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 September 30, 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 November 13, 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 1 “Financial Statements” the
Company’s statements that the adoption of FSP 157-1 and 157-2 will not have a
material effect on the Company’s financial statements; and that the Company
expects to lease a DHC-8-300 aircraft in the fourth quarter to a current lessee;
(ii) 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; that it will
re-lease a DHC-8-300 in the fourth quarter of 2008; that the other leases
expiring in 2008 will be extended by their lessees; 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; (iii) in Item 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Outlook” the Company’s
statements regarding its belief that it will have sufficient debt capacity under
its Credit Facility to fund planned acquisitions for the remainder of 2008 and
2009; that the Company will incur maintenance expense in the fourth quarter for
work performed on an aircraft that was returned early in August 2008; that the
Company expects to deliver a DHC-8-300 aircraft to a current lessee in the
fourth quarter of 2008;  that the Company will be successful in
extending the leases or find new lessees for aircraft with leases expiring
during the fourth quarter of 2008;  that, even if the aircraft that
are currently off lease and may come off lease in the remainder of 2008 remain
off lease for an extended period of time, the Company will be able to meet its
operational needs and 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 that with the recent acquisitions of Fokker 100s
the fluctuations may have greater magnitude; and (iv) 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 the current
banking crisis will not have an immediate effect on the Company; that the
lenders in its Credit Facility will continue to be able to honor their
commitment to provide loans as committed in the Credit Facility agreements and
that the unused capacity under the Credit Facility provides sufficient capital
to fund acquisitions through the end of 2009; that the Company 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 continued availability of Credit Facility financing;
the compliance of the Company's lessees with obligations under their respective
leases, risks related to use of debt financing for acquisitions; a sudden
worsening in demand for regional aircraft or severe reduction in regional
airline capacity; 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; 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 Sheets


Unaudited





ASSETSSeptember
      30,
              2008
            
            
            December
      31,
              2007Assets:Cash
      and cash equivalents
            
            $
            2,471,500
            
            
            $
            2,843,200Accounts
      receivable, including deferred rent of $215,400 and $675,600 at September
      30, 2008 and December 31, 2007, respectively
            
            
            1,659,000
            
            
            
            1,647,700Aircraft
      and aircraft engine held for lease,
              net
      of accumulated depreciation of $31,489,600 and $26,163,200 at September
      30, 2008 and December 31, 2007, respectively
            
            
            127,481,300
            
            
            
            118,924,000Taxes
      receivable
            
            
            1,626,800
            
            
            
            1,835,600Prepaid
      expenses and other
            
            
            1,145,400
            
            
            
            1,402,300Total
      assets
            
            $
            134,384,000
            
            
            $
            126,652,800LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
      payable and accrued expenses
            
            $
            434,600
            
            
            $
            811,000Notes
      payable and accrued interest
            
            
            75,431,400
            
            
            
            73,074,500Maintenance
      reserves and accrued costs
            
            
            7,727,800
            
            
            
            6,025,500Security
      deposits
            
            
            5,467,900
            
            
            
            5,696,500Prepaid
      rent
            
            
            971,800
            
            
            
            1,028,000Deferred
      income taxes
            
            
            9,325,800
            
            
            
            7,649,000Taxes
      payable
            
            
            29,900
            
            
            
            228,600Total
      liabilities
            
            
            99,389,200
            
            
            
            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, 10,000,000 shares
              authorized,
      1,606,557 shares issued and outstanding
            
            
            1,600
            
            
            
            1,600Paid
      in capital
            
            
            14,780,100
            
            
            
            15,377,600Retained
      earnings
            
            
            20,717,200
            
            
            
            17,264,60035,498,900
            
            
            
            32,643,800Treasury
      stock at cost, 63,300 shares
            
            
            (504,100
            )
            
            
            (504,100
            )Total
      stockholders’ equity
            
            
            34,994,800
            
            
            
            32,139,700Total
      liabilities and stockholders’ equity
            
            $
            134,384,000
            
            
            $
            126,652,800





The
accompanying notes are an integral part of these statements.


- 3
-





AeroCentury
Corp.


Condensed
Consolidated Statements of Operations


Unaudited





For
      the Nine Months
              Ended
      September 30,
            
            
            For
      the Three Months
              Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(as
      restated)
            
            
            
            
            
            (as
      restated)Revenues
      and other income:Operating
      lease revenue
            
            $
            17,995,300
            
            
            $
            13,811,500
            
            
            $
            6,342,200
            
            
            $
            5,300,500Maintenance
      reserves income
            
            
            5,534,000
            
            
            
            2,826,800
            
            
            
            1,883,900
            
            
            
            1,152,500Gain
      on sale of aircraft and aircraft engines
            
            
            15,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
            
            
            199,900
            
            
            
            20,000
            
            
            
            10,100
            
            
            
            11,50023,744,200
            
            
            
            16,658,300
            
            
            
            8,236,200
            
            
            
            6,464,500Expenses:Interest
            
            
            4,979,900
            
            
            
            4,369,900
            
            
            
            1,749,800
            
            
            
            1,724,100Depreciation
            
            
            5,326,400
            
            
            
            3,986,000
            
            
            
            1,876,700
            
            
            
            1,493,000Management
      fees
            
            
            2,730,000
            
            
            
            2,161,600
            
            
            
