**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, 2006





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 x  No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o  No 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 13, 2006 the Issuer had
      1,606,557 **** Shares
      of
      Common Stock, par value $0.001 per share, issued, of which 63,300 are held
      as
      Treasury Stock.





Transitional
      Small Business Disclosure Format (check one):


Yes o  No x













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          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 regarding the Company's belief that its current tax positions
      are
      highly certain and that implementation of FASB Interpretation No. 48 will not
      have any material effect on its tax accounts, balances or provisions; and the
      Company’s belief that SAB
      108
      will have a material impact on the Company’s results of operations but will not
      have a material impact on the Company’s financial position (ii) in
      Item 1 “Financial Statements, Note 5” 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 continue to be in compliance with all
      covenants of its credit facility; and that it will have adequate cash flow
      to
      meet its ongoing operational needs; (iv) in Item 2 "Management's Discussion
      and
      Analysis or Plan of Operation -- Outlook," statements regarding the Company's
      belief that the lease for an aircraft that expires in November 2006 will be
      extended; and that the Company’s adoption of a new method for accounting of
      planned major maintenance will lead to a greater fluctuation in quarterly
      earnings; and (v) 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 be able to meet its short term cash flow needs;
      that it will have sufficient cash to fund any required repayments under its
      credit facility caused by borrowing base limitations as a result of assets
      scheduled to come off lease in the near term; that it will have sufficient
      funds
      to pay increased Sarbanes-Oxley compliance costs; that it will acquire primarily
      used aircraft and expect to concentrate in a limited number of airframe and
      aircraft engine types; 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; risks related
      to use of debt financing for acquisitions; the Company’s success in finding
      additional financing and appropriate assets to acquire with such financing;
      general economic conditions, particularly those that affect the air travel
      industry; unanticipated sharp increases in interest rates; further disruptions
      to the air travel industry due to terrorist attacks; and future trends and
      results which cannot be predicted with certainty. The cautionary statements
      made
      in this Report should be read as being applicable to all related forward-looking
      statements wherever they appear herein. All forward-looking statements and
      risk
      factors included in this document are made as of the date hereof, based on
      information available to the Company as of the date hereof, and the Company
      assumes no obligation to update any forward-looking statement or risk factor.
      You should consult the risk factors listed from time to time in the Company's
      filings with the Securities and Exchange Commission.








-
          2
          -


AeroCentury
      Corp.


Condensed
      Consolidated Balance Sheet


Unaudited





ASSETSSeptember
              30, 2006Assets:Cash
                and cash equivalents
            
            $
            3,245,260Accounts
                receivable
            
            
            947,140Aircraft
                and aircraft engine held for lease,
              net
                of accumulated depreciation of $20,767,730
            
            
            90,044,570Prepaid
                expenses and other
            
            
            730,610Total
                assets
            
            $
            94,967,580LIABILITIES
                AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
                payable and accrued expenses
            
            $
            896,810Notes
                payable and accrued interest
            
            
            54,813,300Maintenance
                reserves and accrued costs
            
            
            13,995,480Security
                deposits
            
            
            4,092,860Prepaid
                rent
            
            
            515,710Deferred
                taxes
            
            
            1,243,130Taxes
                payable
            
            
            10,490Total
                liabilities
            
            
            75,567,780Stockholders’
                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
            
            
            13,821,200Retained
                earnings
            
            
            6,081,06019,903,870Treasury
                stock at cost, 63,300 shares
            
            
            (504,070
            )Total
                stockholders’ equity
            
            
            19,399,800$
            94,967,580





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 30,2006
            
            
            2005
            
            
            2006
            
            
            2005Revenues
                and other income:Operating
                lease revenue
            
            $
            11,454,940
            
            $
            8,216,510
            
            $
            3,920,000
            
            $
            2,956,410Gain/(loss)
                on sale of aircraft
            
            
            408,840
            
            
            (59,550
            )
            
            -
            
            
            -Other
                income
            
            
            2,400,700
            
            
            94,600
            
            
            9,510
            
            
            13014,264,480
            
            
            8,251,560
            
            
            3,929,510
            
            
            2,956,540Expenses:Depreciation
            
            
            3,708,520
            
            
            2,935,430
            
            
            1,247,560
            
            
            1,030,030Interest
            
            
            3,687,380
            
            
            2,456,860
            
            
            1,271,750
            
            
            877,000Management
                fees
            
            
            2,061,720
            
            
            1,705,960
            
            
            678,460
            
            
            594,470Maintenance
            
            
            3,554,920
            
            
            219,870
            
            
            221,600
            
            
            169,440Professional
                fees and general
              and
                administrative
            
            
            413,450
            
            
            405,420
            
            
            124,690
            
            
            129,500Insurance
            
            
            183,000
            
            
            242,140
            
            
            53,760
            
            
            75,160Bad
                debt expense
            
            
            48,820
            
            
            88,110
            
            
            -
            
            
            -Provision
                for impairment in
              value
                of aircraft
            
            
            -
            
            
            12,180
            
            
            -
            
            
            -13,657,810
            
            
            8,065,970
            
            
            3,597,820
            
            
            2,875,600Income
                before taxes
            
            
            606,670
            
            
            185,590
            
            
            331,690
            
            
            80,940Tax
                provision
            
            
            196,970
            
            
            47,770
            
            
            112,580
            
            
            28,840Net
                income
            
            $
            409,700
            
            $
            137,820
            
            $
            219,110
            
            $
            52,100Weighted
                average common
              shares
                outstanding
            
            
            1,543,257
            
            
            1,543,257
            
            
            1,543,257
            
            
            1,543,257Basic
                and diluted earnings per share
            
            $
            0.27
            
            $
            0.09
            
            $
            0.14
            
            $
            0.03





The
      accompanying notes are an integral part of these statements.


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          4
          -





AeroCentury
      Corp.


Condensed
      Consolidated Statements of Cash Flows


Unaudited





For
                the Nine Months
              Ended
                September 30,2006
            2005Net
                cash provided by operating activities
            $
                6,007,910
            $
                3,240,390Investing
                activities:Payments
                received on note receivable
            -
            210,080Proceeds
                from disposal of assets
            1,434,770
            7,900,130Purchase
                of aircraft
            (1,015,760)
            (14,488,870)Net
                cash provided/(used) by investing activities
            419,010
            (6,378,660)Financing
                activities:Issuance
                of notes payable
            1,650,000
            10,941,000Repayment
                of notes payable
            (5,450,570)
            (8,800,690)Net
                cash (used)/provided by financing activities
            (3,800,570)
            2,140,310Net
                increase/(decrease) in cash and cash equivalents
            2,626,350
            (997,960)Cash
                and cash equivalents, beginning of period
            618,910
            2,403,630Cash
                and cash equivalents, end of period
            $
                3,245,260
            $
                1,405,670





During
      the nine months ended September 30, 2006 and 2005, the Company paid interest
      totaling $3,454,330 and $2,492,450, respectively, and income taxes totaling
      $48,800 and $1,780,380, respectively.





The
      accompanying notes are an integral part of these statements.





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          5
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





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





*(a)*  *Basis
      of Presentation*





AeroCentury
      Corp. (“AeroCentury”), a Delaware corporation, uses leveraged financing to
      acquire leased aircraft assets. The Company (as defined below) purchases used
      regional aircraft on lease to foreign and domestic regional carriers. Financial
      information for AeroCentury 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.





*(b)*  *Cash
      and Cash Equivalents/Deposits*





The
      Company considers highly liquid investments readily convertible into known
      amounts of cash, with original maturities of 90 days or less from the date
      of
      acquisition, as cash equivalents.





*(c)*  *Aircraft
      and Aircraft Engine Held For Lease and Held for Sale*





The
      Company’s interests in aircraft and aircraft engines are recorded at cost, which
      includes acquisition costs. The Company purchases only used aircraft. It is
      the
      Company’s policy to hold aircraft for approximately twelve years unless market
      conditions necessitate earlier disposition. Depreciation is computed using
      the
      straight-line method over the twelve year period to an estimated residual value
      based on appraisal. Decreases in the market value of aircraft could not only affect the current
      value, but could also affect the assumed residual value. The Company
      periodically obtains a residual value appraisal for its assets and,
      historically, has not written down any estimated residuals. The Company’s
      aircraft which are held for sale are not subject to depreciation.





