**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
    **FORM
        10-QSB**
 ______________________________
 (Mark
        One)
 [
        X
        ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
        of 1934
 For
        the
        quarterly period ended March 31, 2006
 
 [
        ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
        Act of 1934
 For
        the
        transition period from ____________ to ____________
 
 Commission
        File Number:**001-13387**
  **AeroCentury
        Corp.**
 (Exact
        name of small business issuer as specified in its charter)
  **Delaware**
                **94-3263974**(State
                    or other jurisdiction of
                  incorporation
                    or organization)
                (I.R.S.
                  Employer Identification No.)
 
 **1440
        Chapin Avenue, Suite 310**
 **Burlingame,
        California 94010**
 (Address
        of principal executive offices)
 
 **(650)
        340-1888**
 (Issuer’s
        telephone number)
 
 **None**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Check
        whether the Issuer: (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Securities Exchange Act of 1934 during the past 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
x No o
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes oNo x
  State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date: As of May 15, 2006 the Issuer had
        1,606,557****Shares of Common Stock, par value $0.001 per
        share, issued, of which 63,300 are held as Treasury Stock.
 
 Transitional
        Small Business Disclosure Format (check one): Yes o No x
 
 
 
  1
  **PART
        I**
 **FINANCIAL
        INFORMATION**
 
 *Forward-Looking
        Statements*
 
 This
        Quarterly Report on Form 10-QSB includes "forward-looking statements" within
        the
        meaning of Section 27A of the Securities Act and Section 21E of the Exchange
        Act. All statements in this Report other than statements of historical fact
        are
        "forward looking statements" for purposes of these provisions, including
        any
        statements of plans and objectives for future operations and any statements
        of
        assumptions underlying any of the foregoing. Statements that include the
        use of
        terminology such as "may," "will," "expects," "plans," "anticipates,"
        "estimates," "potential," or "continue," or the negative thereof, or other
        comparable terminology are forward-looking statements. Forward-looking
        statements include: (i) in Item 1 "Financial Statements, Note 6," statements
        regarding the Company's belief that future taxable income will be sufficient
        to
        realize the tax beneifits of all the deferred tax assets on the balance sheet;
        (ii) in Item 2 "Management's Discussion and Analysis or Plan of Operation
        --
        Liquidity and Capital Resources," statements regarding the Company's belief
        that
        it will continue to be in compliance with all covenants under its credit
        facility, and that it will have adequate cash flow to meet its ongoing
        operational needs; (iii) in Item 2 "Management's Discussion and Analysis
        or Plan
        of Operation -- Outlook," statements regarding the Company's belief that
        the
        lease for an aircraft that expires in May 2006 will be extended; and (iv)
        in
        Item 2 "Management's Discussion and Analysis or Plan of Operation -- Factors
        that May Affect Future Results,” the Company's belief that it will have
        sufficient cash to fund any required repayments under its credit facility
        caused
        by borrowing base limitations as a result of assets scheduled to come off
        lease
        in the near term; that it will have sufficient funds to pay increased
        Sarbanes-Oxley compliance costs; the Company's anticipated acquisition of
        primarily used aircraft and expected concentration in a limited number of
        airframe and aircraft engine types; the Company's belief that it is competitive
        because of JMC's experience and operational efficiency and will benefit because
        of JMC's reputation in the marketplace.
 
 These
        forward-looking statements involve risks and uncertainties, and it is important
        to note that the Company's actual results could differ materially from those
        projected or assumed in such forward-looking statements. Among the factors
        that
        could cause actual results to differ materially are the factors detailed
        under
        the heading "Management's Discussion and Analysis or Plan of Operation --
        Factors That May Affect Future Results," including increasing fuel costs
        which
        may have a direct negative impact on the customer's existing and potential
        customer base and may increase the risk of lessee default; general economic
        conditions, particularly those that affect the air travel industry;
        unanticipated sharp increases in interest rates; further disruptions to the
        air
        travel industry due to terrorist attacks; the compliance of the Company's
        lessees with obligations under their respective leases; the Company's ability
        to
        find additional debt or equity financing; and future trends and results which
        cannot be predicted with certainty. The cautionary statements made in this
        Report should be read as being applicable to all related forward-looking
        statements wherever they appear herein. All forward-looking statements and
        risk
        factors included in this document are made as of the date hereof, based on
        information available to the Company as of the date hereof, and the Company
        assumes no obligation to update any forward-looking statement or risk factor.
        You should consult the risk factors listed from time to time in the Company's
        filings with the Securities and Exchange Commission.
 
 
 
 
 
 
 
 
 
   2
  
 
 AeroCentury
                  Corp.Condensed
                  Consolidated Balance SheetUnauditedASSETSMarch
                  31,2006Assets:Cash
                  and cash equivalents
              $
                  2,219,920Accounts
                  receivable
              736,190Aircraft
                  and aircraft engines held for lease,net
                  of accumulated depreciation of $18,838,090
              91,939,980Aircraft
                  held for sale,net
                  of accumulated depreciation of $548,680
              1,025,930Prepaid
                  expenses and other
              1,088,370Total
                  assets
              $97,010,390LIABILITIES
                  AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
                  payable and accrued expenses
              $
                  974,360Notes
                  payable and accrued interest
              58,191,260Maintenance
                  reserves and accrued costs
              13,481,250Security
                  deposits
              3,463,620Prepaid
                  rent
              703,700Deferred
                  taxes
              1,100,130Taxes
                  payable
              990Total
                  liabilities
              77,915,310Stockholders’
                  equity:Preferred
                  stock, $.001 par value, 2,000,000 sharesauthorized,
                  no shares issued and outstanding
              -Common
                  stock, $.001 par value, 3,000,000 sharesauthorized,
                  1,606,557 shares issued and outstanding
              1,610Paid
                  in capital
              13,821,200Retained
                  earnings
              5,776,34019,599,150Treasury
                  stock at cost, 63,300 shares
              (504,070)Total
                  stockholders’ equity
              19,095,080$97,010,390The
                  accompanying notes are an integral part of these
                  statements.
 
 3
 AeroCentury
                  Corp.Condensed
                  Consolidated Statements of OperationsUnauditedFor
                  the Three MonthsEnded March 31,2006
              2005Revenues:Operating
                  lease revenue
              
              
              $3,701,000
              $2,521,610(Loss)
                  on sale of aircraft
              
              
              -
              (59,550)Other
                  income
              
              
              2,387,380
              78,0906,088,380
              2,540,150Expenses:Depreciation
              
              
              1,230,190
              925,130Interest
              
              
              1,164,260
              762,720Management
                  fees
              
              
              698,150
              544,350Professional
                  fees andgeneral
                  and administrative
              
              
              166,080
              138,460Insurance
              
              
              78,040
              92,610Maintenance
              
              
              2,553,830
              16,610Bad
                  debt expense
              
              
              48,820
              -Provision
                  for impairmentin
                  value of aircraft
              
              
              -
              12,1805,939,370
              2,492,060Income
                  before taxes
              
              
              149,010
              48,090Tax
                  provision
              
              
              44,020
              8,250Net
                  income
              
              
              $
                  104,990
              $
                  39,840Weighted
                  average commonshares
                  outstanding
              
              
              1,543,257
              1,543,257Earnings
                  per share
              
              
              $
                  0.07
              $
                  0.03The
                  accompanying notes are an integral part of these
                  statements.
  4
  
 AeroCentury
                  Corp.Condensed
                  Consolidated Statements of Cash FlowsUnauditedFor the Three Months EndedMarch
                  31,2006
              2005Net
                  cash provided/(used) by operating activities
              $2,317,490
              $
                  (682,930)Investing
                  activities:Payments
                  received on note receivable
              -
              108,650Proceeds
                  from disposal of assets
              -
              7,187,300Equipment
                  additions to aircraft
              (432,840)
              (117,370)Net
                  cash (used)/provided by investing activities
              (432,840)
              7,178,580Financing
                  activity -Repayment
                  of notes payable
              (283,640)
              (5,868,640)Net
                  cash used by financing activity
              (283,640)
              (5,868,640)Net
                  increase in cash and cash equivalents
              1,601,010
              627,010Cash
                  and cash equivalents, beginning of period
              618,910
              2,403,630Cash
                  and cash equivalents, end of period
              $2,219,920
              $
                  3,030,640During
                  the three months ended March 31, 2006 and 2005, the Company paid
                  interest
                  totaling $976,980and
                  $723,000, respectively, and income taxes totaling $48,000 and $1,704,000,
                  respectively.The
                  accompanying notes are an integral part of these
                  statements.
 
  5
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **1.**  **Organization
        and Summary of Significant Accounting Policies**
 
 *(a)*  *Basis
        of Presentation*
 
 AeroCentury
        Corp. (“AeroCentury”), a Delaware corporation, uses leveraged financing to
        acquire leased aircraft assets. The Company purchases used regional aircraft
        on
        lease to foreign and domestic regional carriers. Financial information for
        AeroCentury and its wholly-owned subsidiaries, AeroCentury Investments II
        LLC
        (“AeroCentury II LLC”), AeroCentury Investments V LLC (“AeroCentury V LLC”) and
        AeroCentury Investments VI LLC (“AeroCentury VI LLC”) (collectively, the
“Company”), is presented on a consolidated basis. All intercompany balances and
        transactions have been eliminated in consolidation. During the second quarter
        of
        2006, the title to the aircraft which had been owned by AeroCentury II LLC
        was
        transferred to AeroCentury VI LLC and AeroCentury II LLC was
        dissolved.
 
 *(b)*  *Cash
        and Cash Equivalents/Deposits*
 
 The
        Company considers highly liquid investments readily convertible into known
        amounts of cash, with original maturities of 90 days or less from the date
        of
        acquisition, as cash equivalents.
 
 *(c)*  *Aircraft
        and Aircraft Engines Held For Lease and Held for Sale*
 
 The
        Company’s interests in aircraft and aircraft engines are recorded at cost, which
        includes acquisition costs. The Company purchases only used aircraft. It
        is the
        Company’s policy to hold aircraft for approximately twelve years unless market
        conditions necessitate earlier disposition. Depreciation is computed using
        the
        straight-line method over the twelve year period to an estimated residual
        value
        based on appraisal. Decreases in the market value of aircraft could not only affect the current
        value, but could also affect the assumed residual value. The Company
        periodically obtains a residual value appraisal for its assets and,
        historically, has not written down any estimated residuals. The Company’s
        aircraft which are held for sale are not subject to depreciation.
 
 *(d)*  *Impairment
        of Long-lived Assets*
 
 The
        Company periodically reviews its portfolio of assets for impairment in
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets."  Such
        review necessitates estimates of current market values, re-lease rents, residual
        values and component values.  The estimates are based on currently
        available market data and are subject to fluctuation from time to
        time *.* The Company initiates its review periodically, whenever events or changes
        in
        circumstances indicate that the carrying amount of a long-lived asset may
        not be
        recoverable.  Recoverability of an asset is measured by comparison of its
        carrying amount to the expected future undiscounted cash flows (without interest
        charges) that the asset is expected to generate.  Any impairment to be
        recognized is measured by the amount by which the carrying amount of the
        asset
        exceeds its fair market value.  Significant management judgment is required
        in the forecasting of future operating results which are used in the preparation
        of projected undiscounted cash flows and, should different conditions prevail,
        material write downs may occur.
 
 
 
  6
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **1.**  **Organization
        and Summary of Significant Accounting Policies (continued)**
 
 *(e)*  *Loan
        Commitment and Related Fees*
 
 To
        the
        extent that the Company is required to pay loan commitment fees and legal
        fees
        in order to secure debt, such fees are amortized over the life of the related
        loan.
 
 *(f)*  *Maintenance
        Reserves and Accrued Costs*
 
 Maintenance
        costs under the Company’s triple net leases are generally the responsibility of
        the lessees. The accompanying consolidated balance sheet reflects liabilities
        for maintenance reserves and accrued costs, which include refundable and
        non-refundable maintenance payments received from lessees. At March 31, 2006,
        the Company’s maintenance reserves and accruals consisted of the
        following:
  Refundable
                  maintenance reserves
              
              $
                     820,070Non-refundable
                  maintenance reserves
              
              7,355,340Accrued
                  costs
              
              5,305,840$13,481,250
  Maintenance
        reserves received by the Company are accounted for as a liability, which
        is
        reduced when maintenance work is performed during the lease. Maintenance
        reserves which are refundable to the lessee are refunded after all return
        conditions specified in the lease and, in some cases, any other payments
        due
        under the lease, are satisfied. Any refundable reserves retained by the Company
        to satisfy return conditions are reclassified to the Company’s own maintenance
        payable account at lease end. Maintenance reserves which are non-refundable
        to
        the lessee are recorded as income at lease end. If an aircraft is returned
        early, any collected reserves are reclassified to the Company’s own maintenance
        payable account.
 
 The
        Company periodically reviews its maintenance reserves and maintenance accruals
        for adequacy in light of the number of hours flown, airworthiness directives
        issued by the manufacturer or government authority, and the return conditions
        specified in the lease, as well as the condition of the aircraft upon return
        or
        inspection. As a result of such review, when it is probable that the Company
        has
        incurred costs for maintenance in excess of amounts accrued, the Company
        records
        an expense for the additional work to be performed. Such costs include
        maintenance such as engine and propeller overhauls, structural inspections
        and
        work to comply with airworthiness directives.
 
 When
        an
        aircraft is sold, any remaining accrual is reversed and included in the
        Company’s gain or loss on sale calculation. During the three months ended March
        31, 2006 and 2005, $0 and $131,600 ,
        respectively, of excess accruals were so included.
 
  7
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **1.**  **Organization
        and Summary of Significant Accounting Policies (continued)**
 
 *(f)*  *Maintenance
        Reserves and Accrued Costs (continued)*
 
 Additions
        to and deductions from the Company’s accruals during the three months ended
        March 31, 2006 and 2005 for maintenance work were as follows:
 
 For the Three Months Ended March 312006
              
              2005Additions:Charged
                  to expense
              $
              2,443,000
              $
              15,100Charged
                  to other
                  -Reclassification
                  of reserves
                  collected from lessees
                to
                  the Company’s own liability account355,8702,798,870
              
              15,100Deductions:Paid
                  for previously accrued
                  maintenance
              
              843,460
              
              199,790Reversals
                  of over-accrued
                  maintenance
              
              -
              
              760Included
                  in (loss)/gain on sale
                  of aircraft an aircraft engines
              
              -
              
              131,600843,460
              
              332,150Net
                  increase/(decrease) in accrued maintenance costs, in excess of
                  amounts
                  received under the leases
              
              1,955,410
              
              (317,050)Balance,
                  beginning of period
              
              3,350,430
              
              2,296,520Balance,
                  end of period
              $
              5,305,840
              $
              1,979,470
 
 *(g)*  *Security
        deposits*
 
 The
        Company’s leases are typically structured so that if any event of default occurs
        under a lease, the Company may apply all or a portion of the lessee’s security
        deposit to cure such default. If such application of the security deposit
        is
        made, the lessee typically is required to replenish and maintain the full
        amount
        of the deposit during the remaining term of the lease. All of the security
        deposits received by the Company are refundable to the lessee at the end
        of the
        lease, upon satisfaction of all lease terms.
 
 *(h)*  *Income
        Taxes*
 
 As
        part
        of the process of preparing the Company’s consolidated financial statements,
        management is required to estimate income taxes in each of the jurisdictions
        in
        which the Company operates. This process involves estimating the Company’s
        current tax exposure under the most recent tax laws and assessing temporary
        differences resulting from differing treatment of items for tax and accounting
        purposes. These differences result in deferred tax assets and liabilities,
        which
        are included in the consolidated balance sheet. Management must also assess
        the
        likelihood that the Company’s deferred tax assets will be recovered from future
        taxable income, and, to the extent management believes it is more likely
        than
        not that some portion or all of the deferred tax assets will not be realized,
        the Company must establish a valuation allowance. To the extent the Company
        establishes a valuation allowance
 
  8
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **1.**  **Organization
        and Summary of Significant Accounting Policies (continued)**
 
 *(h)*  *Income
        Taxes (continued)*
 
 or
        changes the allowance in a period, the Company must reflect the corresponding
        increase or decrease within the tax provision in the consolidated statement
        of
        operations.
  *(i)*  *Revenue
        Recognition and Allowance for Doubtful Accounts*
 
 Revenue
        from leasing of aircraft assets is recognized as operating lease revenue
        on a
        straight-line basis over the terms of the applicable lease agreements. The
        Company estimates and charges to income a provision for bad debts based on
        its
        experience in the business and with each specific customer, the level of
        past
        due accounts, and its analysis of the lessees’ overall financial condition. If
        the financial condition of the Company’s customers deteriorates, it could result
        in actual losses exceeding the estimated allowances.
 
 *(j)*  *Use
        of Estimates*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosures of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates. The Company
        bases its estimates on historical experience and on various other assumptions
        that are believed to be reasonable for making judgments that are not readily
        apparent from other sources.
 
 The
        most
        significant estimates with regard to these financial statements are the residual
        values of the aircraft, the useful lives of the aircraft, the amount and
        timing
        of cash flow associated with each aircraft that are used to evaluate impairment,
        if any, accrued maintenance costs in excess of amounts received from lessees,
        the amounts recorded as bad debt allowances and accounting for income
        taxes.
 
 *(k)*  *Comprehensive
        Income*
 
 The
        Company does not have any comprehensive income other than the revenue and
        expense items included in the consolidated statements of operations. As a
        result, comprehensive income equals net income for the three months ended
        March
        31, 2006 and 2005.
 
 *(l)*  *Recent
        Accounting Pronouncements*
 
 SFAS
        153, *Exchanges
        of Nonmonetary Assets,* addresses the measurement of exchanges of nonmonetary assets. It eliminates
        the
        exception from fair value measurement for nonmonetary exchanges of similar
        productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for
        Nonmonetary Transactions, and replaces it with an exception for exchanges
        that
        do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange
        has commercial substance if the future cash flows of the entity are expected
        to
        change significantly as a result of the exchange. The provisions of SFAS
        153 are
        effective for nonmonetary asset exchanges occurring in fiscal periods beginning
        after June 15, 2005. The adoption of SFAS 153 had no effect on the Company’s
        consolidated financial condition or results of operations.
 
  9
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **1.**  **Organization
        and Summary of Significant Accounting Policies (continued)**
  *(l)*  *Recent
        Accounting Pronouncements (continued)*
 
 In March
        2005 ,
        the
        FASB issued
        interpretation FIN No. 47 , ** *Accounting
        for Conditional Asset Retirement Obligations* ("FIN
        47"). FIN 47  clarifies
        that the term *conditional
        asset retirement obligation* as
        used
        in SFAS 143, *Accounting
        for Asset Retirement Obligations* ,
        refers
        to a legal obligation to perform an asset retirement activity in which the
        timing and (or) method of settlement are conditional on a future event that
        may
        or may not be within the control of the entity. FIN 47 is applicable to fiscal
        years ending after December 15, 2005. T he
        adoption of FIN 47 had no material effect on the Company’s consolidated
        financial condition or results of operations.
 
 SFAS
        123(R), Share-based Payment,  requires compensation cost relating to
        share-based payment transactions be recognized in financial statements. SFAS
        123(R) is effective for small business issuers as of the beginning of the
        first
        interim or annual reporting period that began after December 15, 2005,
        supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
        and
        replaces SFAS No. 123, Accounting for Stock-based Compensation. SFAS No.
        123(R)
        . The pro-forma disclosure previously permitted under SFAS No. 123 will no
        longer be an acceptable alternative to recognition of expenses in the financial
        statements. The adoption of SFAS 123(R) had no effect on the Company’s
        consolidated financial condition or results of operations.
 
 **2.**  **Aircraft
        and Aircraft Engines Held for Lease**
 
 At
        March
        31, 2006, the Company owned eleven deHavilland DHC-8s, three deHavilland
        DHC-6s,
        fourteen Fokker 50s, two Saab 340As, three Saab 340Bs and one turboprop engine
        which are held for lease. ****
 
 At
        March
        31, 2006, one of the Company’s deHavilland DHC-8 aircraft, which was returned at
        lease end in February 2006, its two Saab 340A aircraft and one spare turboprop
        engine were off lease. One of the Saab 340A aircraft was re-leased to a new
        customer in April 2006. The Company and the same lessee have agreed to the
        re-lease of the second aircraft and delivery is expected to occur in May
        2006.
        In addition, the deHavilland DHC-8 aircraft was re-leased to an existing
        customer in May 2006.
 
 During
        the first quarter of 2006:
 
 Pursuant
        to lessee extension options, the Company extended the leases for three of
        its
        Fokker 50 aircraft for 18 months each.
 
 The
        Company signed 36-month leases with a regional carrier in the Caribbean for
        two
        of its deHavilland DHC-8 aircraft which were returned at lease end in December
        2005 and March 2006. One aircraft was delivered to the lessee in January
        2006
        and the other was delivered in March 2006.
 
 **3.**  **Aircraft
        Held for Sale**
 
 In
        February 2006, the Company agreed to the early termination of the lease for
        its
        Shorts SD 3-60 aircraft in exchange for the receipt of a portion of the amounts
        due from the lessee through the termination date. The Company recorded $48,820
        of bad debt expense for uncollected rent. As discussed in Note 8, the aircraft
        was sold in April 2006 for a gain of approximately $400,000.
 
 
 
  10
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **4.**  **Notes
        Payable and Accrued Interest**
 
 *(a)*  *Credit
        facility*
 
 In
        November 2005, the Company’s $50 million credit facility was renewed through
        October 31, 2007. In connection with the renewal, certain financial covenants
        were modified, including the applicable margin, which was revised from a
        range
        of 275 to 375 basis points to a range of 275 to 325 basis points, determined
        by
        certain financial ratios. During
        the first three months of 2006, the Company did not repay any of the outstanding
        principal under its credit facility. As of March 31, 2006, the Company was
        in
        compliance with all covenants under its credit facility agreement, $49,996,000
        was outstanding under the credit facility, and interest of $516,190 was accrued.
 
 *(b)*  *Special
        purpose financing*
 
 In
        September 2000, AeroCentury II LLC acquired a deHavilland DHC-8 aircraft
        using
        cash and bank financing separate from its credit facility. The financing
        resulted in a note obligation in the amount of $3,575,000, due April 15,
        2006,
        which bore interest at
        the
        rate of one-month LIBOR plus 3% . The
        note
        was collateralized by the aircraft and is non-recourse to the Company. Payments
        due under the note consisted of monthly principal and interest and a balloon
        principal payment due on the maturity date. The
        financing also provided for a six month remarketing period at the expiration
        or
        early termination of the lease. The
        balance of the note payable at March 31, 2006 was $1,566,290 and interest
        of
        $1,700 was accrued. As of March 31, 2006, the Company was in compliance with
        all
        covenants of this note obligation. As discussed in Note 8, this note obligation
        was refinanced in April 2006.
 
 In
        November 2005, the Company refinanced two DHC-8 aircraft that had been part
        of
        the collateral base for its credit facility. The financing, by a separate
        bank,
        was provided to a special purpose subsidiary to which the aircraft were
        transferred. The financing resulted in a note obligation in the amount of
        $6,400,000, due November 10, 2008, which bears interest at
        the
        rate 7.87% . The
        note
        is collateralized by the aircraft and is non-recourse to the Company. Payments
        due under the note consist of monthly principal and interest through April
        22,
        2008, interest only from April 22, 2008 until the maturity date, and a balloon
        principal payment due on the maturity date. The balance of the note payable
        at
        March 31, 2006 was $6,097,750 and interest of $13,330 was accrued. As of
        March
        31, 2006, the Company was in compliance with all covenants of this note
        obligation.
 
 **5.**  **Stockholder
        Rights Plan**
 
 On
        April
        8, 1998, the Company’s Board of Directors adopted a stockholder rights plan
        granting a dividend of one stock purchase right for each share of the Company’s
        common stock outstanding as of April 23, 1998. The rights will become
        exercisable only upon the occurrence of certain events specified in the plan,
        including the acquisition of 15% of the Company’s outstanding common stock by a
        person or group. Each right entitles the holder to purchase one one-hundredth
        of
        a share of Series A Preferred Stock of the Company at an exercise price of
        $66.00 per one-one-hundredth of a share. Each right entitles the holder,
        other
        than an “acquiring person,” to acquire shares of the Company’s common stock at a
        50% discount to the then prevailing market price. The Company’s Board of
        Directors may redeem outstanding rights at a price of $0.01 per
        right. **
 
 
 
  11
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
  **6.**  **Income
        Taxes**
 
 The
        items
        comprising income tax expense are as follows:
 For the Three Months Ended March 312006
              
              2005Current
                  tax provision:Federal
              $
              -
              $State
              
              1,200
              
              1,000Current
                  taxprovision
              
              1,200
              
              259,300Deferred
                  tax provision/(benefit):Federal
              
              50,250
              
              (242,290)State
              
              (7,430)
              
              (8,760)Deferred
                  tax provision/(benefit)
              
              42,820
              
              (251,050)Total
                  provision for income taxes
              $
              44,020
              $
              8,250
 
 Total
        income tax expense differs from the amount that would be provided by applying
        the statutory federal income tax rate to pretax earnings as illustrated
        below:
  For
                    the Three Months Ended2006
                
                2005Income
                    tax provision at statutory federal income tax rate
                $
                50,660
                $
                16,350State
                    tax provision, net of federal benefit
                
                1,000
                
                670Tax
                    rate differences
                
                (7,640)
                
                (8,770)Total
                    income tax provision
                $
                44,020
                $
                8,250
 
 Tax
        rate
        differences resulted from a decrease in the Company's effective state tax
        rates
        due to changes in state apportionment percentages.
 
 Temporary
        differences and carry-forwards that give rise to a significant portion of
        deferred tax assets and liabilities as of March 31, 2006 are as
        follows:
 
 Deferred
                  tax assets:Deferred
                  maintenance
              $
              2,108,130Maintenance
                  reserves
              
              2,144,400Net
                  operating loss
                carryovers
              
              174,460Prepaid
                  rent and other
              
              257,020Deferred
                  tax assets
              
              4,684,010Deferred
                  tax liabilities:Depreciation
                  on aircraft andaircraft
                  engines
              
              (5,655,890)Other
              
              (128,250)Net
                  deferred tax liabilities
              $
              (1,100,130)
  No
        valuation allowance is deemed necessary, as the Company has concluded that,
        based on an assessment of all available evidence, it is more likely than
        not
        that future taxable income will be sufficient to realize the tax benefits
        of all
        the deferred tax assets on the consolidated balance sheet.
  12
  AeroCentury
        Corp.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 March
        31,
        2006
 
 **7** **.**  **Related
        Party Transactions**
 
 The
        Company has no employees. Its portfolio of leased aircraft assets is managed
        and
        administered under the terms of a management agreement with JetFleet Management
        Corp. (“JMC”), which is an integrated aircraft management, marketing and
        financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain
        officers of the Company are also officers of JHC and JMC and hold significant
        ownership positions in both JHC and the Company. Under the management agreement,
        JMC receives a monthly management fee based on the net asset value of the
        assets
        under management. JMC may also receive an acquisition fee for locating assets
        for the Company, provided that the aggregate purchase price, including
        chargeable acquisition costs and any acquisition fee, does not exceed the
        fair
        market value of the asset based on appraisal, and a remarketing fee in
        connection with the sale or re-lease of the Company’s assets. The management
        fees, acquisition fees and remarketing fees may not exceed the customary
        and
        usual fees that would be paid to an unaffiliated party for such services.
        The
        Company recorded management fees of $698,150 and
        $544,350 during
        the three months ended March 31, 2006 and 2005, respectively. Because the
        Company did not acquire any aircraft during the first three months of 2006
        or
        2005, no acquisition fees were paid to JMC for these periods. The
        Company recorded remarketing fees totaling $49,650 to JMC in connection with
        the
        sale of aircraft in the first three months of 2005. No
        remarketing fees were paid to JMC during 2006.
  **8.**  **Subsequent
        Events**
 
 In
        April
        2006, the Company refinanced the note obligation for an aircraft previously
        owned by AeroCentury II LLC, using bank financing from another lender. The
        aircraft was transferred to AeroCentury VI LLC, a special purpose LLC, which
        borrowed $1,650,000, due October 15, 2009. The note bears interest at an
        adjustable rate of one-month LIBOR plus 3%. The
        note
        is collateralized by the aircraft and the Company’s interest in AeroCentury VI
        LLC and is non-recourse to the Company. Payments
        due under the note consist of monthly principal and interest through April
        20,
        2009, interest only from April 20, 2009 until the maturity date, and a balloon
        principal payment due on the maturity date. If the aircraft lease agreement
        is
        terminated on April 15, 2008 pursuant to a lessee early termination option,
        the
        note will be due October 15, 2008, and the interest only period will be from
        April 20, 2008 through October 15, 2008. AeroCentury II LLC was dissolved
        in
        April 2006.
 
 In
        April
        2006, the Company sold its Shorts SD 3-60 aircraft, which resulted in a gain
        of
        approximately $400,000. In connection with the sale, the Company paid a
        remarketing fee of $44,000 to JMC.
 
 
 
 
  13
  **Item
        2.**  **Management’s
        Discussion and Analysis or Plan of Operation.**
 
 *Overview*
 
 The
        Company is a lessor of turboprop aircraft and engines which are used by
        customers pursuant to triple net **** operating
        leases. The acquisition of such equipment is generally made using debt
        financing. The Company’s profitability and cash flow are dependent in large part
        upon its ability to acquire equipment, obtain and maintain favorable lease
        rates
        on such equipment, and re-lease or sell owned equipment that comes off lease.
        The Company is subject to the credit risk of its lessees, both as to collection
        of rent and to performance by the lessees of obligations for maintaining
        the
        aircraft. Since lease rates for assets in the Company’s portfolio generally
        decline as the assets age, the Company’s ability to maintain revenue and
        earnings over the medium and long term is dependent upon the Company’s ability
        to grow its asset portfolio.
  The
        Company’s principal expenditures are for interest costs on its financing,
        management fees, and maintenance of its aircraft assets. Maintenance
        expenditures are generally incurred only when aircraft are off lease, are
        being
        prepared for re-lease, or require maintenance in excess of lease return
        conditions.
 
