AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended February 28, 2005
Table of Contents

2

PART I, ITEM 1 – FINANCIAL STATEMENTS

AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of February 28, 2005 and May 31, 2004
(In thousands)

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 February 28, 2005 and May 31, 2004
(In thousands)

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 Nine Months Ended February 28/29, 2005 and 2004
(Unaudited)
(In thousands except per share data)

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 Nine Months Ended February 28/29, 2005 and 2004
(Unaudited)
(In thousands)

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 Nine Months Ended February 28/29, 2005 and 2004
(Unaudited)
(In thousands)

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

7

Note C – Income Taxes

During the third quarter of fiscal 2005 ended February 28, 2005, we recorded a favorable federal income tax adjustment of $496. The benefit is a result of the completion of the fiscal 2004 federal tax return in February 2005, upon which we determined that we qualified for additional tax benefits related to export activities. Similarly, we recorded a $604 federal income tax benefit during the third quarter of last year which primarily related to additional tax benefits from export activities in fiscal 2003.

During the second quarter of fiscal 2005 ended November 30, 2004, we recorded a favorable federal income tax adjustment of $1,575. In October 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act included a number of federal income tax reforms, including an extension of the foreign tax credit carryforward period from five years to ten years. In previous fiscal years, we had established a deferred tax valuation allowance of $1,575 against foreign tax credits expiring in fiscal year 2006. As a result of the new ten-year carryforward period established by the Act, we now expect to utilize the foreign tax credits and recorded a $1,575 credit to the provision for income taxes during the second quarter of fiscal 2005.

Note D – 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.

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

9

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 nine months ended February 28/29, 2005 and 2004:

Note E – New Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123(R)”). 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. SFAS No. 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. We will adopt the provisions of SFAS No. 123(R) in the second quarter of fiscal 2006 ending November 30, 2005 and anticipate that adoption of the standard will result in approximately $1,500 of pre-tax compensation expense in fiscal 2006 for current unvested stock options.

Note F – 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. Service revenues 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. Lease revenues are recognized as earned. Income from monthly or quarterly rental 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.

10

Note G – Inventory

The summary of inventories is as follows:

Note H –Joint Ventures

During the first quarter of fiscal 2005 ended August 31, 2004, 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 debt financing which is non-recourse to the members of the company. Total assets and debt of the limited liability company at February 28, 2005 were $41,674 and $23,485, respectively. Our equity investment in this company is $10,811 at February 28, 2005.

During the first quarter of fiscal 2005 ended August 31, 2004, 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 February 28, 2005. The minority interest in the joint venture was $957 at February 28, 2005.

Note I – Supplemental Cash Flows Information

Non-cash operating and financing activities are excluded from the consolidated statement of cash flows. During the nine-month period ended February 28, 2005, non-cash operating and financing activities related to the consolidation of the joint venture company were as follows:

11

Note J – Common Stock and Earnings per Share of Common Stock

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 ended February 28, 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 to equity at the beginning of the period and is added to outstanding common shares. 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.

12

The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three- and nine-month periods ended February 28/29, 2005 and 2004.

At February 28/29, 2005 and 2004, respectively, stock options to purchase 3,094 and 3,254 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.

13

As of February 28, 2005, we had $67,000 of convertible senior notes outstanding. The notes were issued in February 2004 and are due February 1, 2024 unless earlier redeemed, repurchased or converted, and bear interest at 2.875% payable semiannually on February 1 and August 1.

The notes are convertible into shares of AAR common stock based on a conversion rate of 53.7924 shares per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $18.59 per share, under the following circumstances: (i) on any business day up to the maturity date, if the closing sale price of our common stock for at least 20 trading days in the 30 consecutive trading day period ending on the eleventh trading day of any fiscal quarter is greater than 120% of the applicable conversion price on the eleventh trading day of that quarter; (ii) at any time after February 1, 2019, if the closing price of AAR common stock on any trading day after February 1, 2019, is greater than 120% of the then applicable conversion price; (iii) at any time until February 1, 2019, during the five consecutive business day period in which the trading price for a note for each day of that trading period was less than 98% of the closing sale price of our common stock on such corresponding trading day multiplied by the applicable conversion rate; (iv) we call the notes for redemption; (v) during any period in which the credit rating assigned to our long-term senior debt by Moody’s Investor Services is below Caa1 and by Standard & Poor’s Rating Services is below B, the credit rating assigned to our long-term senior debt is suspended or withdrawn by both such rating agencies, or neither rating agency is rating our long-term senior debt; or (vi) specified corporate transactions occur.