*(d)*  *Impairment
      of Long-lived Assets*





The
      Company periodically reviews its portfolio of assets for impairment in
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets."  Such
      review necessitates estimates of current market values, re-lease rents, residual
      values and component values.  The estimates are based on currently
      available market data and are subject to fluctuation from time to
      time *.* The Company initiates its review periodically, whenever events or changes in
      circumstances indicate that the carrying amount of a long-lived asset may not
      be
      recoverable.  Recoverability of an asset is measured by comparison of its
      carrying amount to the expected future undiscounted cash flows (without interest
      charges) that the asset is expected to generate.  Any impairment to be
      recognized is measured by the amount by which the carrying amount of the asset
      exceeds its fair market value.  Significant management judgment is required
      in the forecasting of future operating results which are used in the preparation
      of projected undiscounted cash flows and, should different conditions prevail,
      material write downs may occur.











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          6
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





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





*(e)*  *Loan
      Commitment and Related Fees*





To
      the
      extent that the Company is required to pay loan commitment fees and legal fees
      in order to secure debt, such fees are amortized over the life of the related
      loan.





*(f)*  *Maintenance
      Reserves and Accrued Costs*





Maintenance
      costs under the Company’s triple net leases are generally the responsibility of
      the lessees. The accompanying consolidated balance sheet reflects liabilities
      for maintenance reserves and accrued costs, which include refundable and
      non-refundable maintenance payments received from lessees based on usage. At
      September 30, 2006, the Company’s maintenance reserves and accruals consisted of
      the following:




Refundable
                maintenance reserves
            
            $
            1,634,880Non-refundable
                maintenance reserves
            
            
            8,454,510Accrued
                costs
            
            
            3,906,090$
            13,995,480




Maintenance
      reserves received by the Company are accounted for as a liability, which is
      reduced when maintenance work is performed during the lease. Maintenance
      reserves which are refundable to the lessee are refunded after all return
      conditions specified in the lease and, in some cases, any other payments due
      under the lease, are satisfied. Any refundable reserves retained by the Company
      to satisfy return conditions are reclassified to the Company’s own maintenance
      payable account at lease end. Maintenance reserves which are non-refundable
      to
      the lessee are recorded as income at lease end. If an aircraft is returned
      early, any collected reserves are reclassified to the Company’s own maintenance
      payable account.





The
      Company periodically reviews its maintenance reserves and maintenance accruals
      for adequacy in light of the number of hours flown, airworthiness directives
      issued by the manufacturer or government authority, and the return conditions
      specified in the lease, as well as the condition of the aircraft upon return
      or
      inspection. As a result of such review, when it is probable that the Company
      has
      incurred costs for maintenance in excess of amounts accrued, the Company records
      an expense for the additional work to be performed. Such costs include
      maintenance such as engine and propeller overhauls, structural inspections
      and
      work to comply with airworthiness directives.





When
      an
      aircraft is sold, any remaining accrual is reversed and included in the
      Company’s gain or loss on sale calculation. During the nine months ended
      September 30, 2006 and 2005, $378,770 and $282,030 ,
      respectively, of excess accruals were so included.





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          7
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





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





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





Additions
      to and deductions from the Company’s accruals during the nine months ended
      September 30, 2006 and 2005 for maintenance work were as follows:





For
                the Nine Months Ended
              September
                30,2006
            
            
            2005Additions:Charged
                to expense
            
            $
            3,175,220
            
            $
            196,800Charged
                to other -Reclassification
                of reserves collected from lessees to the Company’s own liability
                account
            
            
            359,450
            
            
            40,0503,534,670
            
            
            236,850Deductions:Paid
                for previously accrued maintenance
            
            
            2,588,390
            
            
            316,570Reversals
                of over-accrued maintenance
            
            
            11,850
            
            
            760Included
                in gain/(loss) on sale of aircraft and aircraft engines
            
            
            378,770
            
            
            282,0302,979,010
            
            
            599,360Net
                increase/(decrease) in accrued maintenance costs, in excess of amounts
                received under the leases
            
            
            555,660
            
            
            (362,510
            )Balance,
                beginning of period
            
            
            3,350,430
            
            
            2,296,520Balance,
                end of period
            
            $
            3,906,090
            
            $
            1,934,010





*(g)*  *Security
      deposits*





The
      Company’s leases are typically structured so that if any event of default occurs
      under a lease, the Company may apply all or a portion of the lessee’s security
      deposit to cure such default. If such application of the security deposit is
      made, the lessee typically is required to replenish and maintain the full amount
      of the deposit during the remaining term of the lease. All of the security
      deposits received by the Company are refundable to the lessee at the end of
      the
      lease, upon satisfaction of all lease terms.





*(h)*  *Income
      Taxes*





As
      part
      of the process of preparing the Company’s consolidated financial statements,
      management is required to estimate income taxes in each of the jurisdictions
      in
      which the Company operates. This process involves estimating the Company’s
      current tax exposure under the most recent tax laws and assessing temporary
      differences resulting from differing treatment of items for tax and accounting
      purposes. These differences result in deferred tax assets and liabilities,
      which
      are included in the consolidated balance sheet. Management must also assess
      the
      likelihood that the Company’s deferred tax assets will be recovered from future
      taxable income, and, to the extent management believes it is more likely than
      not that some portion or all of the deferred tax assets will not be realized,
      the Company must establish a valuation allowance. To the extent the Company
      establishes a valuation allowance





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          8
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





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





*(h)*  *Income
      Taxes (continued)*





or
      changes the allowance in a period, the Company reflects the corresponding
      increase or decrease within the tax provision in the consolidated statement
      of
      operations.




*(i)*  *Revenue
      Recognition and Allowance for Doubtful Accounts*





Revenue
      from leasing of aircraft assets is recognized as operating lease revenue on
      a
      straight-line basis over the terms of the applicable lease agreements. The
      Company estimates and charges to income a provision for bad debts based on
      its
      experience in the business and with each specific customer, the level of past
      due accounts, and its analysis of the lessees’ overall financial condition. If
      the financial condition of the Company’s customers deteriorates, it could result
      in actual losses exceeding any estimated allowances.





*(j)*  *Use
      of Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosures of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. The Company
      bases its estimates on historical experience and on various other assumptions
      that are believed to be reasonable for making judgments that are not readily
      apparent from other sources.





The
      most
      significant estimates with regard to these financial statements are the residual
      values of the aircraft, the useful lives of the aircraft, the amount and timing
      of cash flow associated with each aircraft that are used to evaluate impairment,
      if any, accrued maintenance costs in excess of amounts received from lessees,
      the amounts recorded as bad debt allowances and accounting for income
      taxes.





*(k)*  *Comprehensive
      Income*





The
      Company does not have any comprehensive income other than the revenue and
      expense items included in the consolidated statements of operations. As a
      result, comprehensive income equals net income for the three months and nine
      months ended September 30, 2006 and 2005.





*(l)*  *Recent
      Accounting Pronouncements*





SFAS
      153, *Exchanges
      of Nonmonetary Assets,* addresses the measurement of exchanges of nonmonetary assets. It eliminates
      the
      exception from fair value measurement for nonmonetary exchanges of similar
      productive assets in paragraph 21(b) of APB Opinion No. 29, *Accounting
      for Nonmonetary Transactions* ,
      and
      replaces it with an exception for exchanges that do not have commercial
      substance. SFAS 153 specifies that a nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. The provisions of SFAS 153 are
      effective for nonmonetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005. The adoption of SFAS 153 had no effect on the Company’s
      consolidated financial condition or results of operations.





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          9
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





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




*(l)*  *Recent
      Accounting Pronouncements (continued)*





In March
      2005 ,
      the
      FASB issued
      interpretation FIN No. 47 , ** *Accounting
      for Conditional Asset Retirement Obligations* ("FIN
      47"). FIN 47  clarifies
      that the term *conditional
      asset retirement obligation* as
      used
      in SFAS 143, *Accounting
      for Asset Retirement Obligations* ,
      refers
      to a legal obligation to perform an asset retirement activity in which the
      timing and (or) method of settlement are conditional on a future event that
      may
      or may not be within the control of the entity. FIN 47 is applicable to fiscal
      years ending after December 15, 2005. T he
      adoption of FIN 47 had no material effect on the Company’s consolidated
      financial condition or results of operations.