 The
        most
        significant non-cash expenses include accruals of maintenance costs to be
        borne
        by the Company and aircraft depreciation, both of which are the result of
        significant estimates. Maintenance expenses are estimated and accrued based
        upon
        utilization of the aircraft. Depreciation is recognized based upon the estimated
        residual value of the aircraft at the end of their estimated lives. Deviation
        from these estimates could have a substantial effect on the Company’s cash flow
        and profitability.
 
 *Critical
        Accounting Policies, Judgments and Estimates*
 
 The
        discussion and analysis of the Company’s financial condition and results of
        operations are based upon the consolidated financial statements, which have
        been
        prepared in accordance with accounting principles generally accepted in the
        United States of America. The preparation of these financial statements requires
        management to make estimates and judgments that affect the reported amounts
        of
        assets and liabilities, revenues and expenses, and the related disclosure
        of
        contingent assets and liabilities at the date of the financial statements.
        Actual results may differ from these estimates under different assumptions
        or
        conditions.
 
 The
        Company’s significant accounting policies are described in Note 1 to the
        consolidated financial statements. The Company believes that the most critical
        accounting policies include the following: Impairment of Long-lived Assets;
        Depreciation Policy, Maintenance Reserves and Accrued Costs; Revenue Recognition
        and Allowance for Doubtful Accounts; and Accounting for Income
        Taxes.
 
 *a.*  *Impairment
        of Long-lived Assets*
 
 The
        Company periodically reviews its portfolio of assets for impairment in
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets."  Such
        review necessitates estimates of current market values, re-lease rents, residual
        values and component values.  The estimates are based on currently
        available market data and third-party appraisals and are subject to fluctuation
        from time to time *.* The Company initiates its review periodically, whenever events or changes
        in
        circumstances indicate that the carrying amount of a long-lived asset may
        not be
        recoverable.  Recoverability of an asset is measured by comparison of its
        carrying amount to the expected future undiscounted cash flows (without interest
        charges) that the asset is expected to generate.  Any impairment to be
        recognized is measured by the amount by which the carrying amount of the
        asset
        exceeds its fair market value.  Significant management judgment is required
        in the forecasting of future operating results which are used in the preparation
        of projected undiscounted cash flows and should different conditions prevail,
        material write downs may occur.
 
  14
  *b.*  *Depreciation
        Policy*
 
 The
        Company’s interests in aircraft and aircraft engines are recorded at cost, which
        includes acquisition costs. The Company purchases only used aircraft. It
        is the
        Company’s policy to hold aircraft for approximately twelve years unless market
        conditions necessitate earlier disposition. Depreciation is computed using
        the
        straight-line method over the twelve year period to an estimated residual
        value
        based on appraisal. Decreases in the market value of aircraft could not only
        affect the current value, discussed above, but could also affect the assumed
        residual value. The Company periodically obtains a residual value appraisal
        for
        its assets and, historically, has not written down any estimated
        residuals.
 
 *c.*  *Maintenance
        Reserves and Accrued Costs*
 
 Maintenance
        costs under the Company’s triple net leases are generally the responsibility of
        the lessees. Maintenance reserves and accrued costs in the accompanying
        consolidated balance sheet include refundable and non-refundable maintenance
        payments received from lessees. The Company periodically reviews maintenance
        reserves for each of its aircraft for adequacy in light of the number of
        hours
        flown, airworthiness directives issued by the manufacturer or government
        authority, and the return conditions specified in the lease, as well as the
        condition of the aircraft upon return or inspection. As a result of such
        review,
        if it is probable that the Company has incurred costs for maintenance in
        excess
        of amounts received from lessees, the Company accrues its share of costs
        for
        work to be performed.
 
 Significant
        management judgment is required in determining aircraft condition and estimating
        maintenance costs. Absent fixed price maintenance agreements, these costs
        cannot
        be determined until such work is completed. Because of the potential magnitude
        of maintenance costs, even slight changes in work scope may have a material
        impact on operating results.
 
 With
        respect to estimated maintenance costs, the Company has found its accruals
        to be
        generally accurate. Nevertheless, the Company has incurred significant
        maintenance expense in connection with aircraft which were returned early
        during
        the last two years in a condition worse than required by the lease, and for
        which the Company was unable to recover the costs of non-compliance from
        the
        lessees. Specifically, the Company incurred maintenance expense of approximately
        $442,000 and $1,864,000 in connection with the early return of aircraft in
        2004
        and 2003, respectively.
 
 15
 *d.*  *Revenue
        Recognition and Allowance for Doubtful Accounts*
 
 Revenue
        from leasing of aircraft assets is recognized as operating lease revenue
        on a
        straight-line basis over the terms of the applicable lease agreements. The
        Company estimates and charges to income a provision for bad debts based on
        its
        experience in the business and with each specific customer, the level of
        past
        due accounts, and its analysis of the lessees’ overall financial condition. If
        the financial condition of the Company’s customers deteriorates, it could result
        in actual losses exceeding the estimated allowances.
 
 *e.*  *Accounting
        for Income Taxes*
 
 As
        part
        of the process of preparing the Company’s consolidated financial statements,
        management is required to estimate income taxes in each of the jurisdictions
        in
        which the Company operates. This process involves estimating the Company’s
        current tax exposure under the most recent tax laws and assessing temporary
        differences resulting from differing treatment of items for tax and accounting
        purposes. These differences result in deferred tax assets and liabilities,
        which
        are included in the consolidated balance sheet. Management must also assess
        the
        likelihood that the Company’s deferred tax assets will be recovered from future
        taxable income, and, to the extent management believes it is more likely
        than
        not that some portion or all of the deferred tax assets will not be realized,
        the Company must establish a valuation allowance. To the extent the Company
        establishes a valuation allowance or changes the allowance in a period, the
        Company must reflect the corresponding increase or decrease within the tax
        provision in the consolidated statement of operations.
 
 Significant
        management judgment is required in determining the Company’s future taxable
        income for purposes of assessing the Company’s ability to realize any benefit
        from its deferred taxes. In the event that actual results differ from these
        estimates or the Company adjusts these estimates in future periods, the
        Company’s operating results and financial position could be materially
        affected.
 
 *Results
        of Operations*
 
 *a.*  *Revenues*
 
 Operating
        lease revenue was approximately $1,179,000 higher in the first three months
        of
        2006 versus 2005, primarily because of increased operating lease revenue
        from
        aircraft purchased beginning in April 2005 and a net increase in rent as
        a
        result of aircraft re-leased after March 31, 2005. These increases, totaling
        approximately $1,324,000 were partially offset by decreases totaling
        approximately $145,000, due to aircraft which were on lease for all of the
        first
        three months of 2005, but off lease for a portion of the first three months
        of
        2006.
 
 Loss
        on
        sale of aircraft was approximately $60,000 for the three months ended March
        31,
        2005 as a result of the sale of a deHavilland DHC-7. There were no sales
        during
        the first three months of 2006.
 
 Other
        income was approximately $2,309,000 higher in the first three months of 2006
        versus the same period in 2005, primarily as a result of $2,396,000 of
        non-refundable maintenance reserves retained by the Company which were recorded
        as income at lease end in 2006. In 2005, the Company’s other income was
        primarily comprised of the $62,000 reversal of previously accrued estimated
        expenses in connection with the sale of one of the Company’s aircraft in
        2004.
 
 16
 *b.*  *Expense
        items*
 
 Depreciation
        was approximately $305,000 higher in the three months ended March 31, 2006
        versus the same period in 2005 and management fees, which are calculated
        on the
        net book value of the aircraft owned by the Company, were approximately $154,000
        higher in 2006. These increases were primarily because of purchases of aircraft
        beginning in April 2005, the effect of which was partially offset by the
        sale of
        an aircraft in the fourth quarter of 2005.
 
 Interest
        expense was approximately $402,000 higher in the first three months of 2006
        versus the same period in 2005 primarily as a result of increases in the
        index
        rates upon which the Company’s interest rates are based and a higher average
        principal balance in 2006 compared to 2005, the effect of which was partially
        offset by a lower margin in 2006 than in 2005.
 
 Maintenance
        expense was approximately $2,537,000 higher in the three months ended March
        31,
        2006 compared to the three months ended March 31, 2005. In 2006, the Company
        retained non-refundable maintenance reserves when two aircraft were returned
        to
        the Company at lease end and recorded such amounts as other income, discussed
        above. Based on the condition of the aircraft at the time of return, the
        Company
        accrued approximately $2,392,000 of maintenance expense for which the Company
        is
        responsible. In 2006, the Company also accrued approximately $162,000 of
        expense
        to prepare several aircraft for re-lease. In 2005, the Company accrued
        approximately $17,000 for the storage of several aircraft.
 
 Professional
        fees and general and administrative expenses were approximately $28,000 higher
        in the first three months of 2006 versus the same period in 2005, primarily
        because of legal expenses associated with the early return of an aircraft,
        the
        effect of which was partially offset by lower accounting fees.
  The
        Company's insurance expense consists primarily of insurance for off-lease
        aircraft and aircraft engines, which varies depending on the type of aircraft
        and engines insured during each period and the length of time each asset
        is
        insured. As a result of the combination of assets insured during each period
        and
        the length of time each was insured, insurance expense was approximately
        $15,000
        lower in the three months ended March 31, 2006 versus the same period in
        2005.
 
 During
        the first three months of 2006, the Company recorded bad debt expense of
        approximately $49,000 for rent receivable which was written off in connection
        with a lessee’s early return of an aircraft. The Company did not record any bad
        debt expense during the first three months of 2005.
 
 The
        Company did not record any impairment charges in the first three months of
        2006.
        In the first three months of 2005, the Company recorded an
        impairment charge of approximately $12,000 for one of its aircraft, based
        on the
        estimated net sales proceeds pursuant to an agreement to sell the aircraft.
 
 The
        Company’s effective tax rates for the three months ended March 31, 2006 and 2005
        were approximately 30% and 17%, respectively. The change in rate was primarily
        a
        result of the recognition of tax benefits related to different state tax
        rates
        that had been accrued in prior years.
 17
 
 *Liquidity
        and Capital Resources*
 
 The
        Company is currently financing its assets primarily through credit facility
        borrowings, special purpose financing and excess cash flow.
 
