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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

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

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

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

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

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

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

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

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

Documents Incorporated by Reference

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

TABLE OF CONTENTS

PART I

ITEM 1.    BUSINESS (Dollars in thousands)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ITEM 2.    PROPERTIES

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

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

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

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

ITEM 3.    LEGAL PROCEEDINGS

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

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

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

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

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

Supplemental Item:

EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

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

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

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PART II

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

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

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

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

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

Notes:

(1)

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

(2)

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

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

Factors Which May Affect Future Results

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

Critical Accounting Policies

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

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

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

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Critical Accounting Policies (continued)

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

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

Results of Operations

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

Three-Year Sales Summary

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

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

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

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

Fiscal 2002 Compared with Fiscal 2001

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

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

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

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

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

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

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

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

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

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

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

Fiscal 2001 Compared with Fiscal 2000

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

Notes:

(1)

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

(2)

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

(3)

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

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Forward-Looking Statements

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

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report

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

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

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

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

KPMG LLP

Chicago, Illinois
June 26, 2002

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AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS