SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-Q


(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended March 31, 2008





o
            TRANSITION
      REPORT PURSUANT TO 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)





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


Yes xNo  o





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


Yes  oNo  x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:  As of May 15, 2008 the
Issuer had 1,606,557Shares of Common Stock,
par value $0.001 per share, issued, of which 63,300 are held as Treasury Stock.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large accelerated
filer  oAccelerated
filer  o


Non-accelerated filer   
oSmaller reporting company  x


- 1
-


PART
I


FINANCIAL
INFORMATION





Forward-Looking
Statements





This
Quarterly Report on Form 10-Q 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 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and Capital
Resources” the Company’s statements regarding its belief that it will
remain in compliance with the covenants of its Credit Facility; and that the
Company will have adequate cash flow to meet its ongoing operational needs,
including required repayments under its Credit Facility, Subordinated Notes
financing and special purpose financings; (ii) in Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Outlook” the Company’s
statements regarding its belief that the proceeds of the June 30, 2008 $18
million Subordinated Notes closing will be used to repay Credit Facility
indebtedness; that the Credit Facility interest rate is likely to continue to be
lower than the Subordinated Notes fixed rate and this is likely to result in the
Company paying a higher effective interest rate on its debt once Subordinated
Note proceeds are used to repay Credit Facility indebtedness; that the debt
financing available to the Company is sufficient to fund planned 2008
acquisitions; that even if two returned aircraft are off lease for an extended
period of time, the Company will be able to remain in compliance with the terms
of its Credit Facility and Subordinated Notes; that the Company may incur
significant unreimbursed expense in order to prepare the two returned aircraft
for re-lease or re-sale; that the Company will be successful in extending leases
or find new lessees for aircraft with leases expiring during the remainder of
2008 and that, even if the aircraft are off lease for an extended period of
time, it will be able to remain in compliance with the terms of its Credit
Facility and Subordinated Notes; and that the Company’s reported net income may
be subject to significant fluctuations from quarter-to-quarter as a
result of the adoption of FSP AUG AIR-1 and with the recent acquisitions of
Fokker 100s to the portfolio the fluctuations may have greater
magnitude;  (iii) in Item 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Factors that May Affect Future
Results,” the Company’s statements regarding its belief that 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; that
JMC personnel's overall industry experience and its technical resources should
permit the Company to effectively manage new aircraft types and engines; that
the bulk of the equipment the Company acquires will be used aircraft equipment;
that the Company intends to focus on regional air carriers and typically is able
to obtain generally higher lease rates from regional carriers than mainline
carriers; and that the Company is competitive because of JMC’s experience and
operational efficiency in identifying and obtaining financing for the
transaction types desired by regional air carriers and that it benefits from
JMC’s reputation.  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 of Financial Condition and Results of Operations -- 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; general economic conditions, particularly those that
affect the air travel industry; the Company’s success in finding additional
financing and appropriate assets to acquire with such financing; a sudden
weakening in demand for regional aircraft or severe reduction in regional
airline capacity; deviations from the assumption that future 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.


- 2
-


Item
1.Financial Statements.





AeroCentury
Corp.


Condensed
Consolidated Balance Sheet


Unaudited





ASSETSMarch
      31, 2008
            
            
            December
      31,
              2007Assets:Cash
      and cash equivalents
            
            $
            5,539,200
            
            
            $
            2,843,200Accounts
      receivable, including deferred rent of $298,600 and $675,550 at March 31,
      2008 and December 31, 2007, respectively
            
            
            1,747,700
            
            
            
            1,647,700Aircraft
      and aircraft engine held for lease,
              net
      of accumulated depreciation of $28,870,000 and $26,163,170 at March 31,
      2008 and December 31, 2007, respectively
            
            
            117,242,300
            
            
            
            118,924,000Taxes
      receivable
            
            
            1,625,100
            
            
            
            1,835,600Prepaid
      expenses and other
            
            
            1,490,700
            
            
            
            1,402,300Total
      assets
            
            $
            127,645,000
            
            
            $
            126,652,800LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
      payable and accrued expenses
            
            $
            1,387,500
            
            
            $
            811,000Notes
      payable and accrued interest
            
            
            71,731,400
            
            
            
            73,074,500Maintenance
      reserves and accrued costs
            
            
            7,776,400
            
            
            
            6,025,500Security
      deposits
            
            
            5,391,000
            
            
            
            5,696,500Prepaid
      rent
            
            
            1,037,400
            
            
            
            1,028,000Deferred
      income taxes
            
            
            7,711,300
            
            
            
            7,649,000Taxes
      payable
            
            
            174,700
            
            
            
            228,600Total
      liabilities
            
            
            95,209,700
            
            
            
            94,513,100Commitments
      and contingenciesStockholders’
      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
            
            
            1,600
            
            
            
            1,600Paid
      in capital
            
            
            15,377,600
            
            
            
            15,377,600Retained
      earnings
            
            
            17,560,200
            
            
            
            17,264,60032,939,400
            
            
            
            32,643,800Treasury
      stock at cost, 63,300 shares
            
            
            (504,100
            )
            
            
            (504,100
            )Total
      stockholders’ equity
            
            
            32,435,300
            
            
            
            32,139,700Total
      liabilities and stockholders’ equity
            
            $
            127,645,000
            
            
            $
            126,652,800





The
accompanying notes are an integral part of these statements.


- 3
-





AeroCentury
Corp.


