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

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.

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.

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.,

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.

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.

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.

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.

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

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.

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	Fiscal 2002						Fiscal 2001
	Market Prices						Market Prices
	Market Prices				Quarterly Dividends		Market Prices				Quarterly Dividends
Quarter	High		Low		Quarterly Dividends		High		Low		Quarterly Dividends
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

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

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.

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.

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.

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

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

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.

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.

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.

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.

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

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.

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:

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.

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.

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.

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

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

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

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.

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

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.

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

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.

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.

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.

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 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.

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.

	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

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.

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.

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.

		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	$	—	$	—

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.

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

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".

	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.

	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.

		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.

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.

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:

		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:

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:

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.

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

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

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.

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

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

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.

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

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

		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.

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)

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		—

		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.

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.

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.

	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

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.

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.

		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

		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

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.

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.

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

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	)

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.

		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

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.

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.

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.

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.

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.

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

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.

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.

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)

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

			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

		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

		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

		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		—		—		—		—		—

		Common Stock			Treasury Stock										Unearned Restricted Stock Awards			Accumulated Other Comprehensive Income (Loss)
		Common Stock			Treasury Stock					Capital Surplus		Retained Earnings									Comprehensive Income (Loss)
		Shares	Amount		Shares		Amount			Capital Surplus		Retained Earnings									Comprehensive Income (Loss)
		(In thousands)
Balance, May 31, 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	)

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

		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

		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

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

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

	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)