**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 September 30, 2007





o
            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
xNo  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 November 14, 2007 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  oNo
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 of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
      amended (“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 1”
the statement that the adoption of SFAS 157 and 159 will not have an impact
      on
      the Company’s financial condition, results of operations, or cash
      flows  (ii) in Item 1 “Financial Statements, Note 6” the statement
      that future taxable income will likely be sufficient to realize the tax benefits
      of all the deferred tax assets on the balance sheet; (iii) 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 of its credit
      facility,  (iv) in Item 2 "Management's Discussion and Analysis or
      Plan of Operation – Cash Flow," statements that it will have adequate cash flow
      to meet its ongoing operational needs; (v) in Item 2 "Management's Discussion
      and Analysis or Plan of Operation -- Outlook," statements regarding the
      Company's belief that it will be successful in timely acquiring appropriate
      assets for acquisition to take financial advantage of the additional resources
      provided under the increased credit facility and Subordinated Note financing;
      that if certain aircraft returned to the Company in March 2007 and to be
      returned in the fourth quarter of 2007 remain off-lease for an extended period
      of time, the Company will still maintain compliance with its debt covenants;
      and
      the Company’s belief that its reported net income may be subject to greater
      fluctuations from quarter-to-quarter than would have been the case had the
      Company continued its use of the previous method of accounting for planned
      major
      maintenance activities; and (vi) in Item 2 "Management's Discussion and Analysis
      or Plan of Operation -- Factors that May Affect Future Results,” statements
      regarding 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 the Company intends to focus solely on regional aircraft and engines;
      that
      JMC’s industry experience and technical resources will allow it to effectively
      manage new aircraft types; that acquisition of new aircraft types may lead
      to
      diversification of the portfolio; and that it will acquire primarily used
      aircraft; that overseas markets present business opportunities; that the Company
      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 the compliance of the
      Company's lessees with obligations under their respective leases; the Company’s
      success in finding additional financing and appropriate assets to acquire with
      such financing; risks related to use of debt financing for acquisitions; general
      economic conditions, particularly those that affect the air travel industry;
      unanticipated sharp increases in interest rates; a sudden weakening in demand
      for regional aircraft; further disruptions to the air travel industry due to
      terrorist attacks; assumptions that major maintenance expenses
      will  relatively evenly spaced over the entire portfolio; 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
          -


**Item
      1. Financial Statements.**





AeroCentury
      Corp.


Condensed
      Consolidated Balance Sheet


Unaudited





ASSETSSeptember
                30, 2007Assets:Cash
                and cash equivalents
            
            $
            2,868,880Accounts
                receivable, net of allowances
            
            
            1,009,720Aircraft
                and aircraft engine held for lease,
              net
                of accumulated depreciation of $24,534,670
            
            
            114,121,980Prepaid
                expenses and other
            
            
            1,682,360Total
                assets
            
            $
            119,682,940LIABILITIES
                AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
                payable and accrued expenses
            
            $
            1,114,400Notes
                payable and accrued interest
            
            
            70,885,680Maintenance
                reserves and accrued costs
            
            
            4,996,940Security
                deposits
            
            
            5,794,900Prepaid
                rent
            
            
            788,130Deferred
                income taxes
            
            
            5,242,720Taxes
                payable
            
            
            402,050Total
                liabilities
            
            
            89,224,820Stockholders’
                equity:Preferred
                stock, $0.001 par value, 2,000,000 shares
              authorized,
                no shares issued and outstanding
            
            
            -Common
                stock, $0.001 par value, 3,000,000 shares
              authorized,
                1,606,557 shares issued and outstanding
            
            
            1,610Paid
                in capital
            
            
            15,377,540Retained
                earnings
            
            
            15,583,04030,962,190Treasury
                stock at cost, 63,300 shares
            
            
            (504,070
            )Total
                stockholders’ equity
            
            
            30,458,120Total
                liabilities and stockholders’ equity
            
            $
            119,682,940





The
      accompanying notes are an integral part of these statements.





-
          3
          -





AeroCentury
      Corp.


Condensed
      Consolidated Statements of Operations


Unaudited





For
                the Nine Months
              Ended
                September 30,
            
            
            For
                the Three Months
              Ended
                September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006(as
                restated)
            
            
            
            
            
            (as
                restated)Revenues
                and other income:Operating
                lease revenue
            
            $
            13,582,920
            
            
            $
            11,454,940
            
            
            $
            5,224,310
            
            
            $
            3,920,000Maintenance
                reserves income
            
            
            2,826,780
            
            
            
            2,258,180
            
            
            
            1,152,460
            
            
            
            709,950Gain
                on sale of aircraft
            
            
            -
            
            
            
            33,690
            
            
            
            -
            
            
            
            -Other
            
            
            20,020
            
            
            
            4,200
            
            
            
            11,540
            
            
            
            9,51016,429,720
            
            
            
            13,751,010
            
            
            
            6,388,310
            
            
            
            4,639,460Expenses:Interest
            
            
            4,369,860
            
            
            
            3,687,380
            
            
            
            1,724,080
            
            
            
            1,271,750Depreciation
            
            
            3,986,030
            
            
            
            3,487,970
            
            
            
            1,492,960
            
            
            
            1,172,770Management
                fees
            
            
            2,161,620
            
            
            
            2,056,300
            
            
            
            794,440
            
            
            
            676,660Maintenance
                costs
            
            
            1,301,200
            
            
            
            3,605,860
            
            
            
            375,310
            
            
            
            869,320Professional
                fees and general and administrative
            
            
            490,390
            
            
            
            389,960
            
            
            
            159,670
            
            
            
            116,860Other
                taxes
            
            
            313,570
            
            
            
            23,490
            
            
            
            291,770
            
            
            
            7,830Insurance
            
            
            133,050
            
            
            
            183,000
            
            
            
            57,610
            
            
            
            53,760Bad
                debt expense
            
            
            15,690
            
            
            
            48,820
            
            
            
            -
            
            
            
            -12,771,410
            
            
            
            13,482,780
            
            
            
            4,895,840
            
            
            
            4,168,950Income
                before income taxes
            
            
            3,658,310
            
            
            
            268,230
            
            
            
            1,492,470
            
            
            
            470,510Income
                tax provision
            
            
            1,156,980
            
            
            
            115,740
            
            
            
            428,160
            
            
            
            162,680Net
                income
            
            $
            2,501,330
            
            
            $
            152,490
            
            
            $
            1,064,310
            
            
            $
            307,830Weighted
                average common shares outstanding
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Basic
                earnings per share
            
            $
            1.62
            
            
            $
            0.10
            
            
            $
            0.69
            
            
            $
            0.20Weighted
                average diluted common
              shares
                outstanding
            
            
            1,588,082
            
            
            
            1,543,257
            
            
            
            1,618,674
            
            
            
            1,543,257Diluted
                earnings per share
            
            $
            1.58
            
            
            $
            0.10
            
            
            $
            0.66
            
            
            $
            0.20





The
      accompanying notes are an integral part of these statements.








-
          4
          -





AeroCentury
      Corp.


Condensed
      Consolidated Statements of Cash Flows


Unaudited





For
                the Nine Months
              Ended
                September 30,2007
            
            
            2006(as
                restated)Net
                cash provided by operating activities
            
            $
            11,605,300
            
            
            $
            6,386,690Investing
                activities:Proceeds
                from sale of aircraft, net of re-sale fees
            
            
            -
            
            
            
            1,056,000Purchases
                of aircraft
            
            
            (25,873,190
            )
            
            
            (1,015,770
            )Net
                cash (used)/provided by investing activities
            
            
            (25,873,190
            )
            
            
            40,230Financing
                activities:Borrowings
                under credit facility
            
            
            21,500,000
            
            
            
            1,650,000Net
                proceeds received from issuance of Subordinated Notes
                payable
            
            
            9,237,400
            
            
            
            -Debt
                issuance costs
            
            
            (735,250
            )
            
            
            -Repayment
                of notes payable
            
            
            (16,249,260
            )
            
            
            (5,450,570
            )Net
                cash provided/(used) by financing activities
            
            
            13,752,890
            
            
            
            (3,800,570
            )Net
                (decrease)/increase in cash and cash equivalents
            
            
            (515,000
            )
            
            
            2,626,350Cash
                and cash equivalents, beginning of period
            
            
            3,383,880
            
            
            
            618,910Cash
                and cash equivalents, end of period
            
            $
            2,868,880
            
            
            $
            3,245,260





During
      the nine months ended September 30, 2007 and 2006, the Company paid interest
      totaling $4,555,690 and $3,454,330, respectively.