Condensed
Consolidated Statements of Operations


Unaudited





For
      the Three Months Ended
              March
      31,2008
            
            
            2007(as
      restated)Revenues
      and other income:Operating
      lease revenue
            
            $
            5,893,900
            
            
            $
            4,283,000Maintenance
      reserves income
            
            
            1,749,500
            
            
            
            827,400Other
            
            
            179,500
            
            
            
            7,4007,822,900
            
            
            
            5,117,800Expenses:Interest
            
            
            2,129,200
            
            
            
            1,221,700Depreciation
            
            
            1,706,900
            
            
            
            1,234,800Management
      fees
            
            
            883,400
            
            
            
            683,400Maintenance
      costs
            
            
            2,381,400
            
            
            
            225,400Professional
      fees and general and administrative
            
            
            278,400
            
            
            
            156,300Other
      taxes
            
            
            (79,800
            )
            
            
            12,200Insurance
            
            
            78,100
            
            
            
            26,700Bad
      debt expense
            
            
            -
            
            
            
            15,7007,377,600
            
            
            
            3,576,200Income
      before income taxes
            
            
            445,300
            
            
            
            1,541,600Income
      tax provision
            
            
            149,700
            
            
            
            517,800Net
      income
            
            $
            295,600
            
            
            $
            1,023,800Earnings
      per share:Basic
            
            $
            0.19
            
            
            $
            0.66Diluted
            
            $
            0.18
            
            
            $
            0.66Shares
      used in per share computations:Basic
            
            
            1,543,257
            
            
            
            1,543,257Diluted
            
            
            1,624,017
            
            
            
            1,543,257





The
accompanying notes are an integral part of these statements.








- 4
-


AeroCentury
Corp.


Condensed
Consolidated Statements of Cash Flows


Unaudited





For
      the Three Months
              Ended
      March 31,2008
            
            
            2007(as
      restated)Net
      cash provided by operating activities
            
            $
            4,563,200
            
            
            $
            3,060,100Investing
      activity -Equipment
      additions to aircraft
            
            
            (25,300
            )
            
            
            -Net
      cash used by investing activity
            
            
            (25,300
            )
            
            
            -Financing
      activity -Repayment
      of notes payable
            
            
            (1,841,900
            )
            
            
            (3,312,700
            )Net
      cash used by financing activity
            
            
            (1,841,900
            )
            
            
            (3,312,700
            )Net
      increase/(decrease) in cash and cash equivalents
            
            
            2,696,000
            
            
            
            (252,600
            )Cash
      and cash equivalents, beginning of period
            
            
            2,843,200
            
            
            
            3,383,900Cash
      and cash equivalents, end of period
            
            $
            5,539,200
            
            
            $
            3,131,300





During
the three months ended March 31, 2008 and 2007, the Company paid interest
totaling $1,570,400 and $1,211,900 respectively.





During
the three months ended March 31, 2008, the Company paid income taxes totaling
$400 and received $210,500 of Federal tax refunds.  During the three
months ended March 31, 2007, the Company paid income taxes totaling
$400.





At March
31, 2008, capital purchases included in accounts payable and accrued expenses
were $303,000.





The
accompanying notes are an integral part of these statements.





- 5
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





1. 
Organization and Summary of Significant Accounting Policies





(a)  Basis of Presentation





AeroCentury Corp., a Delaware
corporation (the Company, as defined below) acquires used regional aircraft for
lease to foreign and domestic regional carriers.  Financial
information for AeroCentury Corp. and its wholly-owned subsidiaries, AeroCentury
Investments V LLC (“AeroCentury V LLC”) and AeroCentury Investments VI LLC
(“AeroCentury VI LLC”) (collectively, the “Company”), is presented on a
consolidated basis.  All intercompany balances and transactions have
been eliminated in consolidation.





The condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.  Operating results for the
three-month period ended March 31, 2008 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2008.





For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-KSB for the year ended December 31,
2007.





(b)  Use of Estimates





The preparation of financial statements
in conformity with GAAP 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.





(c)  Fair Value of Financial Instruments and Accounting for Derivative
Instrument





The Company’s financial instruments,
other than cash, consist principally of cash equivalents, accounts receivable,
accounts payable, amounts borrowed under a credit facility, borrowings under
notes payable and a derivative instrument.  The fair value of cash,
cash equivalents, accounts receivable and accounts payable approximates the
carrying value of these financial instruments because of their short-term
nature.





Borrowings under the Company’s Credit
Facility and certain notes payable bear floating rates of interest that reset
periodically to a market benchmark rate plus a credit margin.  The
Company believes the effective rate of the Credit Facility and debt agreements
approximates current market rates for such agreements at the balance sheet
date.  The Company believes the carrying amount of its fixed rate debt
approximates fair value at the balance sheet date.  As discussed in
Note 5, the fair value of the Company’s interest rate swap derivative instrument
is determined by reference to banker quotations.





- 6
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





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





(d)  Recent Accounting Pronouncements





On March 19, 2008, the FASB issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS
161”), which is effective for fiscal years and interim periods beginning after
November 15, 2008 and which requires enhanced disclosure about derivatives and
hedging transactions.  Early adoption is encouraged.  SFAS 161 amends
SFAS 133, and requires that objectives for using derivative instruments be
disclosed in terms of the underlying risk and accounting designation, better
conveying the purpose underlying the derivatives use in terms of the risk the
reporting entity is intending to manage.  It further requires disclosure of
the fair value of derivative instruments and their gains or losses in tabular
format, information about credit risk-related contingent features providing
information on the potential effect on the reporting entity’s liquidity from
using derivatives, and cross-referencing within footnotes.  The Company has
not yet adopted the provisions of SFAS 161.  Adoption of SFAS 161 will
require additional footnote disclosure but will not impact the amount of gain or
loss recognized, or the financial position, of the Company.





The Company adopted SFAS 157, “Fair
Value Measurements,” on


January
1, 2008.  Information regarding the Company’s fair value measurements
is presented in Note 5.  During February 2008, two FASB Staff
Positions (“FSP”) related to implementation of SFAS 157 were issued.  SFAS
157 provides guidance on the use of fair value measurements in generally
accepted accounting standards.  FSP 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13”, amends SFAS 157 to exclude
SFAS 13 and other pronouncements that address fair value measurements for
purposes of lease classification or amendment from the provisions of SFAS 157,
except in the case of a business combination where such measures are governed by
SFAS 141.  FSP 157-1 is effective upon adoption of SFAS 157.  FSP
157-2, “Effective Date of FASB Statement No. 157,” delays the effective date of
SFAS 157 for non-financial assets and liabilities that are not recognized or
disclosed at fair value, to fiscal years beginning after November 15, 2008 and
interim periods within such years.  The Company does not believe that
adoption of either of these FSPs will have a material effect upon its financial
statements.