            957,300
            
            
            
            794,400Maintenance
      costs
            
            
            4,555,500
            
            
            
            1,301,200
            
            
            
            920,800
            
            
            
            375,300Professional
      fees and general and administrative
            
            
            584,200
            
            
            
            490,300
            
            
            
            149,200
            
            
            
            159,700Other
      taxes
            
            
            (92,600
            )
            
            
            313,600
            
            
            
            (47,300
            )
            
            
            291,800Insurance
            
            
            287,800
            
            
            
            133,100
            
            
            
            116,600
            
            
            
            57,600Bad
      debt expense
            
            
            1,300
            
            
            
            15,700
            
            
            
            1,300
            
            
            
            -18,372,500
            
            
            
            12,771,400
            
            
            
            5,724,400
            
            
            
            4,895,900Income
      before income taxes
            
            
            5,371,700
            
            
            
            3,886,900
            
            
            
            2,511,800
            
            
            
            1,568,600Income
      tax provision
            
            
            1,919,100
            
            
            
            1,235,500
            
            
            
            940,400
            
            
            
            454,300Net
      income
            
            $
            3,452,600
            
            
            $
            2,651,400
            
            
            $
            1,571,400
            
            
            $
            1,114,300Earnings
      per share:Basic
            
            $
            2.24
            
            
            $
            1.72
            
            
            $
            1.02
            
            
            $
            0.72Diluted
            
            $
            2.16
            
            
            $
            1.67
            
            
            $
            1.00
            
            
            $
            0.69Shares
      used in per share computations:Basic
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Diluted
            
            
            1,596,850
            
            
            
            1,588,082
            
            
            
            1,572,.420
            
            
            
            1,618,674





The
accompanying notes are an integral part of these statements.








- 4
-


AeroCentury
Corp.


Condensed
Consolidated Statements of Cash Flows


Unaudited





For
      the Nine Months
              Ended
      September 30,2008
            
            
            2007(as
      restated)Net
      cash provided by operating activities
            
            $
            11,975,000
            
            
            $
            11,605,300Investing
      activities:Proceeds
      from sale of aircraft engine
            
            
            15,000
            
            
            
            -Purchases
      of aircraft
            
            
            (13,883,800
            )
            
            
            (25,873,200
            )Net
      cash used by investing activities
            
            
            (13,868,800
            )
            
            
            (25,873,200
            )Financing
      activities:Borrowings
      under Credit Facility
            
            
            12,500,000
            
            
            
            21,500,000Net
      proceeds received from issuance of subordinated notes
    payable
            
            
            3,960,000
            
            
            
            9,237,400Debt
      issuance costs
            
            
            285,800
            
            
            
            (735,200
            )Repayment
      of notes payable
            
            
            (15,223,700
            )
            
            
            (16,249,300
            )Net
      cash provided by financing activities
            
            
            1,522,100
            
            
            
            13,752,900Net
      decrease in cash and cash equivalents
            
            
            (371,700
            )
            
            
            (515,000
            )Cash
      and cash equivalents, beginning of period
            
            
            2,843,200
            
            
            
            3,383,900Cash
      and cash equivalents, end of period
            
            $
            2,471,500
            
            
            $
            2,868,900





During
the nine months ended September 30, 2008 and 2007, the Company paid interest
totaling $4,554,300 and $4,555,700 respectively.





During
the nine months ended September 30, 2008, the Company paid income taxes totaling
$3,700 and received $210,500 of federal tax refunds.  During the nine
months ended September 30, 2007, the Company paid income taxes totaling $1,200
and received a $64,600 federal tax refund.





The
accompanying notes are an integral part of these statements.





- 5
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 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”), dissolved on August 25, 2008, 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 of America (“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 and nine-month periods ended September 30, 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
revolving credit facility (the “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 rates of the
Credit Facility and debt agreements approximate current market rates for such
indebtedness 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.





(d) 
Reclassifications





Certain of the prior period financial
statement amounts have been reclassified to conform to the current year
presentation.  These reclassifications had no impact on previously
reported net income or cash flows.





- 6
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2008





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





(e) 
Recent Accounting Pronouncements





On May 14, 2008, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) 162, “The Hierarchy of Generally Accepted Accounting
Principles,” which codified the sources of accounting principles and the
framework for selecting the principles to be used in preparation of financial
statements of non-governmental entities that are presented in conformity with
generally accepted accounting principles.  This statement is effective
sixty days following the adoption by the Securities and Exchange Commission
(“SEC”)  of the Public Company Accounting Oversight Board amendments
to AU 411, “The Meaning of Fairly Presented in Conformity With Generally
Accepted Accounting Principles,” and is not expected to have any effect on the
Company’s condensed consolidated financial statements.





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 condensed consolidated
financial statements.





In June
2008, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity's Own Stock" ("EITF 07-5").  EITF 07-5 provides
that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions.  EITF 07-5 is effective for fiscal years beginning after
December 15, 2008.  The Company is currently evaluating the potential
impact the new pronouncement will have on its condensed consolidated financial
statements.


- 7
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2008





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.





The following table shows the effect of
that restatement on the Company’s condensed consolidated statement of operations
for the three months and nine months ended September 30, 2007.  The
restatement had no effect on the Company’s condensed consolidated statement of
cash flows for the nine months ended September 30, 2007.





