Willis Lease Finance (WLFC) 10-K/A 2004 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K/A

(Amendment No. 2)

ý	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	for the fiscal year ended December 31, 2004
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-28774

WILLIS LEASE FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	68-0070656
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
2320 Marinship Way, Suite 300, Sausalito, CA	94965
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code    (415) 275-5100

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class	Name of each exchange on which registered
Common Stock Preferred Stock	Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý     No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendments to this Form 10-K/A. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  o  No  ý

The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $37.6 million (based on a closing sale price of $8.26 per share as reported on the NASDAQ National Market).

The number of shares of the registrant’s Common Stock outstanding as of March 23, 2005 was 9,013,140.

The Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders is incorporated by reference into Part III of this 10-K/A.

EXPLANATORY NOTE

Willis Lease Finance Corporation (the “Company”) is filing this Amendment No. 2 to its Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 10-K”), originally filed on March 31, 2005, to correct typographical errors in the date of the auditor’s report and auditor’s consent made in the Form 10-K/A, Amendment No. 1 filed on August 3, 2005.  Only the auditor’s report and auditor’s consent have been changed but the entire Part II – Item 8 – Financial Statements and Supplementary Data has been included in this Amendment No. 2 to the 2004 10-K.

This Amendment No. 2 to the 2004 10-K should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the 2004 10-K and the filing of the 10-K/A, Amendment No. 1, including any amendments to those filings. The following items have been amended as a result of the corrections described above:

•Part II – Item 8 – Financial Statements and Supplementary Data

•Exhibit 23.1 – Consent of Independent Registered Public Accounting Firm

2

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:	September 27, 2005
		Willis Lease Finance Corporation
		By:	/s/ CHARLES F. WILLIS, IV
			Charles F. Willis, IV
			Chairman of the Board, President, and
			Chief Executive Officer

Dated:	Title	Signature
Date: September 27, 2005	Chief Executive Officer and Director	/s/ CHARLES F. WILLIS, IV
	(Principal Executive Officer)	Charles F. Willis, IV
Date: September 27, 2005	Chief Financial Officer	/s/ MONICA J. BURKE
		Monica J. Burke
Date: September 27, 2005	Chief Accounting Officer	/s/ ROBERT M. WARWICK
		Robert M. Warwick
Date: September 27, 2005	Director	/s/ WILLIAM M. LEROY
		William M. LeRoy
Date: September 27, 2005	Director	/s/ GLENN L. HICKERSON
		Glenn L. Hickerson
Date: September 27, 2005	Director	/s/ W. WILLIAM COON, JR.
		W. William Coon, Jr.
Date: September 27, 2005	Director	/s/ GERARD LAVIEC
		Gerard Laviec

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Willis Lease Finance Corporation:

We have audited the accompanying consolidated balance sheets of Willis Lease Finance Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Willis Lease Finance Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2 to the consolidated financial statements, the Company has restated the accompanying consolidated financial statements to reclassify net gain on debt prepayment in the consolidated statements of income for the year ended December 31, 2002, and to reclassify restricted cash in the consolidated balance sheets as of December 31, 2004, and December 31, 2003, and the consolidated statements of cash flows for each of the years in the three year period ended December 31, 2004.

/s/ KPMG LLP

San Francisco, California

March 18, 2005, except for Note 2 as to which the date is July 27, 2005

4

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

	December 31, 2004		December 31, 2003
	(as restated)		(as restated)
ASSETS
Cash and cash equivalents	$	5,540	$	9,202
Restricted cash	46,324		33,784
Equipment held for operating lease, less accumulated depreciation of $83,881 and $67,873 at December 31, 2004 and 2003, respectively	511,443		499,454
Net investment in direct finance lease	—		5,551
Operating lease related receivable, net of allowances of $400 and $440 at December 31, 2004 and 2003, respectively	1,630		2,095
Notes receivable	436		—
Investment	1,480		1,480
Assets under derivative instruments	1,398		7
Property, equipment & furnishings, less accumulated depreciation of $1,259 and $1,193 at December 31, 2004 and 2003, respectively	7,537		877
Other assets	9,670		7,572
Total assets	$	585,458	$	560,022
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued expenses	$	7,280	$	5,753
Liabilities under derivative instruments	—		696
Deferred income taxes	27,530		25,283
Notes payable	369,840		362,395
Maintenance reserves	56,871		46,408
Security deposits	2,088		2,314
Unearned lease revenue	5,381		7,111
Total liabilities	468,990		449,960
Shareholders’ equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized; none outstanding)	—		—
Common stock, ($0.01 par value, 20,000,000 shares authorized; 8,998,365 and 8,846,805 shares issued and outstanding at December 31, 2004 and 2003, respectively)	90		88
Paid-in capital in excess of par	62,631		61,710
Accumulated other comprehensive gain/(loss), net of tax expense of $355 and tax benefit of $584 at December 31, 2004 and 2003, respectively	966		(660		)
Retained earnings	52,781		48,924
Total shareholders’ equity	116,468		110,062
Total liabilities and shareholders’ equity	$	585,458	$	560,022

See accompanying notes to the consolidated financial statements.

5

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data)

	Years Ended December 31,
	2004			2003			2002
							(as restated)
REVENUE
Lease revenue	$	58,177		$	56,977		$	55,397
Gain on sale of leased equipment	3,085			2,372			482
Other income	677			520			—
Total revenue	61,939			59,869			55,879
EXPENSES
Depreciation expense	23,198			21,686			19,449
Write-down of equipment	577			1,272			3,052
Net finance costs:
Interest expense	18,449			17,409			19,110
Interest income	(434		)	(244		)	(432		)
Net gain on debt prepayment	—			—			(4,073		)
General and administrative	14,791			13,852			14,439
Total expenses	56,581			53,975			51,545
Income before income taxes	5,358			5,894			4,334
Income tax expense	(1,501		)	(1,717		)	(738		)
Net income	$	3,857		$	4,177		$	3,596
Basic earnings per common share:	$	0.43		$	0.47		$	0.41
Diluted earnings per common share:	$	0.42		$	0.47		$	0.41
Average common shares outstanding	8,925			8,840			8,831
Diluted average common shares outstanding	9,276			8,888			8,851

See accompanying notes to the consolidated financial statements.

