##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
file number 001-31616
 INTERNATIONAL LEASE FINANCE CORPORATION
  California
    
    22-3059110(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)10250 Constellation Blvd., Suite 3400Los Angeles, California
    
    90067(Address of principal executive offices)
    
    (Zip Code)
 (310) 788-1999
 þ o
 Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer
þ
    
    Smaller reporting company: o(Do not check if a smaller reporting company)
 o þ




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##### 



INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
 TABLE OF CONTENTS
 PagePart I. Financial InformationItem 1. Financial Statements (Unaudited except for December 31, 2007)Condensed Consolidated Balance Sheets
June 30, 2008 and December 31,
2007
    
    
    2Condensed Consolidated Statements of Income
Three months ended June 30, 2008 and
2007
    
    
    3Condensed Consolidated Statements of Income
Six months ended June 30, 2008 and
2007
    
    
    3Condensed Consolidated Statements of Comprehensive Income
Three months ended June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Comprehensive Income
Six months ended June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2008 and
2007
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    7Item 2. Managements Discussion and Analysis of the Financial
Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market
Risk
    
    
    27Item 4T. Controls and Procedures
    
    
    28Part II. Other InformationItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 6. Exhibits
    
    
    30Signatures
    
    
    32EXHIBIT 10.1EXHIBIT 12EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 
 INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCash, including interest bearing accounts of $86,734 (2008) and $171,609
(2007)
    
    $
    109,369
    
    
    $
    182,772Current income taxes
    
    
    133,959
    
    
    
    138,405Notes receivable, net of allowance, and net investment in finance and
sales-type leases
    
    
    442,632
    
    
    
    418,510Flight equipment under operating leases
    
    
    54,937,354
    
    
    
    52,174,479Less accumulated depreciation
    
    
    11,231,198
    
    
    
    10,376,81943,706,156
    
    
    
    41,797,660Deposits on flight equipment purchases
    
    
    521,871
    
    
    
    794,239Lease receivables and other assets
    
    
    450,274
    
    
    
    428,836Derivative assets, net
    
    
    1,113,740
    
    
    
    863,719Variable interest entities assets
    
    
    104,428
    
    
    
    112,059Deferred debt issue costs, less accumulated amortization of $125,128
(2008) and $110,017 (2007)
    
    
    98,673
    
    
    
    94,390$
    46,681,102
    
    
    $
    44,830,590LIABILITIES AND SHAREHOLDERS EQUITYAccrued interest and other payables
    
    $
    519,867
    
    
    $
    448,185Tax benefit sharing payable to AIG
    
    
    85,000
    
    
    
    85,000Debt financing, net of deferred debt discount of $32,898 (2008) and
$32,570 (2007)
    
    
    30,371,260
    
    
    
    29,451,279Subordinated debt
    
    
    1,000,000
    
    
    
    1,000,000Foreign currency adjustment related to foreign currency denominated debt
    
    
    1,254,365
    
    
    
    968,600Security deposits on aircraft, overhauls and other
    
    
    1,505,658
    
    
    
    1,455,181Rentals received in advance
    
    
    249,509
    
    
    
    251,381Deferred income taxes
    
    
    4,326,126
    
    
    
    4,135,137Variable interest entities liabilities
    
    
    6,408
    
    
    
    7,048SHAREHOLDERS EQUITYMarket Auction Preferred Stock, $100,000 per share liquidation
value; Series A and B, each having 500 shares issued
and outstanding
    
    
    100,000
    
    
    
    100,000Common stock  no par value; 100,000,000 authorized shares,
45,267,723 issued and outstanding
    
    
    1,053,582
    
    
    
    1,053,582Paid-in capital
    
    
    593,981
    
    
    
    593,455Accumulated other comprehensive income (loss)
    
    
    (112,379
    )
    
    
    (106,219
    )Retained earnings
    
    
    5,727,725
    
    
    
    5,387,961Total shareholders equity
    
    
    7,362,909
    
    
    
    7,028,779$
    46,681,102
    
    
    $
    44,830,590
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
 2008
    
    
    2007(Unaudited)REVENUESRental of flight equipment
    
    $
    1,258,637
    
    
    $
    1,133,056Flight equipment marketing
    
    
    28,178
    
    
    
    2,220Interest and other
    
    
    26,299
    
    
    
    21,9931,313,114
    
    
    
    1,157,269EXPENSESInterest
    
    
    366,419
    
    
    
    411,070Effect from derivatives, net of change in hedged items due to
changes in foreign exchange rates
    
    
    7,188
    
    
    
    344Effect from credit and market valuation adjustments on derivatives
    
    
    11,281
    
    
    
    Depreciation of flight equipment
    
    
    464,617
    
    
    
    434,169Provision for overhauls
    
    
    79,214
    
    
    
    66,437Flight equipment rent
    
    
    4,500
    
    
    
    4,500Selling, general and administrative
    
    
    47,685
    
    
    
    46,192980,904
    
    
    
    962,712INCOME BEFORE INCOME TAXES
    
    
    332,210
    
    
    
    194,557Provision for income taxes
    
    
    118,147
    
    
    
    69,180NET INCOME
    
    $
    214,063
    
    
    $
    125,377
 
 INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
 2008
    
    
    2007(Unaudited)REVENUESRental of flight equipment
    
    $
    2,445,390
    
    
    $
    2,202,512Flight equipment marketing
    
    
    39,147
    
    
    
    4,817Interest and other
    
    
    43,791
    
    
    
    40,6162,528,328
    
    
    
    2,247,945EXPENSESInterest
    
    
    746,533
    
    
    
    792,828Effect from derivatives, net of change in hedged items due to
changes in foreign exchange rates
    
    
    7,531
    
    
    
    12,577Effect from credit and market valuation adjustments on derivatives
    
    
    51,238
    
    
    
    Depreciation of flight equipment
    
    
    914,238
    
    
    
    839,701Provision for overhauls
    
    
    150,725
    
    
    
    128,410Flight equipment rent
    
    
    9,000
    
    
    
    9,000Selling, general and administrative
    
    
    84,868
    
    
    
    83,3751,964,133
    
    
    
    1,865,891INCOME BEFORE INCOME TAXES
    
    
    564,195
    
    
    
    382,054Provision for income taxes
    
    
    200,630
    
    
    
    137,518NET INCOME
    
    $
    363,565
    
    
    $
    244,536
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
 2008
    
    
    2007(Unaudited)NET INCOME
    
    $
    214,063
    
    
    $
    125,377OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXNet changes in cash flow hedges, net of
taxes of $(42,241) (2008) and $(14,194)
(2007)
    
    
    78,446
    
    
    
    26,360Change in unrealized appreciation on
securities available for sale, net of taxes
of $(42) (2008) and $(106) (2007)
    
    
    79
    
    
    
    19778,525
    
    
    
    26,557COMPREHENSIVE INCOME
    
    $
    292,588
    
    
    $
    151,934
 
 INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
 2008
    
    
    2007(Unaudited)NET INCOME
    
    $
    363,565
    
    
    $
    244,536OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXNet changes in cash flow hedges, net of
taxes of $3,160 (2008) and $(5,876) (2007)
    
    
    (5,869
    )
    
    
    10,913Change in unrealized appreciation on
securities available for sale, net of taxes
of $157 (2008) and $36 (2007)
    
    
    (291
    )
    
    
    (66
    )(6,160
    )
    
    
    10,847COMPREHENSIVE INCOME
    
    $
    357,405
    
    
    $
    255,383
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
 2008
    
    
    2007(Unaudited)OPERATING ACTIVITIESNet income
    
    $
    363,565
    
    
    $
    244,536Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation of flight equipment
    
    
    914,238
    
    
    