During
      the nine months ended September 30, 2007, the Company paid income taxes totaling
      $1,200 and received a $64,550 federal tax refund.  During the nine
      months ended September 30, 2006, the Company paid income taxes totaling
      $48,800.





At
      September 30, 2007, capital purchases included in accounts payable and accrued
      expenses were $303,000.





The
      accompanying notes are an integral part of these statements.





-
          5
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**1.
      Organization and Summary of Significant Accounting
      Policies**





*(a)
      Basis of Presentation*





AeroCentury
      Corp., a Delaware
      corporation (the Company, as defined below) acquires used regional aircraft
      for
      lease to foreign and domestic regional carriers.  Financial
      information for AeroCentury Corp. and its wholly-owned subsidiaries, 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.  As discussed in Notes 1(*g*)
      and 2, the Company has restated its results for the three months and nine months
      ended September 30, 2006 in connection with its adoption of Staff Accounting
      Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements When
      Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”) and
      Financial Accounting Standards Board (“FASB”) Staff Position AUG AIR-1,
“Accounting for Planned Major Maintenance Activities”**(“FSP AUG
      AIR-1”).





*(b)
      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, the amounts recorded as accounts receivable and income
      allowances, the estimated fair value of equity instruments, and accounting
      for
      income taxes.





*(c)
      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.





*(d)
      Aircraft and Aircraft Engine Held For Lease and Held for Sale and
      Depreciation*





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 dictate otherwise.  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.  Any aircraft which are held for sale are not subject to
      depreciation.





-
          6
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**1.
      Organization and Summary of Significant Accounting Policies
      (continued)**





*(e)
      Impairment of Long-lived Assets*





The
      Company periodically reviews its
      portfolio of assets for impairment in accordance with Statement of Financial
      Accounting Standards (“SFAS”) 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.





*(f)
      Deferred Financing Costs and Commitment Fees*





Costs
      incurred in connection with term
      debt financing are deferred and amortized over the term of the debt using the
      effective interest method or, in certain instances where the differences are
      not
      material, using the straight line method.  Costs incurred in
      connection with the revolving debt are deferred and amortized using the straight
      line method.  Commitment fees for unused funds are expensed as
      incurred.





*(g)
      Maintenance Reserves and Accrued Costs*





Maintenance
      costs under the Company’s
      triple net operating leases are generally the responsibility of the lessees.
      Refundable maintenance reserves received by the Company are accounted for as
      a
      liability, which is reduced when maintenance work is performed during the lease.
      Generally, under the terms of the Company’s leases, the lessees pay amounts to
      the Company based on usage, which are estimated to cover the expected
      maintenance cost.  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 or in connection with an early return of an aircraft are
      recorded as income.  The accompanying condensed consolidated balance
      sheet reflects liabilities for maintenance reserves and accrued costs, which
      include refundable maintenance payments received from lessees based on
      usage.  At September 30, 2007, the Company’s maintenance reserves and
      accruals consisted of the following:





Refundable
                maintenance reserves
            
            $
            3,947,400Accrued
                costs
            
            
            1,049,540$
            4,996,940








-
          7
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**1.
      Organization and Summary of Significant Accounting Policies
      (continued)**





*(g)
      Maintenance Reserves and Accrued Costs (continued)*





As
      more fully discussed at Note 2, the
      Company adopted the provisions of FASB Staff Position AUG AIR-1, “Accounting for
      Planned Major Maintenance Activities” (“FSP AUG AIR-1”) effective January 1,
      2007.  The Company has elected to use the direct expensing method to
      account for maintenance costs.  Maintenance costs associated with
      non-refundable reserves are expensed as such in the condensed consolidated
      statement of operations in the period a reimbursement claim for incurred
      maintenance or sufficient information is received from the
      lessee.  Non-refundable maintenance reserves collected from lessees
      are recorded as maintenance reserves income based on usage, assuming collections
      are reasonably assured or cash is received.  Due to the timing
      difference of recording maintenance reserves income and recording maintenance
      costs, the effect on current period income could be material. Comparative
      financial statements have been adjusted to apply the new method retrospectively.
      The effects of adoption of FSP AUG AIR-1 on the Company’s financial condition
      and results of operations are shown in Note 2.





Additions
      to and deductions from the
      Company’s accrued costs during the nine months ended September 30, 2007 and 2006
      for aircraft maintenance were as follows:





For
                the Nine Months Ended
              September
                30,2007
            
            
            2006(as
                restated)Balance,
                beginning of period
            
            $
            3,846,690
            
            
            $
            3,350,430Adjustment
                pursuant to FSP AUG AIR-1
            
            
            (3,499,260
            )
            
            
            (2,689,630
            )Balance,
                beginning of period, adjusted for adoption of FSP AUG
                AIR-1
            
            
            347,430
            
            
            
            660,800Additions:Charged
                to expense
            
            
            1,340,700
            
            
            
            2,898,410Charged
                to other
            
            
            -
            
            
            
            2,4101,340,700
            
            
            
            2,900,820Deductions:Paid
                for previously accrued maintenance
            
            
            466,050
            
            
            
            2,949,930Reversals
                of over-accrued maintenance
            
            
            172,540
            
            
            
            -638,590
            
            
            
            2,949,930Net
                increase/(decrease) in accrued maintenance costs
            
            
            702,110
            
            
            
            (49,110
            )Balance,
                end of period
            
            $
            1,049,540
            
            
            $
            611,690





*(h)
      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.








-
          8
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**1.
      Organization and Summary of Significant Accounting Policies
      (continued)**





*(i)
      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 condensed 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 reflects
      the corresponding increase or decrease within the tax provision in the condensed
      consolidated statement of operations.





The
      Company adopted the provisions of FASB issued Interpretation No. 48, “Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement
      109”**(“FIN 48”) effective on January 1, 2007.
****As a result of the implementation of FIN 48, the
      Company
      recognized no adjustment in the liability for unrecognized income tax benefits
      relating to uncertain tax positions.





The
      Company records non-income based
      sales, use, value added and franchise taxes as other tax expense.





*(j)
      Revenue Recognition, Accounts Receivable 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. Non-refundable maintenance reserves billed
      to lessees are accrued as maintenance reserves income based on aircraft
      usage.  In instances for which collectibility is not reasonably
      assured, the Company recognizes revenue as cash payments are
      received.  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 any of the
      Company’s customers deteriorates, it could result in actual losses exceeding any
      estimated allowances.





*(k)
      Comprehensive Income/(Loss)*





The
      Company does not have any
      comprehensive income other than the revenue and expense items included in the
      condensed consolidated statements of operations.  As a result,
      comprehensive income equals net income for the three months and nine months
      ended September 30, 2007 and 2006.





-
          9
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**1.
      Organization and Summary of Significant Accounting Policies
      (continued)**





*(l)
      Recent Accounting Pronouncements*





In
      September 2006, the SEC staff issued
      Staff Accounting Bulletin No. 108 (SAB Topic 1N), *Considering the Effects of
      Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements*, which outlines the approach it believes registrants
      should use to quantify the misstatement of current year financial statements
      that results from misstatements of prior year financial statements.  
SAB 108 changes practice by requiring registrants to use a combination of two
      approaches, the “rollover” approach, which quantifies a misstatement based on
      the amount of the error originating in the current year income statement and
      the
“iron curtain” approach, which quantifies a misstatement based on the effects of
      correcting the misstatement existing in the balance sheet at the end of the
      current year. SAB 108 requires registrants to adjust their financial statements
      if the new approach results in a conclusion that an error is material.  SAB
      108 was effective for fiscal years ending after November 15,
      2006.   The Company adopted SAB 108 for the year ended December
      31, 2006.  The effects of adjustments made pursuant to SAB 108 on the
      Company’s results of operations are shown in Note 2.





In
      September 2006, the FASB issued SFAS 157, *Fair Value Measurements”*
      (“SFAS 157”).  This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (“GAAP”), and expands disclosures about fair value measurements. SFAS 157
      applies under other accounting pronouncements that require or permit fair value
      measurements, the FASB having previously concluded in those accounting
      pronouncements that fair value is the relevant measurement attribute.
      Accordingly, SFAS 157 does not require any new fair value measurements. However,
      for some entities, the application of SFAS 157 will change current practice.
      This statement is effective for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The Company believes the adoption
      of SFAS 157 will not have an impact on its financial condition, results of
      operations or cash flows.





