##### 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 March 31, 2006
 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., Los Angeles, California
    
    90067(Address of principal executive offices)
    
    (Zip Code)
 (310) 788-1999
 þ o
  o o þ
 o þ




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##### Table of Contents



INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
 
 TABLE OF CONTENTS
 PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows Three months Ended March 31, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of the Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 6. Exhibits
    
    
    25Signatures
    
    
    26Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32.1
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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)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCash, including interest bearing accounts
of $169,799 (2006) and $155,953 (2005)
    
    $
    174,560
    
    
    $
    157,960Current income taxes
    
    
    170,760
    
    
    
    148,399Notes receivable, net of allowance, and net investment in finance leases
    
    
    516,039
    
    
    
    490,422Flight equipment under operating leases
    
    
    43,687,609
    
    
    
    42,067,504Less accumulated depreciation
    
    
    7,624,618
    
    
    
    7,318,57236,062,991
    
    
    
    34,748,932Deposits on flight equipment purchases
    
    
    1,176,367
    
    
    
    1,148,462Other assets
    
    
    452,181
    
    
    
    289,979Derivative assets
    
    
    448,104
    
    
    
    293,576Investments
    
    
    18,891
    
    
    
    20,313Variable interest entities assets
    
    
    134,531
    
    
    
    138,277Deferred debt issue costs  less accumulated amortization of $69,234
(2006) and $65,377 (2005)
    
    
    98,979
    
    
    
    93,551$
    39,253,403
    
    
    $
    37,529,871LIABILITIES AND SHAREHOLDERS EQUITYAccrued interest and other payables
    
    $
    469,178
    
    
    $
    351,221Tax benefit sharing payable to AIG
    
    
    245,000
    
    
    
    245,000Debt financing, net of deferred debt discount of $40,510
(2006) and
$38,882 (2005)
    
    
    26,368,065
    
    
    
    25,104,165Junior subordinated debentures
    
    
    1,000,000
    
    
    
    1,000,000Foreign currency translation adjustment related to foreign
currency denominated debt
denominated debt
    
    
    328,339
    
    
    
    197,074Derivative liabilities
    
    
    13,780
    
    
    
    49,549Security and other deposits on flight equipment
    
    
    1,100,755
    
    
    
    1,071,676Rentals received in advance
    
    
    216,204
    
    
    
    187,957Deferred income taxes
    
    
    3,160,584
    
    
    
    3,075,545Variable interest entities liabilities
    
    
    45,118
    
    
    
    65,197SHAREHOLDERS 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
    
    
    587,367
    
    
    
    587,484Accumulated other comprehensive (loss) income
    
    
    100,559
    
    
    
    91,715Retained earnings
    
    
    4,464,872
    
    
    
    4,349,706Total shareholders equity
    
    
    6,306,380
    
    
    
    6,182,487$
    39,253,403
    
    
    $
    37,529,871
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 (Dollars in thousands)
 2006
    
    
    2005(Unaudited)REVENUESRental of flight equipment
    
    $
    897,081
    
    
    $
    798,101Flight equipment marketing
    
    
    18,813
    
    
    
    15,561Interest and other
    
    
    21,002
    
    
    
    15,162936,896
    
    
    
    828,824EXPENSESInterest
    
    
    286,793
    
    
    
    240,406Depreciation of flight equipment
    
    
    363,795
    
    
    
    318,891Provision for overhauls
    
    
    53,139
    
    
    
    44,143Rent Expense
    
    
    5,468
    
    
    
    Selling, general and administrative
    
    
    43,705
    
    
    
    36,366752,900
    
    
    
    639,806INCOME BEFORE INCOME TAXES
    
    
    183,996
    
    
    
    189,018Provision for income taxes
    
    
    58,516
    
    
    
    60,096NET INCOME
    
    $
    125,480
    
    
    $
    128,922
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 (Dollars in thousands)
 2006
    
    
    2005(Unaudited)NET INCOME
    
    $
    125,480
    
    
    $
    128,922OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXNet changes in cash flow hedges (net of
taxes in the amounts of $4,747 (2006) and
$27,116 (2005))
    
    
    8,816
    
    
    
    50,358Change in unrealized appreciation on
securities available for sale (net of taxes
in the amounts of $15 (2006) and $78 (2005))
    
    
    28
    
    
    
    (145
    )8,844
    
    
    