    839,701Deferred income taxes
    
    
    194,306
    
    
    
    243,890Change in fair value of derivative instruments
    
    
    (259,050
    )
    
    
    (163,199
    )Foreign currency adjustment of non-US$ denominated debt
    
    
    285,765
    
    
    
    122,725Amortization of deferred debt issue costs
    
    
    15,111
    
    
    
    15,885Other, including foreign exchange adjustments on
foreign currency denominated cash
    
    
    (2,723
    )
    
    
    483Changes in operating assets and liabilities:Decrease in lease receivables and other assets
    
    
    1,542
    
    
    
    40,943Increase in accrued interest and other payables
    
    
    71,363
    
    
    
    87,195Change in current income taxes
    
    
    4,446
    
    
    
    (139,135
    )(Decrease) increase in rentals received in advance
    
    
    (1,872
    )
    
    
    33,519Change in unamortized debt discount
    
    
    (328
    )
    
    
    (3,064
    )Net cash provided by operating activities
    
    
    1,586,363
    
    
    
    1,323,479INVESTING ACTIVITIESAcquisition of flight equipment for operating leases
    
    
    (2,758,278
    )
    
    
    (3,880,514
    )Payments for deposits and progress payments
    
    
    (191,650
    )
    
    
    (256,778
    )Proceeds from disposal of flight equipment  net of gain
    
    
    328,089
    
    
    
    27,783Advance on notes receivable
    
    
    (43,854
    )
    
    
    Collections on notes receivable and finance and
sales-type leases  net of income amortized
    
    
    13,757
    
    
    
    21,412Other
    
    
    
    
    
    
    1,729Net cash used in investing activities
    
    
    (2,651,936
    )
    
    
    (4,086,368
    )FINANCING ACTIVITIESNet change in commercial paper
    
    
    123,837
    
    
    
    1,440,177Proceeds from debt financing
    
    
    2,680,433
    
    
    
    3,398,989Payments in reduction of debt financing
    
    
    (1,883,961
    )
    
    
    (2,169,970
    )Debt issue costs
    
    
    (19,394
    )
    
    
    (21,063
    )Payment of common and preferred dividends
    
    
    (28,061
    )
    
    
    (17,710
    )Increase in customer and other deposits
    
    
    117,048
    
    
    
    113,332Net cash provided by financing activities
    
    
    989,902
    
    
    
    2,743,755Net decrease in cash
    
    
    (75,671
    )
    
    
    (19,134
    )Effect of exchange rate changes on cash
    
    
    2,268
    
    
    
    2,567Cash at beginning of period
    
    
    182,772
    
    
    
    157,120Cash at end of period
    
    $
    109,369
    
    
    $
    140,553
 (Table continued on following page)
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 2008
    
    2007(Unaudited)Cash paid during the period for:Interest, excluding interest
capitalized of $15,095 (2008) and
$19,638 (2007)
    
    $
    726,895
    
    
    $
    723,420Income taxes, net
    
    
    1,878
    
    
    
    32,763
 Non-Cash Investing and Financing Activities
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(Unaudited)
 A.
    
    Basis of PreparationInternational Lease Finance Corporation (the Company, ILFC, management, we, our,
us) is an indirect wholly owned subsidiary of American International Group, Inc. (AIG). AIG
is a holding company, which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities in the United States and abroad. The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) for interim
financial information and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements.The accompanying unaudited condensed consolidated financial statements include our
accounts, accounts of all other entities in which we have a controlling financial interest, as
well as accounts of variable interest entities in which we are the primary beneficiary as
defined by Financial Accounting Standards Board Interpretation (FIN) No. 46R Consolidation
of Variable Interest Entities. All material intercompany accounts have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair statement of the results for the interim
periods presented have been included. Certain reclassifications have been made to the 2007
unaudited condensed consolidated financial statements to conform to the 2008 presentation.
Operating results for the six months ended June 30, 2008 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2008. These statements should be
read in conjunction with the consolidated financial statements and footnotes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2007.B.
    
    Recent Accounting PronouncementsSFAS 157In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements(SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value and expands
disclosures regarding fair value measurement but does not change existing guidance about
whether an asset or liability is carried at fair value. The most significant effect of us
adopting SFAS 157 was a change in the valuation methodologies for derivative instruments
historically carried at fair value. The change primarily was to incorporate counterparties
credit risk and market liquidity risk factors in the fair value measurement. ILFC adopted the
standard on January 1, 2008, its required effective date. With respect to the implementation,
adjustments to the market values of derivatives were applied prospectively in accordance with
SFAS 157. The changes resulted in an incremental reduction of the fair value of the derivative
assets and charges to income of $11.3 million and $51.2 million for the three and six months
ended June 30, 2008, respectively. The change for the six months ended June 30, 2008 includes
an incremental reduction and charge to income of $13.5 million at January 1, 2008. (See Note C
  Fair Value Measurementsand Note D  Derivative Activitiesfor more information on fair value
measurement of derivative instruments.)The fair value measurement and related disclosure guidance in SFAS 157 do not apply to fair
value measurements associated with share-based awards accounted for in accordance with SFAS No.
123(R), Share-Based Payment. In addition, on February 14, 2008, the FASB issued FASB Staff
Position 157-1, Application of FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under
Statement 13,which amends the scope of SFAS 157 to exclude SFAS No. 13 Accounting for
Leasesand its related interpreted accounting pronouncements.SFAS 159In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS 159). SFAS 159 permits entities to choose to measure
at fair value many financial instruments and certain other items that are not currently
required to be measured at fair value. Subsequent changes in fair value for designated items
will be required to be reported in income. SFAS 159 also establishes presentation and
disclosure requirements for similar types of assets and liabilities measured at fair
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2008
(Unaudited)
 value. SFAS 159 permits the fair value option election on an instrument-by-instrument basis for
eligible items existing at the adoption date and at initial recognition of an asset or
liability or upon an event that gives rise to a new basis of accounting for that instrument.
ILFC adopted this standard at January 1, 2008, its required effective date. The adoption of
this standard did not have any effect on our consolidated financial condition, results of
operations or cash flows, since we did not choose to fair value any financial instruments or
other items not currently measured at fair value.SFAS 160In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements, an amendment of Accounting Research Bulletin No. 51(SFAS 160). SFAS
160 requires non-controlling (formally known as minority) interests in partially owned
consolidated subsidiaries to be classified on the Consolidated Balance Sheet as a separate
component of consolidated shareholders equity. SFAS 160 also establishes accounting rules for
subsequent acquisitions and sales of non-controlling interests and how non-controlling
interests should be presented in the Consolidated Statement of Income. The non-controlling
interests share of subsidiary income should be reported as a part of consolidated net income
with disclosure of the attribution of consolidated net income to the controlling and
non-controlling interests on the face of the Consolidated Statement of Income. SFAS 160 is
effective for ILFC beginning with financial statements issued in the first quarter of 2009 and
earlier application is prohibited. SFAS 160 must be adopted prospectively, except that
non-controlling interests should be reclassified from liabilities to a separate component of
shareholders equity and consolidated net income should be recast to include net income
attributable to both the controlling and non-controlling interests retrospectively. We are
currently assessing the impact of SFAS 160 on a prospective basis, as well as equity
classification of controlling and non-controlling interests.SFAS 161In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133(SFAS 161). SFAS 161 requires
enhanced disclosures about (i)how and why we use derivative instruments; (ii)how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activitiesas amended (SFAS 133); and (iii)how
derivative instruments and related hedged items affect our financial position, results of
operations, and cash flows. SFAS 161 is effective for ILFC beginning with financial statements
issued in the first quarter of 2009. Because SFAS 161 only requires additional disclosures
about derivatives, it will have no effect on our consolidated financial position, results of
operations or cash flows.FIN 39-1In April 2007, the FASB directed the FASB Staff to issue FASB Staff Position (FSP) No.
FIN 39-1, Amendment of FIN No. 39(FSP FIN 39-1). FSP FIN 39-1 modifies FIN No. 39,
Offsetting of Amounts Related to Certain Contracts,and permits companies to offset cash
collateral receivables or payables against derivative instruments under certain circumstances.
FSP FIN 39-1 became effective on January 1, 2008 for us. At June 30, 2008, we did not have any
cash collateral receivables or payables to offset against derivative instruments.SFAS 162In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles(SFAS 162). SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements
presented in conformity with GAAP, but does not change current practices. This statement will
become effective on the 60th day following the Securities and Exchange Commissions approval of
the Public Company Accounting Oversight Board amendments to remove GAAP hierarchy from the
auditing standards. SFAS 162 will have no effect on our consolidated financial position,
results of operations or cash flows.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2008
(Unaudited)
 C.
    