In
      February 2007, the FASB issued SFAS
      159, *The Fair Value Option for Financial Assets and Financial Liabilities*(“SFAS 159”).  SFAS 159 permits companies to make a one-time election
      to carry eligible types of financial assets and liabilities at fair value,
      even
      if fair value measurement is not required under GAAP.  SFAS 159 is
      effective for fiscal years beginning after November 15, 2007. Early adoption
      is
      permitted if the decision to adopt the standard is made after the issuance
      of
      SFAS 159 but within 120 days after the first day of the fiscal year of adoption,
      provided no financial statements have yet been issued for any interim period
      and
      provided the requirements of SFAS 157 are adopted concurrently with SFAS
      159.  The Company believes that upon the adoption of SFAS 159, it will not
      have an impact on its financial condition, results of operations or cash
      flows.























-
          10
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**2.
      Adoption of SAB 108 and FSP AUG AIR-1**





As
      discussed in Note 1, the Company
      adopted SAB 108 for the year ended December 31, 2006.  In the course
      of evaluating balance sheet amounts under the provisions of SAB 108, the Company
      identified the following adjustments as of January 1, 2006:  (i) as a
      result of non-refundable maintenance reserves received at the time four aircraft
      were purchased in 1999 which should have been treated as a tax basis reduction
      rather than a liability for maintenance reserves, a net decrease to the
      Company’s deferred tax liability in the amount of $269,340; (ii) as a result of
      funds received from the seller when the Company purchased an aircraft in 2004,
      which should have been treated as a reduction in the purchase price rather
      than
      a liability for maintenance reserves, and the incorrect tax treatment of a
      portion of maintenance reserves as non-refundable instead of refundable, a
      decrease of $287,650 to both the cost basis of the Company’s aircraft and
      maintenance reserves and accrued costs, a decrease of $33,960 in accumulated
      depreciation, an increase of $12,180 in accounts receivable, and an increase
      of
      $14,790 in deferred tax liabilities; (iii) as a result of a reversal of tax
      liabilities due to a lower anticipated state tax rate than was provided for
      at
      the time of the Company’s incorporation, a decrease of $136,800 to deferred tax
      liabilities and (iv) as a result of the incorrect treatment of interest related
      to maintenance reserves for one aircraft as additional reserves rather than
      income, a decrease of $103,080 to refundable maintenance
      reserves.  These amounts were recorded in immaterial amounts prior to
      2006. However, using the dual evaluation approach prescribed by SAB 108,
      correction of the above amounts would have been material to earnings for
      2006.  In accordance with SAB 108, these adjustments have been
      reflected  as an opening adjustment of $540,570 to retained earnings at
      January 1, 2006.  In addition, comparative information for the nine months
      and three months ended September 30, 2006 has been adjusted to reflect the
      adoption of SAB 108, as summarized below:





For
                the Nine Months Ended
              September
                30, 2006
            
            
            For
                the Three Months Ended
              September
                30, 2006As
                reported
              previously
            
            
            As
                adjusted
              under
              SAB
                108
            
            
            Increase/
              (decrease)
              effect
                of
              change
            
            
            As
                reported
              previously
            
            
            As
                adjusted
              under
              SAB
                108
            
            
            Increase/
              (decrease)
              effect
                of
              changeOperating
                lease revenue
            
            $
            11,454,940
            
            
            $
            11,454,940
            
            
            $
            -
            
            
            $
            3,920,000
            
            
            $
            3,920,000
            
            
            $
            -Maintenance
                reserves income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Gain
                on sale of aircraft
            
            
            408,840
            
            
            
            408,840
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
            
            
            2,400,700
            
            
            
            2,400,700
            
            
            
            -
            
            
            
            9,510
            
            
            
            9,510
            
            
            
            -14,264,480
            
            
            
            14,264,480
            
            
            
            -
            
            
            
            3,929,510
            
            
            
            3,929,510
            
            
            
            -Interest
            
            
            3,687,380
            
            
            
            3,687,380
            
            
            
            -
            
            
            
            1,271,750
            
            
            
            1,271,750
            
            
            
            -Depreciation
            
            
            3,708,520
            
            
            
            3,690,550
            
            
            
            (17,970
            )
            
            
            1,247,560
            
            
            
            1,241,560
            
            
            
            (6,000
            )Management
                fees
            
            
            2,061,720
            
            
            
            2,056,300
            
            
            
            (5,420
            )
            
            
            678,460
            
            
            
            676,660
            
            
            
            (1,800
            )Maintenance
            
            
            3,554,920
            
            
            
            3,554,920
            
            
            
            -
            
            
            
            221,600
            
            
            
            221,600
            
            
            
            -Professional
                fees and other
            
            
            645,270
            
            
            
            645,270
            
            
            
            -
            
            
            
            178,450
            
            
            
            178,450
            
            
            
            -13,657,810
            
            
            
            13,634,420
            
            
            
            (23,390
            )
            
            
            3,597,820
            
            
            
            3,590,020
            
            
            
            (7,800
            )Income
                before taxes
            
            
            606,670
            
            
            
            630,060
            
            
            
            23,390
            
            
            
            331,690
            
            
            
            339,490
            
            
            
            7,800Tax
                provision
            
            
            196,970
            
            
            
            230,570
            
            
            
            33,600
            
            
            
            112,580
            
            
            
            123,780
            
            
            
            11,200Net
                income
            
            $
            409,700
            
            
            $
            399,490
            
            
            $
            (10,210
            )
            
            $
            219,110
            
            
            $
            215,710
            
            
            $
            (3,400
            )Earnings
                per share:Basic
            
            $
            0.27
            
            
            $
            0.26
            
            
            $
            (0.01
            )
            
            $
            0.14
            
            
            $
            0.14
            
            
            $
            -Diluted
            
            $
            0.27
            
            
            $
            0.26
            
            
            $
            (0.01
            )
            
            $
            0.14
            
            
            $
            0.14
            
            
            $
            -




-
          11
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**2.
      Adoption of SAB 108 and FSP AUG AIR-1 (continued)**





As
      discussed in Note 1, the Company
      adopted FSP AUG AIR-1 on January 1, 2007.  The effects on the
      Company’s condensed consolidated statement of operations as a result of the
      retroactive restatement of the Company’s results of operations for the nine
      months and three months ended September 30, 2006 were as follows.





For
                the Nine Months Ended
              September
                30, 2006
            
            
            For
                the Three Months Ended
              September
                30, 2006As
                adjusted
              under
              SAB
                108
            
            
            As
                reported
              under
                FSP
              AUG
                AIR-1
            
            
            Increase/
              (decrease)
              effect
                of
              change
            
            
            As
                adjusted
              under
              SAB
                108
            
            
            As
                reported
              under
                FSP
              AUG
                AIR-1
            
            
            Increase/
              (decrease)
              effect
                of
              changeOperating
                lease revenue
            
            $
            11,454,940
            
            
            $
            11,454,940
            
            
            $
            -
            
            
            $
            3,920,000
            
            
            $
            3,920,000
            
            
            $
            -Maintenance
                reserves income
            
            
            -
            
            
            
            2,258,180
            
            
            
            2,258,180
            
            
            
            -
            
            
            
            709,950
            
            
            
            709,950Gain
                on sale of aircraft
            
            
            408,840
            
            
            
            33,690
            
            
            
            (375,150
            )
            
            
            -
            
            
            
            -
            
            
            
            -Other
                income
            
            
            2,400,700
            
            
            
            4,200
            
            
            
            (2,396,500
            )
            
            
            9,510
            
            
            
            9,510
            
            
            
            -14,264,480
            
            
            
            13,751,010
            
            
            
            (513,470
            )
            
            
            3,929,510
            
            
            
            4,639,460
            
            
            
            709,950Interest
            
            
            3,687,380
            
            
            
            3,687,380
            
            
            
            -
            
            
            
            1,271,750
            
            
            
            1,271,750
            
            
            
            -Depreciation
            
            
            3,690,550
            
            
            
            3,487,970
            
            
            
            (202,580
            )
            
            
            1,241,560
            
            
            
            1,172,770
            
            
            
            (68,790
            )Management
                fees
            
            
            2,056,300
            
            
            
            2,056,300
            
            
            
            -
            
            
            
            676,660
            
            
            
            676,660
            
            
            
            -Maintenance
            
            
            3,554,920
            
            
            
            3,605,860
            
            
            
            50,940
            
            
            
            221,600
            
            
            
            869,320
            
            
            
            647,720Professional
                fees and other
            
            
            645,270
            
            
            
            645,270
            
            
            
            -
            
            
            
            178,450
            
            
            
            178,450
            
            
            
            -13,634,420
            
            
            
            13,482,780
            
            
            
            (151,640
            )
            
            
            3,590,020
            
            
            
            4,168,950
            
            
            
            578,930Income
                before taxes
            
            
            630,060
            
            
            
            268,230
            
            
            
