##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-33701
 BABCOCK & BROWN AIR LIMITED
  Bermuda
 West Pier
Dun Laoghaire
County Dublin, Ireland
 Mina Kim, Telephone number: +353 1 231 1900, Facsimile number: +353 1 231 1901
 Securities registered or to be registered pursuant to Section 12(b) of the Act.
 Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares
    
    New York Stock ExchangeCommon Shares, par value of $0.001 per share
    
    New York Stock Exchange*
 *
    
    Not for trading, but only in connection with the registration of American Depositary Shares
representing these shares, pursuant to the requirements of the Securities and Exchange
Commission. 
  
  o þ
  o þ
  þ o
  o þ o
  U.S. GAAP þ
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board o
    
    Other o
  o o
  o þ




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##### Table of Contents



PRELIMINARY NOTE
 This Annual Report should be read in conjunction with the consolidated financial statements and
accompanying notes included in this report.
 The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP) and are presented in U.S. Dollars. These
statements and discussion below contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, objectives, expectations and intentions and other statements contained in this
Annual Report that are not historical facts, as well as statements identified by words such as
expects, anticipates, intends, plans, believes, seeks, estimates, or
words of similar meaning. Such statements address future events and conditions concerning matters
such as, but not limited to, our earnings, cash flow, liquidity and capital resources, compliance
with debt and other restrictive covenants, interest rates and dividends. These statements are based
on current beliefs or expectations and are inherently subject to significant uncertainties and
changes in circumstances, many of which are beyond our control. Actual results may differ
materially from these expectations due to changes in political, economic, business, competitive,
market and regulatory factors. We believe that these factors include, but are not limited to the
those described under Item 3 Risk Factors and elsewhere in this Annual Report.
 We undertake no obligation to update these forward looking statements to reflect events,
developments or circumstances after the date of this document, a change in our views or
expectations, or to reflect the occurrence of future events.
 Unless the context requires otherwise, when used in this Annual Report, (1) the terms B&B Air,
Company, we, our and us refer to Babcock & Brown Air Limited and its subsidiaries;
(2) the term B&B Air Funding refers to our subsidiary, Babcock & Brown Air Funding I Limited;
(3) the term B&B Air Acquisition refers to our subsidiary, Babcock & Brown Air Acquisition I
Limited; (4) all references to our shares refer to our common shares held in the form of American
Depositary Shares, or ADSs; (5) the terms Predecessor and JET-i refer to JET-i Leasing LLC,
the predecessor company of B&B Air; (6) the terms B&B and Babcock & Brown refer to Babcock
& Brown Limited, an Australian company, and its subsidiaries; (7) the terms BBAM and the
Servicer refer to Babcock & Brown Aircraft Management LLC and Babcock & Brown Aircraft
Management (Europe) Limited, collectively; and (8) the term Manager refers to Babcock & Brown
Air Management Co. Limited, the Companys manager.
 Unless indicated otherwise, all percentages and weighted average characteristics of the aircraft in
our portfolio have been calculated using net book values as of December 31, 2008




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TABLE OF CONTENTS
 PagePART IItem 1.
    
    Identity of Directors, Senior Management and Advisers  Not Applicable
    
    
    2Item 2.
    
    Offer Statistics and Expected Timetable  Not Applicable
    
    
    2Item 3.
    
    Key Information
    
    
    2Item 4.
    
    Information on the Company
    
    
    28Item 4A.
    
    Unresolved Staff Comments  Not Applicable
    
    
    38Item 5.
    
    Operating and Financial Review and Prospects
    
    
    39Item 6.
    
    Directors, Senior Management and Employees
    
    
    58Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    62Item 8.
    
    Financial Information
    
    
    74Item 9.
    
    The Offer and Listing
    
    
    75Item 10.
    
    Additional Information
    
    
    76Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    84Item 12.
    
    Description of Securities Other Than Equity Securities  Not Applicable
    
    
    85PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies  Not Applicable
    
    
    86Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    86Item 15.
    
    Controls and Procedures
    
    
    86Item 16A.
    
    Audit Committee Financial Expert
    
    
    87Item 16B.
    
    Code of Ethics
    
    
    87Item 16C.
    
    Principal Accountant Fees and Services
    
    
    88Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees  Not Applicable
    
    
    88Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers  Not Applicable
    
    
    88Item 16G.
    
    Corporate Governance
    
    
    89PART IIIItem 17.
    
    Financial Statements  Not Applicable
    
    
    F-1Item 18.
    
    Financial Statements
    
    
    F-1Item 19.
    
    Exhibits
    
    
    90EX-8.1: LIST OF SUBSIDIARIES OF THE COMPANYEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATION
  i




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
    Selected Financial Data.
  2




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(Dollars in thousands, except share data)Babcock &BrownAir Limited
    
    
    JET-i Leasing LLC (Predecessor Company)For theperiod fromFor the
    
    
    
    
    
    
    
    
    
    
    November 22,period from
    
    
    
    
    
    
    
    
    
    
    2005For the
    
    
    May 3, 2007
    
    
    
    
    
    
    
    
    
    
    (commencementyear
    
    
    (incorporation
    
    
    
    
    
    
    
    
    
    
    ofended
    
    
    date) to
    
    
    For the years ended December
    
    
    operations) toDecember 31,
    
    
    December 31,
    
    
    31,
    
    
    December 31,2008
    
    
    2007
    
    
    2007
    
    
    2006
    
    
    2005RevenuesOperating lease revenue
    
    $
    218,940
    
    
    $
    26,042
    
    
    $
    107,620
    
    
    $
    56,566
    
    
    $
    550Finance lease income
    
    
    2,446
    
    
    
    2,365
    
    
    
    7,477
    
    
    
    1,668
    
    
    
    Gain on sale of aircraft
    
    
    11,437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest and other income
    
    
    3,315
    
    
    
    4,927
    
    
    
    5,940
    
    
    
    3,115
    
    
    
    65Total revenues
    
    
    236,138
    
    
    
    33,334
    
    
    
    121,037
    
    
    
    61,349
    
    
    
    615ExpensesDepreciation
    
    
    74,161
    
    
    
    8,573
    
    
    
    34,548
    
    
    
    17,976
    
    
    
    156Interest expense
    
    
    81,689
    
    
    
    14,628
    
    
    
    61,541
    
    
    
    33,840
    
    
    
    487Interest expense  related party
    
    
    
    
    
    
    
    
    
    
    11,585
    
    
    
    6,390
    
    
    
    288Selling, general and
administrative
    
    
    20,989
    
    
    
    4,866
    
    
    
    4,588
    
    
    
    3,321
    
    
    
    331Maintenance and other costs
    
    
    4,307
    
    
    
    165
    
    
    
    2,415
    
    
    
    1,379
    
    
    
    145Mark-to-market of non-hedge
derivatives
    
    
    
    
    
    
    
    
    
    
    (5,898
    )
    
    
    5,898
    
    
    
    Debt extinguishment costs
    
    
    
    
    
    
    
    
    
    
    9,165
    
    
    
    
    
    
    
    Hedging costs related to
interest rate swap option
    
    
    
    
    
    
    1,725
    
    
    
    5,423
    
    
    
    
    
    
    
    Swap breakage costs
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    
    
    
    
    Total expenses
    
    
    181,146
    
    
    
    29,957
    
    
    
    135,867
    
    
    
    68,804
    
    
    
    1,407Net income (loss) before provision
for income taxes
    
    
    54,992
    
    
    
    3,377
    
    
    
    (14,830
    )
    
    
    (7,455
    )
    
    
    (792
    )Provision for income taxes
    
    
    6,867
    
    
    
    1,032
    
    
    
    466
    
    
    
    17
    
    
    
    Net income (loss)
    
    $
    48,125
    
    
    $
    2,345
    
    
    $
    (15,296
    )
    
    $
    (7,472
    )
    
    $
    (792
    )Earnings per share:Basic and diluted
    
    $
    1.44
    
    
    $
    0.19
    
    
    
    
    
    
    
    
    
    
    
    Pro forma
    
    
    
    
    
    $
    0.07
    
    
    
    
    
    
    
    
    
    
    
    
  3




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(Dollars in thousands, except share)Babcock &Brown Air
    
    JET-i Leasing LLC (PredecessorLimited
    
    Company)As of
    
    As ofDecember
    
    December
    
    As of December 31,31, 2008
    
    31, 2007
    
    2007
    
    2006
    
    2005Balance sheet data:Total assets
    
    $
    2,086,174
    
    
    $
    1,589,226
    
    
    $
    5,249
    
    
    $
    1,010,875
    
    
    $
    83,496Total liabilities
    
    
    1,696,761
    
    
    
    1,098,724
    
    
    
    2,766
    
    
    
    983,175
    
    
    
    57,615Capital stock
    
    
    499,914
    
    
    
    504,546
    
    
    
    
    
    
    
    
    
    
    
    Total
shareholders
equity/ members
capital
    
    
    389,413
    
    
    
    490,502
    
    
    
    2,483
    
    
    
    27,700
    
    
    
    25,881Number of shares
    
    
    32,488,911
    
    
    
    33,603,450
    
    
    
    
    
    
    
    
    
    
    
    
 Risk Factors
 The risks discussed below could materially and adversely affect our business, prospects, financial
condition, results of operations, cash flows and ability to pay dividends and cause the trading
price of our shares to decline. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially and adversely affect our business,
prospects, financial condition, results of operations, cash flows and ability to pay dividends.
 4




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Risks Related to Our Business
 Changes in economic conditions could adversely affect our business.
   The recent changes in demand and supply of aircraft could depress lease rates and the value or our
aircraft portfolio.
  We will need additional capital to finance our growth, and we may not be able to obtain it on
acceptable terms, or at all, which may limit our ability to grow and compete in the aviation
market.
   5




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Unforeseen difficulties and costs associated with the acquisition of our aircraft portfolio and
other aviation assets could reduce or prevent our future growth and profitability.
  
    
    impair our liquidity by using a significant portion of our available cash or borrowing
capacity to finance acquisitions;
 
    
    significantly increase our interest expense and financial leverage to the extent we incur
additional debt to finance acquisitions;
 
    
    incur or assume unanticipated liabilities, losses or costs associated with the aircraft or
other aviation assets that we acquire;
 
    
    incur other significant charges, including asset impairment or restructuring charges; or
 
    
    be unable to maintain our ability to pay regular dividends to our shareholders.
  Risk Related to Our Financial Information
 We have limited independent operating history upon which to assess our prospects or ability to pay
dividends to our shareholders.
  Risks Related to Our Dividend
 We may not be able to pay or maintain dividends on our shares.
  
    
    lack of availability of cash to pay dividends due to changes in our operating cash flow,
capital expenditure requirements, working capital requirements and other cash needs;
 
    
    restrictions imposed by our financing arrangements, including under the Notes, our Aircraft
Acquisition Facility and any indebtedness incurred in the future to refinance our existing
debt or to expand our aircraft portfolio;
 
    
    our inability to make acquisitions of additional aircraft that are accretive to cash flow;
 
    
    application of funds to make and finance acquisitions of aircraft and other aviation assets;
 
    
    reduced levels of demand for, or value of, our aircraft;
 
    
    increased supply of aircraft;
 
    
    obsolescence of aircraft in our portfolio;
 
    
    lower lease rates on new aircraft and re-leased aircraft;
 
    
    delays in re-leasing our aircraft after the expiration or early termination of existing
leases;
 
    
    impaired financial condition and liquidity of our lessees;
 
    
    deterioration of economic conditions in the commercial aviation industry generally;
 
    
    poor performance by our Manager, BBAM and their affiliates and other service providers and
our limited rights to terminate them;
 
    
    unexpected or increased maintenance, operating or other expenses or changes in the timing
thereof;
 
    
    a decision by our board of directors to cease distributing a portion of our cash flow
available for distribution;
 
    
    changes in Irish tax law, the tax treaty between the United States and Ireland (the Irish
Treaty) or our ability to claim the benefits of such treaty;
 
    
    cash reserves established by our board of directors; and
 
    
    restrictions under Bermuda law on the amount of dividends that we may pay.
 Risks Related to Our Indebtedness
 We will not be able to borrow under the Aircraft Acquisition Facility after the end of the
availability period.
  6




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
    
    Babcock & Brown ceases to hold at least 5% of the issued and outstanding shares of B&B Air;
 
    
    Babcock & Brown ceases to hold at least 51% of the capital stock of BBAM;
 
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end or
the unaudited or audited financial statements for each semi-annual period within 90 days, and
in each case such failure to deliver the required financial statements continues for 30 days
after written notice from the agent;
 
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be delivered
as described above contains a going-concern or similar qualification;
 
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
 
    
    A BBAM default on recourse debt over $25 million.
      We may not be able to refinance the Notes or the Aircraft Acquisition Facility on favorable terms
or at all, which may require us to seek more costly or dilutive financing for our investments or to
liquidate assets.
  7




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We will not be able to borrow under the Aircraft Acquisition Facility after the end
of the availability period.
 We are subject to risks related to our indebtedness that may limit our operational flexibility and
our ability to pay dividends on our shares.
  
    
    all the aircraft and related leases in our portfolio secure debt obligations, the terms of
which restrict our ability to sell aircraft and require us to use proceeds from sales of
aircraft, in part, to repay amounts outstanding under those notes;
 
    
    we are required to dedicate a significant portion of our cash flow from operations to debt
service payments, thereby reducing the amount of our cash flow available to pay dividends,
fund working capital, make capital expenditures and satisfy other needs;
 
    
    restrictions on our subsidiaries ability to distribute excess cash flow to us under certain
circumstances;
 
    
    lessee, geographical and other concentration requirements limit our flexibility in leasing
our aircraft;
 
    
    requirements to obtain the consent of third parties including lenders, the financial guaranty
policy provider for the Securitization, whom we refer to as the policy provider, and rating
agency confirmations for certain actions; and
 
    
    restrictions on our subsidiaries ability to incur additional debt, create liens on assets,
sell assets, make freighter conversions and make certain investments or capital expenditures.
  We are a holding company and currently rely on our subsidiaries, B&B Air Funding and B&B Air
Acquisition, and their subsidiaries, the owners of the aircraft in our portfolio, to provide us
with funds necessary to meet our financial obligations and pay dividends, and our subsidiaries are
significantly restricted from making funds available to us.
  Our subsidiaries may be required in certain circumstances to apply funds to the repayment of their
indebtedness.
  8




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Our subsidiaries are subject to interest rate risk, which could impair their ability to make
distributions to us and our ability to pay dividends to you.
  Risks Related to Our Relationship with Babcock & Brown
 We are wholly dependent on B&B, primarily through BBAM, to manage our business and to service our
aircraft portfolio.
  Financial conditions at Babcock & Brown could adversely affect our business.
   9




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
    
    Babcock & Brown ceases to hold at least 5% of the issued and outstanding shares of B&B Air;
 
    
    Babcock & Brown ceases to hold at least 51% of the capital stock of BBAM;
 
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end or
the unaudited or audited financial statements for each semi-annual period within 90 days, and
in each case such failure to deliver the required financial statements continues for 30 days
after written notice from the agent;
 
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be delivered
as described above contains a going-concern or similar qualification in the audit opinion;
 
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
 
    
    BBAM default on recourse debt over $25 million.
 We will not be able to
borrow under the Aircraft Acquisition Facility after the end of the availability period 
  B&B has conflicts of interest with us and their limited contractual or other duties will not
restrict them from favoring their own business interests to our detriment.
  10




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Even if we are dissatisfied with B&Bs performance, there are only limited circumstances under
which we are able to terminate our management and servicing agreements and we may not terminate the
servicing agreement for our Initial Portfolio without the prior written consent of the policy
provider.
  
    
    at least 75% of our independent directors and holders of 75% or more of all of our
outstanding common shares (measured by vote) determine by resolution that there has been
unsatisfactory performance by our Manager that is materially detrimental to us;
 
    
    our Manager materially breaches the management agreement and fails to remedy such breach
within 90 days of receiving written notice from us requiring it to do so, or such breach
results in liability to us and is attributable to our Managers gross negligence, fraud or
dishonesty, or willful misconduct in respect of the obligation to apply the standard of care;
 
    
    any license, permit or authorization held by the Manager which is necessary for it to perform
the services and duties under the management agreement is materially breached, suspended or
revoked, or
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otherwise made subject to conditions which, in the reasonable opinion of our board of
directors, would prevent the Manager from performing the services and the situation is not
remedied within 90 days;
 
    
    our Manager becomes subject to bankruptcy or insolvency proceedings that are not discharged
within 75 days, unless our Manager is withdrawn and replaced within 90 days of the initiation
of such bankruptcy or insolvency proceedings with an affiliate or associate of B&B that is
able to make correctly the representations and warranties set out in the management agreement;
 
    
    B&B in aggregate ceases to hold (directly or indirectly) more than 50% of the issued share
capital of our Manager; or
 
    
    an order is made for the winding up of our Manager, unless our Manager is withdrawn and
replaced within 15 days with an affiliate or associate of B&B that is able to make correctly
the representations and warranties set out in the management agreement.
   
