**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-QSB**


(Mark
      One)


x
            Quarterly
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934





For
      the
      quarterly period ended March 31, 2007





o
            Transition
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934





For
      the
      transition period from ____________ to ____________





Commission
      File Number: **001-13387**





**AeroCentury
      Corp.**


(Exact
      name of small business issuer as specified in its charter)





**Delaware**
            
            **94-3263974**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)


**1440
      Chapin Avenue, Suite 310**


**Burlingame,
      California 94010**


(Address
      of principal executive offices)





**(650)
      340-1888**


(Issuer’s
      telephone number)





**None**


(Former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the Issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90
      days.


Yes 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 May 15, 2007 the Issuer had 1,606,557 **** Shares
      of
      Common Stock, par value $0.001 per share, issued, of which
      63,300 are held as Treasury Stock.





Transitional
      Small Business Disclosure Format (check one):


Yes 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 the adoption of the direct
      expensing method pursuant to FSP AUG -AIR-1 will result in uneven effects on
      the
      Company’s results of operations.; and that the adoption of SFAS 157 and SFAS 159
      will not have an impact on the financial condition, results of operations or
      cash flows of the Company; (ii) in Item 1 “Financial Statements, Note 6” the
      statement that future taxable income will likely be sufficient to realize the
      tax benefits of all the deferred tax assets on the balance sheet; (iii) in
      Item
      2 "Management's Discussion and Analysis or Plan of Operation -- Liquidity and
      Capital Resources," statements regarding the Company's belief that it will
      continue to be in compliance with all covenants of its credit facility, 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 proceeds from the increased
      credit facility and the Subordinated Note financing will be sufficient to fund
      the Company’s short- and medium-term acquisitions; that even if certain aircraft
      returned to the Company in March 2007 remain off-lease for an extended period
      of
      time, the Company will still maintain compliance with its debt covenants; the
      Company’s belief regarding the renewal of aircraft with terms ending in 2007 and
      the re-lease of an aircraft expected to be returned and not renewed and the
      effect on compliance with debt covenants; and the Company’s belief that its
      reported net income may be subject to greater fluctuations from
      quarter-to-quarter than would have been the case had the Company continued
      its
      use of the previous method of accounting for planned major maintenance
      activities; and (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 successful in timely acquiring appropriate
      assets for acquisition to take full financial advantage of the additional
      resources provided under the increased credit facility and Subordinated Note
      financing; 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 JMC’s industry
      experience and technical resources will allow it to effectively manage new
      aircraft types; that acquisition of new aircraft types may lead to
      diversification of the portfolio; that it will have sufficient funds to pay
      increased Sarbanes-Oxley compliance costs; and that it will acquire primarily
      used aircraft; that overseas markets present business opportunities; that the
      Company is competitive because of JMC's experience and operational efficiency
      and will benefit because of JMC's reputation in the marketplace.





These
      forward-looking statements involve risks and uncertainties, and it is important
      to note that the Company's actual results could differ materially from those
      projected or assumed in such forward-looking statements. Among the factors
      that
      could cause actual results to differ materially are the factors detailed under
      the heading "Management's Discussion and Analysis or Plan of Operation --
      Factors That May Affect Future Results," including the compliance of the
      Company's lessees with obligations under their respective leases; 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; assumptions that major
      maintenance expenses will be relatively evenly spaced over the entire portfolio;
      and future trends and results which cannot be predicted with certainty. The
      cautionary statements made in this Report should be read as being applicable
      to
      all related forward-looking statements wherever they appear herein. All
      forward-looking statements and risk factors included in this document are made
      as of the date hereof, based on information available to the Company as of
      the
      date hereof, and the Company assumes no obligation to update any forward-looking
      statement or risk factor. You should consult the risk factors listed from time
      to time in the Company's filings with the Securities and Exchange
      Commission.





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          2
          -


AeroCentury
      Corp.


Condensed
      Consolidated Balance Sheet


Unaudited





ASSETSMarch
                31,
              2007Assets:Cash
                and cash equivalents
            
            $
            3,131,280Accounts
                receivable, net of allowance for doubtful accounts of
                $15,700
            
            
            757,550Aircraft
                and aircraft engine held for lease,
              net
                of accumulated depreciation of $21,783,450
            
            
            90,788,330Prepaid
                expenses and other
            
            
            886,490Total
                assets
            
            $
            95,563,650LIABILITIES
                AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
                payable and accrued expenses
            
            $
            451,850Notes
                payable and accrued interest
            
            
            54,552,610Maintenance
                reserves and accrued costs
            
            
            3,836,610Security
                deposits
            
            
            4,078,880Prepaid
                rent
            
            
            541,940Deferred
                taxes
            
            
            4,585,210Taxes
                payable
            
            
            142,310Total
                liabilities
            
            
            68,
                189,410Stockholders’
                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
            
            
            14,055,50027,878,310Treasury
                stock at cost, 63,300 shares
            
            
            (504,070
            )Total
                stockholders’ equity
            
            
            27,374,240$
            95,563,650





The
      accompanying notes are an integral part of these statements.





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          3
          -





AeroCentury
      Corp.


Condensed
      Consolidated Statements of Operations


Unaudited





For
                the Three Months
              Ended
                March 31,2007
            
            
            2006
              (as
                  restated)Revenues
                and other income:Operating
                lease revenue
            
            $
            4,206,840
            
            $
            3,701,000Maintenance
                reserves income
            
            
            827,380
            
            
            791,750Other
                income
            
            
            7,370
            
            
            (9,130
            )5,041,590
            
            
            4,483,620Expenses:Depreciation
            
            
            1,234,810
            
            
            1,155,010Interest
            
            
            1,221,710
            
            
            1,164,260Management
                fees
            
            
            683,400
            
            
            696,350Maintenance
            
            
            225,340
            
            
            1,092,480Professional
                fees and general and administrative
            
            
            168,520
            
            
            166,080Insurance
            
            
            26,720
            
            
            78,040Bad
                debt expense
            
            
            15,690
            
            
            48,8203,576,190
            
            
            4,401,040Income
                before taxes
            
            
            1,465,400
            
            
            82,580Tax
                provision
            
            
            491,640
            
            
            31,080Net
                income
            
            $
            973,760
            
            $
            51,500Weighted
                average common shares outstanding
            
            
            1,543,257
            
            
            1,543,257Basic
                and diluted earnings per share
            
            $
            0.63
            
            $
            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 Three Months
              Ended
                March 31,2007
            2006
                (as
                  restated)Net
                cash provided by operating activities
            $3,060,120
            $2,317,490Investing
                activity -Equipment
                additions to aircraft
            -
            (432,840)Net
                cash used by investing activity
            -
            (432,840)Financing
                activity -Repayment
                of notes payable
            (3,312,720)
            (283,640)Net
                cash used by financing activity
            (3,312,720)
            (283,640)Net
                (decrease)/increase in cash and cash equivalents
            (252,600)
            1,601,010Cash
                and cash equivalents, beginning of period
            3,383,880
            618,910Cash
                and cash equivalents, end of period
            $3,131,280
            $2,219,920