2. 
Restatement of Previously Issued Financial Statements – Correction
of an Error





In connection with the year-end audit
of the Company’s 2007 consolidated financial statements, the Company identified
certain errors in the unaudited interim financial statements for  each
of the fiscal quarters during years 2007 and 2006 and the annual financial
statements for the year ended December 31, 2006. The errors principally related
to incorrect treatment of two $450,000 non-contingent termination payments due
from a lessee under two leases terminating in October 2007 and February 2008,
respectively, that should have been recognized as operating lease revenue
ratably over the three year terms of the leases.





The Company restated its 2006 and 2007
quarterly and its 2006 annual results to correct the errors and reported the
effects of such restatements in its Form 8-K filing dated February 27,
2008.


- 7
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





2. 
Restatement of Previously Issued Financial Statements – Correction
of an Error (continued)





The following tables show the effect of
that restatement at March 31, 2007 and for the quarter then ended.





Condensed
Consolidated Statement of Operations


For
      the Quarter Ended March 31, 2007As
      previously
              reported
            
            
            As
      restated due to correction of an error
            
            
            Increase/
              (decrease)Operating
      lease revenue
            
            $
            4,206,800
            
            
            $
            4,283,000
            
            
            $
            76,200Maintenance
      reserves income
            
            
            827,400
            
            
            
            827,400
            
            
            
            -Other
            
            
            7,400
            
            
            
            7,400
            
            
            
            -5,041,600
            
            
            
            5,117,800
            
            
            
            76,200Interest
            
            
            1,221,700
            
            
            
            1,221,700
            
            
            
            -Depreciation
            
            
            1,234,800
            
            
            
            1,234,800
            
            
            
            -Maintenance
            
            
            225,400
            
            
            
            225,400
            
            
            
            -Management
      fees
            
            
            683,400
            
            
            
            683,400
            
            
            
            -Professional
      fees and other
            
            
            210,900
            
            
            
            210,900
            
            
            
            -3,576,200
            
            
            
            3,576,200
            
            
            
            -Income
      before taxes
            
            
            1,465,400
            
            
            
            1,541,600
            
            
            
            76,200Income
      tax provision
            
            
            491,600
            
            
            
            517,800
            
            
            
            26,200Net
      income
            
            $
            973,800
            
            
            $
            1,023,800
            
            
            $
            50,000Earnings
      per share:Basic
            
            $
            0.63
            
            
            $
            0.66
            
            
            $
            0.03Diluted
            
            $
            0.63
            
            
            $
            0.66
            
            
            $
            0.03Shares
      used in per share computations:Basic
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Diluted
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257





- 8
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





2. 
Restatement of Previously Issued Financial Statements – Correction
of an Error





Condensed
Consolidated Statements of Cash Flows


For
      the Three Months Ended March 31, 2007As
      previously
              reported
            
            
            As
      restated due to correction of an error
            
            
            Increase/
              (decrease)Net
      cash provided by operating activities
            
            $
            3,060,100
            
            
            $
            3,060,100
            
            
            $
            -Financing
      activity -Repayment
      of notes payable
            
            
            (3,312,700
            )
            
            
            (3,312,700
            )
            
            
            -Net
      cash used by financing activity
            
            
            (3,312,700
            )
            
            
            (3,312,700
            )
            
            
            -Net
      increase in cash and cash equivalents
            
            
            (252,600
            )
            
            
            (252,600
            )
            
            
            -Cash
      and cash equivalents, beginning of period
            
            
            3,383,900
            
            
            
            3,383,900
            
            
            
            -Cash
      and cash equivalents, end of period
            
            $
            3,131,300
            
            
            $
            3,131,300
            
            
            $
            -





3. 
Aircraft and Aircraft Engine Held for Lease





During
the three months ended March 31, 2008, the Company did not purchase or sell any
aircraft.  In January 2008, one of the Company’s DHC-8-300 aircraft,
which was off lease at December 31, 2007, was re-leased to an existing customer
for a 36-month term. The Company also extended the leases for three of its
aircraft.  In March 2008, another of the Company’s deHavilland
DHC-8-300 aircraft was returned at lease end and the Company is seeking re-lease
opportunities for it.  At March 31, 2008, the Company’s two Saab 340A
aircraft and one turboprop engine were also off lease.


- 9
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





4. 
Maintenance Reserves and Accrued Costs





The accompanying condensed consolidated
balance sheet reflects liabilities for maintenance reserves and accrued costs,
which include refundable maintenance payments received from lessees based on
usage.  At March 31, 2008, the Company’s maintenance reserves and
accruals consisted of the following:





Refundable
      maintenance reserves
            
            $
            4,565,900Accrued
      costs
            
            
            3,210,500$
            7,776,400





Additions to and deductions from the
Company’s accrued costs during the quarters ended March 31, 2008 and 2007 for
aircraft maintenance were as follows:





For
      the Three Months Ended
              March
      31,2008
            
            
            2007(as
      restated)Balance,
      beginning of period
            
            $
            1,591,300
            
            
            $
            3,846,700Adjustment
      pursuant to FSP AUG AIR-1
            
            
            -
            
            
            
            (3,499,300
            )Balance,
      beginning of period, adjusted for adoption of FSP AUG
AIR-1
            
            
            1,591,300
            
            
            
            347,400Additions:Charged
      to expense
            
            
            2,424,000
            
            
            
