporation
(the "Borrower"), whose address is 1100 North Wood Dale Road, Wood Dale,
Illinois 60191 and U.S. Bank National Association doing business as Firstar Bank
National Association (the "Bank"), whose address is 777 East Wisconsin Avenue,
MK-FC-GLCB, Milwaukee, Wisconsin 53202.

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

1.   DEFINITIONS.

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

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

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

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

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

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

                                        1


            "BORROWER'S UNSECURED LENDERS" shall mean any lender extending
     credit to Borrower on an unsecured basis under similar revolving loan
     facilities, including, but not limited to, Bank One, Bank of America, N.A.
     The Northern Trust Company and any other lenders who may replace these
     lenders or be added to these facilities from time to time.

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

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

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

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

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

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

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

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

                                        2


            "CONSOLIDATED FIXED CHARGES" means, without duplication, for any
     period, for the Borrower and its Subsidiaries for such period, the sum of
     (i) current maturities for such period, (ii) interest expense on
     indebtedness (excluding capitalized leases) for such period, PLUS (iii)
     total rental expense under all leases other than capitalized leases, and
     PLUS (iv) imputed interest expense under capitalized leases.

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

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

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

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

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

            "CONSOLIDATED TANGIBLE NET WORTH" means, as of any date of
     determination, the sum of (a) Consolidated Net Worth, less consolidated
     Intangible Assets of the Borrower and its Subsidiaries, plus (b)
     Subordinated Debt. For purposes of this definition "Intangible Assets"
     means the amount (to the extent reflected in determining such Consolidated
     Net Worth ) of (i) all write-ups (other than write-ups resulting from
     foreign currency translations and write-ups of assets of a going concern
     business made within twelve months after the acquisition of such business)
     in the book value of any asset

                                        3


     owned by the Borrower or a Consolidated Subsidiary subsequent to May 31,
     2000, and (ii) all unamortized debt discount and expense, unamortized
     deferred charges, goodwill, patents, trademarks, service marks, trade
     names, copyrights, organization or development expenses, costs in excess of
     underlying assets of acquired companies, covenants to not compete, and
     other intangible items, for purposes of this clause (ii), in each case, to
     the extent such items are disclosed as separate line items on the
     Borrower's financial statements required under Section 9.6.

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

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

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

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

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

            "ENVIRONMENTAL LAWS" shall mean all federal, state, district, local
     and foreign laws, rules, regulations, ordinances, and consent decrees
     relating to health, safety, hazardous substances, pollution and
     environmental matters, as now or at any time hereafter in effect,
     applicable to the Borrower's business or facilities owned or operated

                                        4


     by the Borrower, including laws relating to emissions, discharges, releases
     or threatened releases of pollutants, contamination, chemicals, or
     hazardous, toxic or dangerous substances, materials or wastes in the
     environment (including, without limitation, ambient air, surface water,
     land surface or subsurface strata) or otherwise relating to the generation,
     manufacture, processing, distribution, use, treatment, storage, disposal,
     transport or handling of Hazardous Materials.

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

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

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

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

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

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

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

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

            "INDEBTEDNESS" shall mean as determined in accordance with GAAP (i)
     obligations for borrowed money other than those incurred on a non-recourse
     basis, (ii)

                                        5


     obligations representing the deferred purchase price of property or
     services (other than accounts payable and other accrued liabilities arising
     in the ordinary course of such Person's business payable on terms customary
     in the trade), (iii) obligations, whether or not assumed, secured by Liens
     (other than Liens permitted pursuant to any of clauses (a), (d), (e), (f),
     (h) and (k) of Section 8.6) or payable out of the proceeds or production
     from property now or hereafter owned or acquired (iv) obligations which are
     evidenced by notes, acceptances, or other instruments, (v) Capitalized
     Lease Obligations and (vi) net liabilities under currency or interest rate
     swap, exchange or cap agreements; provided, however, that Indebtedness
     shall not include obligations in connection with operating leases and
     leveraged leases.

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

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

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

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

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

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

                                        6


            "INVESTMENT" of a person means any loan, advance (other than
     commission, travel and similar advances to its officers, employees, agents
     and representatives made in the ordinary course of business), extension of
     credit (other than accounts receivable arising in the ordinary course of
     business), deposit account or contribution of capital by such person to any
     other person or any investment in, or purchase or other acquisition of, the
     stock, partnership interests, notes, debentures or other securities of any
     other person made by such person.