6

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

Years Ended December 31, 2004, 2003 and 2002

(In thousands)

	Issued and outstanding shares of common stock	Common Stock		Paid-in Capital in Excess of par		Accumulated Other Comprehensive Income/(Loss) (net)			Retained earnings		Total shareholders’ equity
Balances at December 31, 2001	8,826	$	88	$	61,532	$	(1,815	)	$	41,151	$	100,956
Net Income	—	—		—		—			3,596		3,596
Other comprehensive income
Net gain on cashflow hedging instruments, net of tax of $131	—	—		—		239			—		239
Total comprehensive income											3,835
Shares issued under stock compensation plans	8	—		40		—			—		40
Tax benefit on disqualified dispositions of shares	—	—		74		—			���		74
Balances at December 31, 2002	8,834	88		61,646		(1,576		)	44,747		104,905
Net Income	—	—		—		—			4,177		4,177
Other comprehensive income
Net gain on cashflow hedging instruments, net of tax of $376	—	—		—		916			—		916
Total comprehensive income											5,093
Shares issued under stock compensation plans	13	—		61		—			—		61
Tax benefit on disqualified dispositions of shares	—	—		3		—			—		3
Balances at December 31, 2003	8,847	88		61,710		(660		)	48,924		110,062
Net Income	—	—		—		—			3,857		3,857
Other comprehensive income
Net gain on cashflow hedging instruments, net of tax of $939	—	—		—		1,626			—		1,626
Total comprehensive income											5,483
Shares issued under stock compensation plans	151	2		755		—			—		757
Tax benefit on disqualified dispositions of shares	—	—		166		—			—		166
Balances at December 31, 2004	8,998	$	90	$	62,631	$	966		$	52,781	$	116,468

See accompanying notes to the consolidated financial statements.

7

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Years ended December 31,
	2004			2003			2002
	(as restated)			(as restated)			(as restated)
Cash flows from operating activities:
Net income	$	3,857		$	4,177		$	3,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	23,198			21,686			19,449
Write-down of equipment	577			1,272			3,052
Amortization of loan discount	256			—			—
Allowances and provisions	(40		)	141			200
Loss on derivative instruments	—			—			99
Gain on sale of leased equipment	(3,085		)	(2,372		)	(482		)
Write-off of deferred costs	135			312			781
Changes in assets and liabilities:
Receivables	505			1,144			(1,030		)
Other assets	1,735			(205		)	366
Accounts payable and accrued expenses	1,527			1,314			(686		)
Deferred income taxes	1,474			1,707			729
Restricted cash	(12,540		)	(9,298		)	(4,135		)
Maintenance reserves	14,368			12,197			5,297
Security deposits	(226		)	(26		)	(8		)
Unearned lease revenue	(1,620		)	546			234
Net cash provided by operating activities	30,121			32,595			27,462
Cash flows from investing activities:
Proceeds from sale of equipment held for operating lease (net of selling expenses)	19,007			20,386			16,400
Proceeds from principal payment of notes receivable	1,778			—			—
Proceeds from sale of property, plant & equipment	33			—			—
Purchase of equipment held for operating lease	(59,371		)	(31,881		)	(47,652		)
Purchase of property, equipment and furnishings	(7,445		)	(78		)	(267		)
Net principal payments received on direct finance lease	5,551			1,281			467
Net cash (used in)/provided by investing activities	(40,447		)	(10,292		)	(31,052		)
Cash flows from financing activities:
Proceeds from issuance of notes payable	58,633			68,376			66,378
Debt issuance cost	(1,282		)	(363		)	(2,457		)
Purchase of derivative instruments	—			—			(789		)
Proceeds from issuance of common stock	757			61			40
Principal payments on notes payable	(51,444		)	(83,978		)	(61,245		)
Net cash (used in)/provided by financing activities	6,664			(15,904		)	1,927
Increase (decrease) in cash and cash equivalents	(3,662		)	6,399			(1,663		)
Cash and cash equivalents at beginning of period	9,202			2,803			4,466
Cash and cash equivalents at end of period	$	5,540		$	9,202		$	2,803
Supplemental disclosures of cash flow information:
Net cash paid for:
Interest	$	15,762		$	14,933		$	11,449
Income Taxes	$	25		$	29		$	15
Supplemental disclosures of non-cash investing activities:
In 2003, a liability of $13,317 was incurred in connection with the Company’s purchase of aircraft and engines.

See accompanying notes to the consolidated financial statements

8

WILLIS LEASE FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)Organization and Summary of Significant Accounting Policies

(a)Organization

Willis Lease Finance Corporation (“Willis” or the “Company”) is a provider of aviation services whose primary focus is on providing operating leases of aftermarket commercial aircraft engines and other aircraft-related equipment to air carriers, manufacturers and overhaul/repair facilities worldwide. Willis also engages in the selective purchase and resale of commercial aircraft engines.

T-11 Inc. (T-11), and WLFC-AC1 Inc. are wholly-owned consolidated subsidiaries of Willis. T-11 is a California corporation and WLFC-AC1 Inc., is incorporated in Delaware and were established to purchase, lease and resell commercial aircraft engines and parts.

WLFC (Ireland) Limited is a wholly-owned subsidiary of Willis. WLFC (Ireland) Limited was formed in 1998 to facilitate certain of Willis’ international leasing activities.

During 2004, Terandon Leasing Corporation, T-2 Inc., T-4 Inc., T-5 Inc., T-7 Inc., T-8 Inc., T-10 Inc. and WLFC Engine Pooling Company were merged into their parent and dissolved.

Willis Engine Funding LLC (“WEF”) is a wholly owned subsidiary of Willis. WEF is a Delaware limited liability company and was established in 2002 for the purpose of financing aircraft engines and is a special-purpose bankruptcy-remote entity. WLFC Funding (Ireland) Limited is a wholly-owned subsidiary of WEF and was established in 2001 to facilitate certain international leasing activities.

Management considers the continuing operations of the Company to operate in one reportable segment.

(b)Principles of Consolidation

The consolidated financial statements include the accounts of Willis, WEF, WLFC-AC1 Inc., WLFC Funding (Ireland) Limited and WLFC (Ireland) Limited (together, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

(c)Revenue Recognition

Revenue from leasing of aircraft equipment is recognized as operating lease or finance lease revenue over the terms of the applicable lease agreements. Revenue is not recognized when cash collection is not reasonably assured.

(d)Equipment Held for Operating Lease

Aircraft assets held for operating lease are stated at cost, less accumulated depreciation.  Certain costs incurred in connection with the acquisition of aircraft assets are capitalized as part of the cost of such assets.  Major overhauls paid for by the Company, which add economic value, are capitalized and depreciated over the estimated remaining useful life of the equipment. Overhauls paid for from the accumulated maintenance reserves are not capitalized.

The Company generally depreciates engines on a straight-line basis over a 15-year period from the acquisition date to a 55% residual value.  The Company believes that this methodology accurately reflects the Company’s typical holding period for the assets and, that the residual value assumption reasonably approximates the selling price of the assets 15 years from date of acquisition.