    
    BBAM ceases to be at least majority-owned directly or indirectly by B&B;
 
    
    BBAM fails in any material respect to perform any material services under the servicing
agreements in accordance with the standard of care or the conflicts standard in a manner that
is materially adverse to us and our applicable subsidiaries taken as a whole;
 
    
    specified B&B entities (including BBAM) become subject to bankruptcy or insolvency
proceedings;
 
    
    with respect to the servicing agreement for our Initial Portfolio, we have insufficient funds
for the payment of interest on the notes for a period of at least 60 days;
 
    
    at least 15% of the number of aircraft assets in the Initial Portfolio remain off-lease but
reasonably available for re-lease for a period of at least three months following specified
events set forth in the trust indenture;
 
    
    without limiting BBAMs rights under the security trust agreement, BBAM takes any steps for
the purpose of processing the appointment of an administrative receiver or the making of any
administrative order or for instituting a bankruptcy, reorganization, arrangement, insolvency,
winding up, liquidation, composition or any similar proceeding under the laws of any
jurisdiction with respect to any jurisdiction with respect to B&B Air Funding, and any of its
subsidiaries, or any of the aircraft assets;
 
    
    we cease to own all of the aircraft in our Initial Portfolio;
 
    
    BBAM withdraws from servicing a specified number of our aircraft in the Initial Portfolio for
specified periods of time due to conflicts of interest; or
 
    
    BBAM ceases to be actively involved in the aircraft leasing business.
  12




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Our management and servicing agreements limit our remedies against BBAM for unsatisfactory
performance and provide certain termination rights to the policy provider.
   Our Manager may terminate the management agreement if we breach the management agreement and that
breach is not remedied within 90 days of notice.
  BBAM may resign as Servicer under our servicing agreements under certain circumstances, which would
significantly impair our ability to re-lease or sell aircraft and service our leases.
  The terms of our agreements with B&B were negotiated without independent assessment on our behalf,
and these terms may be less advantageous to us than if they had been the result of transactions
among unaffiliated third parties.
  13




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Risks Relating to Our Aircraft Portfolio
 The variability of supply and demand for aircraft and other aviation assets could depress lease
rates and the value of our leased assets, which would have an adverse effect on our financial
results and growth prospects and on our ability to meet our debt obligations and pay dividends.
  
    
    passenger air travel and air cargo demand;
 
    
    geopolitical and other events, including war, acts of terrorism, outbreaks of epidemic
diseases and natural disasters;
 
    
    operating costs, availability of jet fuel and general economic conditions affecting our
lessees operations;
 
    
    governmental regulation, including new airworthiness directives;
 
    
    interest rates;
 
    
    airline restructurings and bankruptcies;
 
    
    cancellations of orders for aircraft;
 
    
    delays in delivery by manufacturers;
 
    
    availability and cost of credit;
 
    
    manufacturer production levels and technological innovation;
 
    
    retirement and obsolescence of aircraft models;
 
    
    manufacturers merging or exiting the industry or ceasing to produce aircraft or engine types;
 
    
    accuracy of estimates relating to future supply and demand made by manufacturers and lessees;
 
    
    reintroduction into service of aircraft or engines previously in storage; and
 
    
    airport and air traffic control infrastructure constraints.
  Factors that increase the risk of decline in aircraft value and achievable lease rates could have
an adverse affect on our financial results and growth prospects and on our ability to meet our debt
obligations and to pay dividends.
  
    
    the particular maintenance, damage and operating history of the airframes and engines;
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
    
    the number of operators using that type of aircraft or engine;
 
    
    whether an aircraft or other aviation asset is subject to a lease and, if so, whether the
lease terms are favorable to the lessor;
 
    
    the age of our aircraft and other aviation assets;
 
    
    airworthiness directives and service bulletins;
 
    
    aircraft noise and emission standards;
 
    
    any tax, customs, regulatory and other legal requirements that must be satisfied when an
aircraft is purchased, sold or re-leased;
 
    
    compatibility of our aircraft configurations or specifications with other aircraft owned by
operators of that type; and
 
    
    decreases in the creditworthiness of our lessees.
  The advent of superior aircraft technology could cause our existing aircraft portfolio to become
outdated and therefore less desirable, which could adversely affect our financial results and
growth prospects and our ability to compete in the marketplace.
  Our operational costs will increase as our aircraft age, which will adversely affect the amounts
available to pay dividends.
  The concentration of aircraft types in our portfolio could harm our business and financial results
should any difficulties specific to these particular types of aircraft occur.
  15




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We operate in a highly competitive market for investment opportunities in aircraft and other
aviation assets.
  
    
    airlines;
 
    
    aircraft manufacturers;
 
    
    financial institutions (including those seeking to dispose of repossessed aircraft at
distressed prices);
 
    
    aircraft brokers;
 
    
    special purpose vehicles formed for the purpose of acquiring, leasing and selling aircraft;
and
 
    
    public and private partnerships, investors and funds, including private equity and hedge
funds.
   If demand for leased aircraft does not increase, we may not be able to expand our business.
  Depreciation expenses and impairment charges could have a material adverse effect on our financial
condition and results of operations.
   16




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##### Table of Contents



Aircraft liens could impair our ability to repossess, re-lease or resell the aircraft.
   We cannot assure you that all lessees will comply with the registration requirements in the
jurisdiction where they operate.
  Government regulations could require substantial expenditures, reduce our profitability and limit
our growth.
   17




---



##### Table of Contents



Risks Relating to Our Leases
 We will need to re-lease or sell aircraft as leases expire to continue to generate sufficient funds
to meet our debt obligations, finance our growth and operations and pay dividends. We may not be
able to re-lease or sell aircraft on favorable terms, or at all.
  We rely on our lessees continuing performance of their lease obligations.
  
    
    competition;
 
    
    fare levels;
 
    
    air cargo rates;
 
    
    passenger air travel and air cargo demand;
 
    
    geopolitical and other events, including war, acts of terrorism, outbreaks of epidemic
diseases and natural disasters;
 
    
    operating costs, availability and cost of jet fuel and general economic conditions affecting
our lessees operations;
 
    
    labor difficulties;
 
    
    economic conditions and currency fluctuations in the countries and regions in which the
lessee operates; and
 
    
    governmental regulation of, or affecting, the air transportation business.
 18




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##### Table of Contents




    
    result in a grounding of the aircraft;
 
    
    cause us to incur costs in restoring the aircraft to an acceptable maintenance condition to
re-lease the aircraft;
 
    
    adversely affect lease terms in the re-lease of the aircraft; and
 
    
    adversely affect the value of the aircraft.
  If our lessees encounter financial difficulties and we decide to restructure our leases with those
lessees, this could result in less favorable leases, significant reductions in our cash flows and
adversely affect our ability to meet our debt obligations and pay dividends on our shares.
  Lease defaults could result in significant expenses and loss of revenues.
  19




---



##### Table of Contents



Our lessees failure to fund their maintenance requirements on our aircraft could significantly
harm our revenues, cash flows and ability to pay dividends.
  Failure to pay certain potential additional operating costs could result in the grounding of our
aircraft and prevent the re-lease, sale or other use of our aircraft, which would negatively affect
our business, financial condition and results of operations.
  
    
    the costs of casualty, liability, war and political risk insurance and the liability costs or
losses when insurance coverage has not been or cannot be obtained as required or is
insufficient in amount or scope;
 
    
    the costs of licensing, exporting or importing an aircraft, costs of storing and operating an
aircraft, airport taxes, customs duties, air navigation charges, landing fees and similar
governmental or quasi-governmental impositions; and
 
    
    penalties and costs associated with the failure of lessees to keep the aircraft registered
under all appropriate local requirements or obtain required governmental licenses, consents
and approvals.
  Our lessees may have inadequate insurance coverage or fail to fulfill their respective indemnity
obligations, which could result in us not being covered for claims asserted against us and may
negatively affect our business, financial condition and results of operations.
   20




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##### Table of Contents



Failure to obtain certain required licenses, consents and approvals could negatively affect our
ability to re-lease or sell aircraft, which would negatively affect our business, financial
condition and results of operations.
  Some of our leases provide the lessees with early termination rights.
  Risks associated with the concentration of our lessees in certain geographical regions could harm
our business.
  European concentration.
 Asian concentration.
 North American concentration.
 21




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##### Table of Contents



South and Central American concentration.
   Risks Related to the Aviation Industry
 The passenger aviation industry is historically cyclical and a significant downturn in the industry
would adversely impact our lessees ability to make payments to us, which would adversely affect
our financial results and growth prospects.
    22




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##### Table of Contents




    
    downward pressure on demand for the aircraft in our fleet and reduced market lease rates and
lease margins;
 
    
    a higher incidence of lessee defaults, lease restructurings, repossessions and airline
bankruptcies and restructurings, resulting in lower lease margins due to maintenance and legal
and other costs associated with the repossession, as well as lost revenue for the time the
aircraft are off lease and possibly lower lease rates from the new lessees;
 
    
    an inability to lease aircraft on commercially acceptable terms, resulting in lower lease
margins due to such aircraft not earning revenue and resulting in storage, insurance and
maintenance costs; and
 
    
    a loss if our aircraft is damaged or destroyed by an event specifically excluded from an
insurance policy, such as dirty bombs, bio-hazardous materials and electromagnetic pulsing.
 Airline reorganizations could impair our lessees ability to comply with their lease payment
obligations to us.
  High fuel prices can adversely affect the profitability of the airline industry and our lessees
ability to meet their lease payment obligations to us.
  
    
    affect our lessees ability to make rental and other lease payments;
 
    
    result in lease restructurings and aircraft and engine repossessions;
 
    
    increase our costs of servicing and marketing aircraft;
 
    
    impair our ability to re-lease the aircraft and other aviation assets or re-lease or
otherwise dispose of the assets on a timely basis at favorable rates; and
 
    
    reduce the proceeds received for the aircraft or other aviation assets upon any disposition.
 23




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##### Table of Contents



The effects of various environmental regulations may negatively affect the airline industry. This
may cause lessees to default on their lease payment obligations to us.
     The effects of terrorist attacks and geopolitical conditions may negatively affect the airline
industry. This may cause our lessees to default on their lease payment obligations to us.
  
    
    higher costs to airlines because of increased security measures;
 
    
    the inconvenience of additional security measures;
 24




---



##### Table of Contents




    
    the price and availability of jet fuel and the cost and practicability of obtaining fuel
hedges under current market conditions; and
 
    
    significantly higher costs of aircraft insurance coverage for claims caused by acts of war,
terrorism, sabotage, hijacking and other similar perils, and the extent to which such
insurance has been or will continue to be available.
  The effects of war or armed hostilities may negatively affect the airline industry. This may cause
lessees to default on their lease payment obligations to us.
  The effects of pandemic diseases may negatively affect the airline industry. This may cause our
lessees to default on their lease payment obligations to us.
  We depend on aircraft and engine manufacturers success in remaining financially stable and
producing aircraft.
  
    
    an inability to acquire aircraft and related components on terms that will allow us to lease
those aircraft and related components to customers at our anticipated profit levels, resulting
in lower growth rates or a contraction in our fleet;
 
    
    poor customer support from the manufacturers of aircraft and components resulting in reduced
demand for a particular manufacturers product, creating downward pressure on demand for those
aircraft and components in our fleet and reduced market lease rates for those aircraft; and
 25




---



##### Table of Contents




    
    reduction in our competitiveness due to deep discounting by the manufacturers, which may lead
to reduced market lease rates and may adversely affect the value of our portfolio and our
ability to remarket or sell some of the aircraft in our fleet.
 Risks Related to the Ownership of Our Shares
 We have anti-takeover provisions in our bye-laws that may discourage a change of control.
  
    
    provisions that permit us to require any competitor of BBAM that acquires beneficial
ownership of more than 15% of our common shares either to tender for all of our remaining
common shares for no less than their fair market value, or sell such number of common shares
to us or to third parties as would reduce its beneficial ownership to less than 15%, in either
case within 90 days of our request to so tender or sell;
 
    
    provisions that reduce the vote of each common share held by a competitor of BBAM that
beneficially owns 15% or more, but less than 50%, of our common shares to three-tenths of one
vote per share on all matters upon which shareholders may vote;
 
    
    provisions that permit our board of directors to determine the powers, preferences and rights
of any preference shares we may issue and to issue any such preference shares without
shareholder approval;
 
    
    advance notice requirements by shareholders for director nominations and actions to be taken
at annual meetings; and
 
    
    no provision for cumulative voting in the election of directors, such that all the directors
standing for election may be elected by our shareholders by a plurality of votes cast at a
duly convened annual general meeting, the quorum for which is two or more persons present in
person or by proxy at the start of the meeting and representing in excess of 25% of all votes
attaching to all shares in issue entitling the holder to vote at the meeting.
  We are a Bermuda company that is managed and controlled in Ireland. It may be difficult for you to
enforce judgments against us or against our directors and executive officers.
   26




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##### Table of Contents



As a shareholder of our company, you may have greater difficulties in protecting your interests
than as a shareholder of a U.S. corporation.
  Risks Related to Taxation
 We may face increased tax costs.
   The tax rate applicable to us would be higher than we expect if we were considered not to be
carrying on a trade in Ireland for the purposes of Irish law.
  27




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##### Table of Contents



ITEM 4. INFORMATION ON THE COMPANY
     Our Relationship With BBAM
   28




---



##### Table of Contents




    
    Babcock & Brown ceases to hold at least 5% of the issued and outstanding shares of B&B Air;
 
    
    Babcock & Brown ceases to hold at least 51% of the capital stock of BBAM;
 
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end or
the unaudited or audited financial statements for each semi-annual period within 90 days, and
in each case such failure to deliver the required financial statements continues for 30 days
after written notice from the agent;
 
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be delivered
as described above contains a going-concern or similar qualification;
 
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
 
    
    A BBAM default on recourse debt over $25 million.
 We will not be able to borrow under the Aircraft
Acquisition Facility after the end of the availability period 
 29




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##### Table of Contents



Our Aircraft Portfolio
    Date ofLessee Name
    
    Aircraft Type
    
    Airframe Type
    
    Manufacture1
    
    Aeroflot-don
    
    B737-500
    
    Narrowbody
    
    19922
    
    Aeroflot-don
    
    B737-500
    
    Narrowbody
    
    19923
    
    Aeromexico
    
    B737-700
    
    Narrowbody
    
    20054
    
    Aeromexico
    
    B737-700
    
    Narrowbody
    
    20055
    
    Aigle Azur
    
    A320-200
    
    Narrowbody
    
    19986
    
    Air Berlin
    
    B737-800
    
    Narrowbody
    
    19997
    
    Air China
    
    B737-800
    
    Narrowbody
    
    20068
    
    Atlant-Soyuz
    
    B737-800
    
    Narrowbody
    
    20009
    
    CCM
    
    A320-200
    
    Narrowbody
    
    199510
    
    CCM
    
    A320-200
    
    Narrowbody
    
    199511
    
    ChangAn Airlines
    
    B737-800
    
    Narrowbody
    
    200612
    
    China Southern
    
    B757-200
    
    Narrowbody
    
    199913
    
    China Southern
    
    B757-200
    
    Narrowbody
    
    199914
    
    Clickair
    
    A320-200
    
    Narrowbody
    
    200715
    
    Clickair
    
    A320-200
    
    Narrowbody
    
    200716
    
    Donbassaero
    
    A320-200
    
    Narrowbody
    
    199717
    
    Donbassaero
    
    A320-200
    
    Narrowbody
    
    199718
    
    easyJet
    
    A319-100
    
    Narrowbody
    
    200719
    
    Ethiopian Airlines
    
    B757-200
    
    Narrowbody
    
    199720
    
    Ethiopian Airlines
    
    B757-200
    
    Narrowbody
    
    199821
    
    Hainan Airlines
    
    A319-100
    
    Narrowbody
    
    200622
    
    Icelandair
    
    B757-200
    
    Narrowbody
    
    200023
    
    Icelandair
    
    B757-200
    
    Narrowbody
    
    200024
    
    Icelandair
    
    B757-200SF
    (1)
    Narrowbody
    
    199025
    
    Kingfisher Airlines
    
    A320-200
    
    Narrowbody
    
    200526
    
    Kingfisher Airlines
    
    A320-200
    
    Narrowbody
    
    200627
    
    KLM
    
    B777-200ER
    
    Widebody
    
    200428
    
    LTU
    
    A330-200
    
    Widebody
    
    200129
    
    Mexicana
    
    A320-200
    
    Narrowbody
    
    199530
    
    Norwegian Air
    
    B737-800
    
    Narrowbody
    
    2001
 30




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##### Table of Contents



Date ofLessee Name
    
    Aircraft Type
    
    Airframe Type
    
    Manufacture31
    
    Omni Air International
    
    B757-200
    
    Narrowbody
    
    198932
    
    Sky Airlines
    
    B737-800
    
    Narrowbody
    
    200733
    
    SpiceJet Limited
    
    B737-800
    
    Narrowbody
    
    200634
    
    SpiceJet Limited
    
    B737-800
    
    Narrowbody
    
    200635
    
    SpiceJet Limited
    
    B737-800
    
    Narrowbody
    
    200636
    
    SpiceJet Limited
    
    B737-900ER
    
    Narrowbody
    
    200737
    
    SpiceJet Limited
    
    B737-900ER
    
    Narrowbody
    
    200838
    
    Sunwing Airlines
    
    B737-800
    
    Narrowbody
    
    200639
    
    Swiss International
    
    A320-200
    
    Narrowbody
    
    199540
    
    Swiss International
    
    A320-200
    
    Narrowbody
    
    199541
    
    Swiss International
    
    A320-200
    
    Narrowbody
    
    199542
    
    Thomson Airways Ltd
    
    B757-200
    
    Narrowbody
    
    199943
    
    Thomson Airways Ltd
    
    B757-200
    
    Narrowbody
    
    199944
    
    Tiger Airways
    
    A320-200
    
    Narrowbody
    
    200645
    
    Titan Airways
    
    B737-300QC
    (1)
    Narrowbody
    
    199146
    
    Transavia Airlines
    
    B737-700
    
    Narrowbody
    
    200147
    
    Travel Service Airlines
    
    B737-800
    
    Narrowbody
    
    199948
    
    TUI
    
    B767-300ER
    
    Widebody
    
    199749
    
    United Air Lines
    
    B747-400
    
    Widebody
    
    199350
    
    US Airways
    
    A319-100
    
    Narrowbody
    
    200051
    
    US Airways
    
    A319-100
    
    Narrowbody
    
    200052
    
    US Airways
    
    A319-100
    
    Narrowbody
    
    200053
    
    US Airways
    
    A319-100
    
    Narrowbody
    
    200054
    
    Virgin America
    
    A320-200
    
    Narrowbody
    
    200655
    
    Virgin America
    
    A320-200
    
    Narrowbody
    
    200656
    
    Virgin America
    
    A320-200
    
    Narrowbody
    
    200757
    
    Virgin America
    
    A319-100
    
    Narrowbody
    
    200858
    
    Volaris Airlines
    
    A319-100
    
    Narrowbody
    
    199959
    
    Volaris Airlines
    
    A319-100
    
    Narrowbody
    
    200060
    
    Volaris Airlines
    
    A319-100
    
    Narrowbody
    
    200761
    
    Yakutia
    
    B757-200
    
    Narrowbody
    
    199662
    
    Off-lease
    
    B757-200
    
    Narrowbody
    
    1998
 
 (1)
    
    Freighter. 31




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##### Table of Contents



Number ofAircraft Manufacturer
    
    Aircraft Type
    
    AircraftBoeing
    
    B737-300QC
    
    
    1B737-500
    
    
    2B737-700
    
    
    3B737-800
    
    
    11B737-900ER
    
    
    2B747-400
    
    
    1B757-200
    
    
    11B757-200SF
    
    
    1B767-300ER
    
    
    1B777-200ER
    
    
    1Total
    
    
    34Airbus
    
    
    A319-100
    
    
    10A320-200
    
    
    17A330-200
    
    
    1Total
    
    
    28Total
    
    
    
    
    
    
    62
   Number ofAirframe Type
    
    AircraftNarrow-body(1)
    
    
    58Wide-body
    
    
    4Total
    
    
    62
 
 (1)
    
    Includes two freighters.  32




---



##### Table of Contents



Our Markets
  Period from May 3,2007 (IncorporationYear ended December 31,
    
    Date) to December 31,2008
    
    2007(Dollars in thousands)Europe, Middle East and Africa:Germany
    
    $
    16,353
    
    
    
    7
    %
    
    $
    1,416
    
    
    
