**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-QSB**


(Mark
      One)


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





For
      the
      quarterly period ended June 30, 2006





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





For
      the
      transition period from ____________ to ____________





Commission
      File Number: **001-13387**








**AeroCentury
      Corp.**


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





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


**1440
      Chapin Avenue, Suite 310**


**Burlingame,
      California 94010**


(Address
      of principal executive offices)





**(650)
      340-1888**


(Issuer’s
      telephone number)





**None**


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





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


Yes x  No o





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


Yes o  No x





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: As of August 14, 2006 the Issuer had
      1,606,557 **** Shares
      of
      Common Stock, par value $0.001 per share, issued, of which 63,300 are held
      as
      Treasury Stock.





Transitional
      Small Business Disclosure Format (check one):


Yes o  No x













-
          1
          -


**PART
      I**


**FINANCIAL
      INFORMATION**





*Forward-Looking
      Statements*





This
      Quarterly Report on Form 10-QSB includes "forward-looking statements" within
      the
      meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
      amended (“the Exchange Act”). All statements in this Report other than
      statements of historical fact are "forward looking statements" for purposes
      of
      these provisions, including any statements of plans and objectives for future
      operations and any statements of assumptions underlying any of the foregoing.
      Statements that include the use of terminology such as "may," "will," "expects,"
      "plans," "anticipates," "estimates," "potential," or "continue," or the negative
      thereof, or other comparable terminology are forward-looking statements.
      Forward-looking statements include: (i) in Item 1 "Financial Statements, Note
      6," statements regarding the Company's belief that future taxable income will
      be
      sufficient to realize the tax beneifits of all the deferred tax assets on the
      balance sheet; (ii) in Item 2 "Management's Discussion and Analysis or Plan
      of
      Operation -- Liquidity and Capital Resources," statements regarding the
      Company's belief that it will have adequate cash flow to meet its ongoing
      operational needs; (iii) in Item 2 "Management's Discussion and Analysis or
      Plan
      of Operation -- Outlook," statements regarding the Company's belief that the
      lease for an aircraft that expires in November 2006 will be extended; and the
      Company’s belief that it will continue to be in compliance with all covenants of
      its credit facility and (iv) in Item 2 "Management's Discussion and Analysis
      or
      Plan of Operation -- Factors that May Affect Future Results,” the Company's
      belief that it will be able to meet its short term cash flow needs; the
      Company’s belief that it will have sufficient cash to fund any required
      repayments under its credit facility caused by borrowing base limitations as
      a
      result of assets scheduled to come off lease in the near term; that it will
      have
      sufficient funds to pay increased Sarbanes-Oxley compliance costs; the Company's
      anticipated acquisition of primarily used aircraft and expected concentration
      in
      a limited number of airframe and aircraft engine types; the Company's belief
      that it is competitive because of JMC's experience and operational efficiency
      and will benefit because of JMC's reputation in the marketplace.





These
      forward-looking statements involve risks and uncertainties, and it is important
      to note that the Company's actual results could differ materially from those
      projected or assumed in such forward-looking statements. Among the factors
      that
      could cause actual results to differ materially are the factors detailed under
      the heading "Management's Discussion and Analysis or Plan of Operation --
      Factors That May Affect Future Results," including increasing fuel costs which
      may have a direct negative impact on the customer's existing and potential
      customer base and may increase the risk of lessee default; general economic
      conditions, particularly those that affect the air travel industry;
      unanticipated sharp increases in interest rates; further disruptions to the
      air
      travel industry due to terrorist attacks; the compliance of the Company's
      lessees with obligations under their respective leases; the Company's ability
      to
      find additional debt or equity financing; and future trends and results which
      cannot be predicted with certainty. The cautionary statements made in this
      Report should be read as being applicable to all related forward-looking
      statements wherever they appear herein. All forward-looking statements and
      risk
      factors included in this document are made as of the date hereof, based on
      information available to the Company as of the date hereof, and the Company
      assumes no obligation to update any forward-looking statement or risk factor.
      You should consult the risk factors listed from time to time in the Company's
      filings with the Securities and Exchange Commission.








-
          2
          -


AeroCentury
      Corp.


Condensed
      Consolidated Balance Sheet


Unaudited





ASSETSJune
                30, 2006Assets:Cash
                and cash equivalents
            
            $
            3,420,480Accounts
                receivable
            
            
            608,510Aircraft
                and aircraft engines held for lease,
              net
                of accumulated depreciation of $19,520,170
            
            
            91,294,470Prepaid
                expenses and other
            
            
            758,810Total
                assets
            
            $
            96,082,270LIABILITIES
                AND STOCKHOLDERS’ EQUITYLiabilities:Accounts
                payable and accrued expenses
            
            $
            575,470Notes
                payable and accrued interest
            
            
            57,107,720Maintenance
                reserves and accrued costs
            
            
            13,281,760Security
                deposits
            
            
            4,087,360Prepaid
                rent
            
            
            708,250Deferred
                taxes
            
            
            1,140,120Taxes
                payable
            
            
            910Total
                liabilities
            
            
            76,901,590Stockholders’
                equity:Preferred
                stock, $.001 par value, 2,000,000 shares
              authorized,
                no shares issued and outstanding
            
            
            -Common
                stock, $.001 par value, 3,000,000 shares
              authorized,
                1,606,557 shares issued and outstanding
            
            
            1,610Paid
                in capital
            
            
            13,821,200Retained
                earnings
            
            
            5,861,94019,684,750Treasury
                stock at cost, 63,300 shares
            
            
            (504,070
            )Total
                stockholders’ equity
            
            
            19,180,680$
            96,082,270





The
      accompanying notes are an integral part of these statements.