For engines or aircraft that are unlikely to be repaired at the end of the current expected useful lives, the Company depreciates the engines or aircraft over their estimated lives to a residual value based on an estimate of the wholesale value of the parts after disassembly.

The spare parts packages owned by the Company are depreciated on a straight-line basis over an estimated useful life of 15 years to a 25% residual value.

9

The aircraft owned by the Company are depreciated on a straight-line basis over an estimated useful life of 13 to 20 years to a 15% to 17% residual value.

Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”  (SFAS 144) requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and long-lived assets and certain identifiable intangibles to be disposed of generally be reported at the lower of carrying amount or fair value less cost to sell. Impairment is identified by comparison of undiscounted forecast cash flows, including estimated sales proceeds, over the life of the asset with the assets’ book value. If the forecast undiscounted cash flows are less than the book value the asset is written down to its fair value. Fair value is determined by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors considered relevant by Management. The Company conducts a formal annual review of the carrying value of long-lived assets. Such reviews resulted in impairment charges for engines and aircraft of $0.6 million, $1.3 million and $3.1 million (disclosed separately as “Write-down of equipment” in the Consolidated Statements of Income) in 2004, 2003 and 2002, respectively.

(e)Loan Commitment and Related Fees

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

(f)Maintenance and Repair Costs

Maintenance and repair costs under the Company’s leases are generally the responsibility of the lessees. Under many of the Company’s leases, lessees pay periodic use fees to the Company based on the usage of the asset. The Company records a Maintenance reserve liability in respect of the use fees collected. Upon the completion of approved maintenance of an asset, such fees are returned to the lessee up to the amount of the repair but not exceeding the use fees paid by the lessee. Under certain of the Company’s leases, the lessee is not obligated to perform maintenance on the asset. At the end of the lease, any un-reimbursed maintenance reserves are retained by the Company, and recognized as income upon sale of the related engine. Such amounts recognized were $0.9 million for the years ended December 31, 2004 and 2003.

(g)Interest Rate Hedging

The Company has entered into various hedge agreements to mitigate its exposure on its variable rate borrowings.  The differential to be paid or received under the hedge agreements is charged or credited to interest expense.

The Company accounts for derivatives and hedging activities in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (as amended), and under these Statements the Company’s interest rate swaps were designated as cash flow hedges. Cash flow hedges are recognized on the balance sheet at their fair value. The Company formally documents, at the contract’s inception, all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all cash-flow hedges to liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items.

Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability in cash flows of the designated hedged item.

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

During the year ended December 31, 2002, the Company recorded adjustments to Accumulated Other Comprehensive Income/(Loss) of $239,000 (net of tax of $131,000) for changes in fair value of effective cash flow hedges and charges of $0.1 million to interest expense for changes in fair value of ineffective cash flow hedges.

During the year ended December 31, 2003, the Company recorded adjustments to Accumulated Other Comprehensive Income/(Loss) of $0.9 million (net of tax of $0.4 million) for changes in fair value of effective cash flow hedges.

During the year ended December 31, 2004, the Company recorded adjustments to Accumulated Other Comprehensive Income/(Loss) of $1.6 million (net of tax expense of $0.9 million). Refer to Note 5 for further details.

10

(h)Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in the tax rates is recognized in income in the period that includes the enactment date.

(i)Property, Equipment and Furnishings

Property, equipment and furnishings are recorded at cost and depreciated by the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are recorded at cost and depreciated by the straight-line method over the lease term.

(j)Sale of Leased Equipment

The Company regularly sells equipment from its lease portfolio. This equipment may or may not be subject to a lease at the time of sale. The gain or loss on such sales is recognized as revenue and consists of proceeds associated with the sale less the net book value of the asset sold and any direct costs associated with the sale. To the extent that deposits or maintenance reserves associated with the engine are not included in the sale the Company includes such items in its calculation of gain or loss. The Company also engages in engine exchanges and where the cash element of the exchange exceeds 25% of the fair value of the transaction the exchange is treated as a monetary one and the gain or loss on sale is recognized.

(k)Cash and Cash Equivalents

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

(l)Restricted Cash

The Company has certain bank accounts that are subject to restrictions in connection with the Company’s borrowings. Under the warehouse facility cash is collected in a restricted account, which is used to service the debt and any amounts remaining after debt service and defined expenses are distributed to the Company. Additionally, under this facility maintenance reserve payments and lease security deposits are accumulated in a restricted account and are not available for general use. Further, the Company must maintain a cash reserve equal to 2% of the outstanding warehouse debt at all times. The WLFC-AC1 credit facility has similar maintenance reserve and security deposit accounts restricted from general use. Maintenance reserve accounts are only available to meet the costs of specified engine maintenance or repair provisions and will usually be reimbursed to the lessee. In the event an engine is sold, accumulated maintenance reserves may then be available to the Company (see note 1(j) above). Security deposits are held until the end of the lease, at which time provided return conditions have been met, the deposit will be returned to the lessee.  To the extent return conditions are not met, these deposits may be retained by the Company.

(m)Reclassifications

Certain items in the consolidated financial statements of prior years have been reclassified to conform to the current year’s presentation.

(n)Management Estimates

These financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.

The preparation of consolidated financial statements requires the Company 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 ongoing basis, the Company evaluates its estimates, including those related to residual values, estimated asset lives, bad debts, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances 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 or conditions.

11

Management believes that the accounting policies on useful life of equipment, residual values and asset impairment are critical to the results of operations.

If the useful lives or residual values are lower than those estimated by the Company, upon sale of the asset a loss may be realized. Significant management judgment is required in the forecasting of future operating results, which are used in the preparation of projected undiscounted cash-flows and should different conditions prevail, material impairment write-downs may occur.

(o)Comprehensive Income

The Company reports changes in equity from all sources. For the years ended December 31, 2004, 2003 and 2002, comprehensive income includes net income and the net gain or loss on the change in fair value of cash flow hedges.

(p)Per share information

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The computation of fully diluted earnings per share is similar to the computation of basic earnings per share, except for the inclusion of all potentially dilutive common shares. The reconciliation between basic common shares and fully diluted common shares is presented below:

	Years ended December 31,
	2004	2003	2002
	(in thousands)
Shares:
Weighted-average number of common shares outstanding	8,925	8,840	8,831
Potentially dilutive common shares	351	48	20
Total Shares	9,276	8,888	8,851
Potential common stock excluded as anti-dilutive in period	406	1,645	1,263

(q)Investment

The Company’s investment is in a non-marketable security where management does not have significant influence and is recorded at cost. Management evaluates the investment for impairment quarterly. No adjustment to the carrying value was required during the periods presented.

