UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission File No.33-2794

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
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(Exact name of registrant as specified in its charter)

California 94-2985086
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)

201 High Ridge Road, Stamford, Connecticut 06927
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (203) 357-3776

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest

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 X No
--- ---

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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---

No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 2000.

Documents incorporated by reference: None

This document consists of 46 pages.

PART I

Item 1. Business

Polaris Aircraft Income Fund II, A California Limited Partnership (PAIF-II or
the Partnership), was formed primarily to purchase and lease used commercial jet
aircraft in order to provide quarterly distributions of cash from operations, to
maximize the residual values of aircraft upon sale and to protect Partnership
capital through experienced management and diversification. PAIF-II was
organized as a California Limited Partnership on June 27, 1984 and will
terminate no later than December 2010.

PAIF-II has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other Limited Partnerships, banks and several other
types of financial institutions. This market is highly competitive and there is
no single competitor who has a significant influence on the industry. In
addition to other competitors, the General Partner, Polaris Investment
Management Corporation (PIMC), and its affiliates, including GE Capital Aviation
Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris
Holding Company (PHC) and General Electric Capital Corporation (GE Capital),
acquire, lease, finance, sell and remarket aircraft for their own accounts and
for existing aircraft and aircraft leasing programs managed by them. Further,
GECAS provides a significant range of aircraft management services to third
parties, including without limitation, AerFi Group plc (formerly GPA Group plc),
a public limited company organized in Ireland, together with its consolidated
subsidiaries (AerFi), and Airplanes Group, together with its subsidiaries (APG),
each of which two groups leases and sells aircraft. Accordingly, in seeking to
re-lease and sell its aircraft, the Partnership may be in competition with the
General Partner, its affiliates, AerFi, APG, and other third parties to whom
GECAS provides aircraft management services from time to time.

A brief description of the aircraft owned by the Partnership is set forth in
Item 2. The following table describes certain material terms of the
Partnership's leases to Trans World Airlines, Inc. (TWA) as of December 31, 2000
(the "Current Leases"). See additional discussion of TWA in "Item 7. Management
`s Discussion and Analysis of Financial Condition and Results of Operations".

Scheduled
Number of Lease
Lessee Aircraft Type Aircraft Expiration Renewal Options
- ------ ------------- -------- ---------- ---------------
TWA McDonnell Douglas DC-9-30 11 11/04 (1) none
TWA McDonnell Douglas DC-9-30 3 2/05 (1) none

(1) On January 10, 2001, TWA filed a voluntary petition in the United
States Bankruptcy Court of the District of Delaware for reorganization
relief under Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy
Code"). One day prior to filing its bankruptcy petition, TWA entered
into an Asset Purchase Agreement (the "Purchase Agreement") with
American Airlines, Inc. ("American") that provided for the sale to
American of substantially all of TWA's assets. On February 28, 2001,
American presented Polaris Investment Management Corporation ("General
Partner") with a draft letter of intent reflecting a proposal to take
assignment of eleven of the fourteen Current Leases on modified terms
and conditions as part of the TWA leased assets that American wishes to
acquire. The General Partner has evaluated American's proposal and has
determined that accepting such a proposal would be in the best
interests of the Partnership. The TWA Bankruptcy Filing and the
proposal by American to take assignment of eleven of the fourteen
current leases (on modified terms) is discussed in Note 14. The lease
term, rental and maintenance terms of the Current Leases would be
changed materially under American's proposal from the terms describe in
the following paragraph.

The Current Leases to TWA were modified in 1991. The leases for these
aircraft were extended for an aggregate of 75 months beyond the initial
lease expiration date in November 1991 at approximately 46% of the

original lease rates. The Partnership also agreed to share in the costs
of certain Airworthiness Directives (ADs). If such costs are incurred
by TWA, they will be credited against rental payments, subject to
annual limitations with a maximum of $500,000 per aircraft over the
lease terms.

A discussion of the current market condition for the type of aircraft owned by
the Partnership follows. For further information, see Demand for Aircraft in the
Industry Update section of Item 7.

McDonnell Douglas DC-9-30 - The McDonnell Douglas DC-9-30 is a short- to
medium-range twin-engine jet that was introduced in 1967. Providing reliable,
inexpensive lift, these aircraft fill thin niche markets, mostly in the United
States. Hushkits are available to bring these aircraft into compliance with
Stage 3 requirements at a cost of approximately $1.6 million per aircraft. As
noted above, hushkits have been installed on the 14 remaining Partnership
aircraft. Certain ADs applicable to the McDonnell Douglas DC-9 have been issued
to prevent fatigue cracks and control corrosion as discussed in the Industry
Update section of Item 7.

The General Partner believes that, in addition to the factors cited above, the
deteriorated market for the Partnership's aircraft reflects the airline
industry's reaction to the significant expenditures potentially necessary to
bring these aircraft into compliance with certain ADs issued by the FAA relating
to aging aircraft, corrosion prevention and control, and structural inspection
and modification as discussed in the Industry Update section of Item 7.

Item 2. Properties

At December 31, 2000, the Partnership owned 14 McDonnell Douglas DC-9-30
aircraft leased to TWA and spare parts inventory (as discussed in Note 8) out of
its original portfolio of 30 aircraft. All leases are operating leases. Polaris
Aircraft Income Fund II (the Partnership) transferred six Boeing 727-200
aircraft, previously leased to Pan Am, to aircraft inventory in 1992. These
aircraft, which are not included in the following table, were disassembled for
sale of their component parts, the remainder of which was sold to Soundair, Inc.
in 1998. The Partnership sold one Boeing 727-200 aircraft equipped with a
hushkit in February 1995. The Partnership sold the airframe and one engine from
the Boeing 737-200 Combi aircraft in March 1996. The Partnership sold the
remaining engine along with a Boeing 737-200 in January 1997. The Partnership
sold three Boeing 727-200, one McDonnell Douglas DC-9-40 and three McDonnell
Douglas DC-9-30 aircraft to Triton Aviation Services II LLC in May 1997 and June
1997.
The following table describes the Partnership's aircraft portfolio at December
31, 2000 in greater detail:

Year of Cycles
Aircraft Type Serial Number Manufacture As of 12/31/00
- ------------- ------------- ----------- ---------------
McDonnell Douglas DC-9-30 47027 1967 88,798
McDonnell Douglas DC-9-30 47107 1968 87,360
McDonnell Douglas DC-9-30 47108 1968 85,623
McDonnell Douglas DC-9-30 47135 1968 84,343
McDonnell Douglas DC-9-30 47137 1968 84,010
McDonnell Douglas DC-9-30 47174 1968 86,333
McDonnell Douglas DC-9-30 47249 1968 89,909
McDonnell Douglas DC-9-30 47251 1968 88,373
McDonnell Douglas DC-9-30 47324 1969 82,605
McDonnell Douglas DC-9-30 47343 1969 86,838
McDonnell Douglas DC-9-30 47345 1969 85,184
McDonnell Douglas DC-9-30 47357 1969 81,661
McDonnell Douglas DC-9-30 47411 1969 82,713
McDonnell Douglas DC-9-30 47412 1969 82,137

Item 3. Legal Proceedings

Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition
under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court for the Middle District of Florida, Orlando Division. The Bankruptcy Court
disposed of the Partnership's claim in this bankruptcy by permitting the
Partnership to exchange a portion of its unsecured claim for Braniff's right
(commonly referred to as a "Stage 2 Base Level right") under the FAA noise
regulations to operate one Stage 2 aircraft and by allowing the Partnership a
net remaining unsecured claim of $769,231 in the proceedings.

In May 1998, Braniff's bankrupt estate made a $200,000 payment in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Investment
Management Corporation, of which $15,385 was allocated to the Partnership based
on its pro rata share of the total claims. On January 20, 1999, Braniff's
bankrupt estate made an additional $84,000 payment in respect of the unsecured
claims of the Partnership and other affiliates of Polaris Investment Management
Corporation, of which $6,462 was allocated to the Partnership based on its pro
rata share of the total claims. On January 16, 2001, Braniff's bankrupt estate
made a $110,890 payment in respect of the unsecured claims of the Partnership
and other affiliates of Polaris Investment Management Corporation, of which
$8,530 was allocated to the Partnership based on its pro rata share of the total
claims.

Viscount Air Services, Inc. (Viscount) Bankruptcy - As previously reported in
the Partnership's 1999 Form 10-K, all disputes between the Partnership and
Viscount have been resolved, and there is no further pending litigation with
Viscount. However, when Viscount rejected its lease of one of the Partnership's
aircraft ("306 Aircraft"), as authorized by the Bankruptcy Court, the 306
Aircraft was located at a maintenance facility called BAE Aviation, Inc. dba
Tucson Aerospace (BAE). BAE and its subcontractors STS Services, Inc. and Piping
Design Services, Inc., dba PDS Technical Services asserted mechanics' liens over
the 306 Aircraft.

On May 22, 1996, First Security Bank, National Association (FSB), as owner
trustee, filed suit in the Superior Court of Arizona in Pima County to recover
the 306 Aircraft. After FSB filed a bond in the penal amount of $1,371,000, the
Claimants in the action released the 306 Aircraft and filed a claim against the
Bond. FSB filed a motion for summary judgment on all claims raised by the
Claimants in the counterclaim. The Superior Court granted the motion and entered
judgment on October 30,1998 dismissing the counterclaim and exonerating the
Bond. The Court has stayed exoneration of the Bond pending appeal by the
Claimants. FSB filed a motion seeking recovery of its attorneys' fees and costs
incurred in defending the litigation, and the Court entered an order awarding
$159,374.51 to FSB, GE Capital Aviation Services, Inc. and Federal Insurance
Company, as surety, for partial reimbursement of their attorneys' fees and
expenses.

On March 20, 2000, the Superior Court entered an order denying the Claimant's
motion for a new trial and denied FSB's supplemental application for award of
attorneys' fees and expenses. The Claimants filed an appeal on April 18, 2000 to
Division 2 of the Arizona Court of Appeals. The matter was fully briefed; the
Court of Appeals heard oral argument and affirmed the grant of summary judgement
in favor of FSB, GECAS and the surety and against the Claimants. Claimants may
seek reconsideration from the court of appeals or review by the Supreme Court of
Arizona. The court of appeals awarded attorney fees in favor of FSB and against
the Claimants in an amount to be determined.

Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, this
action was filed in the District Court of Harris County, Texas against Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris
Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris
Aircraft Income Fund I, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI,
General Electric Capital Corporation, Prudential Securities, Inc., Prudential

Insurance Company of America and James J. Darr. The complaint alleges violations
of the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections
11 and 12 of the Securities Act of 1933, common law fraud, fraud in the
inducement, negligent misrepresentation, negligence, breach of fiduciary duty
and civil conspiracy arising from the defendants' alleged misrepresentation and
failure to disclose material facts in connection with the sale of limited
partnership units in the Partnership and the other Polaris Aircraft Income
Funds. Plaintiffs seek, among other things, an award of compensatory damages in
an unspecified amount plus interest, and double and treble damages under the
Texas Deceptive Trade Practices Act. The trial date for this action was set and
rescheduled by the trial court several times, and on September 2, 1999, the
court granted a stay of this action pending the submission of the remaining
plaintiffs' claims to arbitration. Subsequently, several of the plaintiffs filed
a motion with the Court to dismiss their claims, which the court granted.

