10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended November 30, 2005

or

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

For the transition period from                   to                   

Commission File No. 1-6263

AAR CORP.

(Exact name of registrant as specified in its charter)

Delaware	36-2334820
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One AAR Place, 1100 N. Wood Dale Road Wood Dale, Illinois	60191
(Address of principal executive offices)	(Zip Code)

(630) 227-2000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes  o  No  ý

As of December 31, 2005, there were 33,498,488 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended November 30, 2005
Table of Contents

Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
			Condensed Consolidated Balance Sheets
			Condensed Consolidated Statements of Operations
			Condensed Consolidated Statements of Cash Flows
			Condensed Consolidated Statements of Comprehensive Income
			Notes to Condensed Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II – OTHER INFORMATION
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits
	Signature Page
	Exhibit Index

2

PART I, ITEM 1 – FINANCIAL STATEMENTS

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of November 30, 2005 and May 31, 2005

(In thousands)

	November 30,		May 31,
	2005		2005
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	13,805	$	40,508
Restricted cash	9,276		9,830
Accounts receivable, less allowances of $6,919 and $5,863, respectively	120,728		127,121
Inventories	230,663		204,990
Equipment on or available for short-term lease	50,919		50,487
Deposits, prepaids and other	18,472		13,934
Deferred tax assets	27,672		27,672
Total current assets	471,535		474,542
Property, plant and equipment, net	72,665		71,474
Other assets:
Goodwill, net	44,392		44,416
Equipment on long-term lease	125,438		67,663
Investment in aircraft joint ventures	19,466		11,234
Other	65,285		62,901
	254,581		186,214
	$	798,781	$	732,230

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

3

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of November 30, 2005 and May 31, 2005

(In thousands)

	November 30,			May 31,
	2005			2005
	(Unaudited)
Liabilities and stockholders’ equity:
Current liabilities:
Short-term debt	$	16,539		$	1,410
Current maturities of long-term debt	200			713
Current maturities of non-recourse long-term debt	1,871			1,622
Accounts payable	97,668			77,015
Accrued liabilities	83,336			79,265
Total current liabilities	199,614			160,025
Long-term debt, less current maturities	197,228			199,919
Non-recourse debt	26,291			27,240
Deferred tax liabilities	24,268			18,089
Other liabilities and deferred income	22,392			11,560
Retirement benefit obligation	654			653
	270,833			257,461
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued	—			—
Common stock, $1.00 par value, authorized 100,000 shares; issued 36,664 and 35,853 shares, respectively	36,664			35,853
Capital surplus	199,431			189,617
Retained earnings	175,364			162,229
Treasury stock, 3,572 and 3,267 shares at cost, respectively	(55,902		)	(50,497		)
Unearned restricted stock awards	(5,925		)	(2,679		)
Accumulated other comprehensive loss -
Cumulative translation adjustments	(3,316		)	(1,797		)
Minimum pension liability	(17,982		)	(17,982		)
	328,334			314,744
	$	798,781		$	732,230

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

4

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended November 30, 2005 and 2004

(Unaudited)

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	November 30,						November 30,
	2005			2004			2005			2004
Sales:
Sales from products	$	179,817		$	147,417		$	345,379		$	287,470
Sales from services	32,371			22,497			62,111			41,076
Sales from leasing	6,042			6,534			10,328			11,675
	218,230			176,448			417,818			340,221
Costs and operating expenses:
Cost of products	149,206			124,461			288,109			242,763
Cost of services	26,770			17,849			49,319			32,065
Cost of leasing	4,264			5,666			7,718			10,396
Selling, general and administrative and other	23,621			20,240			47,522			40,279
	203,861			168,216			392,668			325,503
Equity in earnings of aircraft joint ventures	593			8			798			8
Operating income	14,962			8,240			25,948			14,726
Gain on extinguishment of debt	—			—			—			995
Interest expense	(4,507		)	(4,227		)	(8,629		)	(8,691		)
Interest income	503			382			962			665
Income before provision for income taxes	10,958			4,395			18,281			7,695
Provision (benefit) for income taxes	3,082			(651		)	5,147			136
Income from continuing operations	7,876			5,046			13,134			7,559
Discontinued operations:
Operating loss, net of tax	—			(207		)	—			(434		)
Net income	$	7,876		$	4,839		$	13,134		$	7,125
Earnings per share-basic:
Earnings from continuing operations	$	0.24		$	0.16		$	0.40		$	0.23
Loss from discontinued operations	—			(0.01		)	—			(0.01		)
Earnings per share - basic	$	0.24		$	0.15		$	0.40		$	0.22
Earnings per share-diluted:
Earnings from continuing operations	$	0.22		$	0.15		$	0.37		$	0.22
Loss from discontinued operations	—			(0.01		)	—			(0.01		)
Earnings per share - diluted	$	0.22		$	0.14		$	0.37		$	0.21
Weighted average common shares outstanding - basic	33,048			32,246			33,005			32,244
Weighted average common shares outstanding - diluted	37,137			36,412			37,073			36,311

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended November 30, 2005 and 2004

(Unaudited)

(In thousands)

	Six Months Ended
	November 30,
	2005			2004
Cash flows from operating activities:
Net income	$	13,134		$	7,125
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization	13,916			14,305
Deferred tax provision (benefit) - continuing operations	6,180			(2,062		)
Changes in certain assets and liabilities:
Accounts receivable	5,081			(9		)
Inventories	(30,013		)	(5,604		)
Equipment on or available for short-term lease	(2,197		)	(201		)
Equipment on long-term lease	(58,445		)	3,016
Accounts payable	20,960			1,687
Accrued liabilities and taxes on income	1,495			(1,009		)
Long-term liabilities	10,383			—
Other, primarily deposits and pension contributions	(3,810		)	(8,677		)
Net cash provided from (used in) operating activities	(23,316		)	8,571
Cash flows from investing activities:
Property, plant and equipment expenditures	(8,806		)	(6,700		)
Proceeds from disposal of assets	14			7
Investment in leveraged leases	360			281
Other, primarily investment in aircraft joint ventures	(8,294		)	(7,932		)
Net cash used in investing activities	(16,726		)	(14,344		)
Cash flows from financing activities:
Proceeds from borrowings	27,303			—
Reduction in borrowings	(16,007		)	(15,530		)
Financing costs	(133		)	(29		)
Other	1,650			—
Net cash provided from (used in) financing activities	12,813			(15,559		)
Effect of exchange rate changes on cash	(28		)	(11		)
Decrease in cash and cash equivalents	(27,257		)	(21,343		)
Cash and cash equivalents, beginning of period	50,338			41,010
Cash and cash equivalents, end of period	$	23,081		$	19,667

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

6

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended November 30, 2005 and 2004

(Unaudited)

(In thousands)

	Three Months Ended					Six Months Ended
	November 30,					November 30,
	2005			2004		2005			2004
Net income	$	7,876		$	4,839	$	13,134		$	7,125
Other comprehensive income (loss) -
Foreign currency translation	(1,048		)	3,046		(1,519		)	2,192
Total comprehensive income	$	6,828		$	7,885	$	11,615		$	9,317

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

7

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

November 30, 2005

(Unaudited)

(In thousands, except per share amounts)

Note A – Basis of Presentation

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

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).  The condensed consolidated balance sheet as of May 31, 2005 has been derived from audited financial statements.  To prepare the financial statements in conformity with accounting principles generally accepted in the United States of America, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations of the SEC.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our latest annual report on Form 10-K.