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

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

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

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

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

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

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

                                        7


            "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
     business, properties, financial condition, or results of operations on the
     Borrower and its Subsidiaries taken as a whole, (ii) the ability of the
     Borrower to perform its Obligations under this Agreement, or (iii) the
     validity or enforceability of this Agreement or the rights or remedies of
     the Bank thereunder.

            "MATURITY DATE" shall mean October 2, 2002.

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

            "NOTE" shall mean the Revolving Note.

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

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

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

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

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

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

            "REPORTABLE EVENT" means a reportable event as defined in Section
     4043 of ERISA and the regulations issued under such section, with respect
     to a Plan, excluding, however, such events as to which the PBGC by
     regulation waived the requirement of

                                        8


     Section 4043(a) of ERISA that it be notified within 30 days of the
     occurrence of such event, provide, however, that a failure to meet the
     minimum funding standard of Section 412 of the Internal Revenue Code and of
     Section 302 of ERISA shall be a Reportable Event regardless of the issuance
     of any such waiver of the notice requirement in accordance with either
     Section 4043(a) of ERISA or Section 412(d) of the Internal Revenue Code.

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

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

            "REVOLVING LOAN COMMITMENT" shall mean Ten Million and 00/100
     Dollars ($10,000,000.00).

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

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

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

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

                                        9


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

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

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

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

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

                                       10


shall be a reference to such Section of this Agreement unless
otherwise stated. To the extent any of the provisions of the other Loan
Documents are inconsistent with the terms of this Loan Agreement, the provisions
of this Loan Agreement shall govern.

2.   COMMITMENT OF THE BANK.

     2.1    REVOLVING LOANS.

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

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

            (c)  REVOLVING LOAN PRINCIPAL REPAYMENTS.

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

                                       11


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

     2.2    ADDITIONAL LIBOR LOAN PROVISIONS.

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

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

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

            (d)  LIBOR LOAN INDEMNITY. If any Regulatory Change shall (a)
     impose, modify or deem applicable any assessment, reserve, special deposit
     or similar requirement against assets held by, or deposits in or for the
     account of or loans by, or any other acquisition of funds or disbursements
     by, the Bank; (b) subject the Bank or any LIBOR Loan to any tax, duty,
     charge, stamp tax or fee or change the basis of taxation of payments to the
     Bank of principal or interest due from the Borrower to the Bank hereunder
     (other than a change in the taxation of the overall net income of the
     Bank); or

                                       12


     (c) impose on the Bank any other condition regarding such LIBOR Loan or the
     Bank's funding thereof, and the Bank shall reasonably determine (which
     determination shall be conclusive, absent manifest error) that the result
     of the foregoing is to increase the cost to the Bank of making or
     maintaining such LIBOR Loan or to reduce the amount of principal or
     interest received by the Bank hereunder, then the Borrower shall pay to the
     Bank, within 15 days of demand by the Bank, such additional amounts as the
     Bank shall, from time to time, determine are sufficient to compensate and
     indemnify the Bank for that portion of such increased cost or reduced
     amount attributable to making, funding and maintaining such LIBOR Loan.

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

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

3.   CONDITIONS OF BORROWING.

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

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

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

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

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

                                       13


            (d)  An incumbency certificate dated the date hereof, executed by
     the secretary or assistant secretary of the Borrower, which shall identify
     by name and title and bear the signature of the officers of the Borrower
     authorized to sign the Loan Documents and to make borrowings hereunder,
     upon which certificate the Bank shall be entitled to rely until informed of
     any change in writing by the Borrower.

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

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

            (g)  A certified copy of articles of incorporation.

            (h)  A certified copy of a good standing certificate for the
     Borrower, and the following Subsidiaries: AAR Manufacturing, Inc., AAR
     Parts Trading, Inc., and AAR Distribution, Inc.