Condensed
Consolidated Statement of Operations


For
      the Nine Months
              Ended
      September 30, 2007
            
            
            For
      the Three Months
              Ended
      September 30, 2007As
      previously
              reported
            
            
            As
      restated due to correction of an error
            
            
            Increase
            
            
            As
      previously
              reported
            
            
            As
      restated due to correction of an error
            
            
            IncreaseOperating
      lease revenue
            
            $
            13,582,900
            
            
            $
            13,811,500
            
            
            $
            228,600
            
            
            $
            5,224,300
            
            
            $
            5,300,500
            
            
            $
            76,200Maintenance
      reserves income
            
            
            2,826,800
            
            
            
            2,826,800
            
            
            
            -
            
            
            
            1,152,500
            
            
            
            1,152,500
            
            
            
            -Other
            
            
            20,000
            
            
            
            20,000
            
            
            
            -
            
            
            
            11,500
            
            
            
            11,500
            
            
            
            -16,429,700
            
            
            
            16,658,300
            
            
            
            228,600
            
            
            
            6,388,300
            
            
            
            6,464,500
            
            
            
            76,200Interest
            
            
            4,369,900
            
            
            
            4,369,900
            
            
            
            -
            
            
            
            1,724,100
            
            
            
            1,724,100
            
            
            
            -Depreciation
            
            
            3,986,000
            
            
            
            3,986,000
            
            
            
            -
            
            
            
            1,493,000
            
            
            
            1,493,000
            
            
            
            -Maintenance
            
            
            1,301,200
            
            
            
            1,301,200
            
            
            
            -
            
            
            
            375,300
            
            
            
            375,300
            
            
            
            -Management
      fees
            
            
            2,161,600
            
            
            
            2,161,600
            
            
            
            -
            
            
            
            794,400
            
            
            
            794,400
            
            
            
            -Professional
      fees and other
            
            
            952,700
            
            
            
            952,700
            
            
            
            -
            
            
            
            509,100
            
            
            
            509,100
            
            
            
            -12,771,400
            
            
            
            12,771,400
            
            
            
            -
            
            
            
            4,895,900
            
            
            
            4,895,900
            
            
            
            -Income
      before taxes
            
            
            3,658,300
            
            
            
            3,886,900
            
            
            
            228,600
            
            
            
            1,492,400
            
            
            
            1,568,600
            
            
            
            76,200Income
      tax provision
            
            
            1,157,000
            
            
            
            1,235,500
            
            
            
            78,500
            
            
            
            428,100
            
            
            
            454,300
            
            
            
            26,100Net
      income
            
            $
            2,501,300
            
            
            $
            2,651,400
            
            
            $
            150,100
            
            
            $
            1,064,300
            
            
            $
            1,114,300
            
            
            $
            50,100Earnings
      per share:Basic
            
            $
            1.62
            
            
            $
            1.72
            
            
            $
            0.10
            
            
            $
            0.69
            
            
            $
            0.72
            
            
            $
            0.03Diluted
            
            $
            1.58
            
            
            $
            1.67
            
            
            $
            0.09
            
            
            $
            0.66
            
            
            $
            0.69
            
            
            $
            0.03Shares
      used in
              per
      share computations:Basic
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            -
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            -Diluted
            
            
            1,588,082
            
            
            
            1,588,082
            
            
            
            -
            
            
            
            1,618,674
            
            
            
            1,618,674
            
            
            
            -




- 8
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2008





3.Aircraft
and Aircraft Engine Held for Lease





During the three months ended September
30, 2008, the Company did not purchase or sell any aircraft.  At
September 30, 2008, the Company’s two Saab 340A aircraft, one of the Company’s
deHavilland DHC-8-300 aircraft, one of the Company’s Fokker 50 aircraft and one
turboprop engine were off lease.  As discussed in Note 9, the Company
has a signed term sheet for the re-lease of the DHC-8-300 aircraft. The Fokker
50, the lease for which was to expire in November 2008, was returned to the
Company in August 2008 pursuant to an early termination agreement with the
lessee.  The aircraft is undergoing maintenance to prepare it for
re-lease.





4.Maintenance
Reserves and Accrued Costs





The accompanying condensed consolidated
balance sheets reflect liabilities for maintenance reserves and accrued costs,
which include refundable maintenance payments received from lessees based on
usage.  At September 30, 2008, the Company’s maintenance reserves and
accruals consisted of the following:





Refundable
      maintenance reserves
            
            $
            5,427,200Accrued
      costs
            
            
            2,300,600$
            7,727,800





Additions to and deductions from the
Company’s accrued costs during the nine months ended September 30, 2008 and 2007
for aircraft maintenance were as follows:





For
      the Nine Months Ended
              September
      30,2008
            
            
            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
            
            
            4,308,100
            
            
            
            1,340,700Deductions:Paid
      for previously accrued maintenance
            
            
            3,598,800
            
            
            
            466,100Reversals
      of over-accrued maintenance
            
            
            -
            
            
            
            172,5003,598,800
            
            
            
            638,600Net
      increase in accrued maintenance costs
            
            
            709,300
            
            
            
            702,100Balance,
      end of period
            
            $
            2,300,600
            
            
            $
            1,049,500





- 9
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2008





5. 
Notes Payable and Accrued Interest





At September 30, 2008, the Company’s
notes payable and accrued interest consisted of the following:





Credit
      Facility principal
            
            $
            61,596,000Credit
      Facility accrued interest
            
            
            84,500Subordinated
      Notes principal
            
            
            14,000,000Subordinated
      Notes discount
            
            
            (1,333,700
            )Special
      purpose financing principal
            
            
            840,800Special
      purpose financing accrued interest
            
            
            1,300Interest
      Swap valuation
            
            
            214,500Interest
      Swap accrued interest
            
            
            28,000$
            75,431,400





(a) 
Credit Facility





During
the nine months ended September 30, 2008, the Company borrowed $12,500,000 and
repaid $10,500,000 of the outstanding principal under its Credit
Facility.  As of September 30, 2008, the Company was in compliance
with all covenants under the Credit Facility agreement.