In the opinion of management, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of November 30, 2005 and the condensed consolidated results of operations and comprehensive income for the three- and six-month periods ended November 30, 2005 and 2004, and the condensed consolidated cash flows for the six-month periods ended November 30, 2005 and 2004.  The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note B – Stock-Based Employee Compensation Plans

We have an employee stock option plan which we account for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost related to our stock option plan is reflected in net income, as each option granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant.  No stock options were granted during the three- and six-month periods ended November 30, 2005 other than reload options, which resulted from the exercise of original stock options granted in prior years.  Effective May 1, 2006, the reload provision will be eliminated from substantially all outstanding stock option arrangements.

Restricted stock awards are measured at grant date fair value and amortized to compensation cost over the vesting period.

8

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 to the Company’s stock option plans.

		Three Months Ended						Six Months Ended
		November 30,						November 30,
		2005			2004			2005			2004
Net income as reported		$	7,876		$	4,839		$	13,134		$	7,125
Add: Stock-based compensation expense included in net income as reported, net of tax		407			82			840			144
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of tax		(1,384		)	(700		)	(2,755		)	(1,379		)
Pro forma net income		$	6,899		$	4,221		$	11,219		$	5,890
Earnings per share – basic:	As reported	$	0.24		$	0.15		$	0.40		$	0.22
	Pro forma	$	0.21		$	0.13		$	0.34		$	0.18
Earnings per share – diluted:	As reported	$	0.22		$	0.14		$	0.37		$	0.21
	Pro forma	$	0.19		$	0.12		$	0.32		$	0.18

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in the six months ended November 30, 2005 and 2004:

	Six Months Ended
	November 30,
	2005		2004
Risk-free interest rate	3.8	%	3.7	%
Expected volatility of common stock	38.4	%	66.3	%
Dividend yield	0.0	%	0.0	%
Expected option term in years	1.0		4.0

Note C – Revenue Recognition

Sales and related cost of sales for product sales are recognized upon shipment of the product to the customer.  Our standard terms and conditions provide that title passes to the customer when the product is shipped to the customer.  Sales of certain defense products are recognized upon customer acceptance, which includes transfer of title and transfer of risk of loss.  Sales from services and the related cost of services are generally recognized when customer-owned material is shipped back to the customer.  We have adopted this accounting policy because at the time the customer-owned material is shipped back to the customer, all services related to that material are complete as our service agreements generally do not require us to provide services at customer sites.  Furthermore, the serviced units are typically shipped to the customer immediately upon completion of the related services.  Sales and related cost of sales for certain long-term manufacturing contracts and for certain large airframe maintenance contracts are recognized by the percentage of completion method, based on the relationship of costs incurred to date to estimated total costs under the respective contracts.

9

Certain supply chain management programs we provide our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services.  We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services.  Lease revenues are recognized as earned.  Income from monthly or quarterly lease payments is recorded in the pertinent period according to the lease agreement.  However, for leases that provide variable rents, we recognize lease income on a straight-line basis.  In addition to a monthly lease rate, some engine leases require an additional rental amount based on the number of hours the engine is used in a particular month.  Lease income associated with these contingent rentals is recorded in the period in which actual usage is reported to us by the lessee, which is normally the month following the actual usage.

Note D – Inventory

The summary of inventories is as follows:

	November 30,		May 31,
	2005		2005
Raw materials and parts	$	54,918	$	43,576
Work-in-process	31,112		30,528
Purchased aircraft, parts, engines and components held for sale	144,633		130,886
	$	230,663	$	204,990

Note E – Equipment on Long-Term Lease

In August 2005, we entered into a ten-year agreement with a customer to provide supply chain services for their fleet of CRJ 700/900 and ERJ 145 regional jets.  As part of the agreement, we purchased from the customer approximately $36,500 of equipment to support the program.  The equipment was purchased with an initial cash payment of $22,750, with the remaining balance of approximately $13,750 due in installments in August 2006, 2007 and 2008.  The equipment is included in equipment on long-term lease on the consolidated balance sheet and is being depreciated on a straight-line basis over 10 years to a 30% residual value.  The current portion of the deferred payments is included in accounts payable and the long-term portion is included in other liabilities and deferred income on the consolidated balance sheet.

In November 2005, we signed a similar supply chain services agreement with this same customer to support their fleet of CRJ 200 regional jets.  Under the terms of the agreement, we purchased from the customer approximately $21,900 of equipment to support the program.  The equipment was purchased with an initial cash payment of $16,750, with the remaining balance of approximately $5,150 due in installments in 2006 and 2009. As the customer’s fleet of CRJ 200/700/900 and ERJ 145 increases, we expect to invest an additional $6,000 in equipment to support these programs.

Note F – Supplemental Cash Flows Information

	Six Months Ended
	November 30,
	2005		2004
Interest paid	$	6,669	$	7,115
Income taxes paid	235		414
Income tax refunds received	1,137		1,135

10

Note G – Financing Arrangements

On July 15, 2005, we refinanced a mortgage loan with Principal Commercial Funding, LLC.  Proceeds from the new loan were $11,000 and the term of the financing is 10 years with a fixed rate of 5.01%.  Under the terms of the new loan, interest payments are due monthly with a balloon payment of $11,000 due August 1, 2015.  The new loan payable is secured by our Wood Dale, Illinois facility.  At November 30, 2005, the net book value of our Wood Dale, Illinois facility is $14,868.

Note H – Earnings per Share

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

In the third quarter of fiscal 2005, we adopted the provisions of Emerging Issues Task Force Issue No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (“EITF No. 04-08”), which requires companies to account for contingently convertible debt using the “if converted” method set forth in SFAS No. 128, “Earnings Per Share,” for calculating diluted earnings per share.  Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.  For comparative purposes, diluted earnings per share information for all periods since the convertible debt securities were issued in February 2004 have been restated as required by EITF No. 04-08.

11

The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three- and six-month periods ended November 30, 2005 and 2004.

