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. 33-10122

POLARIS AIRCRAFT INCOME FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)

CALIFORNIA 94-3023671
- ---------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)

201 HIGH RIDGE ROAD, STAMFORD, CONNECTICUT 06927
- ------------------------------------------ ------------
(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:
Depository Units Representing Assignments of Limited Partnership Interests

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 39 pages.

PART I

ITEM 1. BUSINESS

Polaris Aircraft Income Fund III, A California Limited Partnership (PAIF-III 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-III was
organized as a California Limited Partnership on June 27, 1984 and will
terminate no later than December 2020.

PAIF-III 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 Lease"). 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".

NUMBER OF LEASE
LESSEE AIRCRAFT TYPE AIRCRAFT EXPIRATION RENEWAL OPTIONS
- ------ ------------- -------- ---------- ---------------

TWA LLC McDonnell Douglas DC-9-30 4 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 seven of the
ten 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 date of
November 27, 2004 under the Previous Leases, provided that the aggregate
average number of months for which all seven 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 American, as compared to the corresponding conditions
required under the Previous Leases. Three of the seven leased aircraft
were returned prior to 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 four DC-9-30 aircraft leased to TWA
LLC, and two DC-9-30 aircraft held for sale, on the ground in Arizona out of its
original portfolio of 38 aircraft. All leases are operating leases. The
Partnership transferred three McDonnell Douglas DC-9-10 aircraft and six Boeing
727-100 aircraft to aircraft inventory in 1992. The inventoried aircraft were
disassembled for sale of their component parts, the remainder of which was sold
to Soundair, Inc. in 1998. Of its original aircraft portfolio, the Partnership
sold eight DC-9-10 aircraft in 1992 and 1993 and three Boeing 727-200 aircraft
in May 1994. In June 1997, the Partnership sold three McDonnell Douglas DC-9-30
aircraft leased to TWA, and five Boeing 727-200 Advanced aircraft leased to
Continental Airlines, Inc. (Continental) to Triton Aviation Services III LLC.
The Partnership sold three DC-9-30 aircraft to Aeroturbine, Inc. in October
2001. The Partnership sold one DC-9-30 aircraft to Amtec in December 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 47028 1967 90,508
McDonnell Douglas DC-9-30 47095 1967 85,183
McDonnell Douglas DC-9-30 47109 1968 88,883
McDonnell Douglas DC-9-30 47134 1967 85,391
McDonnell Douglas DC-9-30 47173 1968 89,031
McDonnell Douglas DC-9-30 47491 1970 82,597

ITEM 3. LEGAL PROCEEDINGS

MIDWAY AIRLINES, INC. (MIDWAY) BANKRUPTCY - As previously reported in the
Partnership's 2000 Form 10-K, in March 1991, Midway commenced reorganization
proceedings under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division. On
August 9, 1991, the Bankruptcy Court approved Midway's rejection of the leases
of the Partnership's four DC-9-10 aircraft, and the aircraft were returned to
the Partnership on August 12, 1991. On September 18, 1991, the Partnership filed
a proof of claim in Midway's bankruptcy proceeding to recover damages for lost
rent and for Midway's failure to meet return conditions with respect to the four
aircraft. In light of Midway's cessation of operations, on April 30, 1992, the
Partnership amended and restated its prior proof of claim and filed an
additional proof. To date no payment or settlement of the Partnership's
bankruptcy claims has been offered.

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 II, 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 II,
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-III's Limited Partnership interests (Units) are not publicly
traded. Currently there is no market for PAIF-III'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
- ----------------------------------------------------- --------------------------------------------

Depository Units Representing Assignments
Of Limited Partnership Interests: 14,924

General Partnership Interest: 1

The Partnership distributed cash to partners on a quarterly basis
beginning April 1987. Cash distributions to Unit Holders during 2001
and 2000 totaled $11,469,083 and $5,299,576 respectively. Cash
distributions per Limited Partnership unit were $22.94 and $10.60 in
2001 and 2000, respectively.