            191,200Deductions:Paid
      for previously accrued maintenance
            
            
            804,800
            
            
            
            -Reversals
      of over-accrued maintenance
            
            
            -
            
            
            
            12,500804,800
            
            
            
            12,500Net
      increase in accrued maintenance costs
            
            
            1,619,200
            
            
            
            178,700Balance,
      end of period
            
            $
            3,210,500
            
            
            $
            526,100





- 10
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





5. 
Notes Payable and Accrued Interest





At March 31, 2008, the Company’s notes
payable and accrued interest consisted of the following:





Credit
      Facility principal
            
            $
            58,096,000Credit
      Facility accrued interest
            
            
            90,000Subordinated
      Notes principal
            
            
            10,000,000Subordinated
      Notes discount
            
            
            (2,321,200
            )Special
      purpose financing principal
            
            
            5,222,600Special
      purpose financing accrued interest
            
            
            7,500Interest
      Swap valuation
            
            
            620,700Interest
      Swap interest
            
            
            15,800$
            71,731,400





(a)  Credit Facility





During
the three months ended March 31, 2008, the Company borrowed $0 and repaid
$1,500,000 of the outstanding principal under its revolving credit facility
(the  “Credit Facility”).  As of March 31, 2008, the Company
was in compliance with all covenants under the Credit Facility agreement,
$58,096,000 in principal amount was outstanding, and interest of $90,000 was
accrued.





The
weighted average interest rate on the Credit Facility at March 31, 2008 and 2007
was 5.56% and 8.38%, respectively.





(b)  Derivative instrument





In
December 2007, the Company entered into an interest rate swap (the “Swap”) with
a notional amount of $20 million, under which it committed to make or receive a
net settlement for the difference in interest receivable computed monthly on the
basis of 30-day LIBOR and interest payable monthly on the basis of a fixed rate
of 4.04% per annum.





At March
31, 2008, the Company recognized a $620,700 liability for the Swap on its
condensed consolidated balance sheet in notes payable and accrued
interest.  The Company also recognized both a net settlement amount of
$14,300 and a loss of $470,600 for the three months ended March 31, 2008 as a
component of interest expense.


- 11
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





5. 
Notes Payable and Accrued Interest (continued)





(b)  Derivative instrument (continued)





SFAS No.
157 discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash
flow), and the cost approach (cost to replace the service capacity of an asset
or replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three
levels:





Level
      1:  Observable inputs such as quoted prices (unadjusted) in
      active markets for identical assets or
  liabilities.


Level
      2:  Inputs, other than quoted prices, that are observable for
      the asset or liability, either directly or indirectly. These include
      quoted prices for similar assets or
              liabilities
      in active markets and quoted prices for identical or similar assets or
      liabilities in markets that are not
active.


Level
      3:  Unobservable inputs that reflect the reporting entity’s own
      assumptions.





The
following table summarizes the bases used to measure applicable financial assets
and liabilities at fair value on a recurring basis in the balance
sheet:





Basis
      of Fair Value MeasurementsBalance
      at
              March
      31,
              2008
            
            
            Quoted
      prices in active markets for identical items
              (Level
      1)
            
            
            Significant
      other observable inputs
              (Level
      2)
            
            
            Significant
      unobservable inputs
              (Level
      3)Interest
      rate swap derivative financial
              instruments
      (part of Notes payable and
              accrued
      interest)
            
            $
            620,700
            
            
            $
            -
            
            
            $
            620,700
            
            
            $
            -





The Company’s interest rate swap
agreement effectively converts a portion of the Company’s short-term variable
rate debt to fixed rate.  Under this agreement, the Company pays a
fixed rate and receives a variable rate of LIBOR.  The fair value of
this interest rate derivative is based on quoted prices for similar instruments
from a commercial bank and, therefore, the interest rate derivative is
considered a level 2 input.





(c)  Senior unsecured subordinated debt





As of
March 31, 2008, the carrying amount of the senior unsecured subordinated debt
(“Subordinated Debt”) was $7,678,800 (outstanding principal amount of
$10,000,000 less unamortized debt discount of $2,321,200) and accrued interest
payable was $0. The Company was in compliance with all covenants under the
securities purchase agreement which governs the Subordinated Debt.





- 12
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


March 31,
2008





5. 
Notes Payable and Accrued Interest (continued)





(d) 
Special purpose financings





The Company has two special purpose
financings in connection with AeroCentury V LLC and AeroCentury VI LLC. During
the three months ended March 31, 2008, AeroCentury V LLC repaid $257,100 of
principal.  The principal amount owed under the note at March 31, 2008
was $4,198,200 and interest of $6,400 was accrued. During the same period,
AeroCentury VI LLC repaid $84,800 of principal.  The principal amount
owed under that note was $1,024,400 and interest of $1,100 was accrued at March
31, 2008. As of March 31, 2008, the Company was in compliance with all covenants
of both note obligations.  As discussed in Note 8, in April 2008, the
Company repaid the outstanding principal amount due under the AeroCentry V LLC
note.





6. 
Computation of Earnings Per Share





Basic and diluted earnings per share
are calculated as follows:





For
      the Three Months Ended March 31,2008
            
            
            2007(as
      restated)Net
      income
            
            $
            295,600
            
            
            $
            1,023,800Weighted
      average shares outstanding for the period
            
            
            1,543,257
            
            
            
            1,543,257Dilutive
      effect of warrants
            
            
            80,760
            
            
            
            -Weighted
      average diluted shares outstanding
            
            
            1,624,017
            
            
            
            1,543,257Basic
      earnings per share
            
            $
            0.19
            
            
            $
            0.66Diluted
      earnings per share
            
            $
            0.18
            
            
            $
            0.66





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





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. The Company recorded management fees of $883,400 and $683,400 for the
periods ended March 31, 2008 and 2007, respectively. There were no acquisition
or remarketing fees in either quarter.





