UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-K

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

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

                                       OR

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

                           Commission File No.33-2794

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

                 California                               94-2985086
       -------------------------------             -----------------------
       (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:
                      Units of Limited Partnership Interest

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

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

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

                    Documents incorporated by reference: None

                       This document consists of 46 pages.
<PAGE>

                                     PART I


Item 1.  Business

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

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

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

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

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

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

                                       2
<PAGE>

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

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

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

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


Item 2.  Properties

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

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

                                       3
<PAGE>


Item 3.       Legal Proceedings

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

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

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

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

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

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

                                       4
<PAGE>

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

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


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

None.


                                       5
<PAGE>

                                     PART II

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

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

b)       Number of Security Holders:

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

         Limited Partnership Interest:                    13,883

         General Partnership Interest:                       1

c)       Dividends:

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


                                       6
<PAGE>


Item 6.  Selected Financial Data

<TABLE>
<CAPTION>
                                                For the years ended December 31,
                                                --------------------------------

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

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

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

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

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

Cash Distributions per
  Limited Partnership
  Unit                             15.20          16.40         37.35         28.70         35.00

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

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

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


* 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.

                                       7
<PAGE>

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

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

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


Remarketing Update

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

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

Partnership Operations

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

                                       8
<PAGE>


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

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

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

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

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

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

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

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

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

                                       9
<PAGE>


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

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

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

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


Liquidity and Cash Distributions

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

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

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

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


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

                                       10
<PAGE>


TWA Bankruptcy Filing and American's Proposal

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

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

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

                                       11
<PAGE>

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

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

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

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

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

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

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

                                       12
<PAGE>

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

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

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


Sale of Aircraft

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

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

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

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

                                       13
<PAGE>


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

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


Ron Wallace Litigation Settlement

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

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


Viscount Default and Bankruptcy Filing

On January 24, 1996,  Viscount filed a petition for protection  under Chapter 11
of the United States  Bankruptcy Code in the United States  Bankruptcy  Court in
Tucson,  Arizona.  In April 1996,  GECAS,  on behalf of the  Partnership,  First
Security Bank,  National  Association  (formerly known as First Security Bank of
Utah,  National  Association)  (FSB), the owner/trustee  under the Partnership's
leases with Viscount (the Leases),  Viscount,  certain  guarantors of Viscount's

                                       14
<PAGE>

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

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

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

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

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

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

                                       15
<PAGE>


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

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

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


Claims Related to Lessee Defaults

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

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


Industry Update

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

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

                                       16
<PAGE>


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

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

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

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

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

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

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

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

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

                                       17
<PAGE>


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

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


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

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

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


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

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.

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

                                       18
<PAGE>


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

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



                                       19
<PAGE>

Item 8.  Financial Statements and Supplementary Data











                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership




              FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999


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


                                TOGETHER WITH THE


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






                                       20
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



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

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

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

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


                                                             ARTHUR ANDERSEN LLP


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



                                       21
<PAGE>

                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                                 BALANCE SHEETS

                           DECEMBER 31, 2000 AND 1999

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

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

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

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

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

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

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES                              $    295,334   $    226,242

ACCOUNTS PAYABLE AND ACCRUED
  LIABILITIES                                           605,896        518,032

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

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

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

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

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

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


        The accompanying notes are an integral part of these statements.

                                       22
<PAGE>

                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                            STATEMENTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

        The accompanying notes are an integral part of these statements.

                                       23
<PAGE>


                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

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

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


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

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

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

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

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

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

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

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

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

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

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

        The accompanying notes are an integral part of these statements.

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                 POLARIS AIRCRAFT INCOME FUND II,
                                 A California Limited Partnership

                                     STATEMENTS OF CASH FLOWS

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

                                                          2000           1999           1998
                                                          ----           ----           ----
<S>                                                  <C>            <C>            <C>
OPERATING ACTIVITIES:
  Net income (loss)                                  $ (7,634,415)  $  6,622,183   $  3,456,655
  Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
     Depreciation                                      20,102,157      5,254,386      7,729,294
     Gain on sale of aircraft inventory                      --          (69,700)      (133,285)
     Bad debt expense                                      85,000           --             --
     Changes in operating assets and liabilities:
       Decrease (increase) in rent and other
         receivables                                       (2,614)         6,559         (5,934)
       Decrease (increase) in other assets                (11,080)         1,957          1,779
       Increase in payable to affiliates                   69,092         71,119         12,362
       Increase in accounts payable and
          accrued liabilities                              87,864         61,618        138,615
       Decrease in security deposits                         --             --          (50,000)
       Increase in deferred income                      1,697,298      1,697,298      1,697,298
                                                     ------------   ------------   ------------

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

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

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

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

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

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

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

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

        The accompanying notes are an integral part of these statements.