ITEM 6. SELECTED FINANCIAL DATA

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------

Revenues $ 6,891,556 $ 9,742,030 $ 9,590,876 $ 10,055,914 $ 14,959,380

Net Income (Loss) 2,514,059 (6,246,537) 5,605,780 5,287,954 4,989,096

Net Income (Loss)
allocated to Limited
Partners 1,342,125 (6,713,976) 4,912,337 3,948,438 4,939,205

Net Income (Loss) per
Limited Partnership Unit 2.68 (13.43) 9.83 7.90 9.88

Cash Distributions per
Limited Partnership
Unit 22.94 10.60 12.75 38.30 22.20

Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* 19.78 10.60 12.75 38.30 22.20

Total Assets 7,927,561 21,355,564 36,199,898 40,019,792 58,054,962

Partners' Capital 6,311,578 16,540,944 28,675,899 30,152,885 46,144,927

- ------------

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

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

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 III (PAIF-III or the
Partnership) owned a portfolio of 6 used McDonnell Douglas DC-9-30 commercial
jet aircraft ("DC-9-30") out of its original portfolio of 38 aircraft. Four of
these aircraft were leased to TWA Airlines, LLC ("TWA LLC") (collectively the
"Current Leases"). The two remaining DC-9-30 aircraft were being stored in
Arizona and, subsequently, one was sold to Amtec in February 2002. The
Partnership transferred three McDonnell Douglas DC-9-10 aircraft and six Boeing
727-100 aircraft to aircraft inventory in 1992. The inventoried aircraft were
disassembled for sale of their component parts, the remainder of which was sold
to Soundair, Inc. in 1998. The Partnership sold eight DC-9-10 aircraft in 1992
and 1993 and three Boeing 727-200 aircraft in May 1994. In June 1997, the
Partnership sold three McDonnell Douglas DC-9-30 aircraft leased to Trans World
Airlines, Inc. (TWA), and five Boeing 727-200 Advanced aircraft leased to
Continental Airlines, Inc. (Continental) to Triton Aviation Services III LLC.
The Partnership sold three DC-9-30 aircraft to Aeroturbine, Inc. in October 2001
that resulted in neither a gain nor loss to the Partnership. The Partnership
sold one DC-9-30 to Amtec in December 2001 that resulted in a gain of $115,000
to the Partnership.

REMARKETING UPDATE

PARTNERSHIP OPERATIONS

The Partnership reported net income of $2,514,059 or $2.68 per Limited
Partnership unit for the year ended December 31, 2001 compared to a net loss of
$6,246,537, or $13.43 per Limited Partnership unit for the year ended December
31, 2000, and net income of $5,605,780, or $9.83 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 decreases in depreciation
expense due to impairment charges in 2000, management fees, bad debt expense and
interest expense, and a gain on the sale of an aircraft partially offset by
decreases in rental and interest income and increases in operating and legal
expense.

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 5. 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.

The Partnership sold four of its aircraft during 2001 for $835,000. A gain of
$115,000 over book value was recognized on the sale of one of these aircraft.
There were no such sales in 2000 or in 1999.

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 on aircraft to be held and used or held
for sale by the Partnership aggregating approximately $850,000, or $1.70 per
Limited Partnership unit in 2001, and $11 million, or $22.26 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 seven of
the ten 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 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, primarily due to lower rental rates from the modified lease terms.

In November 1996, hushkits were installed on the 10 Partnership aircraft. The
leases for these 10 aircraft were then extended for a period of eight years
until November 2004. 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 $4,960, $222,525, and $581,941 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 as
compared to 1999, primarily due to the TWA Bankruptcy Filing. As discussed in
Note 5, TWA subsequently cured outstanding defaults on seven of the ten Previous
Leases. Three leases which were not cured by TWA had a rent payment due on
December 27, 2000. In 2000, the Partnership recorded an allowance for credit
losses and bad debt expense equal to the rent payment due December 27, 2000.

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 in 2000 as compared to
1999, due to the escalating costs incurred in connection with the TWA
bankruptcy.

Administration and other expenses increased in 2001 as compared to 2000,
primarily due to increases in printing and postage costs. Administration and
other expenses increased in 2000, as compared to 1999, primarily due to bank and
consulting fees incurred for the research and reissue of a large number of
investor distribution checks.