-
          3
          -





AeroCentury
      Corp.


Condensed
      Consolidated Statements of Operations


Unaudited





For
                the Six Months
              Ended
                June 30,
            
            For
                the Three Months
              Ended
                June 30,2006
            
            2005
            
            2006
            
            2005Revenues:Operating
                lease revenue
            
            $
            7,534,940
            
            $
            5,260,090
            
            $
            3,833,940
            
            $
            2,738,480Gain/(loss)
                on sale of aircraft
            
            
            408,840
            
            
            (59,550
            )
            
            408,840
            
            
            -Other
                income
            
            
            2,391,190
            
            
            94,470
            
            
            3,810
            
            
            16,39010,334,970
            
            
            5,295,010
            
            
            4,246,590
            
            
            2,754,870Expenses:Depreciation
            
            
            2,460,960
            
            
            1,905,400
            
            
            1,230,770
            
            
            980,270Interest
            
            
            2,415,630
            
            
            1,579,860
            
            
            1,251,370
            
            
            817,140Management
                fees
            
            
            1,383,250
            
            
            1,111,490
            
            
            685,100
            
            
            567,140Maintenance
            
            
            3,333,320
            
            
            50,430
            
            
            779,490
            
            
            33,820Professional
                fees and general
              and
                administrative
            
            
            288,770
            
            
            275,920
            
            
            122,690
            
            
            137,470Insurance
            
            
            129,250
            
            
            166,970
            
            
            51,210
            
            
            74,360Bad
                debt expense
            
            
            48,820
            
            
            88,110
            
            
            -
            
            
            88,110Provision
                for impairment in
              value
                of aircraft
            
            
            -
            
            
            12,180
            
            
            -
            
            
            -10,060,000
            
            
            5,190,360
            
            
            4,120,630
            
            
            2,698,310Income
                before taxes
            
            
            274,970
            
            
            104,650
            
            
            125,960
            
            
            56,560Tax
                provision
            
            
            84,380
            
            
            18,940
            
            
            40,360
            
            
            10,690Net
                income
            
            $
            190,590
            
            $
            85,710
            
            $
            85,600
            
            $
            45,870Weighted
                average common
              shares
                outstanding
            
            
            1,543,257
            
            
            1,543,257
            
            
            1,543,257
            
            
            1,543,257Earnings
                per share
            
            $
            0.12
            
            $
            0.06
            
            $
            0.06
            
            $
            0.03





The
      accompanying notes are an integral part of these statements.


-
          4
          -





AeroCentury
      Corp.


Condensed
      Consolidated Statements of Cash Flows


Unaudited




For
                  the Six Months
                Ended
                  June 30,2006
              
              
              2005Net
                  cash provided by operating activities
              
              $
              3,888,330
              
              $
              1,186,950Investing
                  activities:Payments
                  received on note receivable
              
              
              -
              
              
              210,080Proceeds
                  from disposal of assets
              
              
              1,434,770
              
              
              7,900,130Purchase
                  of aircraft
              
              
              (1,018,110
              )
              
              (10,131,370
              )Net
                  cash provided/(used) by investing activities
              
              
              416,660
              
              
              (2,021,160
              )Financing
                  activities:Issuance
                  of notes payable
              
              
              1,650,000
              
              
              7,516,000Repayment
                  of notes payable
              
              
              (3,153,420
              )
              
              (6,435,540
              )Net
                  cash (used)/provided by financing activities
              
              
              (1,503,420
              )
              
              1,080,460Net
                  increase in cash and cash equivalents
              
              
              2,801,570
              
              
              246,250Cash
                  and cash equivalents, beginning of period
              
              
              618,910
              
              
              2,403,630Cash
                  and cash equivalents, end of period
              
              $
              3,420,480
              
              $
              2,649,880


During
      the six months ended June 30, 2006 and 2005, the Company paid interest totaling
      $2,244,990 and $1,663,430, respectively, and income taxes totaling $48,800
      and
      $1,704,760, respectively.





The
      accompanying notes are an integral part of these statements.





-
          5
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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





*(a)*  *Basis
      of Presentation*





AeroCentury
      Corp. (“AeroCentury”), a Delaware corporation, uses leveraged financing to
      acquire leased aircraft assets. The Company (as defined below) purchases used
      regional aircraft on lease to foreign and domestic regional carriers. Financial
      information for AeroCentury and its wholly-owned subsidiaries, AeroCentury
      Investments II LLC (“AeroCentury II LLC”), AeroCentury Investments V LLC
      (“AeroCentury V LLC”) and AeroCentury Investments VI LLC (“AeroCentury VI LLC”)
      (collectively, the “Company”), is presented on a consolidated basis. All
      intercompany balances and transactions have been eliminated in consolidation.
      During the second quarter of 2006, the title to the aircraft which had been
      owned by AeroCentury II LLC was transferred to AeroCentury VI LLC and
      AeroCentury II LLC was dissolved.