(r)Stock Options

The Company accounts for its two stock based compensation plans (as described in Note 10) using the intrinsic value method prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, as allowed under SFAS No. 123, “Accounting for Stock Based Compensation” and SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” APB 25 requires compensation expense to be recognized over the employee service period based on the excess, if any, of the quoted market price of the stock at the date the award is granted or other measurement date, as applicable, over an amount the employee must pay to acquire the stock. As a result no compensation expense has been recognized during the three years ended December 31, 2004.

Had compensation cost for the Company’s two stock-based compensation plans been determined consistent with SFAS 148, the Company’s net income and earnings per share would have been as follows:

	2004			2003			2002
Net income as reported	$	3,857		$	4,177		$	3,596
Deduct: Total stock-based employees compensation expense determined under fair value based method for all awards, net of related tax effect	(748		)	(651		)	(929		)
Proforma net income	$	3,109		$	3,526		$	2,667
Basic earnings per common share as reported	$	0.43		$	0.47		$	0.41
Basic earnings per common share pro forma	$	0.35		$	0.40		$	0.30
Diluted earnings per common share as reported	$	0.42		$	0.47		$	0.41
Diluted earnings per common share pro forma	$	0.34		$	0.40		$	0.30

The fair value of the purchase rights under the Purchase Plan, the Plan is estimated using the Black-Scholes option pricing model.

12

The assumptions underlying the estimates derived using the Black-Scholes model are as follows:

	1996 Stock Option/ Stock Issuance Plan						Employee Stock Purchase Plan
	2004		2003		2002		2004		2003		2002
Expected Dividend Yield	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free Interest Rate	3.61	%	2.89	%	3.47	%	1.84	%	1.21	%	3.94	%
Expected Volatility	69.15	%	72.07	%	72.80	%	69.59	%	71.35	%	72.80	%
Expected Life (in years)	5.17		3.97		3.89		0.5 – 2.0		0.5 -1.0		0.5-2.0

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock plans have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock plans and the warrants.

(s)Initial Direct Costs associated with Leases

The Company accounts for the initial direct costs, including sales commission and legal fees, incurred in obtaining a new lease by deferring and amortizing those costs over the term of the lease.  The amortization of these costs is recorded under General and Administrative expenses in the Consolidated Statements of Income.  The amounts amortized were $737,000, $440,000 and $409,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

(2)Restatements

The Company recently reviewed its financial statement presentation and disclosure in response to comments received from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) in a normal periodic review of the Company’s filings.  As a result, the Company is restating the accompanying consolidated statement of income for the year ended December 31, 2002 to reclassify a portion of the Company’s revenue for a net gain on debt prepayment to classify such gain as a separate item as part of expenses.

In response to comments from the Staff the Company is also restating the consolidated balance sheets for December 31, 2004 and 2003, to separately classify cash that is restricted in connection with the Company’s borrowings.  The restricted cash was previously disclosed in narrative form and included within the description for cash and cash equivalents.  The consolidated statements of cash flows for the years ended December 31, 2004, 2003 and 2002 have been restated to reflect the impact of this change.

The changes to the Company’s presentation described above do not change the Company’s total assets, total liabilities, total shareholders’ equity or net income.  All such changes have been consistently applied to all periods presented and a comparison of the amounts previously reported to the restated amounts presented in this Annual Report on Form 10-K/A (in thousands) are shown as follows:

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	For the Year Ended December 31, 2002
Consolidated Income Statement Information	As Previously Filed			As Restated
REVENUE
Net gain on debt repayment	4,073			—
Total revenues	59,952			55,879
EXPENSES
Interest expense	—			19,110
Interest income	—			(432		)
Net gain on debt repayment	—			(4,073		)
Total expenses	36,940			51,545
Interest expense	19,110			—
Interest income	(432		)	—
Net interest and finance costs	18,678			—
Income before income taxes	$	4,334		$	4,334

For the years ended December 31, 2004, 2003 and 2002 the Company is reclassifying interest expense and interest income in the in the consolidated statements of income to expense.  Due to the reclassification, earnings from operations is no longer presented within the statements of income.

	December 31, 2004				December 31, 2003
Consolidated Balance Sheet Information	As Previously Filed		As Restated		As Previously Filed		As Restated
Cash and cash equivalents	$	51,864	$	5,540	$	42,986	$	9,202
Restricted cash	—		46,324		—		33,784

14

	For the Years Ended December 31,
	2004			2003			2002
Consolidated Statements of Cash Flow Information	As Previously Filed	As Restated		As Previously Filed	As Restated		As Previously Filed	As Restated
Changes in assets and liabilities:
Restricted cash	—	(12,540	)	—	(9,298	)	—	(4,135	)
Net cash provided by operating activities	42,661	30,121		41,893	32,595		31,597	27,462
Increase (decrease) in cash and cash equivalents	8,878	(3,662	)	15,697	6,399		2,472	(1,663	)
Cash and cash equivalents at beginning of period	42,986	9,202		27,289	2,803		24,817	4,466
Cash and cash equivalents at end of period	51,864	5,540		42,986	9,202		27,289	2,803

15

(3)Equipment Held For Lease and Net Investment in Direct Finance Lease

At December 31, 2004, the Company had 115 aircraft engines and related equipment with an aggregate original cost of $559.8 million, 3 spare parts packages with an aggregate original cost of $3.6 million and five aircraft with an aggregate original cost of $24.0 million and engine-related equipment with an aggregate original cost of $8.7 million, in its operating lease portfolio. At December 31, 2003, the Company had 119 aircraft engines and related equipment with an aggregate original cost of $534.0 million, 4 spare parts packages with an aggregate original cost of $10.4 million, seven aircraft with an aggregate original cost of $29.6 million and engine-related equipment with an aggregate original cost of $3.4 million in its operating and finance lease portfolio.

A majority of the Company’s aircraft equipment is leased and operated internationally. All leases relating to this equipment are denominated and payable in U.S. dollars.