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 $10
million down to $1 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 $11,469,083
$5,299,576, and $6,374,489, in 2001, 2000 and 1999, respectively. Cash
distributions per Limited Partnership unit were $22.94, $10.60, and $12.75 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 seven of the ten 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 seven of the ten 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 date of November 27,
2004 under the Previous Leases, provided that the aggregate average number of
months for which all seven Aircraft are on lease to TWA LLC is 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. 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
$535,000, 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 $10.2 million, had all ten
aircraft remained on lease at the former lease rate, to approximately $3.5

million, and the average lease term for the four aircraft that remain on lease
at December 31. 2001 was reduced from 35 to 20 months remaining at December 31,
2001. 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 $10.2 million above). In 2001, three
aircraft accepted by American were returned to the Partnership at the end of
their respective lease terms. As of December 31, 2001 the three aircraft were
sold for scrap value in October 2001 (see above), one aircraft was sold for
scrap value in December 2001 for a gain of $115,000, and two aircraft are 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 $11 million, or $22.26 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 $3,899,131 and $180,107,
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 $1,275,431 and $59,691 were recognized as
income in March 2001. For the Assumed Leases, the deferred revenue and accrued
management fees associated with each Aircraft will be recognized over the new
lease terms, ranging from 2 months to 33 months as of March 31, 2001. As of
December 31, 2001, the Partnership had deferred revenue balance of $986,015, and
deferred management fee balance of $45,176 included in Payable to Affiliates on
the Balance Sheet, which will be recognized over the remaining useful life
varying between 12 and 24 months.

SALE OF AIRCRAFT AND INVENTORY

SALES 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
$535,000 cash. The Partnership recognized neither a loss nor a gain on the
transaction due to an impairment expense being taken in anticipation of the

sales. On December 19, 2001 PIMC on behalf of the Partnership, sold one DC-9-30
aircraft to Amtec Corporation for $300,000 cash. The Partnership recognized a
gain of $115,000 over its book value. On February 13, 2002, the General Partner
sold one DC-9-30 to Amtec Corp for $250,000 for a gain of $65,000.

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
returned by TWA under the Rejected Leases and the three aircraft returned in
2001 were 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.

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 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 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 recognized an impairment loss as increased
depreciation expense in 2001 of approximately $850,000, or $1.70 per Limited
Partnership unit.

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 $11 million, or $22.26 per Limited Partnership unit.

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 $311,641 or $.62 per Limited Partnership unit.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

POLARIS AIRCRAFT INCOME FUND III,
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 III,
A California Limited Partnership:

We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
III, 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
III, 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 11, as
to which the date is February 13, 2002)

POLARIS AIRCRAFT INCOME FUND III,
A CALIFORNIA LIMITED PARTNERSHIP

BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

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

ASSETS:

CASH AND CASH EQUIVALENTS $ 3,784,951 $ 12,523,907

RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $255,000 and $255,000
in 2001 and 2000 161,516 597,732

AIRCRAFT HELD FOR SALE 370,000 1,015,342

AIRCRAFT, net of accumulated depreciation
of $29,344,167 in 2001 and $58,628,458 in 2000 3,611,094 7,204,292

OTHER ASSETS -- 14,291
------------ ------------

Total Assets $ 7,927,561 $ 21,355,564
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 467,332 $ 220,339

ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 162,636 130,936

DEFERRED INCOME 986,015 4,258,474

NOTES PAYABLE -- 204,871
------------ ------------

Total Liabilities 1,615,983 4,814,620
------------ ------------

PARTNERS' CAPITAL (DEFICIT):

General Partner (3,880,841) (3,778,433)
Limited Partners, 499,960 units
issued and outstanding 10,192,419 20,319,377
------------ ------------