 *(a)*  *Credit
        facility*
 
 In
        November 2005, the Company’s $50 million credit facility was renewed through
        October 31, 2007. In connection with the renewal, certain financial covenants
        were modified, including the applicable margin, which was revised from a
        range
        of 275 to 375 basis points to a range of 275 to 325 basis points, determined
        by
        certain financial ratios.
 
 During
        the first three months of 2006, the Company did not repay any of the outstanding
        principal under its credit facility. As of March 31, 2006, the Company was
        in
        compliance with all covenants under its credit facility agreement, $49,996,000
        was outstanding under the credit facility, and interest of $516,190 was accrued.
 
 The
        Company is currently in compliance with all covenants and, based on its current
        projections, the Company believes it will continue to be in compliance with
        all
        covenants of its credit facility, but there can be no assurance of such
        compliance. See *"Factors
        That May Affect Future Results - 'Credit Facility Obligations' and 'Risks
        of
        Debt Financing',"* below.
 
 The
        Company's interest expense in connection with the credit facility generally
        moves up or down with prevailing interest rates, as the Company has not entered
        into any interest rate hedge transactions for the credit facility indebtedness.
         Because aircraft owners seeking financing generally can obtain financing
        through either leasing transactions or traditional secured debt financings,
        prevailing interest rates are a significant factor in determining market
        lease
        rates, and market lease rates generally move up or down with prevailing interest
        rates, assuming supply and demand of the desired equipment remain constant.
         However, because lease rates for the Company’s assets typically are fixed
        under existing leases, the Company normally does not experience any positive
        or
        negative impact in revenue from changes in market lease rates due to interest
        rate changes until existing leases have terminated and new lease rates are
        set
        as the aircraft is re-leased.
 
 *(b)*  *Special
        purpose financing*
 
 In
        September 2000, AeroCentury II LLC acquired a deHavilland DHC-8 aircraft
        using
        cash and bank financing separate from its credit facility. The financing
        resulted in a note obligation in the amount of $3,575,000, due April 15,
        2006,
        which bore interest at
        the
        rate of one-month LIBOR plus 3% . The
        note
        was collateralized by the aircraft and was non-recourse to the Company. Payments
        due under the note consisted of monthly principal and interest and a balloon
        principal payment due on the maturity date. The
        financing also provided for a six month remarketing period at the expiration
        or
        early termination of the lease. The
        balance of the note payable at March 31, 2006 was $1,566,290, and interest
        of
        $1,700 was accrued. As of March 31, 2006, the Company was in compliance with
        all
        covenants of this note obligation. In April 2006, the Company refinanced
        this
        note obligation using bank financing from another lender. The aircraft was
        transferred to AeroCentury VI LLC, a special purpose LLC, which borrowed
        $1,650,000, due October 15, 2009. The note bears interest at an adjustable
        rate
        of one-month LIBOR plus 3%. The
        note
        is collateralized by the aircraft and the Company’s interest in AeroCentury VI
        LLC and is non-recourse to the Company. Payments
        due under the note consist of monthly principal and interest through April
        20,
        2009, interest only from April 20, 2009 until the maturity date, and a balloon
        principal payment due on the maturity date. If the aircraft lease agreement
        is
        terminated on April 15, 2008 pursuant to a lessee early termination option,
        the
        note will be due October 15, 2008, and the interest only period will be from
        April 20, 2008 through October 15, 2008. The
        Company is currently in compliance with all covenants of this note
        obligation.
 
 18
 In
        November 2005, the Company refinanced two DHC-8 aircraft that were part of
        its
        credit facility collateral base, using bank financing separate from its credit
        facility. The aircraft were transferred to AeroCentury V LLC, a special purpose
        LLC, which borrowed $6,400,000, due November 10, 2008, which principal bears
        fixed interest at
        the
        rate 7.87% . The
        note
        is collateralized by the aircraft and the Company’s interest in AeroCentury V
        LLC and is non-recourse to the Company. Payments
        due under the note consist of monthly principal and interest through April
        22,
        2008, interest only from April 22, 2008 until the maturity date, and a balloon
        principal payment due on the maturity date. The balance of the note payable
        at
        March 31, 2006 was $6,097,750 and interest of $13,330 was accrued. The
        Company was in compliance with all covenants of this note obligation as of
        that
        date and is currently in compliance.
 
 The
        availability of special purpose financing in the future will depend on several
        factors including (1) the availability of funds to be used for the equity
        portion of the financing, (2) the type of asset being financed, (3) the
        creditworthiness of the underlying lessee and (4) continued compliance with
        certain of the Company’s credit facility covenants. The availability of funds
        for the equity portion of the financing will be dependent on the Company's
        cash
        flow, as discussed in *"Cash
        Flow,"* below.
 
 *(c)*  *Cash
        flow*
 
 The
        Company's primary source of revenue is lease rentals of its aircraft assets.
        It
        is the Company’s policy to monitor each lessee’s needs in periods before leases
        are due to expire. If it appears that a customer will not be renewing its
        lease,
        the Company immediately initiates marketing efforts to locate a potential
        new
        lessee or purchaser for the aircraft. The goal of this procedure is to reduce
        the time that an asset will be off lease. The Company’s aircraft are subject to
        leases with varying expiration dates through November 2010.
 
 Management
        believes that the Company will have adequate cash flow to meet its ongoing
        operational needs, including required repayments under its credit facility,
        based upon its estimates of future revenues and expenditures. The Company’s
        expectations concerning such cash flows are based on existing lease terms
        and
        rents, as well as numerous estimates, including (i) rents on assets to be
        re-leased, (ii) sale proceeds of certain assets currently under lease, (iii)
        the
        cost and anticipated timing of maintenance to be performed and (iv) acquisition
        of additional aircraft and the lease thereof at favorable lease terms. While
        the
        Company believes that the assumptions it has made in forecasting its cash
        flow
        are reasonable in light of experience, actual results could deviate from
        such
        assumptions. Among the more significant external factors outside the Company’s
        control that could have an impact on the accuracy of cash flow assumptions
        are
        (i) an increase in interest rates that negatively affects the Company’s
        profitability and causes the Company to violate covenants of its credit
        facility, requiring repayment of some or all of the amounts outstanding under
        its credit facility, (ii) lessee non-performance or non-compliance with lease
        obligations (which may affect credit facility collateral limitations as well
        as
        revenue and expenses) and (iii) an unexpected deterioration of demand for
        aircraft equipment.
 
  19
  *(i)*  *Operating
        activities*
 
 The
        Company’s cash flow from operations for the three months ended March 31, 2006
        versus the three months ended March 31, 2005 increased by approximately
        $3,000,000. The change in cash flow is a result of changes in several cash
        flow
        items during the period, including principally the following:
 
 Lease
        rents, maintenance reserves and security deposits
 
 Payments
        received from lessees for rent were approximately $1,701,000 higher in the
        three
        months ended March 31, 2006 versus 2005, due primarily to the effect of
        increased lease revenue from aircraft purchased beginning in April 2005,
        which
        was partially offset by decreases due to aircraft which were on lease for
        all of
        the first three months of 2005, but off lease for a portion of the first
        three
        months of 2006. Although increased demand generally in the turboprop market
        has
        caused lease rates to stabilize and, in some cases, rise, it cannot be predicted
        that rental rates on aircraft to be re-leased will not decline, so that,
        absent
        additional acquisitions by the Company, aggregate lease revenues for the
        current
        portfolio could decline over the long term.
 
 Payments
        received from lessees for maintenance reserves increased by approximately
        $349,000 in the first three months of 2006 versus the same period in 2005,
        reflecting principally an increase in the number of aircraft owned by the
        Company and an increase in usage by lessees.
 
 Security
        deposits received increased by approximately $654,000 in the three months
        ended
        March 31, 2006 versus the same period in 2005, because of the cash deposits
        received in connection with the re-lease of aircraft in 2006 and a deposit
        received for the sale of an aircraft.
 
 Expenditures
        for maintenance
 
 Expenditures
        for maintenance were approximately $585,000 higher in the first three months
        of
        2006 versus 2005 primarily as a result of higher payments during 2006 for
        maintenance performed to ready several of the Company’s aircraft for
        remarketing. The effect of these expenditures was partially offset by lower
        payments for maintenance performed by lessees which were funded by maintenance
        reserves held by the Company. The amount of expenditures for maintenance
        in
        future periods will be dependent on the amount and timing of maintenance
        paid
        from lessee maintenance reserves held by the Company and the off-lease status
        of
        the Company’s aircraft.
 
 20
 Expenditures
        for interest
 
 Expenditures
        for interest expense increased by approximately $254,000 in the three months
        ended March 31, 2006 versus the same period in 2005, primarily as a result
        of
        higher average interest rates and a higher average principal balance in 2005.
        Interest expenditures in future periods will be a product of prevailing interest
        rates and the outstanding principal balance on financings, which may be
        influenced by future acquisitions and/or required repayments resulting from
        changes in the collateral base.
 
 Expenditures
        for management fees
 
 Expenditures
        for management fees increased by approximately $120,000 in the three months
        ended March 31, 2006 versus the same period in 2005, as a result of aircraft
        purchases since April 2005.
 
 Expenditures
        for acquisition fees
 
 During
        the first three months of 2006, the Company paid $314,000 to JMC for the
        acquisition fee accrued in December 2005 upon the purchase of four aircraft
        and
        which was included in the Company’s accounts payable balance at December 31,
        2005.
 
 Income
        taxes
 
 Income
        tax payments were approximately $1,656,000 lower in the first three months
        of
        2006 compared to the same period in 2005 primarily because the Company made
        payments of approximately $1,704,000 in 2005 for 2004 tax expense which was
        the
        result of the sale of a portfolio of engines in December 2004.
 
 *(ii)*  *Investing
        activities*
 
 The
        $7,611,000 decrease in cash flow provided by investing activities in the
        first
        three months of 2006 versus the same period in 2005 was primarily due to
        the
        receipt of $5,500,000 of sales proceeds from asset sales in 2005.
 
 *(iii)*  *Financing
        activities*
 
 The
        Company repaid approximately $5,585,000 more of its outstanding debt in the
        three months ended March 31, 2005 versus none in the same period in
        2006.
 
 21
 *Outlook*
 
 The
        Company’s future growth will depend on the availability of additional financing
        for acquisitions of leased assets which, due to rising interest rates, will
        need
        to be leased at increased rental rates to offset the anticipated stable or
        decreased lease rates resulting from future re-leases of the Company’s current
        portfolio. The
        Company is continuing to pursue additional sources of acquisition financing.
 
