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, 2001

[ ] 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, 2001.

Documents incorporated by reference: None

This document consists of 40 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, Airplanes Group, together with its
subsidiaries (APG), which 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, 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 TWA Airlines LLC (TWA LLC) as of December 31, 2001 (the
"Current Leases"). See additional discussion of TWA LLC and of Trans World
Airlines, Inc. (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 LLC McDonnell Douglas DC-9-30 10 Various (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 (the "General Partner") with a draft
letter of intent reflecting a proposal to take assignment of eleven of the
fourteen then existing leases (collectively the "Previous Leases") on
modified terms and conditions as part of the TWA leased assets that
American wished to acquire (collectively the "Assumed Leases"). The
General Partner evaluated American's proposal and determined that
accepting such a proposal was in the best interests of the Partnership.
The lease term, rental and maintenance terms of the Assumed Leases were
changed materially under American's proposal from the terms of the
Previous Leases. In particular, the monthly rental rate for each Aircraft

has been reduced from $85,000 to $40,000, and the reduced rate was made
effective as of March 12, 2001 by a rent credit granted to TWA LLC for the
amount of rent above $40,000 previously paid by TWA in respect of the
period from and after March 12, 2001. In addition, the term of each
Assumed Lease is scheduled to expire at the time of the next scheduled
heavy maintenance check of the applicable Aircraft, compared to the
scheduled expiry dates of November 27, 2004 and February 7, 2005 under the
Previous Leases, provided 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. The maintenance condition of the
aircraft to be met at lease expiry was eased in favor of TWA LLC, as
compared to the corresponding conditions required under the Previous
Leases. One of the eleven aircraft was returned in 2001 and was being
remarketed as of December 31, 2001.

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 ("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 noise restrictions. Hushkits have been installed on the
remaining Partnership aircraft. Certain ADs applicable to the DC-9-30 have been
issued to prevent fatigue cracks and control corrosion as discussed in the
Industry Update section of Item 7.

ITEM 2. PROPERTIES

At December 31, 2001, the Partnership owned ten DC-9-30 aircraft leased to TWA
LLC, one DC-9-30 aircraft held for sale on the ground in Arizona, and spare
parts inventory out of its original portfolio of 30 aircraft. All leases are
operating leases. 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 DC-9-30 aircraft to
Triton Aviation Services II LLC in May 1997 and June 1997. The Partnership sold
three DC-9-30 aircraft to Aeroturbine, Inc. in October 2001.

The following table describes the Partnership's aircraft portfolio at December
31, 2001 in greater detail:

YEAR OF CYCLES
AIRCRAFT TYPE SERIAL NUMBER MANUFACTURE AS OF 12/31/01
- ------------- ------------- ----------- --------------

McDonnell Douglas DC-9-30 47027 1967 89,928
McDonnell Douglas DC-9-30 47107 1968 88,774
McDonnell Douglas DC-9-30 47135 1968 85,851
McDonnell Douglas DC-9-30 47137 1968 85,637
McDonnell Douglas DC-9-30 47249 1968 91,603
McDonnell Douglas DC-9-30 47251 1968 89,722
McDonnell Douglas DC-9-30 47343 1969 88,518
McDonnell Douglas DC-9-30 47345 1969 86,860
McDonnell Douglas DC-9-30 47357 1969 83,335
McDonnell Douglas DC-9-30 47411 1969 84,396
McDonnell Douglas DC-9-30 47412 1969 83,502

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 of 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 2000 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, Wells Fargo Bank Northwest, National Association (f/k/a First
Security Bank, National Association), as owner trustee ("FSB"), 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 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 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 on January 31, 2001, affirmed

the grant of summary judgement in favor of FSB, GECAS and the surety and against
the Claimants. The Court granted the request by FSB et al for an award of
attorney's fees for the appeal. The time for Claimants to seek reconsideration
of the decision by the Court of Appeals or review by the Supreme Court of
Arizona expired without any filing. This finalized the award of summary judgment
in favor of FSB et al and resulted in exoneration of the Bond.

Counsel for FSB et al has previously been awarded legal fees against Claimants
in the amount of $159,374 for fees and costs associated with the trial court
proceedings, plus post-award interest. In addition, counsel was awarded legal
fees against Claimants at the appellate court level, in the amount of $27,800
fees and $2,239 costs. All fee and costs awards in favor of FSB et al were paid
in full. The litigation has now been fully resolved in favor of FSB et al in all
respects.

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.

On June 5, 2001, the remaining plaintiffs who did not ask the court to dismiss
their claims, Gerald and Judy Beckman, made a motion to retain the case on the
docket of the District Court of Harris County, Texas with respect to their
purported claims against all defendants except Prudential Insurance Company of
America and James J. Darr. On June 27, 2001, the Court entered a docket control
order providing for a schedule for discovery and a trial date of December 3,
2001. On October 17, 2001, the remaining plaintiffs entered into a settlement
agreement with 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, and General Electric Capital Corporation. The
Partnership did not contribute to the settlement payments and has no further
liability in respect of such matter.

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) PAIF-II's 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, 2001
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Limited Partnership Interest: 13,239

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 2001
and 2000 totaled $11,399,384 and $7,599,590, respectively. Cash
distributions per Limited Partnership unit were $22.80 and $15.20 in
2001 and 2000, respectively.