Other Proceedings - Part III, Item 10 discusses certain other actions which have
been filed against the general partner in connection with certain public
offerings, including that of the Partnership. The Partnership is not a party to
these actions.

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

None.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

a) Polaris Aircraft Income Fund II's (PAIF-II or the Partnership) Limited
Partnership interests (Units) are not publicly traded. Currently there
is no market for PAIF-II's Units and it is unlikely that any market
will develop.

b) Number of Security Holders:

Number of Record Holders
Title of Class as of December 31, 2000
----------------------------- ------------------------------------

Limited Partnership Interest: 13,883

General Partnership Interest: 1

c) Dividends:

The Partnership distributed cash to partners on a quarterly basis
beginning July 1986. Cash distributions to Limited Partners during 2000
and 1999 totaled $7,599,590 and $8,199,557, respectively. Cash
distributions per Limited Partnership unit were $15.20 and $16.40 in
2000 and 1999, respectively.

Item 6. Selected Financial Data

For the years ended December 31,
--------------------------------

2000 1999 1998 1997 1996
---- ---- ---- ---- ----

Revenues $ 13,729,468 $ 13,559,480 $ 13,901,118 $ 17,609,635 $ 16,304,608

Net Income (Loss) (7,634,415) 6,622,183 3,456,655 4,469,336 (14,708,486)

Net Income (Loss)
Allocated to Limited
Partners (8,317,954) 5,742,360 1,607,397 4,424,643 (16,311,216)

Net Income (Loss) per
Limited Partnership Unit (16.64) 11.49 3.22 8.85 (32.62)

Cash Distributions per
Limited Partnership
Unit 15.20 16.40 37.35 28.70 35.00

Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* 15.20 16.40 37.35 28.70 35.00

Total Assets 31,992,732 51,760,515 57,461,885 77,546,425 87,622,742

Partners' Capital 24,878,560 40,956,964 43,445,400 60,740,696 72,215,709

* The portion of such distributions which represents a return of capital on an
economic basis will depend in part on the residual sale value of the
Partnership's aircraft and thus will not be ultimately determinable until the
Partnership disposes of its aircraft. However, such portion may be significant
and may equal, exceed or be smaller than the amount shown in the above table.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

At December 31, 2000, Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of 14 used commercial jet aircraft that were leased to Trans World
Airlines, Inc. (collectively the "Current Leases") and spare parts inventory (as
discussed in Note 8) out of its original portfolio of 30 aircraft. The portfolio
consists of 14 McDonnell Douglas DC-9-30 aircraft leased to Trans World
Airlines, Inc. (TWA). The Partnership transferred six Boeing 727-200 aircraft,
previously leased to Pan American World Airways, Inc., to aircraft inventory in
1992. These aircraft were disassembled for sale of their component parts. The
Partnership sold its remaining inventory of aircraft parts from the six
disassembled aircraft, to Soundair, Inc., in 1998. The Partnership sold one
Boeing 727-200 aircraft in February 1995, one Boeing 737-200 Combi aircraft in
March 1996, and one Boeing 737-200 aircraft in January 1997. During the second
quarter of 1997, the Partnership sold three McDonnell Douglas DC-9-30 aircraft
and one McDonnell Douglas DC-9-40 aircraft leased to Trans World Airlines, Inc.
(TWA), two Boeing 727-200 Advanced aircraft leased to Continental Micronesia,
Inc. (Continental Micronesia), and one Boeing 727-200 Advanced aircraft leased
to Continental Airlines, Inc. (Continental), to Triton Aviation Services II LLC.

On January 10, 2001, TWA filed a voluntary petition in the United States
Bankruptcy Court of the District of Delaware for reorganization relief under
Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy Code"). One day prior
to filing its bankruptcy petition, TWA entered into an Asset Purchase Agreement
(the "Purchase Agreement") with American Airlines, Inc. ("American") that
provided for the sale to American of substantially all of TWA's assets. On
February 28, 2001, American presented the General Partner with a draft letter of
intent reflecting a proposal to take assignment of eleven of the fourteen
Current Leases on modified terms and conditions as part of the TWA leased assets
that American wishes to acquire. The General Partner has evaluated American's
proposal and has determined that accepting such a proposal would be in the best
interests of the Partnership. The TWA Bankruptcy filing and American's proposal
are discussed in Note 14.

Remarketing Update

General - The General Partner evaluates, from time to time, whether the
investment objectives of the Partnership are better served by continuing to hold
the Partnership's remaining portfolio of Aircraft or marketing such Aircraft for
sale. This evaluation takes into account the current and potential earnings of
the Aircraft, the conditions in the markets for lease and sale and future
outlook for such markets, and the tax consequences of selling rather than
continuing to lease the Aircraft.

American's Lease Proposal - On February 28, 2001, American presented the General
Partner of the Partnership ("General Partner") with a draft letter of intent
reflecting a proposal to take assignment of eleven of the fourteen Current
Leases on modified terms and conditions as part of the TWA leased assets that
American wishes to acquire. The proposal by American is subject, among other
things, to American being successful in its bid to acquire substantially all the
assets of TWA, including receipt of all necessary governmental approvals
required for American to complete that acquisition. The modified terms and
conditions proposed by American are discussed in Note 14.

Partnership Operations

The Partnership reported net loss of $7,634,415, or $16.64 per Limited
Partnership unit for the year ended December 31, 2000, compared to net income of
$6,622,183, or $11.49 per Limited Partnership unit and net income of $3,456,655,
or $3.22 per Limited Partnership unit, for the years ended December 31, 1999 and
1998, respectively. Variances in net income may not correspond to variances in
net income per Limited Partnership unit due to the allocation of components of
income and loss in accordance with the Partnership agreement.

The decrease in net income in 2000 is primarily due to the increase in
depreciation expense, bad debt expense and a decrease in the sale of aircraft
inventory, partially offset by the increases in interest income and decrease in
interest expense.

Interest income increased in 2000 as compared to 1999, primarily due to higher
average cash reserves and a higher rate of return on those cash reserves.
Interest income decreased during 1999, as compared to 1998 primarily due to a
decrease in the cash reserves.

Payments of $69,700 and $133,285 were received during 1999 and 1998
respectively, from the sale of inventoried parts from the six disassembled
aircraft. There were no such sales in 2000.

The Partnership recorded other income of $1,983 in 2000, compared to $-0- and
$50,000 during 1999 and 1998, respectively. The Partnership was holding a
security deposit, received from Jet Fleet in 1992, pending the outcome of
bankruptcy proceedings. The bankruptcy proceeding of Jet Fleet Corporation was
closed on August 6, 1997, and the bankruptcy proceeding of Jet Fleet
International Airlines, Inc. was closed on February 10, 1998. Consequently, the
Partnership recognized, during 1998, revenue of $50,000 that had been held as a
deposit.

The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
residual values obtained from independent parties which provide current and
future estimated aircraft values by aircraft type. The Partnership's future
earnings are impacted by the net effect of the adjustments to the carrying value
of the aircraft (which has the effect of decreasing future depreciation
expense), and the downward adjustments to the estimated residual values (which
has the effect of increasing future depreciation expense).

If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, the Partnership
recognizes the deficiency currently as increased depreciation expense. The
Partnership recognized impairment losses on aircraft to be held and used by the
Partnership aggregating approximately $15 million, or $30.09 per limited
Partnership unit as increased depreciation expense in 2000 as a result of the
TWA bankruptcy and the modified lease terms proposed by American. As discussed
below under "TWA Bankruptcy Filing and American's Proposal", the Partnership
determined to accept and negotiate with American on its proposal to take
assignment of eleven of the fourteen Current Leases on modified terms and
conditions. This proposal constituted an event that required the Partnership to
review the aircraft carrying values pursuant to SFAS 121. As a result of a
review of the Aircraft, it is expected that future cash flows to be derived from
the Aircraft and projected lease terms will be less than the carrying value of
the Aircraft, and the Partnership has recorded an impairment loss as of December
31, 2000. Management believes the assumptions related to fair value of impaired
assets represented the best estimates based on reasonable and supportable
assumptions and projections.

Depreciation expense decreased in 1999, as compared to 1998, was the of result
of several aircraft having been fully depreciated down to their original
estimated residual values during 1998. This decrease was partially offset by
additional depreciation, due to the Partnership's downward adjustment of the
estimated residual value of the portfolio aircraft, beginning in the fourth
quarter of 1999.

The Partnership made a downward adjustment to the estimated residual value of
its aircraft as of October 1, 1999. As a result of the 1999 adjustment to the
estimated residual value, the Partnership recognized increased depreciation
expense in 1999 of approximately $144,721 or $.29 per Limited Partnership unit.

Interest expense decreased in 2000, as compared to 1999, and also decreased from
1998 to 1999, due to the continued payments made on the notes payable for the
TWA hushkits.

In November 1996 and February 1997 hushkits were installed on the 14 Partnership
aircraft. The leases for these 14 aircraft were then extended for a period of
eight years. The rent payable by TWA under the leases was increased by an amount
sufficient to cover the monthly debt service payments on the hushkits (the
"Hushkit Debt") and fully repay, during the term of the TWA leases, the amount
borrowed. The Partnership recorded $333,665, $834,791 and $1,290,441 in interest
expense on the amount borrowed to finance the hushkits during 2000, 1999 and
1998, respectively.

Operating expense decreased in 1999, when compared to 1998 primarily due to
legal expense related to the Ron Wallace Litigation Settlement in 1998 as more
fully described below.

Bad debt expense increased in 2000 compared to 1999 and 1998, primarily due to
the TWA Bankruptcy Filing. As discussed in Note 14, TWA subsequently cured
outstanding defaults on eleven of the fourteen Current Leases. One of the three
leases which was not cured by TWA had a rent payment due on December 27, 2000;
the rent payments on the remaining two leases were due in January 2001. The
Partnership recorded an allowance for credit losses and bad debt expense equal
to the rent payment due December 27, 2000 for the respective lease.

Administrative expenses decreased in 1999 compared to 1998 primarily due to
additional printing and postage costs incurred in 1998 as a result of the Triton
litigation and settlement.