The
weighted average interest rate on the Credit Facility at September 30, 2008 and
2007 was 6.22% and 8.14%, respectively.





(b) 
Derivative instrument





In
December 2007, the Company entered into a two-year 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
September 30, 2008, the Company recorded the fair value of the Swap of $214,500
as a liability on its condensed consolidated balance sheet as a component of
notes payable and accrued interest. The Company recorded a gain on the Swap of
$50,200 for the three months ended September 30, 2008 and a loss of $64,500 for
the nine months ended September 30, 2008 as a component of interest
expense.  The Company also recognized additional interest expense on
the net settlement of the Swap of $80,200 and $165,000 for the three months and
nine months ended September 30, 2008, respectively, as a component of interest
expense.


- 10
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 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
              September
      30,
              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
            
            $
            214,500
            
            
            $
            -
            
            
            $
            214,500
            
            
            $
            -





The Company’s interest rate swap
agreement effectively converts a portion of the Company’s short-term variable
rate debt to a 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
September 30, 2008, the Company was in compliance with all covenants under the
securities purchase agreement that governs its subordinated debt (the
“Subordinated Notes”).  In July 2008, the Company and the holders of
Subordinated Notes agreed to amend the Subordinated Notes securities purchase
agreement (the “Subordinated Notes Agreement”) to reduce the maximum amount of
Subordinated Notes to be issued under the Agreement from $28 million to $14
million and to reduce the number of shares of the Company’s Common Stock
issuable upon exercise of the Warrants issued to the holders of Subordinated
Notes under the Subordinated Notes Agreement from 171,473 to
81,224.  The estimated fair value of the warrants cancelled was
$597,400 and was recorded as a reduction to paid-in capital and debt
discount.  The amendment also provided for the refund to the Company
of certain fees paid to the purchasers of Subordinated Notes at the initial
closing of the Subordinated Notes Agreement, as well as a portion of the unused
commitment fees paid to the noteholders through June 30, 2008, and revised
certain prepayment provisions of the Subordinated Notes
Agreement.  The amendment was accounted for as a debt
modification.  The net proceeds from the $4,000,000 of Subordinated
Notes that were issued pursuant to the amendment were used to repay a portion of
the Company’s Credit Facility debt.




- 11
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2008





5. 
Notes Payable and Accrued Interest (continued)





(d) 
Special purpose financings





Until August 2008, the Company had two
special purpose financings in connection with AeroCentury V LLC and AeroCentury
VI LLC.  In April 2008, the Company repaid the outstanding principal
of $4,109,900 owed by AeroCentury V LLC under its special purpose financing and
paid a prepayment penalty of $8,200. In August 2008, the Company transferred
ownership of the two aircraft that served as collateral for the financing from
AeroCentury V LLC to AeroCentury Corp., at which time the aircraft became
eligible as collateral under the Credit Facility.  On August 25, 2008,
AeroCentury V LLC was dissolved.





During the nine months ended September
30, 2008, AeroCentury VI LLC repaid $268,400 of principal.  The
principal amount owed under that note was $840,800 and interest of $1,300 was
accrued at September 30, 2008. As of September 30, 2008, the Company was in
compliance with all covenants of the AeroCentury VI LLC note
obligation.





6. 
Income Taxes





The Company’s effective tax rates of
approximately 37% and 36% for the three months and nine months ended September
30, 2008, respectively, were substantially higher than the 29% and 32% for the
same periods ended September 30, 2007, respectively, as a result of (i) the
Company’s recognition of the tax benefits associated with foreign tax credits in
the 2007 periods and (ii) recognition in 2008 of the effect of a difference
for GAAP and tax purposes in the valuation of warrants issued in connection with
the Company’s issuance of senior subordinated debt.





7. 
Computation of Earnings Per Share





Basic and diluted earnings per share
are calculated as follows:





For
      the Nine Months
              Ended
      September 30,
            
            
            For
      the Three Months Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(as restated)
            
            
            
            
            
            (as
      restated)Net
      income
            
            $
            3,452,600
            
            
            $
            2,651,400
            
            
            $
            1,571,400
            
            
            $
            1,114,300Weighted
      average shares outstanding for the period
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257
            
            
            
            1,543,257Dilutive
      effect of warrants
            
            
            53,593
            
            
            
            44,825
            
            
            
            29,163
            
            
            
            75,417Weighted
      average diluted shares outstanding
            
            
            1,596,850
            
            
            
            1,588,082
            
            
            
            1,572,420
            
            
            
            1,618,674Basic
      earnings per share
            
            $
            2.24
            
            
            $
            1.72
            
            
            $
            1.02
            
            
            $
            0.72Diluted
      earnings per share
            
            $
            2.16
            
            
            $
            1.67
            
            
            $
            1.00
            
            
            $
            0.69










- 12
-


AeroCentury
Corp.