The Company leases its aircraft equipment to lessees domiciled in 9 geographic regions. The tables below set forth geographic information about the Company’s leased aircraft equipment grouped by domicile of the lessee (which is not necessarily indicative of the asset’s actual location):

	Years ended December 31,
Lease revenue	2004		2003		2002
	(in thousands)
Region
United States	$	8,094	$	6,373	$	9,067
Canada	238		1,042		1,041
Mexico	4,225		4,349		2,717
Australia/New Zealand	670		853		305
Europe	25,943		25,310		24,906
South America	8,452		7,576		6,322
Asia	4,889		5,540		6,312
Africa	1,064		1,373		418
Middle East	4,602		4,561		4,309
Totals	$	58,177	$	56,977	$	55,397

	Years ended December 31,
Lease revenue less applicable depreciation, and interest:	2004			2003			2002
	(in thousands)
Region:
United States	$	2,284		$	1,148		$	3,071
Canada	216			914			488
Mexico	980			1,143			1,177
Australia/New Zealand	194			426			141
Europe	12,241			13,421			12,461
South America	3,852			4,111			3,257
Asia	2,313			2,736			2,978
Africa	571			775			135
Middle East	2,299			2,460			1,860
Off-lease and other	(4,552		)	(4,682		)	(8,097		)
Totals	$	20,398		$	22,452		$	17,471

16

	As of December 31,
Net book value of equipment held for operating lease:	2004		2003		2002 (as restated)
	(in thousands)
Region
United States	$	70,611	$	48,575	$	47,484
Canada	—		—		13,415
Mexico	38,387		37,025		26,776
Australia/New Zealand	—		10,470		18,103
Europe	170,088		195,887		179,230
South America	67,927		59,064		44,265
Asia	41,073		38,213		42,450
Africa	5,860		5,884		15,462
Middle East	38,024		38,475		34,173
Off-lease and other	79,473		65,861		74,040
Totals	$	511,443	$	499,454	$	495,398

Included in “off-lease and other” is equipment that is held for disposal totaling approximately $5.5 million at December 31, 2004 and $7.0 million at December 31, 2003.

As of December 31, 2004 and 2003, the lease status of the equipment held for operating lease was as follows:

Lease Term	December 31, 2004 Net Book Value
	(in thousands)
Off-lease and other	$	79,473
Month-to-month leases	35,252
Leases expiring 2005	180,261
Leases expiring 2006	79,046
Leases expiring 2007	32,988
Leases expiring 2008	29,008
Leases expiring 2009	6,418
Leases expiring thereafter	68,997
	$	511,443

Lease Term	December 31, 2003 Net Book Value
	(in thousands)
Off lease and other	$	65,861
Month-to-month leases	74,325
Leases expiring 2004	134,970
Leases expiring 2005	51,473
Leases expiring 2006	61,745
Leases expiring 2007	34,650
Leases expiring 2008	28,160
Leases expiring thereafter	48,270
	$	499,454

The net investment in direct finance leases on December 31, 2004 and 2003 was as follows:

	2004		2003
	(in thousands)
Minimum payments receivable	$	—	$	714
Guaranteed residual value of leased assets	—		4,950
Unearned income	—		(113		)
Net investment in finance lease	$	—	$	5,551

The finance lease terminated during 2004.

17

As of December 31, 2004, minimum future payments under non-cancelable leases were as follows:

Year	(in thousands)
2005	$	37,431
2006	22,483
2007	16,527
2008	12,258
2009	9,358
Thereafter	11,008
	$	109,065

(4)Notes Receivable

At December 31, 2004, the Company had Notes Receivable of $0.4 million relating to the sale of two airframes in 2004. The notes are payable over two years at 6% per annum interest. The final payment is due July 2006.

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(5)Notes Payable

Notes payable consisted of the following:

	As of December 31,
	2004		2003
	(in thousands)
Notes payable at a fixed interest rate of 8.63%. Secured by aircraft engines. The note matures in September 2006.	$	2,291	$	2,658
Note payable at a fixed interest rate of 6.95% secured by aircraft. The note matures in September 2005.	4,944		5,904
Class A notes payable of $194.4 million payable at a floating rate of interest based on commercial paper rates plus an average weighted spread of 2.26% and $21.6 million Class B notes payable at LIBOR plus an average weighted spread of 5.32%. The facility has a revolving period which ended in March 2005, followed by a 4-year amortization period. The Company has a guarantee to Class B Noteholders to a maximum of $21.6 million. The assets of the Issuer (WEF) and any associated Owner Trust are not available to satisfy the obligations of the Company or any of its affiliates.	216,000		219,000
Credit facility at a floating rate of interest of LIBOR plus 2.25% (2003, 1.75%). Secured by engines. The facility has a committed amount of $148.5 million (2003, $125.0 million), which revolves until May 2006 and matures in May 2007.	117,000		95,000
Note payable at a floating rate of LIBOR + 2.75%. The note had a maturity of December 2009 but was repaid in 2004.	—		415
Note payable at a floating rate of LIBOR + 2.05%. The note matures in June, 2005. Secured by aircraft engines.	17,958		22,225
Note payable at a fixed interest rate of 7.75% secured by aircraft. The note matures in December 2006.	2,644		3,876
Note payable at a fixed interest rate of 6% secured by an aircraft engine. The note was repaid in 2004.	—		4,436
Note payable at fixed interest rate of 6% maturing in 2005. Secured by an engine.	2,592		—
Note payable at a floating rate of LIBOR + 1.78% maturing in 2011. Secured by an aircraft. A second tranche of $0.55 million was committed but unused as of December 31, 2004.	6,411		—
Note payable, with no interest rate, secured by aircraft, engines and related equipment. The note was repaid in 2004 (net of 6% imputed discount of $256).	—		8,881
Total notes payable	$	369,840	$	362,395

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At December 31, 2004, 1-month LIBOR was approximately 2.4% and the Commercial Paper rate was approximately 2.21%. At December 31, 2003, the rates were 1.12% and 1.05%, respectively.

The fair value of the Company’s long-term debt is estimated based on quoted market prices for the same or similar issues or on the rates offered to the Company for debt of the same remaining maturities. The fair value of the Company’s debt is estimated by the Company to be $369.6 million at December 31, 2004.

Principal outstanding at December 31, 2004, is repayable as follows:

Year	(in thousands)
2005	$	37,839
2006	16,430
2007	130,856
2008	14,511
2009	165,042
Thereafter	5,162
	$	369,840

Certain of the debt instruments above also have covenant requirements such as a minimum tangible net worth and interest coverage. As of December 31, 2004, the Company was in compliance with all covenant requirements.

At December 31, 2004, the Company had a $148.5 million revolving credit facility to finance the acquisition of aircraft engines for lease as well as for general working capital purposes. As of December 31, 2004, $31.5 million was available under this facility. The facility matures in May 2007. The interest rate on this facility at December 31, 2004 was 1-month LIBOR plus 2.25%. Under the revolver facility, all subsidiaries except WLFC-AC1 and Willis Engine Funding LLC (“WEF”) jointly and severally guarantee payment and performance of the terms of the loan agreement. The maximum guarantee is $148.5 million plus any accrued and unpaid interest, fees or reimbursements but is limited at any given time to the sum of the principal outstanding plus accrued interest and fees. The guaranty would be triggered by a default under the agreement.