During
      the three months ended March 31, 2007 and 2006, the Company paid interest
      totaling $1,211,940


and
      $976,980, respectively, and income taxes totaling $400 and $48,000,
      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)


March
      31,
      2007





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





*(a)*  *Basis
      of Presentation*





AeroCentury
      Corp., 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 Corp. and its wholly-owned subsidiaries, AeroCentury Investments
      V
      LLC (“AeroCentury V LLC”) and AeroCentury Investments VI LLC (“AeroCentury VI
      LLC”) (collectively, the “Company”), is presented on a consolidated basis. All
      intercompany balances and transactions have been eliminated in consolidation.
      As
      discussed in Note 1( *l* ),
      the
      Company has restated its results for the three months ended March 31, 2006
      in
      connection with its adoption of Financial Accounting Standards Board (“FASB”)
      Staff Position AUG AIR-1, *Accounting
      for Planned Major Maintenance Activities* (“FSP
      AUG
      AIR-1”).





*(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 and
      residual 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.





*(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.








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          6
          -








AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





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





*(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 maintenance
      payments received from lessees based on usage. At March 31, 2007, the Company’s
      maintenance reserves and accruals consisted of the following:




Refundable
                maintenance reserves
            
            $
            3,310,560Accrued
                costs
            
            
            526,050$
            3,836,610




Refundable
      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 or in connection with an early return
      of an
      aircraft are recorded as income.





Maintenance
      reserves which are non-refundable to the lessee are recorded as income as
      accrued and as expense when maintenance work is performed.





Additions
      to and deductions from the Company’s accrued costs during the three months
      ended March 31, 2007 and 2006 for maintenance work were as follows:





For
                the Three Months Ended
              March
                31,2007
            
            
            2006
                (as
                  restated)Balance,
                beginning of period
            
            $
            3,846,690
            
            $
            3,350,430Adjustment
                pursuant to FSP AUG AIR-1
            
            
            (3,499,260
            )
            
            (2,689,630
            )Balance,
                beginning of period, adjusted for adoption of FSP AUG
                AIR-1
            
            
            347,430
            
            
            660,800Additions:Charged
                to expense
            
            
            191,160
            
            
            978,150Charged
                to other -Other
            
            
            
            
            
            12,410191,160
            
            
            990,560Deductions:Paid
                for previously accrued maintenance
            
            
            -
            
            
            1,206,720Reversals
                of over-accrued maintenance
            
            
            12,540
            
            
            -12,540
            
            
            1,206,720Net
                increase/(decrease) in accrued maintenance costs
            
            
            166,620
            
            
            (216,160
            )Balance,
                end of period
            
            $
            526,050
            
            $
            444,640





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          7
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





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





*(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 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, the amounts recorded as bad debt allowances
      and accounting for income taxes.





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          8
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007




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




*(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 quarters ended March
      31,
      2007 and 2006.





*(l)*  *Recent
      Accounting Pronouncements*





In
      December 2004, the FASB issued SFAS 123(R), *Share-based
      Payment (“SFAS 123(R))”* ,
      which
      requires compensation cost relating to share-based payment transactions be
      recognized in financial statements. SFAS 123(R) is effective for small business
      issuers as of the beginning of the first interim or annual reporting period
      that
      began after December 15, 2005, supercedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      replaces SFAS No. 123, *Accounting
      for Stock-based Compensation (“SFAS 123”)* .
      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* (“FIN
      48”). FIN 48 is effective for fiscal years beginning after December 15, 2006.
      FIN 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 FIN 48, the financial statements 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 adopted FIN 48 on January 1, 2007. **** As
      a
      result of the implementation of FIN 48, the Company recognized no adjustment
      in
      the liability for unrecognized income tax benefits relating to uncertain tax
      positions.





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





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          9
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





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




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





FSP
      AUG
      AIR-1 was posted in September 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 and was adopted
      by
      the Company on January 1, 2007. It allows major maintenance activities to be
      accounted for in one of three ways: (i) the built-in overhaul method, (ii)
      the
      deferral method or (iii) the direct expensing method. The Company has evaluated
      the impact of the adoption of this new staff position and determined that it
      will use the direct expensing method, under which actual costs incurred are
      expensed directly. The new mandated accounting methods requires the accrual
      of
      non-refundable maintenance reserves from the Company’s lessees for planned major
      maintenance to be reflected as income on the income statements, and performance
      of maintenance work in connection with the release of maintenance reserves
      to be
      reflected as an expense when maintenance is actually performed. Because the
      net
      effect of recognizing income when maintenance reserves are accrued and accruing
      maintenance expense as incurred within any given period will vary, it is likely
      that the new accounting method will result in uneven effects on the Company’s
      results of operations. Comparative financial statements have been adjusted
      to
      apply the new method retrospectively. The effects of adoption of FSP AUG AIR-1
      on the Company’s financial condition and results of operations are shown in Note
      2.





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





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























-
          10
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





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





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





As
                reported
              previously
            
            
            As
                adjusted under
              SAB
                108
            
            
            Increase/decresase
              effect
                of changeOperating
                lease revenue
            
            $
            3,701,000
            
            $
            3,701,000
            
            $
            -Maintenance
                reserves income
            
            
            -
            
            
            -
            
            
            -Other
                income
            
            
            2,387,380
            
            
            2,387,380
            
            
            -6,088,380
            
            
            6,088,380
            
            
            -Depreciation
            
            
            1,230,190
            
            
            1,224,200
            
            
            (5,990
            )Interest
            
            
            1,164,260
            
            
            1,164,260
            
            
            -Management
                fees
            
            
            698,150
            
            
            696,350
            
            
            (1,800
            )Maintenance
            
            
            2,553,830
            
            
            2,553,830
            
            
            -Professional
                fees and other
            
            
            292,940
            
            
            292,940
            
            
            -5,939,370
            
            
            5,931,580
            
            
            (7,790
            )Income
                before taxes
            
            
            149,010
            
            
            156,800
            
            
            7,790Tax
                provision
            
            
            44,020
            
            
            55,220
            
            
            11,200Net
                income
            
            $
            104,990
            
            $
            101,580
            
            $
            (3,410
            )Earnings
                per share
            
            $
            0.07
            
            $
            0.07
            
            $
            -


-
          11
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





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





As
      discussed in Note 1, the Company adopted FSP AUG AIR-1 on January 1, 2007.
      The
      effects on the Company’s statement of operations as a result of the retroactive
      restatement of the Company’s results of operations for the three months ended
      March 31, 2006 were as follows.