Liquidity and Cash Distributions

Liquidity - The Partnership received all payments due from lessees during 2000,
except for the December 2000 lease payment from TWA. On January 10, 2001, TWA
filed a voluntary petition in the United States Bankruptcy Court of the District
of Delaware for reorganization relief under Chapter 11 of the Federal Bankruptcy
Code (the "Bankruptcy Code"), and prior to March 12, 2001 had not made its
required monthly rental payments of $85,000 per Aircraft per month since
December 27, 2000. On March 12, 2001, TWA cured lease payment defaults under 11
of the 14 leases as required by Section 1110 of the Bankruptcy Code and
separately agreed to pay for continued use of one other aircraft on a short term
basis. On March 12, 2001, the Partnership received its $850,000 rental payment
from TWA for ten out of eleven aircraft that was due on December 27, 2000. This
amount was included in rent and other receivables on the balance sheet at
December 31, 2000.

As discussed in Note 3 to the Financial Statements (Item 8), the Partnership
agreed to share in the cost of meeting certain Airworthiness Directives (ADs)
with TWA. In accordance with the cost-sharing agreement, TWA may offset up to an
additional $1.7 million against rental payments, subject to annual limitations,
over the remaining lease terms.

Payments of $69,700 and $133,285 were received during 1999 and 1998
respectively, from the sale of inventoried parts from the six disassembled
aircraft. There was no such sale in 2000.

Through the time of the TWA bankruptcy filing, PIMC had determined that the
Partnership maintain cash reserves as a prudent measure to ensure that the
Partnership would have available funds in the event that the aircraft on lease
to TWA required remarketing, and for other contingencies including expenses of
the Partnership. The Partnership's cash reserves will be monitored and may be
revised from time to time as further information (including information
regarding the proposal discussed below under "TWA Bankruptcy Filing and
American's Proposal") becomes available in the future.

Cash Distributions - Cash distributions to Limited Partners were $7,599,590,
$8,199,557, and $18,673,991 in 2000, 1999 and 1998, respectively. Cash
distributions per Limited Partnership unit were $15.20, $16.40, and $37.35 per
Limited Partnership unit in 2000, 1999 and 1998, respectively. The timing and
amount of future cash distributions are not yet known and will depend on the
Partnership's future cash requirements (including expenses of the Partnership)
and need to retain cash reserves as previously discussed in the Liquidity
section; the receipt of rental payments from TWA; and payments generated from
the aircraft disassembly process.

TWA Bankruptcy Filing and American's Proposal

TWA Bankruptcy Filing - On January 10, 2001, TWA filed a voluntary petition in
the United States Bankruptcy Court of the District of Delaware (the "Bankruptcy
Court") for reorganization relief under Chapter 11 of the Bankruptcy Code. One
day prior to filing its bankruptcy petition, TWA entered into an Asset Purchase
Agreement (the "Purchase Agreement") with American Airlines, Inc. ("American")
that provided for the sale to American of substantially all of TWA's assets.
Under the terms of the Purchase Agreement, American's acquisition of TWA's
assets is subject to a number of conditions and is contingent upon American
being the prevailing bidder in an auction to be supervised by the Bankruptcy
Court. The Purchase Agreement provides that American may specify which contracts
of TWA (including aircraft leases) American wishes to acquire. In addition to
entering into the Purchase Agreement with American, TWA also obtained a
commitment from American to fund up to $325,000,000 in debtor-in-possession
financing which was approved by the Bankruptcy Court. TWA is managing all of its
property as debtor-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code. The Bankruptcy Court approved the sale to American on March 12,
2001 and also approved additional debtor-in-possession financing being provided
by American.

The filing for reorganization relief under Chapter 11 gives TWA a right to
assume or reject the executory contracts to which it is a party, including the
Current Leases. Pursuant to Section 1110 of the Bankruptcy Code, TWA may
continue to use the Aircraft for sixty days after the filing of its bankruptcy
petition, regardless of whether it assumes or rejects any of the Current Leases,
but, after such sixty day period, TWA must redeliver each Aircraft to the
Partnership on demand unless TWA (i) cures all outstanding defaults under the
Current Lease applicable to such Aircraft within the periods prescribed by
Section 1110 and (ii) continues to perform its obligations as provided under the
terms of the applicable Current Lease. Section 1110 of the Bankruptcy Code
provides that a lessor and lessee may mutually agree to extend the sixty day
time period as well as to make other modifications to a lease. A rejection of a
Current Lease by TWA or TWA's failure to cure as required by Section 1110 would
entitle the Partnership to demand a return of the Aircraft leased thereunder and
file a claim for damages against TWA in the bankruptcy proceeding as an
unsecured creditor.

American's Proposal - On February 28, 2001, American presented the General
Partner of the Partnership ("General Partner") with a draft letter of intent
reflecting a proposal to take assignment of eleven of the fourteen Current
Leases on modified terms and conditions. The proposal by American is subject,
among other things, to American being successful in its bid to acquire
substantially all the assets of TWA, including receipt of all necessary
governmental approvals required for American to complete that acquisition. The
modified terms and conditions proposed by American are substantially less
favorable to the Partnership than the terms and conditions specified in the
Current Leases. In particular, rather than returning the Aircraft at the
currently scheduled expiry date under the Current Leases, American would return
each Aircraft at the time when such Aircraft requires a heavy maintenance check
of the airframe, provided that American would agree that the aggregate average
number of months for which all eleven Aircraft are on lease to American would
not be less than 22 months from and after March 12, 2001. In addition, American
would reduce the rental rate for each of the Aircraft to $40,000 per month.
Further, at lease expiry, American would be required to return each airframe in
a "serviceable" condition, rather than being required to meet the more stringent
maintenance requirements of the Current Leases. Finally, American would be
required to return the installed engines on each Aircraft with a target level of
average cycle life remaining to replacement for all life limited parts of 25%.
If the average cycle life remaining on the installed engines on an Aircraft is
below the 25% target level, a financial adjustment would be payable by American

to the Partnership (but no payment would be owed by the Partnership to American
if cycle life remaining at return exceeds the target level).

Under American's proposal, TWA would assume the Current Leases for the eleven
Aircraft American wishes to lease (the "Assumed Leases"), but would not assume
the Current Leases for the remaining three Aircraft (the "Rejected Leases"). TWA
would be required to cure all payment defaults under the Assumed Leases and pay
rentals at the $85,000 per month contract rate until such time as such leases
are assigned to American; however, American's proposal provides that American
would be, effective upon assignment, entitled to a rental credit equaling the
amount of rent paid by TWA in excess of the $40,000 per month rate for the
period from and after March 12, 2001.

General Partner's Decision to Accept - The General Partner has evaluated
American's proposal to take an assignment of the Assumed Leases and has
determined that accepting such a proposal would be in the best interests of the
Partnership.

The General Partner's determination to accept American's proposal was based upon
consideration of two key factors. First, the General Partner believes that
American's proposal will yield a more favorable return to the Partnership than
repossessing the Aircraft from TWA and attempting to lease or sell the Aircraft
(likely at scrap value). In coming to this conclusion, the Partnership
considered the following: (i) each Aircraft is over 30 years old and has low
specification Pratt & Whitney JT8D-9A engines, which limits their marketability;
(ii) there are but a small number of aircraft operators currently using DC-9
aircraft, which means there is only a limited potential market for re-leasing or
selling the Aircraft; (iii) the cost of transitioning the Aircraft from the
maintenance program employed by TWA to the maintenance program used by another
operator, if the Aircraft were to be re-leased, would be substantial and would
likely require a significant additional investment in these Aircraft by the
Partnership; and (iv) to date, the General Partner's attempts to obtain bids to
purchase the Aircraft have not yielded any prospects for purchase at prices
above scrap value. Second, due to American's credit standing, the General
Partner has concluded that American is capable of meeting its obligations under
its proposal.

Based on this determination, the General Partner is proceeding to negotiate
definitive documentation with American and TWA reflecting the terms of
American's proposal. If American's proposal proceeds on the basis outlined
above, the General Partner would repay from cash reserves, the remaining
principal balance on the Hushkit Debt. The General Partner would also seek to
recover possession of the three Aircraft under the Rejected Leases and market
such Aircraft for sale subject to an informal arrangement whereby one of the
three aircraft will continue to be used by TWA on a short term basis and will
only be available for sale when returned.

Because American's proposal to the Partnership is subject to several important
conditions and contingencies, including, among others, American being successful
in its bid to purchase substantially all of the assets of TWA, and American
receiving all regulatory approvals required to consummate that purchase, there
can be no assurance that the transactions contemplated by such proposal will be
completed or that the terms of the proposal will not be changed in one or more
material respects prior to completion.

Effect of the Bankruptcy - The TWA bankruptcy is expected to have a material
adverse effect on the Partnership's results of operations and financial
position. Assuming that the transaction with American is completed on the terms
described above, aggregate rentals to be received by the Partnership in 2001
will be reduced from approximately $14.3 million to approximately $6.2 million,
and the average lease term for the eleven Aircraft that remain on lease will be
reduced from 47 to 24 months remaining at December 31, 2000. Three of the
Partnership's Aircraft, which would have been expected to generate aggregate
rentals in 2001 under the terms of the Current Leases of approximately $3.0

million, are now expected to be marketed for sale at scrap value (which the
General Partner believes will be materially less than the aggregate rental
amount in 2001).

The amount and timing of the Partnership's distributions of cash available for
allocation depends upon many factors, including whether the transaction with
American is consummated and the timing of the rental payments to be made by TWA
prior to such consummation. The General Partner has determined that the amount
of cash available for distribution for the quarter ending March 31, 2001 will
not be materially different from the corresponding quarter in 2000, but the
General Partner expects the amount of cash available for distribution for the
subsequent quarters in 2001 to be materially less.

As a result of the TWA bankruptcy and the modified lease terms proposed by
American, the Partnership is required to review the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121. Any
downward adjustment in the estimated residual value or decrease in the projected
remaining economic life of any of the Aircraft will dictate an increase in
depreciation expense over the projected economic life of such Aircraft. Further,
if the projected net cash flow for any of the Aircraft (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) is less than the carrying value of such Aircraft,
an impairment loss must be recorded. After a review of the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121, the
Partnership recognized an impairment loss as increased depreciation expense in
2000 of approximately $15 million, or $30.09 per Limited Partnership unit.

Sale of Aircraft

Sale of Boeing 737-200 Aircraft - On January 30, 1997, one Boeing 737-200
formerly on lease to Viscount, was sold to American Aircarriers Support,
Inc.(American Aircarriers) on an "as-is, where-is" basis for $660,000 cash. In
addition, the Partnership retained maintenance reserves from the previous lessee
of $217,075, that had been held by the Partnership, which were recognized as
additional sale proceeds. A net loss of $26,079 was recorded on the sale of the
aircraft.

Sale of Aircraft to Triton - On May 28, 1997, PIMC, on behalf of the
Partnership, executed definitive documentation for the purchase of 7 of the
Partnership's 21 remaining aircraft (the "Aircraft") and certain of its notes
receivables by Triton Aviation Services II LLC, a special purpose company (the
"Purchaser" or "Triton"). The closings for the purchase of the 7 Aircraft
occurred from May 28, 1997 to June 16, 1997. The Purchaser is managed by Triton
Aviation Services, Ltd. ("Triton Aviation" or the "Manager"), a privately held
aircraft leasing company which was formed in 1996 by Triton Investments, Ltd., a
company which has been in the marine cargo container leasing business for 17
years and is diversifying its portfolio by leasing commercial aircraft. Each
Aircraft was sold subject to the existing leases.