At December 31, 2004, the Company had a fully drawn $216.0 million debt warehouse facility. A wholly-owned special purpose entity, WEF, was created in 2002 for the purpose of financing jet aircraft engines. The facility had a six-month revolving period which ended March 9, 2005, followed by a four-year amortization period, during which 90% of the net rents from the collateral are used to pay down principal, followed by a final balloon payment The facility’s structure is designed to facilitate the issuance of public or private securitized notes. There is no assurance that a securitization can be completed or completed on terms that are favorable or acceptable to the Company. The Company will either renegotiate this facility with its lenders or the facility will go into its amortization period.  The facility notes are divided into $194.4 million Class A notes and $21.6 million Class B notes. The Company has a guaranty to the Class B Noteholders determined by a formula in the debt agreement. The maximum amount of the guaranty at December 31, 2004 is $21.6 million. If WEF defaults on its obligations, the full amount of the Class B notes outstanding (together with any accrued interest and fees) is due and payable immediately. The governing documents of the warehouse facility and the WEF operating agreement require that the assets of WEF and any associated Owner Trust are not available to satisfy the obligations of the Company or any of its affiliates.  WEF is consolidated for financial statement presentation purposes. At December 31, 2004, interest on the Class A notes is a commercial paper rate plus a weighted average spread of approximately 2.26% and interest on the Class B Notes is 1-month LIBOR plus a weighted average spread of 5.32%.

At December 31, 2004, the Company had warehouse and revolving credit facilities totaling $364.5 million compared to $344.0 million at December 31, 2003. At December 31, 2004 and 2003, respectively, $31.5 million and $30.0 million was available under these combined facilities.

At December 31, 2004, the Company had an $18.0 million term loan facility available to a wholly-owned consolidated subsidiary of the Company, WLFC-AC1, for the financing of jet aircraft engines sold by the Company to such subsidiary. The facility is a five-year term loan with final maturity of June 29, 2005. The interest rate is 1-month LIBOR plus 2.05%. This facility is fully drawn. The Company guarantees the obligations of WLFC-AC1 under the terms of this facility.

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(6)Derivative Instruments

The Company holds a number of interest rate hedges to mitigate its exposure to changes in interest rates, in particular LIBOR, as 97% of the Company’s borrowings are at variable rates. In addition, WEF is required under its credit agreement to hedge a portion of its borrowings. These hedges have been documented and designated as cash flow hedges under SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” (as amended). At December 31, 2004, the Company was a party to interest rate swap agreements with notional outstanding amounts of $100.0 million, remaining terms of between 27 and 37 months and fixed rates of between 2.52% and 3.45%. The fair value of these swaps at December 31, 2004, was positive $1.4 million and represented the estimated amount the Company would receive if it terminated the swaps. The Company purchased a number of forward-commencing interest rate caps, documented and designated as cash flow hedges, during the second quarter of 2002. These caps have notional amounts of $60.0 million, with 3 year terms, and effective dates commencing in 2003 and rates capped at 5.5%. At December 31, 2004, the estimated fair value of the caps was zero.

Under the swap contracts, the difference between the index and the fixed rate that is paid or received by the Company is charged or credited to interest expense.

The Company uses an external provider to ascertain the fair value of the hedges and assess the effectiveness of the hedges during the period. Valuation of the hedges requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period and has not changed its method of valuation or assessment of effectiveness during the period.

The Company reviews the effectiveness of its interest rate hedges on a quarterly basis and adjusts the fair value of the interest rate hedges through either Accumulated Other Comprehensive Income/(Loss) and/or earnings for the period. For the year ended December 31, 2004, the change in fair value of the interest rate hedges recorded to Accumulated Other Comprehensive Income/(Loss) was a gain of $1.6 million (net of tax expense of $0.9 million). For the year ended December 31, 2003, the change in fair value of the interest rate hedges recorded to Accumulated Other Comprehensive Income/(Loss) was a gain of $0.9 million (net of tax expense of $0.4 million). Interest expense for the years ended December 31, 2004 and 2003, was increased due to the Company’s interest rate hedges by approximately $1.6 million and $2.3 million, respectively. A reclassification into earnings from Accumulated Other Comprehensive Income/(Loss) may occur if the Company changes the terms of its debt such that the terms of the hedges no longer match or the hedges are terminated ahead of their maturity. The Company has no plans to undertake such transactions and accordingly, does not expect any reclassification into earnings within the next 12 months. Based on the implied forward rate for LIBOR at December 31, 2004, the Company anticipates that interest expense will be decreased by approximately $0.2 million for the year ending December 31, 2005.

21

(7)Income Taxes

The components of income tax for the years ended December 31, 2004, 2003 and 2002, included in the accompanying consolidated statements of income were as follows:

	Federal		State			Total
	(in thousands)
December 31, 2004
Current	$	—	$	23		$	23
Deferred	902		410			1,312
Charges in Lieu of Tax	145		21			166
	$	1,047	$	454		$	1,501
December 31, 2003
Current	$	—	$	10		$	10
Deferred	1,184		519			1,703
Charges in Lieu of Tax	3		1			4
	$	1,187	$	530		$	1,717
December 31, 2002
Current	$	—	$	13		$	13
Deferred	988		(337		)	651
Charges in Lieu of Tax	86		(12		)	74
	$	1,074	$	(336	)	$	738

The following is a reconciliation of the federal income tax expense at the statutory rate of 34% to the effective income tax expense on continuing operations:

	Years ended December 31,
	2004				2003				2002
	(in thousands and % of pre-tax income)
	$		%		$		%		$		%
Statutory federal income tax expense	1,822		34		2,004		34		1,474		34
State taxes, net of federal benefit	307		6		350		6		(222	)	(5	)
Extraterritorial income exclusion	(671	)	(13	)	(661	)	(11	)	(533	)	(12	)
Other	43		1		24		—		19		—
Effective income tax expense	1,501		28		1,717		29		738		17

In 2004, 2003, and 2002, the Company determined that a number of assets and their associated leases qualify for exclusion from federal taxable income under the Extraterritorial Income Exclusion rules, resulting in a reduction in the federal effective tax rate.

In 2002, the Company changed its estimated apportionment of income attributable to California, due to a change in the composition of the Company’s revenue, resulting in an income tax benefit of $0.6 million. In addition, the Company has provided for a gross valuation allowance of $0.1 million relating to California net operating losses expiring in 2006 where management believes realizing the benefit of the loss carry-forward is not assured, and included in state taxes in the table above.