Total Partners' Capital 6,311,578 16,540,944
------------ ------------

Total Liabilities and Partners' Capital $ 7,927,561 $ 21,355,564
============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND III,
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 $ 6,364,964 $ 8,989,368 $ 8,989,368
Interest 355,208 751,274 601,444
Gain on sale of aircraft 115,000 -- --
Other 56,384 1,388 64
------------ ------------ ------------
Total Revenues 6,891,556 9,742,030 9,590,876
------------ ------------ ------------

EXPENSES:
Depreciation 3,518,540 14,799,502 2,726,207
Management fees to General Partner 22,654 347,147 347,147
Interest 4,960 222,525 581,941
Bad debt -- 255,000 --
Operating 287,674 14,887 17,722
Legal 168,646 9,899 5,156
Administration and other 375,023 339,607 306,923
------------ ------------ ------------
Total Expenses 4,377,497 15,988,567 3,985,096
------------ ------------ ------------
NET INCOME (LOSS) $ 2,514,059 $ (6,246,537) $ 5,605,780
============ ============ ============
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 1,171,934 $ 467,439 $ 693,443
============ ============ ============
NET INCOME (LOSS) ALLOCATED TO
THE LIMITED PARTNERS $ 1,342,125 $ (6,713,976) $ 4,912,337
============ ============ ============
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 2.68 $ (13.43) $ 9.83
============ ============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND III,
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 $ (3,642,196) $ 33,795,081 $ 30,152,885

Net income 693,443 4,912,337 5,605,780

Cash distributions to partners (708,277) (6,374,489) (7,082,766)
------------ ------------ ------------

Balance, December 31, 1999 (3,657,030) 32,332,929 28,675,899

Net income (loss) 467,439 (6,713,976) (6,246,537)

Cash distributions to partners (588,842) (5,299,576) (5,888,418)
------------ ------------ ------------

Balance, December 31, 2000 (3,778,433) 20,319,377 16,540,944

Net income 1,171,934 1,342,125 2,514,059

Cash distributions to partners (1,274,342) (11,469,083) (12,743,425)
------------ ------------ ------------

Balance, December 31, 2001 $ (3,880,841) $ 10,192,419 $ 6,311,578
============ ============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND III,
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) $ 2,514,059 $ (6,246,537) $ 5,605,780
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,518,540 14,799,502 2,726,207
Gain on sale of aircraft (115,000) -- --
Bad debt expense -- 255,000 --
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables 436,216 10,525 (12,509)
Decrease (increase) in other assets 14,291 (14,291) --
Increase in payable to affiliates 246,993 50,065 54,386
Increase in accounts payable
and accrued liabilities 31,700 2,988 6,316
Increase (decrease) in deferred income (3,272,459) 1,210,631 1,210,633
------------ ------------ ------------
Net cash provided by operating activities 3,374,340 10,067,883 9,590,813
------------ ------------ ------------

INVESTING ACTIVITIES:
Proceeds from sale of aircraft 835,000 -- --
------------ ------------ ------------
Net cash provided by investing activities 835,000 -- --
------------ ------------ ------------

FINANCING ACTIVITIES:
Principal payments on notes payable (204,871) (3,973,063) (3,614,243)
Cash distributions to partners (12,743,425) (5,888,418) (7,082,766)
------------ ------------ ------------
Net cash used in financing activities (12,948,296) (9,861,481) (10,697,009)
------------ ------------ ------------

CHANGES IN CASH AND CASH
EQUIVALENTS (8,738,956) 206,402 (1,106,196)

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 12,523,907 12,317,505 13,423,701
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 3,784,951 $ 12,523,907 $ 12,317,505
============ ============ ============

The accompanying notes are an integral part of these statements.

POLARIS AIRCRAFT INCOME FUND III,
A CALIFORNIA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001

1. ACCOUNTING PRINCIPLES AND POLICIES

ACCOUNTING METHOD - Polaris Aircraft Income Fund III, A California Limited
Partnership (PAIF-III 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 is 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) 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 5)

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 and lease the Partnership's aircraft, including costs related to lessee
defaults.