    Fair Value MeasurementsIn September 2006, the FASB issued SFAS 157, which is effective for fiscal years beginning
after November 15, 2007. We adopted the standard on January 1, 2008. SFAS 157:
 
    
    Defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date and establishes a frame work for measuring fair value;
    
    Establishes a three-level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the
measurement date; and
    
    Expands disclosures about instruments measured at fair value.
 Fair Value Measurements on a Recurring BasisThe fair value is the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
degree of judgment used in measuring the fair value of financial instruments generally
correlates with the level of pricing observability. Financial instruments with quoted prices in
active markets generally have more pricing observability and less judgment is used in measuring
fair value. Conversely, financial instruments traded in other-than-active markets or that do
not have quoted prices have less observability and are measured at fair value using valuation
models or other pricing techniques that require more judgment. Pricing observability is
affected by a number of factors, including the type of financial instrument, whether the
financial instrument is new to the market and not yet established, the characteristics specific
to the transaction and general market conditions. We measure the fair value of derivative
assets and liabilities and marketable securities on a recurring basis.Derivative ContractsWe enter into derivatives to hedge our risk exposure to currency fluctuations and interest
rate fluctuations related to our debt and foreign denominated contractual lease payment
receipts. (See Note D  Derivative Activities.) Our derivatives are not traded on an exchange
and are inherently more difficult to value. AIG provides us the recurring valuations of our
derivative instruments. AIG has established and documented a process for determining fair
values. AIGs valuation model includes a variety of observable inputs, including contractual
terms, interest rates curves, foreign exchange rates, yield curves, credit curves, measure of
volatility, and correlations of such inputs. Valuation adjustments may be made in the
determination of fair value. These adjustments include amounts to reflect counterparty credit
quality and liquidity risk. The following adjustments were added to the model as a result of
the adoption of SFAS 157:
 
    
    Credit Valuation Adjustment (CVA)  The CVA adjusts the valuation of
derivatives to account for nonperformance risk of our counterparty with respect to
all net derivative assets positions. The CVA also accounts for ILFCs own credit
risk, in the fair value measurement of all net derivative liabilities positions,
when appropriate. The CVA is accounted for as either an increase or decrease to the
net derivative position with the corresponding increase or decrease reflected in
income.
    
    Market Valuation Adjustment (MVA)  The MVA adjusts the valuation of
derivatives to reflect the fact that ILFC is an end-user of derivative products.
As such the valuation is adjusted to take into account the bid-offer spread (the
liquidity risk), as ILFC is not a dealer of derivative products. The MVA is
accounted for as either an increase or decrease to the net derivative position with
the corresponding increase or decrease reflected in income.
 The CVA and the MVA are included in the fair value measurement of our derivative
instrument portfolio at June 30, 2008. The inclusion of the CVA and the MVA resulted in
incremental reductions of the fair value of derivative assets with corresponding charges to
income of $11.3 million and $51.2 million for the three and six months ended June 30, 2008,
respectively. At January 1, 2008, when we adopted SFAS 157, the changes would have resulted in
an incremental reduction and a charge to income in the amount of $13.5 million which is
included in the $51.2 million adjustment for the six months ended June 30, 2008. The majority
of the reduction and charge is related to the CVA. Our counterparty is AIG Financial Products
Corp. (AIGFP) a wholly owned subsidiary of AIG with an express guarantee from AIG.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2008
(Unaudited)
 Marketable SecuritiesOur marketable securities are included in our Lease receivable and other assets and
consist of an investment in common stock of an airline and AIG common stock held in connection
with our deferred compensation program. We value marketable securities using quoted market
prices. The marketable securities are immaterial to our financial position and, therefore, are
not separately disclosed.Fair Value Measurements on a Non-Recurring BasisWe also measure the fair value of certain assets and liabilities on a non-recurring basis,
when GAAP requires the application of fair value, including events or changes in circumstances
that indicate that the carrying amounts of assets may not be recoverable. Assets subject to
these measurements include aircraft and notes receivable. Liabilities include asset value
guarantees, loan guarantees and put options, all related to aircraft (AVGs). We principally
use the income approach to measure the fair value of these assets and liabilities when
appropriate, as described below:
 
    
    Aircraft:We record aircraft at fair value when we determine the carrying value
may not be recoverable, in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assetsand other accounting pronouncements
requiring remeasurements at fair value. The fair value is measured using an income
approach based on the present value of cash flows from contractual lease agreements
and projected future lease payments, including contingent rentals, net of expenses,
which extend to the end of the aircrafts economic life in its highest and best use
configuration, as well as a disposition value, based on expectations of market
participants.
    
    Notes Receivable & Finance Lease Receivables: ILFC evaluates the fair value of
its secured notes and finance lease receivables using an income approach, which is
based upon the present value of the expected cash flows of the underlying aircraft
measured using the methodology described above. With regard to unsecured notes
receivable, ILFC also measures the fair value using an income approach based upon
the net present value of expected cash flows of the underlying loan agreement.
    
    AVGs: ILFC measures the fair value of AVGs in accordance with FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others(FIN 45) as permitted under SFAS
157. In accordance with FIN 45, ILFC measures the fair value of AVGs at the
inception of the agreement based upon the proceeds received. Subsequent
non-recurring fair value measurements are based upon the differential between the
contractual strike price and the fair value of the underlying aircraft, measured
using the methodology described above.
 Fair Value HierarchySFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The three levels are defined as
follows:
 
    
    Level 1:Fair value measurements that are quoted prices (unadjusted) in active
markets. Market price data generally is obtained from exchange markets. Our
actively traded listed common stocks are measured at fair value on a recurring
basis and classified as level 1 inputs.
    