	Three Months Ended					Six Months Ended
	November 30,					November 30,
	2005		2004			2005		2004
Income from continuing operations	$	7,876	$	5,046		$	13,134	$	7,559
Loss from discontinued operations, net of tax	—		(207		)	—		(434		)
Net income	$	7,876	$	4,839		$	13,134	$	7,125
Basic shares:
Weighted average common shares outstanding	33,048		32,246			33,005		32,244
Earnings per share – basic:
Earnings from continuing operations	$	0.24	$	0.16		$	0.40	$	0.23
Loss from discontinued operations	—		(0.01		)	—		(0.01		)
Earnings per share - basic	$	0.24	$	0.15		$	0.40	$	0.22
Net income	$	7,876	$	4,839		$	13,134	$	7,125
Add: After-tax interest on convertible debt	306		306			612		618
Net income for diluted EPS calculation	$	8,182	$	5,145		$	13,746	$	7,743
Diluted shares:
Weighted average common shares outstanding	33,048		32,246			33,005		32,244
Additional shares from the assumed exercise of stock options	485		562			464		463
Additional shares from the assumed conversion of convertible debt	3,604		3,604			3,604		3,604
Weighted average common shares outstanding – diluted	37,137		36,412			37,073		36,311
Earnings per share – diluted:
Earnings from continuing operations	$	0.22	$	0.15		$	0.37	$	0.22
Loss from discontinued operations	—		(0.01		)	—		(0.01		)
Earnings per share - diluted	$	0.22	$	0.14		$	0.37	$	0.21

At November 30, 2005 and 2004, respectively, stock options to purchase 1.5 million and 3.1 million shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the exercise price of these options was greater than the average market price of the common shares during the interim periods then ended.

12

Note I –Aircraft Joint Venture

During the first quarter of fiscal 2005, we invested in a limited liability company, which is accounted for under the equity method of accounting.  Our investment in the limited liability company was made under an agreement with a global financial institution.  Our membership interest in this limited liability company is 50% and the primary business of this company is the acquisition, ownership, lease and disposition of certain narrow-body commercial aircraft.  Aircraft that are acquired by the company are purchased with cash contributions by the members of the company, and the proceeds of debt financing which is non-recourse to the members of the company.  The income tax benefit or expense related to the operations of the venture is recorded by the member companies.

Summarized financial information for this limited liability company is as follows:

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2005		2004		2005		2004
Statement of operations information:
Sales	$	10,846	$	330	$	20,426	$	385
Income before provision for income taxes	1,330		48		1,870		80

	November 30,		May 31,
	2005		2005
Balance sheet information:
Assets	$	78,676	$	47,309
Debt	38,063		23,431
Members’ capital	38,932		21,885

During the first quarter of fiscal 2005, we also invested in a joint venture company with a different party.  The joint venture company owns an aircraft on lease to a foreign carrier.  This aircraft was subject to a note payable to a major financial institution that was guaranteed by AAR; during the third quarter of fiscal 2005, we paid the debt of $6,022 in full.  We consolidate the financial position and results of operations of this joint venture.  The equity interest of the other partner in the joint venture is recorded as a minority interest, which was included in other non-current liabilities at November 30, 2005.

Note J – Aviation Equipment Operating Leases

From time to time we lease aviation equipment (engines and aircraft) from lessors under arrangements that are classified as operating leases.  We may also sublease the aviation equipment to a customer on a short- or long-term basis.  The terms of the operating leases in which we are the lessee are typically one year with options to renew annually at our election.  If we elect not to renew a lease or the lease term expires, we may purchase the equipment from the lessor at its scheduled purchase option price.  The terms of the lease agreements also allow us to purchase the equipment at any time during a lease at its scheduled purchase option price.  During the first quarter of fiscal 2006, we exercised our purchase option on two engines.  The acquisition price was $4,954 and the engines are reflected in Equipment on short-term lease on the November 30, 2005 Condensed Consolidated Balance Sheet.  The scheduled purchase option value of remaining leased equipment was $14,918 at November 30, 2005.

13

In those instances in which we anticipate that we will purchase aviation equipment and the scheduled purchase option price will exceed the fair value of such equipment, we record an accrual for loss.  The accrual for loss was $2,107 at November 30, 2005 and is related to the two engines acquired during the first quarter of fiscal 2006.  We have utilized certain assumptions when estimating future undiscounted cash flows, such as current and future lease rates, residual values and market conditions and trends impacting future demand.  Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future provisions for losses on aviation equipment under operating leases.

Note K – Impairment Charges

Prior to September 11, 2001 we were executing our plan to reduce our investment in support of older generation aircraft in line with the commercial airlines’ scheduled retirement plans for these aircraft.  The events of September 11 caused a severe and sudden disruption in the commercial airline industry, which brought about a rapid acceleration of those retirement plans.  System-wide capacity was reduced by approximately 20%, and many airlines cancelled or deferred new aircraft deliveries.  Based on management’s assessment of these and other conditions, in the second quarter ended November 30, 2001, we reduced the value and provided loss accruals for certain of our inventories and engine leases which support older generation aircraft by $75,900.

The write-down for engine and airframe parts was determined by comparing the carrying value for inventory parts that support older generation aircraft to their net realizable value.  In determining net realizable value, we estimated sales prices taking into consideration historical selling prices and demand, as well as anticipated demand.  The write-down for whole engines related to assets that are reported in the caption “Equipment on or available for short-term lease” was determined by comparing the carrying value for each engine to an estimate of its undiscounted future cash flows.  In those instances where there was a shortfall, the impairment was measured by comparing the carrying value to an estimate of the asset’s fair market value.  The loss accruals for engine operating leases were determined by comparing the scheduled purchase option prices to the estimated fair value of such equipment.  In those instances where the scheduled purchase option price exceeded the estimated fair value, an accrual for the estimated loss was recorded.

During the fourth quarter of fiscal 2003, we recorded additional impairment charges related to certain engine and airframe parts and whole engines in the amount of $5,360.  The fiscal 2003 impairment charge was based upon an updated assessment of the net realizable values for certain engine and airframe parts and future undiscounted cash flows for whole engines.

Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in additional impairment charges in future periods.

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

	November 30,		May 31,		November 30,
	2005		2005		2001
Net impaired inventory and engines	$	39,700	$	43,200	$	89,600

14

Proceeds from sales of impaired inventory and engines for the six-month period ended November 30, 2005 and the twelve-month period ended May 31, 2005 were $3,800 and $7,900, respectively.

Note L – Business Segment Information

We are a diversified provider of products and services to the global aviation/aerospace industry. We report our activities in four business segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems; and Aircraft Sales and Leasing.

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

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

Sales in the Structures and Systems segment are derived from the manufacture and sale of a wide array of containers, pallets and shelters used to support the U.S. military’s tactical deployment requirements, in-plane cargo loading and handling systems for commercial and military applications and advanced composite materials and components for aerospace and industrial use.  Sales in this segment are also derived from the repair, overhaul and sale of parts for industrial gas and steam turbine operators and certain military engines.  Cost of sales consists principally of the cost of product, direct labor and overhead.

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

The accounting policies for the segments are the same as those described in Note 1 of the notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended May 31, 2005.  Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the reportable segments.  The expenses and assets related to corporate activities are not allocated to the segments.  Our reportable segments are aligned principally around differences in products and services.