We may redeem for cash all or a portion of the notes at any time on or after February 1, 2008 at specified redemption prices. Holders of the notes have the right to require us to repurchase in cash all or any portion of the notes on February 1, 2010, 2014 and 2019. In each case, the repurchase price payable will be equal to 100% of the principal amount of the notes to be repurchased, plus accrued interest and unpaid interest and liquidated damages, if any, to, but not including, the date of repurchase.

Note K – Impairment Charges

The components of the fiscal 2003 and fiscal 2002 impairment charges were as follows:

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 of fiscal 2002, we reduced the value and provided loss accruals for certain of our inventories and engine leases which support older generation aircraft by $75,900, of which $57,900 was related to the Inventory

14

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 and $5,800 at February 28, 2005 and May 31, 2004, respectively. The reduction in loss accrual is attributable to the buyout of leases and the subsequent sale of the underlying aircraft engines.

Note M – Segment Reporting

We are a leading provider of value-added products and services to the global aviation/aerospace industry. We report our activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

Sales in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and military markets, as well as the distribution of new airframe parts purchased from various original equipment manufacturers and sold to commercial and general aviation customers. Cost of sales consists principally of the cost of product (primarily aircraft and engine parts) and overhead (primarily indirect labor, facility expenses and insurance).

Sales in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts, landing gear and components, aircraft maintenance and storage, and the repair, overhaul and sale of parts for industrial gas and steam turbine operators. Cost of sales consists principally of cost of product (primarily replacement aircraft parts), direct labor and overhead.

Sales in the Manufacturing 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. Cost of sales consists principally of the cost of product, direct labor and overhead.

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

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

16

Gross profit is calculated by subtracting cost of sales from sales. Selected financial information for each reportable segment is as follows:

17

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
February 28, 2005
(In thousands)

General Overview

We report our activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

Sales in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and military markets, as well as the distribution of new airframe parts purchased from various original equipment manufacturers and sold to commercial and general aviation customers. Cost of sales consists principally of the cost of product (primarily aircraft and engine parts) and overhead (primarily indirect labor, facility cost and insurance).

Sales in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts, landing gear and components; aircraft maintenance and storage; and the repair, overhaul and sale of parts for industrial gas and steam turbine operators. Cost of sales consists principally of cost of product (primarily replacement aircraft parts), direct labor and overhead.

Sales in the Manufacturing 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. Cost of sales consists principally of the cost of product, direct labor and overhead.

Sales in the Aircraft and Engine Sales and Leasing segment are derived from the sale and lease of commercial aircraft and engines and technical and advisory services. Cost of sales consists principally of cost of product (aircraft and engines), 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 nine-month periods ended February 28/29, 2005 and 2004.

18

During fiscal 2004 and the first nine months of fiscal 2005, the worldwide airline industry experienced an increase in available seat miles and revenue passenger miles, and improved load factors. Although U.S. carriers have made progress reducing their non-fuel costs, the impact from historically high fuel costs and a highly competitive pricing environment, coupled with weak balance sheets, may cause further U.S. airline restructurings, which may have a negative impact on our operating environment.

Results of Operations

Three-Month Period Ended February 28, 2005

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

Consolidated sales for the third quarter ended February 28, 2005 increased $38,468 or 24.2% over the third quarter of last year. The increase in sales over the prior year was attributable to sales increases in each of the Company’s four reportable segments driven primarily by a 40.8% increase in sales to commercial airline customers. The increase in sales to commercial airline customers reflects improved demand for parts support due to increased passenger traffic as well as successful sales and marketing efforts.

In the Inventory and Logistic Services segment, sales increased $10,862 or 17.8% over the prior year period reflecting increased demand for engine and airframe parts, principally from European and Asian customers.

In the Maintenance, Repair and Overhaul segment, sales increased $5,198 or 10.8% over the prior year representing increased demand for aircraft maintenance, landing gear repair and component overhaul.