NET INCOME PER LIMITED PARTNERSHIP UNIT - Net income per Limited Partnership
unit is based on the Limited Partners' share of net income or loss and the
number of units outstanding of 499,960 for the years ended December 31, 2001,
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 $255,000 $ --

Provision for credit losses -- 255,000
-------- --------
Allowance for credit losses,
end of year $255,000 $255,000
======== ========

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 2020.
Upon organization, both the General Partner and the initial Limited Partner
contributed $500 to capital. The Partnership recognized no profits and losses
during the periods ended December 31, 1984 and 1985. The offering of depositary
units (Units), representing assignments of Limited Partnership interest,
terminated on September 30, 1987 at which time the Partnership had sold 500,000
units of $500, representing $250,000,000. All unit holders were admitted to the
Partnership on or before September 30, 1987. During January 1998, 40 units were
redeemed by the Partnership in accordance with section 18 of the Limited
Partnership agreement. At December 31, 2001, there were 499,960 units
outstanding, net of redemptions.

Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership, supervises the day-to-day operations of the Partnership.
Polaris Depository Company III (PDC) serves as the depositary. PIMC and PDC are
wholly-owned subsidiaries 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 affiliates are described in Notes 7 and 8.

3. AIRCRAFT

At December 31, 2001, Polaris Aircraft Income Fund III (the Partnership) owned
six aircraft from its original portfolio of 38 used commercial jet aircraft
which were acquired and leased or sold as discussed below. Of these, four are
leased to TWA LLC and two are held for sale. All aircraft were acquired from an
affiliate and 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.
Of its original portfolio of 38 aircraft, the Partnership sold one aircraft in
1992, seven aircraft in 1993, three aircraft in 1994, eight aircraft in 1997,
and four aircraft in 2001. In addition, nine aircraft were disassembled for sale
of their component parts, the remainder of which was sold to Soundair, Inc. in
1998.

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 47028 1967
McDonnell Douglas DC-9-30 47095 1967
McDonnell Douglas DC-9-30 47109 1968
McDonnell Douglas DC-9-30 47134 1967
McDonnell Douglas DC-9-30 47173 1968
McDonnell Douglas DC-9-30 47491 1970

SIX MCDONNELL DOUGLAS DC-9-30S - Initially thirteen aircraft were acquired for
$86,163,046 during 1986 and 1987, 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 prior to TWA's 1995 bankruptcy
filing. In June 1997, three of the thirteen aircraft were sold, subject to the
existing leases, to Triton Aviation Services III LLC. The leases for 10 of the
13 aircraft were extended again for eight years until November 2004. 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 seven of the ten then existing
TWA leases of the Partnership's aircraft under modified terms (see Note 5),
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 seven 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 1,909,333
2003 1,182,667
-----------
$ 3,092,000
===========

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 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).

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 $570,000, or $1.14 per Limited
Partnership unit for aircraft on lease and $280,000 or $0.56 per Limited
Partnership unit for aircraft held for sale. The Partnership recorded losses on
aircraft that were deemed impaired to the extent that the carrying value
exceeded the fair value. For Aircraft held for sale the Partnership records
losses to the extent that carrying value exceeds the fair value less cost 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 $11 million, or $22.26 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 5, 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 recorded an impairment loss
to the extent that the carrying value exceeded the fair value. Management
believes the assumptions related to the fair value of impaired assets
represented the best estimates based on reasonable and supportable assumptions
and projections.

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

4. SALE OF AIRCRAFT

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
$535,000 cash. The Partnership recognized neither a loss nor a gain on the

transaction due to an impairment expense being taken on these aircraft in
anticipation of the sales. On December 19, 2001 PIMC on behalf of the
Partnership, sold one DC-9-30 aircraft to Amtec Corporation for $300,000 cash.
The Partnership recognized a gain of $115,000 over its book value.

5. 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 seven of the ten 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 date of November 27,
2004 under the Previous Leases, provided that the aggregate average number of
months for which all seven Aircraft are on lease to TTW 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.