ITEM 6. SELECTED FINANCIAL DATA

FOR THE YEARS ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
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Revenues $ 10,034,851 $ 13,729,468 $ 13,559,480 $ 13,901,118 $ 17,609,635

Net Income (Loss) 4,325,509 (7,634,415) 6,622,183 3,456,655 4,469,336

Net Income (Loss)
Allocated to Limited
Partners 3,142,429 (8,317,954) 5,742,360 1,607,397 4,424,643

Net Income (Loss) per
Limited Partnership Unit 6.29 (16.64) 11.49 3.22 8.85

Cash Distributions per
Limited Partnership
Unit 22.80 15.20 16.40 37.35 28.70

Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* 0.00 1.46** 16.40 37.35 28.70

Total Assets 19,794,199 31,992,732 51,760,515 57,461,885 77,546,425

Partners' Capital 16,538,087 24,878,560 40,956,964 43,445,400 60,740,696

* 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.

** The portion of 2000 distributions representing a return of capital has been
restated to reflect that during 2000 total cumulative distributions, per unit,
reached $500, the initial capital contribution per unit, such that all further
distributions would be considered a return on capital.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we identified the most critical
accounting principles upon which our financial reporting depends. We determined
the critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to lease revenue recognition,
depreciation policies, and valuation of aircraft. We state these accounting
policies in the notes to the financial statements and in relevant sections in
this discussion and analysis.

BUSINESS OVERVIEW

At December 31, 2001, Polaris Aircraft Income Fund II (PAIF-II or the
Partnership) owned a portfolio of 11 used McDonnell Douglas DC-9-30 commercial
jet aircraft (DC-9-30), and spare parts inventory out of its original portfolio
of 30 aircraft. Ten of these aircraft were on lease to TWA Airlines, LLC (TWA
LLC) (collectively the "Current Leases"). The one remaining DC-9-30 aircraft was
being stored in Arizona and was subsequently sold to Amtec in February 2002. 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 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. The Partnership sold three
DC-9-30 aircraft to Aeroturbine, Inc. in October 2001 that resulted in neither a
net gain nor loss to the Partnership.

REMARKETING UPDATE

PARTNERSHIP OPERATIONS

The Partnership reported net income of $4,325,509, or $6.29 per Limited
Partnership unit for the year ended December 31, 2001, compared to a net loss of
$7,634,415, or $16.64 per Limited Partnership unit for the year ended December
31, 2000, and a net income of $6,622,183, or $11.49 per Limited Partnership unit
for the year ended December 31, 1999. 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 increase in net income in 2001 is primarily due to a decrease in
depreciation expense due to impairment charges in 2000, management fees,
interest expense, and bad debt expense, and an increase in other income,
partially offset by decreases in rental and interest income and increases in
legal, operating and administration and other expenses.

Rental income decreased in 2001 as compared to 2000 primarily due to the lower
lease rates and fewer aircraft on lease as a result of the TWA bankruptcy as
discussed further in Note 6. Rental income in 2000 was the same as in 1999 as no
changes in the leases took place during those periods.

Interest income decreased in 2001 as compared to 2000, primarily due to lower
interest rates and lower average cash reserves. 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.

Gain on sale of aircraft inventory decreased in 2001 and 2000, as compared to
1999. In 1999, $69,700 was received from the sale of inventoried parts. There
were no such sales in 2000 or 2001.

Other income increased in 2001, as compared to 2000 and 1999, primarily due to
the receipt of default interest from TWA resulting from late rental payments
subsequent to the TWA bankruptcy filing as discussed further in Note 6.

Depreciation expense decreased in 2001 as compared to 2000 primarily as a result
of $15 million of impairment expense recognized in 2000 while only $200,000 was
recognized in 2001 as discussed below. Also there were fewer aircraft being
depreciated in 2001 as a result of three aircraft being sold during the year.
Depreciation expense increased in 2000 as compared to 1999 primarily as a result
of impairment expense recognized in 2000 as discussed below.

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. 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 aggregating approximately $200,000, or
$0.41 per limited Partnership unit in 2001, and $15 million, or $30.09 per
limited Partnership unit in 2000 as increased depreciation expense as a result
of the TWA bankruptcy and the modified lease terms with TWA LLC. As discussed
below under "TWA Bankruptcy Filing and Transaction with American Airlines", the
Partnership decided to accept American's proposal to take assignment of eleven
of the fourteen existing leases on modified terms and conditions (collectively
the "Previous Leases"). This acceptance constituted an event that required the
Partnership to review the aircraft carrying values pursuant to Statement of
Financial Accounting Standards ("SFAS") 121. As a result of a review of the
Aircraft, future cash flows expected to be derived from the Aircraft and
projected lease terms were less than the carrying value of the Aircraft, and the
Partnership has recorded impairment losses as of December 31, 2000, and
September 30, 2001. Management believes the assumptions related to fair value of
impaired assets represented the best estimates based on reasonable and
supportable assumptions and projections.

Management fees due to the General Partner decreased in 2001 as compared to 2000
and 1999, due to lower rental rates from the modified lease terms.

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 $13,525, $333,665 and $834,791 in interest
expense on the amount borrowed to finance the hushkits during 2001, 2000 and
1999, respectively. The Hushkit Debt was fully repaid in 2001.

Bad debt expense decreased in 2001 as compared to 2000, and increased in 2000
compared to 1999, primarily due to the TWA Bankruptcy Filing. TWA subsequently
cured outstanding defaults on eleven of the fourteen Previous 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.