    5
    %The Netherlands
    
    
    13,990
    
    
    
    6
    %
    
    
    728
    
    
    
    3
    %United Kingdom
    
    
    17,388
    
    
    
    8
    %
    
    
    3,120
    
    
    
    12
    %Switzerland
    
    
    13,296
    
    
    
    6
    %
    
    
    1,083
    
    
    
    4
    %Other
    
    
    42,167
    
    
    
    20
    %
    
    
    3,078
    
    
    
    12
    %Europe, Middle East and Africa  Total
    
    
    103,194
    
    
    
    47
    %
    
    
    9,425
    
    
    
    36
    %Asia Pacific:India
    
    
    26,604
    
    
    
    12
    %
    
    
    2,189
    
    
    
    8
    %China
    
    
    17,491
    
    
    
    8
    %
    
    
    3,827
    
    
    
    15
    %Other
    
    
    3,553
    
    
    
    2
    %
    
    
    939
    
    
    
    4
    %Asia Pacific  Total
    
    
    47,648
    
    
    
    22
    %
    
    
    6,955
    
    
    
    27
    %North America:United States
    
    
    39,180
    
    
    
    18
    %
    
    
    3,457
    
    
    
    13
    %Other
    
    
    5,007
    
    
    
    2
    %
    
    
    433
    
    
    
    2
    %North America  Total
    
    
    44,187
    
    
    
    20
    %
    
    
    3,890
    
    
    
    15
    %South and Central America:Mexico
    
    
    19,802
    
    
    
    9
    %
    
    
    4,086
    
    
    
    16
    %Other
    
    
    4,109
    
    
    
    2
    %
    
    
    1,686
    
    
    
    6
    %South and Central America  Total
    
    
    23,911
    
    
    
    11
    %
    
    
    5,772
    
    
    
    22
    %Total Operating Lease Revenue
    
    $
    218,940
    
    
    
    100
    %
    
    $
    26,042
    
    
    
    100
    %
 Our Leases
 Lease Terms
  33




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##### Table of Contents



Airframe TypeYear of Scheduled Lease Expiration
    
    Narrow(1)
    
    Wide
    
    Total2009
    
    
    3
    
    
    
    
    
    
    
    32010
    
    
    6
    
    
    
    
    
    
    
    62011
    
    
    5
    
    
    
    1
    
    
    
    62012
    
    
    9
    
    
    
    
    
    
    
    92013
    
    
    5
    
    
    
    1
    
    
    
    62014
    
    
    5
    
    
    
    
    
    
    
    52015
    
    
    12
    
    
    
    1
    
    
    
    132016
    
    
    6
    
    
    
    1
    
    
    
    72017
    
    
    2
    
    
    
    
    
    
    
    22018
    
    
    4
    
    
    
    
    
    
    
    4Off-lease
    
    
    1
    
    
    
    
    
    
    
    1Total
    
    
    58
    
    
    
    4
    
    
    
    62
 
 (1)
    
    Includes two freighters in 2012.     34




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##### Table of Contents



Security Deposits and Letters of Credit.
 Maintenance Obligations.
  Compliance with Laws.
 General. i.e
 Lessee
    
    SublesseeTravel Service Airlines
    
    Wind Rose Aviation CompanyIcelandair
    
    Air NiuginiThomson Airways Ltd
    
    Skyservice AirlinesThomson Airways Ltd
    
    Skyservice Airlines
  35




---



##### Table of Contents



Lease Restructurings.
 Aircraft Repossessions.
 Lease Management and Remarketing
   Competition
 We operate in a highly competitive market for investment opportunities in aircraft and other
aviation assets
 Insurance
  36




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##### Table of Contents



37




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##### Table of Contents



Government Regulation
   Properties
  
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 38




---



##### Table of Contents



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this Annual Report. The consolidated financial statements have been prepared in
accordance with U.S. GAAP and are presented in U.S. dollars. The discussion below contains
forward-looking statements that are based upon our current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially from these
expectations due to changes in global, regional or local political, economic, business,
competitive, market, regulatory and other factors, many of which are beyond our control. See
Preliminary note and Item 3 Risk factors.
 Overview
         39




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##### Table of Contents



Critical Accounting Policies and Estimates
  Flight Equipment Held for Operating Leases, Net
  
    
    flight equipment where original manufacturers prices are not relevant due to plane
modifications and conversions; and
 
    
    flight equipment which is out of production and may have a shorter useful life due to
obsolescence.
    Accounting for the Impairment or
Disposal of Long-Lived Assets
 40




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##### Table of Contents



Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities
   Security Deposits and Maintenance Payment Liabilities
   41




---



##### Table of Contents



Revenue Recognition
  
    
    Operating lease revenue.We receive lease revenues from flight equipment under operating
leases. Rental income from aircraft rents is recognized on a straight-line basis over the
respective lease terms. Contingent rents are recognized as revenue when they are earned.
Revenue is not recognized when collection is not reasonably assured.
 
    
    Finance lease income.Revenue from direct finance leases is recognized on the interest method
to produce a level yield over the life of the finance lease. Expected unguaranteed residual
values of leased assets are based on our assessment of residual values and independent
appraisals of the values of leased assets remaining at expiration of a lease term.
    New Accounting Pronouncements
 Fair Value Measurements
 42




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##### Table of Contents



Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 Accounting for Leases
 , Effective Date of FASB Statement No. 157
 Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of SFAS No. 115
 Business Combinations
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133
 43




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##### Table of Contents



The Hierarchy of Generally Accepted Accounting
Principles
 Operating Results
  Consolidated Statement of Operations of B&B Air for the year ended December 31, 2008 and for the
period from May 3, 2007 (incorporation date) to December 31, 2007 (Stub Period 2007)
 For the periodfrom May 3,2007(incorporationYear ended
    
    
    date) toDecember 31,
    
    
    December 31,
    
    
    Increase/2008
    
    
    2007
    
    
    (decrease)(Dollars in thousands)RevenuesOperating lease revenue
    
    $
    218,940
    
    
    $
    26,042
    
    
    $
    192,898Finance lease income
    
    
    2,446
    
    
    
    2,365
    
    
    
    81Gain on sale of aircraft
    
    
    11,437
    
    
    
    
    
    
    
    11,437Interest and other income
    
    
    3,315
    
    
    
    4,927
    
    
    
    (1,612
    )Total revenues
    
    
    236,138
    
    
    
    33,334
    
    
    
    202,804ExpensesDepreciation
    
    
    74,161
    
    
    
    8,573
    
    
    
    65,588Interest expense
    
    
    81,689
    
    
    
    14,628
    
    
    
    67,061Selling, general and administrative
    
    
    20,989
    
    
    
    4,866
    
    
    
    16,123Maintenance and other costs
    
    
    4,307
    
    
    
    165
    
    
    
    4,142Hedging costs related to interest
rate swap option
    
    
    
    
    
    
    1,725
    
    
    
    (1,725
    )Total expenses
    
    
    181,146
    
    
    
    29,957
    
    
    
    151,189Net income from continuing operations
before provision for income taxes
    
    
    54,992
    
    
    
    3,377
    
    
    
    51,615Provision for income taxes
    
    
    6,867
    
    
    
    1,032
    
    
    
    5,835Net income
    
    $
    48,125
    
    
    $
    2,345
    
    
    $
    45,780
   44




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45




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flows of B&B Air for the year ended December 31, 2008 (2008) and for the period from
May 3, 2007 (incorporation date) to December 31, 2007 (Stub Period 2007)
     Our Future Sources and Uses of Liquidity
    46




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##### Table of Contents




    
    Babcock & Brown ceases to hold at least 5% of the issued and outstanding shares of B&B Air;
 
    
    Babcock & Brown ceases to hold at least 51% of the capital stock of BBAM;
 
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end or
the unaudited or audited financial statements for each semi-annual period within 90 days, and
in each case such failure to deliver the required financial statements continues for 30 days
after written notice from the agent;
 
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be delivered
as described above contains a going-concern or similar qualification;
 
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
 
    
    A BBAM default on recourse debt over $25 million.
  47




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##### Table of Contents



Dividends and Share Repurchases.
  Maintenance Cash Flows.
   48




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##### Table of Contents



Financing
 Aircraft Acquisition Facility
  Availability.
  
    
    Babcock & Brown ceases to hold at least 5% of the issued and outstanding shares of B&B Air;
 
    
    Babcock & Brown ceases to hold at least 51% of the capital stock of BBAM;
 
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end or
the unaudited or audited financial statements for each semi-annual period within 90 days, and
in each case such failure to deliver the required financial statements continues for 30 days
after written notice from the agent;
 
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be delivered
as described above contains a going-concern or similar qualification;
 
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
 
    
    A BBAM default on recourse debt over $25 million.
  49




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##### Table of Contents



Commitment Fees.
 Principal Payments.
  Interest.
 Collateral.
 Default and Remedies.
 
    
    interest or principal is not paid when due,
    
    failure to make certain other payments and such payments are not made within 20
business days of receiving written notice,
    
    failure to maintain required insurance levels,
    
    failure to comply with certain other covenants and such noncompliance continuing for 20
business days after receipt of written notice,
    
    B&B Air Acquisition or any of its subsidiaries becoming the subject of insolvency
proceedings,
    
    certain early terminations of B&B Air Acquisitions swap agreements,
    
    failure to meet interest coverage ratios,
    
    Babcock & Brown ceasing to hold at least 5% of the issued and outstanding shares of B&B
Air; and
    
    Babcock & Brown ceasing to hold at least 51% of the capital stock of BBAM.
 50




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Financial conditions at
Babcock & Brown could adversely affect our business.
  Certain Covenants.
 
    
    Aircraft Dispositions.The ability of B&B Air Acquisition to sell aircraft is limited
by the terms of the Aircraft Acquisition Facility. Any sale after the end of the
availability period requires prior written consent of the agent. Any sale prior to that
date requires that no event of default will occur as a result of the sale and that B&B Air
Acquisition must receive a minimum cash sales price equal to at least the debt allocable to
that aircraft plus certain expenses.
    
    Concentration Limits.B&B Air Acquisition may only enter into a future lease if, after
entering into such future lease, B&B Air Acquisition is in compliance with certain criteria
in respect of limits based on, among other things, the proportion of our portfolio leased
to any single lessee, the regional concentration of our lessees and aircraft type and age
concentration limits. These limits may place limits on B&B Air Acquisitions ability
(absent lender consent) to re-lease their aircraft to certain customers at certain times,
even if to do so would provide the best risk-adjusted cash flow and would be within our
risk policies then in effect.
    
    Interest Coverage Ratio.B&B Air Acquisition is required to maintain a monthly
interest coverage ratio of at least 1.1 to 1, and a rolling three-month interest coverage
ratio of at least 1.25 to 1.
    
    Leases.When re-leasing any aircraft, B&B Air Acquisition must receive agent consent.
Follow-on leases must also be in accordance with certain provisions set forth in the
Aircraft Acquisition Facility. The requirements include, but are not limited to,
maintenance, insurance and minimum lease rental rates and conditions.
    
    Additional Aircraft.B&B Air Acquisition is not permitted to acquire any aircraft unless
certain conditions are satisfied, including that the acquisition does not result in an
event of default under the transaction documents and does not result in a default under the
applicable concentration limits. In addition, the agent for the facility has the right to
approve funding requests in its sole discretion.
    
    Modification of Aircraft and Capital Expenditures.B&B Air Acquisition is generally not
permitted to make capital expenditures in respect of any optional improvement or
modification of an aircraft if the aggregate cost of such modifications and improvements
exceeds 7.5% of the
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aircraft value determined as of the date the aircraft was acquired, without the prior
written consent of the agent.
    
    Other Covenants.The Aircraft Acquisition Facility contains other customary covenants,
including covenants that restrict the investment and business activities of B&B Air
Acquisition, maintain the special purpose and bankruptcy remoteness characteristics of B&B
Air Acquisition, limit the amount and type of debt, guarantees or other indebtedness that
can be assumed by B&B Air Acquisition entities, restrict B&B Air Acquisitions ability to
grant liens or other encumbrances, require the maintenance of certain airline hull,
liability, war risk and repossession insurance and limit the ability of the members of B&B
Air Acquisition to merge, amalgamate, consolidate or transfer assets.
 Securitization
  Interest Rate.
 Payment Terms.
 Available Cash.
   52




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Redemption.
  Redemption Date
    
    PriceBefore October 14, 2009
    
    
    101.00
    %On or after October 14, 2009, but before April 14, 2010
    
    
    100.36
    %On or after April 14, 2010, but before October 14, 2010
    
    
    100.27
    %On or after October 14, 2010, but before April 14, 2011
    
    
    100.17
    %On or after April 14, 2011, but before October 14, 2011
    
    
    100.09
    %On or after October 14, 2011
    
    
    100.00
    %
 Collateral.
 Default and Remedies.
 Certain Covenants.
 53




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
    
    Aircraft Dispositions.The ability of B&B Air Funding to sell aircraft is limited under
the Securitization documentation. B&B Air Funding may sell up to ten aircraft without the
consent of the policy provider and additional aircraft with the consent of the policy
provider provided that such sales do not violate the concentration limits discussed below
and the price is above 107% of the obligations of the notes allocable to such aircraft. B&B
Air Funding may also sell aircraft provided that (1) sales in any one year do not exceed
10% of the initial average base value of all our aircraft as adjusted for depreciation as
provided in the indenture, (2) such sales do not violate the concentration limits, (3)
Moodys confirms its rating on the notes and (4) the policy provider consents.
    
    Concentration Limits.B&B Air Funding may only enter into a future lease (other than a
renewal, extension or restructuring of any lease) if, after entering into such future
lease, B&B Air Funding is in compliance with certain criteria in respect of limits based
on, among other things, the proportion of our portfolio leased to any single lessee, the
regional concentration of our lessees and the sovereign ratings of the countries in which
our lessees are located. B&B Air Funding will be permitted to vary from these limits if B&B
Air Funding receives a confirmation from Moodys that it will not lower, qualify or
withdraw its ratings on the notes as a result of such lease and the policy provider
consents to such lease. These limits may place limits on B&B Air Fundings ability (absent
a third-party consent) to re-lease the aircraft in our Initial Portfolio to certain
customers at certain times, even if to do so would provide the best risk-adjusted cash flow
and would be within our risk policies then in effect.
    
    Debt Service Coverage Ratio.From (and including) the monthly period beginning in July
2010 and continuing through July 2012, B&B Air Funding is required to maintain a debt
service coverage ratio of 1.80 to 1. In the event that such debt service coverage ratio is
not maintained for two consecutive months, all amounts on deposit in the collections
account will be applied towards the outstanding principal balance of the notes after the
payment of expenses, senior hedge payments and amounts due and owing to the policy provider
and the liquidity facility provider.
    
    Leases.When re-leasing any aircraft, B&B Air Funding must do so in accordance with
certain core lease provisions set forth in the Indenture. The core lease provisions
include, but are not limited to, maintenance, return conditions in respect of the aircraft,
lease termination events and prohibitions on the assignments of the leases. These core
lease provisions may not be amended without the consent of the policy provider.
    
    Additional Aircraft.B&B Air Funding is not permitted to acquire any aircraft other than
the aircraft in the Initial Portfolio unless certain conditions are satisfied, including
that the acquisition does not result in an event of default under the transaction documents
and does not result in a default under the applicable concentration limits. We have the
right to contribute additional aircraft from time to time to B&B Air Funding. In the event
that additional notes are issued to finance the acquisition of additional aircraft, B&B Air
Funding must obtain the prior written consent of the policy provider and liquidity facility
provider and a confirmation from the rating agencies rating the notes that they will not
lower, qualify or withdraw their ratings on the notes as a result of the acquisition.
Additional aircraft may include, among other things, aircraft, engines and entities with an
ownership or leasehold interest in aircraft or engines. Any additional notes issued will
rank pari passu in right of payment of principal and interest with B&B Air Fundings
outstanding notes. The acquisition of additional aircraft will also require the approval of
the directors of B&B Air Funding.
    
    Modification of Aircraft and Capital Expenditures.B&B Air Funding is generally not
permitted to make capital expenditures in respect of any optional improvement or
modification of an aircraft in the Initial Portfolio, including aircraft conversions from
passenger to cargo aircraft, or for the purpose of purchasing or otherwise acquiring any
engines or parts outside of the ordinary course of business. However, B&B Air Funding may
make capital expenditures in the ordinary course of
 54




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business in connection with an existing or new lease or the sale of an aircraft, and capital
expenditures where: (1) conversions or modifications are funded by capital contributions
from us, (2) modification payments are made and the aggregate net cash cost does not exceed
5% of the aggregate initial average base value of the Initial Portfolio (other than
modification payments funded, with capital contributions from us) or (3) modification
payments permitted under the servicing agreement that do not require the express prior
written approval of B&B Air Funding. Subject to certain conditions set forth in the
indenture, B&B Air Funding is also permitted to use funds available to make scheduled
principal payments on the Notes and amounts available for distributions to us for the
purpose of converting passenger aircraft in the Initial Portfolio to freighter or mixed use
configuration.
    
    Other Covenants.The Indenture contains other covenants customary for a securitization,
including covenants that restrict the investment and business activities of B&B Air
Funding, maintain the special purpose and bankruptcy remoteness characteristics of B&B Air
Funding, limit the amount and type of debt, guarantees or other indebtedness that can be
assumed by B&B Air Funding entities, restrict B&B Air Fundings ability to grant liens or
other encumbrances, require the maintenance of certain airline hull, liability, war risk
and repossession insurance and limit the ability of the members of B&B Air Funding to
merge, amalgamate, consolidate or transfer assets.
    Capital Expenditures
  
    
    One Airbus A320-200 on lease to Clickair (Spain);
    
    One Boeing 757-200 on lease to Icelandair (Iceland);
    
    One Boeing 757-200SF on lease to Icelandair (Iceland);
    
    One Boeing 777-200ER on lease to KLM (The Netherlands);
    
    One Airbus A330-200 on lease to LTU (Germany);
    
    One Boeing 737-800 on lease to Sky Airlines (Turkey);
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
    
    One Boeing 737-900ER on lease to SpiceJet (India);
    
    One Boeing 747-400 on lease to United Air Lines (USA);
    
    One Airbus A319-100 on lease to Virgin America (USA); and
    
    One Airbus A320-200 on lease to Virgin America (USA).
  