 The
        Company currently has two aircraft and one turboprop engine off lease, but
        has
        agreements to lease all of these assets to current customers and anticipates
        these assets going back on-lease during the second quarter of 2006. The Company
        has extended the leases for all of its aircraft with leases expiring in 2006
        except for one expiring on May 31, 2006, which the Company anticipates will
        be
        extended during the second quarter.
 
 The
        Company continually monitors the financial condition of its lessees to prevent
        unanticipated creditworthiness issues, and where necessary, works with lessees
        to remind them of, and ensure continued compliance with, both monetary and
        non-monetary obligations under their respective leases. Currently, the Company
        is closely monitoring the performance of one lessee with two aircraft under
        lease. The Company continues to work closely with this lessee to ensure
        compliance with its current obligations. During
        2006, the Company incurred $49,000 of bad debt expense related to amounts
        owed
        by a former lessee at the time the Company and the lessee agreed to the early
        termination of the lease. This expense materially affected the Company's
        financial performance. If any of the Company's current lessees are unable
        to
        meet their lease obligations, the Company's future results could be materially
        impacted. Any
        weakening in the aircraft industry may also affect the performance of lessees
        that currently appear to the Company to be creditworthy. See " *Factors
        that May Affect Future Results - General Economic Conditions* ,"
        below
 
 *Factors
        that May Affect Future Results*
 
 *Credit
        Facility Obligations.* The
        Company is obligated to make repayment of principal under the credit facility
        in
        order to maintain certain debt ratios with respect to its assets in the
        borrowing base. Assets that come off lease and remain off-lease for a period
        of
        time are removed from the borrowing base. The Company believes it will have
        sufficient cash funds to make any payment that arises due to borrowing base
        limitations caused by assets scheduled to come off lease in the near term.
        The
        Company’s belief is based on certain assumptions regarding renewal of existing
        leases, a lack of extraordinary interest rate increases, continuing
        profitability, no lessee defaults or bankruptcies, and certain other matters
        that the Company deems reasonable in light of its experience in the industry.
        There can be no assurance that the Company’s assumptions will prove to be
        correct. If the assumptions are incorrect (for example, if an asset in the
        collateral base unexpectedly goes off lease for an extended period of time)
        and
        the Company has not obtained an applicable waiver or amendment of applicable
        covenants from its lenders to mitigate the situation, the Company may have
        to
        sell a significant portion of its portfolio in order to maintain compliance
        with
        covenants or face default on its credit facility.
 22
 
 *Concentration
        of Lessees and Aircraft Type.* Currently, the Company’s five largest customers are located in Belgium, Taiwan,
        the Caribbean, Norway and Sweden, and currently account for approximately
        15%,
        13%, 12%, 11% and 10%, respectively, of the Company’s monthly lease revenue. A
        lease default by or collection problems with one of these customers could
        have a
        disproportionate negative impact on the Company’s financial results, and
        therefore, the Company’s operating results are especially sensitive to any
        negative developments with respect to these customers in terms of lease
        compliance or collection. Such concentration of lessee credit risk will diminish
        in the future only if the Company is able to lease additional assets to new
        lessees.
  The
        acquisition of eight Fokker 50 aircraft and six DHC-8 aircraft in 2004 and
        2005
        made these two aircraft types the dominant aircraft types in the portfolio,
        constituting 14 and 11, respectively, of the 33 aircraft currently in the
        portfolio and representing 38% and 49%, respectively, based on book value.
        As a
        result, a change in the desirability and availability of either or both of
        these
        types of aircraft, which would in turn affect valuations of such aircraft,
        would
        have a disproportionately large impact on the Company’s portfolio value. Such
        aircraft type concentration will diminish if the Company acquires additional
        assets of other types. Conversely, acquisition of additional Fokker 50 or
        DHC-8
        aircraft will increase the Company’s risks related to its concentration of those
        aircraft types.
 
 *Risks
        of Debt Financing* .
        The
        Company’s use of acquisition financing under its credit facility and its special
        purpose financings subject the Company to increased risks of leveraging.
        If, due
        to a lessee default, the Company is unable to repay the debt secured by the
        aircraft acquired, then the Company could lose title to the acquired aircraft
        in
        a foreclosure proceeding. With respect to the credit facility, the loans
        are
        secured by the Company’s existing assets as well as the specific assets acquired
        with each financing. In addition to payment obligations, the credit facility
        also requires the Company to comply with certain financial covenants, including
        a requirement of positive annual earnings, interest coverage and net worth
        ratios. Any default under the credit facility, if not waived by the lenders,
        could result in foreclosure upon not only the asset acquired using such
        financing, but also the existing assets of the Company securing the loan.
        It is
        possible that some form of subordinated debt may be issued by the Company
        to
        fund acquisitions if the credit facility is not increased. Such financing
        may
        have separate, more restrictive covenants, and may magnify the adverse
        consequences of a lessee default.
 
 *Interest
        Rate Risk.* The
        Company’s current credit facility and the indebtedness of one of its special
        purpose subsidiaries carry a floating interest rate based upon either the
        lender’s prime rate or a floating LIBOR rate. Lease rates, generally, but not
        always, move with interest rates, since market demand for the asset also
        affects
        lease rates. Because lease rates are fixed at the origination of leases,
        interest rate increases during the term of a lease have no effect on existing
        lease payments. Therefore, if interest rates rise significantly, and there
        is
        relatively little lease origination by the Company following such rate
        increases, the Company could experience lower net earnings. Further, even
        if
        significant lease origination occurs following such rate increases, if the
        contemporaneous aircraft market forces result in lower or flat rental rates,
        the
        Company could experience lower net earnings as well.
 
 It
        appears the economy is continuing a period of sustained increasing interest
        rates, particularly with respect to the rates for short-term borrowings,
        upon
        which the Company’s financing rates are based. The Company has not hedged its
        interest rate obligations. Consequently, if an interest rate increase were
        great
        enough, the Company might not be able to generate sufficient lease revenue
        to
        meet its interest payment and other obligations and comply with the net earnings
        covenant of its credit facility.
 
 *Need
        for Additional Financing.* As
        the
        Company's credit facility is almost fully drawn, in order to continue increasing
        its asset base, it will need additional sources of financing. The Company
        is
        currently actively seeking additional debt financing, but there is no assurance
        that it will be able to obtain such financing on terms that are acceptable
        to
        the Company. In the absence of such financing, the Company will likely be
        able
        to meet its short-term cash flow needs, but over the long term, its revenues
        will decrease consistently as the Company’s existing asset base ages and lease
        rates decline as the assets age.
  23
  *Increased
        Compliance Costs* .
        Current
        Sarbanes-Oxley Act requirements applicable to the Company effective for the
        year
        ended December 31, 2007, relating to internal controls and auditors'
        responsibilities to review and opine on those controls, could result in
        significantly higher fees and expenses in connection with auditor services
        beginning in the second half of 2006. The increase will generally arise from
        increased auditor responsibilities, including the broadening of the scope
        of the
        auditor's examination to include the Company's internal controls. If the
        regulations remain unchanged, the Company anticipates that it will have
        sufficient funds to pay for the increased compliance costs.
 
 On
        April
        23, 2006, however, the Advisory Committee on Smaller Public Companies empaneled
        to study the effects of the Sarbanes-Oxley Act on small- and micro-cap companies
        issued its report recommending that certain qualifying small- and micro-cap
        companies be given exemptive relief from compliance with the internal controls
        examination and testing requirements of the Sarbanes Oxley Act until further
        studies are completed enabling the SEC to develop a more appropriate framework
        for examining such companies’ internal controls. If the Committee's
        recommendations are adopted as reported, the Company would qualify for such
        exemptive relief as a micro-cap company with less than $125 million in revenue.
        The Company would then likely postpone any additional implementation of internal
        controls examination and testing until the SEC issues final regulations
        applicable to the Company on the subject. This would in turn postpone the
        anticipated increase in compliance cost, and if final regulations are less
        onerous than the current regulations, potentially reduce the magnitude of
        the
        increased cost the Company would incur.
 
 *Lessee
        Credit Risk.* If
        a
        customer defaults upon its lease obligations, the Company may be limited
        in its
        ability to enforce remedies. Most of the Company’s lessees are small regional
        passenger airlines, which may be even more sensitive to airline industry
        market
        conditions than the major airlines. As a result, the Company’s inability to
        collect rent under a lease or to repossess equipment in the event of a default
        by a lessee could have a material adverse effect on the Company’s revenue. If a
        lessee that is a certified U.S. airline is in default under the lease and
        seeks
        protection under Chapter 11 of the United States Bankruptcy Code, Section
        1110
        of the Bankruptcy Code would automatically prevent the Company from exercising
        any remedies for a period of 60 days. After the 60-day period has passed,
        the
        lessee must agree to perform the obligations and cure any defaults, or the
        Company will have the right to repossess the equipment. This procedure under
        the
        Bankruptcy Code has been subject to significant recent litigation, however,
        and
        it is possible that the Company’s enforcement rights may be further adversely
        affected by a declaration of bankruptcy by a defaulting lessee. Most of the
        Company’s lessees are foreign and not subject to U.S. bankruptcy laws but there
        may be similar applicable foreign bankruptcy debtor protection schemes available
        to foreign carriers.
 
 *Leasing
        Risks.* The
        Company’s successful negotiation of lease extensions, re-leases and sales may be
        critical to its ability to achieve its financial objectives, and involves
        a
        number of risks. Demand for lease or purchase of the assets depends on the
        economic condition of the airline industry which is, in turn, sensitive to
        general economic conditions. The ability to remarket equipment at acceptable
        rates may depend on the demand and market values at the time of remarketing.
        The
        Company anticipates that the bulk of the equipment it acquires will be used
        aircraft equipment. The market for used aircraft is cyclical, and generally
        reflects economic conditions and the strength of the travel and transportation
        industry. The demand for and value of many types of used aircraft in the
        recent
        past has been depressed by such factors as airline financial difficulties,
        increased fuel costs, the number of new aircraft on order and the number
        of
        aircraft coming off-lease. The Company’s expected concentration in a limited
        number of airframe and aircraft engine types (generally, turboprop equipment)
        subjects the Company to economic risks if those airframe or engine types
        should
        decline in value. If “regional jets” were to be used on short routes previously
        served by turboprops, even though regional jets are more expensive to operate
        than turboprops, the demand for turboprops could lessen. This could result
        in
        lower lease rates and values for the Company’s existing turboprop aircraft.
 