    Level 2:Fair value measurements based on inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include quoted prices for similar assets and
liabilities in active markets other than quoted prices that are observable for the
asset or liability, such as interest rates and yield curves that are observable at
commonly quoted intervals. Our derivative assets and liabilities are measured on a
recurring basis and classified as level 2.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2008
(Unaudited)
 
    
    Level 3:Fair value measurement based on valuation techniques that use
significant inputs that are unobservable. These measurements include circumstances
in which there is little, if any, market activity for the asset or liability. In
certain cases, the inputs used to measure fair value may fall into different levels
of the fair value hierarchy. In such cases, the level in the fair value hierarchy,
within which the fair value measurement in its entirety falls, is determined based
on the lowest level input that is significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment. In making the assessment, we
consider factors specific to the asset or liability. Assets and liabilities
measured at fair value on a non-recurring basis and classified as level 3 include
aircraft, notes receivable, net investment in finance leases, and AVGs.
 Assets and Liabilities Measured at Fair Value on a Recurring BasisThe following table presents information about assets and liabilities measured at fair
value on a recurring basis at June 30, 2008, and indicates the level of the valuation inputs
used to determine such fair value:
 TotalCounterparty
    
    
    June 30,Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Netting
    
    
    2008(Dollars in thousands)Derivative
assets
    
    $
    
    
    
    $
    1,173,532
    
    
    $
    
    
    
    $
    (59,792
    )
    
    $
    1,113,740Derivative
liabilities
    
    
    
    
    
    
    (59,792
    )
    
    
    
    
    
    
    59,792
    
    
    
    Total derivative
assets, net
    
    $
    
    
    
    $
    1,113,740
    
    
    $
    
    
    
    $
    
    
    
    $
    1,113,740
 The following table presents changes during the six months ended June 30, 2008 in
derivative assets and liabilities measured at fair value on a recurring basis, together with
the balances of such assets and liabilities at December 31, 2007, January 1, 2008 and June 30,
2008, and the unrealized gains or losses recorded in income during the six months ended June
30, 2008 related to these assets and liabilities that remained on the consolidated balance
sheet at June 30, 2008:
 (Dollars in thousands)Derivatives:Total fair value at December 31, 2007
    
    $
    863,719Credit value and market value adjustment of fair value recorded in
income
    
    
    (13,485
    )Total fair value at January 1, 2008
    
    $
    850,234Change in fair value subsequent to January 1, 2008:Effective portion recorded in other comprehensive income
    
    
    277,162Ineffective portion recorded in
income
    
    
    (7,919
    )Credit value and market value adjustments recorded in income at
June 30, 2008
    
    
    (37,753
    )Change in accrued
interest
    
    
    32,016Total fair value at June 30, 2008
    
    $
    1,113,740
 Assets and Liabilities Measured at Fair Value on a Non-recurring BasisDuring the three months ended June 30, 2008, based on information received and other
factors, we recorded a $4.5 million charge to write down a secured note to fair value. The
fair value of a secured note is classified as a Level 3 valuation. The unobservable inputs
utilized in the calculation are described in our policy above.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2008
(Unaudited)
 D.
    
    Derivative ActivitiesWe use derivatives to manage exposures to interest rate and foreign currency risks and we
account for derivatives in accordance with SFAS 133. At June 30, 2008, we have interest rate
and currency swap agreements entered into with a related counterparty. The derivatives are
subject to a master netting agreement, which would allow the netting of derivative assets and
liabilities in the case of default under any one contract. Our derivative portfolio is recorded
at fair value on our balance sheet on a net basis (see Note C  Fair Value Measurements).We record the changes in fair value of derivatives in income or other comprehensive
income (OCI) depending on the designation of the hedge. Where hedge accounting is not
achieved pursuant to SFAS 133, the change in fair value of the derivative is recorded in
income. In the second quarter of 2007, we re-designated all our derivatives as cashflow
hedges. Each balance remaining in accumulated other comprehensive income (AOCI) at the time
of re-designation is amortized over the remaining life of the underlying derivative in
accordance with SFAS 133. During the three and six months ended June 30, 2008 and 2007, we
recorded the following in OCI related to derivative instruments:
 Six Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,(Increase) decrease
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Effective portion of change in fair
market value of
derivatives
    
    $
    (277,162
    )
    
    $
    (108,322
    )
    
    $
    (107,774
    )
    
    $
    (99,046
    )Amortization of balances of
de-designated hedges and other
adjustments
    
    
    426
    
    
    
    3,672
    
    
    
    62
    
    
    
    (648
    )Foreign exchange component of cross
currency swaps credited to
income
    
    
    285,765
    
    
    
    87,861
    
    
    
    (12,975
    )
    
    
    59,140Income tax
effect
    
    
    (3,160
    )
    
    
    5,876
    
    
    
    42,241
    
    
    
    14,194Net changes in cash flow hedges, net
of taxes
    
    $
    5,869
    
    
    $
    (10,913
    )
    
    $
    (78,446
    )
    
    $
    (26,360
    )
 During the three and six months ended June 30, 2008, $3.0 million (net) and $10.1 million
(net), respectively, were reclassified from AOCI to income when interest was paid or received
on our qualifying SFAS 133 cash flow hedges. For the three and six months ended June 30, 2007,
the reclassifications were $31.9 million (net) and $48.0 million (net), respectively. We
estimate that within the next twelve months, we will amortize into earnings approximately
$237.6 million of the pre-tax balance in AOCI under cash flow hedge accounting in connection
with our program to convert debt from floating to fixed interest rates. All components of each
derivatives gain or loss were included in the assessment of ineffectiveness.We recorded the following in income for the three and six months ended June 30, 2008 and
2007:
 Six Months Ended
    
    
    Three Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)(Income) loss related to derivative instruments:Changes in fair value of derivative
instruments with no hedge accounting
treatment under SFAS 133 (a)
    
    $
    
    
    
    $
    (17,546
    )
    
    $
    
    
    
    $
    53Offsetting changes in fair value of foreign
denominated debt related to contracts with
no hedge accounting treatment under SFAS
133
    
    
    
    
    
    
    33,572
    
    
    
    
    
    
    
    (50
    )Ineffectiveness of cash flow
hedges
    
    
    7,919
    
    
    
    298
    
    
    
    7,383
    
    
    
    (307
    )Reclassification of AOCI related to
derivative instruments de-designated from
hedges
    
    
    (388
    )
    
    
    (3,747
    )
    
    
    (195
    )
    
    
    648Loss related to derivative instruments and
related economically hedged
items
    
    $
    7,531
    
    
    $
    12,577
    
    
    $
    7,188
    
    
    $
    344
 
 (a)
    
    In the second quarter of 2007, we re-designated four swaps for
hedge accounting under SFAS 133 that were previously outstanding but did not
qualify for hedge accounting treatment under SFAS 133. Subsequent to the
re-designation, all derivatives qualified as hedges under SFAS 133.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2008
(Unaudited)
 In addition, $(12.9) million and $285.8 million of foreign currency adjustments related
to foreign denominated hedged items were reclassified to OCI for the three and six months
ended June 30, 2008, respectively. $59.1 million and $87.9 million were reclassified for the
same periods ended June 30, 2007.We recorded decreases (increases) in lease revenue related to derivatives for the following
periods:
 Six Months EndedJune 30
    
    Three Months Ended
June 302008
    
    2007
    
    2008
    
    2007(Dollars in thousands)Income:$
    5,417
    
    
    $
    (2,092
    )
    
    $
    3,298
    
    
    $
    (595
    )
 Additionally, during the three and six months ended June 30, 2008, losses of $11.3
million and $51.2 million, respectively, were recorded in income related to CVA and MVA
pursuant to the fair valuation of our derivative portfolio in compliance with the provisions
of SFAS 157 (see Note C  Fair Value Measurements).E.
    