    
    Four Airbus A319-100s on lease to US Airways (USA);
    
    One Airbus A320-200 on lease to Clickair (Spain);
    
    One Boeing 737-900ER on lease to SpiceJet (India); and
    
    One Boeing 757-200 on lease to Icelandair (Iceland).
  Inflation
  Foreign Currency Exchange Risk
  Off-Balance Sheet Arrangements
  56




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Contractual Obligations
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalPrincipal payments under the
Notes(1)
    
    $
    
    
    
    $
    11,796
    
    
    $
    11,904
    
    
    $
    50,875
    
    
    $
    108,880
    
    
    $
    644,637
    
    
    $
    828,092Interest payments under the
Notes(2)
    
    
    15,444
    
    
    
    15,452
    
    
    
    15,113
    
    
    
    14,738
    
    
    
    13,069
    
    
    
    30,430
    
    
    
    104,246Payments to affiliates of B&B
under our management
agreement(3)(7)
    
    
    6,054
    
    
    
    6,054
    
    
    
    6,054
    
    
    
    6,054
    
    
    
    6,054
    
    
    
    113,513
    
    
    
    143,783Payments to affiliates of B&B
under our administrative
servicing agreement for our
Initial
Portfolio(4)(7)
    
    
    757
    
    
    
    757
    
    
    
    757
    
    
    
    757
    
    
    
    757
    
    
    
    3,783
    
    
    
    7,568Payments to affiliates of B&B
under our servicing
agreements for additional
aircraft(5)
    
    
    240
    
    
    
    240
    
    
    
    240
    
    
    
    240
    
    
    
    160
    
    
    
    
    
    
    
    1,120Payments to affiliates of B&B
under our servicing agreement
for our Initial
Portfolio(6)(7)
    
    
    1,816
    
    
    
    1,816
    
    
    
    1,816
    
    
    
    1,816
    
    
    
    1,816
    
    
    
    9,082
    
    
    
    18,162Total
    
    $
    24,311
    
    
    $
    36,115
    
    
    $
    35,884
    
    
    $
    74,480
    
    
    $
    130,736
    
    
    $
    801,445
    
    
    $
    1,102,971
 
 (1)
    
    Until July 2010, there are no scheduled principal payments on the Notes. For each
month between July 2010 and August 2012, there are scheduled principal payments in fixed
amounts of approximately $1.0 million per month, in each case subject to satisfying certain
debt service coverage ratios and other covenants. Thereafter, cash flow will not be available
to us for the payment of dividends since principal payments are not fixed in amount but rather
are determined monthly based on revenues collected and costs and other liabilities incurred
prior to the relevant payment date. The final maturity of the Notes is November 14, 2033.(2)
    
    The interest payable under our Notes will vary based on LIBOR. Interest payments
assume LIBOR remains at the current rate through the term of the Notes and reflect amounts we
expect to pay after giving effect to interest swaps and amounts payable to our policy
provider.(3)
    
    Our management agreement provides that we pay base and rent fees and a management
expense amount of $6.0 million annually to our Manager. Base and rent fees paid to BBAM under
our servicing agreements are credited toward (and thereby reduce) such fees payable under our
management agreement and the amounts in the table assume that such credit reduces the base and
rent fees payable under the management agreement to $0. See Management Agreement. In
addition, we pay to our Manager an incentive fee based on whether our quarterly dividends
exceed specified targets and fees 57




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for originations and dispositions of aircraft or other aviation assets. Amounts in the table do
not include incentive fees or fees for originations and dispositions.(4)
    
    Our management agreement provides that we pay our Manager an administrative agency
fee initially equal to $750,000 per annum for each aircraft securitization financing we
complete.(5)
    
    The servicing agreement between BBAM and B&B Air Acquisition provide that they pay
BBAM an administrative agency fee of $20,000 per month. B&B Air Acquisition will also pay BBAM
a rent fee equal to 3.5%, respectively, of the aggregate amount of basic rent actually
collected for all or any part of a month. Amounts in the table reflect the rent fee for our
aircraft as of December 31, 2008.(6)
    
    Our servicing agreement for our Initial Portfolio provides that we will pay BBAM a
base bee of $150,000 per month, which will increase by 0.01% of the maintenance-adjusted base
value (at the time of acquisition) of each additional aircraft acquired into B&B Air Funding
that is not an aircraft in our Initial Portfolio. We will also pay BBAM a rent fee equal to
1.0%, of the aggregate amount of basic rent actually collected for all or any part of a month
for any of their aircraft plus 1.0% of the aggregate amount of basic rent due for all or any
part of a month for any of our aircraft. Amounts in the table do not reflect rent fees payable
on our Initial Portfolio or the acquisition of any aircraft beyond our Initial Portfolio.(7)
    
    Pursuant to the terms of the agreements, the amount of the base fee payable and the
amount of the administrative fee payable will be increased (but not decreased) annually by the
percentage movement (if any) in the CPI index from January 1 to December 31 of the previous
year in the case of the 2009 calendar year and thereafter. Amounts in the table have not been
adjusted for CPI indexed increases. Amounts in the table assume rates in effect for 2009
remain constant in future periods. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
  Name
    
    Age
    
    PositionColm Barrington
    
    63
    
    Chief Executive Officer and DirectorGary Dales
    
    53
    
    Chief Financial OfficerSteven Zissis
    
    49
    
    Chairman and DirectorJames Fantaci
    
    62
    
    DirectorErik G. Braathen.
    
    54
    
    DirectorSean Donlon
    
    69
    
    DirectorJoseph M. Donovan
    
    54
    
    DirectorSusan M. Walton
    
    49
    
    Director
 Colm Barrington
 58




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Gary Dales
 Steven Zissis
 James Fantaci
 Erik G. Braathen
 Sean Donlon
 Joseph M. Donovan
 59




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##### Table of Contents



Susan
M. Walton
 Compensation of Directors
   Executive Compensation
  Board of Directors
   Committees of the Board
  Audit Committee
  
    
    selecting independent auditors for approval by our shareholders;
 
    
    reviewing the scope of the audit to be conducted by our independent auditors, as well as the
results of their audit;
 60




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##### Table of Contents




    
    approving audit and non-audit services provided to us by the independent auditors;
 
    
    reviewing the organization and scope of our internal system of audit, financial and
disclosure controls;
 
    
    overseeing internal controls and risk management;
 
    
    overseeing our financial reporting activities, including our annual report, and the
accounting standards and principles followed;
 
    
    reviewing and approving related-party transactions and preparing reports for the board of
directors on such related-party transactions; and
 
    
    conducting other reviews relating to compliance by our employees with our policies and
applicable laws.
  Compensation Committee
  Nominating and Corporate Governance Committee
  Lead Independent Director
  Our Management
   Share Ownership
  61




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
  Shares Beneficially OwnedName
    
    Number
    
    PercentBabcock & Brown Limited
    
    
    4,767,579
    
    
    
    14.7
    %Neuberger Berman Inc.(1)
    
    
    2,411,010
    
    
    
    7.4
    %BBGP Aircraft Holdings Limited (2)
    
    
    2,074,528
    
    
    
    6.4
    %
 
 (1)
    
    The information above and in this footnote is based on information taken from the
Schedule 13G/A filed by Neuberger Berman Inc. with the SEC on February 12, 2009. Neuberger
Berman Inc. and Neuberger Berman LLC have sole voting power over 1,710,585 ADSs and shared
dispositive power over 2,411,010 ADSs.(2)
    
    Pursuant to a stock repurchase agreement by and between B&B Air and BBGP Aircraft
Holdings Limited (BBGP), on December 31, 2008 we purchased 961,539 ADSs from BBGP for a
price of $5.20 per ADS. Following this sale, BBGP holds 2,074,528 ADSs. BBGP is a subsidiary
of Babcock & Brown Global Partners. BBGP Managing General Partner Ltd. is the general partner
to Babcock & Brown Global Partners. BBGP, Babcock & Brown Global Partners and BBGP Managing
General Partner Ltd. have shared disposive power over 2,074,529 ADSs.    Manager Shares
  Related Party Transactions
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MANAGEMENT AGREEMENT
 General
   Services
  Management and Administrative Services.
 
    
    managing our portfolio of aircraft and other aviation assets and the administration of our
cash balances;
 
    
    if requested by our board, making available a member of the core management team of our
Manager as our nominee on the board of directors of any of our subsidiaries (provided that
each such member must be agreed between us and our Manager);
 
    
    assisting with the implementation of our boards decisions;
 
    
    providing us suitably qualified and experienced persons to perform the management and
administrative services for us and our subsidiaries, including persons to be appointed by our
board to serve as our dedicated chief executive and chief financial officers (who shall remain
employees of, and be remunerated by, our Manager or an affiliate of our Manager while serving
in such capacities);
 
    
    performing or procuring the performance of all reasonable accounting, tax, corporate
secretarial, information technology, reporting and compliance services for us and our
subsidiaries, including the preparation and maintenance of our accounts and such financial
statements and other reports and filings as we are required to make with any governmental
agency (including the SEC) or stock exchange;
 
    
    supervising financial audits of us by an external auditor as required;
 
    
    managing our relations with our investors and the public, including:
 
    
    preparing our annual reports and any notices of meeting, papers, reports and agendas
relating to meetings of our shareholders; and
    
    assisting in the resolution of any complaints by or disputes with our investors and
any litigation involving us (other than litigation in which our interests are adverse to
those of our Manager or Babcock & Brown); and
 
    
    using commercially reasonable efforts to cause us to comply with all applicable laws.
 Origination and Disposition Services.
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##### Table of Contents




    
    sourcing opportunities relating to aircraft and other aviation assets, including using its
commercially reasonable efforts to notify us of potential aviation asset investment
opportunities that come to the attention of our Manager and which our Manager acting
reasonably believes may be of interest to us as investments;
 
    
    in relation to identified potential opportunities to purchase or sell aircraft and other
aviation assets, investigating, researching, evaluating, advising and making recommendations
on or facilitating such opportunities;
 
    
    with respect to prospective purchases and sales of aircraft and other aviation assets,
conducting negotiations with sellers and purchasers and their agents, representatives and
financial advisors; and
 
    
    otherwise providing advice and assistance to us in relation to the evaluation or pursuit of
aviation asset investment or disposition opportunities as we may reasonably request from time
to time.
  Ancillary Management and Administrative Services.
 
    
    the expansion of our Managers core management team with additional personnel as may be
required by developments or changes in the commercial aircraft leasing industry (whether
regulatory, economic or otherwise) or the compliance or reporting environment for publicly
listed companies in the United States (whether as a result of changes to securities laws or
regulations, listing requirements or accounting principles or otherwise); and
 
    
    making available individuals (other than members of our Managers core management team) as
our nominees on the boards of directors of any of our subsidiaries.
 Servicing
  Competitors.
 Compliance With Our Strategy, Policy and Directions
  64




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
    
    that matter has been the subject of a recommendation by our Manager; or
    
    the failure to make that decision, take that action or omit to take that action would breach
the fiduciary duties of our directors or any law.
  
    
    that matter has been the subject of a recommendation by our Manager; or
    
    the failure to make that decision, take that action or omit to take that action would breach
the fiduciary duties of our directors or any law.
  Appointment of Our Chief Executive Officer and Chief Financial Officer
  Restrictions and Duties
   (1)
    
    carry out any transaction with an affiliate of our Manager on our behalf, it being understood
that Babcock & Brown affiliates have been appointed as the exclusive Servicer for our
portfolio of aircraft, and that our Manager may delegate the provision of all or any part of
the services under the management agreement to any person affiliated or associated with
Babcock & Brown;(2)
    
    carry out any aviation asset investment or disposition transaction, or sequence of related
aviation asset investment or disposition transactions with the same person or group of persons
under common control, for us if the aggregate purchase price to be paid or the gross proceeds
to be received by us in connection therewith would exceed $200 million;(3)
    
    carry out any aviation asset investment or disposition transaction if the sum of all the
purchase prices to be paid or of all the gross proceeds to be received by us in connection
with all such transactions during any quarter would exceed $500 million;(4)
    
    appoint or retain any third-party service provider to assist our Manager in providing
management and administrative services if:
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
    
    the amount to be paid by our Manager and reimbursed by us or paid by us to the third
party with respect to any particular matter, or series of related matters, is reasonably
likely to exceed $1 million; or
    
    as a result of the appointment or retention, the amount to be paid by our Manager and
reimbursed by us or paid by us to all such third-party service providers appointed or
retained in any rolling 12-month period is reasonably likely to exceed $5 million;
 (5)
    
    appoint or retain any third-party service provider to assist our Manager in providing
ancillary management and administrative or the origination and disposition services if:
 
    
    the amount to be paid by our Manager and reimbursed by us or paid by us to the third
party with respect to any particular matter, or series of related matters, is reasonably
likely to exceed $1 million; or
    
    as a result of the appointment or retention, the amount to be paid by our Manager and
reimbursed by us or paid by us to all such third-party service providers appointed or
retained in any rolling 12-month period is reasonably likely to exceed $7.5 million; or
 (6)
    
    hold any cash or other assets of ours, provided that our Manager may cause our cash and other
assets to be held in our name or any custodian for us nominated or approved by us.
  Relationship of Management Agreement and Servicing Agreements
  Board Appointees
   Fees and Expenses
  66




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Management and Administrative Services
 Base and Rent Fees
 
    
    a base fee of $150,000 per month per subsidiary we establish for the purpose of entering into
an aircraft securitization financing, which will increase by 0.01% of the maintenance-adjusted
base value (at the time of acquisition) of each additional aircraft acquired beyond the
Initial Portfolio, in the case of B&B Air Funding, or beyond the initial portfolio of aircraft
financed with the proceeds of the applicable aircraft securitization financing, in the case of
any other subsidiary we establish for the purpose of entering into an aircraft securitization
financing (the amount of the base fee will be subject to adjustment as set forth below under
 Fees and Expenses  Adjusting the Base Fees and Administrative Agency Fees); and
 
    
    a rent fee equal to 1.0% of the aggregate amount of basic rent due for all or any part of a
month for any of such aircraft plus 1.0% of the aggregate amount of basic rent actually paid
for all or any part of a month for any of such aircraft.
   Incentive Fee.
 
    
    100% of the notional amount will be paid as a dividend on our common shares, without
the payment of any incentive fee to our Manager, up to a dividend of $0.575 per common
share;
    
    90% of the incremental notional amount in excess of $0.575 per common share will be
paid as a dividend on our common shares and 10% of the incremental notional amount will be
paid to our Manager as an incentive fee until each common share receives a dividend of
$0.650;
    
    80% of the incremental notional amount in excess of $0.650 per common share will be
paid as a dividend on our common shares and 20% of the incremental notional amount will be
paid to our Manager as an incentive fee until each common share receives a dividend of
$0.800; and
    
    75% of the incremental notional amount in excess of $0.800 per common share will be
paid as a dividend on our common shares and 25% of the incremental notional amount will be
paid to our Manager as an incentive fee.
   67




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Portion of Notional
    
    Portion of NotionalAmount Paid as
    
    Amount Paid asDividend to Common
    
    Incentive Fee toQuarterly Dividend Per Common Share
    
    Shares
    
    ManagerUp to $0.575
    
    
    100.00
    %
    
    
    0.00
    %$0.650
    
    
    98.73
    %
    
    
    1.27
    %$0.800
    
    
    94.58
    %
    
    
    5.42
    %$0.900
    
    
    91.91
    %
    
    
    8.09
    %$1.000
    
    
    89.89
    %
    
    
    10.11
    %
  
    
    the amount of the incentive fee (or applicable portion thereof to be paid in the form
of shares), divided by
    
    the average closing price of one common share for the 15 consecutive trading days
following the announcement of the declaration of the applicable dividend on shares (minus
the per share amount of the dividend for any trading day before the ex-dividend date for
the dividend).
 Origination and Disposition Fees and Change of Control Fees.
   Administrative Agency Fees.
  Adjusting the Base Fees and Administrative Agency Fees.
 Ancillary Management and Administrative Services.
  68




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Credit for Servicing Fees Paid
  Break Fees
  Expenses of the Manager
  
    
    quarterly payments of $1.5 million, subject to an annual adjustment indexed to the consumer
price index applicable to the previous year, to our Manager to defray expenses.We refer to this foregoing amount as the management expense amount. The management expense
amount is subject to adjustment by notice from our Manager and the approval of the independent
directors on our board of directors.
 
    
    for all our costs paid for us by our Manager (other than remuneration and certain expenses in
relation to our Managers core management team and our Managers corporate overhead),
including the following items which are not covered by the management expense amount:
 
    
    directors fees for the directors on our board of directors and our subsidiaries,
    
    directors and officers insurance for our and our subsidiaries directors and
officers,
    
    travel expenses of the directors (including flights, accommodation, taxis,
entertainment and meals while traveling) to attend any meeting of the board of our
company,
    
    fees and expenses relating to any equity or debt financings we enter into in the
future,
    
    fees and expenses of the depositary for our ADSs,
    
    costs and expenses related to insuring our aircraft and other aviation assets,
including all fees and expenses of insurance advisors and brokers,
    
    costs incurred in connection with organizing and hosting our annual meetings or other
general meetings of our company,
    
    costs of production and distribution of any of our security holder communications,
including notices of meetings, annual and other reports, press releases, and any
prospectus, disclosure statement, offering memorandum or other form of offering document,
    
    website development and maintenance,
 69




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
    
    travel expenses of the core management team and other personnel of Babcock & Brown
(including flights, accommodation, taxis, entertainment and meals while traveling) related
to sourcing, negotiating and conducting transactions on our behalf and attending any
meeting of the board or our company,
    
    external legal counsel,
    
    fees of third party consultants, accounting firms and other professionals,
    
    external auditors fees, and
    
    internal auditors fees.
 The above list of items is subject to the addition of further items by notice from our Manager
and the approval of our board of directors (which approval shall not be unreasonably withheld
or delayed).
    
    for all taxes, costs, charges and expenses properly incurred by our Manager in connection
with
 
    
    the provision of ancillary management and administrative services,
    
    the engagement of professional advisors, attorneys, appraisers, specialist
consultants and other experts as requested by us from time to time; or which our Manager
considers reasonably necessary in providing the services and discharging its duties and
other functions under the management agreement, including, without limitation, the fees
and expenses of professional advisors relating to the purchase and sale of aircraft and
other aviation assets.
 Term and Termination
  
    
    Babcock & Brown in aggregate ceases to hold (directly or indirectly) more than 50% of the
issued share capital of our Manager;
 
    
    our Manager becomes subject to bankruptcy or insolvency proceedings that are not discharged
within 75 days, unless our Manager is withdrawn and replaced within 90 days of the initiation
of such bankruptcy or insolvency proceedings with an affiliate or associate of Babcock & Brown
that is able to make correctly the representations and warranties set out in the management
agreement;
 
    
    at least 75% of our independent directors and holders of 75% or more of all of our
outstanding common shares (measured by vote) determine by resolution that there has been
unsatisfactory performance by our Manager that is materially detrimental to us;
 
    
    our Manager materially breaches the management agreement and fails to remedy such breach
within 90 days of receiving written notice from us requiring it to do so, or such breach
results in liability to us and is attributable to our Managers gross negligence, fraud or
dishonesty, or willful misconduct in respect of the obligation to apply the standard of care;
 
    
    any license, permit or authorization held by our Manager which is necessary for it to perform
the services and duties under the management agreement is materially breached, suspended or
revoked, or otherwise made subject to conditions which, in the reasonable opinion of our board
of directors, would prevent our Manager from performing the services and the situation is not
remedied within 90 days; or
 
    
    an order is made for the winding up of our Manager, unless our Manager is withdrawn and
replaced within 15 days with an affiliate or associate of Babcock & Brown that is able to make
correctly the representations and warranties set out in the management agreement.
  70