    50,213COMPREHENSIVE INCOME
    
    $
    134,324
    
    
    $
    179,135
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 (Dollars in thousands)
 2006
    
    
    2005(Unaudited)OPERATING ACTIVITIESNet income
    
    $
    125,480
    
    
    $
    128,922Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation of flight equipment
    
    
    363,795
    
    
    
    318,891Deferred income taxes
    
    
    80,277
    
    
    
    110,954Change in derivative instruments
    
    
    (176,735
    )
    
    
    285,452Foreign currency adjustment of cash and non-US$ denominated debt
    
    
    129,829
    
    
    
    (281,145
    )Amortization of deferred debt issue costs
    
    
    7,468
    
    
    
    8,507Other
    
    
    3,003
    
    
    
    Changes in operating assets and liabilities:Other assets
    
    
    (121,414
    )
    
    
    19,949Change in current income taxes
    
    
    (22,361
    )
    
    
    (50,831
    )Increase in accrued interest and other payables
    
    
    97,878
    
    
    
    73,595Increase in rentals received in advance
    
    
    28,247
    
    
    
    11,994Change in unamortized debt discount
    
    
    (1,629
    )
    
    
    (7,923
    )Other
    
    
    5,962
    
    
    
    5,426Net cash provided by operating activities
    
    
    519,800
    
    
    
    623,791INVESTING ACTIVITIESAcquisition of flight equipment for operating leases
    
    
    (1,878,077
    )
    
    
    (2,209,516
    )Increase in deposits and progress payments
    
    
    (27,905
    )
    
    
    (133,605
    )Proceeds from disposal of flight equipment  net of gain
    
    
    163,181
    
    
    
    20,975Advances on notes receivable
    
    
    (48,616
    )
    
    
    (6,500
    )Collections on notes receivable and finance leases
    
    
    14,987
    
    
    
    11,874Other
    
    
    396
    
    
    
    (2,557
    )Net cash used in investing activities
    
    
    (1,776,034
    )
    
    
    (2,319,329
    )FINANCING ACTIVITIESNet change in commercial paper
    
    
    303,821
    
    
    
    1,785,319Proceeds from debt financing
    
    
    1,701,498
    
    
    
    973,146Payments in reduction of debt financing and capital lease obligations
    
    
    (739,790
    )
    
    
    (1,196,501
    )Debt issue costs
    
    
    (12,896
    )
    
    
    (14,672
    )Increase in customer deposits
    
    
    29,079
    
    
    
    128,351Payment of common and preferred dividends
    
    
    (10,314
    )
    
    
    (10,976
    )Net cash provided by financing activities
    
    
    1,271,398
    
    
    
    1,664,667Effect of exchange rate changes on cash
    
    
    1,436
    
    
    
    (2,189
    )Net increase (decrease) in cash
    
    
    15,164
    
    
    
    (30,871
    )Cash at beginning of period
    
    
    157,960
    
    
    
    99,747Cash at end of period
    
    $
    174,560
    
    
    $
    66,687(Table continued on following page)
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands)
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 2006
    
    
    2005(Unaudited)Cash paid (received) during the period for:Interest (net of amount capitalized
of $13,504 (2006) and $14,507
(2005))
    
    $
    245,143
    
    
    $
    167,645Income taxes, net
    
    
    599
    
    
    
    (28
    )
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2006
 (Unaudited)
 A.
    
    Basis of Preparation
  B.
    
    Hedging Activities
  March 31, 2006
    
    
    March 31, 2005(Dollars in thousands)(Income) loss related to derivative instruments:Change in fair value of derivative
instruments with no hedge accounting
treatment under SFAS 133
    
    $
    (75,688
    )
    
    $
    (15,558
    )Offsetting change in value of foreign
denominated debt related to contracts with
no hedge accounting treatment under SFAS
133
    
    
    31,927
    
    
    
    Change in fair value of derivative
instruments accounted for as fair value
hedges
    
    
    (19,105
    )
    
    
    62,179Offsetting change in value of foreign
denominated debt related to fair value
hedges
    
    
    19,156
    
    
    
    (61,134
    )Change in value of foreign denominated
debt related to cash flow hedges
    
    
    78,904
    
    
    
    (219,507
    )Offsetting reclassification to Accumulated
Other Comprehensive Income of the change
in value of foreign denominated debt
related to cash flow hedges
    
    
    (78,904
    )
    
    
    219,507Ineffectiveness related to cash flow hedges
    
    
    (1,551
    )
    
    
    (361
    )$
    (45,261
    )
    
    $
    (14,874
    )
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2006
(Unaudited)
 C.
    