8. 
Subsequent Events





In April 2008, the Company repaid the
outstanding principal owed by AeroCentury V LLC under its special purpose
financing.  The Company intends to transfer ownership of the two
aircraft that served as collateral for the financing from AerioCentury V LLC to
AeroCentury Corp., upon which the aircraft will be eligible as collateral under
the Credit Facility.  Additionally, the leases for the two aircraft
have been extended for two years to May 2010.




On May 1, 2008, the stockholders of the Company
approved an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
3,000,000 to 10,000,000 shares.  On May 6, 2008, the Company filed the
amendment with the Delaware Secretary of State effecting such
increase.








- 13
-


Item
2. Management’s
Discussion and Analysis of Financial Condition
and Results of Operations.





The
following discussion should be read in conjunction with the Company’s Form
10-KSB for the year ended December 31, 2007 and the unaudited financial
statements and the related notes that appear elsewhere in this
report.





Results
of Operations for the Fiscal Quarters Ended March 31, 2008 and 2007





a.  Revenues





Operating
lease revenue was $1,610,900 higher in the three months ended March 31, 2008
versus the same period in 2007, primarily because of increased operating lease
revenue from aircraft purchased during 2007 and re-leases during 2007 at
increased rental rates for several of the Company’s aircraft. The aggregate
effect of these increases was partially offset by a decrease in revenue related
to aircraft that were off lease for all or part of the 2008 period.





Maintenance
reserves income was $922,100 higher in the three months ended March 31, 2008
versus the three months ended March 31, 2007 as a result of the acquisition of
aircraft in 2007.





Other
income was $172,100 higher in the three months ended March 31, 2008 versus the
same period in 2007, primarily as a result of $150,000 of compensation related
to a re-lease transaction which was not consummated.





b.  Expense items





Interest
expense was $907,500 higher in the three months ended March 31, 2008 versus the
three months ended March 31, 2007.  This is primarily the result of
the change in fair value of the Company’s interest swap entered into in December
2007 and an increase in the Company’s average outstanding debt balance during
the first quarter of 2008 compared to the same period in 2007.





Depreciation
was $472,100 higher in the first three months of 2008 versus the same period in
2007, primarily because of purchases of aircraft during
2007.  Management fees, which are calculated on the net book value of
the aircraft owned by the Company, were $200,000 higher in 2008 compared to 2007
because of higher net book values as a result of aircraft
acquisitions.  The effects of this increase were partially offset by
the effect of depreciation on the net book value of the Company’s
aircraft.





The
Company’s maintenance expense is dependent on the aggregate amount of the
maintenance claims submitted by lessees for reimbursement and expenses incurred
in connection with off-lease aircraft.  As a result of higher total
lessee claims, the Company incurred $2,156,000 more in maintenance expense in
the first three months of 2008 versus 2007.





Total
professional fees and general and administrative expenses were $122,100 higher
in the three months ended March 31, 2008 versus the same period in 2007,
primarily because of additional costs incurred in connection with the audit of
the Company’s 2007 financial statements.





The
Company records non-income based sales, use, value-added and franchise taxes as
other tax expense.  Such expenses were $92,000 lower in the first
three months of 2008 versus 2007 because, in 2008, the Company completed further
analysis and reduced the accruals for value-added taxes, penalties and interest
due in connection with an aircraft leased in Australia in the amount of
$113,700.





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 and length of
time each off-lease asset is insured.  Aircraft insurance expense was
$36,700 higher in the three months ended March 31, 2008 versus the same period
in 2007 as a result of off-lease assets.





The
Company recorded no bad debt expense during the first three months of
2008.  During the same period of 2007, the Company recorded bad debt
expense of $15,700 for maintenance reserves that were written off in connection
with a lessee’s early return of two aircraft.





The
Company’s effective tax rates for thee months ended March 31, 2008 and 207 were
approximately 34% for both periods.





- 14
-


Liquidity
and Capital Resources





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





(a)  Credit Facility





During
the three months ended March 31, 2008, the Company borrowed $0 and repaid
$1,500,000 of the outstanding principal under its revolving credit facility
(the  “Credit Facility”).  The balance of the principal
amount owed under the Credit Facility at March 31, 2008 was $58,096,000 and
interest of $90,000 was accrued.





The
Company is currently in compliance with all covenants and, based on its current
projections, the Company believes it will continue to be in compliance with all
covenants of its Credit Facility, but there can be no assurance of such
compliance in the future.  See "Factors That May Affect Future
Results –  'Risks of Debt Financing’ and 'Credit Facility
Obligations,’”below.





The
Company's interest expense in connection with the Credit Facility generally
moves up and down with prevailing interest rates.  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 aircraft are
re-leased.  As discussed in (b) below, the Company
entered into an interest rate swap in December 2007.





(b)  Derivative instrument





In
December 2007, the Company entered into an interest rate swap (the “Swap”) with
a notional amount of $20 million, under which it committed to make or receive a
net settlement for the difference in interest receivable computed monthly on the
basis of 30-day LIBOR and interest payable monthly on the basis of a fixed rate
of 4.04% per annum.





At March
31, 2008, the Company recognized a $620,700 liability for the Swap on its
condensed consolidated balance sheet in Notes Payable and Accrued
Interest.  The Company also recognized both a net settlement amount of
$14,300 and a loss of $470,600 for the three months ended March 31, 2008 as a
component of interest expense.  If short-term interest rates continue
to decline, the Company will incur additional interest expense as a result of
the Swap.





(c)  Senior unsecured subordinated debt





As of
March 31, 2008, the carrying amount of the senior unsecured subordinated debt
(“Subordinated Debt”) was $7,678,800 (outstanding principal amount of
$10,000,000 less unamortized debt discount of $2,321,200) and accrued interest
payable was $0.  As of March 31, 2008, the Company was in compliance
with all covenants under the Securities Purchase Agreement and is currently in
compliance.