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
    
    we are delisted from the NYSE;
 
    
    we fail to make any payment due under the management agreement to our Manager within 15 days
after the same becomes due;
 
    
    we otherwise materially breach the management agreement and fail to remedy the breach within
90 days of receiving written notice from our Manager requiring us to do so;
 
    
    we or any of our significant subsidiaries become subject to bankruptcy or other insolvency
proceedings;
 
    
    an order is made for the winding up of our company; or
 
    
    any person or group (as defined under the Exchange Act) acquires more than 15% of any class
of our voting securities.
  Conflicts of Interest
  
    
    dealing or conducting business with us, our Manager, any affiliate or associate of
Babcock & Brown or any shareholder of ours;
    
    being interested in any contract or transaction with us, our Manager, any affiliate or
associate of Babcock & Brown or any shareholder of ours;
    
    acting in the same or similar capacity in relation to any other corporation or
enterprise;
    
    holding or dealing in any of our shares or other securities or interests therein; or
    
    co-investing with us.
 Acting in Interests of Shareholders
  Indemnification and Limitation of Liability
  71




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Independent Advice
  SERVICING AGREEMENT BETWEEN B&B AIR FUNDING AND BBAM
  
    
    lease marketing and remarketing, including lease negotiation;
 
    
    collecting rental payments and other amounts due under leases, collecting maintenance
payments where applicable, lease compliance and enforcement and delivery and accepting
redelivery of aircraft under lease;
 
    
    implementing aircraft dispositions;
 
    
    monitoring the performance of maintenance obligations of lessees under the leases in a manner
consistent with the practices employed from time to time by BBAM with respect to aircraft
owned or managed by it;
 
    
    using commercially reasonable efforts to maintain compliance with certain of our obligations
in our financing agreements;
 
    
    procuring legal and other professional services with respect to the lease, sale or financing
of the aircraft, any amendment or modification of any lease, the enforcement of our rights
under any lease, disputes that arise as to any aircraft or for any other purpose that BBAM
reasonably determines is necessary in connection with the performance of its services;
 
    
    periodic reporting of operational information relating to the aircraft, including providing
certain reports to the policy provider; and
 
    
    certain aviation insurance related services.
  Term and Termination
  
    
    The Servicing Agreement may be terminated prior to its scheduled termination date in the case
of certain events, including Babcock & Brown ceasing to own at least 50.1% of the voting or
economic interest in BBAM; or
 72




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
    
    The bankruptcy or insolvency of BBAM or Babcock & Brown International Pty Ltd.
   Servicing Fees
  
    
    a base fee of $150,000 per month, which will increase by 0.01% of the maintenance-adjusted
base value (at the time of acquisition) of each additional aircraft acquired into B&B Air
Funding that is not an aircraft in our Initial Portfolio; and
 
    
    a rent fee equal to 1.0% of the aggregate amount of basic rent due for all or any part of a
month for any of aircraft belonging to our Initial Portfolio, plus 1.0% of the aggregate
amount of basic rent actually paid for all or any part of a month for any of such aircraft.
   SERVICING AGREEMENT BETWEEN B&B AIR ACQUISITION AND BBAM
  
    
    lease marketing and remarketing, including lease negotiation;
 
    
    collecting rental payments and other amounts due under leases, lease compliance and
enforcement and accepting delivery of aircraft under lease; and
 
    
    providing legal and accounting services, including preparing and providing reports as
required by the Aircraft Acquisition Facility and providing other services to cause B&B Air
Acquisition to comply with the Aircraft Acquisition Facility.
   
    
    An event of default under the Aircraft Acquisition Facility, including Babcock & Brown
ceasing to hold at least 5% of the issued and outstanding shares of B&B Air;
 
    
    Babcock & Brown ceasing to hold at least 51% of the capital stock of BBAM;
 
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end or
the unaudited or
 73




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audited financial statements for each semi-annual period within 90 days, and in each case such
failure to deliver the required financial statements continues for 30 days after written notice
from the agent;
 
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be delivered
as described above contains a going-concern or similar qualification;
 
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
 
    
    A BBAM default on recourse debt over $25 million.
   ADMINISTRATIVE SERVICES AGREEMENT
  REGISTRATION RIGHTS AGREEMENT
   
 ITEM 8. FINANCIAL INFORMATION
 Consolidated statements and other financial information.
  Legal Proceedings
  74




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Dividend
     
 ITEM 9. THE OFFER AND LISTING
   High
    
    Low2007
    
    $
    23.90
    
    
    $
    16.562008
    
    
    18.85
    
    
    
    4.70
  High
    
    Low2007:Quarter ending September 30, 2007
    
    $
    22.90
    
    
    $
    22.60Quarter ending December 31, 2007
    
    
    23.90
    
    
    
    16.562008:Quarter ending March 31, 2008
    
    
    18.85
    
    
    
    13.40Quarter ending June 30, 2008
    
    
    16.94
    
    
    
    8.73Quarter ending September 30, 2008
    
    
    14.00
    
    
    
    8.03Quarter ending December 31, 2008
    
    
    10.25
    
    
    
    4.70
 75




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High
    
    Low2008:September 2008
    
    $
    12.50
    
    
    $
    8.03October 2008
    
    
    10.25
    
    
    
    5.75November 2008
    
    
    7.95
    
    
    
    4.90December 2008
    
    
    6.96
    
    
    
    4.702009:January 2009
    
    
    7.79
    
    
    
    4.81February 2009
    
    
    5.70
    
    
    
    2.52
 
 ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
  Material Contracts
  1)
    
    Management Agreement, dated as of October 2, 2007, between Babcock & Brown Air Management Co.
Limited and Babcock & Brown Air Limited. See Item 7.B Related Party Transactions 
Management Agreement.
 2)
    
    Asset Purchase Agreement, dated as of October 2, 2007, among JET- i Leasing LLC, the aircraft
sellers named therein and Babcock & Brown Air Funding I Limited. See Item 7.B Related Party
Transactions  Asset Purchase Agreement.
 3)
    
    Servicing Agreement, dated as of October 2, 2007, among Babcock & Brown Aircraft Management
LLC, Babcock & Brown Aircraft Management (Europe) Limited, Babcock & Brown Air Funding I
Limited and AMBAC Assurance Corporation. See Item 7.B Related Party Transactions 
Servicing Agreement.
 4)
    
    Administrative Services Agreement, dated as of October 2, 2007, among Deutsche Bank Trust
Company Americas, AMBAC Assurance Corporation, Babcock & Brown Air Management Co. Limited and
Babcock & Brown Air Funding I Limited. See Item 7 Related Party Transactions 
Administrative Services Agreements.
 5)
    
    Registration Rights Agreement, dated as of October 2, 2007, among private investors and
Babcock & Brown Air Limited. See Item 7 Related Party Transactions  Registration Rights
Agreement.
 6)
    
    Trust Indenture, dated as of October 2, 2007, among Deutsche Bank Trust Company Americas, BNP
Paribas, AMBAC Assurance Corporation and Babcock & Brown Air Funding I Limited. See Item 5
Liquidity and Capital Resources  Financing  Securitization.
 76




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7)
    
    Security Trust Agreement, dated as of October 2, 2007, between Deutsche Bank Trust Company
Americas, and Babcock & Brown Air Funding I Limited. See Item 5 Liquidity and Capital
Resources  Financing  Securitization.
 8)
    
    Aircraft Acquisition Facility, dated as of November 7, 2007 among Babcock & Brown Air
Acquisition I Limited, the Lenders from time to time party thereto and Credit Suisse, New York
Branch. See Item 5 Liquidity and Capital Resources  Financing  Aircraft Acquisition
Facility.
 9)
    
    Servicing and Administrative Services Agreement, dated as of November 7, 2007 among Babcock &
Brown Aircraft Management LLC, Babcock & Brown Aircraft Management (Europe) Limited, Babcock &
Brown Air Acquisition I Limited and each Aircraft Subsidiary that becomes a party thereto. See
Item 7 Related Party Transactions  Servicing Agreement.
 Exchange Controls
   Taxation
 Irish Tax Considerations
    
    
    An Irish Holder is a holder of our shares that (1) beneficially owns our shares by virtue
of holding the related ADSs evidenced by the relevant American Depositary Receipt or ADR; (2)
in the case of individual holders, is resident or ordinarily resident in Ireland under Irish
taxation laws; and (3) in the case of a holder that is a company, is resident in Ireland under
Irish taxation laws and is not also a resident of any other country under any double taxation
agreement entered into by Ireland.
 
    
    A Non-Irish Holder is a Holder of our shares that is not an Irish Holder and has never
been an Irish Holder.
 
    
    A US Holder is a holder of our shares that: (1) beneficially owns our shares by virtue of
holding the related ADSs evidenced by the relevant ADR; (2) is a resident of the United States
for the purposes of the Ireland/United States Double Taxation Convention; (3) in the case of
an individual holder, is not also resident or ordinarily resident in Ireland for Irish tax
purposes; (4) in the case of a corporate holder, is not resident in Ireland for Irish tax
purposes and is not ultimately controlled by persons resident in Ireland; and (5) is not
engaged in any trade or business and does not perform independent personal services through a
permanent establishment or fixed base in Ireland.
 77




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##### Table of Contents




    
    Relevant Territory is defined as a country with which Ireland has a double tax treaty,
(which includes the United States), or a member state of the European Union other than
Ireland.
 Irish Dividend Withholding Tax
  Irish Holders.
 Non-Irish Holders.
 
    
    who are ultimately controlled by persons resident in a Relevant Territory and who are not
ultimately controlled by persons not resident in a Relevant Territory; or
 
    
    who are resident in a Relevant Territory and not controlled by Irish residents; or
 
    
    whose principal class of shares or the principal class of shares of whose 75% or greater
parents are substantially and regularly traded on a recognized stock exchange in a Relevant
Territory; or which are wholly owned by two or more companies, each of whose principal class
of shares are substantially and regularly traded on a recognized stock exchange in a Relevant
Territory may receive dividends free from DWT where they provide the ADS depository with the
relevant documentation required by Irish law.
 Income Tax
 Irish and Non-Irish Holders
 Irish Holders. i.e   
  Non-Irish Holders.
 
    
    an individual resident in a Relevant Territory; or
    
    a corporation that is ultimately controlled by persons resident in a Relevant
Territory; or
    
    a corporation whose principal class of shares (or whose 75% or greater parents
principal class of shares) are substantially and regularly traded on a recognized stock
exchange in a Relevant Territory; or
 78




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##### Table of Contents




    
    a corporation that is wholly owned by two or more corporations each of whose principal
class of shares is substantially and regularly traded on a recognized stock exchange in a
Relevant Territory; or
    
    otherwise entitled to an exemption from DWT.
  Taxation of Capital Gains
 Irish Holders.
 
 Non-Irish Holders.
 Irish Capital Acquisitions Tax
   Irish Stamp Duty
  79




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##### Table of Contents



Taxation of the B&B Air Group
 Corporation Tax
  U.S. Federal Income Tax Considerations
   Taxation of U.S. Holders of Shares
  80




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##### Table of Contents



Tax Consequences of Passive Foreign Investment Company (PFIC) Status
   
    
    Excess distributions by us to a U.S. Holder would be taxed in a special way. Excess
distributions are amounts received by a U.S. Holder with respect to our shares in any taxable
year that exceed 125% of the average distributions received by such U.S. Holder from us in the
shorter of either the three previous years or such U.S. Holders holding period for shares
before the present taxable year. Excess distributions must be allocated ratably to each day
that a U.S. Holder has held our shares. A U.S. Holder must include amounts allocated to the
current taxable year in its gross income as ordinary income for that year. A U.S. Holder must
pay tax on amounts allocated to each prior taxable year in which we were a PFIC at the highest
rate in effect for that year on ordinary income and the tax is subject to an interest charge
at the rate applicable to deficiencies for income tax.
 
    
    The entire amount of gain realized by a U.S. Holder upon the sale or other disposition of
shares will also be treated as an excess distribution and will be subject to tax as described
above.
 
    
    The tax basis in shares that were acquired from a decedent who was a U.S. Holder would not
receive a step-up to fair market value as of the date of the decedents death but would
instead be equal to the decedents basis, if lower than fair market value.
  81




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##### Table of Contents



You should consult your tax advisor about the PFIC rules, including the advisability of making a
QEF election or mark-to-market election.
 Taxation of the Disposition of Shares
 Information Reporting and Backup Withholding for U.S. Holders
   Information Reporting and Backup Withholding for Non-U. S. Holders
   82




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##### Table of Contents



Taxation of B&B Air and Our Subsidiaries
   de minimis
  83




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##### Table of Contents



Bermuda Tax Considerations
  Documents On Display
 http://www.sec.gov www.babcockbrownair.com
 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Sensitivity Analysis
  84




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##### Table of Contents



Foreign Currency Exchange Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  85




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##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures
  (b) Managements Annual Report on Internal Control over Financial Reporting
   (c) Report of Independent Registered Public Accounting Firm
     86




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##### Table of Contents



(d) Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
 www.babcockbrownair.com).
 87




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##### Table of Contents



ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Amount
    
    
    %Audit fees(1)
    
    $
    1,159
    
    
    
    97.2
    %Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    34
    
    
    
    2.8
    %Total
    
    $
    1,193
    
    
    
    100.0
    %
 
 (1)
    
    Audit fees include annual audit fees for B&B Air and its subsidiaries.  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 Issuer Purchases of Equity Securities
   Total Number ofShares
    
    Approximate DollarPurchased as Part
    
    ValueTotal
    
    Average
    
    of a
    
    of Shares that mayNumber
    
    Price
    
    Publicly
    
    yet beof Shares
    
    Paid Per
    
    Announced
    
    Purchased Under thePeriod
    
    Purchased
    
    Share
    
    Repurchased Plan
    
    Plans or ProgramsJune 30, 2008
    
    
    42,000
    
    
    $
    10.18
    
    
    
    42,000
    
    
    $29.6 millionJuly 1 to 3, 2008
    
    
    111,000
    
    
    $
    10.05
    
    
    
    153,000
    
    
    $28.5 millionDecember 31, 2008 [1]
    
    
    961,539
    
    
    $
    5.20
    
    
    
    1,114,539
    
    
    $23.4 million
 
 [1]
    
    Pursuant to a stock purchase agreement by and between the Company and BBGP
Aircraft Holdings Limited (BBGP), we purchased 961,539 ADSs from BBGP. 88




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##### Table of Contents



ITEM 16G. CORPORATE GOVERNANCE
  89




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PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
 INDEX
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets of Babcock & Brown Air Limited as of December 31, 2008 and 2007
    
    
    F-3Consolidated Statements of Operations of Babcock & Brown Air Limited for the year ended December 31,
2008 and for the period from May 3, 2007 (incorporation date) to December 31, 2007
    
    
    F-5Consolidated Statements of Shareholders Equity and Comprehensive Income of Babcock & Brown Air
Limited for the period from May 3, 2007 (incorporation date) to December 31, 2007 and for the year
ended December 31, 2008
    
    
    F-6Consolidated Statements of Cash Flows of Babcock & Brown Air Limited for the year ended December 31,
2008 and for the period from May 3, 2007 (incorporation date) to December 31, 2007
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-10Schedule I  Condensed Financial Information of Parent
    
    
    F-38Report of Independent Registered Public Accounting Firm
    
    
    F-41Predecessor Consolidated Balance Sheet as of December 31, 2007
    
    
    F-42Predecessor Consolidated Statements of Operations for the years ended December 31, 2007 and 2006
    
    
    F-43Predecessor Consolidated Statements of Members Capital for the years ended December 31, 2007 and 2006
    
    
    F-44Predecessor Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006
    
    
    F-45Notes to Predecessor Consolidated Financial Statements
    
    
        F-47
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 F-2




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##### Table of Contents



Babcock & Brown Air Limited
 
 Consolidated Balance Sheets
 AS OF DECEMBER 31, 2008 AND 2007  (Dollar amounts in thousands, except share and par value data)
 December 31, 2008
    
    
    December 31, 2007AssetsCash and cash equivalents
    
    $
    56,763
    
    
    $
    15,616Rent receivables
    
    
    4,148
    
    
    
    832Restricted cash and cash equivalents
    
    
    113,658
    
    
    
    112,621Flight equipment held for operating leases, net
    
    
    1,830,612
    
    
    
    1,309,142Investment in direct finance leases, net
    
    
    
    
    
    
    74,693Deferred tax asset, net
    
    
    40,734
    
    
    
    36,712Fair market value of derivative asset
    
    
    2,368
    
    
    
    Other assets, net
    
    
    37,891
    
    
    
    39,610Total assets
    
    
    2,086,174
    
    
    
    1,589,226LiabilitiesAccounts payable and accrued liabilities
    
    
    13,809
    
    
    
    7,983Rentals received in advance
    
    
    9,476
    
    
    
    7,675Payable to related parties
    
    
    2,728
    
    
    
    1,651Security deposits
    
    
    35,664
    
    
    
    22,899Maintenance payment liability
    
    
    88,526
    
    
    
    49,850Notes payable, net
    
    
    826,301
    
    
    
    850,660Borrowings under aircraft acquisition facility
    
    
    597,471
    
    
    
    132,573Fair market value of derivative liabilities
    
    
    113,374
    
    
    
    18,731Other liabilities
    
    
    9,412
    
    
    
    6,702Total liabilities
    
    
    1,696,761
    
    
    
    1,098,724Shareholders equityCommon shares, $0.001 par value; 499,999,900 shares authorized;
32,488,911 and 33,603,450 shares issued and outstanding at
December 31, 2008 and 2007, respectively
    
    
    32
    
    
    
    34Manager shares, $0.001 par value; 100 shares authorized, issued and
outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    499,882
    
    
    
    506,339Notes receivable for common shares
    
    
    
    
    
    
    (1,827
    )Retained earnings (deficit)
    
    
    (16,584
    )
    
    
    2,345
 F-3




---



##### Table of Contents



December 31, 2008
    
    
    December 31, 2007Accumulated other comprehensive loss, net
    
    
    (93,917
    )
    
    
    (16,389
    )Total shareholders equity
    
    
    389,413
    
    
    
    490,502Total liabilities and shareholders equity
    
    $
    2,086,174
    
    
    $
    1,589,226
  F-4




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##### Table of Contents



Babcock & Brown Air Limited
 
 Consolidated Statements of Operations
 FOR THE YEAR ENDED DECEMBER 31, 2008 AND FOR THE PERIOD FROM MAY 3, 2007
(INCORPORATION DATE) TO DECEMBER 31, 2007
(Dollar amounts in thousands, except share and per share data)
 Period fromMay 3, 2007(IncorporationYear ended
    