    Management Fees from Related Party
  D.
    
    Recent Accounting Pronouncements
  
    
    AIG Stock Option PlanCertain key employees of AIG and its subsidiaries and members of the AIG Board of
Directors can be granted options to purchase a maximum of 45,000,000 shares of AIG
common stock in the aggregate at prices not less than fair market value at the grant
date. The maximum number of shares that may be granted to any one grantee is limited to
900,000 in any one year. Options generally vest over four years (25 percent vesting per
year) and expire 10 years from the date of grant.
    
    AIG Stock Incentive PlanEquity-based or equity-related awards with respect to shares of AIG common stock can be
issued to employees of AIG and its subsidiaries in any year up to a maximum of that
number of shares equal to (a) 1,000,000 shares plus (b) the number of shares available
but not issued in the prior calendar year. The maximum award that a grantee may receive
under the plan per year is rights with respect to 250,000 shares.
    
    AIG Employee Stock Purchase PlanEligible employees (those employed at least one year) of AIG and its subsidiaries may be
granted the right to purchase up to an aggregate of 10,000,000 shares of AIG common
stock at a price equal to 85 percent of the fair market value on the date of the grant
of the purchase privilege. Purchase privileges are granted quarterly and are limited to
the number of whole shares that can be purchased on an annual basis by an amount equal
to the lesser of 10 percent of an employees annual salary or $10,000.
    
    SICO Deferred Compensation Profit Participation PlansStarr International Company, Inc. (SICO) has provided a series of two-year Deferred
Compensation Profit Participation Plans to certain employees of AIG and its subsidiaries
(SICO Plans). The SICO Plans provide that shares of AIG common stock currently held by
SICO are set aside for the benefit of the participant and distributed upon retirement.
The SICO Board of Directors currently may permit an early payout of units under certain
circumstances.
    
    2005-2006 AIG Deferred Compensation Profit Participation Plan (AIG DCPPP)The AIG DCPPP provides equity-based compensation to key employees of AIG and its
subsidiaries. The AIG DCPPP is modeled on the SICO Plans.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2006
(Unaudited)
  E.
    
    Subsequent Events
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 Forward-Looking Statements
 Managements Discussion and Analysis of Financial Condition
and Results of Operations  Overview and Industry Conditions Item 1A. Risk Factors,
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Overview and Industry Condition
     Item 2. Managements Discussion and Analysis 
Non-GAAP Financial Measures (i) (ii) (iii)
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
    (i) (ii) (iii)
 Critical Accounting Policies and Estimates
   
    
    Lease Revenue
    
    Flight Equipment Marketing
    
    Flight Equipment
    
    Capitalized Interest
    
    Provision for Overhauls
    
    Derivative Financial Instruments
 Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Financial Condition
   March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Public term debt with single maturities
    
    $
    13,813,700
    
    
    $
    13,813,700Public medium-term notes with varying maturities
    
    
    5,356,833
    
    
    
    4,689,365Bank and other term debt
    
    
    4,308,813
    
    
    
    4,014,573Junior subordinated debentures
    
    
    1,000,000
    
    
    
    1,000,000Total term debt, bank debt and junior subordinated debentures
    
    
    24,479,346
    
    
    
    23,517,638Commercial paper
    
    
    2,929,229
    
    
    
    2,625,409Deferred debt discount
    
    
    (40,510
    )
    
    
    (38,882
    )Total debt financing
    
    $
    27,368,065
    
    
    $
    26,104,165Selected interest rates and ratio:Composite interest rate
    
    
    5.12
    %
    
    
    5.00
    %Percentage of total debt at fixed rates
    
    
    80.00
    %
    
    
    79.03
    %Composite interest rate on fixed rate debt
    
    
    5.07
    %
    
    
    5.03
    %Bank prime rate
    
    
    7.75
    %
    
    
    7.25
    %
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ITEM 2. 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, 2005
    
    
    March 31, 2006
    
    
    April 15, 2006(Dollars in millions)Registration statement
dated December 20, 2002
(including
$2.88
billion
Medium-Term
Note Program
and $1.0
billion
Retail
Medium-Term
Note
Program)
    
    $
    6,080
    (a)
    