 24
 *Risks
        Related to Regional Air Carriers.* Because
        the Company has concentrated its existing leases, and intends to concentrate
        on
        future leases, to regional air carriers, it is subject to additional risks.
        Some
        of the lessees in the regional air carrier market are companies that are
        start-up, low capital, low margin operations. Often, the success of such
        carriers is dependent upon arrangements with major trunk carriers, which
        may be
        subject to termination or cancellation by such major carrier. These types
        of
        lessees result in a generally higher lease rate on aircraft, but may entail
        higher risk of default or lessee bankruptcy. In the event of a business failure
        of the lessee or its bankruptcy, the Company can generally regain possession
        of
        its aircraft, but the aircraft could be in substantially worse condition
        than
        would be the case if the aircraft were returned in accordance with the
        provisions of the lease at lease expiration.
 
 The
        Company evaluates the credit risk of each lessee carefully, and attempts
        to
        obtain a third party guaranty, letters of credit or other credit enhancements,
        if it deems them necessary. There is no assurance, however, that such
        enhancements will be available or that if obtained they will fully protect
        the
        Company from losses resulting from a lessee default or bankruptcy. Also,
        a
        significant area of growth of this market is in areas outside of the United
        States, where collection and enforcement are often more difficult and
        complicated than in the United States. During
        2005, the Company incurred bad debt expense related to amounts owed by two
        former lessees. This expense materially affected the Company's financial
        performance. If any of the Company's current lessees are unable to meet their
        lease obligations, the Company's future results could be materially
        impacted.
 
 *Reliance
        on JMC.* All
        management of the Company is performed by JMC under a management agreement
        which
        is in the ninth year of a 20-year term and provides for an asset-based
        management fee. JMC is not a fiduciary to the Company or its stockholders.
        The
        Company’s Board of Directors has ultimate control and supervisory responsibility
        over all aspects of the Company and owes fiduciary duties to the Company
        and its
        stockholders. The
        Board
        has no control over the internal operations of JMC, but the Board does have
        the
        ability and responsibility to manage the Company's relationship with JMC
        and the
        performance of JMC's obligations to the Company under the management agreement,
        as it would have for any third party service provider to the Company. While
        JMC
        may not owe any fiduciary duties to the Company by virtue of the management
        agreement, the officers of JMC are also officers of the Company, and in that
        capacity owe fiduciary duties to the Company and the stockholders by virtue
        of
        holding such offices with the Company. In addition, certain officers of the
        Company hold significant ownership positions in the Company and JHC, the
        parent
        company of JMC. ****
 
 The
        JMC
        management agreement may be terminated if JMC defaults on its obligations
        to the
        Company. However, the agreement provides for liquidated damages in the event
        of
        its wrongful termination by the Company. All of the officers of JMC are also
        officers of the Company, and certain directors of the Company are also directors
        of JMC. Consequently, the directors and officers of JMC may have a conflict
        of
        interest in the event of a dispute between the Company and JMC. Although
        the
        Company has taken steps to prevent conflicts of interest arising from such
        dual
        roles, such conflicts may still occur.
 
 25
 JMC
        has
        acted as management company for two other aircraft portfolio owners, JetFleet
        III, which raised approximately $13,000,000 from investors, and AeroCentury
        IV,
        Inc. (“AeroCentury IV”), which raised approximately $5,000,000 from investors.
        In the first quarter of 2002, AeroCentury IV defaulted on certain obligations
        to
        noteholders. In June 2002, the indenture trustee for AeroCentury IV’s
        noteholders repossessed AeroCentury IV’s assets and took over management of
        AeroCentury IV’s remaining assets. JetFleet III defaulted on its bond obligation
        of $11,076,350 in May 2004. The indenture trustee for JetFleet III bondholders
        repossessed JetFleet III’s unsold assets in late May 2004.
 
 *Ownership
        Risks.* The
        Company’s portfolio is leased under operating leases, where the terms of the
        leases are less than the entire anticipated useful life of an asset. The
        Company’s ability to recover its purchase investment in an asset subject to an
        operating lease is dependent upon the Company’s ability to profitably re-lease
        or sell the asset after the expiration of the initial lease term. Some of
        the
        factors that have an impact on the Company’s ability to re-lease or sell include
        worldwide economic conditions, general aircraft market conditions, regulatory
        changes that may make an asset’s use more expensive or preclude use unless the
        asset is modified, changes in the supply or cost of aircraft equipment and
        technological developments which cause the asset to become obsolete. In
        addition, a successful investment in an asset subject to an operating lease
        depends in part upon having the asset returned by the lessee in serviceable
        condition as required under the lease. If the Company is unable to remarket
        its
        aircraft equipment on favorable terms when the operating leases for such
        equipment expire, the Company’s business, financial condition, cash flow,
        ability to service debt and results of operations could be adversely affected.
 
 Furthermore,
        an asset impairment charge against the Company’s earnings may result from the
        occurrence of unexpected adverse changes that impact the Company’s estimates of
        expected cash flows generated from such asset. The Company periodically reviews
        long-term assets for impairments, in particular, when events or changes in
        circumstances indicate the carrying value of an asset may not be recoverable.
        An
        impairment loss is recognized when the carrying amount of an asset is not
        recoverable and exceeds its fair value. The Company may be required to recognize
        asset impairment charges in the future as a result of a prolonged weak economic
        environment, challenging market conditions in the airline industry or events
        related to particular lessees, assets or asset types.
 
 *International
        Risks* .
        The
        Company has focused on leases in overseas markets, which the Company believes
        present opportunities. Leases with foreign lessees, however, may present
        somewhat different credit risks than those with domestic lessees.
 
 Foreign
        laws, regulations and judicial procedures may be more or less protective
        of
        lessor rights than those which apply in the United States. The Company could
        experience collection or repossession problems related to the enforcement
        of its
        lease agreements under foreign local laws and the remedies in foreign
        jurisdictions. The protections potentially offered by Section 1110 of the
        Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law
        may
        not offer similar protections. Certain countries do not have a central
        registration or recording system with which to locally establish the Company’s
        interest in equipment and related leases. This could make it more difficult
        for
        the Company to recover an aircraft in the event of a default by a foreign
        lessee.
 
 26
 A
        lease
        with a foreign lessee is subject to risks related to the economy of the country
        or region in which such lessee is located, which may be weaker than the U.S.
        economy. On the other hand, a foreign economy may remain strong even though
        the
        U.S. economy does not. A foreign economic downturn may impact a foreign lessee’s
        ability to make lease payments, even though the U.S. and other economies
        remain
        stable. Furthermore, foreign lessees are subject to risks related to currency
        conversion fluctuations. Although the Company’s current leases are all payable
        in U.S. dollars, the Company may agree in the future to leases that permit
        payment in foreign currency, which would subject such lease revenue to monetary
        risk due to currency fluctuations. Even with U.S. dollar-denominated lease
        payment provisions, the Company could still be affected by a devaluation
        of the
        lessee’s local currency that would make it more difficult for a lessee to meet
        its U.S. dollar-denominated lease payments, increasing the risk of default
        of
        that lessee, particularly if its revenue is primarily derived in the local
        currency.
 
 *Government
        Regulation.* There
        are a number of areas in which government regulation may result in costs
        to the
        Company. These include aircraft registration, safety requirements, required
        equipment modifications, and aircraft noise requirements. Although it is
        contemplated that the burden and cost of complying with such requirements
        will
        fall primarily upon lessees of equipment, there can be no assurance that
        the
        cost will not fall on the Company. Furthermore, future government regulations
        could cause the value of any non-complying equipment owned by the Company
        to
        decline substantially.
 
 *Competition* .
        The
        aircraft leasing industry is highly competitive. The Company competes with
        aircraft manufacturers, distributors, airlines and other operators, equipment
        managers, leasing companies, equipment leasing programs, financial institutions
        and other parties engaged in leasing, managing or remarketing aircraft, many
        of
        which have significantly greater financial resources and more experience
        than
        the Company. However, the Company believes that it is competitive because
        of
        JMC’s experience and operational efficiency in identifying and obtaining
        financing for the transaction types desired by regional air carriers. This
        market segment, which is characterized by transaction sizes of less than
        $10
        million and lessee credits that may be strong, but are generally unrated,
        is not
        well served by the Company’s larger competitors in the aircraft industry. JMC
        has developed a reputation as a global participant in this segment of the
        market, and the Company believes that JMC’s reputation will benefit the Company.
        There is, however, no assurance that the lack of significant competition
        from
        the larger aircraft leasing companies will continue or that the reputation
        of
        JMC will continue to be strong in this market segment.
 
 *Casualties,
        Insurance Coverage* .
        The
        Company, as owner of transportation equipment, may be named in a suit claiming
        damages for injuries or damage to property caused by its assets. As a triple
        net
        lessor, the Company is generally protected against such claims, since the
        lessee
        would be responsible for, insure against and indemnify the Company for, such
        claims. Further, some protection may be provided by the United States Aviation
        Act with respect to the Company’s aircraft assets. It is, however, not clear to
        what extent such statutory protection would be available to the Company,
        and the
        United States Aviation Act may not apply to aircraft operated in foreign
        countries. Also, although the Company’s leases generally require a lessee to
        insure against likely risks, there may be certain cases where the loss is
        not
        entirely covered by the lessee or its insurance. Though this is a remote
        possibility, an uninsured loss with respect to the equipment, or an insured
        loss
        for which insurance proceeds are inadequate, would result in a possible loss
        of
        invested capital in and any profits anticipated from, such equipment, as
        well as
        a potential claim directly against the Company.
 27
 
 *General
        Economic Conditions.* The
        Company’s business is dependent upon general economic conditions and the
        strength of the travel and transportation industry. The industry has experienced
        a severe cyclical downturn which began in 2001. There are signs that the
        industry is beginning to recover from the downturn, but it is unclear whether
        any recovery will be a sustained one. Any recovery could be stalled or reversed
        by any number of events or circumstances, including the global economy slipping
        back into recession, or specific events related to the air travel industry,
        such
        as further weakening of the air carrier or travel industries as a result
        of
        terrorist attacks, or an increase in operational or labor costs. Recent spikes
        in oil prices, if they persist, may have a negative effect on airline profits
        and increase the likelihood of weakening results for airlines that have not
        hedged aircraft fuel costs, and in the most extreme cases, may initiate or
        accelerate the failure of many already marginal carriers.
 