As
                adjusted
              under
              SAB
                108
            
            
            As
                reported under
              FSP
                AUG AIR-1
            
            
            Increase/(decrease)
              effect
                of changeOperating
                lease revenue
            
            $
            3,701,000
            
            $
            3,701,000
            
            $
            -Maintenance
                reserves income
            
            
            -
            
            
            791,750
            
            
            791,750Other
                income
            
            
            2,387,380
            
            
            (9,130
            )
            
            (2,396,510
            )6,088,380
            
            
            4,483,620
            
            
            (1,604,760
            )Depreciation
            
            
            1,224,200
            
            
            1,155,010
            
            
            (69,190
            )Interest
            
            
            1,164,260
            
            
            1,164,260
            
            
            -Management
                fees
            
            
            696,350
            
            
            696,350
            
            
            -Maintenance
            
            
            2,553,830
            
            
            1,092,480
            
            
            (1,461,350
            )Professional
                fees and other
            
            
            292,940
            
            
            292,940
            
            
            -5,931,580
            
            
            4,401,040
            
            
            (1,530,540
            )Income
                before taxes
            
            
            156,800
            
            
            82,580
            
            
            (74,220
            )Tax
                provision
            
            
            55,220
            
            
            31,080
            
            
            (24,140
            )Net
                income
            
            $
            101,580
            
            $
            51,500
            
            $
            (50,080
            )Earnings
                per share
            
            $
            0.07
            
            $
            0.03
            
            $
            (0.04
            )





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





At
      March
      31, 2007, the Company owned eight deHavilland DHC-8-300s, three deHavilland
      DHC-8-100s, three deHavilland DHC-6s, fourteen Fokker 50s, two Saab 340As,
      six
      Saab 340Bs and one turboprop engine which are held for lease. During the first
      quarter, the Company extended the leases for one of its DHC-6 aircraft and
      one
      of its Fokker 50 aircraft.





In
      March
      2007, based on the lessee’s financial difficulties, the Company agreed to
      the early
      return of two of its aircraft, which had leases expiring in May and July 2008.
      At March 31, 2007, the Company rec orded
      $15,700 of bad debt expense for uncollected reserves. The Company is negotiating
      a termination settlement with the lessee and is seeking re-lease or sale
      opportunities for these aircraft.





-
          12
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





**4.**  **Notes
      Payable and Accrued Interest**





*(a)*  *Credit
      facility*





In
      November 2005, the Company’s $50 million credit facility was renewed through
      October 31, 2007. In connection with the renewal, certain financial covenants
      were modified, including the applicable margin which 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 three months ended March
      31,
      2007, the Company repaid $3,000,000 of the outstanding principal. As of March
      31, 2007, the Company was in compliance with all covenants under its credit
      facility agreement, $47,896,000 was outstanding, and interest of $112,210 was
      accrued. As discussed in Note 8, in April 2007, the amount of the Company’s
      credit facility was increased and its term was extended.




*(b)*  *Special
      purpose financing*





In
      September 2000, a special purpose subsidiary acquired a deHavilland DHC-8-100
      aircraft using cash and bank financing separate from its credit facility. The
      related note obligation, which was due April 15, 2006, was refinanced in April
      2006, using
      bank financing from another lender, and the subsidiary was dissolved. The
      aircraft was transferred to AeroCentury VI LLC, a newly formed special purpose
      limited liability company, which borrowed $1,650,000, due October 15, 2009.
      The
      note bears interest at an adjustable rate of one-month LIBOR plus 3%. The
      note
      is collateralized by the aircraft and the Company’s interest in AeroCentury VI
      LLC and is non-recourse to 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 three months ended March
      31,
      2007, $75,840 of principal was repaid on the note. The balance of the note
      payable at Mach 31, 2007 was $1,345,500 and interest of $3,730 was accrued.
      As
      of March 31, 2007, the Company was in compliance with all covenants of this
      note
      obligation.





In
      November 2005, the Company refinanced two DHC-8-300 aircraft that had been
      part
      of the collateral base for its credit facility. The financing, by a bank
      separate from its credit facility, was provided to a newly formed special
      purpose subsidiary, AeroCentury V LLC, to which the aircraft were transferred.
      The financing resulted in a note obligation in the amount of $6,400,000, due
      November 10, 2008, which bears interest at
      the
      rate 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 three months ended March
      31, 2007, AeroCentury V LLC repaid $236,880 of principal. The balance of the
      note payable at March 31, 2007 was $5,183,830 and interest of $11,330 was
      accrued. As of March 31, 2007, the Company was in compliance with all covenants
      of this note obligation.





-
          13
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





**5.**  **Stockholder
      Rights Plan**





On
      April
      8, 1998, the Company’s Board of Directors adopted a stockholder rights plan
      granting a dividend of one stock purchase right for each share of the Company’s
      common stock outstanding as of April 23, 1998. The rights become exercisable
      only upon the occurrence of certain events specified in the plan, including
      the
      acquisition of 15% of the Company’s outstanding common stock by a person or
      group. Each right entitles the holder to purchase one one-hundredth of a share
      of Series A Preferred Stock of the Company at an exercise price of $66.00 per
      one-one-hundredth of a share. Each right entitles the holder, other than an
      “acquiring person,” to acquire shares of the Company’s common stock at a 50%
      discount to the then prevailing market price. The Company’s Board of Directors
      may redeem outstanding rights at a price of $0.01 per right. **





**6.**  **Income
      Taxes**





The
      items
      comprising income tax expense are as follows:


For
                the Three Months Ended
              March
                31,2007
            
            
            2006
                (as
                  restated)Current
                tax provision:Federal
            
            $
            2,760
            
            $
            -State
            
            
            2,260
            
            
            1,200Foreign
            
            
            39,130
            
            
            -Current
                tax provision
            
            
            44,150
            
            
            1,200Deferred
                tax provision:Federal
            
            
            455,610
            
            
            27,670State
            
            
            (8,120
            )
            
            2,210Deferred
                tax provision
            
            
            447,490
            
            
            29,880Total
                provision for income taxes
            
            $
            491,640
            
            $
            31,080





Total
      income tax expense differs from the amount that would be provided by applying
      the statutory federal income tax rate to pretax earnings as illustrated
      below:





For
                the Three Months Ended
              March
                31,2007
            
            
            2006
              (as
                restated)Income
                tax provision at statutory federal income tax rate
            
            $
            498,240
            
            $
            28,080State
                tax provision, net of federal benefit
            
            
            7,030
            
            
            900Tax
                rate differences
            
            
            (13,630
            )
            
            2,100Total
                income tax provision
            
            $
            491,640
            
            $
            31,080





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








-
          14
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





**6.**  **Income
      Taxes (continued)**





Temporary
      differences and carry-forwards that give rise to a significant portion of
      deferred tax assets and liabilities as of March 31, 2007 are as
      follows:





Deferred
                tax assets:Prior
                year tax losses
            
            $
            1,036,020Prepaid
                rent
            
            
            228,860Cumulative
                effects of prior year adjustments
            
            
            238,910Maintenance
            
            
            122,480Foreign
                tax credit carryover
            
            
            145,820Bad
                debt allowance and other
            
            
            5,660Deferred
                tax assets
            
            
            1,777,750Deferred
                tax liabilities -Accumulated
                depreciation on aircraft and aircraft engines
            
            
            (6,362,960
            )Net
                deferred tax liabilities
            
            $
            (4,585,210
            )





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 prior year tax
      losses will be available to offset taxable income in each of the two preceding
      tax years and in future years through 2026. The foreign tax credit carryover
      will be available to offset federal tax expense in the first preceding tax
      year
      and in future years through 2017.





As
      described in Note 1, the Company adopted FIN 48 on January 1, 2007, which
      proscribes treatment of "unrecognized tax positions," and requires measurement
      and disclosure of such amounts. At both January 1, 2007 and March 31, 2007,
      the
      Company had no material unrecognized tax benefits.





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





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





**7** **.**  **Related
      Party Transactions**





The
      Company has no employees. Its portfolio of leased aircraft assets is managed
      and
      administered under the terms of a management agreement with JetFleet Management
      Corp. (“JMC”), which is an integrated aircraft management, marketing and
      financing business and a subsidiary of JetFleet Holding Corp. ("JHC"). Certain
      officers of the Company are also officers of JHC and JMC and hold significant
      ownership positions in both JHC and the Company. Under the management agreement,
      JMC receives a monthly management fee based on the net asset value of the assets
      under management. JMC also receives an acquisition fee for locating assets
      for
      the Company, provided that the aggregate purchase price, including chargeable
      acquisition costs and any acquisition fee, does not exceed the fair market
      value
      of the asset based on appraisal, and may receive a remarketing fee in connection
      with the sale or re-lease of the Company’s assets. The Company recorded
      management fees of $683,400 and
      $696,350 during
      the three months ended March 31, 2007 and 2006, respectively. Because the
      Company did not acquire any aircraft during the first three months of 2007
      or
      2006, no acquisition fees were paid to JMC for these periods.  No
      remarketing fees were paid to JMC during the three months ended March 31, 2007
      or 2006.


-
          15
          -





AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


March
      31,
      2007





**8.**  **Subsequent
      Events**




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





On
      April
      17, 2007, the Company entered into a
      Securities Purchase Agreement, whereby
      the Company may issue 16% senior unsecured subordinated notes ("Subordinated
      Notes"), with an aggregate principal amount of up to $28 million. The
      Subordinated Notes are due December 30, 2011 and fully amortize. Under the
      Securities Purchase Agreement, the Note Purchasers also were issued Warrants
      to
      purchase up to 171,473 shares of the Company's Common Stock at an exercise
      price
      of $8.75, which are subject to registration rights pursuant to an Investor's
      Registration Rights Agreement. At the April 17 closing, $10 million of the
      Subo rdinated
      Notes were
      sold
      at 99% of the face amount less $500,000. Any notes issued for the remaining
      $18
      million of Subordinated Debt will be sold at 99% of the face amount, at
      subsequent closings expected to occur on or before June 30, 2008.





-
          16
          -


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





*Overview*





The
      Company is a lessor of regional 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 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 primarily dependent upon the Company’s ability to grow its asset
      portfolio.




The
      Company’s principal expenditures are for interest costs on its financing,
      management fees, and maintenance of its aircraft assets. Maintenance
      expenditures are incurred when aircraft are off lease, are being prepared for
      re-lease, or require maintenance in excess of lease return conditions, as well
      as when maintenance work is performed in connection with the release of
      non-refundable maintenance reserves previously received by the Company from
      lessees. See “ *c.* *Maintenance
      Reserves and Accrued Costs* ,”
below,
      regarding the Company’s accounting treatment of maintenance
      expenses.





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





*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 SFAS 144, “Accounting for the Impairment or Disposal of
      Long-lived Assets."  Such review necessitates estimates of current market
      values, re-lease rents, residual values and component values.  The
      estimates are based on currently available market data and third-party
      appraisals and are subject to fluctuation from time to time *.* The Company initiates its review periodically, whenever events or changes in
      circumstances indicate that the carrying amount of a long-lived asset may not
      be
      recoverable.  Recoverability of an asset is measured by comparison of its
      carrying amount to the expected future undiscounted cash flows (without interest
      charges) that the asset is expected to generate.  Any impairment to be
      recognized is measured by the amount by which the carrying amount of the asset
      exceeds its fair market value.  Significant management judgment is required
      in the forecasting of future operating results which are used in the preparation
      of projected undiscounted cash flows and should different conditions prevail,
      material write downs may occur.





-
          17
          -


*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 had to write down any assets due to
      revised estimated residuals.





*c.*  *Maintenance
      Reserves and Accrued Costs*





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





Due to the
      recent adoption of FSP AUG AIR-1, as discussed in Note 1 to the Financial
      Statements, the Company was required to discontinue the accrue-in-advance method
      of accounting for planned major maintenance for financial reporting periods
      beginning on January 1, 2007. The Company has evaluated the impact of the
      adoption of this new staff position and determined that it will use the direct
      expensing method, under which actual costs incurred are expensed directly.
      The
      new mandated accounting method also requires the accrual of non-refundable
      maintenance reserves from the Company’s lessees for planned major maintenance to
      be reflected as income, and performance of maintenance work in connection with
      the release of maintenance reserves to be reflected as an expense when
      maintenance is actually performed. If an invoice for work performed is not
      received at the end of a reporting period, the Company estimates the amount
      of
      such expenses, based on the amount of reserves previously received from the
      lessee and information provided by the lessee regarding maintenance status.





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





Historically,
      as a result of two situations, the Company incurred significant maintenance
      expense when aircraft were returned early and in a condition worse than required
      by the lease and for which the Company was unable to recover the costs of
      non-compliance from the lessees.