            (361,830
            )
            
            
            339,490
            
            
            
            470,510
            
            
            
            131,020Tax
                provision
            
            
            230,570
            
            
            
            115,740
            
            
            
            (114,830
            )
            
            
            123,780
            
            
            
            162,680
            
            
            
            38,900Net
                income
            
            $
            399,490
            
            
            $
            152,490
            
            
            $
            (247,000
            )
            
            $
            215,710
            
            
            $
            307,830
            
            
            $
            92,120Earnings
                per share:Basic
            
            $
            0.26
            
            
            $
            0.10
            
            
            $
            (0.16
            )
            
            $
            0.14
            
            
            $
            0.20
            
            
            $
            0.06Diluted
            
            $
            0.26
            
            
            $
            0.10
            
            
            $
            (0.16
            )
            
            $
            0.14
            
            
            $
            0.20
            
            
            $
            0.06





**3.
      Aircraft and Aircraft Engine Held for Lease**





At
      September 30, 2007, the Company
      owned eight deHavilland DHC-8-300s, three deHavilland DHC-8-100s, three
      deHavilland DHC-6s, fourteen Fokker 50s, two Saab 340As, six Saab 340Bs, four
      Fokker 100s and one turboprop engine which are held for lease.  During
      the third quarter, the Company purchased two Fokker 100 aircraft which are
      subject to leases with a regional carrier in Mexico for terms expiring in June
      and December 2010.  During the third quarter, the Company also
      extended the leases for two of its DHC-8-300 aircraft for three
      years.  At September 30, 2007, the Company’s two Saab 340A aircraft
      and one turboprop engine were off lease.





In
      March 2007, based on the financial
      difficulties of the lessee, the Company agreed to the early return of two of
      its
      aircraft, which had leases expiring in May and July 2008.  In March
      2007, the Company recorded $15,700 of bad debt expense for uncollected
      maintenance reserves.  The Company has initiated legal action against
      the lessee to recover unpaid amounts. The Company is seeking re-lease or sale
      opportunities for these aircraft.





-
          12
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**4.
      Notes Payable and Accrued Interest**





*(a)
      Credit Facility*





On
      April
      17, 2007, the Company and the lenders under its revolving credit facility (the
      “Credit Facility”) entered into an amended and restated credit agreement, which
      provides for (i) a three-year term, (ii) a $25 million increase in the current
      amount available from $55 million to $80 million and (iii) the ability to
      increase the maximum amount available under the Credit Facility to $110
      million.  Certain financial covenants were also modified. During the
      first nine months of 2007, the Company repaid $15,300,000 of the outstanding
      principal under its Credit Facility.  As of September 30, 2007, the
      Company was in compliance with all covenants under the Credit Facility
      agreement, $57,096,000 was outstanding, and interest of $291,980 was
      accrued.  Under the terms of the Credit Facility, the Company pays a
      commitment fee based upon the applicable commitment fee rate on the unused
      portion of the Credit Facility.   Commitment fees are expensed as
      incurred and paid quarterly in arrears.





*(b)
      Senior unsecured subordinated debt*





On
      April
      17, 2007, the Company entered into a Securities Purchase Agreement, whereby
      the
      Company will issue 16% senior unsecured subordinated notes ("Subordinated
      Notes"), with an aggregate principal amount of up to $28 million to certain
      note
      purchasers (“Note Purchasers”). The Subordinated Notes will be issued at 99% of
      the face amount and are due December 30, 2011. Under the Securities Purchase
      Agreement, the Note Purchasers also were issued warrants to purchase up to
      171,473 shares of the Company's common stock at an exercise price of $8.75
      per
      share.  The warrants are exercisable for a four-year period after the
      earliest of (i) a change of control, or (ii) the final maturity of the related
      Subordinated Notes, which is December 30, 2011.  Pursuant to an
      investor’s registration rights agreement, the warrants are subject to
      registration rights that require the Company to use commercially reasonable
      efforts to register the shares issued in conjunction with an exercise of the
      warrants.   Under the terms of the Subordinated Notes, on the last day of
      each month, commencing on May 31, 2007 and ending on the earlier of June 30,
      2008 or the final closing, the Company pays a commitment fee on any unissued
      amount, of the Subordinated Notes.





In
      connection with the issuance of the Subordinated Notes, the Company incurred
      approximately $1,498,000 of costs, of which approximately $763,000 was recorded
      as debt discount and approximately $689,000 and $46,000 were recorded as
      deferred financing costs and as a reduction to additional paid-in capital,
      respectively.  The Company allocated approximately $25.5 million of
      the expected proceeds of the Subordinated Notes to debt and approximately $1.6
      million to the warrants on the basis of their estimated relative fair values.
      The allocation of proceeds representing the fair value of the warrants was
      recorded as additional debt discount on the Subordinated Notes and additional
      paid-in capital.





The
      Company is amortizing the total debt discount and deferred financing costs
      using
      the interest method over the term of the Subordinated Notes. Commitment fees
      are
      expensed as incurred.





At
      the
      initial April 17, 2007 closing, Subordinated Notes with a face amount of $10
      million were issued.  The remaining $18 million of Subordinated Notes
      are required to be issued on or before June 30, 2008. The Company intends to
      use
      the proceeds of the Subordinated Notes offering for acquisition of additional
      aircraft assets.  As of September 30, 2007, the Company was in
      compliance with all covenants under the Securities Purchase Agreement, the
      carrying amount of the Subordinated Notes was approximately $7,594,610
      (outstanding principal amount of $10,000,000 less unamortized debt discount
      of
      approximately $2,405,390) and accrued interest payable was
      $133,330.














-
          13
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**4.
      Notes Payable and Accrued Interest (continued)**





*(c)
      Special purpose financing*





In
      September 2000, a special purpose
      subsidiary acquired a deHavilland DHC-8-100 aircraft using cash and bank
      financing separate from its Credit Facility.   The related note
      obligation, which was due April 15, 2006, was refinanced in April 2006, using
      bank financing from another lender, and the subsidiary was dissolved. The
      aircraft was transferred to AeroCentury VI LLC, a newly formed special purpose
      limited liability company, 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 AeroCentury
      Corp.  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. During the nine months ended September 30, 2007, $231,050 of principal
      was repaid on the note.  The balance of the note payable at September
      30, 2007 was $1,190,290 and interest of $3,090 was accrued.  As of
      September 30, 2007, the Company was in compliance with all covenants of this
      note obligation.





In
      November 2005, the Company
      refinanced two DHC-8-300 aircraft that had been part of the collateral base
      for
      its Credit Facility.  The financing, by a bank separate from its
      Credit Facility, was provided to a newly formed special purpose subsidiary,
      AeroCentury V LLC, 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 of 7.87%.  The
      note is collateralized by the aircraft and is non-recourse to AeroCentury
      Corp.  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. During
      the nine months ended September 30, 2007, AeroCentury V LLC repaid $718,210
      of
      principal.  The balance of the note payable at September 30, 2007 was
      $4,702,500 and interest of $7,200 was accrued.  As of September 30,
      2007, 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 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.**





-
          14
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**6. 
      Income Taxes**





The
      items comprising income tax expense
      are as follows:


For
                the Nine Months Ended
              September
                30,2007
            
            
            2006(as
                restated)Current
                tax provision:Federal
            
            $
            (46,680
            )
            
            $
            -State
            
            
            2,180
            
            
            
            11,140Foreign
            
            
            114,360
            
            
            
            -Current
                tax provision
            
            
            69,860
            
            
            
            11,140Deferred
                tax provision:Federal
            
            
            1,071,850
            
            
            
            87,410State
            
            
            15,270
            
            
            
            17,190Deferred
                tax provision
            
            
            1,087,120
            
            
            
            104,600Total
                provision for income taxes
            
            $
            1,156,980
            
            
            $
            115,740





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 Nine Months Ended
              September
                30,2007
            
            
            2006(as
                restated)Income
                tax provision at statutory federal income tax rate
            
            $
            1,243,830
            
            
            $
            91,200State
                tax provision, net of federal benefit
            
            
            14,480
            
            
            
            8,310Estimated
                effects of amending prior year tax returns
            
            
            (51,360
            )
            
            
            -Tax
                refunds
            
            
            (46,680
            )
            
            
            (550
            )Tax
                rate differences and other
            
            
            (3,290
            )
            
            
            16,780Total
                income tax provision
            
            $
            1,156,980
            
            
            $
            115,740





Tax
      rate differences reflect the change
      in effective state tax rates that resulted from changes in state income tax
      apportionments related to changed nexus of aircraft leasing activities among
      various states.