Notes to
Condensed Consolidated Financial Statements (Unaudited)


September
30, 2008








8. 
Related Party Transactions





The Company’s 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 $2,730,000 and
$2,161,600 for the nine months ended September 30, 2008 and 2007, respectively.
The Company paid acquisition fees totaling $437,000 and $855,800 to JMC during
the nine months ended September 30, 2008 and 2007, respectively, which are
included in the cost basis of the aircraft purchased.  No remarketing fees
were paid to JMC during the nine months ended September 30, 2008 or
2007.





9. 
Subsequent Events





In October 2008, the Company signed a
term sheet for the re-lease of its off-lease DHC-8-300
aircraft.   Delivery to the new lessee, which also leases two of
the Company’s DHC-8-100 aircraft, is expected to occur in the fourth quarter of
2008.


- 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 Three Months and Nine Months Ended September 30, 2008 and
2007





(a) 
Revenues





Operating
lease revenue was $1,041,700 and $4,183,800 greater in the three months and nine
months ended September 30, 2008, respectively, compared to the same periods in
2007, primarily because of increased operating lease revenue from aircraft
purchased during 2007 and 2008 and re-leases of several of the Company’s
aircraft during 2007 at increased rental rates. 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 periods.





Maintenance
reserves revenue, comprised of non-refundable reserves which are earned based on
lessee aircraft usage, was $1,883,900 and $1,152,500 for the three months ended
September 30, 2008 and 2007, respectively, and $5,534,000 and $2,826,800 for the
nine months ended September 30, 2008 and 2007, respectively.  Such
income was $731,400 and $2,707,200 greater in the three months and nine months
ended September 30, 2008, respectively, compared to the 2007 periods primarily
as a result of the increase in maintenance reserves resulting from the
acquisition of aircraft in 2007.





Other
income was $179,900 greater in the nine months ended September 30, 2008 compared
to the same period in 2007, primarily as a result of $150,000 of compensation in
2008 for a potential re-lease transaction that was not consummated.





(b) 
Expense items





Interest
expense was $25,700 greater in the three months ended September 30, 2008
compared to the same period in 2007.  The Company incurred $356,700
more in interest expense related to its Subordinated Notes in the 2008 period
than in 2007 as a result of a higher principal balance and amortization of
fees.  During the three months ended September 30, 2008, the Company
recorded $80,200 of net settlement interest related to the Swap, which was
entered into on December 31, 2007.  The aggregate effect of these
increases was almost entirely offset by $314,400 less interest related to the
Company’s Credit Facility debt in the three months ended September 30, 2008
compared to the same period in 2007.  This decrease was a result of
the net effect of lower average index rates upon which the Credit Facility’s
interest rates were based, and a higher average Credit Facility balance. The
Company also recorded a gain of $50,200 for the change in fair value of the Swap
and $46,500 less in commitment fees related to the unused portion of its Credit
Facility and Subordinated Notes debt.





Interest
expense was $610,000 greater in the nine months ended September 30, 2008,
compared to the same period in 2007.  The Company incurred $924,300
more in interest expense related to its Subordinated Notes in the 2008 period
than in 2007 as a result of a higher principal balance and amortization of
fees.  During the nine months ended September 30, 2008, the Company
recorded $164,900 of net settlement interest related to the Swap and a loss of
$64,500 for the change in fair value of the Swap.  The aggregate
effect of these increases was partially offset by $518,900 less interest related
to the Company’s Credit Facility debt in the nine months ended September 30,
2008 compared to the same period in 2007.  This decrease was a result
of the net effect of lower average index rates upon which the Credit Facility’s
interest rates were based, and a higher average Credit Facility balance. The
Company also recorded $24,800 less in commitment fees related to the unused
portion of its Credit Facility and Subordinated Notes debt.





Depreciation
was $383,700 and $1,340,400 greater in the three months and nine months ended
September 30, 2008 compared to the same periods in 2007, primarily because of
purchases of aircraft during 2007 and 2008.  Management fees, which
are calculated on the net book value of the aircraft owned by the Company, were
$162,900 and $568,400 greater in the three months and nine months ended
September 30, 2008, respectively, compared to the same periods in 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 from non-refundable
reserves and expenses incurred in connection with off-lease
aircraft.  Primarily as a result of higher expense related to
off-lease aircraft, the Company incurred $545,500 more in maintenance expense in
the three months ended September 30, 2008 than in the same period in
2007.  In the nine months ended September 30, 2008, the Company
incurred $3,254,300 more in maintenance expense than in the same period of 2007,
as a result of an increase in total lessee claims in 2008, as well as an
increase in expense related to off-lease aircraft.  During the three
months and nine months ended September 30, 2008, $454,900 and $1,887,400
respectively, of the Company’s maintenance expense was funded by non-refundable
maintenance reserves which were recorded as income when accrued.  The
amounts funded by non-refundable maintenance reserves during the three months
and nine months ended September 30, 2007 were $347,100 and $1,127,600,
respectively.