*d.*  *Revenue
      Recognition 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 statements of operations. As discussed in Note 1 to the
      financial statements, the Company adopted FIN 48 on January 1, 2007, which
      proscribes treatment of “unrecognized tax positions” and requires measurement
      and disclosure of such amounts.





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





-
          18
          -


*Results
      of Operations*





*a.*  *Revenues*





Operating
      lease revenue was approximately $506,000 higher in the three months ended March
      31, 2007 versus the same period in 2006, primarily because of increased
      operating lease revenue from aircraft purchased in the fourth quarter of 2006
      and revenue from several aircraft which had been off lease for all or part
      of
      the first three months of 2006, the effects of which were partially offset
      by a
      decrease in revenue from an aircraft which was sold in the second quarter of
      2006.





Maintenance
      reserves income was approximately $36,000 higher in the three months ended
      March
      31, 2007 versus the same period in 2006, as a result of increased aircraft
      usage
      by the Company’s lessees, on which the amount of reserves income is
      based.





Other
      income was approximately $16,000 higher in the three months ended March 31,
      2007
      versus the same period in 2006, primarily as a result of an increase in the
      amount of interest income earned on the Company’s cash balances, which were
      higher in 2007, net of accrued interest on certain of the Company’s securities
      deposits and maintenance reserves payable to several lessees.





*b.*  *Expense
      items*





Depreciation
      was approximately $80,000 higher in the three months ended March 31, 2007 versus
      2006, primarily because of purchases of aircraft in the fourth quarter of 2006,
      the effect of which was partially offset by an aircraft sale in the second
      quarter of 2006. Management fees, which are calculated on the net book value
      of
      the aircraft owned by the Company, were approximately $13,000 lower in the
      three
      months ended March 31, 2007 compared to 2006 because of lower net book values
      as
      a result of depreciation and adjustments made in December 2006 and January
      2007
      as a result of the Company’s adoption of SAB 108 and FSP AUG AIR-1,
      respectively. The effects of these changes were partially offset by the purchase
      of three aircraft in the fourth quarter of 2006.





Interest
      expense was approximately $57,000 higher in the three months ended March 31,
      2007 versus 2006, primarily as a result of increases in the index rates upon
      which the Company’s interest rates are based, the effect of which was partially
      offset by a lower average principal balance and margin in 2007 compared to
      2006.





The
      Company’s maintenance expense is dependent on the aggregate maintenance claims
      submitted by lessees and expenses incurred in connection with off-lease
      aircraft. As a result of lower total lessee claims and fewer off-lease aircraft
      in 2007, the Company incurred approximately $867,000 less in maintenance expense
      in the three months ended March 31, 2007 versus the same period in
      2006.


Maintenance
      expense was approximately $867,000 lower in the three months ended March 31,
      2007 compared to 2006, primarily as a result of lower expense for maintenance
      claims submitted by lessees and lower expense to prepare aircraft for re-lease
      in 2007 than in 2006.





Total
      professional fees and general and administrative expenses were approximately
      the
      same in the three month periods ended March 31, 2007 and 2006. Legal expense,
      however, was approximately $45,000 lower in 2007, primarily because of costs
      associated with the early return of an aircraft in 2006. Accounting fees were
      approximately $40,000 higher in 2007 as a result of additional costs incurred
      in
      connection with the audit of the Company’s 2006 financial statements. Directors
      fees were also higher by approximately $5,000 in 2007 as a result of higher
      fees
      authorized by the board of directors, effective January 1, 2007.





The
      Company's insurance expense consists primarily of directors and officers
      insurance, as well as product liability insurance and insurance for off-lease
      aircraft and aircraft engines, which varies depending on the type of assets
      insured during each period and the length of time each asset is insured. As
      a
      result of the combination of assets insured during each period and the length
      of
      time each was insured, insurance expense was approximately $48,000 lower in
      the
      first three months of 2007 versus the same period of 2006. Directors and
      officers insurance expense was approximately $3,000 less in 2007 as a result
      of
      a lower annual premium.





During
      the first three months of 2007, the Company recorded bad debt expense of
      approximately $16,000 for reserves receivable which was written off in
      connection with a lessee’s early return of two aircraft. During the first three
      months of 2006, the Company recorded bad debt expense of approximately $49,000
      for rent receivable which was written off in connection with a lessee’s early
      return of an aircraft.





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





The
      Company’s effective tax rates for the period ended March 31, 2007 and 2006 were
      approximately 34% and 38%, respectively. The change in rate was primarily a
      result of the change in effective state tax rates resulting from the decrease
      in
      the number of aircraft leased to domestic carriers.


-
          19
          -





*Liquidity
      and Capital Resources*





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





*(a)*  *Credit
      facility*





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.





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





During
      the first three months of 2007, the Company repaid $3,000,000 of the outstanding
      principal under its credit facility. The
      balance of the note payable at March 31, 2007 was $47,896,000
      and interest of $112,210 was accrued.





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 - 'Risks of Debt Financing’ and 'Credit Facility
      Obligations,’”* below.





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





*(b)*  *Unsecured
      subordinated debt*





On
      April
      17, 2007, the Company entered into a
      Securities Purchase Agreement, whereby
      the Company may issue 16% senior unsecured subordinated notes ("Subordinated
      Notes"), with an aggregate principal amount of up to $28 million. The
      Subordinated Notes are due December 30, 2011 and fully amortize. Under the
      Securities Purchase Agreement, the Note Purchasers also were issued Warrants
      to
      purchase up to 171,473 shares of the Company's Common Stock, which are subject
      to registration rights pursuant to an Investor's Registration Rights Agreement.
      At the April 17 closing, $10 million of the Subo rdinated
      Notes were
      sold
      at 99% of the face amount less $500,000. Notes issued for the remaining $18
      million of Subordinated Debt will be sold at 99% of the face amount. The Company
      intends to use the proceeds of the debt offering for acquisition of additional
      aircraft assets.





*(c)*  *Special
      purpose financing*





In
      September 2000, a special purpose subsidiary acquired a deHavilland DHC-8-100
      aircraft using cash and bank financing separate from its credit facility. The
      related note obligation, which was due April 15, 2006, was refinanced in April
      2006, using
      bank financing from another lender, and the subsidiary was dissolved. The
      aircraft was transferred to AeroCentury VI LLC, a newly formed special purpose
      limited liability company, which borrowed $1,650,000, due October 15, 2009.
      The
      note bears interest at an adjustable rate of one-month LIBOR plus 3%. The
      note
      is collateralized by the aircraft and the Company’s interest in AeroCentury VI
      LLC and is non-recourse to 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 three months ended March
      31,
      2007, $75,840 of principal was repaid on the note. The balance of the note
      payable at Mach 31, 2007 was $1,345,500 and interest of $3,730 was accrued.
      As
      of March 31, 2007, the Company was in compliance with all covenants of this
      note
      obligation and is currently in compliance.