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Gross profit is calculated by subtracting cost of sales from sales.  Selected financial information for each reportable segment has been reclassified to conform with current year presentation and is as follows:

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2005		2004		2005		2004
Sales:
Aviation Supply Chain	$	107,993	$	92,323	$	215,104	$	178,169
Maintenance, Repair and Overhaul	43,257		25,022		81,229		46,303
Structures and Systems	63,817		49,194		115,177		94,142
Aircraft Sales and Leasing	3,163		9,909		6,308		21,607
	$	218,230	$	176,448	$	417,818	$	340,221

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2005		2004		2005		2004
Gross profit:
Aviation Supply Chain	$	22,576	$	15,467	$	42,286	$	29,176
Maintenance, Repair and Overhaul	4,963		2,774		10,705		5,111
Structures and Systems	9,828		9,200		18,165		17,377
Aircraft Sales and Leasing	623		1,031		1,516		3,333
	$	37,990	$	28,472	$	72,672	$	54,997

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PART I, ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AAR CORP. and Subsidiaries

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

November 30, 2005

(In thousands)

General Overview

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

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

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

Sales in the Structures and Systems segment are derived from the manufacture and sale of a wide array of containers, pallets and shelters used to support the U.S. military’s tactical deployment requirements, in-plane cargo loading and handling systems for commercial and military applications and advanced composite materials and components for aerospace and industrial use.  Sales in this segment are also derived from the repair, overhaul and sale of parts for industrial gas and steam turbine operators and certain military engines.  Cost of sales consists principally of the cost of product, direct labor and overhead.

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

The table below sets forth consolidated sales for our four business segments for the three- and six-month periods ended November 30, 2005 and 2004.

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2005		2004		2005		2004
Sales:
Aviation Supply Chain	$	107,993	$	92,323	$	215,104	$	178,169
Maintenance, Repair and Overhaul	43,257		25,022		81,229		46,303
Structures and Systems	63,817		49,194		115,177		94,142
Aircraft Sales and Leasing	3,163		9,909		6,308		21,607
	$	218,230	$	176,448	$	417,818	$	340,221

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Published reports by both Boeing and Airbus project an increase in the world’s fleet of commercial aircraft. As more aircraft enter the system, demand for maintenance support will increase. Many major carriers in the U.S. are outsourcing more of their maintenance requirements to third parties as a way to reduce costs and improve their competitive position.  In addition, low-cost carriers continue to expand their presence around the world. Certain of these low-cost carriers are flying newer aircraft which will also result in increasing demand for maintenance in future years. We believe we are well positioned with our broad range of products and services as these trends continue to develop.

The current airline environment has been negatively impacted by historically high fuel costs. If fuel prices remain at these historically high levels, the industry may experience a reduction in capacity. Delta Air Lines and Northwest Airlines filed for bankruptcy protection and announced a reduction in aircraft servicing North America. At this time, we are unable to predict what impact, if any, fleet reductions would have on aircraft values, lease rates and demand for maintenance, repair and overhaul services.

Results of Operations

Three-Month Period Ended November 30, 2005

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

Consolidated sales for the second quarter ended November 30, 2005 increased $41,782 or 23.7% over the second quarter of last year.  Sales increased in the Aviation Supply Chain; Maintenance, Repair and Overhaul and Structures and Systems segments with sales to commercial customers increasing 19.6% and sales to defense customers up 32.0% compared to the prior year.  The sales increase to commercial airline customers reflects new supply chain management programs, higher engine parts sales from existing program customers and increased airframe maintenance sales, primarily attributable to the commencement of operations at our Indianapolis-based maintenance facility.  Sales to defense customers increased as we continue to experience strong demand for performance-based logistics programs along with specialized mobility products.

Sales in the Aviation Supply Chain segment increased $15,670 or 17.0% over the prior year.  The sales increase reflects strong demand for engine and airframe parts from commercial customers due to improved sourcing and program execution as well as the implementation of new supply chain programs.  The increase in sales to defense customers was driven by continued strong demand for parts support from existing and new performance-based logistics programs.

In the Maintenance, Repair and Overhaul segment, sales increased $18,235 or 72.9% from the same quarter last year.  The increase is primarily attributable to sales at our Indianapolis-based maintenance facility, which commenced operations in January 2005, as well as increased sales at our Oklahoma City airframe maintenance facility.

In the Structures and Systems segment, sales increased $14,623 or 29.7% over the prior year.  The increase in sales was primarily due to increased sales of products supporting our defense customer’s deployment activities due to continued strong demand and new product development and increased demand for cargo systems.

In the Aircraft Sales and Leasing segment, sales decreased $6,746 or 68.1% compared with the prior year.  The decrease in sales is principally due to the fact that the majority of aircraft activity is conducted through unconsolidated joint ventures, whose revenues are not included in our consolidated net

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sales.  Our aircraft strategy post September 11, 2001 has been to participate in aircraft sales and leasing transactions principally through joint ventures.  During the second quarter, one of our joint ventures purchased five aircraft and sold one aircraft, bringing the total number of aircraft held in joint ventures to ten.  We also own seven aircraft outside of the joint ventures (see Note I of Notes to Condensed Consolidated Financial Statements).

Consolidated gross profit increased $9,518 or 33.4% over the prior year.  The increase in gross profit was attributable to the consolidated sales increase, as well as an improvement in the consolidated gross margin percentage to 17.4% from 16.1% in the prior year’s quarter.  The gross profit margin percentage increased primarily due to increased volumes in the Aviation Supply Chain and Maintenance, Repair and Overhaul segments, partially offset by lower margins in our Structures and Systems segment due to the unfavorable mix of inventory sold.  In addition, during the second quarter of fiscal 2006, the gross profit margin in the Maintenance, Repair and Overhaul segment was adversely impacted by a three-week power interruption caused by Hurricane Wilma at our Miami-based landing gear facility, as well as a considerable ramp-up in training costs associated with the integration of approximately 225 new employees at our Indianapolis maintenance facility.  We estimate these items impacted second quarter gross profit by approximately $1,000.  The Miami landing gear facility was fully operational by the end of November, and we expect increased training costs to continue for the balance of the fiscal year.

Operating income increased $6,722 or 81.6% compared with the prior year due to increased gross profit, partially offset by an increase in selling, general and administrative expenses.  During the second quarter, our selling, general and administrative expenses increased $3,381 or 16.7% primarily due to increased resources to support our growth. As a percentage of sales, selling, general and administrative expenses declined from 11.5% to 10.8%. Net interest expense declined $159 or 4.1% due to lower overall outstanding borrowings.

Our effective income tax rate for the second quarter was 28.1% compared to a 14.8% income tax benefit recorded in the prior year.  In the second quarter of last year, we recorded a favorable federal income tax adjustment of $1,575 or $0.05 per diluted share related to an adjustment in the deferred tax asset valuation allowance.

Income from continuing operations was $7,876 for the second quarter of fiscal 2006 compared to $5,046 in the prior year due to the factors discussed above.

Six-Month Period Ended November 30, 2005

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

Consolidated sales for the six-month period ended November 30, 2005 increased $77,597 or 22.8% over the prior year.  The increase in sales over the prior year was attributable to sales increases in the Aviation Supply Chain; Maintenance, Repair and Overhaul and Structures and Systems segments due to a 22.1% increase in sales to commercial airline customers and a 24.5% increase in sales to defense customers.  The increase in sales to commercial airline customers principally reflects improved demand for engine and airframe parts support due to increased passenger traffic, improved sourcing and program execution and the commencement of operations of the Indianapolis maintenance facility.  The increase in sales to defense customers was driven by continued strong demand for specialized mobility products and new supply chain management programs.