    
    Date) toDecember 31,
    
    
    December 31,2008
    
    
    2007RevenuesOperating lease revenue
    
    $
    218,940
    
    
    $
    26,042Finance lease income
    
    
    2,446
    
    
    
    2,365Gain on sale of aircraft
    
    
    11,437
    
    
    
    Interest and other income
    
    
    3,315
    
    
    
    4,927Total revenues
    
    
    236,138
    
    
    
    33,334ExpensesDepreciation
    
    
    74,161
    
    
    
    8,573Interest expense
    
    
    81,689
    
    
    
    14,628Hedging costs
    
    
    
    
    
    
    1,725Selling, general and administrative
    
    
    20,989
    
    
    
    4,866Maintenance and other costs
    
    
    4,307
    
    
    
    165Total expenses
    
    
    181,146
    
    
    
    29,957Net income before provision for income taxes
    
    
    54,992
    
    
    
    3,377Income tax provision
    
    
    6,867
    
    
    
    1,032Net income
    
    $
    48,125
    
    
    $
    2,345Weighted average number of shares  basic and diluted
    
    
    33,524,074
    
    
    
    12,584,008Basic and diluted earnings per share
    
    $
    1.44
    
    
    $
    0.19Dividends declared and paid per share
    
    $
    2.00
    
    
    $
    
  F-5




---



##### Table of Contents



Babcock & Brown Air Limited
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
 FOR THE PERIOD FROM MAY 3, 2007 (INCORPORATION DATE) TO DECEMBER 31, 2007  (Dollar amounts in thousands, except share data)
 Notes
    
    
    
    
    
    AccumulatedAdditional
    
    Receivable
    
    
    
    
    
    Other
    
    Total
    
    TotalManager Shares
    
    
    Common Shares
    
    Paid-in
    
    for Common
    
    Retained
    
    Comprehensive
    
    Shareholders
    
    ComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Shares
    
    Earnings
    
    Loss, net
    
    Equity
    
    LossBalance May 3,
2007
(incorporation
date)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Cancellation of
common shares
    
    
    
    
    
    
    
    
    
    
    (1,000,000
    )
    
    
    (1
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Issuance of
manager and common
shares, net of
underwriting fees
and offering costs
of $26,444
    
    
    100
    
    
    
    
    
    
    
    33,603,450
    
    
    
    34
    
    
    
    746,402
    
    
    
    (321,354
    )
    
    
    
    
    
    
    
    
    
    
    425,082Collections of
notes receivable
for common shares
and offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,527
    
    
    
    
    
    
    
    
    
    
    
    319,527Interest received
on notes
receivable for
common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    877Deemed
distribution to
predecessor
company, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240,940
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240,940
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,345
    
    
    
    
    
    
    
    2,345
    
    
    $
    2,345Net change in the
fair value of
derivatives, net
of deferred tax
benefit of $2,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,389
    )
    
    
    (16,389
    )
    
    
    (16,389
    )Comprehensive
loss, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (14,044
    )Balance December
31, 2007
    
    
    100
    
    
    $
    
    
    
    
    33,603,450
    
    
    $
    34
    
    
    $
    506,339
    
    
    $
    (1,827
    )
    
    $
    2,345
    
    
    $
    (16,389
    )
    
    $
    490,502
  F-6




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##### Table of Contents



Babcock & Brown Air Limited  Consolidated Statements of Shareholders Equity and Comprehensive Income
 FOR THE YEAR ENDED DECEMBER 31, 2008  (Dollar amounts in thousands, except share data)
 Notes
    
    
    
    
    
    AccumulatedAdditional
    
    Receivable
    
    Retained
    
    Other
    
    Total
    
    TotalManager Shares
    
    
    Common Shares
    
    Paid-in
    
    for Common
    
    Earnings
    
    Comprehensive
    
    Shareholders
    
    ComprehensiveShares
    
    Amount
    

    Shares
    
    Amount
    
    Capital
    
    Shares
    
    (Deficit)
    
    Loss, net
    
    Equity
    
    LossBalance December
31, 2007
    
    
    100
    
    
    $
    
    
    
    
    33,603,450
    
    
    $
    34
    
    
    $
    506,339
    
    
    $
    (1,827
    )
    
    $
    2,345
    
    
    $
    (16,389
    )
    
    $
    490,502Collections of
notes receivable
for common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,827
    
    
    
    
    
    
    
    
    
    
    
    1,827Dividends to
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,054
    )
    
    
    
    
    
    
    (67,054
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140Shares repurchased
    
    
    
    
    
    
    
    
    
    
    (1,114,539
    )
    
    
    (2
    )
    
    
    (6,597
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,599
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,125
    
    
    
    
    
    
    
    48,125
    
    
    $
    48,125Net change in the
fair value of
derivatives, net
of deferred tax
benefit of $11,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,528
    )
    
    
    (77,528
    )
    
    
    (77,528
    )Comprehensive
loss, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (29,403
    )Balance December
31, 2008
    
    
    100
    
    
    $
    
    
    
    
    32,488,911
    
    
    $
    32
    
    
    $
    499,882
    
    
    $
    
    
    
    $
    (16,584
    )
    
    $
    (93,917
    )
    
    $
    389,413
  F-7




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##### Table of Contents



Babcock & Brown Air Limited
 
 Consolidated Statements of Cash Flows
 FOR THE YEAR ENDED DECEMBER 31, 2008 AND FOR THE PERIOD FROM MAY 3, 2007
(INCORPORATION DATE) TO DECEMBER 31, 2007
(Dollar amounts in thousands)
 Period fromMay 3, 2007Year ended
    
    
    (Incorporation Date) toDecember 31, 2008
    
    
    December 31, 2007Cash Flows from Operating ActivitiesNet Income
    
    $
    48,125
    
    
    $
    2,345Adjustments to reconcile net income to net cash flows provided by operating activities:Gain on sale of aircraft
    
    
    (11,437
    )
    
    
    Depreciation
    
    
    74,161
    
    
    
    8,573Amortization of debt issuance and extinguishment costs
    
    
    7,532
    
    
    
    1,467Amortization of lease incentives
    
    
    2,333
    
    
    
    Amortization of lease discounts/premiums and other items
    
    
    (1,910
    )
    
    
    189Direct finance lease income
    
    
    (2,446
    )
    
    
    (2,365
    )Maintenance payment liability relieved
    
    
    (8,463
    )
    
    
    Deferred income taxes
    
    
    7,054
    
    
    
    36Unrealized gain on derivative instruments
    
    
    (156
    )
    
    
    Proceeds from termination of swap contract
    
    
    2,065
    
    
    
    Changes in operating assets and liabilities:Rent receivables
    
    
    (3,316
    )
    
    
    (832
    )Other assets
    
    
    (5,600
    )
    
    
    (8,934
    )Payable to related parties
    
    
    430
    
    
    
    1,651Accounts payable and accrued liabilities
    
    
    (1,973
    )
    
    
    6,464Rentals received in advance
    
    
    1,801
    
    
    
    7,675Other liabilities
    
    
    3,012
    
    
    
    5,891Net cash flows provided by operating activities
    
    
    111,212
    
    
    
    22,160Cash Flows from Investing ActivitiesAcquisition of aircraft comprising the Initial Portfolio
    
    
    (54,068
    )
    
    
    (1,139,952
    )Purchase of flight equipment
    
    
    (451,579
    )
    
    
    (228,423
    )Deposits on flight equipment purchases
    
    
    
    
    
    
    (700
    )Lessor contribution to maintenance
    
    
    (9,964
    )
    
    
    Proceeds from sale of aircraft
    
    
    42,145
    
    
    
    Proceeds from direct finance lease
    
    
    2,700
    
    
    
    2,635Net cash flows used in investing activities
    
    
    (470,766
    )
    
    
    (1,366,440
    )Cash Flows from Financing ActivitiesRestricted cash and cash equivalents
    
    
    (1,037
    )
    
    
    (112,621
    )Security deposits received
    
    
    8,931
    
    
    
    24,842Security deposits returned
    
    
    (5,913
    )
    
    
    (1,943
    )Maintenance payment liability receipts
    
    
    39,137
    
    
    
    7,590Maintenance payment liability disbursements
    
    
    (7,687
    )
    
    
    Debt issuance costs
    
    
    (894
    )
    
    
    Proceeds from aircraft acquisition facility
    
    
    464,898
    
    
    
    122,908Proceeds from issuance of notes payable, net
    
    
    
    
    
    
    825,149Repayment of notes payable
    
    
    (24,908
    )
    
    
    
 F-8




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##### Table of Contents



Period fromMay 3, 2007Year ended
    
    
    (Incorporation Date) toDecember 31, 2008
    
    
    December 31, 2007Proceeds from issuance of IPO shares, net
    
    
    
    
    
    
    401,353Proceeds from private placement shares
    
    
    
    
    
    
    24,195Shares repurchased
    
    
    (6,599
    )
    
    
    (10
    )Interest received on notes receivable for common shares
    
    
    
    
    
    
    877Collections of notes receivable for common shares
    
    
    1,827
    
    
    
    67,556Dividends paid
    
    
    (67,054
    )
    
    
    Net cash flows provided by financing activities
    
    
    400,701
    
    
    
    1,359,896Net increase in cash
    
    
    41,147
    
    
    
    15,616Cash at beginning of period
    
    
    15,616
    
    
    
    Cash at end of period
    
    $
    56,763
    
    
    $
    15,616Supplemental Disclosure:Cash paid during the period for:Interest paid
    
    $
    72,936
    
    
    $
    10,168Taxes paid
    
    
    659 401
    
    
    
    341Noncash investing and financing activities:Maintenance liabilities transferred for Initial Portfolio
    
    
    
    
    
    
    42,259Noncash consideration exchanged for aircraft
    
    
    
    
    
    
    251,971Noncash transactions from purchase of flight equipment:Security deposits
    
    
    10,693
    
    
    
    Maintenance payment liability
    
    
    15,689
    
    
    
    Other liabilities
    
    
    2,267Noncash transactions from sale of aircraft:Security deposits
    
    
    (946
    )
    
    
    
 
 F-9




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##### Table of Contents



Babcock & Brown Air Limited
 
   1. ORGANIZATION
      th
 F-10




---



##### Table of Contents



Babcock & Brown Air Limited
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PREPARATION
   USE OF ESTIMATES
  RISKS AND UNCERTAINTIES
   §
    
    The success of the Company is dependent on the performance of the commercial aviation
industry. A downturn in the industry could adversely impact the lessees ability to make
payments, increase the risk of unscheduled lease termination and depress lease rates and
the value of the Companys aircraft.§
    
    The Company will require access to the capital markets to refinance its current
portfolio of aircraft and to grow its business through the acquisition of additional
aircraft. Financing may not be available on acceptable terms or at all if the current
dislocation of the financial markets continues. In addition, the Company is subject to
risks associated with movements in interest rates, which may impact the Companys
obligations under its debt facilities and its derivative contracts. The Company also bears
the credit risks of its counterparties in its derivative contracts.§
    
    The Company also faces risks associated with its management and servicing arrangements.
The Company relies on an external servicer to manage its business and service its aircraft
portfolio. The
 F-11




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##### Table of Contents



Babcock & Brown Air Limited
  CASH AND CASH EQUIVALENTS
  RENT RECEIVABLES
  RESTRICTED CASH AND CASH EQUIVALENTS
   FLIGHT EQUIPMENT HELD FOR OPERATING LEASES
  
    
    Flight equipment where original manufacturers prices are not relevant due to plane
modifications and conversions.
 F-12




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##### Table of Contents



Babcock & Brown Air Limited
 
    
    Flight equipment which is out of production and may have a shorter useful life or lower
residual value due to obsolescence.
     FLIGHT EQUIPMENT HELD FOR SALE
 Accounting for the
Impairment or Disposal of Long-Lived Assets
 .
 IMPAIRMENT OF FLIGHT EQUIPMENT
  F-13




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##### Table of Contents



Babcock & Brown Air Limited
   INVESTMENT IN DIRECT FINANCE LEASES
 Accounting for Leases
  DERIVATIVE FINANCIAL INSTRUMENTS
 Accounting
for Derivative Instruments and Hedging Activities
   F-14




---



##### Table of Contents



Babcock & Brown Air Limited
  OTHER ASSETS
  SECURITY DEPOSITS
  MAINTENANCE PAYMENT LIABILITY
    Accounting for Planned Maintenance Activities,
  F-15




---



##### Table of Contents



Babcock & Brown Air Limited
  REVENUE RECOGNITION
  OPERATING LEASE REVENUE
  FINANCE LEASE INCOME
  TAXES
 Accounting
for Income Taxes
 Accounting for Uncertainty in Income Taxes
 NEW ACCOUNTING PRONOUNCEMENTS
 Fair Value Measurements
 Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value
 F-16




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##### Table of Contents



Babcock & Brown Air Limited
 Measurements
for Purposes of Lease Classification or Measurement under Statement 13 Accounting for Leases
 , Effective Date of FASB Statement No. 157
 Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of SFAS No. 115
 Business Combinations
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133
 F-17




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##### Table of Contents



Babcock & Brown Air Limited
 The Hierarchy of Generally Accepted Accounting
Principles
 3. FLIGHT EQUIPMENT UNDER OPERATING LEASES
    December 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Cost
    
    $
    1,910,798
    
    
    $
    1,317,715Accumulated depreciation
    
    
    (80,186
    )
    
    
    (8,573
    )Net Flight Equipment Held for Operating Lease
    
    $
    1,830,612
    
    
    $
    1,309,142
    F-18




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##### Table of Contents



Babcock & Brown Air Limited
  Period from May 3,2007 (IncorporationYear ended December
    
    
    Date) to December 31,2008
    
    
    2007(Dollars in thousands)Europe, Middle East and Africa:Germany
    
    $
    16,353
    
    
    
    7
    %
    
    $
    1,416
    
    
    
    5
    %The Netherlands
    
    
    13,990
    
    
    
    6
    %
    
    
    728
    
    
    
    3
    %United Kingdom
    
    
    17,388
    
    
    
    8
    %
    
    
    3,120
    
    
    
    12
    %Switzerland
    
    
    13,296
    
    
    
    6
    %
    
    
    1,083
    
    
    
    4
    %Other
    
    
    42,167
    
    
    
    20
    %
    
    
    3,078
    
    
    
    12
    %Europe, Middle East and Africa  Total
    
    
    103,194
    
    
    
    47
    %
    
    
    9,425
    
    
    
    36
    %Asia Pacific:India
    
    
    26,604
    
    
    
    12
    %
    
    
    2,189
    
    
    
    8
    %China
    
    
    17,491
    
    
    
    8
    %
    
    
    3,827
    
    
    
    15
    %Other
    
    
    3,553
    
    
    
    2
    %
    
    
    939
    
    
    
    4
    %Asia Pacific  Total
    
    
    47,648
    
    
    
    22
    %
    
    
    6,955
    
    
    
    27
    %North America:United States
    
    
    39,180
    
    
    
    18
    %
    
    
    3,457
    
    
    
    13
    %Other
    
    
    5,007
    
    
    
    2
    %
    
    
    433
    
    
    
    2
    %North America  Total
    
    
    44,187
    
    
    
    20
    %
    
    
    3,890
    
    
    
    15
    %South and Central America:Mexico
    
    
    19,802
    
    
    
    9
    %
    
    
    4,086
    
    
    
    16
    %Other
    
    
    4,109
    
    
    
    2
    %
    
    
    1,686
    
    
    
    6
    %South and Central America  Total
    
    
    23,911
    
    
    
    11
    %
    
    
    5,772
    
    
    
    22
    %Total Operating Lease Revenue
    
    $
    218,940
    
    
    
    100
    %
    
    $
    26,042
    
    
    
    100
    %
    F-19




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##### Table of Contents



Babcock & Brown Air Limited
   Year ending December 31,
    
    (Dollars in thousands)2009
    
    $
    221,6122010
    
    
    209,4022011
    
    
    192,0222012
    
    
    172,0792013
    
    
    140,087Thereafter
    
    
    268,701Future Minimum Rental Payments under Operating Leases
    
    $
    1,203,903
  Year ending December 31,
    
    (Dollars in thousands)2009
    
    $
    4,2382010
    
    
    4,2382011
    
    
    4,2382012
    
    
    4,2382013
    
    
    2,833Thereafter
    
    
    889Future amortization of lease incentives
    
    $
    20,674
 F-20




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##### Table of Contents



Babcock & Brown Air Limited
  December 31, 2008
    
    December 31, 2007(Dollars in thousands)Europe, Middle East and Africa:Germany
    
    $
    136,712
    
    
    
    8
    %
    
    $
    39,578
    
    
    
    3
    %The Netherlands
    
    
    132,116
    
    
    
    7
    %
    
    
    24,743
    
    
    
    2
    %Spain
    
    
    80,639
    
    
    
    4
    %
    
    
    73,055
    
    
    
    6
    %United Kingdom
    
    
    76,120
    
    
    
    4
    %
    
    
    109,342
    
    
    
    8
    %Switzerland
    
    
    42,394
    
    
    
    2
    %
    
    
    45,905
    
    
    
    3
    %Other
    
    
    381,310
    
    
    
    21
    %
    
    
    139,354
    
    
    
    11
    %Europe, Middle East and Africa 
Total
    
    
    849,291
    
    
    
    46
    %
    
    
    431,977
    
    
    
    33
    %Asia Pacific:India
    
    
    263,450
    
    
    
    15
    %
    
    
    230,553
    
    
    
    18
    %China
    
    
    148,731
    
    
    
    8
    %
    
    
    154,272
    
    
    
    12
    %Other
    
    
    37,689
    
    
    
    2
    %
    
    
    39,070
    
    
    
    2
    %Asia Pacific Total
    
    
    449,870
    
    
    
    25
    %
    
    
    423,895
    
    
    
    32
    %North America:United States
    
    
    315,972
    
    
    
    17
    %
    
    
    199,881
    
    
    
    15
    %Other
    
    
    40,603
    
    
    
    2
    %
    
    
    42,047
    
    
    
    4
    %North America  Total
    
    
    356,575
    
    
    
    19
    %
    
    
    241,928
    
    
    
    19
    %South and Central America:Mexico
    
    
    155,710
    
    
    
    9
    %
    
    
    162,326
    
    
    
    12
    %Other
    
    
    
    
    
    
    
    
    
    
    49,016
    
    
    
    4
    %South and Central America  Total
    
    
    155,710
    
    
    
    9
    %
    
    
    211,342
    
    
    
    16
    %Off-lease  Total
    
    
    19,166
    
    
    
    1
    %
    
    
    