In
      November 2005, the Company refinanced two DHC-8-300 aircraft that had been
      part
      of the collateral base for its credit facility. The financing, by a bank
      separate from its credit facility, was provided to a newly formed special
      purpose subsidiary, AeroCentury V LLC, to which the aircraft were transferred.
      The financing resulted in a note obligation in the amount of $6,400,000, due
      November 10, 2008, which bears interest at
      the
      rate 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 three months ended March
      31, 2007, AeroCentury V LLC repaid $236,880 of principal. The balance of the
      note payable at March 31, 2007 was $5,183,830 and interest of $11,330 was
      accrued. As of March 31, 2007, the Company was in compliance with all covenants
      of this note obligation and is currently in compliance.





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





-
          20
          -


*(d)*  *Cash
      flow*





The
      Company's primary source of revenue is lease rentals of its aircraft assets.
      It
      is the Company’s policy to monitor each lessee’s needs in periods before leases
      are due to expire. If it appears that a customer will not be renewing its lease,
      the Company immediately initiates marketing efforts to locate a potential new
      lessee or purchaser for the aircraft. 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 2011.





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





*(i)*  *Operating
      activities*





The
      Company’s cash flow from operations for the three months ended March 31, 2007
      versus 2006 increased by approximately $743,000. The change in cash flow is
      a
      result of changes in several cash flow items during the period, including
      principally the following:





Lease
      rents, maintenance reserves and security deposits





Payments
      received from lessees for rent were approximately $125,000 higher in the first
      three months of 2007 versus the same period in 2006, due primarily to the effect
      of increased payments for aircraft purchased in November 2006 and rent for
      several aircraft which had been off lease for all or part of the first three
      months of 2006, the effects of which were partially offset by a decrease in
      rental payments for an aircraft which was sold in 2006.. Although increased
      demand generally in the turboprop market has caused lease rates to stabilize
      and, in some cases, rise, it cannot be predicted that rental rates on aircraft
      to be re-leased will not decline, so that, absent additional acquisitions by
      the
      Company, aggregate lease revenues for the current portfolio could decline over
      the long term.





Security
      deposits received decreased by approximately $654,000 in the first three months
      of 2007 versus 2006 because the Company did not acquire aircraft or re-lease
      any
      aircraft to new lessees during the 2007 period and, therefore, received no
      security deposits.





Expenditures
      for maintenance





Expenditures
      for maintenance were approximately $1,375,000 lower in the three months ended
      March 31, 2007 versus the same period in 2006 primarily as a result of higher
      payments during 2006 for maintenance performed to prepare several of the
      Company’s aircraft for remarketing and for maintenance reserves claims submitted
      by lessees. The amount of expenditures for maintenance in future periods will
      be
      dependent on the amount and timing of maintenance paid from lessee maintenance
      reserves held by the Company and the off-lease status of the Company’s
      aircraft.





-
          21
          -


Expenditures
      for interest





Expenditures
      for interest increased by approximately $236,000 in the first three months
      of
      2007 compared to 2006, primarily as a result of higher average interest rates,
      the effect of which was partially offset by a lower average credit facility
      principal balance and margin in 2007 compared to 2006. Interest expenditures
      in
      future periods will be a product of prevailing interest rates and the
      outstanding credit facility principal balance, which may be influenced by future
      acquisitions and/or required repayments resulting from changes in the collateral
      base, as well as the outstanding principal of the Subordinated Notes and
      principal payments required by the Subordinated Note covenants. As a result
      of
      the Company’s expected Subordinated Note financings, it is likely that
      expenditures for interest will increase significantly.





Expenditures
      for acquisition fees





Because
      the Company did not acquire any aircraft during the first three months of 2007,
      it paid no acquisition fees during the period. During the first three months
      of
      2006, the Company paid $314,000 to JMC for the acquisition fee accrued in
      December 2005 upon the purchase of four aircraft and which was included in
      the
      Company’s accounts payable balance at December 31, 2005.





Expenditures
      for professional fees and general and administrative expenses





Expenditures
      for professional fees and general and administrative expenses decreased by
      approximately $81,000 in the three months ended March 31, 2007 versus the same
      period in 2006, primarily as a result of lower legal expenditures.





Expenditures
      for prepaid expenses





Expenditures
      for prepaid expenses were approximately $304,000 higher in the first three
      months of 2007 versus the same period in 2006, primarily as a result of a
      deposit paid to the seller of two aircraft which the Company anticipates
      acquiring in the second quarter of 2007.





*(ii)*  *Investing
      activities*





During
      the three months ended March 31, 2006, the Company used $433,000 for capital
      equipment installed on aircraft. The Company made no such investments in the
      three months ended March 31, 2007.





*(iii)*  *Financing
      activities*





The
      $3,029,000 increase in cash flow used by financing activities was a result
      of
      the Company’s repayments of $3,000,000 of principal under its credit facility in
      2007.





*Outlook*





In
      April
      2007, the Company signed an agreement for a $25 million increase in its
      revolving credit facility, with the ability to increase the maximum amount
      available under the facility to $110 million. At the same time it entered into
      an agreement to issue
      up
      to $28 million of Subordinated Notes. At the same time, the Company issued
      $10
      million of the Subordinated Notes, and is required to draw the remaining $18
      million on or before June 30, 2008. As the Subordinated Notes bear fixed
      interest of 16% per annum immediately upon issuance, as well as an unused
      commitment fee on the unissued balance, an important factor in the Company’s
      near term results will be the Company’s ability to expediently locate and
      acquire assets using the Subordinated Note proceeds, in order to generate
      revenue to offset the increased interest expense. The Company anticipates that
      the combined credit facility increase and potential for a further increase
      in
      the credit facility by an additional $30 million, along with the Subordinated
      Debt financing, should provide sufficient capital for its projected short-
      and
      medium-term future acquisitions.





In
      March
      2007, the Company and the lessee of two aircraft, which have leases expiring
      in
      May and July 2008, agreed to the early return of the aircraft based on the
      lessee’s financial difficulties. **** The
      Company is negotiating a termination settlement with the lessee and is seeking
      re-lease or sale opportunities for these aircraft .
      There
      is no assurance as to when the Company will be successful in its efforts to
      re-lease or sell the aircraft, but the Company believes that, even if the
      aircraft are off lease for an extended period of time, it will be able to remain
      in compliance with the terms of its credit facility and Subordinated Notes.