    $
    5,710
    
    
    $
    5,710
    
    
    $
    5,717Registration
statement
dated
December 28,
2004
(including
$2.0 billion
Medium Term
Note
Program)
    
    
    7,045
    (b)
    
    
    2,950
    
    
    
    4,250
    
    
    
    4,250Euro
Medium-Term
Note
Programme
dated
September
2005 (c)(d)
    
    
    7,000
    
    
    
    4,979
    
    
    
    4,979
    
    
    
    4,979
 
 (a)
    
    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.(b)
    
    Includes $2.045 billion, which was incorporated into the registration statement
from a prior registration statement, increasing the maximum offering from $5.0 billion to
$7.045 billion.(c)
    
    We have hedged the foreign currency risk of the notes through derivatives or
through the offset provided by operating lease payments denominated in the related
currency.(d)
    
    This is a perpetual program. As a bond matures, the principal amount becomes
available for new issuances under the program. Bank Term Debt
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Junior Subordinated Debentures
 (i) (ii) (iii)
 Commercial Paper
 Bank Commitments
 Bank Commitments
  Other Variable Interest Entities
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Derivatives
  
    
    Contracts entered into with the intention of (i)fixing the interest rate on our
bank term debt or (ii)fixing the interest rate and swapping the foreign currency
into US dollars on our Euro denominated debt. The contracts do not qualify for hedge
accounting because our hedge documentation was deemed insufficient.
    
    A contract entered into with the intention to hedge the interest rate on our
capital lease obligations, where the debt and the contract dates were slightly
different and thereby the hedge was deemed not to be highly effective, as defined by
SFAS 133.
    
    One contract we obtained as a result of an exercise of a guarantee and it has no
hedged item.
   Market Liquidity Risk
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Existing Commitments
 Commitments Due by Fiscal YearTotal
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter(Dollars in thousands)Public and Bank
Term Debt
    
    $
    23,479,346
    
    
    $
    3,937,674
    
    
    $
    3,998,716
    
    
    $
    4,403,993
    
    
    $
    3,518,252
    
    
    $
    4,002,158
    
    
    $
    3,618,553Commercial Paper
    
    
    2,929,229
    
    
    
    2,929,229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior Subordinated
Debentures
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Interest Payments
on Debt Outstanding (a)
    
    
    7,346,452
    
    
    
    867,113
    
    
    
    996,777
    
    
    
    810,164
    
    
    
    599,139
    
    
    
    394,414
    
    
    
    3,678,845Operating Leases
    
    
    91,876
    
    
    
    6,484
    
    
    
    8,952
    
    
    
    9,303
    
    
    
    9,594
    
    
    
    9,969
    
    
    
    47,574Pension Obligations (b)
    
    
    12,515
    
    
    
    1,939
    
    
    
    2,209
    
    
    
    2,160
    
    
    
    2,112
    
    
    
    2,064
    
    
    
    2,031Tax Benefit Sharing
Agreement Due to
AIG
    
    
    245,000
    
    
    
    
    
    
    
    160,000
    
    
    
    
    
    
    
    85,000
    
    
    
    
    
    
    
    Purchase
Commitments (c)
    
    
    21,428,400
    
    
    
    4,145,900
    
    
    
    5,599,400
    
    
    
    4,924,100
    
    
    
    2,134,200
    
    
    
    1,641,200
    
    
    
    2,983,600Total
    
    $
    56,532,818
    
    
    $
    11,888,339
    
    
    $
    10,766,054
    
    
    $
    10,149,720
    
    
    $
    6,348,297
    
    
    $
    6,049,805
    
    
    $
    11,330,603
 Contingent Commitments
 Contingency Expiration by Fiscal YearTotal
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter(Dollars in thousands)Purchase Options on New
Aircraft (c)
    
    $
    1,539,700
    
    
    $
    
    
    
    $
    131,400
    
    
    $
    
    
    
    $
    867,900
    
    
    $
    
    
    
    $
    540,400Put Options (d)
    
    
    343,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,550Asset Value Guarantees
(d)
    
    
    85,889
    
    
    
    2,626
    
    
    
    5,341
    
    
    
    35,178
    
    
    
    
    
    
    
    
    
    
    
    42,744Loan Guarantees
(d)
    
    
    39,232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,232Lines of Credit
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Total
    
    $
    2,058,371
    
    
    $
    2,626
    
    
    $
    136,741
    
    
    $
    35,178
    
    
    $
    867,900
    
    
    $
    
    
    