In the Manufacturing segment, sales increased $7,513 or 17.0% due to continued strong demand for specialized mobility products supporting defense customers and increased sales of cargo systems and composite structures primarily due to successful marketing efforts.

Sales in the Aircraft and Engine Sales and Leasing segment were $20,753, an increase of $14,895 over the prior year period reflecting the sale of the Company’s interest in certain aircraft for approximately $15 million at essentially book value.

Consolidated gross profit was $30,735 which represents a $4,179 increase over the prior year period reflecting the increase in consolidated sales, as well as an improvement in the gross profit margin within the Inventory and Logistic Services and Maintenance, Repair and Overhaul segments as a result of favorable product mix and increased volume.

Operating income increased $3,624 from the prior year as a result of increased sales, partially offset by higher selling, general and administrative expenses. Our selling, general and administrative expenses increased $753 or 3.7% compared to the same period in the prior year principally due to higher selling expenses from increased personnel costs. As a percentage of sales, selling, general and administrative expenses declined from 12.8% to 10.7%. Net interest expense declined $679 or 15.4% due to lower overall outstanding borrowings.

During the third quarter of fiscal 2005, upon completion of our fiscal 2004 Federal income tax return, we determined the Company qualified for additional tax benefits of $496 related to higher than estimated margin on fiscal 2004 export activities. Similarly, we recorded a $604 benefit during the third quarter of last year which primarily related to additional tax benefits from fiscal 2003 export activities.

19

Income from continuing operations was $5,185 or more than double the prior year due to the factors discussed above.

During the third quarter of fiscal 2005, we sold our engine component repair business which is classified as discontinued operations in the Consolidated Statement of Operations. During the third quarter of fiscal 2005, the loss from discontinued operations was $2,590, or $0.07 per share and is comprised of the operating loss, net of tax, of $364 and the loss on disposal, net of tax, of $2,226.

Net income was $2,595 for the third quarter of fiscal 2005 compared to $2,012 in the prior year.

Nine-Month Period Ended February 28, 2005

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

Consolidated sales for the nine-month period ending February 28, 2005 increased $70,288 or 15.0% over the prior year period. The increase in sales was primarily attributable to continued strong demand for our specialized mobility products supporting defense customers as well as a 22.8% increase in sales to commercial airline customers. The increase to commercial airline customers reflects improved demand for parts support due to increased passenger traffic and successful sales and marketing efforts.

Sales in the Inventory and Logistic Services segment increased $8,686 or 4.5% compared to the prior year period primarily due to higher demand for engine and airframe parts, principally in the Asian and European markets. Lower sales to general aviation customers as we de-emphasized certain lower margin products and lower sales of logistics support to our defense customers compared with record sales in the prior year period partially offset the engine and airframe parts increase.

In the Maintenance, Repair and Overhaul segment, sales decreased $2,153 or 1.4% as we experienced decreased demand for industrial gas turbine overhaul services and lower sales at our aircraft maintenance facility on a year to date basis. Increased demand for landing gear repairs and component repair services partially offset the reductions within the segment.

In the Manufacturing segment, sales increased $41,857 or 41.4% compared to the prior year period as we experienced increased sales at all of our business units within the segment. We continue to experience strong sales to the U.S. Military for products supporting defense efforts and expect this trend to continue into future quarters. We also experienced increased demand for cargo systems and composite structures to airline customers within the segment primarily due to successful marketing efforts.

Sales in the Aircraft and Engine Sales and Leasing segment increased $21,898 or 94.8%, which was primarily driven by the sale of our interest in certain aircraft for approximately $15 million at essentially book value.

Consolidated gross profit increased $12,548 or 17.1% compared with the prior year. The increase in our gross profit is primarily attributable to the increase in sales and a slight increase in the gross profit margin to 15.9% from 15.6% in the prior year. The gross profit percentage increased primarily due to the mix of products sold within the Inventory and Logistics Services segment largely due to reduced levels of low margin sales in the general aviation market and operational efficiencies obtained within the Manufacturing segment.