- 15
-


(d)  Special purpose financings




The
Company has two special purpose financings in connection with AeroCentury V LLC
and AeroCentury VI LLC. During the three months ended March 31, 2008,
AeroCentury V LLC repaid $257,100 of principal.  The principal amount
owed under the note at March 31, 2008 was $4,198,200 and interest of $6,400 was
accrued.  During the same period, AeroCentury VI LLC repaid $84,800 of
principal.  The principal amount owed under that note was $1,024,400
and interest of $1,100 was accrued at March 31, 2008. As of March 31, 2008, the
Company was in compliance with all covenants of both note obligations and is
currently in compliance.





(e)  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
assets, in an attempt to reduce the time that an asset will be off
lease.  The Company’s aircraft assets are subject to leases with
varying expiration dates through January 2012. At March 31, 2008, the Company’s
two Saab 340A aircraft, one of its deHavilland DHC-8-300 aircraft and one
turboprop engine were off lease.





Management
believes that the Company will have adequate cash flow to meet its ongoing
operational needs, including required repayments under its Credit Facility,
Subordinated Notes financing and special purpose financings, based upon its
estimates of future revenues and expenditures. The Company’s expectations
concerning such cash flows are based on existing lease terms and rents, as well
as numerous estimates, including (i) rents on assets to be re-leased, (ii)
timely use of proceeds of unused debt capacity toward additional acquisitions of
income producing assets, and (iii) the cost and anticipated timing of
maintenance to be performed.  While the Company believes that the
assumptions it has made in forecasting its cash flow are reasonable in light of
experience, actual results could deviate from such assumptions.  Among
the more significant external factors outside the Company’s control that could
have an impact on the accuracy of cash flow assumptions are (i) an increase in
interest rates that negatively affects the Company’s profitability
and causes the Company to violate covenants of its Credit Facility or its
Subordinated Notes, which may in turn require repayment of some or all of the
amounts outstanding under the Credit Facility or the Subordinated Notes, (ii)
lessee non-performance or non-compliance with lease obligations (which may
affect Credit Facility collateral limitations and Subordinated Notes covenants,
as well as revenue and expenses) and (iii) inability to locate and acquire a
sufficient volume of additional aircraft assets at prices that will produce
acceptable net returns.





(i)  Operating
activities





The
Company’s cash flow from operations for the three months ended March 31, 2008
versus 2007 increased by $1,503,100.  The change in cash flow is a
result of changes in several cash flow items during the year, including
principally the following:





Lease rents, maintenance
reserves and security deposits





Payments
received from lessees for rent were $1,944,300 higher in the three months ended
March 31, 2008 versus 2007, due primarily to the effect of increased payments
for aircraft purchased during 2007, and re-leases during 2007 at increased
rental rates for several of the Company’s aircraft. The aggregate effect of
these increases was partially offset by a decrease in revenue related to
aircraft that were off lease for all or part of the 2008 period.





Although
increased demand generally in the turboprop market has caused lease rates to
stabilize and, in some cases, rise, there can be no assurance that rental rates
on aircraft to be re-leased will not decline, so that, absent additional
acquisitions by the Company beyond those made in 2007, aggregate lease revenues
for the current portfolio could decline in the future.





Payments
received for refundable and non-refundable maintenance reserves were $795,000
higher in the first three months of 2008 than in the first three months of 2007
as a result of a net increase in average aircraft usage by the Company’s
lessees, on which the amount of reserves is based, and additional usage in
connection with aircraft acquired in 2007.





During
the three months ended March 31, 2008, the Company returned a $308,000 security
deposit to a lessee upon return of an aircraft at lease end.  During
the same period in 2007, the Company neither collected nor refunded any security
deposits.





Payments for
maintenance





Payments
for maintenance were $615,600 higher in the first three months of 2008 versus
the same period in 2007 primarily as a result of higher payments during 2008 in
connection with maintenance reserves claims submitted by lessees.  The
amount of payments for maintenance in future periods will be dependent on the
amount and timing of maintenance paid from lessee maintenance reserves held by
the Company and maintenance paid for off-lease aircraft.





- 16
-


Payments for
interest





Payments
for interest increased by $358,500 in the first three months of 2008 compared to
the same period in 2007, primarily as a result of an increase in the Company’s
outstanding indebtedness under the Subordinated Notes and Credit Facility in
2008.  The effects of these increases were partially offset by a
decrease in the average index rates upon which the Company’s senior debt
interest rates were based and a lower margin in 2008 compared to
2007.





Interest
payments in future periods will be determined by prevailing interest rates and
the aggregate principal balance owed under the Credit Facility and the
Subordinated Notes, which may be influenced by future acquisitions and/or
required repayments of principal resulting from changes in the collateral base
pursuant to the Company’s debt agreements with its lenders. Interest expense
will increase significantly when further borrowings are made under the Credit
Facility and the Subordinated Notes.





Payments for management
fees





Payments
for management fees increased by $231,100 in the three months ended March 31,
2008 versus the same period in 2007 because of higher net book values as a
result of aircraft acquisitions.





Income
taxes





During
the three months ended March 31, 2008, the Company received $210,500 of Federal
tax refunds.  The Company paid taxes of $400 in the three months ended
March 31, 2008 and 2007.




(ii) 
Investing activities





During
the three months ended March 31, 2008 and 2007, the Company used cash of $25,300
and $0, respectively, for capital equipment installed on aircraft.





(iii) 
Financing activities





The
Company did not borrow funds in the first three months of 2008 or
2007.  The Company repaid $1,841,900 and $3,312,700 of its outstanding
indebtedness in the three months ended March 31, 2008 and 2007,
respectively.