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. 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
$535,000, resulting in neither a gain nor a loss for the Partnership (see Note
4) 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 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 have 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 $10.2 million, had
all ten aircraft remained on lease at the former lease rate, to approximately
$3.5 million, and the average lease term for the four Aircraft that remain on
lease at December 31, 2001 was reduced from 35 to 20 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 $10.2 million
above). As of December 31, 2001 those three aircraft were sold for scrap value
in October 2001 (see Note 4). In addition, three more aircraft were returned in
2001. Of these, one aircraft was sold for scrap value in December 2001, for a
gain of $65,000, and two aircraft are being marketed for sale at scrap value.
One of these was sold after year end for a gain (see Note 11).

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.
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 $11 million, or $22.26 per limited partnership unit. The
write-downs included the impact of the revised lease terms that were effective
as of March 12, 2001.

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 $3,899,131 and $180,107,
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 $1,275,431 and $59,691 were recognized as
rental revenue and a reduction of management fee respectively in March 2001. For
the Assumed Leases, the deferred revenue and accrued management fees associated
with each Aircraft was recognized over the new lease terms, ranging from 2
months to 33 months as of March 31, 2001. As of December 31, 2001, the
Partnership had deferred revenue balance of $986,015, and deferred management
fee balance of $45,176 included in Payable to Affiliates on the Balance Sheet,
which will be recognized over the remaining useful life varying between 12 and
24 months.

6. 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
10 Partnership aircraft formerly on lease to TWA, as well as other aircraft
owned by affiliates of PIMC and leased to TWA. The 10 aircraft that received
hushkits were designated by TWA. The hushkits recondition the aircraft so as to
meet Stage 3 noise level restrictions. Installation of the 10 hushkits on the
Partnership's aircraft was completed in November 1996.

The aggregate cost of the hushkit reconditioning was $15,930,822, or
approximately $1.6 million per aircraft, which was capitalized by the
Partnership. The Partnership paid $3.0 million of the aggregate hushkit cost and
the balance of $12,930,822 was financed by the engine/hushkit manufacturer over
50 months (through December 2000) at an interest rate of approximately 10% per
annum. Cash paid for interest on all the loans was $4,960, $226,937 and $585,758
in 2001, 2000 and 1999, respectively. The notes were completely paid off in
2001.

7. 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-,
$300,000, and $300,000, respectively. Management fees payable to PIMC were
$221,624 and $198,970 at December 31, 2001 and 2000, 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, the Partnership reimbursed PIMC for expenses of $668,867,
$397,831, and $309,612, respectively. Reimbursements totaling $245,708 and
$21,369 were payable to PIMC 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 unit holders 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 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 8).

8. 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 7). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 10, 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 accounts of the General
Partner and the Limited Partners is estimated to be $(14,574) and $6,212,801,
respectively.

9. 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 $ 7,927,561 $ 6,781,047 $ 1,146,514
Liabilities 1,615,983 582,820 1,033,163

2000: Assets $ 21,355,564 $ 18,071,961 $ 3,283,603
Liabilities 4,814,620 508,999 4,305,621

10. RECONCILIATION OF BOOK NET INCOME TO TAXABLE NET INCOME

The following is a reconciliation between net income 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 $ 2.68 $ (13.43) $ 9.83
Adjustments for tax purposes represent differences
between book and tax revenue and expenses:
Rental revenue (4.97) 2.90 2.40
Gain on sale of aircraft (1.59) -- --
Management fee expense -- 0.09 0.23
Depreciation 4.32 25.40 0.21
-------- -------- --------
Taxable net income per Limited Partnership unit $ 0.44 $ 14.96 $ 12.67
======== ======== ========

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, revenue is generally
recognized when legally earned. For tax purposes, management fee expense is
accrued in the same year as the tax basis rental revenue while management fees
are accrued using GAAP revenue for book 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 book depreciation expense is
greater than the tax 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.

11. SUBSEQUENT EVENT

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

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 III, A California Limited Partnership (PAIF-III 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.

- -------------------
(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.

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.

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

ITEM 11. EXECUTIVE COMPENSATION

PAIF-III has no directors or officers. PAIF-III 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 7 to the financial statements (Item
8).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

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

TITLE NAME OF AMOUNT AND NATURE OF PERCENT
OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
-------- ---------------- -------------------- --------

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

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

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 III,
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