The
Company records non-income based sales, use, value-added and franchise taxes as
other tax expense.  Such expenses were $339,100 and $406,200 lower in
the three months ended September 30, 2008 compared to the three months ended
September 30, 2007.  Based on the Company’s analysis of value-added
taxes related to an aircraft leased in Australia, the Company recorded
value-added taxes, penalties and interest totaling $283,900 and $290,100 in the
three months and nine months ended September 30, 2007,
respectively.  Upon completion of further analysis and confirmation
from the Australian tax authority, the Company reduced the accruals for such
amounts in the three months and nine months ended September 30, 2008 by $63,400
and $177,100 respectively.





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
$59,000 and $154,700 greater in the three months and nine months ended September
30, 2008, respectively, compared to the same periods in 2007 as a result of
differences in the type of and length of time the insured assets were off
lease.





The
Company’s effective tax rates of approximately 37% and 36% for the three months
and nine months ended September 30, 2008, respectively, were substantially
higher than the 29% and 32% for the three months and nine months ended September
30, 2007, respectively, as a result of (i) the Company’s recognition of the tax
benefits associated with foreign tax credits in the 2007 periods and (ii)
recognition in 2008 of the effect of a difference for GAAP and tax purposes
in the valuation of warrants issued in connection with the Company’s issuance of
the Subordinated Notes.





- 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 nine months ended September 30, 2008, the Company borrowed $12,500,000 and
repaid $10,500,000 of the outstanding principal under its revolving credit
facility (the  “Credit Facility”).  The balance of the
principal amount owed under the Credit Facility at September 30, 2008 was
$61,596,000 and interest of $84,500 was accrued.  At September 30,
2008, the Company was in compliance with all covenants of the Credit
Facility.





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
increases and decreases 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 a two-year 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.





The
Company recognized net settlement expense related to the Swap of $80,200 and
$164,900 for the three months and nine months ended September 30, 2008,
respectively, as a component of interest expense.  Short-term interest
rates are currently below the fixed rate of the Swap. If short-term interest
rates remain below the fixed rate of the Swap, the Company will incur additional
interest expense as a result.





At
September 30, 2008, the Company also recognized a $214,500 liability for the
Swap on its condensed consolidated balance sheet as a component of notes payable
and accrued interest.  The Company also recognized a gain of $50,200
for the three months ended September 30, 2008 and a loss of $64,500 for the nine
months ended September 30, 2008 as a component of interest expense for the
change in fair value of the swap contract.  Market expectations of
increasing interest rates will tend to decrease the fair value of the swap, and
expectations of decreasing interest rates will tend to increase the fair value
of the swap.





(c) 
Senior unsecured subordinated debt





As of
September 30, 2008, the carrying amount of the Subordinated Notes was
$12,666,300 (outstanding principal amount of $14,000,000 less unamortized debt
discount of $1,333,700) and accrued interest payable was $0.  As of
September 30, 2008, the Company was in compliance with all covenants under the
Subordinated Notes Agreement and is currently in compliance.





In July
2008, the Company and the holders of Subordinated Notes agreed to amend the
Subordinated Notes Agreement to reduce the maximum amount of Subordinated Notes
to be issued under the Subordinated Notes Agreement from $28 million to $14
million and to reduce the number of shares of the Company’s Common Stock
issuable upon exercise of the Warrants from 171,473 to 81,224.  The
Company recorded a reduction to paid-in capital and debt discount of $597,400
related to the reduction in Warrants.   The amendment also
provided for the refund to the Company of certain fees paid at the initial
closing of the Subordinated Notes Agreement, as well as a portion of the unused
commitment fees paid through June 30, 2008 and revised certain prepayment
provisions of the Subordinated Notes Agreement.  The net proceeds from
the $4,000,000 of Subordinated Notes that were issued pursuant to the amendment
were used to repay a portion of the Company’s Credit Facility
debt.  Future acquisitions may be financed from funds available under
the Credit Facility.





(d) 
Special purpose financings





Until
August 2008, the Company had two special purpose financings in connection with
AeroCentury V LLC and AeroCentury VI LLC.  In April 2008, the Company
repaid the outstanding principal of $4,109,900 owed by AeroCentury V LLC under
its special purpose financing and paid a prepayment penalty of $8,200. In August
2008, the Company transferred ownership of the two aircraft that served as
collateral for the financing from AeroCentury V LLC to AeroCentury Corp., upon
which the aircraft became eligible as collateral under the Credit
Facility.  On August 25, 2008, AeroCentury V LLC
dissolved.  During the nine months ended September 30, 2008,
AeroCentury VI LLC repaid $268,400 of principal.  The principal amount
owed under that note was $840,800 and interest of $1,300 was accrued at
September 30, 2008. As of September 30, 2008, the Company was in compliance with
all covenants of the note obligations of AeroCentury Investments VI LLC and is
currently in compliance.





(e) 
Cash flow





The
Company's primary source of cash is lease rentals of its aircraft assets.
Currently, one of the Company’s deHavilland DHC-8-300 aircraft, one of its
Fokker 50 aircraft, its two Saab 340A aircraft and one turboprop engine are off
lease. The Company is not receiving rent income for its off-lease aircraft and
may incur significant maintenance expense in order to prepare the aircraft for
re-lease.  In October 2008, the Company signed a term sheet for the
re-lease of its off-lease DHC-8-300 aircraft and delivery to the new lessee,
which also leases two of the Company’s DHC-8-100 aircraft, is expected to occur
in the fourth quarter of 2008. In addition, two of the Company’s other aircraft
leases expire in 2008; however, the Company believes that it is likely that the
aircraft will be retained by the lessee pursuant to lease
extensions.