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





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





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





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





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





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











-
          6
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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





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





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





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





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




Refundable
                maintenance reserves
            
            $
            1,134,580Non-refundable
                maintenance reserves
            
            
            7,991,980Accrued
                costs
            
            
            4,155,200$
            13,281,760




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





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





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





-
          7
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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





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





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




For
                  the Six Months Ended June 30,2006
              
              2005Additions:Charged
                  to expense
              
              $
              3,175,220
              
              $
              28,300Charged
                  to other -Reclassification
                  of reserves collected from lessees to the Company’s own liability
                  account
              
              
              359,450
              
              
              40,0503,534,670
              
              
              68,350Deductions:Paid
                  for previously accrued maintenance
              
              
              2,351,130
              
              
              241,930Reversals
                  of over-accrued maintenance
              
              
              -
              
              
              760Included
                  in (loss)/gain on sale of aircraft and aircraft engines
              
              
              378,770
              
              
              282,0302,729,900
              
              
              524,720Net
                  increase/(decrease) in accrued maintenance costs, in excess of
                  amounts
                  received under the leases
              
              
              804,770
              
              
              (456,370
              )Balance,
                  beginning of period
              
              
              3,350,430
              
              
              2,296,520Balance,
                  end of period
              
              $
              4,155,200
              
              $
              1,840,150





*(g)*  *Security
      deposits*





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





*(h)*  *Income
      Taxes*





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





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          8
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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





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





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




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





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





*(j)*  *Use
      of Estimates*





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





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





*(k)*  *Comprehensive
      Income*





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





*(l)*  *Recent
      Accounting Pronouncements*





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





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          9
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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




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





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





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





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





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





During
      the second quarter of 2006:





The
      Company sold its Shorts SD 3-60 aircraft, which resulted in a gain of
      approximately $400,000. In connection with the sale, the Company paid a
      remarketing fee of $44,000 to JetFleet Management Corp. (“JMC”).





The
      Company re-leased a deHavilland DHC-8 aircraft to an existing customer for
      a
      term of 36 months.





The
      Company re-leased two Saab 340A aircraft which had been off lease to a regional
      carrier in the United States for terms of approximately two years.














-
          10
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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





*(a)*  *Credit
      facility*





In
      November 2005, the Company’s $50 million credit facility was renewed through
      October 31, 2007. In connection with the renewal, certain financial covenants
      were modified, including the applicable margin, which was revised from a range
      of 275 to 375 basis points to a range of 275 to 325 basis points, determined
      by
      certain financial ratios. In May
      2006, **** a
      participant was added to the Company’s credit facility and the amount of the
      facility was increased to $55 million. During the first six months of 2006,
      the
      Company repaid $1 million of the outstanding principal under its credit
      facility. As
      a
      result of maintenance expense in connection with preparing one of the Company’s
      aircraft for lease in the second quarter, the Company was out of compliance
      with
      a financial ratio covenant on June 30, 2006. As discussed in Note 8, the Company
      obtained a waiver from its banks regarding that covenant for the quarter then
      ended. As
      of
      June 30, 2006, the Company was in compliance with all other covenants under
      its
      credit facility agreement, $48,996,000 was outstanding under the credit
      facility, and interest of $651,930 was accrued.





*(b)*  *Special
      purpose financing*





In
      September 2000, AeroCentury II LLC acquired a deHavilland DHC-8 aircraft using
      cash and bank financing separate from its credit facility. The financing
      resulted in a note obligation in the amount of $3,575,000, due April 15, 2006,
      which bore interest at
      the
      rate of one-month LIBOR plus 3% . The
      note
      was collateralized by the aircraft and was non-recourse to the Company. Payments
      due under the note consisted of monthly principal and interest and a balloon
      principal payment due on the maturity date. The
      financing also provided for a six month remarketing period at the expiration
      or
      early termination of the lease. This note obligation was refinanced in April
      2006, using
      bank financing from another lender, and AeroCentury II LLC was dissolved. The
      aircraft was transferred to AeroCentury VI LLC, a special purpose limited
      liability company, which borrowed $1,650,000, due October 15, 2009. The note
      bears interest at an adjustable rate of one-month LIBOR plus 3%. The
      note
      is collateralized by the aircraft and the Company’s interest in AeroCentury VI
      LLC and is non-recourse to the Company. Payments
      due under the note consist of monthly principal and interest through April
      20,
      2009, interest only from April 20, 2009 until the maturity date, and a balloon
      principal payment due on the maturity date. If the aircraft lease agreement
      is
      terminated on April 15, 2008 pursuant to a lessee early termination option,
      the
      note will be due October 15, 2008, and the interest only period will be from
      April 20, 2008 through October 15, 2008. The balance of the note payable at
      June
      30, 2006 was $1,567,270 and interest of $3,970 was accrued. As of June 30,
      2006,
      the Company was in compliance with all covenants of this note
      obligation.