SFAS
      123(R), *Share-based
      Payment* ,
      requires compensation cost relating to share-based payment transactions be
      recognized in financial statements. SFAS 123(R) is effective for small business
      issuers as of the beginning of the first interim or annual reporting period
      that
      began after December 15, 2005, supercedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      replaces SFAS No. 123, *Accounting
      for Stock-based Compensation* .
      The
      pro-forma disclosure previously permitted under SFAS No. 123 is no longer an
      acceptable alternative to recognition of expenses in the financial statements.
      The adoption of SFAS 123(R) had no effect on the Company’s consolidated
      financial condition or results of operations.





In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement
      109* .
      Interpretation No. 48 is effective for fiscal years beginning after December
      15,
      2006. Interpretation No. 48 prescribes a comprehensive model for how a company
      should recognize, measure, present, and disclose in its financial statements
      uncertain tax positions that a company has taken or expects to take on a tax
      return (including a decision whether to file or not to file a return in a
      particular jurisdiction). Under the Interpretation, the financial statements
      will reflect expected future tax consequences of such positions presuming the
      taxing authorities' full knowledge of the position and all relevant facts,
      but
      without considering time values. The Company is required to implement
      Interpretation No. 48 in the year beginning January 1, 2007; however, the
      Company believes that its current tax positions are highly certain and therefore
      that such implementation will not have any material affect on its tax accounts,
      balances or provisions.





FASB
      Staff Position AUG AIR-1, *Accounting
      for Planned Major Maintenance Activities* (“FSP
      AUG
      AIR-1”), was posted on September 8, 2006 and prohibits the use of the
      accrue-in-advance method of accounting for planned major maintenance activities
      in annual and interim financial reporting periods. FSP AUG AIR-1 must be applied
      to the first fiscal year beginning after December 15, 2006. The Company is
      evaluating the impact of adoption of FSP AUG AIR-1 on its consolidated financial
      statements.





On
      September 13, 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 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.  Implementing the approach outlined in SAB 108 may
      require the Company to make significant adjustments in its 2006 annual financial
      statements.  The SAB will change 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. The SAB requires registrants
      to
      adjust their financial statements if the new approach results in a conclusion
      that an error is material.  SAB 108 is effective for fiscal years ending
      after November 15, 2006. The Company is required to adopt SAB 108 in the year
      ending December 31, 2006.  Management believes the impact of adopting SAB
      108 will have a material impact on results of operations but will not have
      a
      material impact on the Company’s financial position.








-
          10
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





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





At
      September 30, 2006, the Company owned eleven deHavilland DHC-8s, three
      deHavilland DHC-6s, fourteen Fokker 50s, two Saab 340As, three Saab 340Bs and
      one turboprop engine which are held for lease. **** At
      September 30, 2006, all of the Company’s aircraft were on lease. The Company’s
      spare turboprop engine was leased in November 2006.





**3.**  **Notes
      Payable and Accrued Interest**





*(a)*  *Credit
      facility*





In
      November 2005, the Company’s $50 million credit facility was renewed through
      October 31, 2007. In connection with the renewal, certain financial covenants
      were modified, including the applicable margin which is added to the index
      rate
      for each of the Company’s outstanding loans under the credit facility. The
      margin, which is determined by certain financial ratios, was revised from a
      range of 275 to 375 basis points to a range of 275 to 325 basis
      points. In May
      2006, **** a
      participant was added to the Company’s credit facility and the amount of the
      facility was increased to $55 million. During the first nine months of 2006,
      the
      Company repaid $3 million of the outstanding principal under its credit
      facility. As
      a
      result of maintenance expense in connection with preparing one of the Company’s
      aircraft for lease in the second quarter, on June 30, 2006, the Company was
      out
      of compliance with a financial ratio covenant which is based on net income.
      The
      Company obtained a waiver from its banks regarding that covenant for the quarter
      then ended. As
      of
      September 30, 2006, the Company was in compliance with all covenants under
      its
      credit facility agreement, $46,996,000 was outstanding under the credit
      facility, and interest of $655,260 was accrued.




*(b)*  *Special
      purpose financing*





In
      September 2000, a special purpose subsidiary acquired a deHavilland DHC-8
      aircraft using cash and bank financing separate from its credit facility. The
      financing resulted in a note obligation in the amount of $3,575,000, due April
      15, 2006, which bore interest at
      the
      rate of one-month LIBOR plus 3% . The
      note
      was collateralized by the aircraft and was non-recourse to the Company. Payments
      due under the note consisted of monthly principal and interest and a balloon
      principal payment due on the maturity date. The
      financing also provided for a six month remarketing period at the expiration
      or
      early termination of the lease. This note obligation 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 the Company. Payments
      due under the note consist of monthly principal and interest through April
      20,
      2009, interest only from April 20, 2009 until the maturity date, and a balloon
      principal payment due on the maturity date. If the aircraft lease agreement
      is
      terminated on April 15, 2008 pursuant to a lessee early termination option,
      the
      note will be due October 15, 2008, and the interest only period will be from
      April 20, 2008 through October 15, 2008. During the first nine months of 2006,
      these two special purpose subsidiaries repaid $1,785,530 of principal. The
      balance of the note payable at September 30, 2006 was $1,495,360 and interest
      of
      $3,810 was accrued. As of September 30, 2006, the Company was in compliance
      with
      all covenants of this note obligation.














-
          11
          -








AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006




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





*(b)*  *Special
      purpose financing (continued)*





In
      November 2005, the Company refinanced two DHC-8 aircraft that had been part
      of
      the collateral base for its credit facility. The financing, by a 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 7.87% . The
      note
      is collateralized by the aircraft and is non-recourse to the Company. Payments
      due under the note consist of monthly principal and interest through April
      22,
      2008, interest only from April 22, 2008 until the maturity date, and a balloon
      principal payment due on the maturity date. During the first nine months of
      2006, AeroCentury V LLC repaid $665,040 of principal. The balance of the note
      payable at September 30, 2006 was $5,651,750 and interest of $11,120 was
      accrued. As of September 30, 2006, the Company was in compliance with all
      covenants of this note obligation.





**4.**  **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. **





**5.**  **Income
      Taxes**





The
      items
      comprising income tax expense are as follows:


For
                the Nine Months Ended
              September
                30,2006
            
            
            2005Current
                tax provision:Federal
            
            $
            -
            
            $
            175,390State
            
            
            11,140
            
            
            1,630Current
                tax provision
            
            
            11,140
            
            
            177,020Deferred
                tax provision/(benefit):Federal
            
            
            202,540
            
            
            (103,330
            )State
            
            
            (16,710
            )
            
            (25,920
            )Deferred
                tax provision/(benefit)
            
            
            185,830
            
            
            (129,250
            )Total
                provision for income taxes
            
            $
            196,970
            
            $
            47,770





-
          12
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





**5.**  **Income
      Taxes (continued)**





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
                30,2006
            
            
            2005Income
                tax provision at statutory federal income tax rate
            
            $
            206,450
            
            $
            63,100State
                tax provision, net of federal benefit
            
            
            9,060
            
            
            1,090Adjustment
                to asset tax basis
            
            
            -
            
            
            10,100Tax
                rate differences
            
            
            (23,200
            )
            
            (26,520
            )Other
            
            
            4,660
            
            
            -Total
                income tax provision
            
            $
            196,970
            
            $
            47,770





Tax
      rate
      differences resulted from a decrease in the Company's effective state tax rates
      due to changes in state apportionment percentages.





Temporary
      differences and carry-forwards that give rise to a significant portion of
      deferred tax assets and liabilities as of September 30, 2006 are as
      follows:





Deferred
                tax assets:Deferred
                maintenance
            
            $
            1,748,050Maintenance
                reserves
            
            
            2,463,590Current
                year tax losses
            
            
            847,550Prepaid
                rent and other
            
            
            195,930Deferred
                tax assets
            
            
            5,255,120Deferred
                tax liabilities:Depreciation
                on aircraft and aircraft engines
            
            
            (6,387,100
            )Other
            
            
            (111,150
            )Net
                deferred tax liabilities
            
            $
            (1,243,130
            )





No
      valuation allowance is deemed necessary, as the Company has concluded that,
      based on an assessment of all available evidence, it is more likely than not
      that future taxable income will be sufficient to realize the tax benefits of
      all
      the deferred tax assets on the consolidated balance sheet. The current year
      tax
      losses, if not utilized in the current year, will be available to offset taxable
      income in each of the two preceding tax years and in future years through
      2026.