    Related Party TransactionsWe are party to cost sharing agreements with AIG. Generally, these agreements provide for
the allocation of corporate costs based upon a proportional allocation of costs to all
subsidiaries. We also pay AIG a fee related to management services provided for certain of our
foreign subsidiaries. We earned management fees from two trusts consolidated by AIG for the
management of aircraft we have sold to the trusts.Our financial statements include the following amounts involving related parties:
 Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands)Income StatementExpense (income):Allocation of corporate costs from AIG
    
    $
    6,613
    
    
    $
    6,736
    
    
    $
    2,270
    
    
    $
    3,090Management services paid to subsidiaries of AIG
    
    
    423
    
    
    
    366
    
    
    
    189
    
    
    
    151Management fees received
    
    
    (4,902
    )
    
    
    (4,839
    )
    
    
    (2,449
    )
    
    
    (2,412
    )
 At
    
    AtJune 30,
    
    December 31,2008
    
    2007(Dollars in thousands)Balance SheetAsset (liability):Taxes benefit sharing payable to AIG
    
    $
    (85,000
    )
    
    $
    (85,000
    )Accrued corporate costs payable to AIG
    
    
    (2,725
    )
    
    
    (1,495
    )Accrued dividend payable to AIG
    
    
    
    
    
    
    (4,260
    )Income taxes receivable from AIG
    
    
    133,959
    
    
    
    138,405Medium term notes
    
    
    (200,000
    )
    
    
    (200,000
    )Net (payable) receivable for management fees and other
    
    
    (718
    )
    
    
    (577
    )
 All of our derivative contracts are with AIGFP, a related party. The fair market value is
disclosed separately on our Condensed Consolidated Balance Sheets. See Note D - Derivative
Activitiesfor amounts included in our Condensed Consolidated Statements of Income.
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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 Forward-Looking StatementsThis quarterly report on Form 10-Q contains or incorporates statements that constitute
forward-looking statements. Those statements appear in a number of places in this Form 10-Q and
include statements regarding, among other matters, the state of the airline industry, our
access to the capital markets, our ability to restructure leases and repossess aircraft, the
structure of our leases, regulatory matters pertaining to compliance with governmental
regulations and other factors affecting our financial condition or results of operations. Words
such as expects, anticipates, intends, plans, believes, seeks, estimates, and
should and variations of these words and similar expressions, are used in many cases to
identify these forward-looking statements. Any such forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and other factors that may
cause actual results, performance or achievements of us or industry to vary materially from our
future results, performance or achievements, or those of our industry, expressed or implied in
such forward-looking statements. Such factors include, among others, the risk factors described
and referred to in the sections titled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Overview and Industry Condition, Quantitative and
Qualitative Disclosures about Market Riskand Part II  Item 1A. Risk Factors, in this Form
10-Q and in the section titled Part I  Item 1A. Risk Factorsin our Annual Report on Form
10-K for the year ended December 31, 2007, and general industry economic and business
conditions, which will, among other things, affect demand for aircraft, availability and
creditworthiness of current and prospective lessees, lease rates, availability and cost of
financing and operating expenses, governmental actions and initiatives, and environmental and
safety requirements. We undertake no obligation to (and we expressly disclaim any obligation
to) revise or update any forward-looking information to reflect actual results or changes in
the factors affecting the forward-looking information.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Overview and Industry ConditionILFC primarily acquires new commercial jet aircraft from The Boeing Company, or Boeing,
and Airbus S.A.S., or Airbus, and leases these aircraft to airlines throughout the world. In
addition to our leasing activity, we sell aircraft from our leased aircraft fleet to other
leasing companies, financial services companies and airlines. In some cases, we provide fleet
management services to investors and/or owners of aircraft portfolios for a management fee. We
have also provided asset value guarantees and a limited number of loan guarantees to buyers of
aircraft or to financial institutions for a fee. Additionally, we remarket and sell aircraft
owned or managed by others for a fee.As of June 30, 2008, we owned 947 aircraft, had nine additional aircraft in the fleet
classified as finance and sales-type leases, and provided fleet management services for 99
aircraft. We have contracted with Airbus and Boeing to buy 179 new aircraft for delivery
through 2019 with an estimated purchase price of $17.6 billion, 18 of which will deliver during
the remainder of 2008. We anticipate financing the purchases through a combination of operating
cash flows and debt. Proceeds from borrowings decreased for the six months ended June 30, 2008
compared to the same period in 2007. We expect a further decline in our future need for
borrowings on an annual basis due to the continuing decrease in our annual aircraft purchases,
coupled with the expected revenues generated from the existing fleet.Since August 2007, disruption in the global credit markets coupled with the re-pricing of
credit risk has created difficult conditions in the financial markets. These conditions have
resulted in greater volatility, less liquidity, and widening of credit spreads. It is difficult
to predict how long these conditions will exist and the extent to which our credit spreads will
continue to be affected, potentially making some of our term-borrowings more expensive. We
have, however, seen a decrease in our composite interest rate during the six-month period ended
June 30, 2008, driven primarily by a decrease in short-term interest rates.Our sources of revenue are principally from scheduled and charter airlines and companies
associated with the airline industry. The airline industry is cyclical, economically sensitive,
and highly competitive. Airlines and related companies may be affected by fuel prices and
shortages, political or economic instability, terrorist activities, changes in national policy,
competitive pressures, labor actions, pilot shortages, insurance costs, recessions, and other
political or economic events adversely affecting world or regional trading markets. Our
customers ability to react to and cope with the volatile competitive environment in which they
operate, as well as our own competitive environment, will affect our revenues and income.Improvements seen in worldwide airline industry performance over the past few years and
the resulting increase in demand for our aircraft are having a positive effect on our financial
results. However, we are currently seeing financial stress to varying degrees across the
airline industry largely precipitated by record-high fuel costs, tightening of the credit
markets, and generally worsening economic conditions. This financial stress is causing a
slow-down in the airline industry which will likely have a negative impact on future lease
rates and could begin to influence our future results, as some airlines may approach us to
renegotiate transactions. In the United States in particular, we have seen airlines cancel
routes, eliminate jobs, and retire aircraft in an attempt to reduce capacity. Four of our
customers in the United States have to date this year filed for bankruptcy protection: ATA
Airlines (ATA) (ten owned and two managed aircraft), Frontier Airlines (five owned aircraft),
Eos Airlines (Eos) (three owned aircraft), and Aloha Airlines (one owned aircraft). As of
June 30, 2008, Frontier Airlines continues to operate and continues to lease five aircraft from
us. ATA, Eos and Aloha Airlines ceased operations during the period ended June 30, 2008, and
returned to us the 14 aircraft we own and the two we manage. As of July 31, 2008, we had placed
all of these 16 aircraft with other airlines. We recorded a charge for $13.1 million for rent
adjustments related to ATA for the six-month period ended June 30, 2008 and we did not earn
$9.4 million of lease revenue related to the 14 aircraft we own and which were previously
operated by ATA, Eos and Aloha Airlines. Another U.S. operator, Skybus Airlines, filed for
bankruptcy protection and ceased operations during the period ended June 30, 2008. We had
signed follow-on leases with Skybus for two used aircraft, owned by us and scheduled for
delivery subsequent to their bankruptcy filing. As of July 31, 2008, we had leased the two
aircraft to a foreign airline.Subsequent to June 30, 2008, another customer of ours, TradeWinds Airlines, Inc.
(TradeWinds), an all cargo carrier (one owned aircraft), filed for bankruptcy protection. The
aircraft lease was rejected on July 29, 2008. We will have to remarket this aircraft.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 We derive approximately 90% of our revenues from airlines outside of the United States. A
key factor in our success has been a concentrated effort to maximize our lease placements in
regions where the airline industry is performing better on a relative scale, such as in the
Middle East, Russia and Eastern Europe, and parts of Asia, Western Europe, and South America
and to minimize placements in regions that are under stress. At July 31, 2008, we have signed
leases for all our new aircraft deliveries through the end of 2009. Furthermore, our
contractual purchase commitments for future new aircraft deliveries from 2010 to 2019 are at
historic lows. For these reasons, we believe we are well positioned not only for an industry
downturn, but to reap benefits from any opportunities a down market may present.We have ordered 74 787s from Boeing with the first aircraft now scheduled to deliver in
November 2011. Boeing has made several announcements concerning the delays in the deliveries of
the 787s. Boeing has informed us that our 787 deliveries may be delayed by approximately 19 to
30 months with an average delay of 27 months per aircraft and span across our entire order,
with the original contracted deliveries running from January 2010 through 2017. We are unable
to assess whether these delays will have any significant impact on our operations for any
future period.Income before income taxes for the three and six month periods ended June 30, 2008
increased compared to the same periods in 2007. The increases resulted from (i)a net increase
in the size of our fleet by 53 aircraft from July 1, 2007 to June 30, 2008; (ii)an increase
in lease rates for aircraft that have returned and been delivered to new lessees; (iii)an
increase in gains related to sales of flight equipment; and (iv)a decrease in interest
expense, due to our lower composite interest rate.On January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements(SFAS 157), which provides guidance on how to determine fair
market value. As a result, we changed the methodology used to calculate the fair value of our
derivative instruments. As few classes of derivative contracts are listed on an exchange, all
our derivative positions were valued using internally developed models that use as their basis
observable market parameters. The major change in our methodology to measure fair value of
derivatives was the incorporation of a credit valuation adjustment (CVA) and a market
valuation adjustment (MVA). The CVA adjusts the valuation to account for nonperformance risk
of our counterparty and the MVA takes into account the bid-offer spread (liquidity risk). Prior
to January 1, 2008, no CVA or MVA was included in the fair market value of our derivatives. At
June 30, 2008, we were in a net derivative asset position and the CVA and MVA reduced the value
of the derivative assets. The adjustments resulted in a charge from the widening of our
counterpartys credit default spreads in the amount of $13.5 million at January 1, 2008 and an
additional charge of $37.7 million during the period, aggregating a $51.2 million charge in the
six-month period ended June 30, 2008. In the past nine months, financial markets and credit
default swap spreads, which were used to calculate the credit risk, have behaved erratically.
Other types of models or analysis could result in materially different estimates. For example,
a third-party analysis provided to us, which uses different credit and market value inputs,
estimated the potential total CVA and MVA adjustments for the six months ended June 30, 2008 at
approximately $12.4 million.Included in our derivative
portfolio are derivative instruments hedging 2.85 billion
and £300 million of debt financings previously issued, of
which 1.25 billion will mature in
the fourth quarter of 2008. We do not anticipate exiting these derivatives prior to maturity.
In addition, these derivatives are with a non-subsidiary affiliate that is rated AA- by
Standard & Poors, a division of The McGraw-Hill Companies, Inc. (S&P), Aa3 by Moodys
Investors Service, Inc. (Moodys), and AA- Fitch Ratings, Inc (Fitch), due to credit
support from American International Group, Inc. (AIG), its parent. See Notes C and D of Notes
to Condensed Consolidated Financial Statementsfor more information on derivative activities.Critical Accounting Policies and EstimatesManagements discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on- going basis, we evaluate the estimates and judgments, including those
related to revenue, depreciation,
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 overhaul reserves, and contingencies. The estimates are based on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. The results
form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions and conditions.We believe that the following critical accounting policies can have a significant impact
on our results of operations, financial position and financial statement disclosures, and may
require subjective and complex estimates and judgments.Fair Value Measurements:We measure the fair value of financial instruments in accordance with
SFAS 157, on a recurring basis. Based on SFAS 157, fair value is the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The degree of judgment used in measuring the fair
value of financial instruments generally correlates with the level of pricing observability.
Financial instruments with quoted prices in active markets generally have more pricing
observability and less judgment is used in measuring fair value. Conversely, financial
instruments traded in other-than-active markets or that do not have quoted prices have less
observability and are measured at fair value using valuation models or other pricing techniques
that require more judgment. Pricing observability is affected by a number of factors, including
the type of financial instrument, whether the financial instrument is new to the market and not
yet established, the characteristics specific to the transaction and general market conditions.
We measure the fair value of derivative assets and liabilities on a recurring basis. Our
derivatives are not traded on an exchange and are inherently more difficult to value. AIG
provides us the recurring valuations of our derivative instruments. AIG has established and
documented a process for determining fair values. AIGs valuation model includes a variety of
observable inputs, including contractual terms, interest rate curves, foreign exchange rates,
yield curves, credit curves, measures of volatility, and correlations of such inputs. Valuation
adjustments may be made in the determination of fair value. These adjustments include amounts
to reflect counterparty credit quality and liquidity risk and are recorded in income.We also measure the fair value of certain assets and liabilities on a non-recurring basis,
when GAAP requires the application of fair value, including events or changes in circumstances
that indicate that the carrying amounts of assets may not be recoverable. These assets include
aircraft and notes receivable. Liabilities include asset value guarantees, loan guarantees and
put options, all related to aircraft (AVGs). We principally use the income approach to
measure the fair value of these assets and liabilities, when appropriate. The income approach
is based on the present value of cash flows from contractual lease agreements and projected
future lease payments, including contingent rentals, net of expenses, which extend to the end
of the aircrafts economic life in its highest and best use configuration, as well as a
disposition value based on expectations of market participants.For a detailed discussion on the application of the following additional accounting
policies, see Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007.
 