Operating expense increased in 2001 as compared to 2000 and 1999 primarily due
to the costs of inspecting and storing the aircraft between the time of their
return and the time of their sale.

Legal expense increased in 2001 as compared to 2000 and 1999, primarily due to
the costs incurred in connection with the TWA bankruptcy.

Administrative and other expenses increased in 2001 as compared to 2000, and
1999 primarily due to costs related to the TWA bankruptcy. This includes the
cost of auditing as well as additional printing and postage expenses.

LIQUIDITY AND CASH DISTRIBUTIONS

LIQUIDITY - The Partnership received all rent payments due in 2001 from the
lessee according to the modified terms of the Current Leases. As discussed below
under "TWA Bankruptcy Filing and Transaction with American Airlines", the
General Partner has filed administrative claims in the TWA bankruptcy proceeding
in an effort to recover (i) the fair value of TWA's actual use, if any, of these
three Aircraft during the 60-day period following TWA's filing of its bankruptcy
petition, and (ii) claims relating to these Aircraft for the period from March
12, 2001 (the expiration of the 60-day automatic stay period after the filing of
bankruptcy petition) to April 20, 2001, the date on which these Previous Leases
were rejected by TWA.

Through the time of the TWA bankruptcy filing, discussed below under "TWA
Bankruptcy Filing and Transaction with American Airlines", 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. During 2001 such reserves were reduced from $14
million down to $2.5 million due to reduced expectations of future cash
requirements. The Partnership's cash reserves will be monitored and may be
revised from time to time as further information becomes available.

CASH DISTRIBUTIONS - Cash distributions to Limited Partners were $11,399,384,
$7,599,590, and $8,199,557 in 2001, 2000, and 1999, respectively. Cash
distributions per Limited Partnership unit were $22.80, $15.20, and $16.40 in
2001, 2000 and 1999, 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 LLC; and payments generated from the aircraft
disassembly and sales proceeds.

TWA BANKRUPTCY FILING AND TRANSACTION WITH AMERICAN AIRLINES

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 on January 10, 2001. One day prior to filing
its bankruptcy petition, TWA entered into an Asset Purchase Agreement with
American that provided for the sale to American of substantially all of TWA's
assets and permitted American to exclude certain TWA contracts (including
aircraft leases) from the assets of TWA to be acquired by American. On February
28, 2001, American presented the General Partner of the Partnership ("General
Partner") with a written proposal to assume, on modified terms and conditions,
the Previous Leases applicable to eleven of the fourteen Aircraft. The General
Partner decided to accept American's proposal, although consummation of the
transactions with American remained subject to a number of contingencies,
including the approval of the Bankruptcy Court and other regulatory approvals.

On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, TWA LLC assumed the Previous Leases
applicable to eleven of the fourteen Aircraft, and simultaneously, such Previous
Leases were amended to incorporate modified terms (as so assumed and amended,
the "Assumed Leases"). The Assumed Leases are substantially less favorable to
the Partnership than the Previous Leases. In particular, the monthly rental rate
for each Aircraft was reduced from $85,000 to $40,000, and the reduced rate was
made effective as of March 12, 2001 by a rent credit granted to TWA LLC for the
amount of rent above $40,000 previously paid by TWA in respect of the period
from and after March 12, 2001. In addition, the term of each Assumed Lease is
scheduled to expire at the time of the next scheduled heavy maintenance check of
the applicable Aircraft, compared to the scheduled expiry dates of November 27,
2004 and February 7, 2005 under the Previous Leases, provided that the aggregate
average number of months for which all eleven Aircraft are on lease to TWA LLCis
not less than 22 months from and after March 12, 2001. Finally, the maintenance
condition of the aircraft to be met at lease expiry was eased in favor of TWA
LLC, as compared to the corresponding conditions required under the Previous
Leases.

With respect to the three Aircraft that American did not elect to acquire, TWA
officially rejected the Previous Leases applicable to these Aircraft
(collectively, the "Rejected Leases") as of April 20, 2001. One of these
aircraft was leased to TWA for the period of March 12, 2001 to April 12, 2001
for $85,000. All three Aircraft have been returned to the Partnership. As
aircraft were returned to the Partnership they were parked in storage in Arizona
while the General Partner remarketed them for sale. The three aircraft were sold
on October 19, 2001 for $565,000, resulting in neither a gain nor a loss for the
Partnership. In addition, the General Partner has filed administrative claims in
the TWA bankruptcy proceeding in an effort to recover (i) the fair value of
TWA's actual use, if any, of these three Aircraft during the 60-day period
following TWA's filing of its bankruptcy petition, and (ii) claims relating to
these Aircraft for the period from March 12, 2001 (the expiration of the 60-day
automatic stay period after the filing of bankruptcy petition) to April 20,
2001, the date on which these Previous Leases were rejected by TWA. Furthermore,
the General Partner has filed general unsecured claims for damages arising from
TWA's breach of the Rejected Leases. However, there can be no assurances as to
whether, or when, the General Partner will be successful in asserting the value
of the claims or be able to collect any amounts out of the TWA bankruptcy
estate, either in respect of administrative claims or other claims.