Several
      of the Company’s aircraft leases are scheduled to expire in 2007. The Company
      expects that all but one of them will be renewed. The Company believes that
      it
      will be able to re-lease the one aircraft it expects to be returned at lease
      end
      and that, even if the aircraft is off lease for an extended period of time,
      it
      will be able to remain in compliance with the terms of its credit facility
      and
      Subordinated Notes.





The
      Company continually monitors the financial condition of its lessees to avoid
      unanticipated creditworthiness issues, and where necessary, works with lessees
      to ensure continued compliance with 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
      the first three months of 2007, the Company incurred $16,000 of bad debt expense
      related to amounts owed by the lessee of two of the Company’s aircraft,
      discussed above. If any of the Company's current lessees are unable to meet
      their lease obligations, the Company's future results could be materially
      impacted. Any
      weakening in the aircraft industry may also affect the performance of lessees
      that currently appear to the Company to be creditworthy. See " *Factors
      that May Affect Future Results - General Economic Conditions* ,"
      below.





Due
      to
      the recent adoption of FSP AUG AIR-1, as discussed in Note 1 to the Financial
      Statements and under *“Critical
      Accounting Policies, Judgments and Estimates, c. Maintenance Reserves and
      Accrued Cost* s”,
      above, ** the
      treatment of non-refundable maintenance reserves will impact the Company’s
      income and expenses and, as a result, beginning in the first quarter of 2007,
      the Company believes that its reported net income may be subject to greater
      fluctuations from quarter-to-quarter than would have been the case had the
      Company continued its use of the previous method of accounting for planned
      major
      maintenance activities.





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          22
          -


*Factors
      that May Affect Future Results*





*Risks
      of Debt Financing* .
      The
      Company’s use of debt as the primary form of acquisition financing subjects the
      Company to increased risks of leveraging. With respect to the credit facility,
      the loans are secured by the Company’s existing assets as well as the specific
      assets acquired with each financing. In addition to payment obligations, the
      credit facility also requires the Company to comply with certain financial
      covenants, including a requirement of positive 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.





The
      addition of the Subordinated Note debt, while providing additional resources
      for
      acquisition by the Company of revenue generating assets, also has the effect
      of
      increasing the Company’s overall cost of capital, as the Subordinated Notes bear
      an effective overall interest rate that is higher than the rate charged on
      the
      credit facility. Since the Subordinated Notes bear interest immediately upon
      issuance, the Company’s success in utilizing the proceeds to purchase income
      generating assets will be critical to the financial results of the Company.
      The
      Company has not yet identified specific asset acquisitions for which the entire
      Subordinated Note proceeds will be applied, but believes that it will be
      successful in timely acquiring appropriate assets for acquisition to take full
      financial advantage of the additional resources provided under the increased
      credit facility and Subordinated Note financing.





*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, but 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.





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





*Concentration
      of Lessees and Aircraft Type.* Currently, the Company’s seven largest customers are located in Belgium, Taiwan,
      the Caribbean, Norway, the United States and Sweden, and currently account
      for
      approximately 14%, 13%, 12%, 11%, 10%, 10% 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
      Company owns fourteen Fokker 50, eight DHC-8-300 and six Saab 340B aircraft,
      making these three aircraft types the dominant types in the portfolio and
      representing 36%, 37% and 11%, respectively, based on net book value. As a
      result, a change in the desirability and availability of any of these types
      of
      aircraft, which would in turn affect valuations of such aircraft, would have
      a
      disproportionately large impact on the Company’s portfolio value. Such aircraft
      type concentration will diminish if the Company acquires additional assets
      of
      other types. Conversely, acquisition of these types of aircraft will increase
      the Company’s risks related to its concentration of those aircraft
      types.





-
          23
          -


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





*Increased
      Compliance Costs* .
      Current
      Sarbanes-Oxley Act requirements applicable to the Company effective for the
      year
      ended December 31, 2007 relating to internal controls could result in
      significantly higher fees and expenses in connection with auditor services
      beginning in 2007. 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. Values may also increase for certain aircraft types
      that become desirable based on market conditions and changing airline capacity.
      If the Company were to purchase an aircraft during a period of increasing
      values, it would need a corresponding higher lease rate.





The
      Company’s current concentration in a limited number of turboprop airframe and
      aircraft engine types subjects the Company to economic risks if an airframe
      or
      engine type owned by the Company should significantly decline in value relative
      to the assets’ purchase price. 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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*Risks
      Related to Regional Air Carriers.* Because
      the Company has concentrated its existing leases, and intends to continue to
      concentrate future leases, on regional air carriers, it is subject to additional
      risks. Some of the lessees in the regional air carrier market are companies
      that
      are start-up, low capital, low margin operations. Often, the success of such
      carriers is dependent upon contractual arrangements with major trunk carriers
      or
      franchises from governmental agencies that provide subsidies for operating
      essential air routes, both of which may be subject to termination or
      cancellation with short notice periods,. Because of this exposure, the Company
      typically is able to obtain generally higher lease rates from these types of
      lessees. In the event of a business failure of the lessee or its bankruptcy,
      the
      Company can generally regain possession of its aircraft, but the aircraft could
      be in substantially worse condition than would be the case if the aircraft
      were
      returned in accordance with the provisions of the lease at lease expiration.





The
      Company evaluates the credit risk of each lessee carefully, and attempts to
      obtain a third party guaranty, letters of credit or other credit enhancements,
      if it deems them necessary. There is no assurance, however, that such
      enhancements will be available or that, if obtained, they will fully protect
      the
      Company from losses resulting from a lessee default or bankruptcy. Also, a
      significant area of market growth is outside of the United States, where
      collection and enforcement are often more difficult and complicated than in
      the
      United States. During
      2006 and 2005, the Company incurred bad debt expense related to amounts owed
      by
      three former lessees. This expense materially affected the Company's financial
      performance. If any of the Company's current lessees are unable to meet their
      lease obligations, the Company's future results could be materially
      impacted.