                                       25
<PAGE>

                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 2000


1.       Accounting Principles and Policies

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

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

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

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

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

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

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

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

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

                                       26
<PAGE>

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

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

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

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

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


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

      Allowance for credit losses                     85,000            --

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


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


2.    Organization and the Partnership

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

                                       27
<PAGE>

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

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


3.    Aircraft

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

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

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

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

                                       28
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       29
<PAGE>


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

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

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

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

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

                                       30
<PAGE>

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

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


5.       Ron Wallace Litigation Settlement

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

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


6.       Disassembly of Aircraft

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


7.       TWA Lease Extension

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

                                       31
<PAGE>

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

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

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

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

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

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

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


8.       Viscount Restructuring Agreement and Default

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

During 1995,  Viscount delivered the Partnership's  Boeing 737-200 aircraft to a
repair facility operated by BAE Aviation, Inc., d/b/a Tucson Aerospace,  located
in  Arizona,  to  perform  a  heavy  maintenance  check  on  the  aircraft.  The
Partnership has paid to Tucson Aerospace approximately $565,000 from maintenance
reserves  and cash  reserves  for this  aircraft  as  progress  payments on this
maintenance  check.  Work on the  maintenance  check was suspended  prior to the
filing of the Chapter 11 petition by  Viscount.  Tucson  Aerospace  asserts that
Viscount owes it approximately $866,000 for work done on the aircraft,  which is
in addition to the  approximately  $565,000 already paid by the Partnership from
maintenance  reserves. In addition, a third party vendor, who claims it provided
personnel to work on the aircraft, is asserting a claim against Tucson Aerospace

                                       32
<PAGE>

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

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

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

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

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

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

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

Viscount's failure to perform its financial obligations to the Partnership had a
material adverse effect on the Partnership's  financial position. As a result of
Viscount's  defaults  and Chapter 11  bankruptcy  filing,  the  Partnership  had
accrued legal costs of approximately  $15,000 and $116,000,  which are reflected

                                       33
<PAGE>

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


9.       Claims Related to Lessee Defaults

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

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


10.      Related Parties

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

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

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

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

                                       34
<PAGE>


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

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


11.      Partners' Capital

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

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

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

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


12.      Income Taxes

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

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

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

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

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

                                       35
<PAGE>



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

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

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

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

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

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

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

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


14.      Subsequent Event

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

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

                                       36
<PAGE>

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

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

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

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

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

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

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

                                       37
<PAGE>


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

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

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


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

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

                                       38
<PAGE>

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

As a result of the TWA  bankruptcy  and the  modified  lease  terms  proposed by
American,  the  Partnership  is  required  to review the  carrying  value of the
Aircraft  pursuant to applicable  accounting  standards  including SFAS 121. Any
downward adjustment in the estimated residual value or decrease in the projected
remaining  economic  life of any of the  Aircraft  will  dictate an  increase in
depreciation expense over the projected economic life of such Aircraft. Further,
if the  projected  net  cash  flow  for any of the  Aircraft  (projected  rental
revenue, net of management fees, less projected  maintenance costs, if any, plus
the estimated  residual value) is less than the carrying value of such Aircraft,
an impairment loss must be recorded. After a review of the carrying value of the
Aircraft  pursuant to applicable  accounting  standards  including SFAS 121, the
Partnership  recognized an impairment loss as increased  depreciation expense in
2000 of  approximately  $15  million,  or $30.09 per Limited  Partnership  unit.
Deferred  revenue as of December 31, 2000 will be amortized over the life of the
proposed modified leases.



                                       39
<PAGE>

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

None.




                                       40
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

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

The officers and directors of PIMC are:

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

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

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

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

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

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

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

                                       41
<PAGE>

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

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

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


Certain Legal Proceedings:

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

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

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

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

                                       42
<PAGE>

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

                                       43
<PAGE>

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


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


Item 11. Executive Compensation

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


Item 12. Security Ownership of Certain Beneficial Owners and Management

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

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

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

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

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


Item 13. Certain Relationships and Related Transactions

None.



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<PAGE>

                                     PART IV

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

1.       Financial Statements.

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

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

2.       Reports on Form 8-K.

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

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

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

4.       Financial Statement Schedules.

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


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<PAGE>

                                   SIGNATURES



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


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




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


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



   Signature                          Title                           Date

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

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

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

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



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