The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser was $13,988,000 which was allocated to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $1,575,888 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $12,412,112. The Partnership received payment of $1,575,888 from the
escrow account on June 24, 1997. On December 30, 1997, the Partnership received
prepayment in full of the outstanding note receivable and interest earned by the
Partnership to that date.

Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser had the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases.

The Accounting Treatment of the Transaction - In accordance with GAAP, the
Partnership recognized rental income up until the closing date for each aircraft
which occurred from May 28, 1997 to June 16, 1997. However, under the terms of
the transaction, the Purchaser was entitled to receive payment of the rents,
receivables and other income accruing from April 1, 1997. As a result, the
Partnership made payments to the Purchaser in the amount of the rents,
receivables and other income due and received from April 1, 1997 to the closing
date of $1,001,067, which is included in rent from operating leases and interest
income. For financial reporting purposes, the cash down payment portion of the
sales proceeds of $1,575,888 has been adjusted by the following: income and
proceeds, including rents and receivables from the effective date of April 1,
1997 to the closing date, interest due on the cash portion of the purchase
price, interest on the Promissory Note from the effective date of April 1, 1997
to the closing date and estimated selling costs. As a result of these GAAP
adjustments, the net adjusted sales price recorded by the Partnership, including
the Promissory Note, was $13,205,140.

The Aircraft sold pursuant to the definitive documentation executed on May 28,
1997 had been classified as aircraft held for sale from that date until the
actual closing date. Under GAAP, aircraft held for sale are carried at their
fair market value less estimated costs to sell. The adjustment to the sales
proceeds described above and revisions to estimated costs to sell the Aircraft
required the Partnership to record an adjustment to the net carrying value of
the aircraft held for sale of $749,373 during the three months ended June 30,
1997. This adjustment to the net carrying value of the aircraft held for sale is
included in depreciation expense on the statement of operations.

Ron Wallace Litigation Settlement

Ron Wallace v. Polaris Investment Management Corporation, et al. - On or about
June 18, 1997, a purported class action entitled Ron Wallace v. Polaris
Investment Management Corporation, et al. was filed on behalf of the unitholders
of Polaris Aircraft Income Funds II through VI in the Superior Court of the
State of California, County of San Francisco. The complaint names each of
Polaris Investment Management Corporation (PIMC), GE Capital Aviation Services,
Inc. (GECAS), Polaris Aircraft Leasing Corporation, Polaris Holding Company,
General Electric Capital Corporation, certain executives of PIMC and GECAS and
John E. Flynn, a former PIMC executive, as defendants. The complaint alleges
that defendants committed a breach of their fiduciary duties with respect to the
Sale Transaction involving the Partnership as described in Item 7, under the
caption "Sale of Aircraft -- Sale of Aircraft to Triton." On September 2, 1997,
an amended complaint was filed adding additional plaintiffs, and on December 18,
1997, the plaintiffs filed a second amended complaint asserting their claims
derivatively.

On November 9, 1998, defendants, acting through their counsel, entered into a
settlement agreement with plaintiffs and with the plaintiff in a related action,
"Accelerated" High Yield Income Fund II, Ltd., L.P. v. Polaris Investment
Management Corporation, et al. The settlement agreement does not provide for any
payments to be made to the Partnership. Plaintiff's counsel sought reimbursement
from the Partnership for its attorneys' fees and expenses. A settlement notice
setting forth the terms of the settlement was mailed to the last known address
of each unitholder of the Partnership on November 20, 1998. On December 24,
1998, the Court approved the terms of the settlement and approved plaintiffs'
attorney's fees and expenses in the amount of $438,766, which is included in
1998 operating expenses.

Viscount Default and Bankruptcy Filing

indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. The
Compromise and Stipulation provided, among other things, that Viscount rejected
the lease of the Partnership's aircraft. The rejection of the lease gave rise to
a pre-petition unsecured claim in Viscount's bankruptcy for breach of contract
damages. Notwithstanding Viscount's rejection of the Partnership's aircraft
lease, Viscount continued to possess and use the Partnership's engine and
refused to return various aircraft parts removed from the Partnership's
aircraft.

During 1995, Viscount delivered the Partnership's Boeing 737-200 aircraft to a
repair facility operated by BAE Aviation, Inc., d/b/a Tucson Aerospace, located
in Arizona, to perform a heavy maintenance check on the aircraft. The
Partnership has paid to Tucson Aerospace approximately $565,000 from maintenance
reserves and cash reserves for this aircraft as progress payments on this
maintenance check. Work on the maintenance check was suspended prior to the
filing of the Chapter 11 petition by Viscount. Tucson Aerospace asserts that
Viscount owes it approximately $866,000 for work done on the aircraft, which is
in addition to the approximately $565,000 already paid by the Partnership from
maintenance reserves. In addition, a third party vendor, who claims it provided
personnel to work on the aircraft, is asserting a claim against Tucson Aerospace
and a lien against the aircraft in the amount of $720,000. Another third-party
vendor, who claims it provided inspectors, is claiming $185,000 from Tucson
Aerospace. On May 22, 1996, First Security Bank, National Association (formerly
known as First Security Bank of Utah, National Association) (FSB), as
owner/trustee, filed suit in the Superior Court of Arizona in Pima County, to
recover the airframe from BAE Aviation, Inc. and certain creditors alleging
mechanics liens and to determine the validity of the claimed liens.

Pursuant to a stipulated order of the Superior Court entered on July 9, 1996,
FSB filed a bond in the penal sum of $1,371,000 for the benefit of the
lienholders, who subsequently released the aircraft to the Partnership on July
11, 1996 and filed a claim against the bond. FSB filed a motion for summary
judgment on all claims raised by the claimants in the counterclaim. The Superior
Court granted the motion and entered judgment on October 30, 1998 dismissing the
counterclaim and exonerating the bond. The Court has stayed exoneration of the
bond pending appeal by the claimants. The Court has denied the claimants'
subsequent motion for a new trial seeking reconsideration. FSB filed a motion
seeking recovery of its attorneys' fees and costs incurred in defending the
litigation, and the Court set a hearing on the motion for March 8, 1999.
Subsequently, FSB and the claimants agreed to settle this claim for an agreed
judgement of $159,374.51 in attorney's fees to be paid to FSB. The settlement
agreement is subject to approval by the Court. The claimants are appealing the
Court's rulings.

On July 12, 1996, GECAS and FSB filed a motion in Viscount's bankruptcy case to
recover the engines and parts leased in connection with the Partnership's
aircraft. GECAS and FSB assert that these engines and parts should have been
delivered to FSB pursuant to the Compromise and Stipulation. Viscount paid to
the Partnership $10,000 for the use of the engine during the month of August
1996, and continued through August 1996 to pay maintenance reserves pursuant to
the lease terms.

On September 18, 1996, GECAS (on behalf of the Partnership, Polaris Holding
Company, Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund IV and
Polaris Aircraft Investors XVIII) (collectively, the Polaris Entities) and
Viscount entered into a Stipulation and Agreement (the Stipulation and
Agreement) by which Viscount agreed to voluntarily return all of the Polaris
Entities' aircraft and engines, turn over possession of the majority of its
aircraft parts inventory, and cooperate with GECAS in the transition of aircraft
equipment and maintenance, in exchange for which, upon Bankruptcy Court approval
of the Stipulation and Agreement, the Polaris Entities would waive their pre-
and post-petition claims against Viscount for amounts due and unpaid.

A consignment agreement has been entered into with a sales agent for the
disposal of the spare parts inventory recovered from Viscount. Given that many
of the parts require repair/overhaul, the cost of which is not accurately
determinable in advance, and the inherent uncertainty of sales prices for used
spare parts, there remains uncertainty as to whether the Partnership will derive
further proceeds from the sale of this inventory.

The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB would release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.

The Partnership evaluated the airframe and engines previously leased to Viscount
for potential re-lease or sale and estimated that maintenance and refurbishment
costs aggregating approximately $1.6 million would be required to re-lease the
airframe and engines. Alternatively, a sale of the airframe and engines would
likely be made on an "as is, where is" basis, without the Partnership incurring
substantial maintenance costs. The aircraft was sold in January 1997 for
$660,000.

Viscount's failure to perform its financial obligations to the Partnership had a
material adverse effect on the Partnership's financial position. As a result of
Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership had
accrued legal costs of approximately $15,000, $116,000 and $107,000, which are
reflected in operating expense in the Partnership's 1999, 1998 and 1997 and
statement of operations, respectively. In 1998, the Partnership revised its
estimate of legal costs and reduced the accrual for legal costs by $68,753.

Claims Related to Lessee Defaults

Industry Update

Maintenance of Aging Aircraft - The process of aircraft maintenance begins at
the aircraft design stage. For aircraft operating under Federal Aviation
Administration (FAA) regulations, a review board consisting of representatives
of the manufacturer, FAA representatives and operating airline representatives
is responsible for specifying the aircraft's initial maintenance program. The
General Partner understands that this program is constantly reviewed and
modified throughout the aircraft's operational life.

Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of ADs which mandate that operators conduct more intensive
inspections, primarily of the aircraft fuselages. The results of these mandatory
inspections may result in the need for repairs or structural modifications that
may not have been required under pre-existing maintenance programs.

In addition, an AD adopted in 1990, applicable to McDonnell Douglas aircraft,
requires replacement or modification of certain structural items on a specific
timetable. These structural items were formerly subject to periodic inspection,
with replacement when necessary. The AD requires specific work to be performed
at various cycle thresholds between 40,000 and 100,000 cycles, and on specific
date or age thresholds. The estimated cost of compliance with all of the
components of this AD is approximately $850,000 per aircraft. The extent of
modifications required to an aircraft varies according to the level of
incorporation of design improvements at manufacture.

In January 1993, the FAA adopted another AD intended to mitigate corrosion of
structural components, which would require repeated inspections from 5 years of
age throughout the life of an aircraft, with replacement of corroded components
as needed. Integration of the new inspections into each aircraft operator's
maintenance program was required by January 31, 1994.

The Partnership's Current Leases require TWA to maintain the Partnership's
aircraft in accordance with an FAA-approved maintenance program during the lease
term. Under the Current Leases, TWA was generally required to return the
aircraft in airworthy condition including compliance with all ADs for which
action is mandated by the FAA during the lease term. An aircraft returned to the
Partnership as a result of a lease default would most likely not be returned to
the Partnership in compliance with all return conditions required by the lease.
As noted under "TWA Bankruptcy Filing and American's Proposal", three of the
Partnership's Aircraft are expected to be returned by TWA without meeting the
return conditions specified in the Current Leases, and the return conditions
under the modified lease terms and conditions proposed by American for the
Partnership's eleven remaining Aircraft would be quite limited. The costs of
compliance with FAA maintenance standards will likely cause the Partnership to
sell for scrap value the three Aircraft being returned by TWA under the Rejected
Leases. Similarly, such costs will likely cause the Partnership to sell for
scrap value, at the end of the lease term, the eleven Aircraft which American
proposes to lease.

Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft meet current FAA requirements, subject to the phase-out rules discussed
below. Stage 3 aircraft are the most quiet and Stage 3 is the standard for all
new aircraft.

On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2
aircraft by the end of this decade. The key features of the rule include:

- Compliance can be accomplished through a gradual process of
phase-in or phase-out (see below) on each of three interim
compliance dates: December 31, 1994, 1996, and 1998. All Stage
2 aircraft must be phased out of operations in the contiguous
United States by December 31, 1999, with waivers available in
certain specific cases to December 31, 2003.

- All operators have the option of achieving compliance through
a gradual phase-out of Stage 2 aircraft (i.e., eliminate 25%
of its Stage 2 fleet on each of the compliance dates noted
above), or a gradual phase-in of Stage 3 aircraft (i.e., 55%,
65% and 75% of an operator's fleet must consist of Stage 3
aircraft by the respective interim compliance dates noted
above).

The federal rule does not prohibit local airports from issuing more stringent
phase-out rules. In fact, several local airports have adopted more stringent
noise requirements which restrict the operation of Stage 2 and certain Stage 3
aircraft.

Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.

Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3
requirements, are currently available for the Partnership's aircraft and have
been added to eleven of the Partnership's aircraft in 1996 and to three of their
aircraft in 1997.

Legislation has been drafted and has been under review by the EU for sometime to
adopt anti-hushkitting regulations within member states. The legislation seeks
to ban hushkitted aircraft from being added to member states registers and
preclude all operation of hushkitted aircraft within the EU after certain
specific dates. Due to criticism by the US Government, the enactment of this
legislation has been deferred twice and it is now uncertain if it will ever be
enacted at this point. However, the effect of this proposal has been to reduce
the demand for hushkitted aircraft within the EU and its neighboring states,
including the former Eastern Block states.

Demand for Aircraft - At year end 2000, there were approximately 14,678 jet
aircraft in the world fleet. Air travel continued to be strong in 2000 with
traffic growth in North America of 7.65%, and Globally 10.66%. In 2001 traffic
is projected to drop to an estimated growth rate of 1-3% depending on the
magnitude of an observed slowdown in the US economy. Surging fuel prices in 1999
hit the Gulf War levels and continued throughout 2000. Airlines added fuel
surcharge to their tickets, but unhedged carriers had lowered margins despite
the surcharges. Alliances continued to evolve in 2000 as in 1999 as airlines
aligned themselves with code sharing, joint pricing, schedule integration and
corporate agreements. Additionally, a wave of consolidation began in the US
market during 2000. Regulatory hurdles remain before these transactions are
completed. Manufacturers continue to produce at high levels compared to what
demand will require in the future years. A down cycle appears imminent, but a
rebound in traffic growth or a wave of retirements could stabilize the supply
demand situation. Order data for 2000 appears below.

Number of Orders Percentage of Total Percentage of total orders
between Boeing/Airbus

Airbus 476 26% 45%
Boeing 587 32% 55%
RJs 756 42% --
--- --- ---
Total 1,819 100% 100%

Effects on the Partnership's Aircraft - The Partnership periodically reviews the
estimated realizability of the residual values at the projected end of each
aircraft's economic life based on estimated residual values obtained from
independent parties which provide current and future estimated aircraft values
by aircraft type. For any downward adjustment in estimated residual value or
decrease in the projected remaining economic life, the depreciation expense over
the projected remaining economic life of the aircraft is increased.

As discussed above, the Partnership uses information obtained from third party
valuation services in arriving at its estimate of fair value for purposes of
determining residual values. The Partnership will use similar information, plus
available information and estimates related to the Partnership's aircraft, to
determine an estimate of fair value to measure impairment as required by SFAS
No. 121. The estimates of fair value can vary dramatically depending on the
condition of the specific aircraft and the actual marketplace conditions at the
time of the actual disposition of the asset. If assets are deemed impaired,
there could be substantial write-downs in the future.

The Partnership made further downward adjustment to the estimated net book
values and residual value of its aircraft as of December 31, 2000 as a result of
the TWA bankruptcy and the modified lease terms proposed by American as
previously discussed. After a review of the carrying value of the Aircraft
pursuant to applicable accounting literature including SFAS 121, the Partnership
recognized an impairment loss as increased depreciation expense in 2000 of
approximately $15 million, or $30.09 per Limited Partnership unit.

Item 8. Financial Statements and Supplementary Data

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999

AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

TOGETHER WITH THE

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Polaris Aircraft Income Fund II,
A California Limited Partnership:

We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
II, A California Limited Partnership as of December 31, 2000 and 1999, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the General Partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund
II, A California Limited Partnership as of December 31, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

San Francisco, California,
January 26, 2001
(Except with respect to the matter discussed in Notes 3 and 14 as to which
the date is March 12, 2001)

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership

BALANCE SHEETS

DECEMBER 31, 2000 AND 1999

2000 1999
---- ----
ASSETS:

CASH AND CASH EQUIVALENTS $ 19,195,305 $ 18,789,625

RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $85,000 and $-0-
in 2000 and 1999 852,618 935,004

AIRCRAFT, net of accumulated depreciation of
$103,432,415 in 2000 and $83,330,258 in 1999 11,930,894 32,033,051

OTHER ASSETS 13,915 2,835
------------ ------------

Total Assets $ 31,992,732 $ 51,760,515
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 295,334 $ 226,242

ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 605,896 518,032

DEFERRED INCOME 5,719,554 4,022,256

NOTES PAYABLE 493,388 6,037,021
------------ ------------

Total Liabilities 7,114,172 10,803,551
------------ ------------

PARTNERS' CAPITAL (DEFICIT):
General Partner (3,448,329) (3,287,469)
Limited Partners, 499,973 units
issued and outstanding 28,326,889 44,244,433
------------ ------------

Total Partners' Capital (Deficit) 24,878,560 40,956,964
------------ ------------

Total Liabilities and Partners'
Capital (Deficit) $ 31,992,732 $ 51,760,515
============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

2000 1999 1998
---- ---- ----
REVENUES:
Rent from operating leases $ 12,582,702 $ 12,582,702 $ 12,582,702
Interest 1,144,783 907,078 1,113,284
Claims related to lessee defaults -- -- 21,847
Gain on sale of aircraft
inventory -- 69,700 133,285
Other 1,983 -- 50,000
------------ ------------ ------------

Total Revenues 13,729,468 13,559,480 13,901,118
------------ ------------ ------------

EXPENSES:
Depreciation 20,102,157 5,254,386 7,729,294
Management fees to General
Partner 486,468 486,468 486,468
Interest 333,665 834,791 1,290,441
Operating 41,782 41,387 581,127
Bad debt 85,000 -- --
Administration and other 314,811 320,265 357,133
------------ ------------ ------------

Total Expenses 21,363,883 6,937,297 10,444,463
------------ ------------ ------------

NET INCOME (LOSS) $ (7,634,415) $ 6,622,183 $ 3,456,655
============ ============ ============

NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 683,539 $ 879,823 $ 1,849,258
============ ============ ============

NET INCOME (LOSS) ALLOCATED
TO THE LIMITED PARTNERS $ (8,317,954) $ 5,742,360 $ 1,607,397
============ ============ ============

NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (16.64) $ 11.49 $ 3.22
============ ============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

General Limited
Partner Partners Total
------- -------- -----

Balance, December 31, 1997 $ (3,030,600) $ 63,771,296 $ 60,740,696

Net income 1,849,258 1,607,397 3,456,655

Capital redemptions -- (3,072) (3,072)

Cash distributions to partners (2,074,888) (18,673,991) (20,748,879)
------------ ------------ ------------

Balance, December 31, 1998 (3,256,230) 46,701,630 43,445,400

Net income 879,823 5,742,360 6,622,183

Cash distributions to partners (911,062) (8,199,557) (9,110,619)
------------ ------------ ------------

Balance, December 31, 1999 (3,287,469) 44,244,433 40,956,964

Net income (loss) 683,539 (8,317,954) (7,634,415)

Cash distributions to partners (844,399) (7,599,590) (8,443,989)
------------ ------------ ------------

Balance, December 31, 2000 $ (3,448,329) $ 28,326,889 $ 24,878,560
============ ============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

2000 1999 1998
---- ---- ----

OPERATING ACTIVITIES:
Net income (loss) $ (7,634,415) $ 6,622,183 $ 3,456,655
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 20,102,157 5,254,386 7,729,294
Gain on sale of aircraft inventory -- (69,700) (133,285)
Bad debt expense 85,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables (2,614) 6,559 (5,934)
Decrease (increase) in other assets (11,080) 1,957 1,779
Increase in payable to affiliates 69,092 71,119 12,362
Increase in accounts payable and
accrued liabilities 87,864 61,618 138,615
Decrease in security deposits -- -- (50,000)
Increase in deferred income 1,697,298 1,697,298 1,697,298
------------ ------------ ------------

Net cash provided by operating activities 14,393,302 13,645,420 12,846,784
------------ ------------ ------------

INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory -- 69,700 133,285
------------ ------------ ------------

Net cash provided by investing
activities -- 69,700 133,285
------------ ------------ ------------

FINANCING ACTIVITIES:
Principal payments on notes payable (5,543,633) (5,042,969) (4,587,519)
Capital redemptions -- -- (3,072)
Cash distributions to partners (8,443,989) (9,110,619) (20,748,879)
------------ ------------ ------------

Net cash used in financing activities (13,987,622) (14,153,588) (25,339,470)
------------ ------------ ------------

CHANGES IN CASH AND CASH
EQUIVALENTS 405,680 (438,468) (12,359,401)

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 18,789,625 19,228,093 31,587,494
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 19,195,305 $ 18,789,625 $ 19,228,093
============ ============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2000

1. Accounting Principles and Policies

Accounting Method - Polaris Aircraft Income Fund II, A California Limited
Partnership (PAIF-II or the Partnership), maintains its accounting records, and
prepares its financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates. The most significant estimates
with regard to these financial statements are related to the projected cash
flows analysis in determining the fair value of aircraft held for lease.

Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and Cash Equivalents are stated at cost, which
approximates fair value.

Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 30 years from the date of manufacture or the end
of the remaining lease term beyond the 30 year life. Depreciation in the year of
acquisition was calculated based upon the number of days that the aircraft were
in service.

The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life. For any downward
adjustment in estimated residual value or decrease in the projected remaining
economic life, the depreciation expense over the projected remaining economic
life of the aircraft will be increased.

If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, as discussed in Note 3, measurement of an impairment loss will
be based on the "fair value" of the asset as defined in the statement.

Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as discussed above.

Aircraft Inventory - Aircraft held in inventory for sale are reflected at the
lower of depreciated cost or estimated net realizable value. Proceeds from sales
are applied against inventory until the book value is fully recovered. The
remaining book value of the inventory was recovered in 1997. Proceeds in excess
of inventory net book value were recorded as revenue when received.

Operating Leases - The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases. Due to the fact that the Partnership received greater payments in the
beginning of the lease than it does at the end of the lease, this has resulted
in deferred income on the balance sheet.

Maintenance Reserves - The Partnership received maintenance reserve payments
from certain of its lessees that were to be reimbursed to the lessee or applied
against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.

Maintenance reserve payments were recognized when received and balances
remaining at the termination of the lease, if any, were used by the Partnership
to offset future maintenance expenses or recognized as revenue.

Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.

Net Income Per Limited Partnership Unit - Net income per Limited Partnership
unit is based on the Limited Partners' share of net income or loss, allocated in
accordance with the Partnership Agreement, and the number of units outstanding
of 499,973 for the years ended December 2000, 1999 and 1998.

Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.

Receivables - The Partnership records an allowance for credit losses for certain
impaired receivables.

2000 1999
---- ----
Allowance for credit losses,
beginning of year $ -- $ --

Allowance for credit losses 85,000 --

Allowance for credit losses, -------- --------
end of year $ 85,000 $ --
======== ========

New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value and specifies the accounting for
changes in fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," to defer the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued Statement of
Financial Accounting Standard No. 138 ("SFAS 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133." SFAS 138 amends the accounting and reporting standards of
SFAS 133 for certain derivative instruments and certain hedging activities. Due
to the fact that the Partnership does not utilize any derivative instruments,
these pronouncements are not expected to have an impact on the Partnership's
balance sheet or statement of operations.

2. Organization and the Partnership

The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2010.
Upon organization, both the General Partner and the initial Limited Partner
contributed $500. The Partnership recognized no profits or losses during the
periods ended December 31, 1985 and 1984. The offering of Limited Partnership
units terminated on December 31, 1986, at which time the Partnership had sold
499,997 units of $500, representing $249,998,500. All partners were admitted to
the Partnership on or before December 1, 1986. During January 1998, 24 units
were redeemed by the Partnership in accordance with section 18 of the Limited

Partnership agreement. At December 31, 2000, there were 499,973 units
outstanding, net of redemptions.

Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Notes 10 and 11.

3. Aircraft

At December 31, 2000, Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of 14 used commercial jet aircraft that were leased to Trans World
Airlines, Inc. (collectively the "Current Leases") and spare parts inventory (as
discussed in Note 8) out of its original portfolio of 30 aircraft, which were
acquired, leased or sold as discussed below. All aircraft acquired from an
affiliate were purchased within one year of the affiliate's acquisition at the
affiliate's original price paid. The aircraft leases are net operating leases,
requiring the lessees to pay all operating expenses associated with the aircraft
during the lease term. While the leases require the lessees to comply with
Airworthiness Directives (ADs) which have been or may be issued by the Federal
Aviation Administration and require compliance during the lease term, in certain
of the leases the Partnership has agreed to share in the cost of compliance with
ADs. Trans World Airlines, Inc (TWA) may offset up to an additional $1.7 million
against rental payments, subject to annual limitations, over the remaining lease
terms. The leases generally state a minimum acceptable return condition for
which the lessee is liable under the terms of the lease agreement. In the event
of a lessee default, these return conditions are not likely to be met. Certain
leases also provide that, if the aircraft are returned at a level above the
minimum acceptable level, the Partnership must reimburse the lessee for the
related excess, subject to certain limitations. The related liability to these
lessees, if any, cannot currently be estimated and therefore is not reflected in
the financial statements.

The following table describes the Partnership's aircraft portfolio at December
31, 2000 in greater detail:

Year of
Aircraft Type Serial Number Manufacture
- ------------- ------------- -----------
McDonnell Douglas DC-9-30 47027 1967
McDonnell Douglas DC-9-30 47107 1968
McDonnell Douglas DC-9-30 47108 1968
McDonnell Douglas DC-9-30 47135 1968
McDonnell Douglas DC-9-30 47137 1968
McDonnell Douglas DC-9-30 47174 1968
McDonnell Douglas DC-9-30 47249 1968
McDonnell Douglas DC-9-30 47251 1968
McDonnell Douglas DC-9-30 47324 1969
McDonnell Douglas DC-9-30 47343 1969
McDonnell Douglas DC-9-30 47345 1969
McDonnell Douglas DC-9-30 47357 1969
McDonnell Douglas DC-9-30 47411 1969
McDonnell Douglas DC-9-30 47412 1969

14 McDonnell Douglas DC-9-30 - Initially there were 17 McDonnell Douglas DC-9-30
and one McDonnell Douglas DC-9-40 which were acquired for $122,222,040 during
1986 and leased to Ozark Air Lines, Inc. (Ozark). In 1987, Trans World Airlines,
Inc. (TWA) merged with Ozark and assumed the leases. The leases were modified
and extended in 1991 prior to TWA's 1995 bankruptcy filing. Two of the aircraft
had a lease expiration date of February 1998 and two other aircraft had a lease

expiration date of November 1998. These four aircraft were sold to Triton
Aviation Services II LLC in June 1997. The leases for 11 of the aircraft that
previously had lease expiration dates in 1998 were extended until November 2004.
The leases for three of the aircraft that previously had lease expiration dates
in 1998 were extended in February 1997 for eight years until February 2005.

On January 10, 2001, TWA filed a voluntary petition in the United States
Bankruptcy Court of the District of Delaware (the "Bankruptcy Court") for
reorganization relief under Chapter 11 of the Bankruptcy Code. One day prior to
filing its bankruptcy petition, TWA entered into an Asset Purchase Agreement
(the "Purchase Agreement") with American Airlines, Inc. ("American") that
provided for the sale to American of substantially all of TWA's assets. On
February 28, 2001, American presented the General Partner with a draft letter of
intent reflecting a proposal to take assignment of eleven of the fourteen
Current Leases on modified terms and conditions as part of the TWA leased assets
that American wishes to acquire. The General Partner has evaluated American's
proposal and has determined that accepting such a proposal would be in the best
interests of the Partnership. The TWA Bankruptcy filing and American's proposal
are discussed in Note 14.

The following is a schedule by year of future minimum rental revenue under
American's proposal:

Year Amount
---- ------

2001 $ 6,264,800
2002 4,058,800
2003 1,772,400
-----------

Total $ 2,096,000
===========

Future minimum rental payments may be offset or reduced by future costs as
described above.

As discussed in Note 1, the Partnership periodically reviews the estimated
realizability of the residual values at the projected end of each aircraft's
economic life based on estimated residual values obtained from independent
parties which provide current and future estimated aircraft values by aircraft
type. The Partnership's future earnings are impacted by the net effect of the
adjustments to the carrying values of the aircraft (which has the effect of
decreasing future depreciation expense) and the downward adjustments to the
estimated residual values (which has the effect of increasing future
depreciation expense).

The Partnership recognized an impairment loss on aircraft held and used by the
Partnership aggregating approximately $15 million, or $30.09 per limited
Partnership unit as increased depreciation expense in 2000. The impairment loss
was the result of the TWA bankruptcy and the modified lease terms proposed by
American as discussed in Note 14, which constituted an event that required the
Partnership to review the aircraft carrying values pursuant to SFAS No. 121. In
determining the impairment loss, the Partnership estimated fair value based on
the present value of the estimated future net cash flows of the aircraft
(projected rental revenue, net of management fees, less projected maintenance
costs, if any, plus the estimated residual value) using the current incremental
borrowing rate as the discount rate. The Partnership recorded an impairment loss
to the extent that the carrying value exceeded the fair value. Management
believes the assumptions related to the fair value of impaired assets
represented the best estimates based on reasonable and supportable assumptions
and projections.

The General Partner evaluates, from time to time, whether the investment
objectives of the Partnership are better served by continuing to hold the
Partnership's remaining portfolio of Aircraft or marketing such Aircraft for
sale. This evaluation takes into account the current and potential earnings of
the Aircraft, the conditions in the markets for lease and sale and future
outlook for such markets, and the tax consequences of selling rather than
continuing to lease the Aircraft. The General Partner has had discussions with
third parties regarding the possibility of selling some or all of these
Aircraft. While such discussions may continue, and similar discussions may occur
again in the future, there is no assurance that such discussions will result in
the Partnership receiving a purchase offer for all or any of the Aircraft which
the General Partner would regard as acceptable.

4. Sale of Aircraft

adjustments, the net adjusted sales price recorded by the Partnership, including
the Promissory Note, was $13,205,140.

5. Ron Wallace Litigation Settlement

Ron Wallace v. Polaris Investment Management Corporation, et al. - On or about
June 18, 1997, a purported class action entitled Ron Wallace v. Polaris
Investment Management Corporation, et al. was filed on behalf of the unitholders
of Polaris Aircraft Income Funds II through VI in the Superior Court of the
State of California, County of San Francisco. The complaint names each of
Polaris Investment Management Corporation (PIMC), GE Capital Aviation Services,
Inc. (GECAS), Polaris Aircraft Leasing Corporation, Polaris Holding Company,
General Electric Capital Corporation, certain executives of PIMC and GECAS and
John E. Flynn, a former PIMC executive, as defendants. The complaint alleges
that defendants committed a breach of their fiduciary duties with respect to the
Sale Transaction involving the Partnership as described in Note 4, under the
caption "Sale of Aircraft -- Sale of Aircraft to Triton." On September 2, 1997,
an amended complaint was filed adding additional plaintiffs, and on December 18,
1997, the plaintiffs filed a second amended complaint asserting their claims
derivatively.

6. Disassembly of Aircraft

In an attempt to maximize the economic return from the remaining six aircraft
formerly leased to Pan Am, the Partnership entered into an agreement with
Soundair, Inc. (Soundair) in October 1992, for the disassembly and sale of
certain of the Partnership's aircraft. The Partnership has incurred the cost of
disassembly and received the proceeds from the sale of such parts, net of
necessary overhaul expenses, and commissions paid to Soundair. The Partnership
received net proceeds from the sale of aircraft inventory of $-0-, $69,700 and
$133,285 during 2000, 1999 and 1998, respectively. There was no such sale in
2000. The net book value of the Partnership's aircraft inventory was reduced to
zero during 1997.

7. TWA Lease Extension

GECAS, on behalf of the Partnership, negotiated with TWA for the acquisition of
noise-suppression devices, commonly known as "hushkits", for the 14 Partnership
aircraft currently on lease to TWA, as well as other aircraft owned by
affiliates of PIMC and leased to TWA. The 14 aircraft that received hushkits
were designated by TWA. The hushkits recondition the aircraft so as to meet
Stage 3 noise level restrictions. Hushkits were installed on 11 of the

Partnership's aircraft during 1996 and the leases for these 11 aircraft were
extended for a period of eight years until November 2004. Hushkits were
installed on 3 of the Partnership's aircraft during 1997 and the leases for
these 3 aircraft were extended for a period of eight years until February 2005.