The
      Company recognized a tax benefit in
      2007 as the result of an election to amend its prior year tax returns to claim
      foreign tax credits rather than claim deductions.








-
          15
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**6.
      Income Taxes (continued)**





Temporary
      differences and
      carry-forwards that give rise to a significant portion of deferred tax assets
      and liabilities as of September 30, 2007 are as follows:





Deferred
                tax assets:Current
                and prior year tax losses
            
            $
            3,044,950Prepaid
                rent
            
            
            263,460Maintenance
            
            
            151,500Foreign
                tax credit carryover
            
            
            391,510Prior
                year minimum tax credit
            
            
            100,820Bad
                debt allowance and other
            
            
            5,660Deferred
                tax assets
            
            
            3,957,900Deferred
                tax liabilities:Accumulated
                depreciation on aircraft and aircraft engines
            
            
            (9,143,410
            )Subordinated
                Notes loan fees and discount
            
            
            (57,210
            )Net
                deferred tax liabilities
            
            $
            (5,242,720
            )





Current
      and prior year tax losses
      include losses resulting from a change in the accounting method related to
      maintenance costs approved by the Internal Revenue Service in August
      2007.  The change was effective for tax years beginning January 1,
      2005 and related to the Company’s method of accounting for major maintenance
      costs.  In addition, current and prior year tax losses include other
      adjustments involving the corrected treatment of reserves received when certain
      aircraft were acquired. The prior year tax losses will be available to offset
      taxable income in each of the two preceding tax years from when the loss was
      incurred and in future years through 2026.





The
      foreign tax credit carryover will
      be available to offset federal tax expense in the first preceding tax year
      and
      in future years.  The foreign tax credit carryovers expire beginning
      in 2013 and extend through 2017.  The minimum tax credit will be
      available to offset federal tax expense in excess of the alternative minimum
      tax
      in future years and does not expire.





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
      condensed consolidated balance sheet.





As
      described in Note 1, the Company
      adopted FIN 48 on January 1, 2007, which prescribes treatment of "unrecognized
      tax positions," and requires measurement and disclosure of such
      amounts.  At both January 1, 2007 and September 30, 2007, the Company
      had no material unrecognized tax benefits.





The
      Company accounts for interest
      related to uncertain tax positions as interest expense, and for income tax
      penalties as tax expense.





All
      of the Company's tax years remain
      open to examination other than as barred in the various jurisdictions by
      statutes of limitations.





-
          16
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





**7.
      Computation of Net Income/(Loss) Per Share**





Basic
      and diluted earnings per share
      are calculated as follows:





For
                the Nine Months
            
            
            For
                the Three MonthsEnded
                September 30,
            
            
            Ended
                September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006(as
                restated)
            
            
            
            
            
            (as
                restated)Net
                income
            
            $
            2,501,330
            
            
            $
            152,490
            
            
            $
            1,064,310
            
            
            $
            307,830Weighted
                average shares outstanding for the period
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Dilutive
                effect of warrants
            
            
            44,825
            
            
            
            -
            
            
            
            75,417
            
            
            
            -Weighted
                average diluted shares outstanding
            
            
            1,588,082
            
            
            
            1,543,257
            
            
            
            1,618,674
            
            
            
            1,543,257Basic
                earnings per share
            
            $
            1.62
            
            
            $
            0.10
            
            
            $
            0.69
            
            
            $
            0.20Diluted
                earnings per share
            
            $
            1.58
            
            
            $
            0.10
            
            
            $
            0.66
            
            
            $
            0.20





Basic
      income per common share is
      computed using net income and the weighted average number of common shares
      outstanding during the period.  Diluted income per common share is
      computed using net income and the weighted average number of common shares
      outstanding, assuming dilution.  Weighted average common shares
      outstanding, assuming dilution, includes potentially dilutive common shares
      outstanding during the period. Potentially dilutive common shares include the
      assumed exercise of warrants using the treasury stock method.





**8.
      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
      also receives 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 may receive a remarketing fee in connection with the sale or
      re-lease of the Company’s assets. The Company recorded management fees of
      $2,161,620 and $2,056,300 during the nine months ended September 30, 2007 and
      2006, respectively. The Company paid acquisition fees totaling $855,780 to
      JMC
      during the nine months ended September 30, 2007, which are included in the
      cost
      basis of the aircraft purchased.  Because the Company did not acquire
      any aircraft during the first nine months of 2006, no acquisition fees were
      paid
      to JMC for this period.  The Company paid remarketing fees totaling
      $44,000 to JMC in connection with the sale of an aircraft during the first
      nine
      months of 2006, which is included in the computation of the gain on sale of
      aircraft.  No remarketing fees were paid to JMC during the nine months
      ended September 30, 2007.











-
          17
          -


**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.**





*Overview*





The
      Company owns regional aircraft and engines which are leased to customers under
      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 lessees of their obligations to maintain 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 is primarily 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 incurred when aircraft are off lease, are being prepared for
      re-lease, or require maintenance in excess of lease return conditions, as well
      as when maintenance work is performed in connection with the release of
      maintenance reserves previously received by the Company from lessees. See
“*c.**Maintenance Reserves and Accrued Costs*,” below, regarding
      the Company’s accounting treatment of maintenance expenses.





The
      most
      significant non-cash expenses include aircraft depreciation, which is the result
      of significant estimates, and, beginning in the second quarter of 2007,
      amortization of costs associated with the Company’s Subordinated Notes, which is
      included in interest expense.





*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
      condensed consolidated financial statements.  The Company believes
      that the most critical accounting policies include the
      following:  Impairment of Long-lived Assets; Aircraft Capitalization
      and Depreciation; Maintenance Reserves and Accrued Costs; Revenue Recognition
      and Accounts Receivable and Income Allowances; and Accounting for Income
      Taxes.





*a.
      Impairment of Long-lived Assets*





The
      Company periodically reviews its portfolio of assets for impairment in
      accordance with SFAS 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.





-
          18
          -


b.
      *Aircraft Capitalization and Depreciation*





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 dictate
      otherwise.  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 had to write down any assets
      due to revised estimated residuals.





*c.
      Maintenance Reserves and Accrued Costs*





Maintenance
      costs under the Company’s triple net operating leases are generally the
      responsibility of the lessees.  Maintenance reserves and accrued costs
      in the accompanying condensed consolidated balance sheet include refundable
      maintenance payments received from lessees, which are paid out as related
      maintenance is performed.





Upon
      adoption of FSP AUG AIR-1 on January 1, 2007, as discussed in Notes 1 and 2
      to
      the condensed consolidated financial statements, the Company was required to
      discontinue the accrue-in-advance method of accounting for planned major
      maintenance for financial reporting periods beginning on January 1,
      2007.  The Company has evaluated the impact of the adoption of this
      new staff position and elected to use the direct expensing method, under which
      maintenance costs are expensed as incurred.  Under this method,
      non-refundable maintenance reserves for planned major maintenance are reflected
      as income based on reported usage.  The Company accrues estimated
      maintenance costs at the time a reimbursement claim for incurred maintenance
      or
      sufficient information is received from its lessees.





Accrued
      costs also reflect amounts accrued by the Company for maintenance work performed
      under certain circumstances and which is not related to the release of reserves
      received from lessees.





In
      the
      past, as a result of two situations, the Company incurred significant
      maintenance expense when aircraft were returned early and 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.





*d.
      Revenue Recognition, Accounts Receivable 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.
      Non-refundable maintenance reserves billed to lessees are accrued as maintenance
      reserves income based on aircraft usage.  In instances for which
      collectibility is not reasonably assured, the Company recognizes revenue as
      cash
      payments are received. 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.





-
          19
          -


*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 reflects
      the corresponding increase or decrease in the tax provision in the condensed
      consolidated statements of operations.  As discussed in Note 1 to the
      condensed consolidated financial statements, the Company adopted FIN 48 on
      January 1, 2007, which proscribes treatment of “unrecognized tax positions” and
      requires measurement and disclosure of such amounts.





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 $2,128,000 and $1,304,000 higher in the nine
      months and three months ended September 30, 2007, respectively, versus the
      same
      periods in 2006, primarily because of increased operating lease revenue from
      aircraft purchased in the fourth quarter of 2006 and first nine months of 2007
      and lease modifications which involved rent increases for several of the
      Company’s aircraft.  In addition, in the three months ended September
      30, 2007, the Company recorded revenue from several aircraft which had been
      off
      lease for part of the same period in 2006.  The aggregate effects of
      these increases were partially offset by a decrease in revenue related to
      aircraft which were off lease for part of the 2007 periods.