-
          13
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





**6** **.**  **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 JMC, which is an
      integrated aircraft management, marketing and financing business and a
      subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company
      are also officers of JHC and JMC and hold significant ownership positions in
      both JHC and the Company. Under the management agreement, JMC receives a monthly
      management fee based on the net asset value of the assets under management.
      JMC
      may also receive an acquisition fee for locating assets for the Company,
      provided that the aggregate purchase price, including chargeable acquisition
      costs and any acquisition fee, does not exceed the fair market value of the
      asset based on appraisal, and a remarketing fee in connection with the sale
      or
      re-lease of the Company’s assets. The Company recorded management fees of
      $2,061,720 and
      $1,705,960 during
      the nine months ended September 30, 2006 and 2005, respectively. 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 accrued
      acquisition fees totaling $520,900 payable to JMC during the first nine months
      of 2005. The
      Company recorded remarketing fees totaling $44,000 and $73,250 to JMC in
      connection with the sale of aircraft in the first nine months of 2006 and 2005,
      respectively.







-
          14
          -


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





*Overview*





The
      Company is a lessor of turboprop aircraft and engines which are used by
      customers pursuant to triple net **** operating
      leases. The acquisition of such equipment is generally made using debt
      financing. The Company’s profitability and cash flow are dependent in large part
      upon its ability to acquire equipment, obtain and maintain favorable lease
      rates
      on such equipment, and re-lease or sell owned equipment that comes off lease.
      The Company is subject to the credit risk of its lessees, both as to collection
      of rent and to performance by the lessees of obligations for maintaining the
      aircraft. Since lease rates for assets in the Company’s portfolio generally
      decline as the assets age, the Company’s ability to maintain revenue and
      earnings is dependent upon the Company’s ability to grow its asset portfolio.




The
      Company’s principal expenditures are for interest costs on its financing,
      management fees, and maintenance of its aircraft assets. Maintenance
      expenditures are generally incurred only when aircraft are off lease, are being
      prepared for re-lease, or require maintenance in excess of lease return
      conditions.





The
      most
      significant non-cash expenses include accruals of maintenance costs to be borne
      by the Company and aircraft depreciation, both of which are the result of
      significant estimates. Maintenance expenses are estimated and accrued based
      upon
      utilization of the aircraft. Depreciation is recognized based upon the estimated
      residual value of the aircraft at the end of their estimated lives. Deviation
      from these estimates could have a substantial effect on the Company’s cash flow
      and profitability.





*Critical
      Accounting Policies, Judgments and Estimates*





The
      discussion and analysis of the Company’s financial condition and results of
      operations are based upon the consolidated financial statements, which have
      been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      management to make estimates and judgments that affect the reported amounts
      of
      assets and liabilities, revenues and expenses, and the related disclosure of
      contingent assets and liabilities at the date of the financial statements.
      Actual results may differ from these estimates under different assumptions
      or
      conditions.





The
      Company’s significant accounting policies are described in Note 1 to the
      consolidated financial statements. The Company believes that the most critical
      accounting policies include the following: Impairment of Long-lived Assets;
      Depreciation Policy, Maintenance Reserves and Accrued Costs; Revenue Recognition
      and Allowance for Doubtful Accounts; and Accounting for Income
      Taxes.





*a.*  *Impairment
      of Long-lived Assets*





The
      Company periodically reviews its portfolio of assets for impairment in
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets."  Such
      review necessitates estimates of current market values, re-lease rents, residual
      values and component values.  The estimates are based on currently
      available market data and third-party appraisals and are subject to fluctuation
      from time to time *.* The Company initiates its review periodically, whenever events or changes in
      circumstances indicate that the carrying amount of a long-lived asset may not
      be
      recoverable.  Recoverability of an asset is measured by comparison of its
      carrying amount to the expected future undiscounted cash flows (without interest
      charges) that the asset is expected to generate.  Any impairment to be
      recognized is measured by the amount by which the carrying amount of the asset
      exceeds its fair market value.  Significant management judgment is required
      in the forecasting of future operating results which are used in the preparation
      of projected undiscounted cash flows and should different conditions prevail,
      material write downs may occur.





-
          15
          -


*b.*  *Depreciation
      Policy*





The
      Company’s interests in aircraft and aircraft engines are recorded at cost, which
      includes acquisition costs. The Company purchases only used aircraft. It is
      the
      Company’s policy to hold aircraft for approximately twelve years unless market
      conditions necessitate earlier disposition. Depreciation is computed using
      the
      straight-line method over the twelve year period to an estimated residual value
      based on appraisal. Decreases in the market value of aircraft could not only
      affect the current value, discussed above, but could also affect the assumed
      residual value. The Company periodically obtains a residual value appraisal
      for
      its assets and, historically, has not written down any estimated
      residuals.





*c.*  *Maintenance
      Reserves and Accrued Costs*





Maintenance
      costs under the Company’s triple net leases are generally the responsibility of
      the lessees. Maintenance reserves and accrued costs in the accompanying
      consolidated balance sheet include refundable and non-refundable maintenance
      payments received from lessees. The Company periodically reviews maintenance
      reserves for each of its aircraft for adequacy in light of the number of hours
      flown, airworthiness directives issued by the manufacturer or government
      authority, and the return conditions specified in the lease, as well as the
      condition of the aircraft upon return or inspection. As a result of such review,
      if it is probable that the Company has incurred costs for maintenance in excess
      of amounts received from lessees, the Company accrues its share of costs for
      work to be performed.





Significant
      management judgment is required in determining aircraft condition and estimating
      maintenance costs. Absent fixed price maintenance agreements, these costs cannot
      be determined until such work is completed. Because of the potential magnitude
      of maintenance costs, even slight changes in work scope may have a material
      impact on operating results.





With
      respect to estimated maintenance costs, the Company has found its accruals
      to be
      generally accurate. Its accruals, however, are based on the assumption that
      aircraft will be returned at lease end in accordance with the return conditions
      of the lease. Consequently, as a result of two past situations, the Company
      has
      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 and Allowance for Doubtful Accounts*





Revenue
      from leasing of aircraft assets is recognized as operating lease revenue on
      a
      straight-line basis over the terms of the applicable lease agreements. The
      Company estimates and charges to income a provision for bad debts based on
      its
      experience in the business and with each specific customer, the level of past
      due accounts, and its analysis of the lessees’ overall financial condition. If
      the financial condition of the Company’s customers deteriorates, it could result
      in actual losses exceeding the estimated allowances.





*e.*  *Accounting
      for Income Taxes*





As
      part
      of the process of preparing the Company’s consolidated financial statements,
      management is required to estimate income taxes in each of the jurisdictions
      in
      which the Company operates. This process involves estimating the Company’s
      current tax exposure under the most recent tax laws and assessing temporary
      differences resulting from differing treatment of items for tax and accounting
      purposes. These differences result in deferred tax assets and liabilities,
      which
      are included in the consolidated balance sheet. Management must also assess
      the
      likelihood that the Company’s deferred tax assets will be recovered from future
      taxable income, and, to the extent management believes it is more likely than
      not that some portion or all of the deferred tax assets will not be realized,
      the Company must establish a valuation allowance. To the extent the Company
      establishes a valuation allowance or changes the allowance in a period, the
      Company reflects the corresponding increase or decrease within the tax provision
      in the consolidated statement of operations.





Significant
      management judgment is required in determining the Company’s future taxable
      income for purposes of assessing the Company’s ability to realize any benefit
      from its deferred taxes. In the event that actual results differ from these
      estimates or the Company adjusts these estimates in future periods, the
      Company’s operating results and financial position could be materially
      affected.


-
          16
          -





*Results
      of Operations*





*a.*  *Revenues
      and other income*





Operating
      lease revenue was approximately $3,238,000 and $964,000 higher in the nine
      months and three months ended September 30, 2006 versus the same periods in
      2005, primarily because of increased operating lease revenue from aircraft
      purchased beginning in April 2005 and revenue from two aircraft which had been
      off lease in 2005.