Sales in the Aviation Supply Chain segment increased $36,935 or 20.7% compared to the prior year.  The sales increase reflects increased sales of engine and airframe parts to commercial customers as

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well as an increase in sales to program customers using our supply chain management programs.  The increase in sales to defense customers was driven by continued strong demand for parts support from existing and new performance-based logistics programs.

In the Maintenance, Repair and Overhaul segment, sales increased $34,926 or 75.4% over the prior year.  The sales increase is attributable to the opening of our Indianapolis airframe maintenance facility which commenced operations in January 2005, as well as increased sales at our Oklahoma City airframe maintenance facility.

In the Structures and Systems segment, sales increased $21,035 or 22.3% over the prior year as we experienced increased sales at all of our business units within the segment.  The increase was primarily attributable to increased sales of products supporting our defense customer’s deployment activities due to continued strong demand and new product development and increased demand for cargo systems and composite structure products primarily due to successful sales and marketing efforts.

In the Aircraft Sales and Leasing segment, sales decreased $15,299 or 70.8% compared with the prior year.  The decrease in sales is principally due to the fact that the majority of aircraft activity is conducted through unconsolidated joint ventures, which excludes revenues from our consolidated net sales.  Our aircraft strategy post September 11 has been to participate in aircraft transactions principally through joint ventures.  During the second quarter, one of our joint ventures purchased five aircraft and sold one aircraft, bringing the total number of aircraft held in joint ventures to ten.  We also own seven aircraft outside of the joint ventures (see Note I of Notes to Condensed Consolidated Financial Statements).

Consolidated gross profit increased $17,675 or 32.1% over the prior year.  The increase in gross profit was attributable to the consolidated sales increase, as well as an improvement in the consolidated gross margin percentage to 17.4% from 16.2% in the prior year.  The gross profit margin percentage increased due to the favorable mix of inventories sold in the Aviation Supply Chain segment and increased volumes and operational efficiencies at many of our business units in the Aviation Supply Chain, Maintenance, Repair and Overhaul and Structures and Systems segments. During the second quarter of fiscal 2006, the gross profit margin in the Maintenance, Repair and Overhaul segment was impacted by the three-week power interruption, caused by Hurricane Wilma, at our Miami-based landing gear facility as well as a considerable ramp-up in training costs associated with the integration of approximately 225 new employees at our Indianapolis maintenance facility.  We estimate these items impacted second quarter gross profit by approximately $1,000.  The Miami landing gear facility was fully operational by the end of November, and we expect elevated training costs to continue for the balance of the fiscal year.

Operating income increased $11,222 or 76.2% compared with the prior year due to increased gross profit, partially offset by an increase in selling, general and administrative expenses.  During the six-month period ended November 30, 2005, our selling, general and administrative expenses increased $7,243 or 18.0% primarily due to increased resources to support our growth. As a percentage of sales, selling, general and administrative expenses declined slightly from 11.8% to 11.4%.  Net interest expense declined $359 or 4.5% due to lower overall outstanding borrowings.

Our effective income tax rate for the six-month period ended November 30, 2005 was 28.1% compared to 1.8% last year. In the second quarter of last year, we recorded a favorable federal income tax adjustment of $1,575 or $0.05 per diluted share related to an adjustment in the deferred tax asset valuation allowance.

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Income from continuing operations was $13,134 compared to $7,559 in the prior year due to the factors discussed above.

Factors Which May Affect Future Results

Our operating results and financial position may be adversely affected or fluctuate on a quarterly basis as a result of general economic conditions, geo-political events, the commercial airline environment and other factors, including:  (1) declining demand for our products and services and the ability of certain of our airline customers to meet their financial obligations due to their precarious financial position; (2) relatively high fuel prices and its impact on our commercial customers’ financial position; (3) declining market values for aviation products and equipment; (4) difficulties in re-leasing or selling aircraft and engines that are currently being leased;  (5) inability of our Indianapolis airframe maintenance business to capture market share in the highly competitive airframe maintenance market; (6) lack of assurance that sales to the U.S. defense department, its agencies and its contractors (which were 33.7% of total sales in fiscal 2005), will continue at levels previously experienced, including the mix of products sold; (7) access to the debt and equity capital markets and the ability to draw down funds under financing agreements; (8) non-compliance with restrictive and financial covenants contained in certain of our loan agreements; (9) changes in or non-compliance with laws and regulations that may affect certain of our aviation related activities that are subject to licensing, certification and other regulatory requirements imposed by the FAA and other regulatory agencies, both domestic and foreign; (10) competition from other companies, including original equipment manufacturers, some of which have greater financial resources than we do; (11) exposure to product liability and property claims that may be in excess of our substantial liability insurance coverage; and (12) the outcome of any pending or future material litigation or environmental proceedings.

Liquidity and Capital Resources

Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets.  In addition to these cash sources, our capital resources include secured credit arrangements, which include an accounts receivable securitization program and a secured revolving credit facility. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including general economic conditions, airline and aviation industry conditions, geo-political events, including the war on terrorism, and our operating performance.  Our ability to use our accounts receivable securitization program and revolving credit facility also may be negatively affected by these factors.  Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. We have a universal shelf registration on file with the Securities and Exchange Commission under which, subject to market conditions, up to $163,675 of common stock, preferred stock or medium- or long-term debt securities may be issued or sold.

At November 30, 2005, our liquidity and capital resources included cash of $23,081 and working capital of $271,921.  As of November 30, 2005, $9,276 of cash was restricted to support letters of credit.  At November 30, 2005, we had an accounts receivable securitization program which supports the sale of up to $50,000 in qualifying accounts receivable.  The amount available under this agreement at any point in time is based on a formula of qualifying accounts receivable.  At November 30, 2005, $50,000 was available and $15,000 was outstanding under this program. At November 30, 2005, we had $28,786 available under our secured revolving credit facility, of which $15,000 was outstanding.  The amount

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available under the revolving credit facility is also based on a formula of qualifying assets as well as outstanding letters of credit.  At November 30, 2005, we had $1,108 available under a foreign line of credit.  As of November 30, 2005, unrestricted cash and amounts available to us under our secured credit arrangement and accounts receivable securitization program totaled $63,699.

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

During the six-month period ended November 30, 2005, we used $23,316 of cash from operations primarily due to a cash investment in equipment on long-term lease of $39,500 to support a new supply chain management program (see Note E of Notes to Condensed Consolidated Financial Statements) and a $30,013 increase to inventories reflecting investments made to support other supply chain management programs and the growth of our operations, partially offset by an increase in accounts payable of $20,960 reflecting increased inventory levels as well as net income and depreciation and amortization of $27,050.  Accounts and trade notes receivable decreased $5,081 as a result of the sale of $15,000 of accounts receivable under our accounts receivable securitization program, partially offset by increased receivables due to increased sales.

During the six-month period ended November 30, 2005, our investing activities used $16,726 of cash principally reflecting capital expenditures of $8,806 and investments made in aircraft joint ventures of $8,294.

During the six-month period ended November 30, 2005, our financing activities provided $12,813 of cash as a result of proceeds from borrowings on our secured revolving credit facility of $15,000 and $11,000 of proceeds on the new note payable secured by a mortgage on our Wood Dale, Illinois building (see Note G of Notes to Condensed Consolidated Financial Statements), offset by a reduction in borrowings of $16,007 which includes the $10,143 payoff of the note payable secured by a mortgage and the early retirement of 6.875% Notes due December 15, 2007 for $3,960, as well as scheduled principal reductions.

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Contractual Obligations and Off-Balance Sheet Arrangements

A summary of contractual obligations and off-balance sheet arrangements as of November 30, 2005 is as follows:

	Payments Due by Period
													After
	Total		11/30/06		11/30/07		11/30/08		11/30/09		11/30/10		11/30/10
On Balance Sheet:
Debt	$	197,428	$	200	$	200	$	63,620	$	200	$	208	$	133,000
Non-recourse Debt	28,162		1,871		1,986		2,110		22,195		—		—
Bank Borrowings	16,539		16,539		—		—		—		—		—
Off Balance Sheet:
Aviation Equipment Operating Leases	15,576		15,576		—		—		—		—		—
Garden City Operating Lease	31,095		1,405		1,440		1,476		1,513		1,551		23,710
Accounts Receivable Securitization Program	15,000		15,000		—		—		—		—		—

Critical Accounting Policies and Significant Estimates

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

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be collected.  In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history, and the customer’s current and expected future financial performance.

Inventories

Inventories are valued at the lower of cost or market.  Cost is determined by the specific identification, average cost or first-in, first-out methods.  Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions.  We have utilized certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement values and expected future demand.  Principally as a result of the terrorist attacks of September 11, 2001 and its anticipated impact on the global airline industry’s financial condition, fleet size and aircraft utilization, we recorded a

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significant charge for impaired inventories during the second quarter of fiscal 2002 utilizing those assumptions.  During the fourth quarter of fiscal 2003, we recorded an additional charge as a result of a further decline in market value for these inventories.  Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in additional impairment charges in future periods.

Revenue Recognition

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

Equipment on or Available for Lease

The cost of assets under lease is original purchase price plus overhaul costs.  Depreciation is computed using the straight-line method over the estimated service life of the equipment, and maintenance costs are expensed as incurred.

In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-lived Assets”, we are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows.  When applying the provisions of SFAS No. 144 to equipment on or available for lease, we have utilized certain assumptions when estimating future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand.  Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future impairments of equipment on or available for lease.

Aviation Equipment Operating Leases

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

New Accounting Standards

SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123(R)”) was issued in December 2004.  SFAS No. 123(R) addresses the accounting for transactions in which an enterprise exchanges its equity instruments for employee services.  It also addresses transactions in which an enterprise incurs liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of those equity instruments in exchange for employee services.  For public entities, the cost of employee services received in exchange for equity instruments, including employee stock options, is to be measured based on the grant-date fair value of those instruments.  That cost will be recognized as compensation expense over the service period, which would normally be the vesting period.  On April 15, 2005, the Securities and Exchange Commission (SEC) adopted a rule that delays required

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stock option and other share plan expensing under SFAS No. 123(R).  Under the SEC’s rule, public companies will be required to implement SFAS No. 123(R) at the beginning of their first fiscal year that begins after June 15, 2005.  We will adopt the provisions of SFAS No. 123(R) in the first quarter of fiscal 2007, and anticipate that adoption of the standard will result in approximately $1,000 of pre-tax compensation expense in fiscal 2007 for current unvested stock options.

Forward-Looking Statements

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information available to the Company as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under this Item 2 under the heading “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.

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PART I, ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk includes fluctuating interest rates under our credit agreements, changes in foreign exchange rates and credit risk on accounts receivable.  See Part I, Item 1 for a discussion on accounts receivable exposure.  During the three- and six-month periods ended November 30, 2005 and 2004, we did not utilize derivative financial instruments to offset these risks.

At November 30, 2005, $28,786 was available under our secured revolving credit facility with Merrill Lynch Capital.  Interest on amounts borrowed under this credit facility is LIBOR based.  As of November 30, 2005, the outstanding balance under this agreement was $15,000.  A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during the three-month period ended November 30, 2005 would not have had a material impact on our financial position or results of operations.

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

PART I, ITEM 4 – CONTROLS AND PROCEDURES

As required by Rules 13a-15(e) and 15d-15(e) of the Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2005.  This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures.  Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of November 30, 2005, ensuring that information required to be disclosed in the reports that are filed under the Act is recorded, processed, summarized and reported in a timely manner.

There were no changes in our internal control over financial reporting during the second quarter ended November 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II, ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders was held on October 19, 2005.  The following items were acted upon at the meeting.

1)Election of two Class III directors to serve until the 2008 Annual Meeting of Stockholders.  Two directors were nominated and elected by the stockholders by the requisite vote.

Directors Nominated and Elected at the Meeting

	Votes	Votes
	For	Withheld
Ronald R. Fogleman	29,397,362	1,499,866
Ronald B. Woodard	29,624,774	1,272,724

Continuing Directors

Michael R. Boyce

James G. Brocksmith, Jr.

James E. Goodwin

David P. Storch

Marc J. Walfish

2)Ratify appointment of KPMG LLP as the independent registered public accounting firm for the fiscal year ending May 31, 2006.

Votes For	30,651,390
Votes Against	236,148
Abstained	9,960

3)Amendment to the AAR CORP. Stock Benefit Plan to permit awards of restricted stock to non-employee directors.

Votes For	16,458,450
Votes Against	11,067,375
Abstained	27,300

PART II, ITEM 6 – EXHIBITS

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

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SIGNATURE

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

		AAR CORP.
		(Registrant)
Date:	January 6, 2006	/s/ TIMOTHY J. ROMENESKO
		Timothy J. Romenesko
		Vice President and Chief Financial Officer
		(Principal Financial Officer and officer duly
		authorized to sign on behalf of registrant)
		/s/ MICHAEL J. SHARP
		Michael J. Sharp
		Vice President – Controller
		(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description	Exhibits
10.	Material Contracts	10.17	Consulting Agreement dated October 19, 2005 between Ira A. Eichner and AAR CORP.(1)
		10.23	Form of Non-Employee Director Non-Qualified Stock Option Agreement (filed herewith).
31.	Rule 13a-14(a)/15(d)- 14(a) Certifications	31.1	Section 302 Certification dated January 6, 2006 of David P. Storch, President and Chief Executive Officer of Registrant (filed herewith).
		31.2	Section 302 Certification dated January 6, 2006 of Timothy J. Romenesko, Vice President and Chief Financial Officer of Registrant (filed herewith).
32.	Section 1350 Certifications	32.1	Section 906 Certification dated January 6, 2006 of David P. Storch, President and Chief Executive Officer of Registrant (filed herewith).
		32.2	Section 906 Certification dated January 6, 2006 of Timothy J. Romenesko, Vice President and Chief Financial Officer of Registrant (filed herewith).