20

Operating income increased $10,184 compared with the prior year primarily due to the increased sales, partially offset by higher selling, general and administrative costs. During the nine-month period ended February 28, 2005, our selling, general and administrative costs increased $2,570 or 4.4% primarily due to added resources to support company-wide growth. As a percentage of sales, selling, general and administrative costs declined from 12.6% to 11.4%. Net interest expense decreased $2,340 or 17.9% due to lower overall outstanding borrowings, lower weighted average interest rates and a first quarter $995 gain recorded on the early retirement of debt, partially offset by $500 of additional interest expense associated with outstanding litigation.

During the third quarter of fiscal 2005, upon completion of our fiscal 2004 Federal income tax return, we determined the Company qualified for additional tax benefits of $496 related to higher than estimated margin on fiscal 2004 export activities. Similarly, we recorded a $604 benefit during the third quarter of last year which primarily related to additional tax benefits from fiscal 2003 export activities.

During the second quarter of fiscal 2005 ended November 30, 2004, we recorded a favorable federal income tax adjustment of $1,575 or $0.05 per share. In October 2004 American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act included a number of federal income tax reforms, including an extension of the foreign tax credit carryforward period from five years to ten years. In previous fiscal years, we had established a deferred tax valuation allowance of $1,575 against foreign tax credits expiring in fiscal year 2006. As a result of the new ten-year carryforward period established by the Act, we now expect to utilize the foreign tax credits and recorded a $1,575 credit to the provision for income taxes during the second quarter of fiscal 2005.

Income from continuing operations was $12,744 or an increase of $10,841 over the prior year due to the factors discussed above.

During the third quarter of fiscal 2005, we sold our engine component repair business which is classified as discontinued operations in the Consolidated Statement of Operations. During the nine-month period ended February 28, 2005, the loss from discontinued operations was $3,024 or $0.08 per diluted share and is comprised of the operating loss, net of tax, of $798 and the loss on disposal, net of tax, of $2,226.

Net income was $9,720 for the nine-month period ended February 28, 2005 compared to $932 in the prior year.

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) possible declines in demand for our products and services and the ability of our customers to meet their financial obligations; (2) possible declines in market values for aviation products and equipment; (3) difficulties in re-leasing or selling aircraft and engines that are currently being leased; (4) lack of assurance that sales to the U.S. Government, its agencies and its contractors (which were 34.6% and 33.8% of total sales for the nine month periods ended February 28, 2005 and February 29, 2004, respectively), will continue at levels previously experienced; (5) access to the debt and equity capital markets and the ability to draw down funds under financing agreements; (6) inability to comply with restrictive and financial covenants contained in certain of our loan agreements; (7) changes in or inability to comply 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; (8) competition from other companies, including

21

original equipment manufacturers, some of which have greater financial resources than us; (9) exposure to product liability and property claims that may be in excess of our substantial liability insurance coverage; and (10) 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 is also dependent on these factors. Our ability to generate cash from operations is influenced primarily by our operating performance and working capital management. We also 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 February 28, 2005, our liquidity and capital resources included cash of $32,091 and working capital of $281,291. As of February 28, 2005, $11,600 of cash was restricted to support letters of credit. At February 28, 2005, we had $50,000 available under our accounts receivable securitization program; no accounts receivable were securitized as of that date. The amount available under this agreement is based on a formula of qualifying accounts receivable. At February 28, 2005, we had $26,207 available under our secured revolving credit facility; no amounts were outstanding as of that date. The amount available under the revolving credit facility is also based on a formula of qualifying assets. As of February 28, 2005, unrestricted cash and amounts available to us under our secured credit arrangement and accounts receivable securitization program totaled $98,135.

We continue to evaluate other financing arrangements 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.

In July 2005, non-recourse notes of $31,496 mature and therefore have been classified as current on the February 28, 2005 Condensed Consolidated Balance Sheet. We expect to renew the lease agreement on the aircraft that secures the notes and to refinance the existing non-recourse notes with the lender on terms more favorable than those contained in the current lease and note agreements. As of February 28, 2005, our equity investment in the aircraft was $1,058.

During the nine-month period ended February 28, 2005, we generated $28,029 of cash from operations, primarily due to $21,112 of non-cash depreciation and amortization and approximately $15 million received from the sale of our interest in certain aircraft, partially offset by an increase in accounts receivable and inventory and cash contributions to our pension plan.

22

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.

25

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.

27