Gain
      on
      sale of aircraft was approximately $409,000 for the nine months ended September
      30, 2006 as a result of the sale of an aircraft in April 2006. Loss on sale
      of
      aircraft was approximately $60,000 for the nine months ended September 30,
      2005
      as a result of the sale of an aircraft in February 2005.





Other
      income was approximately $2,306,000 higher in the nine months ended September
      30, 2006 versus the same period in 2005, primarily as a result of $2,396,000
      of
      non-refundable maintenance reserves retained by the Company which were recorded
      as income at lease end in 2006. Other income was approximately the same in
      the
      three month periods of both years.





*b.*  *Expense
      items*





Depreciation
      was approximately $773,000 and $218,000 higher in the nine months and three
      months ended September 30, 2006, respectively, versus the same periods in 2005.
      These increases were primarily because of purchases of aircraft beginning in
      April 2005, the effect of which was partially offset by the sale of two
      aircraft, one in November 2005 and the second in April 2006. Management fees,
      which are calculated on the net book value of the aircraft owned by the Company,
      were approximately $356,000 and $84,000 higher in the nine month and three
      month
      periods of 2006 compared to 2005, respectively, for the same
      reasons.





Interest
      expense was approximately $1,231,000 and $395,000 higher in the nine months
      and
      three months ended September 30, 2006 versus the same periods in 2005 primarily
      as a result of increases in the index rates upon which the Company’s interest
      rates are based and a higher average principal balance in 2006 compared to
      2005,
      the effect of which was partially offset by a lower margin in 2006 than in
      2005.





Maintenance
      expense was approximately $3,335,000 higher in the nine months ended September
      30, 2006 versus the same period in 2005. In 2006, the Company retained
      non-refundable maintenance reserves when two aircraft were returned to the
      Company at lease end and recorded such amounts as other income, discussed above.
      Based on the condition of the aircraft at the time of return, the Company
      accrued approximately $2,392,000 of maintenance expense for which the Company
      is
      responsible. In 2006, the Company also accrued approximately $1,163,000 of
      expense to prepare several aircraft for re-lease. In 2005, the Company accrued
      approximately $220,000 of maintenance expense, for the storage and preparation
      for re-lease of several aircraft. Maintenance expense was approximately $52,000
      higher in the three months ended September 30, 2006 compared to the same period
      in 2005, primarily because of the expense to prepare an aircraft for re-lease.





The
      Company's insurance expense consists primarily of 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, insurance expense was approximately $59,000 and $21,000
      lower in the nine months and three months ended September 30, 2006,
      respectively, versus the same periods in 2005.





During
      the first quarter of 2006, the Company recorded bad debt expense of
      approximately $49,000 for rent receivable which was written off in connection
      with a lessee’s early return of an aircraft. During the second quarter of 2005,
      the Company recorded bad debt expense of approximately $88,000, to fully reserve
      the balance of a note receivable from a former lessee, based on a notice
      received from the lessee that it had filed for reorganization.


-
          17
          -





The
      Company did not record any impairment charges in the first nine months of 2006.
      In the first nine months of 2005, the Company recorded an
      impairment charge of approximately $12,000 for one of its aircraft, based on
      the
      estimated net sales proceeds pursuant to an agreement to sell the aircraft.





The
      Company’s effective tax rates for the nine months ended September 30, 2006 and
      2005 were approximately 32% and 26%, respectively. The change in rate was
      primarily a result of the recognition of tax benefits relating to different
      state tax rates that had been accrued in prior years. Since the Company earned
      less income for the period ended September 30, 2005 than it earned for the
      period ended September 30, 2006, the recognition of tax benefits related to
      the
      reduced state tax rates acted to reduce the Company’s effective tax rate more
      for the period ended September 30, 2005 than it did for the period ended
      September 30, 2006. In addition, during the period ended September 30, 2006,
      the
      Company leased more aircraft within the United States which resulted in
      additional state tax expense than for that period than for the period ended
      September 30, 2005.





*Liquidity
      and Capital Resources*





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





*(a)*  *Credit
      facility*





In
      November 2005, the Company’s credit facility was renewed through October 31,
      2007. In connection with the renewal, certain financial covenants were modified,
      including the applicable margin which is added to the index rate for each of
      the
      Company’s outstanding loans under the credit facility. The margin, which is
      determined by certain financial ratios, was revised from a range of 275 to
      375
      basis points to a range of 275 to 325 basis points. In May 2006, **** a
      participant was added to the Company’s credit facility and the amount of the
      facility was increased from $50 million to $55 million.





During
      the first nine months of 2006, the Company repaid $3 million of the outstanding
      principal under its credit facility. The
      balance of the note payable at September 30, 2006 was $46,996,000 and interest
      of $655,260 was accrued.





As
      a
      result of maintenance expense in connection with preparing one of the Company’s
      aircraft for lease in the second quarter, on June 30, 2006, the Company was
      out
      of compliance with a financial ratio covenant which is based on net income.
      The
      Company obtained a waiver from its banks regarding that covenant for the quarter
      then ended. 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 - 'Credit Facility Obligations' and 'Risks of
      Debt Financing',"* below.





The
      Company's interest expense in connection with the credit facility generally
      moves up or down with prevailing interest rates, as the Company has not entered
      into any interest rate hedge transactions for the credit facility indebtedness.
       Because aircraft owners seeking financing generally can obtain financing
      through either leasing transactions or traditional secured debt financings,
      prevailing interest rates are a significant factor in determining market lease
      rates, and market lease rates generally move up or down with prevailing interest
      rates, assuming supply and demand of the desired equipment remain constant.
       However, because lease rates for the Company’s assets typically are fixed
      under existing leases, the Company normally does not experience any positive
      or
      negative impact in revenue from changes in market lease rates due to interest
      rate changes until existing leases have terminated and new lease rates are
      set
      as the aircraft is re-leased.





-
          18
          -


*(b)*  *Special
      purpose financing*





In
      September 2000, a special purpose subsidiary acquired a deHavilland DHC-8
      aircraft using cash and bank financing separate from its credit facility. The
      financing resulted in a note obligation in the amount of $3,575,000, due April
      15, 2006, which bore interest at
      the
      rate of one-month LIBOR plus 3% . The
      note
      was collateralized by the aircraft and was non-recourse to the Company. Payments
      due under the note consisted of monthly principal and interest and a balloon
      principal payment due on the maturity date. The
      financing also provided for a six month remarketing period at the expiration
      or
      early termination of the lease. This note obligation 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 the Company. Payments
      due under the note consist of monthly principal and interest through April
      20,
      2009, interest only from April 20, 2009 until the maturity date, and a balloon
      principal payment due on the maturity date. If the aircraft lease agreement
      is
      terminated on April 15, 2008 pursuant to a lessee early termination option,
      the
      note will be due October 15, 2008, and the interest only period will be from
      April 20, 2008 through October 15, 2008. During the first nine months of 2006,
      these two special purpose subsidiaries repaid $1,785,530 of principal. The
      balance of the note payable at September 30, 2006 was $1,495,360 and interest
      of
      $3,810 was accrued. As of September 30, 2006, 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 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 7.87% . The
      note
      is collateralized by the aircraft and is non-recourse to the Company. Payments
      due under the note consist of monthly principal and interest through April
      22,
      2008, interest only from April 22, 2008 until the maturity date, and a balloon
      principal payment due on the maturity date. During the first nine months of
      2006, AeroCentury V LLC repaid $665,040 of principal. The balance of the note
      payable at September 30, 2006 was $5,651,750 and interest of $11,120 was
      accrued. As of September 30, 2006, 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 several
      factors including (1) the availability of funds to be used for the equity
      portion of the financing, (2) the type of asset being financed, (3) the
      creditworthiness of the underlying lessee and (4) continued compliance with
      the
      Company’s credit facility covenants. The availability of funds for the equity
      portion of the financing will be dependent on the Company's cash flow, as
      discussed in *"Cash
      Flow,"* below.





*(c)*  *Cash
      flow*





The
      Company's primary source of revenue is lease rentals of its aircraft assets.
      It
      is the Company’s policy to monitor each lessee’s needs in periods before leases
      are due to expire. If it appears that a customer will not be renewing its lease,
      the Company immediately initiates marketing efforts to locate a potential new
      lessee or purchaser for the aircraft. The goal of this procedure is to reduce
      the time that an asset will be off lease. The Company’s aircraft are subject to
      leases with varying expiration dates through November 2010.