The aggregate cost of the hushkit reconditioning for the 11 aircraft was
$17,516,722, or approximately $1.6 million per aircraft, which was capitalized
by the Partnership during 1996. The Partnership paid $3.3 million of the
aggregate hushkit cost and the balance of $14,216,722 was financed by the
hushkit manufacturer over 50 months at an interest rate of approximately 10% per
annum.

The aggregate cost of the hushkit reconditioning completed in February 1997 for
the 3 remaining aircraft was $4,784,633, or approximately $1.6 million per
aircraft, which was capitalized by the Partnership during 1997. The Partnership
paid $900,000 of the aggregate hushkit cost and the balance of $3,884,633 was
financed by UT Finance Corporation (UT Finance), a wholly owned subsidiary of
United Technologies Corporation, of which a division is Pratt and Whitney Group,
the hushkit manufacturer, over 50 months at an interest rate of approximately
10% per annum. Cash paid for interest expense on all the loans was $336,367,
$837,033 and $1,292,480 in 2000, 1999 and 1998, respectively. Total outstanding
debt at December 31, 2000 was $493,388.

The rent payable by TWA under the leases was increased by an amount sufficient
to cover the monthly debt service payments on the hushkits and fully repay,
during the term of the TWA leases, the amount borrowed. The loans from the
hushkit manufacturer are non-recourse to the Partnership and secured by a
security interest in the lease receivables. The following, is a schedule of note
principal payments due under the loans:

Year Amount
---- ------

2001 $ 493,388
---------

Total $ 493,388
=========

8. Viscount Restructuring Agreement and Default

On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. The
Compromise and Stipulation provided, among other things, that Viscount rejected
the lease of the Partnership's aircraft. The rejection of the lease gave rise to
a pre-petition unsecured claim in Viscount's bankruptcy for breach of contract
damages. Notwithstanding Viscount's rejection of the Partnership's aircraft
lease, Viscount continued to possess and use the Partnership's engine and
refused to return various aircraft parts removed from the Partnership's
aircraft.

and a lien against the aircraft in the amount of $720,000. Another third-party
vendor, who claims it provided inspectors, is claiming $185,000 from Tucson
Aerospace. On May 22, 1996, First Security Bank, National Association (formerly
known as First Security Bank of Utah, National Association) (FSB), as
owner/trustee, filed suit in the Superior Court of Arizona in Pima County, to
recover the airframe from BAE Aviation, Inc. and certain creditors alleging
mechanics liens and to determine the validity of the claimed liens.

Pursuant to a stipulated order of the Superior Court entered on July 9, 1996,
FSB filed a bond in the penal sum of $1,371,000 for the benefit of the
lienholders, who subsequently released the aircraft to the Partnership on July
11, 1996 and filed a claim against the bond. FSB filed a motion for summary
judgment on all claims raised by the claimants in the counterclaim. The Superior
Court granted the motion and entered judgment on October 30, 1998 dismissing the
counterclaim and exonerating the bond. The Court has stayed exoneration of the
bond pending appeal by the claimants. The Court has denied the claimants'
subsequent motion for a new trial seeking reconsideration. FSB filed a motion
seeking recovery of its attorneys' fees and costs incurred in defending the
litigation, and the Court set a hearing on the motion for March 8, 1999.
Subsequently, FSB and the claimants agreed to settle this claim for an agreed
judgement of $159,374 in attorney's fees to be paid to FSB. The settlement
agreement is subject to approval by the Court. The claimants are appealing the
Court's rulings.

On July 12, 1996, GECAS and FSB filed a motion in Viscount's bankruptcy case to
recover the engines and parts leased in connection with the Partnership's
aircraft. GECAS and FSB asserted that these engines and parts should have been
delivered to FSB pursuant to the Compromise and Stipulation. Viscount paid to
the Partnership $10,000 for the use of the engine during the month of August
1996, and continued through August 1996 to pay maintenance reserves pursuant to
the lease terms.

The Partnership evaluated the airframe and engines previously leased to Viscount
for potential re-lease or sale and estimated that maintenance and refurbishment
costs aggregating approximately $1.6 million will be required to re-lease the
airframe and engines. Alternatively, a sale of the airframe and engines would
likely be made on an "as is, where is" basis, without the Partnership incurring
substantial maintenance costs. The aircraft was sold in January 1997 for
$660,000.

in operating expense in the Partnership's 1999 and 1998 statement of operations,
respectively. In 1998, the Partnership revised its estimate of legal costs and
reduced the accrual for legal costs by $68,753.

9. Claims Related to Lessee Defaults

In May 1998, Braniff's bankrupt estate made a $200,000 payment in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Investment
Management Corporation, of which $15,385 was allocated to the Partnership based
on its pro rata share of the total claims. This amount is included in Lessee
settlement and other income. On January 20, 1999, Braniff's bankrupt estate made
an additional $84,000 payment in respect of the unsecured claims of the
Partnership and other affiliates of Polaris Investment Management Corporation,
of which $6,462 was allocated to the Partnership based on its pro rata share of
the total claims. This amount is included in Lessee settlement and other income.
On January 16, 2001, Braniff's bankrupt estate made a $110,890 payment in
respect of the unsecured claims of the Partnership and other affiliates of
Polaris Investment Management Corporation, of which $8,530 was allocated to the
Partnership based on its pro rata share of the total claims.

10. Related Parties

Under the Limited Partnership Agreement (Partnership Agreement), the Partnership
paid or agreed to pay the following amounts to PIMC and/or its affiliates in
connection with services rendered:

a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases or 2% of gross rental revenues with respect
to full payout leases of the Partnership, payable upon receipt of the
rent. In 2000, 1999 and 1998, the Partnership paid management fees to
PIMC of $420,000, $420,000, and $420,000, respectively. Management fees
payable to PIMC at December 31, 2000 and 1999 were $275,734 and
$209,266 respectively.

b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets.
In 2000, 1999 and 1998, $390,268, $285,463, and $377,665, respectively,
were reimbursed by the Partnership to PIMC for administrative expenses.
Administrative reimbursements of $19,600 and $16,976 were payable at
December 31, 2000 and 1999, respectively. Reimbursements for
maintenance and remarketing costs of $-0-, $5,803, and $483,221 were
paid by the Partnership in 2000, 1999 and 1998, respectively.

c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement. After the
Partnership has sold or disposed of aircraft representing 50% of the
total aircraft cost, gains from the sale or other disposition of
aircraft are generally allocated first to the General Partner until
such time that the General Partner's capital account is equal to the
amount to be distributed to the General Partner from the proceeds of
such sale or disposition.

d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after Limited Partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.

e. In the event that, immediately prior to the dissolution and termination
of the Partnership, the General Partner shall have a deficit balance in
its tax basis capital account, then the General Partner shall
contribute in cash to the capital of the Partnership an amount which is
equal to such deficit (see Note 11).

11. Partners' Capital

The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the Limited Partners
(see Note 10). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 13, varies from
income or loss calculated for tax purposes.

Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the General Partner and 90% to the Limited
Partners.

The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.

Had all the assets of the Partnership been liquidated at December 31, 2000 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be $(807,726) and
$56,598,225, respectively.

12. Income Taxes

Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the financial statements.

The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 2000 and 1999 are as
follows:

Reported Amounts Tax Basis Net Difference
---------------- --------- --------------

2000: Assets $ 31,992,732 $ 56,909,383 $(24,916,651)
Liabilities 7,114,172 1,118,884 5,995,288

1999: Assets $ 51,760,515 $ 59,381,146 $ (7,620,631)
Liabilities 10,803,551 6,572,029 4,231,522

13. Reconciliation of Net Book Income to Taxable Net Income (Loss)

The following is a reconciliation between net income (loss) per Limited
Partnership unit reflected in the financial statements and the information
provided to Limited Partners for federal income tax purposes:

For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----

Book net income (loss) per Limited
Partnership unit $(16.64) $ 11.49 $ 3.22
Adjustments for tax purposes represent
differences between book and tax
revenue and expenses:
Rental revenue 3.53 3.36 3.36
Management fee expense 0.13 0.71 (0.19)
Depreciation 34.08 2.81 (2.16)
Gain or loss on sale of aircraft or
inventory - (0.01) -
Other revenue and expense items - - (0.04)
------- ------- -------

Taxable net income (loss) per Limited
Partnership unit $ 21.10 $ 18.36 $ 4.19
======= ======= =======

The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.

For book purposes, rental revenue is generally recorded as it is earned. For tax
purposes, certain temporary differences exist in the recognition of revenue. For
tax purposes, management fee expense is accrued in the same year as the tax
basis rental revenue. Increases in the Partnership's book maintenance reserve
liability were recognized as rental revenue for tax purposes.

The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. The Partnership also periodically evaluates the ultimate
recoverability of the carrying values and the economic lives of its aircraft for
book purposes and, accordingly, recognized adjustments which increased book
depreciation expense. As a result, the current year tax depreciation expense is
less than the book depreciation expense. These differences in depreciation
methods result in book to tax differences on the sale of aircraft. In addition,
certain costs were capitalized for tax purposes and expensed for book purposes.

14. Subsequent Event

TWA Bankruptcy Filing
- ---------------------

On January 10, 2001, TWA filed a voluntary petition in the United States
Bankruptcy Court of the District of Delaware (the "Bankruptcy Court") for
reorganization relief under Chapter 11 of the Bankruptcy Code. One day prior to
filing its bankruptcy petition, TWA entered into an Asset Purchase Agreement
(the "Purchase Agreement") with American Airlines, Inc. ("American") that
provided for the sale to American of substantially all of TWA's assets. Under
the terms of the Purchase Agreement, American's acquisition of TWA's assets is
subject to a number of conditions and is contingent upon American being the
prevailing bidder in an auction to be supervised by the Bankruptcy Court. The
Purchase Agreement provides that American may specify which contracts of TWA
(including aircraft leases) American wishes to acquire. In addition to entering
into the Purchase Agreement with American, TWA also obtained a commitment from
American to fund up to $325,000,000 in debtor-in-possession financing which was
approved by the Bankruptcy Court. TWA is managing all of its property as

debtor-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy
Code. The Bankruptcy Court approved the sale to American on March 12, 2001 and
also approved additional debtor-in-possession financing being provided by
American.