    
    Lease Revenue
    
    Flight Equipment Marketing
    
    Flight Equipment
    
    Provision for Overhauls
    
    Income Taxes
    
    Derivative Financial Instruments
 
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Financial ConditionWe borrow funds to purchase new and used flight equipment, including funds for progress
payments during aircraft construction, and to pay off maturing debt obligations. These funds
are borrowed principally on an unsecured basis from various sources. During the six months
ended June 30, 2008, we borrowed $2.7 billion (excluding commercial paper) and $1.6 billion was
provided by operating activities. As of June 30, 2008, we have committed to purchase 179 new
aircraft from Airbus and Boeing at an estimated aggregate purchase price of $17.6 billion for
delivery through 2019. We currently expect to fund expenditures for aircraft and to meet
liquidity needs from a combination of available cash balances, internally generated funds and
financing arrangements. Our borrowing strategy will, over time, result in approximately 15% of
our debt, excluding commercial paper, maturing in any one year. Management continues to explore
new funding sources and ways to diversify our investor base.Our debt financing was comprised of the following at the following dates:
 June 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Public bonds and medium-term notes
    
    $
    22,075,684
    
    
    $
    21,360,020Bank and other term debt
    
    
    3,706,082
    
    
    
    3,625,274Subordinated debt
    
    
    1,000,000
    
    
    
    1,000,000Total public debt, bank debt and subordinated debt
    
    
    26,781,766
    
    
    
    25,985,294Commercial paper
    
    
    4,622,392
    
    
    
    4,498,555Less: Deferred debt discount
    
    
    (32,898
    )
    
    
    (32,570
    )Total debt financing
    
    $
    31,371,260
    
    
    $
    30,451,279Selected interest rates and ratios which
include the economic effect of
derivative instruments:Composite interest rate
    
    
    4.74
    %
    
    
    5.16
    %Percentage of total debt at fixed rates
    
    
    74.24
    %
    
    
    73.84
    %Composite interest rate on fixed rate debt
    
    
    5.30
    %
    
    
    5.17
    %Bank prime rate
    
    
    5.00
    %
    
    
    7.25
    %
 The above amounts represent the anticipated settlement of our currently outstanding debt
obligations. Certain adjustments required to present currently outstanding economically hedged
debt obligations have been recorded and presented separately on the balance sheet, including
adjustments related to foreign currency hedging and interest rate hedging activities. We have
eliminated the currency exposure arising from foreign currency denominated notes by
economically hedging the notes through swaps. Foreign currency denominated debt is translated
into US dollars using exchange rates as of each balance sheet date. The foreign exchange
adjustment for the foreign currency denominated debt economically hedged with derivative
contracts was $1.3 billion at June 30, 2008, and $1.0 billion at December 31, 2007. Composite
interest rates and percentages of total debt at fixed rates reflect the effect of derivative
instruments. Our lower composite interest rate at June 30, 2008, compared to December 31, 2007,
is driven by a decrease in short-term interest rates.
 -18-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Public Debt(Exclusive of the Commercial Paper Program)
  Maximum
    