    
    
    
    Total Flight Equipment
    
    $
    1,830,612
    
    
    
    100
    %
    
    $
    1,309,142
    
    
    
    100
    %
  4. INVESTMENT IN DIRECT FINANCE LEASES
   F-21




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##### Table of Contents



Babcock & Brown Air Limited
   December 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Total minimum lease payments receivable
    
    $
    
    
    
    $
    142,200Estimated unguaranteed residual value of leased assets
    
    
    
    
    
    
    41,200Unearned finance income
    
    
    
    
    
    
    (108,707
    )Net Investment in Direct Finance Leases
    
    $
    
    
    
    $
    74,693
 5. OTHER ASSETS
  December 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Loan issuance costs, net
    
    $
    27,018
    
    
    $
    33,599Lease premiums
    
    
    4,120
    
    
    
    4,745Other assets
    
    
    6,753
    
    
    
    1,266Total Other Assets
    
    $
    37,891
    
    
    $
    39,610
    F-22




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##### Table of Contents



Babcock & Brown Air Limited
  Year ending December 31,
    
    (Dollars in thousands)2009
    
    $
    6012010
    
    
    6012011
    
    
    6012012
    
    
    6012013
    
    
    601Thereafter
    
    
    1,115Total future amortization of lease premiums
    
    $
    4,120
 6. NOTES PAYABLE
     F-23




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##### Table of Contents



Babcock & Brown Air Limited
    Redemption Date
    
    PriceBefore October 14, 2009
    
    
    101.00
    %On or after October 14, 2009, but before April 14, 2010
    
    
    100.36
    %On or after April 14, 2010, but before October 14, 2010
    
    
    100.27
    %On or after October 14, 2010, but before April 14, 2011
    
    
    100.17
    %On or after April 14, 2011, but before October 14, 2011
    
    
    100.09
    %On or after October 14, 2011
    
    
    100.00
    %
     
    
    Babcock & Brown ceasing to own at least 50.1% of the voting or economic interest in
BBAM; or
    
    The bankruptcy or insolvency of BBAM or Babcock & Brown International Pty Ltd.
 F-24




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##### Table of Contents



Babcock & Brown Air Limited
  7. AIRCRAFT ACQUISITION FACILITY
 Balance as of
    
    
    Balance as ofAircraft Acquisition Facility:
    
    Facility Limit
    
    
    December 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Principal  Tranche A
    
    $
    920,000
    
    
    $
    413,471
    
    
    $
    Principal  Tranche B
    
    
    184,000
    
    
    
    184,000
    
    
    
    132,573Borrowings under aircraft acquisition facility
    
    
    1,104,000
    
    
    
    597,471
    
    
    
    132,573Equity Tranche
    
    
    96,000
    
    
    
    96,000
    
    
    
    96,000Total Aircraft Acquisition Facility
    
    $
    1,200,000
    
    
    $
    693,471
    
    
    $
    228,573
    F-25




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##### Table of Contents



Babcock & Brown Air Limited
     
    
    Babcock & Brown ceases to hold at least 5% of the issued and outstanding shares of B&B
Air;
    
    Babcock & Brown ceases to hold at least 51% of the capital stock of BBAM;
    
    BBAM fails to deliver the audited financial statements of Babcock & Brown Limited to the
agent and lenders in the Aircraft Acquisition Facility within 120 days of fiscal year end
or the unaudited or audited financial statements for each semi-annual period within 90
days, and in each case such failure to deliver the required financial statements continues
for 30 days after written notice from the agent;
    
    Any Babcock & Brown Limited annual or quarterly financial statement required to be
delivered as described above contains a going-concern or similar
qualification;
    
    The insolvency of BBAM or any significant subsidiary of BBAM; and
    
    A BBAM default on recourse debt over $25 million.
     F-26




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##### Table of Contents



Babcock & Brown Air Limited
   8. DERIVATIVES
     F-27




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##### Table of Contents



Babcock & Brown Air Limited
   GainReclassifiedAdjusted
    
    
    
    
    
    Loss
    
    fromFair
    
    
    
    
    
    Fair
    
    
    
    
    
    Recognized in
    
    AccumulatedSwap
    
    Market
    
    
    
    
    
    Market
    
    
    
    
    
    Accumulated
    
    OtherHedge
    
    Contract
    
    Value of
    
    Credit
    
    Value of
    
    Deferred
    
    Other
    
    ComprehensiveMaturity
    
    Interest
    
    Notional
    
    Derivative
    
    Risk
    
    Derivative
    
    Tax
    
    Comprehensive
    
    Loss intoDate
    
    Rate
    
    Amount
    
    Liability
    
    Adjustment
    
    Liability
    
    Benefit
    
    Loss
    
    IncomeInterest rate swap contracts:10/14/2015
    
    
    4.93
    %
    
    $
    299,530
    
    
    $
    (34,363
    )
    
    $
    1,809
    
    
    $
    (32,554
    )
    
    $
    4,069
    
    
    $
    (28,485
    )
    
    $
    10/14/2015
    
    
    4.93
    %
    
    
    299,530
    
    
    
    (34,363
    )
    
    
    1,809
    
    
    
    (32,554
    )
    
    
    4,069
    
    
    
    (28,485
    )
    
    
    11/15/2015
    
    
    4.36
    %
    
    
    28,876
    
    
    
    (3,405
    )
    
    
    207
    
    
    
    (3,198
    )
    
    
    400
    
    
    
    (2,798
    )
    
    
    12/15/2015
    
    
    4.37
    %
    
    
    28,878
    
    
    
    (3,437
    )
    
    
    212
    
    
    
    (3,225
    )
    
    
    403
    
    
    
    (2,822
    )
    
    
    9/15/2015
    
    
    4.36
    %
    
    
    29,335
    
    
    
    (3,434
    )
    
    
    206
    
    
    
    (3,228
    )
    
    
    403
    
    
    
    (2,825
    )
    
    
    11/15/2015
    
    
    4.37
    %
    
    
    29,109
    
    
    
    (3,467
    )
    
    
    212
    
    
    
    (3,255
    )
    
    
    407
    
    
    
    (2,848
    )
    
    
    1/14/2015
    
    
    3.40
    %
    
    
    63,747
    
    
    
    (4,061
    )
    
    
    178
    
    
    
    (3,883
    )
    
    
    485
    
    
    
    (3,398
    )
    
    
    3/15/2018
    
    
    3.31
    %
    
    
    254,592
    
    
    
    (12,298
    )
    
    
    534
    
    
    
    (11,764
    )
    
    
    1,470
    
    
    
    (10,294
    )
    
    
    8/15/2015
    
    
    3.85
    %
    
    
    46,242
    
    
    
    (2,736
    )
    
    
    122
    
    
    
    (2,614
    )
    
    
    327
    
    
    
    (2,287
    )
    
    
    5/15/2016
    
    
    4.49
    %
    
    
    61,838
    
    
    
    (6,116
    )
    
    
    352
    
    
    
    (5,764
    )
    
    
    721
    
    
    
    (5,043
    )
    
    
    3/15/2015
    
    
    4.22
    %
    
    
    41,071
    
    
    
    (3,304
    )
    
    
    173
    
    
    
    (3,131
    )
    
    
    391
    
    
    
    (2,740
    )
    
    
    4/15/2015
    
    
    4.07
    %
    
    
    37,504
    
    
    
    (3,201
    )
    
    
    172
    
    
    
    (3,029
    )
    
    
    379
    
    
    
    (2,650
    )
    
    
    10/15/2016
    
    
    4.25
    %
    
    
    40,025
    
    
    
    (3,637
    )
    
    
    224
    
    
    
    (3,413
    )
    
    
    428
    
    
    
    (2,985
    )
    
    
    Accrued
interest
    
    
    
    
    
    
    
    
    
    
    (1,762
    )
    
    
    
    
    
    
    (1,762
    )
    
    
    
    
    
    
    
    
    
    
    Total -
derivative
liabilities
    
    
    
    
    
    $
    1,260,277
    
    
    $
    (119,584
    )
    
    $
    6,210
    
    
    $
    (113,374
    )
    
    $
    13,952
    
    
    $
    (97,660
    )
    
    $
    
 F-28




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##### Table of Contents



Babcock & Brown Air Limited
  GainReclassifiedAdjusted
    
    
    
    
    
    Gain
    
    fromFair
    
    
    
    
    
    Fair
    
    
    
    
    
    Recognized in
    
    AccumulatedEURO to
    
    Swap
    
    Market
    
    
    
    
    
    Market
    
    
    
    
    
    Accumulated
    
    OtherUS Dollar
    
    Contract
    
    Value of
    
    Credit
    
    Value of
    
    Deferred
    
    Other
    
    ComprehensiveMaturity
    
    Conversion
    
    Notional
    
    Derivative
    
    Risk
    
    Derivative
    
    Tax
    
    Comprehensive
    
    Loss intoDate
    
    Rate
    
    Amount
    
    Instrument
    
    Adjustment
    
    Instrument
    
    Liability
    
    Loss
    
    IncomeCross currency coupon swap contract:1/15/2016
    
    1EURO to US1.4452
    
    $
    1,650
    
    
    $
    2,521
    
    
    $
    (153
    )
    
    $
    2,368
    
    
    $
    (296
    )
    
    $
    2,072
    
    
    $
    Terminated Contract
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (239
    )
    
    
    1,671
    
    
    
    96Total  derivative asset
    
    $
    1,650
    
    
    $
    2,521
    
    
    $
    (153
    )
    
    $
    2,368
    
    
    $
    (535
    )
    
    $
    3,743
    
    
    $
    96
  Year ending December 31,
    
    (Dollars in thousands)2009
    
    $
    2572010
    
    
    2952011
    
    
    2962012
    
    
    2792013
    
    
    264Thereafter
    
    
    519Total future amortization of terminated cross currency coupon swap contract
    
    $
    1,910
  9. INCOME TAXES
  F-29




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##### Table of Contents



Babcock & Brown Air Limited
  Period from May 3,2007 (IncorporationYear ended
    
    
    Date) toDecember 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Deferred tax expense:Ireland
    
    $
    7,054
    
    
    $
    36Current tax expense (benefit):Ireland:Current
    
    
    286
    
    
    
    996Adjustment for prior periods tax provision
    
    
    (868
    )
    
    
    France
    
    
    52
    
    
    
    United States
    
    
    343
    
    
    
    Current tax expense (benefit)  total
    
    
    (187
    )
    
    
    996Total Income Tax Expense
    
    $
    6,867
    
    
    $
    1,032
    December 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Ireland:Excess of tax basis over book basis of aircraft
    
    $
    4,196
    
    
    $
    29,554Net operating loss carryforwards
    
    
    23,121
    
    
    
    4,816Net unrealized losses on derivative instruments
    
    
    13,417
    
    
    
    2,342Deferred Tax Asset, Net
    
    $
    40,734
    
    
    $
    36,712
 F-30




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##### Table of Contents



Babcock & Brown Air Limited
  Period from May 3,2007 (IncorporationYear ended
    
    
    Date) toDecember 31, 2008
    
    
    December 31, 2007(Percentage)Irish statutory corporate tax rate on trading income
    
    
    12.5
    %
    
    
    12.5
    %Incremental effect of higher tax rate on non-trading income
    
    
    0.5
    %
    
    
    18.3
    %Adjustment for prior periods tax provision
    
    
    (1.6
    %)
    
    
    Other
    
    
    1.1
    %
    
    
    (0.2
    %)Income tax expense
    
    
    12.5
    %
    
    
    30.6
    %
 10. OTHER LIABILITIES
  December 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Unamortized lease discounts
    
    $
    4,887
    
    
    $
    5,760Other
    
    
    4,525
    
    
    
    942Total Other Liabilities
    
    $
    9,412
    
    
    $
    6,702
   Year ending December 31,
    
    (Dollars in thousands)2009
    
    $
    2,5742010
    
    
    8672011
    
    
    3382012
    
    
    3382013
    
    
    338Thereafter
    
    
    432Total future amortization of lease discounts
    
    $
    4,887
 F-31




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##### Table of Contents



Babcock & Brown Air Limited
 11. SHAREHOLDERS EQUITY
     12. ACCUMULATED COMPREHENSIVE LOSS
  Period fromMay 3, 2007(IncorporationYear ended
    
    
    Date) toDecember 31,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Net income
    
    $
    48,125
    
    
    $
    2,345Unrealized loss on derivative instruments, net of tax benefit
    
    
    (77,528
    )
    
    
    (16,389
    )Total comprehensive loss
    
    $
    (29,403
    )
    
    $
    (14,044
    )
  F-32




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##### Table of Contents



Babcock & Brown Air Limited
 13. EARNINGS PER SHARE
 Earnings per Share
 Year ended
    
    
    Period from May 3, 2007 (Incorporation Date)December 31, 2008
    
    
    to December 31, 2007Basic and diluted
    
    
    Basic and diluted
    
    
    Pro forma(Dollars in thousands, except share and per share data)NumeratorNet income
    
    $
    48,125
    
    
    $
    2,345
    
    
    $
    2,345DenominatorWeighted average
number of shares
outstanding for the
period
    
    
    33,524,074
    
    
    
    12,584,008
    
    
    
    33,603,450Earnings per share
    
    $
    1.44
    
    
    $
    0.19
    
    
    $
    0.07
  14 COMMITMENTS AND CONTINGENCIES
   15. RELATED PARTY TRANSACTIONS
  F-33




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##### Table of Contents



Babcock & Brown Air Limited
         F-34




---



##### Table of Contents



Babcock & Brown Air Limited
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    Total(Dollars in thousands)Fixed base fee payments(1)
    
    $
    1,816
    
    
    $
    1,816
    
    
    $
    1,816
    
    
    $
    1,816
    
    
    $
    1,816
    
    
    $
    9,082
    
    
    $
    18,162Fixed administrative agency fee
payments due from B&B Air Funding
(1)
    
    
    757
    
    
    
    757
    
    
    
    757
    
    
    
    757
    
    
    
    757
    
    
    
    3,783
    
    
    
    7,568Fixed administrative agency fee
payments due from B&B Air Acquisition
    
    
    240
    
    
    
    240
    
    
    
    240
    
    
    
    240
    
    
    
    160
    
    
    
    
    
    
    
    1,120Fixed payments for Management
Expenses(1)
    
    
    6,054
    
    
    
    6,054
    
    
    
    6,054
    
    
    
    6,054
    
    
    
    6,054
    
    
    
    113,513
    
    
    
    143,783Total
    
    $
    8,867
    
    
    $
    8,867
    
    
    $
    8,867
    
    
    $
    8,867
    
    
    $
    8,787
    
    
    $
    126,378
    
    
    $
    170,633
 (1)
    
    Amounts in the table assume CPI rates in effect for 2009 remain constant in future
periods. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
    F-35




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##### Table of Contents



Babcock & Brown Air Limited
  December 31, 2008
    
    December 31, 2007Carrying Amount
    
    Fair Value
    
    Carrying Amount
    
    Fair Value(Dollars in thousands)Notes payable
    
    $
    826,301
    
    
    $
    413,151
    
    
    $
    850,550
    
    
    $
    749,876Aircraft Acquisition Facility
    
    
    597,471
    
    
    
    491,301
    
    
    
    132,573
    
    
    
    132,573Derivative asset
    
    
    2,368
    
    
    
    2,368
    
    
    
    
    
    
    
    Derivative liabilities
    
    
    113,374
    
    
    
    113,374
    
    
    
    18,731
    
    
    
    18,731
      Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)At December 31, 2008:Derivative asset
    
    $
    
    
    
    $
    2,368
    
    
    $
    
    
    
    $
    2,368Derivative liabilities
    
    
    
    
    
    
    113,374
    
    
    
    
    
    
    
    113,374At December 31, 2007:Derivative liabilities
    
    
    
    
    
    
    18,731
    
    
    
    
    
    
    
    18,731
 F-36




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##### Table of Contents



Babcock & Brown Air Limited
 17. UNAUDITED QUARTERLY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
  March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except shares and per share data)
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008Total revenues
    
    $
    51,945
    
    
    $
    57,199
    
    
    $
    66,310
    
    
    $
    60,684Net income (loss)
    
    $
    11,684
    
    
    $
    11,062
    
    
    $
    16,029
    
    
    $
    9,350Earnings (loss) per share
    
    $
    0.35
    
    
    $
    0.33
    
    
    $
    0.48
    
    
    $
    0.28
  From May 3, 2007(incorporation
    
    
    Three months endeddate) to
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except shares and per share data)
    
    June 30, 2007
    
    
    2007
    
    
    2007Total revenues
    
    $
    
    
    
    $
    
    
    
    $
    33,334Net income (loss)
    
    $
    
    
    
    $
    (2,070
    )
    
    $
    4,415Earnings (loss) per share
    
    $
    
    
    
    $
    
    
    
    $
    0.13Pro forma earnings (loss) per share
    
    $
    
    
    
    $
    (0.06
    )
    
    $
    0.13
  18. SUBSEQUENT EVENTS
   F-37




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##### Table of Contents



Schedule I  Condensed financial information of parent
 Babcock & Brown Air Limited  Condensed Balance Sheet
 AS OF DECEMBER 31, 2008 AND 2007  (DOLLARS IN THOUSANDS)
 December 31,
    
    
    December 31,2008
    
    
    2007AssetsCash and cash equivalents
    
    $
    56,684
    
    
    $
    15,573Restricted cash and cash equivalents
    
    
    
    
    
    
    19,816Receivable from subsidiaries
    
    
    96
    
    
    
    34,299Investments in subsidiaries
    
    
    332,265
    
    
    
    421,454Deferred tax asset, net
    
    
    422
    
    
    
    Other assets, net
    
    
    2,005
    
    
    
    788Total assets
    
    
    391,472
    
    
    
    491,930LiabilitiesPayable to related parties
    
    
    441
    
    
    
    96Accrued and other liabilities
    
    
    1,618
    
    
    
    1,332Total liabilities
    
    
    2,059
    
    
    
    1,428Shareholders equity
    
    
    389,413
    
    
    
    490,502Total liabilities and shareholders equity
    
    $
    391,472
    
    
    $
    491,930
 F-38




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##### Table of Contents



Schedule I  Condensed financial information of parent
 Babcock & Brown Air Limited  Condensed Statement of Operations
 FOR THE YEAR ENDED DECEMBER 31, 2008 AND FOR THE PERIOD FROM MAY 3, 2007
(INCORPORATION DATE) TO DECEMBER 31, 2007
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 Period fromMay 3, 2007(IncorporationYear ended
    
    
    Date) toDecember 31,
    
    
    December 31,2008
    
    
    2007RevenuesEquity in earnings of subsidiaries
    
    $
    51,622
    
    
    $
    2,981Intercompany management fee income
    
    
    5,100
    
    
    
    1,275Interest and other income
    
    
    548
    
    
    