Management
      believes that the Company will have adequate cash flow to meet its ongoing
      operational needs, including required repayments under its credit facility,
      based upon its estimates of future revenues and expenditures. The Company’s
      expectations concerning such cash flows are based on existing lease terms and
      rents, as well as numerous assumptions, including (i) rents on assets to be
      re-leased, (ii) sale proceeds of certain assets currently under lease, (iii)
      the
      cost and anticipated timing of maintenance to be performed and (iv) acquisition
      of additional aircraft and the lease thereof at favorable lease terms. While
      the
      Company believes that the assumptions it has made in forecasting its cash flow
      are reasonable in light of experience, actual results could deviate from such
      assumptions. Among the more significant external factors outside the Company’s
      control that could have an impact on the accuracy of cash flow assumptions
      are
      (i) an increase in interest rates that may negatively affect the Company’s
      profitability and may cause the Company to violate covenants of its credit
      facility, requiring repayment of some or all of the amounts outstanding under
      its credit facility, (ii) lessee non-performance or non-compliance with lease
      obligations (which may affect credit facility collateral limitations as well
      as
      revenue and expenses) and (iii) an unexpected deterioration of demand for
      aircraft equipment.





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          19
          -


*(i)*  *Operating
      activities*





The
      Company’s cash flow from operations for the nine months ended September 30, 2006
      versus the nine months ended September 30, 2005 increased by approximately
      $2,768,000. 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 $3,560,000 higher in the
      nine
      months ended September 30, 2006 versus 2005, due primarily to the effect of
      increased lease revenue from aircraft purchased beginning in April 2005.
      Although increased demand generally in the turboprop market has caused lease
      rates to stabilize and, in some cases, rise, it cannot be predicted that rental
      rates on aircraft to be re-leased will not decline, so that, absent additional
      acquisitions by the Company, aggregate lease revenues for the current portfolio
      could decline over the long term.





Security
      deposits received increased by approximately $793,000 in the nine months ended
      September 30, 2006 versus the same period in 2005, because of the cash deposits
      received in connection with the re-lease of aircraft in 2006.





Expenditures
      for maintenance





Expenditures
      for maintenance were approximately $2,286,000 higher in the first nine months
      of
      2006 versus 2005 primarily as a result of payments during 2006 for maintenance
      performed to ready several of the Company’s aircraft for remarketing. The effect
      of these expenditures was partially offset by lower payments for maintenance
      performed by lessees, which were funded by the payout of maintenance reserves
      held by the Company. The amount of expenditures for maintenance in future
      periods will be dependent on the amount and timing of maintenance paid from
      lessee maintenance reserves held by the Company and the off-lease status of
      the
      Company’s aircraft.





Expenditures
      for interest





Expenditures
      for interest increased by approximately $962,000 in the nine months ended
      September 30, 2006 versus the same period in 2005, primarily as a result of
      higher average interest rates and a higher average principal balance in 2006.
      Interest expenditures in future periods will be a product of prevailing interest
      rates and the outstanding principal balance on financings, which may be
      influenced by future acquisitions and/or required repayments resulting from
      changes in the collateral base.





Expenditures
      for management fees





Expenditures
      for management fees increased by approximately $575,000 in the nine months
      ended
      September 30, 2006 versus the same period in 2005, as a result of aircraft
      purchases since April 2005.





Income
      taxes





Income
      tax payments were approximately $1,732,000 lower in the first nine months of
      2006 compared to the same period in 2005 primarily because the Company made
      payments of approximately $1,704,000 in 2005 for 2004 tax expense which was
      the
      result of the sale of a portfolio of engines in December 2004. In addition,
      the
      Company had lower taxable income in 2006 than in 2005.




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          20
          -


*(ii)*  *Investing
      activities*





The
      $6,798,000 increase in cash flow provided by investing activities in the first
      nine months of 2006 versus the same period in 2005 was primarily due to a
      decrease in the amount invested in aircraft assets which was partially offset
      by
      a decrease in the amount received from aircraft sales in 2006.





*(iii)*  *Financing
      activities*





The
      Company borrowed approximately $9,291,000 less in the first nine months of
      2006
      versus the same period in 2005 for aircraft financing and repaid approximately
      $3,350,000 less of its outstanding debt in 2006. 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*





The
      Company’s future growth will depend on the availability of additional financing
      for acquisitions of leased assets which, due to rising interest rates, will
      need
      to be leased at increased rental rates to offset the anticipated stable or
      decreased lease rates resulting from future re-leases of the Company’s current
      portfolio. The
      Company is continuing to pursue additional sources of acquisition financing.





All
      of
      the Company’s aircraft are currently on lease. The next scheduled expiration of
      one of the Company’s aircraft leases is in November 2006, and the Company
      expects it will be extended at that time.





The
      Company continually monitors the financial condition of its lessees to prevent
      unanticipated creditworthiness issues, and where necessary, works with lessees
      to ensure continued compliance with both monetary and non-monetary obligations
      under their respective leases. Currently, the Company is closely monitoring
      the
      performance of two lessees with a total of three aircraft under lease. The
      Company continues to work closely with these lessees to ensure compliance with
      their current obligations. During
      2006, the Company incurred $49,000 of bad debt expense related to amounts owed
      by a former lessee at the time the Company and the lessee agreed to the early
      termination of the lease. 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





Due
      to
      the recent adoption of FASB Staff Position AUG AIR-1, as discussed in Footnote
      1
      to the Financial Statements, the Company must discontinue the accrue-in-advance
      method of accounting for planned major maintenance for financial reporting
      periods beginning on January 1, 2007. Under the accrue-in-advance method of
      accounting, the collection of non-refundable maintenance reserves for planned
      major maintenance and disbursements from reserves to lessees to pay for
      maintenance performed was reflected only on the Company's balance sheet. The
      Company is still evaluating the impact of the adoption of this new staff
      position and determining which alternative method of accounting it will use
      going forward. In any event, the new mandated accounting methods will require
      receipt of non-refundable maintenance reserves for planned major maintenance
      from the Company's lessees to be reflected as income on the income statements,
      and release of maintenance reserves to be reflected as an expense when
      maintenance is actually performed. Therefore, beginning in the first quarter
      of
      2007, the Company believes that the Company's 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 accrue-in-advance method of accounting
      for planned major maintenance activities. Furthermore, because this guidance
      must be applied retroactively, the Company anticipates that, beginning with
      its
      March 31, 2007 financial reporting requirements, the balance sheet will reflect
      a catch-up cumulative adjustment to retained earnings as of January 1, 2006,
      as
      a result of the change to the new accounting method.





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          21
          -


*Factors
      that May Affect Future Results*





*Need
      for Additional Financing.* As
      there
      is limited availability under the Company's $55 million credit facility, in
      order to continue increasing its asset base, it will need additional sources
      of
      financing. The Company is currently actively seeking additional debt financing
      through an increase in the amount of the credit facility and through other
      sources of acquisition financing, but there is no assurance that it will be
      able
      to obtain such financing on terms that are acceptable to the Company. In the
      absence of such financing, the Company will likely be able to meet its
      short-term cash flow needs, but over the long term, its revenues will decrease
      consistently as the Company’s existing asset base ages and lease rates decline
      as the assets age.





*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 annual earnings, interest
      coverage and net worth ratios. Any default under the credit facility, if not
      waived by the lenders, could result in foreclosure upon not only the asset
      acquired using such financing, but also the existing assets of the Company
      securing the loan. It is possible that some form of subordinated debt may be
      issued by the Company to fund acquisitions if the credit facility is not
      increased, or in combination with an increase in the credit facility. Such
      financing may have separate, more restrictive covenants, and may magnify the
      adverse consequences of a lessee default.





*Interest
      Rate Risk.* The
      Company’s current credit facility and the indebtedness of one of its special
      purpose subsidiaries carry a floating interest rate based upon either the
      lender’s prime rate or a floating LIBOR rate. Lease rates, generally, but not
      always, move with interest rates, since market demand for the asset also affects
      lease rates. Because lease rates are fixed at the origination of leases,
      interest rate increases during the term of a lease have no effect on existing
      lease payments. Therefore, if interest rates rise significantly, and there
      is
      relatively little lease origination by the Company following such rate
      increases, the Company could experience lower net earnings. Further, even if
      significant lease origination occurs following such rate increases, if the
      contemporaneous aircraft market forces result in lower or flat rental rates,
      the
      Company could experience lower net earnings as well.