The
Company’s primary uses of cash are for aircraft maintenance and interest. The
amount and timing of the Company’s maintenance expenditures are dependent on the
aggregate amount of the maintenance claims submitted by lessees for
reimbursement from reserves and expenses incurred in connection with off-lease
aircraft and preparation of such aircraft for re-lease.  The amount of
interest paid by the Company is dependent on the outstanding balance of its
Credit Facility, Subordinated Notes and special purpose financing
debt.  In addition, the amount of interest expenditures related to the
Company’s Credit Facility and special purpose financing debt are dependent on
changes in prevailing interest rates.





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), (iii) inability to locate and acquire a sufficient
volume of additional aircraft assets at prices that will produce acceptable net
returns and (iv) lessee performance of maintenance earlier than anticipated.





- 15
-


(i)  Operating
activities





The
Company’s cash flow from operations for the nine months ended September 30, 2008
compared to 2007 increased by $369,700.  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 $3,977,900 greater in the nine months ended
September 30, 2008 compared to 2007, due primarily to the effect of increased
rent payments for aircraft acquired during 2007 and 2008, 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 and in 2008, aggregate
lease revenues for the current portfolio could decline in the
future.





Payments
received for refundable and non-refundable maintenance reserves are based on
usage of the Company’s aircraft.  Such payments were $2,989,400
greater in the first nine months of 2008 than in the first nine months of 2007
as a result of usage of the five aircraft acquired in 2007, the effect of which
was partially offset by a net decrease in average lessee usage of other aircraft
owned by the Company.





During
the nine months ended September 30, 2008, the Company returned a $307,980
security deposit to a lessee upon return of an aircraft at lease end and
received $210,000 of deposits in connection with the proposed re-lease of three
of the Company’s off-lease aircraft.  During the same period in 2007,
the Company received $1,705,000 of security deposits in connection with four
aircraft purchased in 2007 and re-leases of two aircraft.





Payments for
maintenance





Payments
for maintenance were $3,758,100 greater in the first nine months of 2008
compared to the same period in 2007 as a result of increases in the amount of
maintenance claims submitted by lessees in 2008 and the amount of maintenance
for off-lease aircraft. 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.





Payments for management
fees





Payments
for management fees increased by $603,500 in the nine months ended September 30,
2008 compared to the same period in 2007 because of an overall higher net book
value as a result of aircraft acquisitions.





Payments for professional fees and general
and administrative expenses





Payments
for professional fees and general and administrative expenses increased by
$254,200 in the first nine months of 2008 compared to the same period in 2007
primarily because of higher accounting and legal fees.




Payments for aircraft
insurance





Payments
for aircraft insurance were $184,500 greater in the nine months ended September
30, 2008 compared to the same period in 2007 because the Company had more
aircraft off lease in the 2008 period.




Income taxes





During
the nine months ended September 30, 2008, the Company received $210,500 of
federal tax refunds and paid taxes of $1,500.  The Company received a
federal tax refund of $64,600 and paid taxes of $1,200 in the nine months ended
September 30, 2007.





(ii)  Investing
activities





During
the nine months ended September 30, 2008 and 2007, the Company used cash of
$14,502,980 and $25,873,200 respectively, for aircraft acquisitions and capital
equipment installed on aircraft.




(iii) 
Financing activities





The
Company borrowed $12,500,000 and $21,500,000 for aircraft financing and repaid
$15,223,700 and $16,249,300 of its outstanding debt in the first nine months of
2008 and 2007, respectively.  The Company also issued $4,000,000 and
$10,000,000 of principal amount of Subordinated Notes, the net proceeds of which
were used to repay a portion of the Company’s Credit Facility debt in the first
nine months of 2008 and 2007, respectively.





- 16
-


Outlook





As
discussed above in “Liquidity and Capital Resources – (c)Senior unsecured subordinated
debt,”the
Company received $4,000,000 through the issuance of Subordinated Notes in July
2008.  The proceeds were used to pay down Credit Facility
debt.  The Company anticipates that the available debt capacity under
the Credit Facility will be sufficient to fund planned acquisitions for the
remainder of 2008 and 2009.





In the
second quarter of 2008, the Company and a regional carrier signed a term sheet
for a four-year re-lease of two aircraft and the carrier tendered a refundable
security deposit.  As a result, the Company began performing
maintenance on one of the aircraft and such work was substantially complete at
September 30, 2008.  In early October, based on the financial
condition of the potential lessee, the Company and the regional carrier
terminated negotiations for the lease of both aircraft, and the Company returned
the security deposit. The Company is currently seeking other re-lease
opportunities for both aircraft, and maintenance on the second aircraft will not
commence until a new lessee is identified.





In August
2008, due to its cessation of operations, the lessee of one aircraft signed a
return agreement with the Company that provided for an early return of the
aircraft and the termination of the lessee’s obligation to pay rent after the
execution date. The Company is taking possession of the aircraft and assuming
responsibility for its repair.  Maintenance reserves of approximately
$1.1 million previously collected from the lessee and recorded as income will be
used to prepare the aircraft for re-lease.  Approximately $157,000 of
such work was recorded as expense in the third quarter of 2008.  The
balance of such work will be recognized as expense when the work is performed in
the fourth quarter of 2008.