In
      November 2005, the Company refinanced two DHC-8 aircraft that had been part
      of
      the collateral base for its credit facility. The financing, by a bank separate
      from its credit facility, was provided to a special purpose subsidiary to which
      the aircraft were transferred. The financing resulted in a note obligation
      in
      the amount of $6,400,000, due November 10, 2008, which bears interest at
      the
      rate 7.87% . The
      note
      is collateralized by the aircraft and is non-recourse to the Company. Payments
      due under the note consist of monthly principal and interest through April
      22,
      2008, interest only from April 22, 2008 until the maturity date, and a balloon
      principal payment due on the maturity date. The balance of the note payable
      at
      June 30, 2006 was $5,876,990 and interest of $11,560 was accrued. As of June
      30,
      2006, the Company was in compliance with all covenants of this note
      obligation.














-
          11
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006




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





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





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





The
      items
      comprising income tax expense are as follows:


For
                the Six Months Ended June 30,2006
            
            2005Current
                tax provision:Federal
            
            $                             
                     -
            
            $                     
                 180,200State
            
            1,570
            
            1,010Current
                tax provision
            
            
            1,570
            
            
            181,210Deferred
                tax provision/(benefit):Federal
            
            
            93,010
            
            
            (144,960
            )State
            
            
            (10,200
            )
            
            (17,310
            )Deferred
                tax provision/(benefit)
            
            
            82,810
            
            
            (162,270
            )Total
                provision for income taxes
            
            $
            84,380
            
            $
            18,940





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





For
                the Six Months Ended June 30,2006
            
            2005Income
                tax provision at statutory federal income tax rate
            
            $
            93,680
            
            $
            35,580State
                tax provision, net of federal benefit
            
            
            2,000
            
            
            670Tax
                refunds
            
            
            (550
            )
            
            -Tax
                rate differences
            
            
            (10,750
            )
            
            (17,310
            )Total
                income tax provision
            
            $
            84,380
            
            $
            18,940





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


-
          12
          -


AeroCentury
      Corp.


Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


June
      30,
      2006





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





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





Deferred
                tax assets:Deferred
                maintenance
            
            $
            1,808,890Maintenance
                reserves
            
            
            2,230,390Current
                year tax losses
            
            
            641,290Prepaid
                rent and other
            
            
            260,960Deferred
                tax assets
            
            
            4,941,530Deferred
                tax liabilities:Depreciation
                on aircraft and aircraft engines
            
            
            (5,961,950
            )Other
            
            
            (119,700
            )Net
                deferred tax liabilities
            
            $
            (1,140,120
            )





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





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





The
      Company has no employees. Its portfolio of leased aircraft assets is managed
      and
      administered under the terms of a management agreement with JMC, which is an
      integrated aircraft management, marketing and financing business and a
      subsidiary of JetFleet Holding Corp. ("JHC"). Certain officers of the Company
      are also officers of JHC and JMC and hold significant ownership positions in
      both JHC and the Company. Under the management agreement, JMC receives a monthly
      management fee based on the net asset value of the assets under management.
      JMC
      may also receive an acquisition fee for locating assets for the Company,
      provided that the aggregate purchase price, including chargeable acquisition
      costs and any acquisition fee, does not exceed the fair market value of the
      asset based on appraisal, and a remarketing fee in connection with the sale
      or
      re-lease of the Company’s assets. The management fees, acquisition fees and
      remarketing fees may not exceed the customary and usual fees that would be
      paid
      to an unaffiliated party for such services. The Company recorded management
      fees
      of $1,383,250 and
      $1,111,490 during
      the six months ended June 30, 2006 and 2005, respectively. Because the Company
      did not acquire any aircraft during the first six months of 2006, no acquisition
      fees were paid to JMC for this period. The Company accrued acquisition fees
      totaling $354,900 payable to JMC during the first six months of 2005. The
      Company recorded remarketing fees totaling $44,000 and $73,250 to JMC in
      connection with the sale of aircraft in the first six months of 2006 and 2005,
      respectively.




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





In
      July
      2006, the Company obtained
      a one-time waiver from its credit facility banks regarding a financial covenant
      with which the Company was out of compliance at June 30, 2006.











-
          13
          -


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





*Overview*





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




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





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





*Critical
      Accounting Policies, Judgments and Estimates*





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





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





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





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





-
          14
          -


*b.*  *Depreciation
      Policy*





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





*c.*  *Maintenance
      Reserves and Accrued Costs*





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





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





With
      respect to estimated maintenance costs, the Company has found its accruals
      to be
      generally accurate. Nevertheless, the Company accrued significant maintenance
      expense of $442,000 and $1,864,000 in 2004 and 2003, respectively, in connection
      with its initial estimate of maintenance expense for aircraft which were
      returned early and in a condition worse than required by the lease, and for
      which the Company was unable to recover the costs of non-compliance from the
      lessees.





*d.*  *Revenue
      Recognition and Allowance for Doubtful Accounts*





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





*e.*  *Accounting
      for Income Taxes*





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





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





-
          15
          -


*Results
      of Operations*





*a.*  *Revenues*





Operating
      lease revenue was approximately $2,275,000 and $1,095,000 higher in the six
      months and three months ended June 30, 2006 versus the same periods in 2005,
      primarily because of increased operating lease revenue from aircraft purchased
      beginning in April 2005.