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

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

     3.3    ADVERSE EFFECT.  There exists no Material Adverse Effect.

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

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

4.   NOTES EVIDENCING LOANS.

     The Revolving Loans shall be evidenced by a single Revolving Note (together
with any and all renewal, extension, modification or replacement notes executed
by the Borrower and delivered to the Bank and given in substitution therefor,
the "Revolving Note") dated as of the date hereof in the form of EXHIBIT "A"
attached hereto, duly executed by the Borrower and payable to the order of the
Bank. At the time of the initial disbursement of a Revolving Loan and at each
time an additional Revolving Loan shall be requested hereunder or a repayment
made in whole or in part thereon, an appropriate notation thereof shall be made
on the books and records of the Bank. All amounts recorded shall be, absent
demonstrable error, conclusive and

                                       14


binding evidence of (i) the principal amount of the Revolving Loans advanced
hereunder (ii) any unpaid interest owing on the Revolving Loans, and (iii) all
amounts repaid on the Revolving Loans. The failure to record any such amount or
any error in recording such amounts shall not, however, limit or otherwise
affect the obligations of the Borrower under the Revolving Note to repay the
principal amount of the Revolving Loans, together with all interest accruing
thereon.

5.   MANNER OF BORROWING.

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

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

6.   INTENTIONALLY OMITTED.

7.   REPRESENTATIONS AND WARRANTIES.

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

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

                                       15


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

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

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

     7.4    ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES. Neither the Borrower
nor any Subsidiary has received any notice to the effect that its operations are
not in material compliance with any applicable Environmental Laws or the subject
of any federal or state investigation evaluating whether any remedial action is
needed to respond to a release of Hazardous Materials into the environment which
non-compliance or remedial action could reasonably be expected to have a
Material Adverse Effect.

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

                                       16


     7.6    FINANCIAL STATEMENTS. All financial statements submitted to the Bank
have been prepared in accordance with GAAP on a basis, except as otherwise noted
therein, consistent with the previous fiscal year and fairly present the
financial condition of the Borrower and the consolidated results of the
operations for the Borrower and its Subsidiaries as of such date and for the
periods indicated. Since the May 31, 2001 financial statement submitted by the
Borrower to the Bank, there has been no Material Adverse Effect in the financial
condition or in the assets or liabilities of the Borrower and its Subsidiaries
taken as a whole.

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

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

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

     7.10   ADVERSE CIRCUMSTANCES. There is no Material Averse Effect.

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

     7.12   INTENTIONALLY OMITTED.

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

                                       17


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

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

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

8.   NEGATIVE COVENANTS.

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

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

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

            (c)  Any Subsidiary may declare and pay dividends to the Borrower.

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

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

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

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

                                       18


     8.3    SALE OF ASSETS. The Borrower will not, nor will it permit any
Subsidiary to, sell, lease, transfer, assign or otherwise dispose of (including,
for the avoidance of doubt, in connection with a sale leaseback transaction),
any of its assets (including, for the avoidance of doubt, the capital stock of
Subsidiaries, but excluding (i) inventory sold in the ordinary course of the
Borrower's or any Subsidiary's business, (ii) property formerly used in the
Borrower's or any Subsidiary's business which is worn out or obsolete, (iii)
assets of any Domestic Subsidiary transferred to the Borrower or to another
Domestic Subsidiary which is a Wholly-Owned Subsidiary, (iv) assets of any
Foreign Subsidiary transferred to the Borrower or to another Subsidiary which is
a Wholly-Owned Subsidiary, (v) assets permitted to be sold or otherwise
transferred pursuant to Section 8.4 and (vi) promissory note ("Payment Note")
received as partial or full payment for assets sold if, after giving effect
thereto, the sum of all such assets transferred, assigned or otherwise disposed
of during the twelve-month period ending with (and including) the month of such
disposition either (a) represents more than 10% of Consolidated Assets
determined as of the date of (and after giving effect to ) such disposition or
(b) were responsible for more than 10% of the consolidated net sales or of the
consolidated net income of the Borrower and its Subsidiaries during such
twelve-month period.

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

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

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

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

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

                                       19


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

     8.5    INVESTMENTS AND ACQUISITIONS. The Borrower will not, nor will it
permit any Subsidiary to, make or suffer to exist any Investments (including
without limitation, loans and advances to, and other Investments in,
Subsidiaries), or commitments therefor, or to create any Subsidiary or to become
or remain a partner in any partnership or joint venture, or to make any
Acquisition of any Person, except:

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

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

            (c)  Demand deposit accounts maintained in the ordinary course of
     business.

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

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

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

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

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

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

                                       20


            (j)  Investments evidenced by Payment Notes.