22

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

	As of December 31,
	2004			2003
	(in thousands)
Deferred tax assets:
Charitable contribution	$	83		$	67
Unearned lease revenue	1,968			2,411
State Taxes	8			9
Reserves and allowances	309			161
Alternative minimum tax credit	335			335
Net operating loss carry forward	37,789			30,410
Total gross deferred tax assets	40,492			33,393
Less valuation allowances	(115		)	(115		)
Net deferred tax assets	40,377			33,278
Deferred tax liabilities:
Depreciation on aircraft engines and equipment	(67,552		)	(59,145		)
	(27,175		)	(25,867		)
Deferred tax (liability)/asset related to unrealized (gain)/loss on derivative instruments	(355		)	584
Net deferred tax liability	$	(27,530	)	$	(25,283	)

As of December 31, 2004, the Company had net operating loss carry forwards of approximately $108.2 million for federal tax purposes and $17.0 million for state tax purposes. The federal net operating loss carry forwards will expire at various times from 2019 to 2024 and the state net operating loss carry forwards will expire at various times from 2006 to 2014. However, in 2002, the Company provided for a valuation allowance against California net operating losses (NOLs) totaling $2.0 million that expire in 2006 and realization is not assured. Net operating losses can be used as a deduction against future income arising from the U.S. consolidated filing group. As of December 31, 2004, the Company also had alternative minimum tax credits of approximately $0.3 million for federal income tax purposes which have no expiration date and which should be available to offset future alternative minimum tax liabilities. Management believes that no valuation allowance is required on deferred tax assets, other than the California NOL as stated, as it is more likely than not that all amounts are recoverable through future taxable income.

(8)Risk Management Issues

Risk Concentrations

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits, receivables and non-payment of maintenance reserves due at lease end.

The Company places its cash deposits with financial institutions and other creditworthy issuers and limits the amount of credit exposure to any one party. Concentrations of credit risk with respect to lease receivables are limited due to the large number of customers comprising the Company’s customer base, and their dispersion across different geographic areas. Some lessees are required to make payments for maintenance reserves at the end of the lease however, risk is considered limited due to the number of these lessees which have this provision in the lease.

Interest Rate Risk Management

To mitigate exposure to interest rate changes, the Company has entered into interest rate swap and cap agreements.  As of December 31, 2004, such swap agreements had notional outstanding amounts of $100.0 million, average remaining terms of between 27 and 37 months and average fixed rates of between 2.52% and 3.45%. Caps had notional amounts of $60.0 million, effective dates commencing in 2003, with remaining terms of between three and four months and rates capped at 5.5%

As a result of these hedge arrangements, interest expense was increased in 2004 and 2003 by $1.6 million and $2.3 million. For further information see Note 1(g) and Note 5.

(9)Commitments, Contingencies, Guarantees and Indemnities

The Company has three leases for its office space. The annual lease rental commitment for the Sausalito office for 2005 is approximately $352,000 and the lease expires on December 31, 2005 but has two one-year renewal options. The Company has given notice that it may exercise its options to extend the lease for at least one further year. The remaining lease rental commitment, for premises for the San Diego operation, is approximately $64,000 plus expenses and the lease expires on October 31, 2005. The lease

23

for premises in Shanghai, China expires in June 2005 and the remaining lease commitment is approximately $25,000.

24

The Company has a number of guaranties in respect of its credit facilities. Refer to Note 4 for a full description of the nature and terms of these guaranties. Additionally, the Company generally indemnifies the purchaser of its equipment against any taxes arising from the sale of the equipment (except taxes incurred by the purchaser). The amount of the indemnification is not determinable and the Company has not had to make any payments under such indemnifications.

The Company has commitments to purchase, during 2005, engines and other engine-related equipment totaling $18.2 million.

In July 2004, one of the Company’s engines (with a net investment of $1.9 million) was damaged while on lease to a customer. The Company does not believe that a loss will be incurred; however, no assurance can be given on the eventual outcome.

(10)Investments

In July 1999, the Company entered into an agreement to participate in a joint venture formed as a limited company — Sichuan Snecma Aero-engine Maintenance Co. Ltd. (Sichuan Snecma). The Company’s investment is 7% in the venture. Sichuan Snecma focuses on providing maintenance services for CFM56 series engines and is located in Chengdu, China. Other participants in the joint venture are Air China International Company and Snecma Services. As of the year ended December 31, 2004, $1.5 million has been contributed. This investment is recorded at cost.

(11)Employee Benefit Plans

Employee Stock Purchase Plan

The Company has a 1996 Employee Stock Purchase Plan (the “Purchase Plan”) under which 175,000 shares of common stock have been reserved for issuance. This plan was effective in September 1996. Eligible employees may designate not more than 10% of their cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan, and participants may purchase not more than 1,000 shares or $25,000 of common stock in any one calendar year. Each January 31 and July 31 shares of common stock are purchased with the employees’ payroll deductions from the immediately preceding six months at a price per share of 85% of the lesser of the market price of the common stock on the purchase date or the market price of the common stock on the date of entry into an offering period. In fiscal 2004 and 2003, 11,262 and 9,077 shares of common stock, respectively were issued under the Purchase Plan.

The weighted average per share fair value of the employee’s purchase rights under the Purchase Plan for the rights granted in 2004 and 2003 were $2.23 and $1.87, respectively.

1996 Stock Option/Stock Issuance Plan

In June 1996, the Board of Directors approved the 1996 Stock Option/Stock Issuance Plan (the “Plan”). The Plan was amended by the Stockholders and restated in May 2003, to provide for an increase in the number of shares reserved for issuance under the Plan from 2,525,000 shares to 3,025,000 shares. The plan includes a Discretionary Option Grant Program, a Stock Issuance Program and an Automatic Option Grant Program for eligible non-employee Board members. The stock options vest over a period determined by the Plan Administrator (usually 4 years), have a life of up to 10 years and the exercise price on grant is equal to the market value of the shares on that date.

25

A summary of the activity under the plan is as follows:

	Options Outstanding
	Options Available for Grant		Options		Weighted Average Exercise Price		Weighted Average Fair Value
Balances at December 31, 2001	946,521		1,274,506		$	7.67
Options Granted	(317,542	)	317,542		4.67		$	2.63
Options Canceled	54,636		(54,636	)	5.37
Balances at December 31, 2002	683,615		1,537,412		$	7.13
Additional Options Made Available	500,000		—		—
Options Granted	(447,210	)	447,210		4.91		$	2.84
Options Exercised	—		(3,750	)	5.54
Options Canceled	68,222		(68,222	)	9.85
Balance as of December 31, 2003	804,627		1,912,650		$	6.52
Options Granted	(25,817	)	25,817		5.33
Options Exercised	—		(140,298	)	5.01		$	5.91
Options Canceled	33,449		(33,449	)	7.44
Balance as of December 31, 2004	812,259		1,764,720		$	6.61

A summary of the outstanding, exercisable options and their weighted average exercise prices is as follows:

	Options	Weighted Average Exercise Price
At December 31, 2002	822,367	$	8.63
At December 31, 2003	1,062,934	$	7.63
At December 31, 2004	1,258,711	$	7.19