EFFECT OF THE TWA BANKRUPTCY

The TWA bankruptcy had a material adverse effect on the Partnership's results of
operations and financial position. As a result of the TWA bankruptcy and the
transactions with American described above, aggregate rentals received by the
Partnership in 2001 were reduced from approximately $14.3 million, had all
fourteen aircraft remained on lease at the former lease rate, to approximately
$6.2 million, and the average lease term for the ten Aircraft that remain on
lease at December 31, 2001 was reduced from 35 to 13 months remaining. Three of
the Partnership's Aircraft, would have been expected to generate aggregate
rentals in 2001 under the terms of the Previous Leases of approximately $3.0
million (included in the $14.3 million above). One of the aircraft that was
accepted by American was returned in August 2001. As of December 31, 2001 three
aircraft were sold for scrap value in October 2001 and one aircraft was being
marketed for sale at scrap value.

The amount and timing of the Partnership's distributions of cash available for
distribution depends upon many factors, including whether the General Partner is
able to collect any amounts in respect to the administrative and other claims
filed with the Bankruptcy Court.

THE ACCOUNTING TREATMENT OF THE TWA TRANSACTION

As a result of the TWA bankruptcy and the modified lease terms reflected in the
Assumed Leases, the Partnership was required to review the carrying value of the
Aircraft pursuant to applicable accounting standards including Statement of
Financial Accounting Standards ("SFAS") 121 in 2000. 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 the fourth quarter of
2000 of approximately $15 million, or $30.09 per limited partnership unit.

In accordance with accounting principles generally accepted in the United States
("GAAP"), the Partnership recognized rental income and management fees on a
straight line basis over the original lease terms of the Previous Leases. As a
result, deferred revenue and accrued management fees were recorded each month
since the inception of each Previous Lease, resulting in balances of deferred
rental income and accrued management fees of $5,068,954 and $232,533,
respectively as of March 12, 2001. Since the Previous Leases were effectively
modified on March 12, 2001, the Partnership recognized the balances of deferred
revenue and accrued management fees over the new lease terms, from the date the
leases were modified. For the three Rejected Leases, the deferred revenue and
accrued management fees amounting to $950,130 and $38,432 were recognized as
income in March 2001. For the Assumed Leases, the deferred revenue and accrued
management fees associated with each Aircraft was be recognized over the new
lease terms, ranging from 4 months to 30 months as of March 31, 2001. As of
December 31, 2001, the Partnership had a deferred revenue balance of $1,999,872,
and a deferred management fee balance of $93,548 included in Payable to
Affiliates on the Balance Sheet, which will be recognized over the remaining
useful life varying between 2 and 22 months.

SALE OF AIRCRAFT

SALE OF MCDONNELL DOUGLAS DC-9-30 AIRCRAFT - On October 19, 2001, PIMC, on
behalf of the Partnership, sold three DC-9-30 aircraft to Aeroturbine, Inc. for
$565,000 cash. The Partnership recognized neither a loss nor a gain on the
transaction due to an impairment expense being taken during 2001 in anticipation
of the sales. On February 13, 2002, the General Partner sold one DC-9-30 to
Amtec Corp for $250,000 for a gain of $65,000.

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. 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.

INDUSTRY UPDATE

DEMAND FOR AIRCRAFT - At year end 2001, there were approximately 16,445
passenger and freighter jet aircraft in the world fleet. As a result of a
slowdown in travel during the year as well as the large shift in travel levels
in the wake of the September 11th tragedy, 2,133 of those aircraft are currently
stored or out of active service. Air travel as measured by global revenue
passenger miles for 2001 is expected to be 5-6% less than the year 2000 when the
final numbers are compiled. 2002 traffic levels are expected to remain
relatively flat compared to 2001 due to the continued impact of the September
11th tragedy.

The unprecedented and worldwide demand shock has had profound implications to
airlines as well as aircraft owners and manufacturers. Airlines are experiencing
huge losses, and are struggling to match capacity to demand. Manufacturers have
attempted to deliver the aircraft that were already in production and achieve
some stability in their production lines in the face of numerous requests for
deferrals from the airlines. Trading values and lease rates have declined,
particularly on older aircraft as the demand shock took a cyclical downturn into
a deep trough. As manufacturers reduce production, airlines accelerate
retirements of older aircraft, and a recovering air travel market begins to
reduce the aircraft surplus, this cyclical downturn is expected to reverse
itself and the market is expected to return to a stable condition. This will
take some time as manufacturers cannot drop production overnight and owners will
be reluctant to scrap aircraft that they own despite the lack of a current
market for them.

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 Airworthiness Directives (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.

The Partnership's Current Leases require TWA LLC to maintain the Partnership's
aircraft in accordance with an FAA-approved maintenance program during the lease
term. Under the Previous 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.
Three of the Partnership's Aircraft were returned by TWA without meeting the
return conditions specified in the Previous Leases, and the return conditions
under the modified lease terms and conditions for the Partnership's remaining
Aircraft were quite limited. The costs of compliance with FAA maintenance
standards caused the Partnership to sell for scrap value the three Aircraft
being returned by TWA under the Rejected Leases and the aircraft returned in
2001 was likewise marketed at scrap value. Similarly, such costs will likely
cause the Partnership to sell for scrap value, at the end of the lease term, the
Partnership's remaining Aircraft.

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.

Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3
requirements, are currently available for the Partnership's aircraft and were
added to the Partnership's aircraft in 1996 and 1997.

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.

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.

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. 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.