    $
    1,015,926
 
 (a)
    
    Future interest payments on floating rate debt are estimated using floating
interest rate in effect at March 31, 2006.(b)
    
    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 2006
consists of total estimated allocations for 2006 and the column Thereafter consists of
the 2011 estimated allocation. The amount allocated has not been material to date.(c)
    
    The recorded basis of aircraft may be adjusted to reflect notional credits provided
by the manufacturers in connection with the leasing of aircraft.(d)
    
    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. -18-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 Non-GAAP Financial Measures
 Lease Margin
 Other Variable Interest Entities
  Three months EndedMarch 31(Dollars in millions)2006
    
    
    2005Total revenues (A)
    
    $
    936.9
    
    
    $
    828.8Flight equipment marketing
    
    
    (18.8
    )
    
    
    (15.6
    )Interest and other
    
    
    (21.0
    )
    
    
    (15.1
    )Rental of flight equipment (B)
    
    
    897.1
    
    
    
    798.1Total expenses (C)
    
    
    752.9
    
    
    
    639.8VIE expenses
    
    
    (5.0
    )
    
    
    (5.2
    )Adjusted total expenses (D)
    
    
    747.9
    
    
    
    634.6Profit margin (A)  (C) = (E)
    
    $
    184.0
    
    
    $
    189.0Lease margin (B)  (D) = (F)
    
    $
    149.2
    
    
    $
    163.5Profit margin % (E) divided by (A)
    
    
    19.64
    %
    
    
    22.80
    %Lease margin % (F) divided by (B)
    
    
    16.63
    %
    
    
    20.48
    %
 (i) (ii) (iii)
 Results
of Operations
 (i) (ii) (iii) (i) (ii) (i) (ii)
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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
   (i) (ii)
 (i) (ii) Note B. Hedging
Activities Notes to Condensed Consolidated Financial Statements
 2006
    
    
    2005
    
    
    Increase (decrease)Beginning of Quarter
    
    
    5.00
    %
    
    
    4.34
    %
    
    
    0.66
    %End of Quarter
    
    
    5.12
    %
    
    
    4.49
    %
    
    
    0.63
    %Average
    
    
    5.06
    %
    
    
    4.42
    %
    
    
    0.64
    %
     (i) (ii) (iii)
    -20-




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Value at Risk
     ILFC Market RiskThree months ended
    
    
    Year EndedMarch 31, 2006
    
    
    December 31, 2005(Dollars in millions)Average
    
    
    High
    
    
    Low
    
    
    Average
    
    
    High
    
    
    LowCombined
    
    $
    196.5
    
    
    $
    209.8
    
    
    $
    183.2
    
    
    $
    129.2
    
    
    $
    209.8
    
    
    $
    84.2Interest Rate
    
    
    195.1
    
    
    
    207.7
    
    
    
    182.4
    
    
    
    128.9
    
    
    
    207.7
    
    
    
    83.9Currency
    
    
    4.0
    
    
    
    4.2
    
    
    
    3.8
    
    
    
    2.1
    
    
    
    4.2
    
    
    
    0.5
 - 21 -




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 (A)
    
    Evaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the periods specified in the
rules and forms of the Securities and Exchange Commission, and such information is
accumulated and communicated to our management, including the Chairman of the Board and
Chief Executive Officer and the Vice Chairman, Chief Financial Officer and Chief
Accounting Officer (collectively the Certifying Officers), as appropriate, to allow
timely decisions regarding required disclosure. Our management, including the Certifying
Officers, recognizes that any set of controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired
control objectives.Based on our evaluation as of March 31, 2006, we have concluded that our disclosure
controls and
procedures were ineffective at the reasonable assurance level due to a material weakness
in internal controls as described below. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has not been fully remediated as
of March 31, 2006:The Company did not maintain effective controls over the valuation and presentation and
disclosure of derivative transactions. Specifically, we did not maintain adequate
documentation regarding the effectiveness of certain derivative transactions used to
hedge interest rate and foreign currency exchange rate risk. This control deficiency
could result in a misstatement to the financial statement line items (Derivative assets,
Derivative liabilities, Accumulated other comprehensive income and Interest expense)
that could cause a material misstatement to the annual or interim financial statements.
Accordingly, management concluded this control deficiency constitutes a material
weakness.As a result of this material weakness, management, including the Certifying Officers,
concluded that our disclosure controls and procedures were not effective at the
reasonable assurance level as of March 31, 2006. See (C) Remediation of Material
Weaknesses in Internal Control Over Financial Reporting.Variable Interest EntitiesOur consolidated financial statements for the period ended March 31, 2006, include
assets in the amount of $134.5 million (2006) and $138.3 million (December 31, 2005),
liabilities in the amount of $45.1 million (2006) and $65.2 million (December 31, 2005)
and a net loss of $1.7 million (2006) and a net gain of $1.6 million (2005) related to
Variable Interest Entities (VIEs). Our assessment of disclosure controls and
procedures, as described above, includes the Variable Interest Entities. Each of the
VIEs has a discrete number of assets and we, as lender and guarantor to the VIEs, have
been provided sufficient information to conclude that our procedures with respect to
these VIEs are effective in providing reasonable assurance that the information required
to be disclosed by us relating to these entities is reconciled, processed, summarized
and reported within the periods specified by the Securities and Exchange Commission.
However, management has been unable to assess the effectiveness of internal controls at
those entities due to our inability to dictate or modify the control over financial
reporting of those entities, or to assess those controls.
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##### Table of Contents



