General Overview

We report our activities in three business segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; and Structures and Systems. The table below sets forth consolidated sales for our three business segments for the three-month periods ended August 31, 2009 and 2008.

                                     Three Months Ended
                                         August 31,
                                      2009        2008
Sales:
Aviation Supply Chain              $  141,085   $ 156,825
Maintenance, Repair and Overhaul       78,744      86,310
Structures and Systems                121,694     116,769
                                   $  341,523   $ 359,904

Since mid-calendar year 2008, many U.S. carriers announced a series of cost reduction initiatives, including staffing reductions, route consolidations and capacity reductions. Earlier actions were principally in response to high oil prices, while more recent actions have been in response to recessionary conditions both in the U.S. and most other industrialized nations. Capacity in North America was down approximately 7% during the second calendar quarter of 2009 compared to last year. Certain foreign carriers have also reduced capacity in response to weak world-wide economic conditions. The reduction in the global operating fleet of passenger and cargo aircraft has resulted in reduced demand for parts support and maintenance activities for the types of aircraft affected.

Disruptions in the financial markets, including tightened credit markets, have reduced the amount of liquidity available to certain of our customers which, in turn, affects their ability to buy parts, services, engines and aircraft. We continue to monitor economic conditions for their impact on our customers and markets, assessing both risks and opportunities that may affect our business.

We expect many carriers will continue to seek ways to reduce their cost structure, including outsourcing more of their maintenance and support functions to third parties, while we believe other carriers who have historically outsourced their maintenance requirements will continue to do so. Although we believe we remain well positioned to respond to the market with our broad range of products and services, the factors above may have an adverse impact on our growth rates and our results of operations and financial condition.

During the first quarter of fiscal 2010, sales to global defense customers increased 4.4% and for the three months ended August 31, 2009 represented 46.2% of consolidated sales. We continue to see opportunities to provide performance-based logistics services and manufactured products supporting our defense customers' requirements. Although it remains difficult for us to predict long-term demand for these types of products and services, we believe we are well positioned with our current portfolio of products and services and growth plans to benefit from longer-term U.S. military deployment and program management strategies.

Results of Operations

Three-Month Period Ended August 31, 2009

Consolidated sales for the first quarter ended August 31, 2009 decreased $18,381 or 5.1% compared to the prior year period. Sales to commercial customers declined 12.0% compared to the prior year as airlines further reduced inventory levels and maintenance visits in response to weak economic conditions and tight credit markets. Sales to defense customers increased 4.4% reflecting higher shipments of specialized mobility systems products.

In the Aviation Supply Chain segment, sales declined $15,740 or 10.0% as compared to the prior year reflecting lower demand for aftermarket parts support as airlines continue to reduce inventory levels in response to weak economic conditions. Gross profit in the Aviation Supply Chain segment declined $14,195 or 38.4% and the gross profit margin percentage declined to 16.1% from 23.5% in the prior year principally due to lower volumes and pricing pressures from our airline customers as they seek ways to further lower costs and conserve cash. Gross profit was also unfavorably impacted by the sale of an interest in an aircraft leveraged lease, in which the Company recorded a $3,800 negative gross profit margin.

In the Maintenance, Repair and Overhaul segment, sales declined $7,566 or 8.8% versus the prior year reflecting fewer maintenance visits by our airline customers due to capacity reductions. Gross profit in the Maintenance, Repair and Overhaul segment declined $2,158 or 16.9% and the gross profit margin percentage declined to 13.5% from 14.8% in the prior year principally as a result of lower volume.

In the Structures and Systems segment, sales increased $4,925 or 4.2% over the prior year reflecting increased shipments for specialized mobility products. Gross profit in the Structures and Systems segment increased $3,238 or 18.6%, and the gross profit margin percentage increased to 17.0% from 14.9% in the prior year due to increased volume and increased shipments of higher margin products.