The Partnership uses all 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 and to determine residual values. 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 downward adjustments to the estimated residual value of
certain of its aircraft on-lease as of September 30, 2001. This decrease
reflected the weakening used aircraft market and reflected the additional facts
and circumstances resulting from the advanced negotiations with Aeroturbine,
which resulted in a sale of three held for sale aircraft on October 19, 2001. As
a result, the Partnership decreased the residual values as of September 30, 2001
to reflect the depressed market. This decrease in residual values will be
reflected in greater depreciation expense over the remaining life of the
aircraft.

The Partnership made previous downward adjustments 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.

The Partnership made a downward adjustment to the estimated residual values 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000

AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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, 2001 and 2000, 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, 2001.
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, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

San Francisco, California,
February 1, 2002 (except with respect to the matter discussed in Note 13, as
to which the date is February 13, 2002)

POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP

BALANCE SHEETS

DECEMBER 31, 2001 AND 2000

2001 2000
------------ ------------

ASSETS:

CASH AND CASH EQUIVALENTS $ 12,639,824 $ 19,195,305

RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $85,000 and $85,000
in 2001 and 2000 404,822 852,618

AIRCRAFT HELD FOR SALE 185,000 492,055

AIRCRAFT, net of accumulated depreciation of
$75,763,132 in 2001 and $95,865,484 in 2000 6,564,553 11,438,839

OTHER ASSETS -- 13,915
------------ ------------

Total Assets $ 19,794,199 $ 31,992,732
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 637,651 $ 295,334

ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 618,589 605,896

DEFERRED INCOME 1,999,872 5,719,554

NOTES PAYABLE -- 493,388
------------ ------------

Total Liabilities 3,256,112 7,114,172
------------ ------------

PARTNERS' CAPITAL (DEFICIT):
General Partner (3,531,847) (3,448,329)
Limited Partners, 499,966 units (499,973 for 2000)
issued and outstanding 20,069,934 28,326,889
------------ ------------

Total Partners' Capital 16,538,087 24,878,560
------------ ------------

Total Liabilities and Partners' Capital $ 19,794,199 $ 31,992,732
============ ============

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, 2001, 2000 AND 1999

2001 2000 1999
------------ ------------ ------------

REVENUES:
Rent from operating leases $ 9,341,022 $ 12,582,702 $ 12,582,702
Interest 647,909 1,144,783 907,078
Gain on sale of aircraft inventory -- -- 69,700
Other 45,920 1,983 --
------------ ------------ ------------

Total Revenues 10,034,851 13,729,468 13,559,480
------------ ------------ ------------

EXPENSES:
Depreciation 4,616,341 20,102,157 5,254,386
Management fees to General Partner 124,065 486,468 486,468
Interest 13,525 333,665 834,791
Bad debt expense -- 85,000 --
Operating 376,626 41,782 41,387
Legal 229,465 10,511 5,156
Administration and other 349,320 304,300 315,109
------------ ------------ ------------

Total Expenses 5,709,342 21,363,883 6,937,297
------------ ------------ ------------

NET INCOME (LOSS) $ 4,325,509 $ (7,634,415) $ 6,622,183
============ ============ ============

NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 1,183,080 $ 683,539 $ 879,823
============ ============ ============

NET INCOME (LOSS) ALLOCATED
TO THE LIMITED PARTNERS $ 3,142,429 $ (8,317,954) $ 5,742,360
============ ============ ============

NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 6.29 $ (16.64) $ 11.49
============ ============ ============

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, 2001, 2000 AND 1999

GENERAL LIMITED
PARTNER PARTNERS TOTAL
------------ ------------ ------------

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

Net income 1,183,080 3,142,429 4,325,509

Cash distributions to partners (1,266,598) (11,399,384) (12,665,982)
------------ ------------ ------------

Balance, December 31, 2001 $ (3,531,847) $ 20,069,934 $ 16,538,087
============ ============ ============

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, 2001, 2000 AND 1999

2001 2000 1999
------------ ------------ ------------

OPERATING ACTIVITIES:
Net income (loss) $ 4,325,509 $ (7,634,415) $ 6,622,183
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 4,616,341 20,102,157 5,254,386
Gain on sale of aircraft inventory -- -- (69,700)
Bad debt expense -- 85,000 --
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables 447,796 (2,614) 6,559
Decrease (increase) in other assets 13,915 (11,080) 1,957
Increase in payable to affiliates 342,317 69,092 71,119
Increase in accounts payable and
accrued liabilities 12,693 87,864 61,618
Increase (decrease) in deferred income (3,719,682) 1,697,298 1,697,298
------------ ------------ ------------

Net cash provided by operating activities 6,038,889 14,393,302 13,645,420
------------ ------------ ------------

INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 565,000 -- 69,700
------------ ------------ ------------

Net cash provided by investing activities 565,000 -- 69,700
------------ ------------ ------------

FINANCING ACTIVITIES:
Principal payments on notes payable (493,388) (5,543,633) (5,042,969)
Cash distributions to partners (12,665,982) (8,443,989) (9,110,619)
------------ ------------ ------------

Net cash used in financing activities (13,159,370) (13,987,622) (14,153,588)
------------ ------------ ------------

CHANGES IN CASH AND CASH
EQUIVALENTS (6,555,481) 405,680 (438,468)

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 19,195,305 18,789,625 19,228,093
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 12,639,824 $ 19,195,305 $ 18,789,625
============ ============ ============

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, 2001

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 the residual values of the
aircraft, the useful lives of the aircraft and the estimated amount and timing
of cash-flows associated with each aircraft which are used to determine
impairment, if any.