ITEM
4. CONTROLS AND PROCEDURES (CONTINUED)
 (B)
    
    Changes in Internal Control Over Financial ReportingExcept as described below under (C) Remediation of Material Weaknesses in Internal
Control Over Financial Reporting,during the fiscal quarter ended March 31, 2006, no
changes were made to internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.(C)
    
    Remediation of Material Weaknesses in Internal Control Over Financial ReportingWe have begun, but have not completely remediated the material weakness in our internal
control over financial reporting with respect to accounting for derivative instruments
as discussed above. The remediation actions include improving training and accounting
reviews, all designed to ensure that all relevant personnel involved in derivatives
transactions understand and apply hedge accounting in compliance with SFAS 133. In
coordination with AIGs remediation efforts related to derivative transactions, we will
work closely with AIG to identify processes and procedures which will assist us in
remediating our material weakness with respect to derivative transactions.We will describe additional remediation efforts in our future filings. In addition, we
will continue to assess our controls and procedures and will take any further actions
that we deem necessary.We believe that our Consolidated Financial Statements fairly present, in all material
respects, our financial condition, results of operations and cash flows as of, and for,
the periods presented and that this Quarterly Report on Form 10-Q contains no material
inaccuracies or omissions of material fact and contains the information required to be
included in accordance with the Exchange Act.
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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Quantitative and Qualitative Disclosures about Market
Risk.
   
    
    Overall Airline Industry Risk
 Ø
    
    Demand for air travelØ
    
    Insurance costsØ
    
    Competition between carriersØ
    
    Security, terrorism and warØ
    
    Fuel prices and availabilityØ
    
    Worldwide health concernsØ
    
    Labor costs and stoppagesØ
    
    Equity and borrowing capacityØ
    
    Maintenance costsØ
    
    Environmental concernsØ
    
    Employee labor contractsØ
    
    Government regulationØ
    
    Airport and air traffic control infrastructure constraintsØ
    
    Interest ratesØ
    
    Airport accessØ
    
    Overcapacity
 
    
    Airframe, Engine and Other Manufacturer Risk
 
    
    Borrowing Risks
 Ø
    
    LiquidityØ
    
    Interest rate risk
 
    
    Other Risks
 Ø
    
    Residual valueØ
    
    ObsolescenceØ
    
    Key personnelØ
    
    Foreign currency exchange rate riskØ
    
    Relationship with AIG
 - 24 -




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##### Table of Contents



PART II. OTHER INFORMATION (CONTINUED)
 Item 1A. Risk
Factors
 
 ITEM 6. 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).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 June 30, 2003 and
incorporated herein by reference).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, Chief Financial
Officer and Chief Accounting Officer32.1
    
    Certification under 18 U.S.C., Section 1350
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##### Table of Contents



SIGNATURES
   May 11, 2006
    
    /S/ Steven F. Udvar-HazySTEVEN F. UDVAR-HAZYChairman of the Board andChief Executive OfficerMay 11, 2006
    
    /S/ Alan H. LundALAN H. LUNDVice Chairman,Chief Financial Officerand Chief Accounting Officer
 - 26 -




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##### Table of Contents



INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
   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, Chief Financial
Officer and Chief Accounting Officer32.1
    
    Certification under 18 U.S.C., Section 1350
 
 - 27 -