 Since
        regional carriers are generally not as well-capitalized as major air carriers,
        any economic setback in the industry may result in the increased possibility
        of
        an economic failure of one or more of the Company’s lessees, particularly since
        many carriers are undertaking expansion of capacity to accommodate the
        recovering air passenger traffic. If lessees experience financial difficulties,
        this could, in turn, affect the Company’s financial performance.
 
 During
        any periods of economic contraction, carriers generally reduce capacity,
        in
        response to lower passenger loads, and as a result there is a reduced demand
        for
        aircraft and a corresponding decrease in market lease rental rates and aircraft
        values. This reduced market value for aircraft could affect the Company’s
        results if the market value of an asset or assets in the Company’s aircraft
        portfolio falls below carrying value, and the Company determines that a
        write-down of the value on the Company’s balance sheet is appropriate.
        Furthermore, as older leases expire and are replaced by lease renewals or
        re-leases at decreasing lease rates, the lease revenue of the Company from
        its
        existing portfolio is likely to decline, with the magnitude of the decline
        dependent on the length of the downturn and the depth of the decline in market
        rents.
 
 Economic
        downturns can affect specific regions of the world exclusively. As the Company’s
        portfolio is not entirely globally diversified, a localized downturn in one
        of
        the key regions in which the Company leases aircraft (e.g., Europe or Asia)
        could have a significant adverse impact on the Company.
 
 *Possible
        Volatility of Stock Price* .
        The
        market price of the Company’s common stock could be subject to fluctuations in
        response to the Company’s operating results, changes in general conditions in
        the economy, the financial markets, the airline industry, changes in accounting
        principles or tax laws applicable to the Company or its lessees, or other
        developments affecting the Company, its customers or its competitors, some
        of
        which may be unrelated to the Company’s performance. Also, because the Company
        has a relatively small capitalization of approximately 1.5 million shares,
        there
        is a correspondingly limited amount of trading of the Company’s shares.
        Consequently, a single or small number of trades could result in a market
        fluctuation not related to any business or financial development concerning
        the
        Company.
 
 28
 **Item
        3.**  **Controls
        and Procedures.**
 
 **Quarterly
        evaluation of the Company’s Disclosure Controls and Internal
        Controls.** As of
        the end of the period covered by this report, the Company evaluated the
        effectiveness of the design and operation of its “disclosure controls and
        procedures” (“Disclosure Controls”), and its “internal controls over financial
        reporting” (“Internal Controls”). This evaluation (the “Controls Evaluation”)
        was done under the supervision and with the participation of management,
        including the Company’s Chief Executive Officer (“CEO”) and Chief Financial
        Officer (“CFO”). Rules adopted by the Securities and Exchange Commission (“SEC”)
        require that in this section of the Report the Company present the conclusions
        of the CEO and the CFO about the effectiveness of our Disclosure Controls
        and
        Internal Controls based on and as of the date of the Controls
        Evaluation.
 
 **CEO
        and CFO Certifications.** Attached
        as exhibits to this report are two separate forms of “Certifications” of the CEO
        and the CFO. The first form of Certification is required in accordance with
        Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certification”).
        This section of the report is the information concerning the Controls Evaluation
        referred to in the Section 302 Certifications and this information should
        be
        read in conjunction with the Section 302 Certifications for a more complete
        understanding of the topics presented.
 
 **Disclosure
        Controls and Internal Controls.** Disclosure Controls are procedures that are designed with the objective of
        ensuring that information required to be disclosed in the Company’s reports
        filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as
        this report, is recorded, processed, summarized and reported within the time
        periods specified in the SEC’s rules and forms. Disclosure Controls are also
        designed with the objective of ensuring that such information is accumulated
        and
        communicated to the Company’s management, including the CEO and CFO, as
        appropriate to allow timely decisions regarding required disclosure. Internal
        Controls are procedures which are designed with the objective of providing
        reasonable assurance that (1) the Company’s transactions are properly
        authorized; (2) the Company’s assets are safeguarded against unauthorized or
        improper use; and (3) the Company’s transactions are properly recorded and
        reported, all to permit the preparation of the Company’s consolidated financial
        statements in conformity with generally accepted accounting
        principles.
 
 **Limitations
        on the Effectiveness of Controls.** The
        Company’s management, including the CEO and CFO, does not expect that its
        Disclosure Controls or its Internal Controls will prevent all errors and
        all
        fraud. A control system, no matter how well conceived and operated, can provide
        only reasonable, not absolute, assurance that the objectives of the control
        system are met. Further, the design of a control system must reflect the
        fact
        that there are resource constraints, and the benefits of controls must be
        considered relative to their costs. Because of the inherent limitations in
        all
        control systems, no evaluation of controls can provide absolute assurance
        that
        all control issues and instances of fraud, if any, within the Company have
        been
        detected. These inherent limitations include the realities that judgments
        in
        decision-making can be faulty, and that breakdowns can occur because of simple
        error or mistake. Additionally, controls can be circumvented by the individual
        acts of some persons, by collusion of two or more people, or by management
        override of the control. The design of any system of controls also is based
        in
        part upon certain assumptions about the likelihood of future events, and
        there
        can be no assurance that any design will succeed in achieving its stated
        goals
        under all potential future conditions; over time, control may become inadequate
        because of changes in conditions, or the degree of compliance with the policies
        or procedures may deteriorate. Because of the inherent limitations in a
        cost-effective control system, misstatements due to error or fraud may occur
        and
        not be detected.
 
 **Scope
        of the Controls Evaluation.** The
        CEO/CFO evaluation of the Company’s Disclosure Controls and the Company’s
        Internal Controls included a review of the controls objectives and design,
        the
        controls implementation by the company and the effect of the controls on
        the
        information generated for use in this report. In the course of the Controls
        Evaluation, the CEO and CFO sought to identify data errors, controls problems
        or
        acts of fraud and to confirm that appropriate corrective action, including
        process improvements, were being undertaken. This type of evaluation will
        be
        done on a quarterly basis so that the conclusions concerning controls
        effectiveness can be reported in the Company’s quarterly reports on Form 10-QSB
        and annual report on Form 10-KSB. The Company’s Internal Controls are also
        evaluated on an ongoing basis by **** other
        personnel in the Company’s finance organization and by the Company’s independent
        auditors in connection with their audit and review activities. The overall
        goals
        of these various evaluation activities are to monitor the Company’s Disclosure
        Controls and the Company’s Internal Controls and to make modifications as
        necessary; the Company’s intent in this regard is that the Disclosure Controls
        and the Internal Controls will be maintained as dynamic systems that change
        (including with improvements and corrections) as conditions
        warrant.
 
 29
 Among
        other matters, the Company sought in its evaluation to determine whether
        there
        were any “significant deficiencies” or “material weaknesses” in the Company’s
        Internal Controls, or whether the Company had identified any acts of fraud
        involving personnel who have a significant role in the Company’s Internal
        Controls. This information was important both for the Controls Evaluation
        generally and because item 5 in the Section 302 Certifications of the CEO
        and
        CFO require that the CEO and CFO disclose that information to the Audit
        Committee of the Company’s Board and to the Company’s independent auditors and
        to report on related matters in this section of the Report. In the professional
        auditing literature, “significant deficiencies” are referred to as “reportable
        conditions”; these are control issues that could have a significant adverse
        effect on the ability to record, process, summarize and report financial
        data in
        the financial statements. A “material weakness” is defined in the auditing
        literature as a particularly serious reportable condition where the internal
        control does not reduce to a relatively low level the risk that misstatements
        caused by error or fraud may occur in amounts that would be material in relation
        to the financial statements and not be detected within a timely period by
        employees in the normal course of performing their assigned functions. The
        Company also sought to deal with other controls matters in the Controls
        Evaluation, and in each case if a problem was identified, the Company considered
        what revision, improvement and/or correction to make in accordance with our
        on-going procedures.
 
 In
        accordance with SEC requirements, the CEO and CFO note that there has been
        no
        significant change in Internal Controls that occurred during our most recent
        fiscal quarter that has materially affected or is reasonably likely to
        materially affect our Internal Controls.
 
 **Conclusions.** Based
        upon the Controls Evaluation, the Company’s CEO and CFO have concluded that, (i)
        the Company’s Disclosure Controls are effective to ensure that the information
        required to be disclosed by the Company in the reports that it files under
        the
        Exchange Act is recorded, processed, summarized and reported, within the
        time
        periods specified in the Commission’s rules and forms and then accumulated and
        communicated to Company management, including the CEO and CFO, as appropriate
        to
        make timely decisions regarding required disclosures, and (ii) that the
        Company’s Internal Controls are effective to provide reasonable assurance that
        the Company’s consolidated financial statements are fairly presented in
        conformity with generally accepted accounting principles.
 
  30
  **PART
        II**
 **OTHER
        INFORMATION**
 
 
 **Items
        1, 2, 3, 4 and 5 have been omitted as they are not
        applicable.**
 
 **Item
        6.**  **Exhibits**
 
 Exhibits
 
 Exhibit
                Number
              Description31.1
              Certification
                  of Neal D. Crispin, Chief Executive Officer, pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of Toni M. Perazzo, Chief Financial Officer, pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.32.1*
              Certification
                  of Neal D. Crispin, Chief Executive Officer, pursuant to
                Section
                  906 of the Sarbanes-Oxley Act of 2002.32.2*
              Certification
                  of Toni M. Perazzo, Chief Financial Officer, pursuant to
                Section
                  906 of the Sarbanes-Oxley Act of 2002.
 
 *
        These
        certificates are furnished to, but shall not be deemed to be filed with,
        the
        Securities and Exchange Commission.
 
 
 
 
  31
  **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **AEROCENTURY
                CORP**Date: May
                15,
                2006
              By:
              /s/ Toni
                M.
                PerazzoTitle: 
                Senior Vice President-Finance and Chief Financial
                Officer
  32