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. Aircraft
held for sale are carried at the lower of cost or fair value less cost to sell.

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 or the remaining lease term, if shorter. These
costs are also subject to periodic evaluation as discussed above.

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 at the end of the lease under the Previous Leases,
this has resulted in deferred income on the balance sheet. (See Note 6)

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 as liabilities 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 499,966 for the year ended December 2001, and 499,973 for the years ended
December 2000 and 1999.

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.

2001 2000
------- -------
Allowance for credit losses,
beginning of year $85,000 $ --

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

NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No.
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 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 did not have an impact on the
Partnership's balance sheet or statement of operations when implemented on
January 1, 2001.

In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred and that the associated asset retirement costs be
capitalized as part of the carrying value of the related long-lived asset. SFAS
No. 143 will be effective January 1, 2003 for the Partnership. Management does
not expect this standard to have a material impact on the Partnership's balance
sheet or statement of operations.

In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the
presentation of discontinued operations to include more transactions and
eliminates the need to accrue for future operating losses. Additionally, SFAS
No. 144 prohibits the retroactive classification of assets as held for sale and
requires revisions to the depreciable lives of long-lived assets to be
abandoned. SFAS No. 144 will be effective January 1, 2002 for the Partnership.
Management does not expect this standard to have a material 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. During December 2001, 7 units were abandoned. At December
31, 2001, there were 499,966 units outstanding.

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 9 and 10.

3. AIRCRAFT

At December 31, 2001, Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of ten used commercial jet aircraft that are leased to TWA LLC, one
used commercial jet aircraft held for sale, and spare parts inventory 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. 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.

The following table describes the Partnership's aircraft portfolio at December
31, 2001 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 47135 1968
McDonnell Douglas DC-9-30 47137 1968
McDonnell Douglas DC-9-30 47249 1968
McDonnell Douglas DC-9-30 47251 1968
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

11 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. 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. As a result of the bankruptcy
of TWA in 2001, modified terms and conditions were accepted that were
substantially less favorable to the Partnership than the terms and conditions
specified in the Previous Leases. In particular, rather than returning the
Aircraft at the previously scheduled expiry date under the Previous Leases, TWA
LLC, who, in 2001, assumed eleven of the fourteen then existing TWA leases of
the Partnership's aircraft under modified terms (see Note 6), would return each
Aircraft at the time when such Aircraft requires a heavy maintenance check of
the airframe, provided that the aggregate average number of months for which all
eleven Aircraft are on lease to TWA LLC is not less than 22 months from and
after March 12, 2001. In addition, TWA LLC reduced the rental rate for each of
the Aircraft to $40,000 per month. Further, at lease expiry, TWA LLC is required
to return each airframe in a "serviceable" condition, rather than being required
to meet the more stringent maintenance requirements of the Previous Leases.
Finally, TWA LLC is 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 is
payable by TWA LLC to the Partnership (but no payment will be owed by the
Partnership to TWA LLC if cycle life remaining at return exceeds the target
level).

The following is a schedule by year of future minimum rental revenue:

YEAR AMOUNT
---- ----------

2002 3,900,000
2003 1,453,333
----------

Total $5,353,333
==========

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. 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 made a downward adjustment to the estimated net book values and
residual value of its aircraft as of September 30, 2001 as a result of the
anticipated sale of three aircraft to Aeroturbine. 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 2001 of approximately $200,000 or $0.41 per Limited
Partnership unit. The Partnership recorded impairment losses to the extent that
the carrying value exceeded the anticipated sales price less expected costs to
sell. 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 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 6, which constituted an event that required the
Partnership to review the aircraft carrying values pursuant to SFAS 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 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.

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

SALE OF MCDONNELL DOUGLAS DC-9-30 AIRCRAFT - On October 19, 2001, PIMC, on
behalf of the Partnership, sold three DC-9-30 aircraft to Aeroturbine, Inc. for
$565,000 cash. The Partnership recognized neither a loss nor a gain on the
transaction due to an impairment expense being taken on these aircraft during
2001 in anticipation of the sales.

5. 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 $69,700 during
1999. There were no such sales in 2000 or in 2001.

6. TWA BANKRUPTCY FILING AND TRANSACTION WITH AMERICAN AIRLINES

On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, TWA LLC assumed the Previous Leases
applicable to eleven of the fourteen Aircraft, and simultaneously, such Previous
Leases were amended to incorporate modified terms (as so assumed and amended,
the "Assumed Leases"). The Assumed Leases are substantially less favorable to
the Partnership than the Previous Leases. In particular, the monthly rental rate
for each Aircraft has been reduced from $85,000 to $40,000, and the reduced rate
was made effective as of March 12, 2001 by a rent credit granted to TWA LLC for
the amount of rent above $40,000 previously paid by TWA in respect of the period
from and after March 12, 2001. In addition, the term of each Assumed Lease is
scheduled to expire at the time of the next scheduled heavy maintenance check of
the applicable Aircraft, compared to the scheduled expiry dates of November 27,
2004 and February 7, 2005 under the Previous Leases, provided that the aggregate
average number of months for which all eleven Aircraft are on lease to TWA LLC
were not less than 22 months from and after March 12, 2001. Finally, the
maintenance condition of the aircraft to be met at lease expiry was eased in
favor of TWA LLC, as compared to the corresponding conditions required under the
Previous Leases.