    Sold as of
    
    Sold as of
    
    Sold as ofOffering
    
    December 31, 2007
    
    June 30, 2008
    
    July 31, 2008(Dollars in millions)Registration
statement dated
August 16, 2006
(including $10.0
billion
Medium-Term Note
Program and $1.0
billion Retail
Medium-Term Note
Program)
    
    Unlimited(a)
    
    $
    4,650
    
    
    $
    6,796
    
    
    $
    6,857Registration
statement dated
November 22, 2002
(including $2.88
billion
Medium-Term Note
Program and $1.0
billion Retail
Medium-Term Note
Program)
    
    $
    6,080
    (b)
    
    
    5,922
    
    
    
    6,080
    
    
    
    6,080Euro Medium-Term
Note Programme
dated
September 2006
(c)(d)
    
    
    7,000
    
    
    
    3,832
    
    
    
    3,832
    
    
    
    3,832
 
 (a)
    
    Includes $645 million, which was incorporated into the registration statement from
a prior registration statement. As a result of the Companys Well Known Seasoned Issuer
(WKSI) status, we have an unlimited amount of debt securities registered for sale.(b)
    
    Includes $1.08 billion, which was incorporated into the registration statement from
a prior registration statement, increasing the maximum offering from $5.0 billion to
$6.08 billion.(c)
    
    We have economically hedged the foreign currency risk of the notes through
derivatives.(d)
    
    This is a perpetual program. As a bond matures, the principal amount becomes
available for new issuances under the program.
 Bank Term DebtIn January 1999, we entered into an Export Credit Facility for up to a maximum of $4.3
billion for aircraft delivered through 2001. The facility was used to fund 85% of each
aircrafts purchase price. This facility is guaranteed by various European Export Credit
Agencies. We financed 62 aircraft using $2.8 billion under this facility over ten years with
interest rates from 5.753% to 5.898%. We have collateralized the debt by a pledge of the shares
of a subsidiary, which holds title to the aircraft financed under the facility. At June 30,
2008, $504 million was outstanding under the facility and the net book value of the related
aircraft was $2.4 billion.We have an Export Credit Facility for up to a maximum of $3.64 billion for Airbus aircraft
originally to be delivered through May 31, 2008. During the three-month period ended June 30,
2008, we extended this facility through May 31, 2009. The facility is used to fund 85% of each
aircrafts purchase price. This facility becomes available as the various European Export Credit
Agencies provide their guarantees for aircraft based on a six-month forward-looking calendar.
The financing is for a ten-year fully amortizing loan per aircraft at an interest rate
determined through a bid process. We have collateralized the debt by a pledge of the shares of a
subsidiary, which holds title to the aircraft financed under this facility. As of June 30, 2008,
we had financed 40 aircraft using $2.75 billion under this facility and $2.1 billion was
outstanding. The interest rates are either LIBOR based with spreads ranging from 0.01% to 0.28%
or fixed rates ranging from 4.2% to 4.7%. The net book value of the related aircraft was $2.9
billion at June 30, 2008.From time to time, we enter into funded bank financing arrangements. As of June 30, 2008,
we had a total of $1.1 billion outstanding, which have varying maturities through February 2012.
The interest rates are LIBOR based with spreads ranging from 0.300% to 1.625%.Subordinated DebtIn December 2005, we entered into two tranches of subordinated debt totaling $1.0 billion.
Both mature on December 21, 2065, but each tranche has a different call option. The $600 million
tranche has a call date of December 21, 2010, and the $400 million tranche has a call date of
December 21, 2015. The tranche with the
 -19-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 (i) (ii) (iii)
 Commercial Paper
 Bank Commitments
 Bank Commitments
  Derivatives
 Accounting for Derivative Instruments and Hedging
Activities,
   -20-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  Credit Market Environment
  Market Liquidity Risk
    Rating Agency
    
    Short-term Debt
    
    Long-term Debt
    
    Outlook
    
    Date of Last ActionFitch
    
    F1
    
    A
    
    Stable
    
    May 22, 2008Moodys
    
    P-1
    
    A1
    
    Negative
    
    May 22, 2008S&P
    
    A-1
    
    A+
    
    Negative
    
    May 21, 2008
    -21-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  Existing Commitments
 Commitments Due by Fiscal YearTotal
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    Thereafter(Dollars in thousands)Public and Bank
Term Debt
    
    $
    25,781,766
    
    
    $
    2,766,010
    
    
    $
    4,142,886
    
    
    $
    4,392,948
    
    
    $
    4,835,760
    
    
    $
    4,165,094
    
    
    $
    5,479,068Commercial Paper
    
    
    4,622,392
    
    
    
    4,617,392
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated
Debt
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Interest Payments
on Debt Outstanding
(a)(b)
    
    
    7,366,927
    
    
    
    676,782
    
    
    
    1,139,148
    
    
    
    925,510
    
    
    
    685,763
    
    
    
    437,623
    
    
    
    3,502,101Operating Leases
(c)
    
    
    82,559
    
    
    
    4,668
    
    
    
    10,690
    
    
    
    11,407
    
    
    
    11,870
    
    
    
    12,352
    
    
    
    31,572Pension Obligations
(d)
    
    
    3,065
    
    
    
    432
    
    
    
    467
    
    
    
    507
    
    
    
    547
    
    
    
    553
    
    
    
    559Tax Benefit Sharing
Agreement Due to
AIG
    
    
    85,000
    
    
    
    
    
    
    
    85,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase
Commitments
    
    
    17,565,900
    
    
    
    1,017,700
    
    
    
    2,625,300
    
    
    
    231,000
    
    
    
    349,600
    
    
    
    1,047,700
    
    
    
    12,294,600Total
    
    $
    56,507,609
    
    
    $
    9,082,984
    
    
    $
    8,008,491
    
    
    $
    5,561,372
    
    
    $
    5,883,540
    
    
    $
    5,663,322
    
    
    $
    22,307,900
 Contingent Commitments
 Contingency Expiration by Fiscal YearTotal
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    Thereafter(Dollars in thousands)AVGs (e)
    
    $
    559,652
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    27,841
    
    
    $
    78,950
    
    
    $
    452,861Lines of Credit
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    Total (f)
    
    $
    609,652
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    77,841
    
    
    $
    78,950
    
    
    $
    452,861
 
 (a)
    
    Future interest payments on floating rate debt are estimated using floating
interest rate in effect at June 30, 2008.(b)
    
    Includes the effect of interest rate and foreign currency derivative instruments.(c)
    
    Excludes fully defeased aircraft sale-lease back transactions.(d)
    
    Our pension obligations are part of intercompany expenses, which AIG allocates to
us on an annual basis. The amount is an estimate of such allocation. The column 2008
consists of total estimated allocations for 2008 and the column Thereafter consists of
the 2013 estimated allocation. The amount allocated has not been material to date.(e)
    
    From time to time, we participate with airlines, banks and other financial
institutions to assist in financing aircraft by providing asset guarantees, put options,
or loan guarantees collateralized by aircraft. As a result, should we be called upon to
fulfill our obligations, we would have recourse to the value of the underlying aircraft.(f)
    
    Excluded from total contingent commitments are $87.2 million of uncertain tax
liabilities. The amounts are included in Current taxes on our 2008 Condensed Consolidated
Balance Sheet. The future cash flows to these liabilities are uncertain and we are unable
to make reasonable estimates of the outflows. -22-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Other Variable Interest Entities
   Results of Operations
 (i) (ii) (iii)
 (i) (ii)
   (i) (ii)
  -23-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  2008
    