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





Other
      income was approximately $2,297,000 higher in the six months ended June 30,
      2006
      versus the same period in 2005, primarily as a result of $2,396,000 of
      non-refundable maintenance reserves retained by the Company which were recorded
      as income at lease end in 2006. Other income was approximately $91,000 lower
      in
      the three months ended June 30, 2006 versus the same period in 2005 because,
      in
      2005, the Company reversed approximately $62,000 of previously accrued estimated
      expenses in connection with the sale of one of the Company’s aircraft in 2004
      and because the Company recorded approximately $22,000 more interest income
      in
      2005.





*b.*  *Expense
      items*





Depreciation
      was approximately $556,000 and $251,000 higher in the six months and three
      months ended June 30, 2006, respectively, versus the same periods in 2005.
      These
      increases were primarily because of purchases of aircraft beginning in April
      2005, the effect of which was partially offset by the sale of two aircraft,
      one
      in November 2005 and the second in April 2006. Management fees, which are
      calculated on the net book value of the aircraft owned by the Company, were
      approximately $272,000 and $118,000 higher in the six month and three month
      periods of 2006 compared to 2005, respectively, for the same
      reasons.





Interest
      expense was approximately $836,000 and $434,000 higher in the six months and
      three months ended June 30, 2006 versus the same periods in 2005 primarily
      as a
      result of increases in the index rates upon which the Company’s interest rates
      are based and a higher average principal balance in 2006 compared to 2005,
      the
      effect of which was partially offset by a lower margin in 2006 than in
      2005.





Maintenance
      expense was approximately $3,283,000 higher in the six months ended June 30,
      2006 versus the same period in 2005. In 2006, the Company retained
      non-refundable maintenance reserves when two aircraft were returned to the
      Company at lease end and recorded such amounts as other income, discussed above.
      Based on the condition of the aircraft at the time of return, the Company
      accrued approximately $2,392,000 of maintenance expense for which the Company
      is
      responsible. In 2006, the Company also accrued approximately $941,000 of expense
      to prepare several aircraft for re-lease. In 2005, the Company accrued
      approximately $50,000 of maintenance expense, primarily for the storage of
      several aircraft. Maintenance expense was approximately $746,000 higher in
      the
      three months ended June 30, 2006 compared to the same period in 2005, primarily
      because of expense to prepare several aircraft for re-lease.





The
      Company's insurance expense consists primarily of insurance for off-lease
      aircraft and aircraft engines, which varies depending on the type of assets
      insured during each period and the length of time each asset is insured. As
      a
      result of the combination of assets insured during each period and the length
      of
      time each was insured, insurance expense was approximately $38,000 and $23,000
      lower in the six months and three months ended June 30, 2006, respectively,
      versus the same periods in 2005.





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





-
          16
          -


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





The
      Company’s effective tax rates for the six months ended June 30, 2006 and 2005
      were approximately 31% and 18%, respectively. The change in rate was primarily
      a
      result of the recognition of tax benefits relating to different state tax rates
      that had been accrued in prior years. Since the Company earned less income
      for
      the period ended June 30, 2005 than it earned for the period ended June 30,
      2006, the recognition of tax benefits related to the reduced state tax rates
      acted to reduce the Company’s effective tax rate more for the period ended June
      30, 2005 than it did for the period ended June 30, 2006. In addition, during
      the
      period ended June 30, 2006, the Company leased more aircraft within the United
      States which resulted in additional state tax expense than for that period
      than
      for the period ended June 30, 2005.





*Liquidity
      and Capital Resources*





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





*(a)*  *Credit
      facility*





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





During
      the first six months of 2006, the Company repaid $1 million of the outstanding
      principal under its credit facility. As
      a
      result of maintenance expense in connection with preparing one of the Company’s
      aircraft for lease in the second quarter, the Company was out of compliance
      with
      a financial ratio covenant on June 30, 2006. As discussed in Note 8, the Company
      obtained a waiver from its banks regarding that covenant for the quarter then
      ended. As
      of
      June 30, 2006, the Company was in compliance with all other covenants under
      its
      credit facility agreement, $48,996,000 was outstanding under the credit
      facility, and interest of $651,930 was accrued.





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





-
          17
          -


*(b)*  *Special
      purpose financing*





In
      September 2000, AeroCentury II LLC acquired a deHavilland DHC-8 aircraft using
      cash and bank financing separate from its credit facility. The financing
      resulted in a note obligation in the amount of $3,575,000, due April 15, 2006,
      which bore interest at
      the
      rate of one-month LIBOR plus 3% . The
      note
      was collateralized by the aircraft and was non-recourse to the Company. Payments
      due under the note consisted of monthly principal and interest and a balloon
      principal payment due on the maturity date. The
      financing also provided for a six month remarketing period at the expiration
      or
      early termination of the lease. This note obligation was refinanced in April
      2006, using
      bank financing from another lender, and AeroCentury II LLC was dissolved. The
      aircraft was transferred to AeroCentury VI LLC, a special purpose LLC, which
      borrowed $1,650,000, due October 15, 2009. The note bears interest at an
      adjustable rate of one-month LIBOR plus 3%. The
      note
      is collateralized by the aircraft and the Company’s interest in AeroCentury VI
      LLC and is non-recourse to the Company. Payments
      due under the note consist of monthly principal and interest through April
      20,
      2009, interest only from April 20, 2009 until the maturity date, and a balloon
      principal payment due on the maturity date. If the aircraft lease agreement
      is
      terminated on April 15, 2008 pursuant to a lessee early termination option,
      the
      note will be due October 15, 2008, and the interest only period will be from
      April 20, 2008 through October 15, 2008. The balance of the note payable at
      June
      30, 2006 was $1,567,270 and interest of $3,970 was accrued. As of June 30,
      2006,
      the Company was in compliance with all covenants of this note obligation and
      is
      currently in compliance.