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

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

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

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

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

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

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

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

            (e)  Liens incidental to the conduct of business or the ownership of
     properties and assets, including, those imposed by law, such as carrier's,
     warehousemen's and

                                       21


     mechanics' liens and other similar liens arising in the ordinary course of
     business which secure payment of obligations not more than 60 days past due
     or which are being contested in good faith by appropriate proceedings and
     for which adequate reserves shall have been set aside on its books in
     accordance with GAAP, or other Liens incurred in the ordinary course of
     business and not in connection with borrowed money.

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

            (g)  Liens existing on the date hereof.

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

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

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

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

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

                                       22


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

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

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

9.   AFFIRMATIVE COVENANTS.

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

     9.2    CONDUCT OF BUSINESS. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted and to do all things necessary to remain duly

                                       23


incorporated, validly existing and in good standing as a domestic or foreign
corporation, as the case may be, in its jurisdiction of incorporation and main
all requisite authority to conduct its business in each jurisdiction in which
its business is conducted; PROVIDED, that nothing contained in this Section 9.2
shall prohibit (a) any Subsidiary from entering into a merger or consolidation
otherwise permitted by SECTION 8.2 or (b) the liquidation of any Subsidiary
substantially all of whose assets have been transferred to the Borrower or
another Subsidiary in compliance with SECTION 8.3.

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

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

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

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

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

                                       24


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

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

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

            (e)  Within 270 days after the close of each fiscal year, a
     statement of the Unfunded Liabilities of each Single Employer Plan,
     certified as correct by an actuary enrolled under ERISA, except that the
     Borrower shall not be required to deliver such statement for any such
     fiscal year to the extent that such information is specifically set forth
     in the audit report for such fiscal year delivered to the Lender pursuant
     to clause (a) of this Section 9.6.

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

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

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

                                       25


     9.8    COVENANT/QUARTER COMPLIANCE REPORT. The Borrower shall, within 45
days after the end of each fiscal quarter commencing with the fiscal quarter
ending November 30, 2001, deliver to the Bank a computation in such detail as
the Bank shall specify, showing compliance by the Borrower with the financial
covenants set forth in Section 10, and certified to as accurate by the Borrower
by execution and delivery to the Bank of a Compliance Certificate satisfactory
to the Bank.

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

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

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

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

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

10.  FINANCIAL COVENANTS.

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

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

                                       26


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

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

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

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

11.  EVENTS OF DEFAULT.

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

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

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

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

                                       27


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

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

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

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

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

     11.9   ASSIGNMENT FOR CREDITORS. Any Foreign Subsidiary shall have taken or
instituted or permitted to be taken or instituted any action or proceeding, or
any such action or proceeding is instituted against such Foreign Subsidiary,
whereby a substantial amount of its property shall

                                       28


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

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

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

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

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

                                       29


12.  REMEDIES.

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

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

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

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

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

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

            (d)  make an election with respect to the Accounts or any other from
     time to time collateral for any of the Obligations under Section 1111 of
     the Code or take action under Section 364 or any other section of the Code;
     provided, however, that any such

                                       30


     action of the Bank as set forth herein shall not, in any manner whatsoever,
     impair or affect the liability of the Borrower hereunder, nor prejudice,
     waive, nor be construed to impair, affect, prejudice or waive the Bank's
     rights and remedies at law, in equity or by statute, nor release,
     discharge, nor be construed to release or discharge, the Borrower, any
     guarantor or other person, firm, corporation or other entity liable to the
     Bank for the Obligations; and

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

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

     12.3   INTENTIONALLY OMITTED.

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

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

13   MISCELLANEOUS.

                                       31


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

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

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

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

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

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

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

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

                                       32


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

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

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

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

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

                                       33


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

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

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

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

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

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

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

                                       34


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

            If to the Bank:           Firstar Bank National Association
                                      777 East Wisconsin Avenue
                                      MK-FC-GLCB
                                      Milwaukee, Wisconsin 53202
                                      Attention: Dennis Krakau

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

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

                                       35


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

                                               AAR CORP.