    2007
    
    DecreaseBeginning of Quarter
    
    
    4.79
    %
    
    
    5.23
    %
    
    
    0.44
    %End of Quarter
    
    
    4.74
    %
    
    
    5.27
    %
    
    
    0.53
    %Average
    
    
    4.77
    %
    
    
    5.25
    %
    
    
    0.48
    %
  Notes to Condensed Consolidated Financial Statements
    (i) (ii) (i) (ii)
    Results of Operations
 (i) (ii) (iii)
 -24-




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
  (i) (ii) (iii)
   (i) (ii) (iii) (iv) (v)
   2008
    
    2007
    
    DecreaseBeginning of Six Months
    
    
    5.16
    %
    
    
    5.24
    %
    
    
    0.08
    %End of Six Months
    
    
    4.74
    %
    
    
    5.27
    %
    
    
    0.53
    %Average
    
    
    4.95
    %
    
    
    5.26
    %
    
    
    0.31
    %
 Notes to Condensed Consolidated Financial Statements
 Notes to Condensed Consolidated Financial Statements
  -25-




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
   (i) (ii) (i) (ii)
    -26-




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Value at Risk
     ILFC Market RiskSix months Ended
    
    Year EndedJune 30, 2008
    
    December 31, 2007(Dollars in millions)Average
    
    High
    
    Low
    
    Average
    
    High
    
    LowCombined
    
    $
    42.7
    
    
    $
    53.6
    
    
    $
    36.1
    
    
    $
    70.0
    
    
    $
    102.3
    
    
    $
    38.5Interest Rate
    
    
    43.0
    
    
    
    53.8
    
    
    
    36.5
    
    
    
    69.9
    
    
    
    102.2
    
    
    
    38.8Currency
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.7
    
    
    
    0.9
    
    
    
    1.2
    
    
    
    0.7
 -27-




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##### Table of Contents



ITEM 4T.
 CONTROLS
AND PROCEDURES
 (A)
    
    Evaluation of Disclosure Controls and Procedures
     (B)
    
    Changes in Internal Control Over Financial Reporting
  -28-




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Managements Discussion and Analysis of Financial
Condition and Results of Operations  Overview and Industry Condition Quantitative and Qualitative Disclosures about Market Risk.
   
    
    Overall Airline Industry Risk
 Ø       Demand for air travel
    
    Ø       Geopolitical eventsØ       Competition between carriers
    
    Ø       Security, terrorism and warØ       Fuel prices and availability
    
    Ø       Worldwide health concernsØ       Labor costs and stoppages
    
    Ø       Equity and borrowing capacityØ       Maintenance costs
    
    Ø       Environmental concernsØ       Employee labor contracts
    
    Ø       Government regulationØ       Air traffic control infrastructure constraints
    
    Ø       Interest ratesØ       Airport access
    
    Ø       OvercapacityØ       Insurance costs and coverage
    
    Ø       Natural disasters
 
    
    Airframe, Engine and Other Manufacturer Risk
    
    Borrowing Risks
 Ø
    
    LiquidityØ
    
    Interest rate risk
 -29-




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##### Table of Contents



PART II. OTHER INFORMATION (CONTINUED)
 
    
    Other Risks
 Ø
    
    Residual valueØ
    
    ObsolescenceØ
    
    Credit riskØ
    
    Key personnelØ
    
    Foreign currency exchange rate riskØ
    
    Relationship with AIGØ
    
    Accounting pronouncements
 Item 1A. Risk
Factors
 
 ITEM 6. EXHIBITS
 a)
    
    Exhibits
 3.1
    
    Restated Articles of Incorporation of the Company,
as amended through December 9, 1992, filed November 3, 1993 (filed as an
exhibit to Registration Statement No. 33-50913 and incorporated herein by
reference).3.2
    
    Certificate of Determination of Preferences of
Series A Market Auction Preferred Stock (filed December 9, 1992 as an
exhibit to Registration Statement No. 33-54294 and incorporated herein by
reference).3.3
    
    Certificate of Determination of Preferences of
Series B Market Auction Preferred Stock (filed December 9, 1992 as an
exhibit to Registration Statement 33-54294 and incorporated herein by
reference).3.4
    
    Certificate of Determination of Preferences of
Series C Market Auction Preferred Stock (filed as an exhibit to Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).3.5
    
    Certificate of Determination of Preferences of
Series D Market Auction Preferred Stock (filed as an exhibit to Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).3.6
    
    Certificate of Determination of Preferences of
Series E Market Auction Preferred Stock (filed as an exhibit to Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).3.7
    
    Certificate of Determination of Preferences of
Series F Market Auction Preferred Stock (filed as an exhibit to Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).3.8
    
    Certificate of Determination of Preferences of
Series G Market Auction Preferred Stock (filed as an exhibit to Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).3.9
    
    Certificate of Determination of Preferences of
Series H Market Auction Preferred Stock (filed as an exhibit to Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).3.10
    
    Certificate of Determination of Preferences of
Preferred Stock of the Company (filed as an exhibit to Form 10-K for the
year ended December 31, 2001 and incorporated herein by reference).3.11
    
    By-Laws of the Company, including amendment thereto
dated August 31, 1990 (filed as an exhibit to Form 10-K for the year
ended December 31, 2003 and incorporated herein by reference).
 -30-




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##### Table of Contents



PART II. OTHER INFORMATION (CONTINUED)
 3.12
    
    Unanimous Written Consent of Sole Stockholder of
the Company, dated January 2, 2002, amending the Bylaws of the Company
(filed as an exhibit to Form 10-Q for the quarter ended September 30,
2003 and incorporated herein by reference).10.1
    
    Extension Letter, dated May 29, 2008, to Aircraft
Facility Agreement, dated as of May 18, 2004, among Whitney Leasing
Limited, as borrower, the Company, as guarantor, and the Bank of Scotland
and other banks listed therein providing up to $3,643,660,000 (plus
related premiums) for the financing of aircraft, as most recently amended
on May 30, 2006 and May 30, 2007.12.
    
    Computation of Ratios of Earnings to Fixed Charges
and Preferred Stock Dividends31.1
    
    Certification of Chairman of the Board and Chief Executive Officer31.2
    
    Certification of Vice Chairman and Chief Financial Officer32.1
    
    Certification under 18 U.S.C., Section 1350
 -31-




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##### Table of Contents



SIGNATURES
   August 7, 2008
    /S/ Steven F. Udvar-HazySTEVEN F. UDVAR-HAZYChairman of the Board and
Chief Executive Officer
(Principal Executive Officer)August 7, 2008
    /S/ Alan H. LundALAN H. LUNDVice Chairman and
Chief Financial Officer
(Principal Financial Officer)August 7, 2008
    /S/ Kurt H. SchwarzKURT H. SCHWARZSenior Vice President,
Chief Accounting Officer and
Controller
(Principal Accounting Officer) -32-




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##### Table of Contents



INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
   10.1
    
    Extension Letter, dated May 29, 2008, to Aircraft
Facility Agreement, dated as of May 18, 2004, among Whitney Leasing
Limited, as borrower, the Company, as guarantor, and the Bank of Scotland
and other banks listed therein providing up to $3,643,660,000 (plus
related premiums) for the financing of aircraft, as most recently amended
on May 30, 2006 and May 30, 2007.12.
    
    Computation of Ratios of Earnings to Fixed Charges
and Preferred Stock Dividends31.1
    
    Certification of Chairman of the Board and Chief Executive Officer31.2
    
    Certification of Vice Chairman and Chief Financial Officer32.1
    
    Certification under 18 U.S.C., Section 1350
 -33-