In
      November 2005, the Company refinanced two DHC-8 aircraft that had been part
      of
      the collateral base for its credit facility. The financing, by a bank separate
      from its credit facility, was provided to a special purpose subsidiary to which
      the aircraft were transferred. The financing resulted in a note obligation
      in
      the amount of $6,400,000, due November 10, 2008, which bears interest at
      the
      rate 7.87% . The
      note
      is collateralized by the aircraft and is non-recourse to the Company. Payments
      due under the note consist of monthly principal and interest through April
      22,
      2008, interest only from April 22, 2008 until the maturity date, and a balloon
      principal payment due on the maturity date. The balance of the note payable
      at
      June 30, 2006 was $5,876,990 and interest of $11,560 was accrued. As of June
      30,
      2006, the Company was in compliance with all covenants of this note obligation
      and is currently in compliance.





The
      availability of special purpose financing in the future will depend on several
      factors including (1) the availability of funds to be used for the equity
      portion of the financing, (2) the type of asset being financed, (3) the
      creditworthiness of the underlying lessee and (4) continued compliance with
      the
      Company’s credit facility covenants. The availability of funds for the equity
      portion of the financing will be dependent on the Company's cash flow, as
      discussed in *"Cash
      Flow,"* below.





*(c)*  *Cash
      flow*





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





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





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          18
          -


*(i)*  *Operating
      activities*





The
      Company’s cash flow from operations for the six months ended June 30, 2006
      versus the six months ended June 30, 2005 increased by approximately $2,701,000.
      The change in cash flow is a result of changes in several cash flow items during
      the period, including principally the following:





Lease
      rents, maintenance reserves and security deposits





Payments
      received from lessees for rent were approximately $2,933,000 higher in the
      six
      months ended June 30, 2006 versus 2005, due primarily to the effect of increased
      lease revenue from aircraft purchased beginning in April 2005. Although
      increased demand generally in the turboprop market has caused lease rates to
      stabilize and, in some cases, rise, it cannot be predicted that rental rates
      on
      aircraft to be re-leased will not decline, so that, absent additional
      acquisitions by the Company, aggregate lease revenues for the current portfolio
      could decline over the long term.





Payments
      received from lessees for maintenance reserves increased by approximately
      $658,000 in the first six months of 2006 versus the same period in 2005,
      reflecting principally an increase in the number of aircraft owned by the
      Company and an increase in usage by lessees.





Security
      deposits received increased by approximately $923,000 in the six months ended
      June 30, 2006 versus the same period in 2005, because of the cash deposits
      received in connection with the re-lease of aircraft in 2006.





Expenditures
      for maintenance





Expenditures
      for maintenance were approximately $2,042,000 higher in the first six months
      of
      2006 versus 2005 primarily as a result of higher payments during 2006 for
      maintenance performed to ready several of the Company’s aircraft for
      remarketing. The effect of these expenditures was partially offset by lower
      payments for maintenance performed by lessees, which were funded by maintenance
      reserves held by the Company. The amount of expenditures for maintenance in
      future periods will be dependent on the amount and timing of maintenance paid
      from lessee maintenance reserves held by the Company and the off-lease status
      of
      the Company’s aircraft.





Expenditures
      for interest





Expenditures
      for interest expense increased by approximately $540,000 in the six months
      ended
      June 30, 2006 versus the same period in 2005, primarily as a result of higher
      average interest rates and a higher average principal balance in 2006. Interest
      expenditures in future periods will be a product of prevailing interest rates
      and the outstanding principal balance on financings, which may be influenced
      by
      future acquisitions and/or required repayments resulting from changes in the
      collateral base.





Expenditures
      for management fees





Expenditures
      for management fees increased by approximately $488,000 in the six months ended
      June 30, 2006 versus the same period in 2005, as a result of aircraft purchases
      since April 2005.





Expenditures
      for acquisition fees





During
      the first six months of 2006, the Company paid $314,000 to JMC for the
      acquisition fee accrued in December 2005 upon the purchase of four aircraft
      and
      which was included in the Company’s accounts payable balance at December 31,
      2005.





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          19
          -


Expenditures
      for prepaid expenses





Expenditures
      for prepaid expenses were approximately $293,000 higher in the first six months
      of 2006 compared to the same period in 2005 primarily because of fees paid
      in
      connection with the renewal of the Company’s credit facility and the addition of
      a bank to the facility, both of which are amortized over the remaining term
      of
      the facility, an annual administrative fee related to the facility, and legal
      costs related to several aircraft re-leases, which are amortized over the term
      of the lease.





Income
      taxes





Income
      tax payments were approximately $1,656,000 lower in the first six months of
      2006
      compared to the same period in 2005 primarily because the Company made payments
      of approximately $1,704,000 in 2005 for 2004 tax expense which was the result
      of
      the sale of a portfolio of engines in December 2004. In addition, the Company
      had lower taxable income in 2006 than in 2005.