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


                                               Agreed and accepted:

                                               Firstar Bank National Association


                                               By:    /s/ Matt Schulz
                                                      --------------------------
                                               Name:  Matt Schulz
                                               Title: Assistant Vice President

                                       36


                                   EXHIBIT "A"

                                 REVOLVING NOTE

                                                            No._________________
$10,000,000.00                                            Date:  October 3, 2001
Chicago, Illinois                                     Due Date:  October 2, 2002

     FOR VALUE RECEIVED, AAR CORP., a Delaware corporation (the "Borrower"),
whose address is 1100 North Wood Dale Road, Wood Dale, Illinois 60191, promises
to pay to the order of Firstar Bank National Association (hereinafter, together
with any holder hereof, called the "Bank"), at its office at 777 East Wisconsin
Avenue, MK-FC-GLCB, Milwaukee, Wisconsin 53202, on or before October 2, 2002
(the "Maturity Date"), the lesser of (i) the principal sum of TEN MILLION and
00/100 DOLLARS ($10,000,000.00), or (ii) the aggregate principal amount of all
Loans outstanding under and pursuant to that certain Revolving Loan Agreement
dated as of October 3, 2001 between the Borrower and the Bank, as amended from
time to time (as amended, supplemented or modified from time to time, the "Loan
Agreement"), and made available by the Bank to the Borrower at the maturity or
maturities and in the amount or amounts stated on the records of the Bank,
together with interest (computed on the actual number of days elapsed on the
basis of a 360 day year) as herein after provided on the aggregate principal
amount of all Revolving Loans outstanding from time to time hereunder from the
date hereof through and including the Maturity Date. Capitalized words and
phrases not otherwise defined herein shall have the meanings assigned thereto in
the Loan Agreement.

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

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

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

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

                                       37


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

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

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

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

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

                                       38


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

                                          AAR CORP.


                                          By:
                                                --------------------------------
                                          Its:  Vice President
                                          Attention:  Timothy J. Romenesko
                                                      1100 North Wood Dale Road
                                                      Wood Dale, Illinois 60191

                                       39


                                   EXHIBIT "B"

                                BORROWING NOTICE


                                                          ________________, 2001

To:  Firstar Bank National Association

Re:  Borrowing Notice


Ladies and Gentlemen:

     We make reference to that certain Revolving Loan Agreement dated as of
October 3, 2001, between AAR CORP. and Firstar Bank National Association, as it
may from time to time be amended, modified, renewed or extended (the "Loan
Agreement"). All capitalized terms used herein shall have the meanings
attributed to them in the Loan Agreement.

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

Borrowing Date:   _______________, 2001(1)



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




                                          Sincerely yours,

                                          AAR CORP.


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

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

                                       40


                               FIRST AMENDMENT TO
                          THE REVOLVING LOAN AGREEMENT


          THIS FIRST AMENDMENT TO THE REVOLVING LOAN AGREEMENT DATED
          AS OF OCTOBER 3, 2001 (THE "CREDIT AGREEMENT") is made as of
          the 30th day of November, 2001, between AAR Corp. ("AAR"),
          and U.S. Bank National Association doing business as Firstar
          Bank National Association (the "Bank").

WHEREAS, AAR and the Bank entered into the Credit Agreement dated October 3,
2001.

WHEREAS, AAR, and the Bank desire to amend the Credit Agreement as set forth
herein.

NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties agree that effective as of the date hereof, the Credit Agreement is
amended as follows:

1.   Section 10.2, Consolidated Tangible Net Worth shall be amended and read as
     follows:

          10.2 CONSOLIDATED TANGIBLE NET WORTH. The Borrower will
          maintain at all times Consolidated Tangible Net Worth in an
          amount not less than the sum of (a) $240,000,000 plus (b)
          the net cash proceeds received by the Borrower from the sale
          of any of its capital stock on or after May 31, 2000 plus
          (c) an amount equal to the aggregate of one-third of
          Consolidated Net Income earned during each of its fiscal
          years beginning with its fiscal year commencing June 1,
          2000, said fiscal years to be taken as one accounting period
          minus (d) amounts (not to exceed $30,000,000 in the
          aggregate for the purposes of this covenant) either used for
          the purchase or retirement of the Borrower's capital stock
          or representing the after tax write-down of assets and
          associated costs on or after May 31, 2000."