In
October 2008, the Company and a lessee signed a term sheet for a three-year
re-lease of the Company’s off lease DHC-8-300 aircraft and delivery is expected
to occur in the fourth quarter of 2008.  The Company and the lessee,
which also leases two of the Company’s DHC-8-100 aircraft, also agreed to a
three-year extension of the lease for one of those aircraft.





Two of
the Company’s other aircraft leases expire in the fourth quarter of 2008. The
Company believes that it will be successful in extending the leases for these
aircraft. If the aircraft are returned at lease end, it is likely the Company
will incur significant maintenance expense in the fourth quarter of 2008 and the
first quarter of 2009, as a result of the use of previously collected reserves
for maintenance that the lessee will be required to perform to meet the return
obligations under the leases.





Even if
the aircraft that are currently off lease and may come off lease in the
remainder of 2008 remain off lease for an extended period of time, the Company
believes it will be able to meet its operational needs and 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 two lessees with a total of three aircraft under lease.  The
Company continues to work closely with these lessees to ensure compliance with
their current obligations.  If any of the Company's current lessees
are unable to meet their lease payment obligations, the Company's future
operating 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.





- 17
-


Factors
that May Affect Future Results





Availability of
Financing.The Company’s continued growth will depend on its
ability to obtain capital, either through debt or equity
financings.  The financial markets have experienced certain setbacks
related in many cases to certain financial institutions’ investments in
mortgage-backed securities.  As a result, commercial lending
origination has dramatically decreased, and asset based debt financing is now
more difficult to obtain.  The Company believes that the current
banking crisis will not have an immediate effect on the Company.  The
Company believes the lenders in its Credit Facility will continue to be able to
honor their commitment to provide loans as committed in the Credit Facility
agreements and that the unused capacity under the Credit Facility provides
sufficient capital to fund acquisitions through the end of 2009.  The
Company, however, will eventually need to seek additional capital once its
Credit Facility is fully drawn.  The Company is currently seeking
additional lenders for participation in its Credit Facility, and investigating
other sources of debt financing. There is no assurance that the Company will
succeed in finding such additional capital, and if such financing is found, it
may not be on terms as favorable as its current debt financings.





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, 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
payable under 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.





General Economic Conditions.The Company’s business is dependent upon general economic conditions and
the strength of the travel and transportation industry.  The industry
is in a period of financial difficulty and contraction caused primarily by
recent record-high fuel prices and may be severely affected by a possible global
recession brought on by the ongoing credit crisis.  Continuing
unavailability of additional debt financing relied on by many regional carriers
caused by the current credit crisis 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.





- 18
-


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
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 the overall industry experience of JMC’s
personnel 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).





Warrant
Issuance.  As part of the Subordinated Notes financing, as
revised upon the second and final closing in July 2008, the holders of
Subordinated Notes hold warrants to purchase up to 81,224 shares of the
Company’s common stock, which represents 5% 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.





Concentration of Lessees and
Aircraft Type. Currently, the Company’s five largest customers are
located in Mexico, Antigua, Norway, Netherlands Antilles and Germany and
currently account for approximately 17%, 14%, 11%, 11% and 11%, 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 seven Fokker 100
aircraft, making these three aircraft types the dominant types in the portfolio
and representing 25%, 23% and 34%, respectively, of 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’s customer base is regional air
carriers and the Company continues to focus on regional 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 lease provisions 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.





- 19
-


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 also experience lower
net income.





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 Credit 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 November 12, 2008,
the one-month LIBOR rate was 1.4375%.





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.  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 a
Management Agreement between the Company and JMC, 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
(the “Board”) 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.





- 20
-


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. 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.





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.  In the ordinary course, a lessee has the
obligation to return an aircraft to the Company in the condition required under
a lease, which generally requires the aircraft be returned in equal or better
condition than that at delivery to the lessee.  If the lessee becomes
insolvent during the term of its lease and the Company has to repossess the
aircraft from the lessee, it is unlikely that the lessee will have the financial
ability to meet these return obligations.  Thus upon repossession, the
Company will be required to expend its own resources to return the aircraft to a
remarketable condition, and maintenance reserves collected from the lessee
during the term of the lease may be insufficient to fund the total expense of
such repair and maintenance.





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
competition from larger aircraft leasing companies will not increase
significantly 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.





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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 the Company’s
Disclosure Controls as of September 30, 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 being 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
September 30, 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 quarter
ended September 30, 2008 that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial
reporting.





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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 & Exchange Commission on May 7,
      200810.32
            Form
      of Second Amendment to Securities Purchase Agreement between the Company
      and Satellite Fund II, L.P., Satellite Fund IV, L.P., The Apogee Group,
      LLC and Satellite Fund V, LLC, incorporated by reference to Exhibit 10.1
      to the Report on Form 8-K filed by the Company on July 23,
      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.











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-


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.







AeroCentury
    Corp.Date: 
      November 13, 2008
              By:
              /s/ Toni
      M. PerazzoName:
      Toni M. PerazzoTitle:
      Sr. V. P. & C.F.O.