Operating income decreased $14,574 or 45.8% compared with the prior year due to the impact from the reduction of sales and gross profit in the Aviation Supply Chain and Maintenance, Repair and Overhaul segments, as well as a reduction in earnings from unconsolidated joint ventures. Selling, general and administrative expenses were essentially flat with the prior year, even while including approximately $2,400 of expense associated with the launch of AAR Global Solutions in fiscal 2010. Earnings from joint ventures declined $1,365 or 94.3%, principally due to increased depreciation expense recorded in the aircraft joint ventures as a result of reducing the useful lives of certain narrow-body aircraft to 25 years, as well as less aircraft owned in joint venture as compared to the prior year. Net interest expense declined $1,542 or 19.8% compared to the prior year due to a reduction in outstanding borrowings. Our effective income tax rate declined to 23.0% in the first quarter of fiscal 2010 compared to 34.4% last year primarily due to the favorable tax impact from the sale of an interest in an aircraft leveraged lease. The Company expects its effective income tax rate to be approximately 34% for the balance of the fiscal year.

During the first quarter of fiscal 2010, we retired $10,500 par value of our 1.625% convertible notes and $2,000 par value of our 2.25% convertible notes resulting in a net gain on extinguishment of debt of $913.

Effective June 1, 2009, we adopted FSP APB 14-1. FSP APB 14-1 requires retrospective application and as a result, operating results for the three-month period ended August 31, 2008 have been restated (see Note 7 in Notes to Condensed Consolidated Financial Statements.) In addition to FSP APB 14-1, effective June 1, 2009, we adopted the provisions of SFAS 160 for AAR Global Solutions. The loss attributable to noncontrolling interest of $1,046 on the condensed consolidated statements of

operations represents the joint venture partners' share of the net loss of the joint venture during the first quarter of fiscal 2010.

Liquidity and Capital Resources

Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets. In addition to these cash sources, our current capital resources include our unsecured credit facility. We continually evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, including the war on terrorism, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. Under a universal shelf registration statement filed with the Securities and Exchange Commission that became effective on December 12, 2008, we may offer and sell up to $300,000 of various types of securities, including common stock, preferred stock and medium-term or long-term debt securities, subject to market conditions.

At August 31, 2009, our liquidity and capital resources included cash of $122,840 and working capital of $598,971. Our revolving credit agreement, as amended (the "Credit Agreement") with various financial institutions, as lenders, and Bank of America National Association as successor by merger to LaSalle Bank National Association ("Bank of America"), as administrative agent for the lenders, provides us with unsecured revolving borrowing capacity of up to $250,000. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $75,000, not to exceed $325,000 in total. The term of our Credit Agreement extends to August 31, 2011. Borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate ("LIBOR") plus 100 to 237.5 basis points based on certain financial measurements. Borrowings outstanding under this facility at August 31, 2009 were $50,000, and there were approximately $13,190 of outstanding letters of credit which reduced the availability of this facility. In addition to our Credit Agreement, we also have $3,169 available under a foreign line of credit.

During the three-month period ended August 31, 2009, cash flow from operations was $34,122 primarily as a result of a reduction in accounts receivable of $24,469 and net income attributable to AAR and noncontrolling interest and depreciation and amortization of $20,722, partially offset by a decrease in accrued liabilities of $14,249.

During the three-month period ended August 31, 2009, our investing activities used $5,112 of cash principally as a result of capital expenditures of $8,943, which mainly represents capacity expansion and capability improvements in our Structures and Systems and Maintenance, Repair and Overhaul segments, partially offset by proceeds from the sale of our interest in a leveraged lease of $5,220.

During the three-month period ended August 31, 2009, our financing activities used $18,716 of cash primarily due to a reduction in borrowings of $18,768, which includes the retirement of convertible notes for $9,115 cash and the payoff of non-recourse debt of $9,261.

Critical Accounting Policies and Significant Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the consolidated

financial statements. The most significant estimates made by management include those related to the allowance for doubtful accounts, assumptions used in assessing goodwill impairment, adjustments to reduce the value of inventories and aviation equipment on or available for lease, revenue recognition, loss accruals for aviation equipment operating leases, program development costs and assumptions used in determining pension plan obligations. Accordingly, actual results could differ materially from those estimates. The following is a summary of the accounting policies considered critical by management.