    1,298Total revenues
    
    
    57,270
    
    
    
    5,554ExpenseSelling, general and administrative
    
    
    9,567
    
    
    
    3,115Net income from continuing operations
before provision for income taxes
    
    
    47,703
    
    
    
    2,439Income tax provision (benefit)
    
    
    (422
    )
    
    
    94Net income
    
    $
    48,125
    
    
    $
    2,345Weighted average number of shares
    
    
    33,524,074
    
    
    
    12,584,008Basic and diluted earnings per share
    
    $
    1.44
    
    
    $
    0.19
 F-39




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##### Table of Contents



Schedule I  Condensed financial information of parent
 Babcock & Brown Air Limited
 Condensed Statement of Cash Flows
 FOR THE YEAR ENDED DECEMBER 31, 2008 AND FOR THE PERIOD FROM MAY 3, 2007
(INCORPORATION DATE) TO DECEMBER 31, 2007
(DOLLARS IN THOUSANDS)
 Period from May 3,2007 (IncorporationYear ended
    
    
    Date) to DecemberDecember 31, 2008
    
    
    31, 2007Cash Flows from Operating ActivitiesNet Income
    
    $
    48,125
    
    
    $
    2,345Adjustments to reconcile net income to net cash flow provided by operating activities:Equity in earnings of subsidiaries
    
    
    (51,622
    )
    
    
    (2,981
    )Income tax benefit
    
    
    (422
    )
    
    
    Changes in operating assets and liabilities:Receivable from subsidiaries
    
    
    34,203
    
    
    
    (34,299
    )Other assets
    
    
    (1,217
    )
    
    
    (788
    )Payable to related parties
    
    
    345
    
    
    
    96Accrued and other liabilities
    
    
    426
    
    
    
    876Net cash flows provided by (used in) operating activities
    
    
    29,838
    
    
    
    (34,751
    )Cash Flows from Investing ActivitiesCapital contributions to subsidiaries
    
    
    (20,114
    )
    
    
    (444,588
    )Distributions received from subsidiaries
    
    
    83,397
    
    
    
    20,757Net cash flows provided by (used in) investing activities
    
    
    63,283
    
    
    
    (423,831
    )Cash Flows from Financing ActivitiesMovement in restricted cash and cash equivalents
    
    
    19,816
    
    
    
    (19,816
    )Dividends paid
    
    
    (67,054
    )
    
    
    Proceeds from issuance of shares, net
    
    
    
    
    
    
    401,353Proceeds from private placement
    
    
    
    
    
    
    24,195Repurchase of common shares
    
    
    
    
    
    
    (10
    )Interest received on notes receivable for common shares
    
    
    
    
    
    
    877Collections received on notes receivable for common shares
    
    
    
    
    
    
    67,556Collections made on subscription notes receivable
    
    
    1,827
    
    
    
    Shares repurchased
    
    
    (6,599
    )
    
    
    Net cash flows (used in) provided by financing activities
    
    
    (52,010
    )
    
    
    474,155Net increase in cash
    
    
    41,111
    
    
    
    15,573Cash at beginning of period
    
    
    15,573
    
    
    
    Cash at end of period
    
    $
    56,684
    
    
    $
    15,573Supplemental Disclosure of Non Cash Activities:Taxes paid
    
    $
    
    
    
    $
    341Noncash financing activities:Issuance of other receivables to JET-i for transfer of aircraft
    
    
    
    
    
    
    (251,971
    )Proceeds from notes receivable for common shares
    
    
    
    
    
    
    251,971
 F-40




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    Accounting for
Uncertainty in Income Taxes  and Interpretation of FASB Statement No. 109.
  
 F-41




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##### Table of Contents



JET-i Leasing LLC
 
 Predecessor Consolidated Balance Sheets
 AS OF DECEMBER 31, 2007
 December 31, 2007(Dollars in thousands)AssetsCash and cash equivalents
    
    $
    5,181Other assets, net
    
    
    68Total assets
    
    
    5,249LiabilitiesAccounts payable and accrued liabilities
    
    
    1,135Payable to related parties
    
    
    316Other liabilities
    
    
    1,315Total liabilities
    
    
    2,766Members capitalMembers contributions
    
    
    328,304Distributions to Member
    
    
    (302,261
    )Accumulated deficit
    
    
    (23,560
    )Total members capital
    
    
    2,483Total liabilities and members capital
    
    $
    5,249
  F-42




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##### Table of Contents



JET-i Leasing LLC
 
 Predecessor Consolidated Statements of Operations
 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
 Year ended December 31,2007
    
    
    2006(Dollars in thousands)RevenuesOperating lease revenue
    
    $
    107,620
    
    
    $
    56,566Finance lease income
    
    
    7,477
    
    
    
    1,668Interest income
    
    
    5,190
    
    
    
    3,115Other revenues
    
    
    750
    
    
    
    Total revenues
    
    
    121,037
    
    
    
    61,349ExpensesDepreciation
    
    
    34,548
    
    
    
    17,976Interest expense
    
    
    61,541
    
    
    
    33,840Interest expense  related party
    
    
    11,585
    
    
    
    6,390Debt extinguishment costs
    
    
    9,165
    
    
    
    Selling, general and administrative
    
    
    4,588
    
    
    
    3,321Maintenance and other costs
    
    
    2,415
    
    
    
    1,379Mark-to-market of non-hedge derivatives
    
    
    (5,898
    )
    
    
    5,898Hedging costs related to interest rate
swap option
    
    
    5,423
    
    
    
    Swap breakage costs
    
    
    12,500
    
    
    
    Total expenses
    
    
    135,867
    
    
    
    68,804Net loss before provision for income taxes
    
    
    (14,830
    )
    
    
    (7,455
    )Provision for income taxes
    
    
    466
    
    
    
    17Net loss
    
    $
    (15,296
    )
    
    $
    (7,472
    )
  F-43




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##### Table of Contents



JET-i Leasing LLC
 
 Consolidated Statements of Members Capital
 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2007
 Members
    
    
    Distributions
    
    
    Accumulated
    
    
    Total MembersContributions
    
    
    to Member
    
    
    Deficit
    
    
    Capital(Dollars in thousands)Balance December 31, 2005
    
    $
    26,673
    
    
    
    
    
    
    $
    (792
    )
    
    $
    25,881Capital contributions
    
    
    9,291
    
    
    
    
    
    
    
    
    
    
    
    9,291Net loss
    
    
    
    
    
    
    
    
    
    
    (7,472
    )
    
    
    (7,472
    )Balance December 31, 2006
    
    $
    35,964
    
    
    
    
    
    
    $
    (8,264
    )
    
    $
    27,700Capital contributions
    
    
    19,165
    
    
    
    
    
    
    
    
    
    
    
    19,165Capital contributions
in excess of net book
value of assets
transferred
    
    
    273,175
    
    
    
    
    
    
    
    
    
    
    
    273,175Distributions to Member
    
    
    
    
    
    
    (302,261
    )
    
    
    
    
    
    
    (302,261
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (15,296
    )
    
    
    (15,296
    )Balance December 31, 2007
    
    $
    328,304
    
    
    $
    (302,261
    )
    
    $
    (23,560
    )
    
    $
    2,483
  F-44




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##### Table of Contents



JET-i Leasing LLC
 
 Consolidated Statements of Cash Flows
 FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006(Dollars in thousands)Cash Flows from Operating ActivitiesNet loss
    
    $
    (15,296
    )
    
    $
    (7,472
    )Adjustments to reconcile net loss to net cash flow provided by operating activities:Depreciation
    
    
    34,548
    
    
    
    17,976Amortization of debt issuance costs
    
    
    1,627
    
    
    
    2,030Debt extinguishment costs
    
    
    9,165
    
    
    
    Amortization of lease discounts and other items
    
    
    (1,730
    )
    
    
    1,728Mark-to-market of non-hedge derivatives
    
    
    (5,898
    )
    
    
    5,898Direct finance lease income
    
    
    (7,477
    )
    
    
    (1,668
    )Changes in operating assets and liabilities:Rent receivables
    
    
    740
    
    
    
    (740
    )Other assets
    
    
    (2,223
    )
    
    
    (289
    )Accounts payable and accrued liabilities
    
    
    (5,454
    )
    
    
    6,603Rentals received in advance
    
    
    (4,261
    )
    
    
    4,010Security deposits and maintenance payment liabilities retained
    
    
    (3,929
    )
    
    
    (2,862
    )Accrued interest payable
    
    
    (3,143
    )
    
    
    2,978Other liabilities
    
    
    97
    
    
    
    5,696Net cash flows provided by (used in) operating activities
    
    $
    (3,234
    )
    
    $
    33,888Cash Flows from Investing ActivitiesPurchase of flight equipment
    
    $
    (263,350
    )
    
    $
    (864,078
    )Lessor contributions to maintenance
    
    
    (4,856
    )
    
    
    Proceeds from transfer of flight equipment at historical cost
    
    
    1,014,752
    
    
    
    Deposits on flight equipment purchases
    
    
    300
    
    
    
    1,300Proceeds from transfer of investment in direct finance leases at historical cost
    
    
    71,965
    
    
    
    Proceeds from finance leases
    
    
    8,165
    
    
    
    2,208Net cash flows provided by (used in) investing activities
    
    $
    826,976
    
    
    $
    (860,570
    )Cash Flows from Financing ActivitiesMovement in restricted cash and cash equivalents
    
    $
    101,194
    
    
    $
    (83,064
    )Proceeds from security deposits and maintenance payment liabilities
    
    
    31,156
    
    
    
    61,915Security deposits and maintenance payment liabilities paid
    
    
    (14,675
    )
    
    
    (8,974
    )Security deposits transferred
    
    
    (22,572
    )
    
    
    Proceeds from warehouse credit facility
    
    
    260,173
    
    
    
    826,325Proceeds from warehouse credit facility  related party
    
    
    
    
    
    
    28,337Repayments of warehouse credit facility
    
    
    (1,078,175
    )
    
    
    (8,323
    )Repayments of warehouse credit facility  related party
    
    
    (80,000
    )
    
    
    Loan issuance costs
    
    
    (638
    )
    
    
    (1,122
    )Financing from related parties, net
    
    
    14,043
    
    
    
    11,608Capital contributions
    
    
    
    
    
    
    Contributions received in excess of net book value of assets transferred
    
    
    21,203
    
    
    
    Distributions paid to Member
    
    
    (50,290
    )
    
    
    Net cash flows provided by (used for) financing activities
    
    $
    (818,581
    )
    
    $
    826,702Net increase in cash
    
    $
    5,161
    
    
    $
    20
 F-45




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##### Table of Contents



2007
    
    
    2006Cash at beginning of period
    
    
    20
    
    
    
    Cash at end of period
    
    $
    5,181
    
    
    $
    20Supplemental Disclosure of Non Cash Activities:Cash paid during the period for:Interest
    
    $
    74,691
    
    
    $
    35,309Taxes
    
    $
    6
    
    
    $
    100Noncash investing and financing activities:Conversion of payable to related party to capital contribution
    
    $
    19,165
    
    
    $
    9,291Contribution of other receivable for transfer of aircraft and related assets
and liabilities
    
    $
    251,971
    
    
    
    Distribution of other receivable to Member
    
    $
    (251,971
    )
    
    
    
  F-46




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##### Table of Contents



JET-i Leasing LLC
 
 Notes to the Predecessor Consolidated Financial Statements
 For the Year Ended December 31, 2007
 1. ORGANIZATION
 ORGANIZATION
       F-47




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PREPARATION AND PRINCIPLES OF CONSOLIDATION
 Consolidation of Variable Interest Entities
  RISKS AND UNCERTAINTIES
  USE OF ESTIMATES
  CASH AND CASH EQUIVALENTS
  REVENUE RECOGNITION
  F-48




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
 Operating Lease Revenue
  Finance Lease Income
  TAXES
 Accounting for Income Taxes
 3. FLIGHT EQUIPMENT UNDER OPERATING LEASES
   F-49




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
  Year ended
    
    
    Year endedDecember 31, 2007
    
    
    December 31, 2006(Dollars in thousands)Europe  Developed:United Kingdom
    
    $
    8,991
    
    
    
    8
    %
    
    $
    7,436
    
    
    
    13
    %Sweden
    
    
    
    
    
    
    
    
    
    
    4,065
    
    
    
    7
    %France
    
    
    6,601
    
    
    
    6
    %
    
    
    6,256
    
    
    
    11
    %Other
    
    
    25,291
    
    
    
    24
    %
    
    
    10,559
    
    
    
    19
    %Europe  Developed
    
    
    40,883
    
    
    
    38
    %
    
    
    28,316
    
    
    
    50
    %Asia Pacific:India
    
    
    19,134
    
    
    
    18
    %
    
    
    10,826
    
    
    
    19
    %China
    
    
    10,801
    
    
    
    10
    %
    
    
    2,642
    
    
    
    5
    %Other
    
    
    1,620
    
    
    
    1
    %
    
    
    
    
    
    
    Asia Pacific
    
    
    31,555
    
    
    
    29
    %
    
    
    13,468
    
    
    
    24
    %North America:United States
    
    
    8,120
    
    
    
    8
    %
    
    
    7,942
    
    
    
    14
    %Other
    
    
    4,605
    
    
    
    4
    %
    
    
    2,870
    
    
    
    5
    %North America
    
    
    12,725
    
    
    
    12
    %
    
    
    10,812
    
    
    
    19
    %South and Central
America:Mexico
    
    
    16,918
    
    
    
    16
    %
    
    
    3,880
    
    
    
    7
    %Other
    
    
    5,539
    
    
    
    5
    %
    
    
    90
    
    
    
    0
    %South and Central
America
    
    
    22,457
    
    
    
    21
    %
    
    
    3,970
    
    
    
    7
    %Total Operating Lease
Revenue
    
    $
    107,620
    
    
    
    100
    %
    
    $
    56,566
    
    
    
    100
    %
   F-50




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
 4. INVESTMENT IN DIRECT FINANCE LEASES
   5. AIRCRAFT WAREHOUSE CREDIT FACILITY
    F-51




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
     6. INCOME TAXES
   Year ended December 31,2007
    
    
    2006(Dollars in thousand)Deferred Tax ExpenseIreland
    
    $
    (14
    )
    
    $
    12Luxembourg
    
    
    (4
    )
    
    
    (18
    )
    
    
    12Less valuation allowance
    
    
    4
    
    
    
    Total Deferred Tax Expense
    
    
    (14
    )
    
    
    12Current Tax ExpenseIreland
    
    
    446
    
    
    
    4Luxembourg
    
    
    34
    
    
    
    1Total Current Tax Expense
    
    
    480
    
    
    
    5Total Income Tax Expense
    
    $
    466
    
    
    $
    17
 F-52




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
 7. OTHER LIABILITIES
  2007(Dollars in thousands)Income taxes payable
    
    $
    415Accrual for major maintenance activities and costs
    
    
    900Total Other Liabilities
    
    $
    1,315
 8. RELATED PARTY TRANSACTIONS
       F-53




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##### Table of Contents



JET-i Leasing LLC
Notes to the Predecessor Consolidated Financial Statements
For the Year Ended December 31, 2007
  9. UNAUDITED QUARTERLY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
  Three months endedJune 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands)
    
    March 31, 2007
    
    
    2007
    
    
    2007
    
    
    2007Total revenues
    
    
    29,658
    
    
    
    37,705
    
    
    
    35,814
    
    
    
    12,670Net income (loss)
    
    $
    (708
    )
    
    $
    10,640
    
    
    $
    (17,443) $$$
    
    
    $
    (7,785
    )
 Three months endedJune 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands)
    
    March 31, 2006
    
    
    2006
    
    
    2006
    
    
    2006Total revenues
    
    
    3,695
    
    
    
    11,531
    
    
    
    18,720
    
    
    
    24,288Net income (loss)
    
    $
    (874
    )
    
    $
    2,245
    
    
    $
    (10,404) $$$
    
    
    $
    1,561
 F-54




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##### Table of Contents



ITEM 19. EXHIBITS
  ExhibitNumber
    
    Description of Exhibit1.1
    
    Memorandum of Association*1.2
    
    Bye-laws*2.1
    
    Deposit Agreement between Deutsche Bank Trust Company Americas and
Babcock & Brown Air Limited.*4.1
    
    Management Agreement, dated as of October 2, 2007, between Babcock
& Brown Air Management Co. Limited and Babcock & Brown Air
Limited.*4.2
    
    Asset Purchase Agreement, dated as of October 2, 2007, among JET-
i Leasing LLC, the aircraft sellers named therein and Babcock &
Brown Air Funding I Limited.*4.3
    
    Servicing Agreement, dated as of October 2, 2007, among Babcock &
Brown Aircraft Management LLC, Babcock & Brown Aircraft Management
(Europe) Limited, Babcock & Brown Air Funding I Limited and AMBAC
Assurance Corporation.*4.4
    
    Administrative Services Agreement, dated as of October 2, 2007,
among Deutsche Bank Trust Company Americas, AMBAC Assurance
Corporation, Babcock & Brown Air Management Co. Limited and
Babcock & Brown Air Funding I Limited.*4.5
    
    Registration Rights Agreement, dated as of October 2, 2007, among
private investors and Babcock & Brown Air Limited.*4.6
    
    Trust Indenture, dated as of October 2, 2007, among Deutsche Bank
Trust Company Americas, BNP Paribas, AMBAC Assurance Corporation
and Babcock & Brown Air Funding I Limited.*4.7
    
    Security Trust Agreement, dated as of October 2, 2007, between
Deutsche Bank Trust Company Americas, and Babcock & Brown Air
Funding I Limited.*4.8
    
    Cash Management Agreement between Deutsche Bank Trust Company
Americas and Babcock & Brown Air Funding I Limited.*4.9
    
    Director Service Agreement between Babcock & Brown Air Limited and
each director thereof.*4.10
    
    Aircraft Acquisition Facility, dated as of November 7, 2007 among
Babcock & Brown Air Acquisition I Limited, the Lenders from time
to time party thereto and Credit Suisse, New York Branch.**4.11
    
    Servicing and Administrative Services Agreement, dated as of
November 7, 2007 among Babcock & Brown Aircraft Management LLC,
Babcock & Brown Aircraft Management (Europe) Limited, Babcock &
Brown Air Acquisition I Limited and each Aircraft Subsidiary that
becomes a party thereto.**8.1
    
    List of subsidiaries of the Company.12.1
    
    Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes Oxley Act of 2002.12.2
    
    Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes Oxley Act of 2002.13.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 *
    
    Previously filed with the Registration Statement on Form F-1, File No. 333-145994.**
    
    Previously filed with the Annual Report on Form 20-F for the
year ended December 31, 2007. 90




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##### Table of Contents



SIGNATURE
  Babcock & Brown Air LimitedBy:
    /s/ Colm BarringtonColm BarringtonChief Executive Officer and Director