*(ii)*  *Investing
      activities*





The
      $2,438,000 increase in cash flow provided by investing activities in the first
      six months of 2006 versus the same period in 2005 was primarily due to a net
      decrease in the amount invested in aircraft assets and received from aircraft
      sales in 2006.





*(iii)*  *Financing
      activities*





The
      Company borrowed approximately $5,866,000 less in the first six months of 2006
      versus the same period in 2005 for aircraft financing and repaid approximately
      $3,282,000 less of its outstanding debt in 2006. In 2006, the Company’s
      borrowings included $1,650,000 for the refinancing of an aircraft and repayments
      included approximately $1,566,000 which was repaid from the refinancing
      proceeds.





*Outlook*





As
      discussed, in “Liquidity and Capital Resources - Credit Facility” above, the
      Company was out of compliance with a financial covenant under its credit
      facility, but received a waiver of that covenant for the fiscal quarter ended
      June 30, 2006. The Company anticipates that it will be in compliance with the
      financial covenant that was waived at the time of next measurement on September
      30, 2006, The Company is currently in compliance with all other 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. See *"Factors
      That May Affect Future Results - 'Credit Facility Obligations' and 'Risks of
      Debt Financing',"* below.





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





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





The
      Company continually monitors the financial condition of its lessees to prevent
      unanticipated creditworthiness issues, and where necessary, works with lessees
      to remind them of, and ensure continued compliance with, both monetary and
      non-monetary obligations under their respective leases. Currently, the Company
      is closely monitoring the performance of one lessee with two aircraft under
      lease. The Company continues to work closely with this lessee to ensure
      compliance with its current obligations. During
      2006, the Company incurred $49,000 of bad debt expense related to amounts owed
      by a former lessee at the time the Company and the lessee agreed to the early
      termination of the lease. This expense materially affected the Company's
      financial performance. If any of the Company's current lessees are unable to
      meet their lease obligations, the Company's future results could be materially
      impacted. 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





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          20
          -


*Factors
      that May Affect Future Results*





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





*Risks
      of Debt Financing* .
      The
      Company’s use of acquisition financing under its credit facility and its special
      purpose financings subject the Company to increased risks of leveraging. If,
      due
      to a lessee default, the Company is unable to repay the debt secured by the
      aircraft acquired, then the Company could lose title to the acquired aircraft
      in
      a foreclosure proceeding. With respect to the credit facility, the loans are
      secured by the Company’s existing assets as well as the specific assets acquired
      with each financing. In addition to payment obligations, the credit facility
      also requires the Company to comply with certain financial covenants, including
      a requirement of positive annual earnings, interest coverage and net worth
      ratios. Any default under the credit facility, if not waived by the lenders,
      could result in foreclosure upon not only the asset acquired using such
      financing, but also the existing assets of the Company securing the loan. It
      is
      possible that some form of subordinated debt may be issued by the Company to
      fund acquisitions if the credit facility is not increased. Such financing may
      have separate, more restrictive covenants, and may magnify the adverse
      consequences of a lessee default.





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





It
      appears the economy is continuing a period of sustained increasing interest
      rates, particularly with respect to the rates for short-term borrowings, upon
      which the Company’s financing rates are based. The Company has not hedged its
      interest rate obligations. Consequently, if an interest rate increase were
      great
      enough, the Company might not be able to generate sufficient lease revenue
      to
      meet its interest payment and other obligations and comply with the net earnings
      covenant of its credit facility.





*Credit
      Facility Obligations.* The
      Company is obligated to make repayment of principal under the credit facility
      in
      order to maintain certain debt ratios with respect to its assets in the
      borrowing base. Assets that come off lease and remain off-lease for a period
      of
      time are removed from the borrowing base. The Company believes it will have
      sufficient cash funds to make any payment that arises due to borrowing base
      limitations caused by assets scheduled to come off lease in the near term.
      The
      Company’s belief is based on certain assumptions regarding renewal of existing
      leases, a lack of extraordinary interest rate increases, continuing
      profitability, no lessee defaults or bankruptcies, and certain other matters
      that the Company deems reasonable in light of its experience in the industry.
      There can be no assurance that the Company’s assumptions will prove to be
      correct. If the assumptions are incorrect (for example, if an asset in the
      collateral base unexpectedly goes off lease for an extended period of time)
      and
      the Company has not obtained an applicable waiver or amendment of applicable
      covenants from its lenders to mitigate the situation, the Company may have
      to
      sell a significant portion of its portfolio in order to maintain compliance
      with
      covenants or face default on its credit facility.





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




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





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          21
          -


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





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





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





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





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





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          22
          -


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





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





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





*Ownership
      Risks.* The
      Company’s portfolio is leased under operating leases, where the terms of the
      leases are less than the entire anticipated useful life of an asset. The
      Company’s ability to recover its purchase investment in an asset subject to an
      operating lease is dependent upon the Company’s ability to profitably re-lease
      or sell the asset after the expiration of the initial lease term. Some of the
      factors that have an impact on the Company’s ability to re-lease or sell include
      worldwide economic conditions, general aircraft market conditions, regulatory
      changes that may make an asset’s use more expensive or preclude use unless the
      asset is modified, changes in the supply or cost of aircraft equipment and
      technological developments which cause the asset to become obsolete. In
      addition, a successful investment in an asset subject to an operating lease
      depends in part upon having the asset returned by the lessee in serviceable
      condition as required under the lease. If the Company is unable to remarket
      its
      aircraft equipment on favorable terms when the operating leases for such
      equipment expire, the Company’s business, financial condition, cash flow,
      ability to service debt and results of operations could be adversely affected.