Maintenance
      reserves income was approximately $569,000 and $443,000 higher in the nine
      months and three months ended September 30, 2007, respectively, versus the
      same
      periods in 2006, as a result of increased aircraft usage by the Company’s
      lessees, on which the amount of reserves income is based, and the acquisition
      of
      aircraft in the second and third quarters of 2007.





There
      were no sales of aircraft in the first nine months of 2007.  Gain on
      sale of aircraft was approximately $34,000 in the first nine months of 2006
      as a
      result of the sale of an aircraft in April 2006.





Other
      income was approximately $16,000 and $2,000 higher in the nine months and three
      months ended September 30, 2007, respectively, versus the same period in 2006,
      primarily as a result of an increase in the amount of interest income earned
      on
      the Company’s cash balances, which were higher in 2007, net of accrued interest
      payable to lessees for certain of the Company’s security deposits and
      maintenance reserves payable.





-
          20
          -


*b.
      Expense items*





Interest
      expense was approximately $682,000 higher in the nine months ended September
      30,
      2007 versus the same period in 2006, as a result of an increase in the Company’s
      Subordinated Notes balance in 2007, which was used to repay a portion of the
      Company’s senior debt, but which bears interest at a higher rate, increases in
      the index rates upon which the Company’s senior debt interest rates are based
      and an increase in the fees paid by the Company on its unused senior debt
      because of a higher unused balance of senior debt in 2007.   The
      effects of these increases were partially offset by a lower average senior
      debt
      balance and lower margin in 2007 compared to 2006.





Interest
      expense was approximately $452,000 higher in the three months ended September
      30, 2007, as a result of an increase in the Company’s Subordinated Notes balance
      in 2007, which was used to repay a portion of the Company’s senior debt, but
      which bears interest at a higher fixed rate, an increase in the Company’s senior
      debt balance as a result of borrowing for aircraft acquisitions, increases
      in
      the index rates upon which the Company’s senior debt interest rates are based
      and an increase in the fees paid by the Company on its unused senior debt,
      because of a higher unused balance of senior debt in 2007.  The
      effects of these increases were partially offset by a lower margin in 2007
      compared to 2006.





Depreciation
      was approximately $498,000 and $320,000 higher in the nine months and three
      months ended September 30, 2007 versus 2006, respectively, primarily because
      of
      purchases of aircraft in the fourth quarter of 2006 and first nine months of
      2007, the effect of which was partially offset by an aircraft sale in the second
      quarter of 2006.  Management fees, which are calculated on the net
      book value of the aircraft owned by the Company, were approximately $105,000
      and
      118,000 higher in the nine months and three months ended September 30, 2007
      compared to 2006 because of higher net book values as a result of aircraft
      acquisitions.  The effects of these changes were partially offset by
      the effect of depreciation on the net book value of the Company’s
      aircraft.





The
      Company’s maintenance expense is dependent on the aggregate maintenance claims
      submitted by lessees and expenses incurred in connection with off-lease
      aircraft.  As a result of lower total lessee claims and less expense
      incurred for off-lease aircraft in 2007, the Company incurred approximately
      $2,305,000 and $494,000 less in maintenance expense in the nine months and
      three
      months ended September 30, 2007, respectively, as compared to the same periods
      in 2006.****





Total
      professional fees and general and administrative expenses were approximately
      $100,000 and $43,000 higher in the nine months and three months ended September
      30, 2007, respectively, versus the same periods in 2006, primarily because
      of
      higher accounting fees and an increase in directors fees which was authorized
      by
      the board of directors, effective January 1, 2007.  The effect of
      these increases in the nine month periods was partially offset by a decrease
      in
      legal fees in 2007 as a result of legal expense incurred in connection with
      the
      early termination of two of the Company’s aircraft leases in 2006.





The
      Company records non-income based sales, use, value added and franchise taxes
      as
      other tax expense.  Such expenses were approximately $290,000 and
      $284,000 higher in the nine months and three months ended September 30, 2007,
      respectively, versus the same periods in 2006 because, in 2007, the Company
      accrued value added  taxes, penalties and interest in connection with
      an aircraft leased in Australia.





The
      Company's insurance expense consists primarily of directors and officers
      insurance, as well as product liability insurance and insurance for off-lease
      aircraft and aircraft engines, which varies depending on the type of assets
      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, aircraft insurance expense
      was
      approximately $50,000 lower in the nine months ended September 30, 2007, versus
      the same period of 2006, and approximately $4,000 higher in the three months
      ended September 30, 2007 versus the same period in 2006.





-
          21
          -


During
      the nine months ended September 30, 2007, the Company recorded bad debt expense
      of approximately $16,000 for maintenance reserves that were written off in
      connection with a lessee’s early return of two aircraft.   During
      the nine months ended September 30, 2006, the Company recorded bad debt expense
      of approximately $49,000 for a rent receivable that was written off in
      connection with a lessee’s early return of an aircraft.  The Company
      recorded no bad debt expense in the three months ended September 30, 2007 or
      2006.





The
      Company did not record any impairment charges in the first nine months of 2007
      or 2006.





The
      Company’s effective tax rates for the nine months ended September 30, 2007 and
      2006 were approximately 32% and 43%, respectively.  The change in rate
      was primarily a result of the Company’s election to amend its prior year tax
      returns to claim credits for foreign taxes withheld by a lessee rather than
      claim a deduction for the foreign taxes withheld, which had not been recognized
      in previous years.





*Liquidity
      and Capital Resources*





The
      Company is currently financing its assets primarily through debt borrowings,
      special purpose financing and excess cash flow.





*(a)
      Credit Facility*





On
      April
      17, 2007, the Company and the Credit Facility lenders entered into an amended
      and restated credit agreement, which provides for (i) a three-year term, (ii)
      a
      $25 million increase in the current amount available under the Credit Facility
      to $80 million and (iii) the ability to increase the maximum amount available
      under the Credit Facility to $110 million.  Certain financial
      covenants were also modified.





During
      the first nine months of 2007, the Company repaid $15,300,000 of the outstanding
      principal under its Credit Facility.  The balance of the note payable
      at September 30, 2007 was $57,096,000, and interest of $291,980 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 in the future.  See *"Factors That May Affect Future
      Results –  'Risks of Debt Financing’ and 'Credit Facility
      Obligations,’”*below.





The
      Company's interest expense in connection with the Credit Facility generally
      moves up and 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.





-
          22
          -


*(b)Senior
      unsecured subordinated debt*





On
      April
      17, 2007, the Company entered into a Securities Purchase Agreement, whereby
      the
      Company will issue 16% senior unsecured subordinated notes ("Subordinated
      Notes"), with an aggregate principal amount of up to $28 million to certain
      note
      purchasers (“Note Purchasers”). The Subordinated Notes will be issued at 99% of
      the face amount and are due December 30, 2011. Under the Securities Purchase
      Agreement, the Note Purchasers also were issued warrants to purchase up to
      171,473 shares of the Company's common stock at an exercise price of $8.75
      per
      share. The warrants are exercisable for a four-year period after the earliest
      of
      (i) a change of control, or (ii) the final maturity of the related Subordinated
      Notes, which is December 30, 2011.  Pursuant to an investor’s
      registration rights agreement, the warrants are subject to registration rights
      that require the Company to use commercially reasonable efforts to register
      the
      shares issued in conjunction with an exercise of the warrants.   Under the
      terms of the Subordinated Notes, on the last day of each month, commencing
      on
      May 31, 2007 and ending on the earlier of June 30, 2008 or the final closing,
      the Company pays a commitment fee on any unissued amount, of the Subordinated
      Notes.





In
      connection with the issuance of the Subordinated Notes, the Company incurred
      approximately $1,498,000 of costs, of which approximately $763,000 was recorded
      as debt discount and approximately $689,000 and $46,000 were recorded as
      deferred financing costs and as a reduction to additional paid-in capital,
      respectively.  The Company allocated approximately $25.5 million of
      the expected proceeds of the Subordinated Notes to debt and approximately $1.6
      million to the warrants on the basis of their estimated relative fair values.
      The allocation of proceeds representing the fair value of the warrants was
      recorded as additional debt discount on the Subordinated Notes and additional
      paid-in capital.





The
      Company is amortizing the total debt discount and deferred financing costs
      using
      the interest method over the term of the Subordinated Notes. Unused commitment
      fees are expensed as incurred.





At
      the
      initial April 17, 2007 closing, Subordinated Notes with a face amount of $10
      million were issued.  The remaining $18 million of Subordinated Notes
      are required to be issued on or before June 30, 2008.  The Company
      intends to use the proceeds of the Subordinated Notes offering for acquisition
      of additional aircraft assets.  As of September 30, 2007, the Company
      was in compliance with all covenants under the Securities Purchase Agreement,
      the carrying amount of the Subordinated Notes was approximately $7,594,610
      (outstanding principal amount of $10,000,000 less unamortized debt discount
      of
      approximately $2,405,390) and accrued interest payable was $133,330.





-
          23
          -


*(c)
      Special purpose financing*





In
      September 2000, a special purpose subsidiary acquired a deHavilland DHC-8-100
      aircraft using cash and bank financing separate from its Credit Facility. The
      related note obligation, which was due April 15, 2006, was refinanced in April
      2006, using bank financing from another lender, and the subsidiary was
      dissolved. The aircraft was transferred to AeroCentury VI LLC, a newly formed
      special purpose limited liability company, 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
      AeroCentury Corp.  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. During the nine months ended September 30, 2007, $231,050 of principal
      was repaid on the note.  The balance of the note payable at September
      30, 2007 was $1,190,290 and interest of $3,090 was accrued.  As of
      September 30, 2007, the Company was in compliance with all covenants of this
      note obligation and is currently in compliance.





In
      November 2005, the Company refinanced two DHC-8-300 aircraft that had been
      part
      of the collateral base for its Credit Facility.  The financing, by a
      bank separate from its Credit Facility, was provided to a newly formed special
      purpose subsidiary, AeroCentury V LLC, 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
      of
      7.87%.  The note is collateralized by the aircraft and is non-recourse
      to AeroCentury Corp.  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. During the nine months ended September 30, 2007, AeroCentury V LLC repaid
      $718,210 of principal.  The balance of the note payable at September
      30, 2007 was $4,702,500 and interest of $7,200 was accrued.  As of
      September 30, 2007, the Company was in compliance with all covenants of this
      note obligation and is currently in compliance.





The
      availability of special purpose financing in the future will depend on receiving
      specific dispensation from the Credit Facility lenders and the Subordinated
      Notes holders.





*(d)
      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, in an attempt to reduce the time that an asset will be off
      lease.  The Company’s aircraft are subject to leases with varying
      expiration dates through January 2012. At September 30, 2007, the Company’s two
      Saab 340A aircraft and one turboprop engine were off lease.





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) timely use of proceeds of unused debt capacity toward additional
      acquisitions of income producing assets, and (iii) the cost and anticipated
      timing of maintenance to be performed.  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 and its Subordinated Notes agreement, and may require 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 and Subordinated Notes covenants, as
      well
      as revenue and expenses) and (iii) inability to locate and acquire a sufficient
      volume of additional aircraft assets at prices that will produce acceptable
      net
      returns.





-
          24
          -


*(i)
      Operating
      activities*





The
      Company’s cash flow from operations for the nine months ended September 30, 2007
      versus 2006 increased by approximately $5,219,000.  The change in cash
      flow is a result of changes in several cash flow items during the period,
      including principally the following:





Lease
      rents and security
      deposits





Payments
      received from lessees for rent were approximately $2,274,000 higher in the
      first
      nine months of 2007 versus the same period in 2006, due primarily to the effect
      of increased payments for aircraft purchased in November 2006 and June, August
      and September 2007, rent increases for several of the Company’s aircraft and
      revenue from several aircraft which had been off lease for part of the first
      nine months of 2006, the effects of which were partially offset by a decrease
      in
      revenue from aircraft which were off lease for part of the 2007
      period.  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 beyond those made in the
      first nine months of 2007, aggregate lease revenues for the current portfolio
      could decline over the long term.





Security
      deposits received increased by approximately $672,000 in the first nine months
      of 2007 versus 2006 because of an increase in the amount of security deposits
      required under leases initiated by the Company in each of the periods, net
      of
      amounts returned to lessees at lease end.





Expenditures
      for
      maintenance





Expenditures
      for maintenance were approximately $2,637,000 lower in the nine months ended
      September 30, 2007 versus the same period in 2006 primarily as a result of
      higher payments during 2006 for maintenance performed to prepare several of
      the
      Company’s aircraft for remarketing and for maintenance reserves claims submitted
      by lessees.  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 maintenance paid for
      off-lease aircraft.





Expenditures
      for
      interest





Expenditures
      for interest increased by approximately $1,102,000 in the first nine months
      of
      2007 compared to 2006, as a result of an increase in the Company’s Subordinated
      Notes balance in 2007, which was used to repay a portion of the Company’s senior
      debt, but which bears interest at a higher fixed rate, increases in the index
      rates upon which the Company’s senior debt interest rates are based and an
      increase in the fees paid by the Company on its unused senior debt because
      of a
      higher unused balance of senior debt in 2007.   The effects of
      these increases were partially offset by a lower average senior debt balance
      and
      lower margin in 2007 compared to 2006.  Interest expenditures in
      future periods will be determined by prevailing interest rates and the aggregate
      principal balance of both its Credit Facility debt and the Subordinated Notes
      debt, which may be influenced by future acquisitions and/or required repayments
      of principal resulting from changes in the collateral base pursuant to the
      Company’s debt agreements with its lenders.  As a result of future
      borrowings of the Company’s available credit facility and Subordinated Notes
      debt, it is likely that expenditures for interest will increase significantly
      when such borrowings are made.





*(ii)
      Investing activities*





During
      the nine months ended September 30, 2007 and 2006, the Company used cash of
      approximately $25,873,000 and $1,016,000, respectively, for aircraft
      acquisitions and capital equipment installed on aircraft.


-
          25
          -





*(iii)
      Financing activities*





The
      Company borrowed approximately $19,850,000 more in the first nine months of
      2007
      versus the same period in 2006 for aircraft financing and repaid approximately
      $10,799,000 more of its outstanding debt in 2007 compared to 2006.  In
      2007,
      the Company also borrowed $10,000,000of Subordinated Notes, which was
      used to repay a portion of the Company’s Credit Facility debt.  In
      2006, the Company’s borrowings included $1,650,000 for the refinancing of an
      aircraft and repayments included approximately $1,566,000 which was repaid
      from
      the refinancing proceeds.





*Outlook*





In
      April
      2007, the Company signed an agreement for a $25 million increase in its
      revolving Credit Facility to a total of $80 million, with the ability to
      increase the maximum amount available under the facility to $110 million. At
      the
      same time, the Company issued $10 million of the Subordinated Notes, and is
      required to draw the remaining $18 million (for a total of $28 million) on
      or
      before June 30, 2008.





As
      the
      Subordinated Notes bear fixed interest of 16% per annum immediately upon
      issuance, as well as a commitment fee on the unissued balance, an important
      factor in the Company’s near term results will be the Company’s ability to
      expediently locate and acquire additional assets utilizing these
      funds.  To optimize its debt financing expense, the Company will need
      to acquire sufficient assets on or before June 30, 2008 to enable the Company
      to
      utilize a significant portion of its unused Credit Facility availability of
      approximately $23 million as well as draw the Subordinated Notes proceeds no
      later than the deadline discussed above.  If the Company fails to meet
      this deadline, it will likely use the Subordinated Notes proceeds from the
      required drawdown to repay a portion of its outstanding Credit Facility
      debt.  Since the Credit Facility interest rate is likely to continue
      to be lower than the Subordinated Notes fixed rate, this would likely result
      in
      a higher effective interest rate, without a corresponding increase in operating
      revenue. The Company has not yet identified specific asset acquisitions for
      which the entire amount of the Subordinated Notes proceeds will be applied,
      but
      believes that it will be successful in timely acquiring appropriate assets
      for
      acquisition to take financial advantage of the additional resources provided
      under the increased Credit Facility and Subordinated Notes
      financing.





In
      March
      2007, the Company and the lessee of two aircraft, which had leases expiring
      in
      May and July 2008, agreed to an early return of the aircraft based on the
      lessee’s financial difficulties.****The Company is seeking
      re-lease or sale opportunities for these aircraft.  There is no
      assurance as to when the Company will be successful in its efforts to re-lease
      or sell the aircraft, but the Company believes that, even if the aircraft are
      off lease for an extended period of time, it will be able to remain in
      compliance with the terms of its Credit Facility and Subordinated
      Notes.  Since the lessee of the aircraft has essentially ceased
      operations, the Company may incur significant unreimbursed expense in order
      to
      prepare the aircraft for re-lease or resale, the magnitude of which is unknown
      at this time.





Two
      of
      the Company’s aircraft leases are scheduled to expire during the fourth quarter
      of 2007.  The Company believes that it will be able to re-lease both
      aircraft within an acceptable period after return at lease end and that, even
      if
      the aircraft are off lease for an extended period of time, it will be able to
      remain in compliance with the terms of its Credit Facility and Subordinated
      Notes.