- 17
-


Outlook





The
Company is required to borrow an additional $18 million under its Subordinated
Notes financing on or before June 30, 2008.  Because the Subordinated
Notes bear fixed interest of 16% per annum immediately upon issuance, an
important factor in the Company’s near- and mid-term results will be the
Company’s ability to expediently locate and acquire additional assets utilizing
these funds.  It is likely that the remaining Subordinated Notes
proceeds will be used to repay a portion of the indebtedness outstanding under
the Credit Facility.  Since the Credit Facility interest rate is now,
and is likely to continue to be, lower than the Subordinated Notes fixed rate,
using Subordinated Notes proceeds to pay down Credit Facility debt would
probably result in a higher effective interest rate and interest expense,
without a corresponding increase in operating revenue.  Acquisitions
occurring after the June 30, 2008 Subordinated Notes issuance would be financed
from funds available under the Credit Facility.  The Company
anticipates that the available debt capacity will be sufficient to fund planned
acquisitions for 2008.





In March
2007, the Company and the lessee of two aircraft, which had leases expiring in
May and July 2008, agreed to an early return of the aircraft based on the
lessee’s financial difficulties.The Company is seeking
re-lease or sale opportunities for these aircraft.  There is no
assurance as to when the Company will be successful in its efforts to re-lease
or sell the aircraft, but the Company believes that, even if the aircraft are
off lease for an extended period of time, it will be able to remain in
compliance with the terms of its Credit Facility and Subordinated
Notes.  Since the lessee of the aircraft has essentially ceased
operations, the Company may incur significant unreimbursed expense in order to
prepare the aircraft for re-lease or resale, which is expected to total
approximately $600,000 based on current estimates.





One of
the Company’s aircraft leases expired during the first quarter of 2008 and the
Company is seeking re-lease opportunities for it. Three of the Company’s other
leases expire in 2008. The Company believes that it will be successful in
extending the leases for these aircraft or be able to re-lease them within an
acceptable period after return at lease end and that, even if the aircraft are
off lease for an extended period of time, it will be able to remain in
compliance with the terms of its Credit Facility and Subordinated Notes.





The
Company continually monitors the financial condition of its lessees to avoid
unanticipated creditworthiness issues, and where necessary, works with lessees
to ensure continued compliance with obligations under their respective
leases.  Currently, the Company is closely monitoring the performance
of three lessees with a total of four aircraft under lease.  The
Company continues to work closely with these lessees to ensure compliance with
their current obligations.  If any of the Company's current lessees
are unable to meet their lease payment obligations, the Company's future results
could be materially impacted.  Any weakening in the aircraft industry
may also affect the performance of lessees that currently appear to the Company
to be creditworthy.  See "Factors that May Affect Future
Results – General Economic Conditions," below.





Beginning
on January 1, 2007, due to the adoption of FSP AUG AIR-1, the Company began to
accrue non-refundable maintenance reserves received from lessees as income based
on aircraft usage and record maintenance expenses as incurred.  The
Company accrues estimated maintenance costs based on information provided by its
third party lessees and, accordingly, estimates of such expenses depend on
timely and accurate reporting by such parties.  The Company believes
that its reported net income may be subject to significant fluctuations
from quarter-to-quarter as a result of the adoption of FSP AUG AIR-1. Due to the
recent acquisition of Fokker 100 jet engine powered aircraft, the magnitude of
these fluctuations may be greater as a result of the higher maintenance reserve
rates and related maintenance expense for jet engines as compared to turboprop
engines.





- 18
-


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.  Indebtedness owed under the Credit Facility is secured by
the Company’s existing assets as well as the specific assets acquired with each
financing.  In addition to payment obligations, the Credit Facility
also requires the Company to comply with certain financial covenants, including
a requirement of positive earnings, interest coverage and net worth
ratios.  Any default under the Credit Facility, if not waived by the
lenders, could result in foreclosure upon not only the asset acquired using such
financing, but also the existing assets of the Company securing the
loan.  Any such default could also result in a cross default under the
Subordinated Notes.





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





Credit Facility Obligations.
The Company is obligated to make repayments 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, as well as assets with lease payments more than 30 days
past due, are excluded 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.





Investment in New Aircraft
Types.  The Company has traditionally invested in a limited
number of types of turboprop aircraft and engines. While the Company intends to
continue to focus solely on regional aircraft and engines, the Company has
recently acquired Fokker 100 regional jet aircraft, and may continue to seek
acquisition opportunities for new types and models of regional jet and turboprop
aircraft and engines used in the Company's targeted customer base of regional
air carriers.  Acquisition of other aircraft types and engines not
previously acquired by the Company entails greater ownership risk due to the
Company's lack of experience managing those aircraft and engine 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 types and engines.  Further, the broadening of the asset
types in the aircraft portfolio may have a benefit of diversifying the Company's
portfolio (See "Factors That
May Affect Future Results – Concentration of Lessees and Aircraft Type,”
below).





General Economic Conditions.The Company’s business is dependent upon general economic conditions and
the strength of the travel and transportation industry.  The industry
appears to be entering a period of financial difficulty and contraction caused
primarily by record-high fuel prices.  A number of carriers have
ceased operations due to the inability to cover increased costs, and a possible
global economic recession, which will certainly affect carriers’ revenue, may
result in more failures.





A
widespread economic setback in the industry may result in the increased
possibility of an economic failure of one or more of the Company’s
lessees.  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 from the Company’s
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.,
Latin America or Europe) could have a significant adverse impact on the
Company.





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





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Concentration of Lessees and
Aircraft Type. Currently, the Company’s five largest customers are
located in Mexico, Antigua, Netherlands Antilles, Sweden and Belgium and
currently account for approximately 18%, 16%, 11%, 11% and 10%, respectively, of
the Company’s monthly lease revenue.A lease default by or
collection problem with one or a combination of any of these significantcustomers 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 decreases as
the Company leases additional assets to new lessees.





Currently,
the Company owns eight DHC-8-300, fourteen Fokker 50 and five Fokker 100
aircraft, making these three aircraft types the dominant types in the portfolio
and representing 28%, 26% and 26%, 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.





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 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 lessees.