(ii) claims relating to these Aircraft for the period from March 12, 2001 (the
expiration of the 60-day automatic stay period after the filing of bankruptcy
petition) to April 20, 2001, the date on which these Previous Leases were
rejected by American. Furthermore, the General Partner has filed general
unsecured claims for damages arising from TWA's breach of the Rejected Leases.
However, there can be no assurances as to whether, or when, the General Partner
will be successful in asserting the value of the claims or be able to collect
any amounts out of the TWA bankruptcy estate, either in respect of
administrative claims or other claims.

EFFECT OF THE TWA BANKRUPTCY
The TWA bankruptcy had a material adverse effect on the Partnership's results of
operations and financial position. As a result of the TWA bankruptcy and the
transactions with American described above, aggregate rentals received by the
Partnership in 2001 were reduced from approximately $14.3 million, had all
fourteen aircraft remained on lease at the former lease rate, to approximately
$6.2 million, and the average lease term for the ten Aircraft that remain on
lease at December 31, 2001 was reduced from 35 to 13 months remaining at
December 31, 2001. Three of the Partnership's Aircraft that were rejected, had
been expected to generate aggregate rentals in 2001 under the terms of the
Previous Leases of approximately $3.0 million (included in the $14.3 million
above). As of December 31, 2001 three aircraft have been sold for scrap value in
October 2001 (see Note 4). In addition, one more aircraft was returned in 2001,
and is being marketed for sale at scrap value. This aircraft was sold after year
end for a gain (see Note 13).

THE ACCOUNTING TREATMENT OF THE TWA TRANSACTION
As a result of the TWA bankruptcy and the modified lease terms reflected in the
Assumed Leases, the Partnership was required to review the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121 in 2000.
Any downward adjustment in the estimated residual value or decrease in the
projected remaining economic life of any of the Aircraft dictates 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
the fourth quarter of 2000 of approximately $15 million, or $30.09 per limited
partnership unit.

In accordance with GAAP, the Partnership recognized rental income and management
fees on a straight line basis over the original lease terms of the Previous
Leases. As a result, deferred revenue and accrued management fees were recorded
each month since the inception of each Previous Lease, resulting in balances of
deferred rental income and accrued management fees of $5,068,954 and $232,533,
respectively as of March 12, 2001. Since the Previous Leases were effectively
modified on March 12, 2001, the Partnership recognized the balances of deferred
revenue and accrued management fees over the new lease terms, from the date the
leases were modified. For the three Rejected Leases, the deferred revenue and
accrued management fees amounting to $950,130 and $38,432 were recognized in
March 2001 as rental revenue and a reduction of management fees, respectively.
For the Assumed Leases, the deferred revenue and accrued management fees
associated with each Aircraft was recognized over the new lease terms, ranging
from 4 months to 30 months as of March 31, 2001. As of December 31, 2001, the
Partnership had a deferred revenue balance of $1,999,872, and a deferred
management fee balance of $93,548 included in Payable to Affiliates on the
Balance Sheet, which will be recognized over the remaining useful life varying
between 2 and 22 months.

7. NOTES PAYABLE

In 1996, 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 formerly 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.
All of these leases were modified due to TWA's bankruptcy in 2001 as discussed
above.

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 on all the loans was $12,841, $336,367,
and $837,033 in 2001, 2000 and 1999, respectively. The notes were completely
paid off in 2001.

8. CLAIMS RELATED TO LESSEE DEFAULTS

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 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. This is included in Other Income.

9. 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 2001, 2000, and 1999, the Partnership paid management fees to PIMC of
$-0-, $420,000, and $420,000, respectively. Management fees payable to
PIMC at December 31, 2001 and 2000 were $399,799 and $275,734
respectively.

b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets. In
2001, 2000, and 1999, $475,321, $390,268, and $285,463, respectively, were
reimbursed by the Partnership to PIMC for administrative and legal
expenses. Administrative and legal reimbursements of $84,888 and $19,600
were payable at December 31, 2001 and 2000, respectively. Reimbursements
for operational costs of $392,194, $-0-, and $5,803 were paid by the
Partnership in 2001, 2000 and 1999, respectively. Operational
reimbursements of $152,965 and $-0-, were payable at December 31, 2001 and
2000, 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 10).

10. 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 9). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 12, 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, 2001 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be $(902,262) and
$47,250,502, respectively.

11. 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, 2001 and 2000 are as
follows:

REPORTED AMOUNTS TAX BASIS NET DIFFERENCE
---------------- --------- --------------

2001: Assets $ 19,794,199 $ 47,204,681 $(27,410,482)
Liabilities 3,256,112 856,441 2,399,671

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

12. 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,
----------------------------------------
2001 2000 1999
-------- -------- --------

Book net income (loss) per Limited Partnership unit $ 6.29 $ (16.64) $ 11.49
Adjustments for tax purposes represent differences
between book and tax revenue and expenses:
Rental revenue (5.93) 3.53 3.36
Management fee expense 0.25 0.13 0.71
Depreciation 5.05 34.08 2.81
Gain or loss on sale of aircraft or inventory (1.56) -- (0.01)

Taxable net income per Limited Partnership unit $ 4.10 $ 21.10 $ 18.36
======== ======== ========

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 on a
straight line basis for operating leases. For tax purposes, certain temporary
differences exist in the recognition of revenue which is generally recognized
when received. 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.