-
          26
          -


The
      Company continually monitors the financial condition of its lessees to avoid
      unanticipated creditworthiness issues, and where necessary, works with lessees
      to ensure continued compliance with obligations under their respective
      leases.  Currently, the Company is closely monitoring the performance
      of three lessees with a total of five aircraft under lease. For one of these
      lessees, the Company recorded a bad debt allowance of $190,000 in the second
      quarter of 2007 which, based on subsequent payments, was reversed in the third
      quarter. The Company continues to work closely with these lessees to ensure
      compliance with their current obligations. During the first nine months of
      2007,
      the Company incurred $16,000 of bad debt expense related to amounts owed by
      the
      lessee of two aircraft which were returned early, discussed above. 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.





Beginning
      on January 1, 2007, due to the recent adoption of FSP AUG AIR-1, as discussed
      in
      Note 1 to the condensed consolidated financial statements and under
*“Critical Accounting Policies, Judgments and Estimates, c. Maintenance
      Reserves and Accrued Cost*s”, the Company began to accrue non-refundable
      maintenance reserves received from lessees as income based on aircraft usage
      and
      record maintenance expenses as incurred.  The Company accrues
      estimated maintenance costs based on information provided by its third party
      lessees and, accordingly, estimates of such expenses depend on timely and
      accurate reporting by such parties.  As a result, the Company believes
      that its reported net income may be subject to greater fluctuations from
      quarter-to-quarter than would have been the case had the Company continued
      its
      use of the previous method of accounting for planned major maintenance
      activities.





*Factors
      that May Affect Future Results*





*Risks
      of Debt Financing*.  The Company’s use of debt as the primary form
      of acquisition financing subjects the Company to increased risks of
      leveraging.  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 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.





The
      addition of the Subordinated Notes debt, while providing additional resources
      for acquisition by the Company of revenue generating assets, also has the effect
      of increasing the Company’s overall cost of capital, as the Subordinated Notes
      bear an effective overall interest rate that is currently higher than the rate
      charged on the Credit Facility.  Since the Subordinated Notes bear
      interest immediately upon issuance, the Company’s success in utilizing the
      proceeds to purchase income generating assets will be critical to the financial
      results of the Company.





*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 short-term interest rate indices. Lease rates,
      generally, but not always, move with interest rates, but market demand for
      the
      asset also affects lease rates. Because lease rates are fixed at the origination
      of leases, interest rate changes 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.





The
      Company has not hedged its variable rate debt obligations and such obligations
      are based on short-term interest rate indices.  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 other covenants of its Credit
      Facility.





*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.





-
          27
          -


*Warrant
      Issuance.*  As part of the Subordinated Notes financing, the
      Company issued warrants to purchase up to 171,473 shares of the Company’s common
      stock, which is equal to 10% of the post-exercise fully diluted capitalization
      of the Company.  The exercise price under the Warrants is $8.75 per
      share.  If the warrants to purchase shares are exercised, there could
      be dilution to the existing holders of Common Stock.  This dilution of
      the Company’s common stock could depress its trading price.





*Concentration
      of Lessees and Aircraft Type.* Currently, the Company’s five largest
      customers are located in Antigua, Netherlands Antilles, Mexico, Sweden and
      Belgium and currently account for approximately 16%, 12%, 12%, 11% and 10%,
      respectively, of the Company’s monthly lease revenue.****A
      lease default by or collection problems with one or a combination of any of
      these significant****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.





Currently,
      the Company owns fourteen Fokker 50, eight DHC-8-300 and four Fokker 100
      aircraft, making these three aircraft types the dominant types in the portfolio
      and representing 28%, 29% and 22%, respectively, based on net book value. As
      a
      result, a change in the desirability and availability of any 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 these types of aircraft will increase
      the Company’s risks related to its concentration of those aircraft
      types.





*Investment
      in New Aircraft Types.*  The Company has traditionally invested in
      a limited number of types of turboprop aircraft and engines. While the Company
      intends to continue to focus solely on regional aircraft and engines, the
      Company has recently closed acquisitions of Fokker 100 regional jet aircraft,
      and may continue to seek acquisition opportunities for new types and models
      of
      regional jet and turboprop aircraft and engines used in the Company's targeted
      customer base of regional air carriers.  Acquisition of other aircraft
      types and engines not previously acquired by the Company entails greater
      ownership risk due to the Company's lack of experience managing this aircraft
      type. The Company believes, however, that JMC personnel's overall industry
      experience and its technical resources should permit the Company to effectively
      manage such new aircraft.  Further, the broadening of the asset types
      in the aircraft portfolio may have a countervailing benefit of diversifying
      the
      Company's portfolio (See "*Factors That May Affect Future Results –
Concentration of Lessees and Aircraft Type*,” above).





*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.  Values may also increase for
      certain aircraft types that become desirable based on market conditions and
      changing airline capacity.  If the Company were to purchase an
      aircraft during a period of increasing values, it would need a corresponding
      higher lease rate.





-
          28
          -


The
      Company’s current concentration in a limited number of turboprop airframe and
      aircraft engine types subjects the Company to economic risks if an airframe
      or
      engine type owned by the Company should significantly decline in value relative
      to the assets’ purchase price.   To date, turboprop aircraft have
      been the primary equipment type used by regional air carriers on the shorter
      segments served by such carriers.  Even though regional jets are more
      expensive to operate than turboprops on those routes, a move motivated by
      non-economic factors by regional carriers to serve those routes with regional
      jets could lessen the demand for turboprop equipment.  This could
      result in lower lease rates and values for turboprop aircraft, of which the
      Company’s portfolio primarily consists.





*Risks
      Related to Regional Air Carriers.*Because the Company has
      concentrated its existing leases, and intends to continue to concentrate future
      leases, on 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
      contractual arrangements with major trunk carriers or franchises from
      governmental agencies that provide subsidies for operating essential air routes,
      both of which may be subject to termination or cancellation with short notice
      periods.  Because of this exposure, the Company typically is able to
      obtain generally higher lease rates from these types of lessees.  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 market growth is outside of
      the United States, where collection and enforcement are often more difficult
      and
      complicated than in the United States. During 2006 and 2005, the Company
      incurred bad debt expense related to amounts owed by three 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 its stockholders.  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.





JMC
      has
      acted as the 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.





-
          29
          -


*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 the 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 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.





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.





In
      addition, if the Company undertakes certain obligations under a lease to
      contribute to a repair or improvement and if the work is performed in a foreign
      jurisdiction and paid for in foreign currency, currency fluctuations causing
      a
      weaker dollar between the time such agreement is made and the time payment
      for
      the work is made may result in an unanticipated increase in dollar cost for
      the
      Company.





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.





Finally,
      ownership of a leased asset operating in a foreign country and/or by a foreign
      carrier may subject the Company to additional tax liabilities that are not
      present with domestically operated aircraft.  Depending on the
      jurisdiction, laws governing such tax liabilities may be complex or not well
      formed or not uniformly enforced. In such jurisdictions, the Company may decide
      to take an uncertain tax position based on the best advice of the local tax
      experts it engages, which position may be challenged by the taxing
      authority.  If the taxing authority later assesses a liability, the
      Company may be required to pay penalties and interest on the assessed amount,
      which penalties and interest would not give rise to a corresponding foreign
      tax
      credit on the Company’s U. S. tax return.





*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.





-
          30
          -


*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.  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.  JMC has developed a reputation as a global participant
      in this segment of the market, and the Company believes that JMC’s reputation
      benefits the Company.  There is, however, no assurance that the lack
      of significant competition from 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.





*General
      Economic Conditions.*The Company’s business is dependent upon general
      economic conditions and the strength of the travel and transportation
      industry.  The industry is continuing to recover and expand after a
      prolonged downturn which began in 2001.   It is unclear whether
      and how long this recovery will last.   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 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 marginally
      profitable 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 has been 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.





-
          31
          -


**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 is 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
      (reflecting improvements and corrections) as conditions warrant.





-
          32
          -


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 requires 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
      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 the
      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 the most recent
      fiscal quarter that has materially affected or is reasonably likely to
      materially affect the Company’s 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.





**Item
      3A(T). Controls and Procedures**





This
      quarterly report does not include a report of management’s assessment regarding
      internal control over financial reporting or an attestation report of the
      Company’s independent registered public accounting firm due to a transition
      period established by the rules of the Securities and Exchange
      Commission.





-
          33
          -


**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.











-
          34
          -


**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: 
                Novermber 14, 2007
            By:
            **/s/
                Toni M. Perazzo**Name:
              Toni M.
              PerazzoTitle:
              Senior VP Finance and
              Chief Financial Officer