Recent
      actions by the Federal Reserve Board indicate that its previous moves to
      increase the prevailing short term borrowing rates have ceased for the time
      being, but there is no assurance that economic circumstances may not cause
      the
      Board to resume moving short term borrowing rates higher. The Company has not
      hedged its variable rate debt obligations and such obligations are based on
      short-term interest rate indexes. Consequently, if an interest rate increase
      were great enough, the Company might not be able to generate sufficient lease
      revenue to meet its interest payment and other obligations and comply with
      the
      net earnings covenant of its credit facility.





*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.





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          22
          -


*Concentration
      of Lessees and Aircraft Type.* Currently, the Company’s five largest customers are located in Belgium, Taiwan,
      the Caribbean, Norway and Sweden, and currently account for approximately 15%,
      13%, 12%, 11% and 10%, respectively, of the Company’s monthly lease revenue. A
      lease default by or collection problems with one of these customers could have
      a
      disproportionate negative impact on the Company’s financial results, and
      therefore, the Company’s operating results are especially sensitive to any
      negative developments with respect to these customers in terms of lease
      compliance or collection. Such concentration of lessee credit risk will diminish
      in the future only if the Company is able to lease additional assets to new
      lessees.




The
      acquisition of eight Fokker 50 aircraft and six DHC-8 aircraft in 2004 and
      2005
      made these two aircraft types the dominant aircraft types in the portfolio,
      constituting 14 and 11, respectively, of the 33 aircraft currently in the
      portfolio and representing 38% and 50%, respectively, based on book value.
      As a
      result, a change in the desirability and availability of either or both of
      these
      types of aircraft, which would in turn affect valuations of such aircraft,
      would
      have a disproportionately large impact on the Company’s portfolio value. Such
      aircraft type concentration will diminish if the Company acquires additional
      assets of other types. Conversely, acquisition of additional Fokker 50 or DHC-8
      aircraft will increase the Company’s risks related to its concentration of those
      aircraft types.





*Increased
      Compliance Costs* .
      Current
      Sarbanes-Oxley Act requirements applicable to the Company effective for the
      year
      ended December 31, 2007, relating to internal controls and auditors'
      responsibilities to review and opine on those controls, could result in
      significantly higher fees and expenses in connection with auditor services
      beginning in the second half of 2006. The increase will generally arise from
      increased auditor responsibilities, including broadening of the scope of the
      auditor's examination to include the Company's internal controls. If the
      regulations remain unchanged, the Company anticipates that it will have
      sufficient funds to pay for the increased compliance costs.





*Lessee
      Credit Risk.* If
      a
      customer defaults upon its lease obligations, the Company may be limited in
      its
      ability to enforce remedies. Most of the Company’s lessees are small regional
      passenger airlines, which may be even more sensitive to airline industry market
      conditions than the major airlines. As a result, the Company’s inability to
      collect rent under a lease or to repossess equipment in the event of a default
      by a lessee could have a material adverse effect on the Company’s revenue. If a
      lessee that is a certified U.S. airline is in default under the lease and seeks
      protection under Chapter 11 of the United States Bankruptcy Code, Section 1110
      of the Bankruptcy Code would automatically prevent the Company from exercising
      any remedies for a period of 60 days. After the 60-day period has passed, the
      lessee must agree to perform the obligations and cure any defaults, or the
      Company will have the right to repossess the equipment. This procedure under
      the
      Bankruptcy Code has been subject to significant recent litigation, however,
      and
      it is possible that the Company’s enforcement rights may be further adversely
      affected by a declaration of bankruptcy by a defaulting lessee. Most of the
      Company’s lessees are foreign and not subject to U.S. bankruptcy laws but there
      may be similar applicable foreign bankruptcy debtor protection schemes available
      to foreign carriers.





*Leasing
      Risks.* The
      Company’s successful negotiation of lease extensions, re-leases and sales may be
      critical to its ability to achieve its financial objectives, and involves a
      number of risks. Demand for lease or purchase of the assets depends on the
      economic condition of the airline industry which is, in turn, sensitive to
      general economic conditions. The ability to remarket equipment at acceptable
      rates may depend on the demand and market values at the time of remarketing.
      The
      Company anticipates that the bulk of the equipment it acquires will be used
      aircraft equipment. The market for used aircraft is cyclical, and generally
      reflects economic conditions and the strength of the travel and transportation
      industry. The demand for and value of many types of used aircraft in the recent
      past has been depressed by such factors as airline financial difficulties,
      increased fuel costs, the number of new aircraft on order and the number of
      aircraft coming off-lease. The Company’s expected concentration in a limited
      number of airframe and aircraft engine types (generally, turboprop equipment)
      subjects the Company to economic risks if those airframe or engine types should
      decline in value. If “regional jets” were to be used on short routes previously
      served by turboprops, even though regional jets are more expensive to operate
      than turboprops on those routes, the demand for turboprops could lessen. This
      could result in lower lease rates and values for the Company’s existing
      turboprop aircraft.





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          23
          -


*Risks
      Related to Regional Air Carriers.* Because
      the Company has concentrated its existing leases, and intends to concentrate
      on
      future leases, to regional air carriers, it is subject to additional risks.
      Some
      of the lessees in the regional air carrier market are companies that are
      start-up, low capital, low margin operations. Often, the success of such
      carriers is dependent upon arrangements with major trunk carriers, which may
      be
      subject to termination or cancellation by such major carrier. These types of
      lessees result in a generally higher lease rate on aircraft, but may entail
      higher risk of default or lessee bankruptcy. In the event of a business failure
      of the lessee or its bankruptcy, the Company can generally regain possession
      of
      its aircraft, but the aircraft could be in substantially worse condition than
      would be the case if the aircraft were returned in accordance with the
      provisions of the lease at lease expiration.





The
      Company evaluates the credit risk of each lessee carefully, and attempts to
      obtain a third party guaranty, letters of credit or other credit enhancements,
      if it deems them necessary. There is no assurance, however, that such
      enhancements will be available or that if obtained they will fully protect
      the
      Company from losses resulting from a lessee default or bankruptcy. Also, a
      significant area of growth of this market is in areas outside of the United
      States, where collection and enforcement are often more difficult and
      complicated than in the United States. During
      2006 and 2005, the Company incurred bad debt expense related to amounts owed
      by
      a total of 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 the stockholders by virtue
      of
      holding such offices with the Company. In addition, certain officers of the
      Company hold significant ownership positions in the Company and JHC, the parent
      company of JMC. ****





The
      JMC
      management agreement may be terminated if JMC defaults on its obligations to
      the
      Company. However, the agreement provides for liquidated damages in the event
      of
      its wrongful termination by the Company. All of the officers of JMC are also
      officers of the Company, and certain directors of the Company are also directors
      of JMC. Consequently, the directors and officers of JMC may have a conflict
      of
      interest in the event of a dispute between the Company and JMC. Although the
      Company has taken steps to prevent conflicts of interest arising from such
      dual
      roles, such conflicts may still occur.





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.





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          24
          -


*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 credit risks than those with domestic lessees.





Foreign
      laws, regulations and judicial procedures may be more or less protective of
      lessor rights than those which apply in the United States. The Company could
      experience collection or repossession problems related to the enforcement of
      its
      lease agreements under foreign local laws and the remedies in foreign
      jurisdictions. The protections potentially offered by Section 1110 of the
      Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law
      may
      not offer similar protections. Certain countries do not have a central
      registration or recording system with which to locally establish the Company’s
      interest in equipment and related leases. This could make it more difficult
      for
      the Company to recover an aircraft in the event of a default by a foreign
      lessee.





A
      lease
      with a foreign lessee is subject to risks related to the economy of the country
      or region in which such lessee is located, which may be weaker than the U.S.
      economy. On the other hand, a foreign economy may remain strong even though
      the
      U.S. economy does not. A foreign economic downturn may impact a foreign lessee’s
      ability to make lease payments, even though the U.S. and other economies remain
      stable. Furthermore, foreign lessees are subject to risks related to currency
      conversion fluctuations. Although the Company’s current leases are all payable
      in U.S. dollars, the Company may agree in the future to leases that permit
      payment in foreign currency, which would subject such lease revenue to monetary
      risk due to currency fluctuations. Even with U.S. dollar-denominated lease
      payment provisions, the Company could still be affected by a devaluation of
      the
      lessee’s local currency that would make it more difficult for a lessee to meet
      its U.S. dollar-denominated lease payments, increasing the risk of default
      of
      that lessee, particularly if its revenue is primarily derived in the local
      currency.