*Reliance
      on JMC.* All
      management of the Company is performed by JMC under a management agreement
      which
      is in the ninth year of a 20-year term and provides for an asset-based
      management fee. JMC is not a fiduciary to the Company or its stockholders.
      The
      Company’s Board of Directors has ultimate control and supervisory responsibility
      over all aspects of the Company and owes fiduciary duties to the Company and
      its
      stockholders. The
      Board
      has no control over the internal operations of JMC, but the Board does have
      the
      ability and responsibility to manage the Company's relationship with JMC and
      the
      performance of JMC's obligations to the Company under the management agreement,
      as it would have for any third party service provider to the Company. While
      JMC
      may not owe any fiduciary duties to the Company by virtue of the management
      agreement, the officers of JMC are also officers of the Company, and in that
      capacity owe fiduciary duties to the Company and its stockholders. In addition,
      certain officers of the Company hold significant ownership positions in the
      Company and JHC, the parent company of JMC. ****





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





JMC
      has
      acted as the management company for two other aircraft portfolio owners,
      JetFleet III, which raised approximately $13,000,000 from investors, and
      AeroCentury IV, Inc. (“AeroCentury IV”), which raised approximately $5,000,000
      from investors. In the first quarter of 2002, AeroCentury IV defaulted on
      certain obligations to noteholders. In June 2002, the indenture trustee for
      AeroCentury IV’s noteholders repossessed AeroCentury IV’s assets and took over
      management of AeroCentury IV’s remaining assets. JetFleet III defaulted on its
      bond obligation of $11,076,350 in May 2004. The indenture trustee for JetFleet
      III bondholders repossessed JetFleet III’s unsold assets in late May
      2004.





*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.





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          25
          -


*International
      Risks* .
      The
      Company has focused on leases in overseas markets, which the Company believes
      present opportunities. Leases with foreign lessees, however, may present
      somewhat different risks than those with domestic lessees.





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





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





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





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





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          26
          -


*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.





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





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





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





**Item
      3.**  **Controls
      and Procedures.**





**Quarterly
      evaluation of the Company’s Disclosure Controls and Internal
      Controls.** As of
      the end of the period covered by this report, the Company evaluated the
      effectiveness of the design and operation of its “disclosure controls and
      procedures” (“Disclosure Controls”), and its “internal controls over financial
      reporting” (“Internal Controls”). This evaluation (the “Controls Evaluation”)
      was done under the supervision and with the participation of management,
      including the Company’s Chief Executive Officer (“CEO”) and Chief Financial
      Officer (“CFO”). Rules adopted by the Securities and Exchange Commission (“SEC”)
      require that in this section of the Report, the Company present the conclusions
      of the CEO and the CFO about the effectiveness of our Disclosure Controls and
      Internal Controls based on and as of the date of the Controls
      Evaluation.





**CEO
      and CFO Certifications.** Attached
      as exhibits to this report are two separate forms of “Certifications” of the CEO
      and the CFO. The first form of Certification is required in accordance with
      Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certification”).
      This section of the report is the information concerning the Controls Evaluation
      referred to in the Section 302 Certifications and this information should be
      read in conjunction with the Section 302 Certifications for a more complete
      understanding of the topics presented.





**Disclosure
      Controls and Internal Controls.** Disclosure Controls are procedures that are designed with the objective of
      ensuring that information required to be disclosed in the Company’s reports
      filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as
      this report, is recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules and forms. Disclosure Controls are also
      designed with the objective of ensuring that such information is accumulated
      and
      communicated to the Company’s management, including the CEO and CFO, as
      appropriate to allow timely decisions regarding required disclosure. Internal
      Controls are procedures which are designed with the objective of providing
      reasonable assurance that (1) the Company’s transactions are properly
      authorized; (2) the Company’s assets are safeguarded against unauthorized or
      improper use; and (3) the Company’s transactions are properly recorded and
      reported, all to permit the preparation of the Company’s consolidated financial
      statements in conformity with generally accepted accounting
      principles.





**Limitations
      on the Effectiveness of Controls.** The
      Company’s management, including the CEO and CFO, does not expect that its
      Disclosure Controls or its Internal Controls will prevent all errors and all
      fraud. A control system, no matter how well conceived and operated, can provide
      only reasonable, not absolute, assurance that the objectives of the control
      system are met. Further, the design of a control system must reflect the fact
      that there are resource constraints, and the benefits of controls must be
      considered relative to their costs. Because of the inherent limitations in
      all
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues and instances of fraud, if any, within the Company have
      been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty, and that breakdowns can occur because of simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people, or by management
      override of the control. The design of any system of controls also is based
      in
      part upon certain assumptions about the likelihood of future events, and there
      can be no assurance that any design will succeed in achieving its stated goals
      under all potential future conditions; over time, control may become inadequate
      because of changes in conditions, or the degree of compliance with the policies
      or procedures may deteriorate. Because of the inherent limitations in a
      cost-effective control system, misstatements due to error or fraud may occur
      and
      not be detected.





**Scope
      of the Controls Evaluation.** The
      CEO/CFO evaluation of the Company’s Disclosure Controls and the Company’s
      Internal Controls included a review of the controls objectives and design,
      the
      controls implementation by the Company and the effect of the controls on the
      information generated for use in this report. In the course of the Controls
      Evaluation, the CEO and CFO sought to identify data errors, controls problems
      or
      acts of fraud and to confirm that appropriate corrective action, including
      process improvements, were being undertaken. This type of evaluation is be
      done
      on a quarterly basis so that the conclusions concerning controls effectiveness
      can be reported in the Company’s quarterly reports on Form 10-QSB and annual
      report on Form 10-KSB. The Company’s Internal Controls are also evaluated on an
      ongoing basis by **** other
      personnel in the Company’s finance organization and by the Company’s independent
      auditors in connection with their audit and review activities. The overall
      goals
      of these various evaluation activities are to monitor the Company’s Disclosure
      Controls and the Company’s Internal Controls and to make modifications as
      necessary; the Company’s intent in this regard is that the Disclosure Controls
      and the Internal Controls will be maintained as dynamic systems that change
      (reflecting improvements and corrections) as conditions warrant.





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





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





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





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          27
          -


**PART
      II**


**OTHER
      INFORMATION**








**Items
      1, 2, 3, 4 and 5 have been omitted as they are not
      applicable.**





**Item
      6.**  **Exhibits**





Exhibits





Exhibit
              Number
            Description31.1
            Certification
                of Neal D. Crispin, Chief Executive Officer, pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Toni M. Perazzo, Chief Financial Officer, pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.32.1*
            Certification
                of Neal D. Crispin, Chief Executive Officer, pursuant to
              Section
                906 of the Sarbanes-Oxley Act of 2002.32.2*
            Certification
                of Toni M. Perazzo, Chief Financial Officer, pursuant to
              Section
                906 of the Sarbanes-Oxley Act of
                2002.





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











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          28
          -


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.







**AEROCENTURY
              CORP.**Date: 
May
              15, 2007
            By:
            /s/ Toni
              M.
              PerazzoTitle:
              Sr. Vice President, Finance


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