2.   The definition of "Interest Rate" shall be amended and read as follows:

          INTEREST RATE  shall mean the Borrower's option of,
          (i)    LIBOR for the relevant Interest Period (rounded upward if
                 necessary, to the nearest 1/16 of 1.00%) plus 1.00% at all
                 times. The LIBOR Rate shall be fixed for each Interest Period;
                 or
          (ii)   the Prime Rate plus zero % at all times when the Borrower has
                 an Investment Grade Rating and 0.50% at all times when the
                 Borrower does not have an Investment Grade Rating.
                 Provided, however, that in no event shall the Interest Rate be
                 less than the highest rate charged at any time by the
                 Borrower's Unsecured Lenders.

                                        1


3.   Except as specifically amended hereby, the Credit Agreement is and shall
     remain in full force and effect.


IN WITNESS WHEREOF, the parties have executed and delivered this amendment to
the Credit Agreement as of the date first written above.


AAR CORP.


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


U.S. BANK NATIONAL ASSOCIATION


By: /s/ Patrick Pfersch
       ------------------------
Name:   Patrick Pfersch
Title: Assistant Vice President

                                        2

EX-10.6

                                                                    EXHIBIT 10.6

                                 AMENDMENT NO. 2
                        TO AAR CORP. AMENDED AND RESTATED
                    SUPPLEMENTAL KEY EMPLOYEE RETIREMENT PLAN

     WHEREAS, the Company amended and restated the AAR CORP. Supplemental Key
Employee Retirement Plan, effective April 11, 2000, as the AAR CORP. Amended and
Restated Supplemental Key Employee Retirement Plan (the "SKERP" or "Plan"); and

     WHEREAS, the Company further amended the Plan on April 10, 2001 (Amendment
No. 1); and

     WHEREAS, the Company now desires to further amend the Plan in certain
respects;

     NOW THEREFORE, the Company hereby amends the Plan as follows, effective as
of October 1, 2001:

     1.   Section 1.17 of the Plan is hereby amended to read as follows:

          1.17  "Qualified Retirement Benefit" means the benefit payable to a
     Participant pursuant to the Qualified Retirement Plan (including any
     increased amounts payable with respect to any calendar year as described in
     Appendix A of the Qualified Retirement Plan) by reason of his termination
     of employment with the Company and all Affiliated Companies for any reason
     other than death; provided, however, that such benefit shall be determined
     in accordance with Section 3.1 or Section 3.2 as applicable.

     2.   Section 1.26 of the Plan is hereby amended to read as follows:

          1.26. "Supplemental Retirement Benefit" means the benefit payable to a
     Participant pursuant to Section 3.1 or 3.2 of the Plan by reason of his
     termination of employment with the Company and all Affiliated Companies for
     any reason other than death, or in connection with the termination of the
     Plan or termination of participation in the Plan.

     3.   Article II of the Plan is hereby amended by adding a new Section 2.3
thereto to read as follows:

          2.3   CESSATION OF PARTICIPATION. Notwithstanding the foregoing
     provisions of Section 2.1 or Section 2.2, effective as of October 1, 2001:

          (a)   No Executive Officer or Key Employee who was not already a
     Participant in the Plan as of October 1, 2001 shall be eligible to
     participate in the



     Plan with respect to the Supplemental Retirement Benefit or Supplemental
     Surviving Spouse Benefit set forth in Section 3.1, 3.2 and 3.3 of the Plan;
     and

          (b)   No Participant who is a Key Employee shall accrue any further
     Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit on
     or after October 1, 2001.

     4.   The last paragraph of Section 3.1 of the Plan is hereby amended to
read as follows:

     For purposes of determining the Supplemental Retirement Benefit described
     above:

          (i)   The amount described in (a) above for any Participant who
     commences participation in the Plan after January 1, 2001 shall be
     multiplied by a fraction, the numerator of which shall be years of Credited
     Service not to exceed 20, and the denominator of which shall be 20,
     determined as of the date of the Participant's termination of employment
     with the Company and all Affiliated Companies.

          (ii)  A Participant's Final Average Earnings described in (a) above
     shall be determined as of October 1, 2001, and shall be adjusted by an
     amount equal to 25% of the percentage increase in the Participant's base
     salary in effect on September 30, 2001 compared to the Participant's base
     salary in effect on the date of the Participant's termination of employment
     for any reason, including Retirement, Disability or death.