The following table summarizes information concerning outstanding and exercisable options at December 31, 2004:

	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Outstanding	Weighted Average Exercise Price
From $1.30 to $5.01	709,076	7.47	$	4.58	387,364	$	4.29
From $5.07 to $6.05	620,157	5.81	5.43		448,780	5.48
From $6.50 to $22.12	435,487	4.87	11.58		422,567	11.67
From $1.30 to $22.12	1,764,720	6.25	$	6.61	1,258,711	$	7.19

Employee 401(k) Plan

The Company adopted The Willis 401(k) Plan (the “401(k) Plan”) effective as of January 1997.  The 401(k) Plan provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code.  The 401(k) Plan is a contributory plan available to all full-time and part-time employees of the Company in the United States.  In 2004, employees who participated in the 401(k) Plan could elect to defer and contribute to the 401(k) Plan up to 20% of pretax salary or wages up to $13,000 (or $16,000 for employees at least 50 years of age). The Company matches employee contributions up to 50% of 8% of the employee’s salary which totaled $158,000 in 2004, $129,000 in 2003 and $94,000 in 2002.

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(12)Quarterly Consolidated Financial Information (Unaudited)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2004, 2003 and 2002 (in thousands, except per share data).

Fiscal 2004	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Full Year
Total Revenue	$	15,086	$	15,057	$	14,684	$	17,112	$	61,939
Net income	969		915		508		1,465		3,857
Basic earnings per common share Net income	$	0.11	$	0.10	$	0.06	$	0.16	$	0.43
Diluted earnings per common share Net income	$	0.11	$	0.10	$	0.05	$	0.16	$	0.42
Average common shares outstanding	8,856		8,908		8,959		8,975		8,925
Diluted average common shares outstanding	9,161		9,315		9,297		9,330		9,276

Fiscal 2003	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Full Year
Total Revenue	$	14,042	$	15,612	$	14,185	$	16,030	$	59,869
Net income	842		1,152		745		1,438		4,177
Basic earnings per common share Net income	0.10		0.13		0.08		0.16		0.47
Diluted earnings per common share Net income	0.09		0.13		0.08		0.16		0.47
Average common shares outstanding	8,836		8,838		8,841		8,844		8,840
Diluted average common shares outstanding	8,875		8,874		8,889		8,960		8,888

Fiscal 2002	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Full Year
							(as restated)		(as restated)
Total Revenue	$	14,352	$	13,408	$	14,005	$	14,114	$	55,879
Net income	966		577		33		2,020		3,596
Basic earnings per common share Net income	0.11		0.07		0.00		0.23		0.41
Diluted earnings per common share Net income	0.11		0.07		0.00		0.23		0.41
Average common shares outstanding	8,828		8,830		8,832		8,834		8,831
Diluted average common shares outstanding	8,854		8,852		8,841		8,857		8,851

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(13)Related Party and Similar Transactions

The Company occasionally sells engines to and purchases materials from avioserv, the successor to a former subsidiary of the Company and a current subsidiary of T Group America. T Group America is owned by T Group (f/k/a SR Technics Group), an entity that is related to FlightTechnics LLC, which holds 14% of the Company’s common stock. The Company also leases office space from avioserv with the lease term expiring October 31, 2005. During the year ended December 31, 2004, the Company sold one engine to avioserv at a net gain of $260,000. W. William Coon, Jr., a director of the Company, is a director of Flight Technics, LLC and T Group America. He is also Chairman of the Board of Directors of avioserv.

Effective September 13, 2002, the Company entered into a consulting agreement with Hans Jorg Hunziker, a former executive of Flightlease AG, a wholly-owned subsidiary of SAir Group. Mr. Hunziker is a former Director of the Company having resigned from the Board on July 1, 2003. The agreement was for a one-year term ending September 13, 2003, and thereafter extended until January 2004 when it was terminated. Mr. Hunziker was to provide strategic advice and investigation into additional sources of capital in Europe.

Gavarnie Holding, LLC, a Delaware Limited Liability Company (“Gavarnie”) owned by Charles F. Willis, IV, purchased the stock of Aloha IslandAir, Inc., a Delaware Corporation, (“IslandAir”) from Aloha AirGroup, Inc. (“Aloha”) on May 11, 2004. Charles F. Willis, IV is the President, CEO and Chairman of the Board of Directors of the Company and owns approximately 34% of the Company’s stock as of December 31, 2004. IslandAir leases five DeHaviland DHC-8-100 aircraft from the Company, under non-cancelable leases which generate lease revenue of approximately $2.5 million per year and have a net book value of $16.0 million, for remaining periods of between two and four years. IslandAir’s obligations under four of these leases are guaranteed by Aloha. However, Aloha has recently filed for reorganization under Chapter 11 of the Bankruptcy Code and the Company expects Aloha’s obligations under the guarantees to be discharged in this proceeding. Gavarnie is required to indemnify Aloha if a claim is made against Aloha in respect of its guaranties of IslandAir’s leases from the Company.

The Company entered into a Consignment Agreement dated April 30, 2004 with Avsets.com, Inc. to sell parts from a disassembled engine.  J.T. Power LLC (“J.T. Power”) has agreed to market these parts on behalf of Avsets.com, Inc. and also shares office space with Avsets.com, Inc. J.T. Power is an entity whose majority shareholder, Austin Willis, is the son of the President and Chief Executive Officer of the Company, and directly and indirectly, a shareholder of the Company. The book value of the parts consigned to Avsets.com is approximately $19,000.

(14)Restatement for the Year Ended December 31, 2000

The Company restated its Consolidated Financial Statements for the year ended December 31, 2000 as a result of an accounting error, discovered during the second quarter of 2003, in calculating the cost of goods sold of an inventory item disposed of in 2000. As a result of the error, income from discontinued operations, net income and retained earnings for the year ended December 31, 2000, have been reduced by $625,000 (net of tax benefit of $375,000). Equipment held for operating lease and deferred income taxes were reduced by $1.0 million and $375,000, respectively. The restatement also affects retained earnings, equipment held for operating lease and deferred income taxes by the same amounts at December 31, 2001 and 2002. There is no effect on operating, finance or investing cash flows for any period.

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Schedule II

Valuation Accounts

Willis Lease Finance Corporation

Valuation Accounts

(in thousands)

	Balance at Beginning of period		Additions Charged to Expense		Recoveries		Deductions			Balance at End of Period
December 31, 2002
Accounts receivable, allowance for doubtful accounts	$	175	$	200	$	—	$	(76	)	$	299
December 31, 2003
Accounts receivable, allowance for doubtful accounts	299		112		53		(24		)	440
December 31, 2004
Accounts receivable, allowance for doubtful accounts	440		—		17		(57		)	400

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