Allowance for Doubtful Accounts

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

Goodwill

Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The Company reviews and evaluates its goodwill and indefinite life intangible assets for potential impairment at a minimum annually, on May 31, or more frequently if circumstances indicate that impairment is possible. We use a two step process to evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying value of the reporting unit, including goodwill. We estimate the fair value of each reporting unit using a valuation technique based on a multiple of earnings or discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, we would be required to complete a second step to determine the amount of goodwill impairment. In the second step, we would determine an implied fair value of the reporting unit's goodwill by allocating the reporting unit's fair value to all of the assets and liabilities other than goodwill. We then would compare the implied fair value of goodwill to the carrying amount and recognize the difference as an impairment charge.

The assumptions we used to estimate fair value of our reporting units are based on historical performance as well as forecasts used in our current business plan.

The amount reported under the caption "Goodwill and other intangible assets, net" is comprised of goodwill and intangible assets associated with acquisitions we made, principally since the beginning of fiscal 1998.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the specific identification, average cost or first-in, first-out methods. Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. We have utilized certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement values and expected future demand. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in the recognition of impairment charges in future periods.

During the fourth quarter of fiscal 2009, we recorded a $10,100 pre-tax impairment charge on inventory and engines which had been acquired prior to September 11, 2001. This inventory was also subject to impairment charges recorded in previous fiscal years. The fiscal 2009 impairment charge was

triggered by declining conditions in the commercial aviation industry and a slowdown in the sales volume of these assets during the fiscal year.

Revenue Recognition

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

Equipment on or Available for Lease

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

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

During the second quarter of fiscal 2009, we performed a comprehensive review of our aircraft portfolio. The primary objective of this review was to assess the impact of the economic slowdown and credit crisis on market conditions. Based upon that review, and taking into consideration the desire to improve liquidity and generate cash, we made the decision to sell one of the four aircraft acquired before September 11, 2001, and offer two of the remaining three for sale. As a result of this review and taking into consideration our assessment of current market conditions, the Company recorded a $21,033 pre-tax impairment charge to reduce the carrying value of the three aircraft to their estimated net realizable value during the second quarter of fiscal 2009.

Program Development Costs

In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new Airbus A400M Military Transport Aircraft ("A400M"). We are a subcontractor to Pfalz Flugzeugwerke GmbH ("PFW") on this Airbus program. Our portion of the revenue from this program is expected to exceed $300,000 through fiscal 2020, based on sales projections of the A400M. During fiscal 2009, Airbus agreed to reimburse AAR and PFW 20.0 million euros for costs incurred to develop the A400M system. AAR's share of this reimbursement was $18,700 and reduced the amount of capitalized program development costs. As of August 31, 2009, we have capitalized, net of the $18,700 reimbursement, approximately $41,500 of costs associated with the engineering and development of the cargo system in accordance with SOP 81-1 "Accounting for Performance of Construction - Type and Certain Production - Type Contracts." Sales and related cost of sales will be recognized on the units of delivery method. In determining the recoverability of the

capitalized program development costs, we have utilized certain judgments and estimates concerning expected revenues and the cost to manufacture the A400M cargo system. Differences between actual results and the assumptions utilized by us may result in us not fully recovering the value of the program development costs, which would unfavorably impact our financial condition and results of operations.

Pension Plans

The liabilities and net periodic cost of our pension plans are determined utilizing several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets.

Our discount rate is determined based on a review of long-term, high quality corporate bonds as of May 31, 2009, and models that match projected benefit payments to coupons and maturities from the high quality bonds. The assumption for the expected long-term return on plan assets is developed through analysis of historical asset returns by investment category, our fund's actual return experience and current market conditions. Changes in the discount rate and differences between expected and actual return on plan assets may impact the amount of net periodic pension expense recognized in our condensed consolidated statement of operations.

New Accounting Standards

In June 2009, we adopted the provisions of FSP APB 14-1 (see Note 7 of Notes to Condensed Consolidated Financial Statements). The following tables set forth the effect of the retrospective application of FSP APB 14-1 on certain previously reported items for the second, third and fourth quarters of fiscal 2009.