Notes:

(1)Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated October 24, 2005.

29

EX-10.23

Exhibit 10.23

AAR CORP.

NON-EMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AGREEMENT

(“Agreement”)

1.  Subject to the provisions set forth herein and the terms and conditions of the AAR CORP. Stock Benefit Plan (“Plan”), the terms of which are hereby incorporated by reference, and in consideration of the agreements of «Name» (“Grantee”) herein provided, AAR CORP., a Delaware corporation (“Company”), hereby grants to the Grantee an option entitling the Grantee to purchase from the Company common stock of the Company, par value $1.00 per share (“Common Stock”), in the number of shares at the purchase price per share, and on the schedule, set forth below (“Option”).

Number of Shares
Subject to Option: (subject to adjustment pursuant to the terms of this Agreement.)	3,500
Option Price Per Share: (subject to adjustment pursuant to the terms of this Agreement.)	$	«Price»
Date of Grant:	«Date»

Option Vesting Schedule:

Number of Shares Becoming	Date First
Subject to Exercise	Exercisable
First 875 shares of Grant	«IncrDate1»
Second 875 shares of Grant	«IncrDate2»
Third 875 shares of Grant	«IncrDate3»
Fourth 875 shares of Grant	«IncrDate4»

Each of the above option increments shall expire on «Expiry» (“Expiration Date” of the Option) or upon the earlier expiration of the Option as provided in this Agreement.

In the event the Grantee’s membership on the Board terminates within one year following a Change in Control whether or not such Change in Control has the prior written approval of a majority of the Continuing Directors, and notwithstanding any conditions or restrictions contained in this Agreement, the Option shall become immediately exercisable on the date of such termination with respect to all shares of Common Stock covered thereby, whether vested or not, and not previously purchased upon exercise of the Option and shall remain so exercisable until the Option expires as provided in paragraph 1 or 3 herein.

For purposes of this Agreement, the following terms have the meaning set forth below:

(a)“Permitted Assignment” means an assignment in writing approved by the Company, and otherwise meeting the requirements of the Plan document, of all or any portion of this award to (i) Grantee’s spouse or lineal descendent(s), (ii) the trustee of a trust for the primary benefit of Grantee’s spouse or lineal descendent(s), (iii) a partnership of which the Grantee’s spouse or lineal descendent(s) are the only partners, or (iv) a tax exempt organization as defined in Section 501(c)(3) of the Internal Revenue Code, for which the Grantee does not receive any consideration.

(b)“Retirement” means the voluntary termination of membership on the Board at or after age 65 with not less than five (5) consecutive years of service as a non-employee director of the Company.

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2.The exercise of the Option is conditioned upon the acceptance by the Grantee of the terms hereof as evidenced by the Grantee’s execution of this Agreement and return of an executed copy to the Secretary of the Company within thirty (30) days from the date of the cover letter from the Secretary transmitting original copies to the Grantee for execution.

3.(a)If the Grantee’s service on the Board is terminated for any reason, other than for Retirement, death or Disability, the Option of Grantee shall terminate on the earlier to occur of (i) three months after termination of service on the Board or (ii) the date that the Option expires in accordance with its terms.

(b)If the Grantee’s service on the Board is terminated by reason of Retirement, the Option shall remain exercisable by the retired Grantee until the Option expires by its terms and may be exercised by the retired Grantee in the same manner and to the same extent as if he had continued service on the Board during that period; provided, however, that if the Grantee dies before the Option expires, the Option shall be exercisable only by the Successor of the deceased Grantee (as defined in the Plan) to the extent that the deceased Grantee was entitled at the date of the Grantee’s death.

(c)If (i) the Grantee’s service on the Board is terminated by reason of death or (ii) the Grantee dies within three months after the termination of his service on the Board, the Option shall expire on the earlier to occur of one year after Grantee’s death or the Expiration Date of the Option; provided, however, that during such period, the Option shall be exercisable only by the Successor of the deceased Grantee to

3

the extent, if any, that the deceased Grantee was entitled at the date of the Grantee’s death.

(d)If the Grantee’s service on the Board is terminated by reason of Disability, the Option shall expire on the earlier to occur of one year after termination of service on the Board or the date the Option expires in accordance with its terms, and during said period the Option may be exercised by the disabled Grantee with respect to the same number of shares, in the same manner and to the same extent as if the Grantee had continued service on the Board during such period.

(e)If at any time prior to expiration of this Option, the Grantee, without the Company’s express written consent, directly or indirectly, alone or as a member of a partnership, group or joint stock venture or as an employee, officer, director, or stockholder of any corporation, or in any capacity engages in any activity which is competitive with any of the businesses conducted by the Company or its Affiliated Companies from time to time or at any time during the Grantee’s term of employment, the Grantee shall forfeit and return all Award Shares not previously released from the restrictions of Section 1 hereof.

4.Written notice of an election to exercise any portion of the Option, specifying the portion thereof being exercised and the exercise date, shall be given by the Grantee, or the Grantee’s personal representative in the event of the Grantee’s death or disability necessitating a Court approved personal representative, by delivering such notice to the Secretary of the Company, accompanying such notice with (i) payment in full of the purchase price of any shares to be purchased, which may be made in cash, or in

4

the form of a certified check or a cashier’s check issued by a federally insured bank or federally insured savings and loan association, in all cases made payable to AAR CORP., and as set forth in the Plan, or by surrendering a number of shares of Common Stock of the Company with a Fair Market Value (as defined in the Plan) on the date of exercise equal to the purchase price, or by directing the Company to withhold such number of shares otherwise issuable upon exercise of such Option having an aggregate Fair Market Value on the date of exercise equal to the purchase price, or by any combination of the above, and (ii) payment of an amount sufficient to satisfy any applicable withholding requirements as provided for in Section 13 below.  Any exercise of the Option shall be effective as of the later of the dates specified in such notice and the date the notice and accompanying payment are actually received by the Secretary of the Company.

5.Any exercise of an Option shall be subject to action by the Board taken at any time in its sole discretion (i) to effect, amend or maintain any necessary registration of the Plan or the shares of Common Stock issuable upon exercise of the Option under the Securities Act of 1933, as amended, or the securities laws of any applicable jurisdiction, (ii) to permit any action to be taken in order to (A) list such shares on a stock exchange if the shares are then listed on such exchange or (B) comply with restrictions or regulations incident to the maintenance of a public market for its shares of Common Stock, including any rules or regulations of any stock exchange on which such shares are listed, or (iii) to determine that such shares and the Plan are exempt from such registration or that no action of the kind referred to in (ii)(B) above needs to be taken; and the Company shall not be obligated by virtue of any terms and conditions of the Option, or

5

any provision of this Agreement or the Plan, to recognize an exercise of the Option or to sell or issue shares of Common Stock in violation of the Securities Act of 1933 or the law of any government having jurisdiction thereof.  Any such postponement shall not extend the Expiration Date of the Option, and neither the Company nor its directors or officers shall have any obligation or liability to the Grantee or to any other person with respect to any shares as to which the Option shall lapse because of such postponement.  If deemed necessary by the Committee, the Grantee may be required to represent at the time of each exercise of the Option that the shares purchased are being acquired for investment and not with a view to distribution; and the Company may place a legend on the related stock certificate to indicate that the stock may not be sold or otherwise disposed of except in accordance with the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, including, but not limited to Rule 144.