          (iii) In determining a Participant's Qualified Retirement Benefit, the
     Participant's Cash Account Balance shall not be credited with any Credits
     for any period of time on or after October 1, 2001, and the participant
     shall be deemed to have received his Cash Account Balance on October 1,
     2001; and in the case of a Participant who is a Grandfathered Participant,
     the Grandfathered Benefit shall be calculated considering the Participant's
     Final Average Earnings, Credited Service (not in excess of 20 years) and
     Social Security offset as of October 1, 2001.

          (iv)  The amounts described in (a) and (b) shall be computed in the
     form of an annuity payable over the Participant's lifetime only.

     5.   Section 3.2 of the Plan is hereby amended to read as follows:

          3.2   KEY EMPLOYEES. Effective as of October 1, 2001, no Participant
     who is a Key Employee of the Company as described in Section 2.2 shall
     accrue any further Supplemental Retirement Benefit. The Supplemental
     Retirement Benefit of a Participant who is such a Key Employee shall be a
     monthly amount equal to the difference between (a) and (b) below:

          (a)   The monthly amount of the Qualified Retirement Benefit accrued
     as of October 1, 2001 to which the Participant would have been entitled
     under the Qualified Retirement Plan without giving effect to the
     limitations imposed by Section 401(a)(17) or any other section of the Code;

                                        2


                                      LESS

          (b)   The monthly amount of the Qualified Retirement Benefit accrued
     as of October 1, 2001 and payable to the Participant under the Qualified
     Retirement Plan at October 1, 2001.

     For purposes of determining the Supplemental Retirement Benefit described
     above:

          (i)   For calculating the Qualified Retirement Benefit under Section
     3.2(a) only, any Key Employee Participant who was over the age of 55 on
     January 1, 2000 shall be deemed a "Grandfathered Participant" as defined
     under the Qualified Retirement Plan.

          (ii)  A Participant's Final Average Earnings shall be determined as of
     October 1, 2001, and shall not be based on or include Compensation earned
     by a Participant after such date.

          (iii) In determining a Participant's Qualified Retirement Benefit, the
     Participant's Cash Account Balance shall not be credited with Pay Credits
     for any period of time on or after October 1, 2001, and in the case of a
     Participant who is a Grandfathered Participant, the Grandfathered Benefit
     shall be calculated considering the Participant's Final Average Earnings,
     Credited Service (not in excess of 20 years) and Social Security offset as
     of October 1, 2001.

          (iv)  The amounts described in (a) and (b) shall be computed in the
     form of an annuity payable over the Participant's lifetime only.

     6.   Section 3.3 of the Plan is hereby amended to add a final sentence to
the end thereof to read as follows:

     Notwithstanding the foregoing provisions of this Section 3.3, no
     Participant who is a Key Employee of the Company as described in Section
     2.2 shall accrue any further Supplemental Surviving Spouse Benefit on or
     after October 1, 2001.

     7.   The second sentence of Section 7.2 of the Plan is hereby amended to
delete the reference to "Sections 3.4 through 3.8" and insert "Sections 3.4 and
3.5" in lieu thereof.

     8.   Article VII of the Plan is hereby amended by adding a new Section 7.4
thereto to read as follows:

          7.4   TERMINATION OF PARTICIPATION. The Company, in its sole
     discretion, shall have the right to terminate the participation in the Plan
     or any portion thereof of any Executive Officer or Key Employee whose
     initial participation in the Plan was designated by the Compensation
     Committee, upon recommendation of management, pursuant to Section 1.6 or
     1.7. Upon such termination of participation, distribution of the
     Supplemental Retirement Benefit, Supplemental Surviving Spouse Benefit, and
     amounts in the Supplemental Salary Deferral Account, Supplemental Company
     Account and Supplemental Profit Sharing

                                        3


     Account, as applicable to such Participant, determined as of the date of
     termination of participation, shall be made to such Participant, his
     Surviving Spouse or beneficiaries either (i) in the manner and at the time
     described in Articles III and IV of the Plan; or (ii) in the sole
     discretion of the Company in a lump sum payment as soon as practicable
     following such termination of participation. No additional Supplemental
     Retirement Benefit or Surviving Spouse Benefit shall be earned by such
     Participant after termination of his participation in the Plan with respect
     to such benefits, and no additional credits of Supplemental Salary Deferral
     Contributions, Supplemental Company Contributions or Supplemental Profit
     Sharing Contributions shall be made to the Accounts of such Participant
     after termination of his participation in the Plan with respect to such
     benefits, but the Company shall continue to credit earnings, gains and
     losses to existing Accounts of such Participant pursuant to Section 4.5
     until the balances of such Accounts have been fully distributed to the
     Participant or his beneficiaries.