Furthermore,
      an asset impairment charge against the Company’s earnings may result from the
      occurrence of unexpected adverse changes that impact the Company’s estimates of
      expected cash flows generated from such asset. The Company periodically reviews
      long-term assets for impairments, in particular, when events or changes in
      circumstances indicate the carrying value of an asset may not be recoverable.
      An
      impairment loss is recognized when the carrying amount of an asset is not
      recoverable and exceeds its fair value. The Company may be required to recognize
      asset impairment charges in the future as a result of a prolonged weak economic
      environment, challenging market conditions in the airline industry or events
      related to particular lessees, assets or asset types.





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          23
          -


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





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





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





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





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





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





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          24
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*General
      Economic Conditions.* The
      Company’s business is dependent upon general economic conditions and the
      strength of the travel and transportation industry. The industry has experienced
      a severe cyclical downturn which began in 2001. There are signs that the
      industry is beginning to recover from the downturn, but it is unclear whether
      any recovery will be a sustained one. Any recovery could be stalled or reversed
      by any number of events or circumstances, including the global economy slipping
      back into recession, or specific events related to the air travel industry,
      such
      as further weakening of the air carrier or travel industries as a result of
      terrorist attacks, or an increase in operational or labor costs. Recent spikes
      in oil prices, if they persist, may have a negative effect on airline profits
      and increase the likelihood of weakening results for airlines that have not
      hedged aircraft fuel costs, and in the most extreme cases, may initiate or
      accelerate the failure of many already marginal carriers.





Since
      regional carriers are generally not as well-capitalized as major air carriers,
      any economic setback in the industry may result in the increased possibility
      of
      an economic failure of one or more of the Company’s lessees, particularly since
      many carriers are undertaking expansion of capacity to accommodate the
      recovering air passenger traffic. If lessees experience financial difficulties,
      this could, in turn, affect the Company’s financial performance.





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





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





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





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





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





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





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





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





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





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





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          26
          -


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





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





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          -


**PART
      II**


**OTHER
      INFORMATION**








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





**Item
      4.**  **Submission of Matters to a Vote of Security Holders**





On
      April
      27, 2006, the Company held its annual stockholders' meeting in San Carlos,
      California. At that meeting, Thomas W. Orr and Marc J. Anderson were re-elected
      to the Board of Directors. The
      vote
      tally was as follows:


FOR
                ELECTION
            WITHHELDMr.
                Anderson
            1,313,484
            17,244Mr.
              Orr
            1,308,329
            22,399






The
      stockholders also confirmed the appointment of PricewaterhouseCoopers LLP as
      auditors of the Company. The
      vote
      was as follows:





IN FAVOR
            1,239,255AGAINST
            1,217ABSTAIN
            36,554




The
      terms
      off office for Neal D. Crispin, Toni M. Perazzo, Thomas G. Hiniker and Evan
      M.
      Wallach continued after the annual stockholders’ meeting on April 27,
      2006.












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          28
          -


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






Exhibit
                Number
              Description10.1
              Form
                  of Joinder Agreement and Thirteenth Amendment to Amended and Restated
                  Credit Agreement, dated May 15, 2006, by and among the Company,
                  National
                  City Bank, as agent, and National City Bank, California Bank & Trust,
                  First Bank d.b.a. First Bank & Trust, and Bridge Bank, N.A., as
                  lenders. (1)10.2
              Form
                  of Credit Agreement, dated April 19, 2006, by and between AeroCentury
                  Investments VI, LLC and Landsbanki Islands HF. (2)10.3
              Form
                  of Waiver to Credit Agreement, dated July 19, 2006, by and among
                  the
                  Company, National City Bank, as agent, and National City Bank,
                  California
                  Bank & Trust, First Bank d.b.a. First Bank & Trust, and Bridge
                  Bank, N.A., as lenders. (3)31.1
              Certification
                  of Neal D. Crispin, Chief Executive Officer, pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of Toni M. Perazzo, Chief Financial Officer, pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.32.1*
              Certification
                  of Neal D. Crispin, Chief Executive Officer, pursuant to
                Section
                  906 of the Sarbanes-Oxley Act of 2002.32.2*
              Certification
                  of Toni M. Perazzo, Chief Financial Officer, pursuant to
                Section
                  906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Form 8-K, as filed with the
                  Securities and Exchange Commission on May 17,
                  2006.
 
 (2)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Form 8-K, as filed with the
                  Securities and Exchange Commission on April 24,
                  2006.
 
 (3)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Form 8-K, as filed with the
                  Securities and Exchange Commission on July 24,
                  2006.
 
 *
        These
        certificates are furnished to, but shall not be deemed to be filed with,
        the
        Securities and Exchange Commission.`




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          29
          -


**SIGNATURES**





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


**AEROCENTURY
              CORP.**Date: August
              14, 2006
            By:
            /s/ Toni
              M.
              PerazzoTitle:
              Sr. Vice President - Finance and Chief Financial
              Officer






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