6.Notwithstanding any provision of this Agreement to the contrary, the Company shall not be obliged to issue or transfer any of its Common Stock to Grantee upon exercise of the Option, if the Committee or the Board of Directors of the Company determines that the issuance or transfer of such Common Stock, or payment of such amount of cash, would be in violation of any covenant in any of the Company’s loan agreements or other contracts.

7.Any increase or decrease in the number of outstanding shares of Common Stock of the Company occurring through stock splits, stock dividends, stock consolidations, spin offs, other distributions of assets to shareholders or assumption or conversion of outstanding Options due to an acquisition after the Date of Grant of the

6

Option shall be reflected proportionately in the number of shares of Common Stock subject to the Option; and a proportionate reduction or increase, as applicable, shall be made in the Option Price Per Share hereunder.  Any fractional shares resulting from such adjustment shall be eliminated.  If changes in capitalization other than those considered above shall occur, the Board of Directors of the Company shall make such adjustment in the number or class of shares purchasable upon exercise of the Option and in the Option Price Per Share as the Board in its discretion may consider appropriate, and all such adjustments shall be conclusive upon all persons.

8.The Option may be exercised only by the Grantee during the Grantee’s lifetime and may not be transferred other than by a Permitted Assignment, will or the applicable laws of descent or distribution.  The Option shall not otherwise be transferred, assigned, pledged or hypothecated for any purpose whatsoever and is not subject, in whole or in part, to execution, attachment, or similar process.  Any attempted assignment, transfer, pledge or hypothecation or other disposition of the Option, other than in accordance with the terms set forth herein, shall be void and of no effect.

9.Neither the Grantee nor any other person entitled to exercise the Option under the terms hereof shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any of the shares of Common Stock issuable on exercise of the Option, unless and until such shares shall have been actually issued.

10.In the event the Option shall be exercised in part, the Company may require that this Agreement be delivered by the Grantee to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, in such manner as the

7

Company shall determine, such partial exercise.  In the event the Option shall be exercised in whole, this Agreement shall be surrendered to the Company for cancellation. In the event that a change in the number or designation of the Common Stock shall be made, the Company may require the Grantee to surrender this Agreement to the Company for the purpose of making appropriate notation thereon, or of otherwise reflecting, such change in the number or designation of the Common Stock.

11.When the Option expires as herein provided, such expiration shall occur at the Company’s close of business on the date of expiration.

12.Nothing in the Option shall constitute or be evidence of any agreement or understanding, express or implied, that the Company shall retain a director for any period of time, or at any particular rate of compensation.  The execution of this agreement by the Grantee conclusively evidences the Grantee’s intent to continue to serve as a director of the Company for the remainder of the Grantee’s term during which the Option was granted.

13.Upon any exercise of the Option, the Grantee shall remit to the Company an amount necessary to satisfy applicable withholding requirements including those arising under state and federal income tax laws.  If the Grantee does not remit such amount, the Company may withhold all or a portion of any compensation then or in the future owed to the Grantee as necessary to satisfy such requirements.

The Grantee may satisfy the income tax withholding obligation in connection with such Option in whole or in part by (i) directing the Company to withhold a portion of the shares otherwise distributable to the Grantee or (ii) transferring to the Company shares of

8

Common Stock of the Company previously acquired by the Grantee having a Fair Market Value (as defined in the Plan) on the date such shares are transferred to the Company equal to the amount of such withholding or lesser portion thereof as may be desired by the Grantee.  A Grantee’s election pursuant to the preceding sentence must be made on or prior to the date as of which income is realized by the Grantee in connection with such Option and must be irrevocable.  In lieu of a separate election on each Taxable Date (as defined in the Plan), the Grantee may file a blanket election with the Committee which shall govern all future Taxable Dates until revoked by the Grantee.

14.The Option shall be exercised in accordance with such administrative regulations as the Committee shall from time to time adopt.

15.The Option, and this Agreement, shall be construed, administered and governed in all respects under and by the laws of the State of Illinois.

16.This Agreement has been examined by the parties hereto, and accordingly the rule of construction that ambiguities be construed against a party which causes a document to be drafted shall have no application in the construction or interpretation hereof.  If any part of this Agreement is held invalid for any reason, the remainder hereof shall nevertheless remain in full force and effect.

17.This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and any prior understanding or representation of any kind antedating this Agreement concerning such subject matter shall not be binding upon either party except to the extent incorporated herein.  No consent, waiver, modification or amendment hereof, or additional obligation assumed by

9

either party in connection herewith, shall be binding unless evidenced by a writing signed by both parties and referring specifically hereto.  No consent, waiver, modification or amendment with respect hereto shall be construed as applicable to any past or future events other than the one in respect of which it was specifically made.

18.This Agreement shall be construed consistent with the provisions of the Plan and in the event of any conflict between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control.

19.Capitalized terms used herein and not defined herein will have the meaning set forth in the Plan.

IN WITNESS WHEREOF, this Agreement has been executed for the Company by its duly authorized officer on the 23rd day of August, 2004.

AAR CORP.
By:
Name:	Howard A. Pulsifer
Title:	Vice President and Secretary

The undersigned hereby accepts the foregoing Option and the terms and conditions thereof on this              day of                               , 2004.

Director
Name:	«Name»

10

EX-31.1

Exhibit 31.1

SECTION 302

CERTIFICATION

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

1.I have reviewed this quarterly report on Form 10-Q of AAR CORP. for the quarterly period ending November 30, 2005;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and  material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

DATE:  January 6, 2006

 /s/ DAVID P. STORCH

 David P. Storch

Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

SECTION 302

CERTIFICATION

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

1.I have reviewed this quarterly report on Form 10-Q of AAR CORP. for the quarterly period ending November 30, 2005;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and  material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

DATE:  January 6, 2006

 /s/ TIMOTHY J. ROMENESKO

 Timothy J. Romenesko

 Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

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

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the “Company”) quarterly report on Form 10-Q for the period ending November 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Storch, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   January 6, 2006

 /s/ DAVID P. STORCH

 David P. Storch

Chairman, President and Chief Executive Officer

EX-32.2

Exhibit 32.2

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

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the “Company”) quarterly report on Form 10-Q for the period ending November 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy J. Romenesko, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   January 6, 2006

 /s/ TIMOTHY J. ROMENESKO

 Timothy J. Romenesko

 Vice President and Chief Financial Officer