     IN WITNESS WHEREOF, this Amendment No. 2 has been executed on this 10th day
of October, 2001.

                                               AAR CORP.


                                               By: /s/ David P. Storch
                                                   -----------------------------
                                                      David P. Storch, President

                                        4

EX-21.1

                                                                    EXHIBIT 21.1

                          SUBSIDIARIES OF AAR CORP.(1)



                                                                                                 STATE OF
                                    NAME OF CORPORATION                                       INCORPORATION

                                                                                           
    AAR Distribution, Inc.(2)...............................................................    Illinois
    AAR Allen Services, Inc.(3).............................................................    Illinois
    AAR Parts and Trading, Inc.(4)..........................................................    Illinois
    AAR Engine Services, Inc.(5)............................................................    Illinois
    AAR Aircraft & Engine Sales & Leasing, Inc..............................................    Illinois
    AAR International, Inc.(6)..............................................................    Illinois
    AAR Manufacturing, Inc.(7)..............................................................    Illinois




- ---------------------

    (1)     Subsidiaries required to be listed pursuant to Regulation S-K
            Item 601(b)(21).

    (2)     Also does business under the names AAR Distribution, AAR
            Expendables, and AAR Defense Systems.

    (3)     Also does business under the names AAR Landing Gear, AAR Component
            Services, and Mars Aircraft Radio.

    (4)     Also does business under the names AAR Aircraft Turbine Center,
            AAR Aircraft Sales and Leasing, AAR Allen Aircraft, and AAR Engine
            Sales & Leasing.

    (5)     Also does business under the name AAR Engine Component Services and
            AAR Energy Services.

    (6)     Also does business under the names AAR Distribution, AAR Aircraft
            Component Services, AAR Engine Group International, and AAR Allen
            Group International.

    (7)     Also does business under the names AAR Cargo Systems, AAR Mobility
            Systems, AAR Composites and AAR Craig Systems.

EX-23.1

                                                                    EXHIBIT 23.1

                               CONSENT OF KPMG LLP

The Board of Directors
AAR CORP.:

We consent to the incorporation by reference in Registration Statements Nos.
33-19767, 333-54178, 333-95433, 333-71067, 333-44693, 333-38671, 33-26783,
33-38042, 33-43839, 33-58456, 333-56023, 33-57753, 333-15327, 333-22175,
333-26093, 333-00205 and 002-002-95635 on Form S-8 and in Registration Statement
No. 333-52853 on Form S-3 of AAR CORP. of our report dated June 26, 2002
relating to the consolidated balance sheets of AAR CORP. and subsidiaries as of
May 31, 2002 and 2001 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended May 31, 2002, which report appears in the May 31, 2002 annual
report on Form 10-K of AAR CORP.

KPMG LLP

Chicago, Illinois
August 26, 2002

EX-99.1

                                                                    EXHIBIT 99.1

                                                                    ATTACHMENT I

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the AAR CORP. (the "Company") Annual Report on Form 10-K
for the period ending May 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, David P. Storch, Chief
Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge:

     1.   The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended; and

     2.   The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


Date:  August 26, 2002                   /s/ DAVID P. STORCH
                                         -------------------
                                         David P. Storch
                                         President and Chief Executive Officer


The foregoing certification is provided solely for the purposes of complying
with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002.

EX-99.2

                                                                    EXHIBIT 99.2

                                                                   ATTACHMENT II

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with the AAR CORP. (the "Company") Annual Report on Form 10-K
for the period ending May 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Timothy J. Romenesko, Chief
Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge:

     1.   The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended; and

     2.   The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


Date:  August 26, 2002                    /s/ TIMOTHY J. ROMENESKO
                                          ------------------------
                                          Timothy J. Romenesko
                                          Vice President, Treasurer and
                                          Chief Financial Officer


The foregoing certification is provided solely for purposes of complying with
the provisions of Section 906 of the Sarbanes-Oxley Act of 2002.