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 equipment 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 in turn need to lease such aircraft at a
corresponding higher lease rate.





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 or bankruptcy of the
lessee, 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 in addition to customary security
deposits.  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. If any of the Company's current or future lessees are unable to
meet their lease obligations, the Company's future results could be materially
impacted.





- 20
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Interest Rate
Risk.  The Company’s current Credit Facility and the
indebtedness of one of its special purpose subsidiaries carry a floating
interest rate based upon short-term interest rate indices. Lease rates
typically, but not always, move with interest rates, but market demand for the
asset also affects lease rates. Because lease rates are fixed at the origination
of leases, interest rate changes during the term of a lease have no effect on
existing lease payments.  Therefore, if interest rates rise
significantly, and there is relatively little lease origination by the Company
following such rate increases, the Company could experience lower net
income.   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
income as well.





The
Company has chosen to hedge some, but not all, of its variable interest rate
exposure.  Nonetheless, if an interest rate increase were great
enough, the Company might not be able to generate sufficient lease revenue to
meet its unhedged interest payment and other obligations and comply with the
other covenants of its Creit Facility or indebtedness of one of its special
purpose subsidiaries.  Furthermore, a drop in prevailing LIBOR rates
would cause the hedge transaction to have a negative impact on the Company’s
results.  If the one-month LIBOR rate applicable for an interest
period is below the fixed swap rate set in the hedge, the Company will be
obligated to pay the swap counterparty the difference between the fixed swap
rate of 4.04% and that one-month LIBOR rate.  As of May 14, 2008, the
one-month LIBOR rate was 2.505 %.





International
Risks.  The Company has focused on leases in overseas
markets.  Leases with foreign lessees, however, may present 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 remedies in
foreign jurisdictions. The protections potentially offered by Section 1110 of
the Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law
may not offer similar protections.  Certain countries do not have a
central registration or recording system with which to locally establish the
Company’s interest in equipment and related leases.  This could make
it more difficult for the Company to recover an aircraft in the event of a
default by a foreign lessee.





A lease
with a foreign lessee is subject to risks related to the economy of the country
or region in which such lessee is located, which may be weaker than the U.S.
economy.  On the other hand, a foreign economy may remain strong even
though the U.S. economy does not.  A foreign economic downturn may
impact a foreign lessee’s ability to make lease payments, even though the U.S.
and other economies remain stable.





Furthermore,
foreign lessees are subject to risks related to currency conversion
fluctuations.  Although the Company’s current leases are all payable
in U.S. dollars, the Company may agree in the future to leases that permit
payment in foreign currency, which would subject such lease revenue to monetary
risk due to currency fluctuations.  In addition, if the Company
undertakes certain obligations under a lease to contribute to a repair or
improvement and if the work is performed in a foreign jurisdiction and paid for
in foreign currency, currency fluctuations causing a weaker dollar between the
time such agreement is made and the time payment for the work is made may result
in an unanticipated increase in dollar cost for the Company.





Even with
U.S. dollar-denominated lease payment provisions, the Company could still be
affected by a devaluation of the lessee’s local currency that would make it more
difficult for a lessee to meet its U.S. dollar-denominated lease payments,
increasing the risk of default of that lessee, particularly if its revenue is
primarily derived in the local currency.





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





Reliance on
JMC.All management of the Company is performed by JMC under
the Management Agreement, which is in the eleventh 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, all of 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
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 in bond issuance proceeds,
and AeroCentury IV, Inc. (“AeroCentury IV”), which raised approximately
$5,000,000 in bond issuance proceeds.  In the first quarter of 2002,
AeroCentury IV defaulted on certain bond obligations.  In June 2002,
the indenture trustee for AeroCentury IV’s bondholders repossessed AeroCentury
IV’s assets and took over management of AeroCentury IV’s remaining
assets.  JetFleet III defaulted on its bond obligation of $11,076,350
in May 2004.  The indenture trustee for JetFleet III bondholders
repossessed JetFleet III’s unsold assets in late May 2004.





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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 impairment, 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.





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 creditworthiness that may be strong,
but 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 JMC’s reputation will continue to be strong in this market segment.





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





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 outstanding, 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.





- 22
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Item
3.  Quantitative and  Qualitative Disclosures About Market
Risk.





This
report does not include information described under Item 3 of Form 10-Q pursuant
to the rules of the Securities and Exchange Commission that permit “smaller
reporting companies” to omit such information.





Item
4T.  Controls and Procedures.





Quarterly evaluation of the Company’s
Disclosure Controls and Procedures. 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”).  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 as of March 31, 2008.





Disclosure 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.





Limitations on the Effectiveness of
Disclosure Controls. The Company’s management, including the CEO and CFO,
does not expect that its Disclosure 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
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-Q and annual report on
Form 10-K. The overall goals of these various evaluation activities are to
monitor the Company’s Disclosure 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.





Conclusions. Based upon the
Controls Evaluation, the Company’s CEO and CFO have concluded that, as of March
31, 2008, 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.





Changes in Internal Controls Over
Financial Reporting.  In accordance with SEC requirements, the
CEO and CFO note that there has been no significant change in the Company’s
internal controls over financial reporting that occurred during the first
quarter that has materially affected or is reasonably likely to materially
affect the Company’s internal control over financial reporting.





- 23
-


PART
II


OTHER
INFORMATION





Item
6.  Exhibits





Exhibits





Exhibit
                Number
              Description3.6
              Form
      of Certificate of Amendment of Certificate of Incorporation, incorporated
      herein by reference to Exhibit 99.1 of the Company’s Report on Form 8-K
      filed with the Securities & Exchage Commission on May 7,
      200831.1
              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.











- 24
-


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




AEREOCENTURY
    CORP.Date:
      May 15, 2008
              By:
              /s/ Toni
      M. PerazzoName:
      Toni M. PerazzoTitle:
      Sr. Vice President - Finance and CFO