13. SUBSEQUENT EVENT

SALE OF AIRCRAFT On February 13, 2002, the General Partner sold one DC-9-30 to
Amtec Corp for $250,000 resulting in a $65,000 gain.

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 Delaware
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
---- ----------

William Carpenter 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. Carpenter, 38, assumed the position of President and Director of PIMC
effective October 1, 2001. Mr. Carpenter holds the position of Executive Vice
President and Chief Risk Manager of GECAS, having previously held the position
of Vice President - Chief Risk Manager of GECAS (Acting). Prior to joining GECAS
seven years ago, Mr. Carpenter was an aerospace engineer specializing in
aircraft handling qualities. Prior to that, Mr. Carpenter was a commissioned
officer and pilot in the United States Armed Forces.

Mr. Helming, 43, 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, 36, 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, 44, 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 - Sales and Marketing 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 for General Electric Capital Corporation and in
Syndications and Leasing for the Transportation & Industrial Funding division of
General Electric Capital Corporation. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.

Mr. Warman, 53, 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, 60, 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.

SARA J. BISHOP, ET AL. v. KIDDER, PEABODY & CO., ET AL., Superior Court of
California, County of Sacramento; WILSON ET AL. v. POLARIS HOLDING COMPANY ET
AL., Superior Court of California, County of Sacramento, and ten other
California Actions(1) - In the California actions filed in 1996, approximately
4000 plaintiffs who purchased limited partnership units in Polaris Aircraft
Income Funds I through VI and other limited partnerships sold by Kidder, Peabody
named Kidder, Peabody, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, and General Electric Credit
Corporation and Does 1-100 as defendants. The Partnership was not named as a
defendant in these actions. The complaints all allege violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaints seek to recover compensatory damages and punitive damages in an
unspecified amount, interest, and rescission with respect to Polaris Aircraft
Income Funds III-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The California actions have been settled.
An additional settlement was entered into with certain plaintiffs who had
refused to participate in the first settlement. Plaintiffs' counsel advised the
Court that they would withdraw from representing the remaining plaintiffs --
approximately 330 -- who refused to participate in either of the settlements. In
July, 2000, plaintiffs' counsel submitted to the Court motions to withdraw as
counsel of record for all of the actions. The Court indicated that it would
grant such motions and thereafter would consider dismissing each of the actions
if no plaintiff came forward to prosecute. On August 2, 2001, the Court
conducted a series of status conferences in connection with each of the twelve
California actions and at the conferences dismissed most of the remaining
plaintiffs in those actions. On November 9, 2001, defendants moved for summary
judgment against most of the remaining plaintiffs based upon a settlement and
bar order entered in a multi-district litigation in 1997.

- --------

(1) The ten other actions are ABRAMS, ET AL. v. POLARIS HOLDING COMPANY, ET
AL., ELPHICK, ET AL. v. KIDDER PEABODY & CO., ET AL., JOHNSON, ET AL. v.
POLARIS HOLDING COMPANY, ET AL., KUNTZ, ET AL. v. POLARIS HOLDING COMPANY,
ET AL., MCDEVITT, ET AL. v. POLARIS HOLDING COMPANY, ET AL., OUELLETTE, ET
AL. v. KIDDER PEABODY & CO., ET AL., ROLPH, ET AL. v. POLARIS HOLDING
COMPANY, ET AL., SELF, ET AL. v. POLARIS HOLDING COMPANY, ET AL., TARRER,
ET AL. v. KIDDER PEABODY & CO., ET AL., ZICOS, ET AL. v. POLARIS HOLDING
COMPANY, ET AL., all filed in Superior Court of California, County of
Sacramento.

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

The Partnership has no directors or officers. The Partnership is managed by
PIMC, the General Partner. In connection with management services provided, no
management or advisory fees were paid to PIMC in 2001, however a 10% interest in
all cash distributions was paid as described in Note 9 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 the Partnership to own
beneficially, more than five percent of any class of voting
securities of the Partnership.

b) The General Partner of the Partnership owns the equity securities of
the Partnership 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 the Partnership, including any
pledge by any person of securities of the Partnership, the operation
of which may at a subsequent date result in a change in control of
the Partnership.

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 17
Balance Sheets 18
Statements of Operations 19
Statements of Changes in Partners' Capital (Deficit) 20
Statements of Cash Flows 21
Notes to Financial Statements 22

2. Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter ended December 31,
2001.

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

99. Letter from the Partnership to the SEC regarding Arthur Andersen LLP.

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 29, 2002 By: /s/ WILLIAM CARPENTER
- --------------------------- -------------------------------
Date William Carpenter, 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/ WILLIAM CARPENTER President and Director of Polaris Investment MARCH 29, 2002
- ---------------------------------- Management Corporation, General Partner of the --------------
(William Carpenter) Registrant

/s/ KEITH HELMING Chief Financial Officer of Polaris Investment MARCH 29, 2002
- ---------------------------------- Management Corporation, General Partner of the --------------
(Keith Helming) Registrant

/s/ MELISSA HODES Vice President and Director of Polaris Investment MARCH 29, 2002
- ---------------------------------- Management Corporation, General Partner of the --------------
(Melissa Hodes) Registrant

/s/ NORMAN C. T. LIU Vice President and Director of Polaris Investment MARCH 29, 2002
- ---------------------------------- Management Corporation, General Partner of the --------------
(Norman C. T. Liu) Registrant