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          25
          -


*Government
      Regulation.* There
      are a number of areas in which government regulation may result in costs to
      the
      Company. These include aircraft registration, safety requirements, required
      equipment modifications, and aircraft noise requirements. Although it is
      contemplated that the burden and cost of complying with such requirements will
      fall primarily upon lessees of equipment, there can be no assurance that the
      cost will not fall on the Company. Furthermore, future government regulations
      could cause the value of any non-complying equipment owned by the Company to
      decline substantially.





*Competition* .
      The
      aircraft leasing industry is highly competitive. The Company competes with
      aircraft manufacturers, distributors, airlines and other operators, equipment
      managers, leasing companies, equipment leasing programs, financial institutions
      and other parties engaged in leasing, managing or remarketing aircraft, many
      of
      which have significantly greater financial resources and more experience than
      the Company. However, the Company believes that it is competitive because of
      JMC’s experience and operational efficiency in identifying and obtaining
      financing for the transaction types desired by regional air carriers. This
      market segment, which is characterized by transaction sizes of less than $10
      million and lessee credits that may be strong, but are generally unrated, is
      not
      well served by the Company’s larger competitors in the aircraft industry. JMC
      has developed a reputation as a global participant in this segment of the
      market, and the Company believes that JMC’s reputation will benefit the Company.
      There is, however, no assurance that the lack of significant competition from
      the larger aircraft leasing companies will continue or that the reputation
      of
      JMC will continue to be strong in this market segment.





*Casualties,
      Insurance Coverage* .
      The
      Company, as owner of transportation equipment, may be named in a suit claiming
      damages for injuries or damage to property caused by its assets. As a triple
      net
      lessor, the Company is generally protected against such claims, since the lessee
      would be responsible for, insure against and indemnify the Company for, such
      claims. Further, some protection may be provided by the United States Aviation
      Act with respect to the Company’s aircraft assets. It is, however, not clear to
      what extent such statutory protection would be available to the Company, and
      the
      United States Aviation Act may not apply to aircraft operated in foreign
      countries. Also, although the Company’s leases generally require a lessee to
      insure against likely risks, there may be certain cases where the loss is not
      entirely covered by the lessee or its insurance. Though this is a remote
      possibility, an uninsured loss with respect to the equipment, or an insured
      loss
      for which insurance proceeds are inadequate, would result in a possible loss
      of
      invested capital in and any profits anticipated from, such equipment, as well
      as
      a potential claim directly against the Company.





*General
      Economic Conditions.* The
      Company’s business is dependent upon general economic conditions and the
      strength of the travel and transportation industry. The industry has experienced
      a severe cyclical downturn which began in 2001. There are signs that the
      industry is beginning to recover from the downturn, but it is unclear whether
      any recovery will be a sustained one. Any recovery could be stalled or reversed
      by any number of events or circumstances, including the global economy slipping
      back into recession, or specific events related to the air travel industry,
      such
      as 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.





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During
      any periods of economic contraction, carriers generally reduce capacity, in
      response to lower passenger loads, and as a result there is a reduced demand
      for
      aircraft and a corresponding decrease in market lease rental rates and aircraft
      values. This reduced market value for aircraft could affect the Company’s
      results if the market value of an asset or assets in the Company’s aircraft
      portfolio falls below carrying value, and the Company determines that a
      write-down of the value on the Company’s balance sheet is appropriate.
      Furthermore, as older leases expire and are replaced by lease renewals or
      re-leases at decreasing lease rates, the lease revenue of the Company from
      its
      existing portfolio is likely to decline, with the magnitude of the decline
      dependent on the length of the downturn and the depth of the decline in market
      rents.





Economic
      downturns can affect specific regions of the world exclusively. As the Company’s
      portfolio is not entirely globally diversified, a localized downturn in one
      of
      the key regions in which the Company leases aircraft (e.g., Europe or Asia)
      could have a significant adverse impact on the Company.





*Possible
      Volatility of Stock Price* .
      The
      market price of the Company’s common stock could be subject to fluctuations in
      response to the Company’s operating results, changes in general conditions in
      the economy, the financial markets, the airline industry, changes in accounting
      principles or tax laws applicable to the Company or its lessees, or other
      developments affecting the Company, its customers or its competitors, some
      of
      which may be unrelated to the Company’s performance. Also, because the Company
      has a relatively small capitalization of approximately 1.5 million shares,
      there
      is a correspondingly limited amount of trading of the Company’s shares.
      Consequently, a single or small number of trades could result in a market
      fluctuation not related to any business or financial development concerning
      the
      Company.





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          27
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**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 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.





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          -


**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 done
      on
      a quarterly basis so that the conclusions concerning controls effectiveness
      can
      be reported in the Company’s quarterly reports on Form 10-QSB and annual report
      on Form 10-KSB. The Company’s Internal Controls are also evaluated on an ongoing
      basis by **** other
      personnel in the Company’s finance organization and by the Company’s independent
      auditors in connection with their audit and review activities. The overall
      goals
      of these various evaluation activities are to monitor the Company’s Disclosure
      Controls and the Company’s Internal Controls and to make modifications as
      necessary; the Company’s intent in this regard is that the Disclosure Controls
      and the Internal Controls will be maintained as dynamic systems that change
      (including with improvements and corrections) as conditions
      warrant.





Among
      other matters, the Company sought in its evaluation to determine whether there
      were any “significant deficiencies” or “material weaknesses” in the Company’s
      Internal Controls, or whether the Company had identified any acts of fraud
      involving personnel who have a significant role in the Company’s Internal
      Controls. This information was important both for the Controls Evaluation
      generally and because item 5 in the Section 302 Certifications of the CEO and
      CFO require that the CEO and CFO disclose that information to the Audit
      Committee of the Company’s Board and to the Company’s independent auditors and
      to report on related matters in this section of the Report. In the professional
      auditing literature, “significant deficiencies” are referred to as “reportable
      conditions”; these are control issues that could have a significant adverse
      effect on the ability to record, process, summarize and report financial data
      in
      the financial statements. A “material weakness” is defined in the auditing
      literature as a particularly serious reportable condition where the internal
      control does not reduce to a relatively low level the risk that misstatements
      caused by error or fraud may occur in amounts that would be material in relation
      to the financial statements and not be detected within a timely period by
      employees in the normal course of performing their assigned functions. The
      Company also sought to deal with other controls matters in the Controls
      Evaluation, and in each case if a problem was identified, the Company considered
      what revision, improvement and/or correction to make in accordance with our
      on-going procedures.





In
      accordance with SEC requirements, the CEO and CFO note that there has been
      no
      significant change in Internal Controls that occurred during our most recent
      fiscal quarter that has materially affected or is reasonably likely to
      materially affect our Internal Controls.





**Conclusions.** Based
      upon the Controls Evaluation, the Company’s CEO and CFO have concluded that, (i)
      the Company’s Disclosure Controls are effective to ensure that the information
      required to be disclosed by the Company in the reports that it files under
      the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the Commission’s rules and forms and then accumulated and
      communicated to Company management, including the CEO and CFO, as appropriate
      to
      make timely decisions regarding required disclosures, and (ii) that the
      Company’s Internal Controls are effective to provide reasonable assurance that
      the Company’s consolidated financial statements are fairly presented in
      conformity with generally accepted accounting principles.





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          29
          -


**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
            Description-10.1
            Form
                of Waiver to Credit Agreement, dated July 19, 2006, by and among
                the
                Company, National City Bank, as agent, and National City Bank, California
                Bank & Trust, First Bank d.b.a. First Bank & Trust, and Bridge
                Bank, N.A., as lenders (1)31.1
            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.(1) 
                Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, as
                filed with the Securities and Exchange
              Commission on July 24,
                2006.




*
      These
      certificates are furnished to, but shall not be deemed to be filed with, the
      Securities and Exchange Commission.











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          30
          -


**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: November
              13,.2006
            By:
            /s/ 
Toni
              M.
              PerazzoTitle Senior
              Vice President-Finance and Chief Financial
              Officer