American's Proposal
- -------------------

On February 28, 2001, American presented the General Partner of the Partnership
("General Partner") with a draft letter of intent reflecting a proposal to take
assignment of eleven of the fourteen Current Leases on modified terms and
conditions. The proposal by American is subject, among other things, to American
being successful in its bid to acquire substantially all the assets of TWA,
including receipt of all necessary governmental approvals required for American
to complete that acquisition. The modified terms and conditions proposed by
American are substantially less favorable to the Partnership than the terms and
conditions specified in the Current Leases. In particular, rather than returning
the Aircraft at the currently scheduled expiry date under the Current Leases,
American would return each Aircraft at the time when such Aircraft requires a
heavy maintenance check of the airframe, provided that American would agree that
the aggregate average number of months for which all eleven Aircraft are on
lease to American would not be less than 22 months from and after March 12,
2001. In addition, American would reduce the rental rate for each of the
Aircraft to $40,000 per month. Further, at lease expiry, American would be
required to return each airframe in a "serviceable" condition, rather than being
required to meet the more stringent maintenance requirements of the Current
Leases. Finally, American would be required to return the installed engines on
each Aircraft with a target level of average cycle life remaining to replacement
for all life limited parts of 25%. If the average cycle life remaining on the
installed engines on an Aircraft is below the 25% target level, a financial
adjustment would be payable by American to the Partnership (but no payment would
be owed by the Partnership to American if cycle life remaining at return exceeds
the target level).

General Partner's Decision to Accept
- ------------------------------------

The General Partner has evaluated American's proposal to take an assignment of
the Assumed Leases and has determined that accepting such a proposal would be in
the best interests of the Partnership.

Based on this determination, the General Partner is proceeding to negotiate
definitive documentation with American and TWA reflecting the terms of
American's proposal. If American's proposal proceeds on the basis outlined
above, the General Partner would repay from cash reserves, the remaining
principal balance on the Hushkit Debt. The General Partner would also seek to
recover possession of the three Aircraft under the Rejected Leases and market
such Aircraft for sale, subject to an informal arrangement by which one of the
three aircraft will continue to be used by TWA on a short term basis and will
only be available for sale when returned.

Because American's proposal to the Partnership is subject to several important
conditions and contingencies, including, among others, receipt of approval from
the Bankruptcy Court, American being successful in its bid to purchase
substantially all of the assets of TWA, and American receiving all regulatory
approvals required to consummate that purchase, there can be no assurance that
the transactions contemplated by such proposal will be completed or that the
terms of the proposal will not be changed in one or more material respects prior
to completion.

Effect of TWA Bankruptcy
- ------------------------

The TWA bankruptcy is expected to have a material adverse effect on the
Partnership's results of operations and financial position. Assuming that the
transaction with American is completed on the terms described above, aggregate
rentals to be received by the Partnership in 2001 will be reduced from
approximately $14.3 million to approximately $6.2 million, and the average lease
term for the eleven Aircraft that remain on lease will be reduced from 47 to 24
months remaining at December 31, 2000. Three of the Partnership's Aircraft,
which would have been expected to generate aggregate rentals in 2001 under the
terms of the Current Leases of approximately $3.0 million, are now expected to
be marketed for sale at scrap value (which the General Partner believes will be
materially less than the aggregate rental amount in 2001).
`
The Partnership made a cash distribution, to Limited Partners, of $2,249,879 or
$4.50 per Limited Partnership unit, and $249,986 to the General Partner on
January 15, 2001. The amount and timing of the Partnership's distributions of
cash available for allocation depends upon many factors, including whether the
transaction with American is consummated and the timing of the rental payments
to be made by TWA prior to such consummation. The General Partner has determined
that the amount of cash available for distribution for the quarter ending March
31, 2001 will not be materially different from the corresponding quarter in

2000, but the General Partner expects the amount of cash available for
distribution for the subsequent quarters in 2001 to be materially less.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Polaris Aircraft Income Fund II, A California Limited Partnership (PAIF-II or
the Partnership) has no directors or officers. Polaris Holding Company (PHC) and
its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and
Polaris Investment Management Corporation (PIMC), the General Partner of the
Partnership (collectively Polaris), restructured their operations and businesses
(the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into
a services agreement dated as of July 1, 1994 (the Services Agreement) with GE
Capital Aviation Services, Inc. (GECAS), a Delaware corporation which is a
wholly owned subsidiary of General Electric Capital Corporation, a New York
corporation (GE Capital). GE Capital has been PHC's parent company since 1986.
As subsidiaries of GE Capital, GECAS and PIMC are affiliates.

The officers and directors of PIMC are:

Name PIMC Title
--------------------------- ------------------------------------

Edwin Forti President; Director
Keith Helming Chief Financial Officer
Melissa Hodes Vice President; Director
Norman C. T. Liu Vice President; Director
Ray Warman Secretary
Robert W. Dillon Assistant Secretary

Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.

Mr. Forti, 50, assumed the position of President and Director of PIMC effective
May 19, 2000. Mr. Forti holds the position of Senior Vice President and Acting
Chief Risk Manager of GECAS, having previously held the position of Senior Vice
President and Manager - Structured Finance Risk. Prior to joining GECAS, Mr
Forti was the Senior Risk Manager with GE Capital Global Risk Management. Prior
to that, Mr. Forti held various positions with Chemical Bank.

Mr. Helming, 42, assumed the position of Chief Financial Officer of PIMC
effective October 1, 2000. Mr. Helming presently holds the positions of
Executive Vice President and Chief Financial Officer of GECAS. Mr. Helming has
been with General Electric Company (GE) and its subsidiaries since 1981. Prior
to joining GECAS, Mr. Helming served as the Senior Vice President of Finance at
GE Capital Fleet Services for three years. Prior to that, Mr. Helming was Chief
Financial Officer for GE Capital Global Consumer Finance U.K.

Ms. Hodes, 35, assumed the position of Director of PIMC effective May 19, 2000.
Ms. Hodes presently holds the position of Senior Vice President, Financial
Planning and Analysis for GECAS. Ms. Hodes has been with the General Electric
Company (GE) and its subsidiaries since 1987. Prior to joining GECAS, Ms. Hodes
held various financial management positions with GE Capital Card Services, GE
Audit Staff and GE Power Systems.

Mr. Liu, 43, assumed the position of Vice President of PIMC effective May 1,
1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the
position of Executive Vice President - Marketing and Structured Finance of
GECAS, having previously held the position of Executive Vice President - Capital
Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management

positions in corporate Business Development and in Syndications and Leasing for
TIFC. Mr. Liu previously held the position of managing director of Kidder,
Peabody & Co., Incorporated.

Mr. Warman, 52, assumed the position of Secretary of PIMC effective March 23,
1998. Mr. Warman has served as a GECAS Senior Vice President and Associate
General Counsel since March 1996, and for 13 years theretofore was a partner,
with an air-finance and corporate practice of the national law firm of Morgan,
Lewis & Bockius LLP.

Mr. Dillon, 59, held the position of Vice President - Aviation Legal and
Insurance Affairs, from April 1989 to October 1997. Previously, he served as
General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994,
Mr. Dillon assumed the position of Assistant Secretary of PIMC. Mr. Dillon
presently holds the position of Senior Vice President and Associate General
Counsel of GECAS.

Certain Legal Proceedings:

On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et. al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. The Partnership is not
named as a defendant in this action. Plaintiff alleges claims of tort, breach of
fiduciary duty in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning
the inducement and solicitation of purchases arising out of the public offering
of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages,
attorney's fees, interest, costs and general relief.

On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. The Partnership is not named
as a defendant in this action. Plaintiffs allege claims of tort, breach of
fiduciary duty, in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in
connection with the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.

In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. The Partnership is not named as a
defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary
duty, in tort, contract and quasi-contract, violation of sections of the
Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection
with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs
seek compensatory damages, attorneys' fees, interest, costs and general relief.

In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities. Incorporated, et al. was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint named as
defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or
about January 18, 1996, plaintiff filed a First Supplemental and Amending
Petition adding defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and

quasi-contract, violation of sections of the Louisiana Blue Sky Law and
violation of the Louisiana Civil Code in connection with the public offering of
Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages,
attorneys' fees, interest, costs and general relief.

On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Fund IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.

In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of section of the Louisiana Blue Sky Law and violation
of the Louisiana Civil Code concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund
III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.

On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
concerning the inducement and solicitation of purchases arising out of the
public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek
compensatory damages, attorneys' fees, interest, costs and general relief.

On or about May 7, 1996, a petition entitled Charles Rich. et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiffs allege claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Funds
III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief.

On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.

On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as

defendants General Electric Company and General Electric Capital Corporation.
The Partnership is not named as a defendant in this action. Plaintiff alleges
claims of tort concerning the inducement and solicitation of purchases arising
out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks
compensatory damages, attorneys' fees, interest, costs and general relief.

Other Proceedings - Part I, Item 3 discusses certain other actions arising out
of certain public offerings, including that of the Partnership, to which both
the Partnership and its general partner are parties.

Item 11. Executive Compensation

PAIF-II has no directors or officers. PAIF-II is managed by PIMC, the General
Partner. In connection with management services provided, management and
advisory fees of $420,000 were paid to PIMC in 2000 in addition to a 10%
interest in all cash distributions as described in Note 10 to the financial
statements (Item 8).

Item 12. Security Ownership of Certain Beneficial Owners and Management

a) No person owns of record, or is known by PAIF-II to own beneficially,
more than five percent of any class of voting securities of PAIF-II.

b) The General Partner of PAIF-II owns the equity securities of PAIF-II as
set forth in the following table:

Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
- -------- ---------------- -------------------- --------

General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
cash available from operations, and a
1% interest in net income or loss

c) There are no arrangements known to PAIF-II, including any pledge by any
person of securities of PAIF-II, the operation of which may at a
subsequent date result in a change in control of PAIF-II.

Item 13. Certain Relationships and Related Transactions

None.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

1. Financial Statements.

The following are included in Part II of this report:
Page No.
--------

Report of Independent Public Accountants 21
Balance Sheets 22
Statements of Operations 23
Statements of Changes in Partners' Capital (Deficit) 24
Statements of Cash Flows 25
Notes to Financial Statements 26

2. Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter ended December 31,
2000.

3. Exhibits required to be filed by Item 601 of Regulation S-K.

27. Financial Data Schedule (in electronic format only).

4. Financial Statement Schedules.

All financial statement schedules are omitted because they are not
applicable, not required or because the required information is
included in the financial statements or notes thereto.

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.

POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner

March 30, 2001 By: /S/ Edwin Forti
- --------------------------- --------------------------
Date Edwin Forti, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date

/S/Edwin Forti President and Director of Polaris March 30, 2001
- -------------- Investment Management Corporation, --------------
(Edwin Forti) General Partner of the Registrant

/S/Keith Helming Chief Financial Officer of Polaris March 30, 2001
- ---------------- Investment Management Corporation, --------------
(Keith Helming) General Partner of the Registrant

/S/Melissa Hodes Vice President and Director of Polaris March 30, 2001
- ---------------- Investment Management Corporation, --------------
(Melissa Hodes) General Partner of the Registrant

/S/Norman C. T. Liu Vice President and Director of Polaris March 30, 2001
- ------------------- Investment Management Corporation, --------------
(Norman C. T. Liu) General Partner of the Registrant