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 (Fee Required)
                   For the fiscal year ended December 31, 1995

                                       OR

           ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
                        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 Mission Street,  27th Floor,  San Francisco, California             94105
-----------------------------------------------------------           ----------
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code:   (415) 284-7400

        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.

No formal  market  exists  for the units of  limited  partnership  interest  and
therefore there exists no aggregate market value at December 31, 1995.

                    Documents incorporated by reference: None

                       This document consists of 54 pages.

                                        

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                                     PART I

Item 1.         Business

The  principal  objectives  of Polaris  Aircraft  Income  Fund II, A  California
Limited Partnership (PAIF-II or the Partnership), are 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 management  services to GPA Group plc, a
public  limited  company  organized in Ireland,  together with its  consolidated
subsidiaries (GPA), which acquires, 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, and GPA.

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), Viscount Air Services,
Inc.  (Viscount),  Continental  Micronesia,  Inc.  (Continental  Micronesia) and
Continental Airlines,  Inc.  (Continental) as of December 31, 1995. As discussed
in Items 7 and 8, Viscount defaulted on certain payments due to the Partnership.
Viscount was then notified on January 9, 1996 that the  Partnership  had elected
to terminate  the lease (which is disputed by Viscount).  Viscount  subsequently
filed a petition for protection under Chapter 11 of the United States Bankruptcy
Code  (Items 3, 7 and 8) and the  Partnership's  aircraft  is  currently  in the
possession of Tucson Aerospace,  a maintenance  facility located in Arizona,  as
discussed below.  Viscount's  ultimate  compliance or non-compliance with end of
lease  maintenance  return  conditions  may require the  Partnership to evaluate
whether  a sale  or a  re-lease  of the  Partnership's  aircraft  would  be most
beneficial  for the  Partnership's  unit  holders.  As a  result  of  Viscount's
defaults  and  Chapter  11  bankruptcy   filing,   the   Partnership  may  incur
maintenance,   remarketing,   transition   and  legal   costs   related  to  the
Partnership's aircraft.

                                                     Scheduled
                                          Number of    Lease
Lessee              Aircraft Type         Aircraft   Expiration  Renewal Options
------              -------------         --------   ----------  ---------------
TWA           McDonnell Douglas DC-9-30      16        2/98 (1)       none
              McDonnell Douglas DC-9-40       1       11/98 (1)       none
              McDonnell Douglas DC-9-30       1       11/98 (1)       none

Viscount      Boeing 737-200                  1       11/97 (2)       none

Continental   Boeing 727-200 Advanced         1        4/98 (3)       none

Continental
Micronesia    Boeing 727-200 Advanced         2        4/98 (4)       none

                                        2

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(1)        TWA may specify a lease  expiration  date for each aircraft up to six
           months  before the date shown,  provided  the average date for the 16
           aircraft is February  1998, and the average  expiration  date for the
           remaining two aircraft is November 1998. The TWA leases were modified
           in  1991.  The  leases  for  the 16  aircraft  were  extended  for an
           aggregate of 75 months  beyond the initial lease  expiration  date in
           November 1991 at  approximately  46% of the original lease rates. The
           leases for the  remaining  two aircraft  were  extended for 72 months
           beyond  the  initial  lease  expiration  dates  in  November  1992 at
           approximately  42% of the original lease rates.  The Partnership also
           agreed  to share in the  costs of  certain  Airworthiness  Directives
           (ADs).  If such  costs are  incurred  by TWA,  they will be  credited
           against rental payments, subject to annual limitations with a maximum
           of $500,000 per aircraft over the lease terms.

           As discussed in Item 7, in October 1994,  TWA notified its creditors,
           including the Partnership,  of a proposed  restructuring of its debt.
           Subsequently,  GECAS negotiated a standstill agreement with TWA which
           was approved on behalf of the  Partnership  by PIMC.  That  agreement
           provided for a moratorium of the rent due the Partnership in November
           1994 and 75% of the  rents due the  Partnership  from  December  1994
           through  March  1995.  The  deferred  rents,  which  aggregated  $3.6
           million, plus interest were repaid in monthly installments  beginning
           in May  1995  through  October  1995.  The  Partnership  received  as
           consideration for the agreement  $218,071 and warrants for TWA Common
           Stock (Item 7).

(2)        This aircraft was previously on lease to SABA Airlines,  S.A. (SABA).
           The lease rate to Viscount was  approximately  56% of the prior lease
           rate. Items 3, 7 and 8 contain additional discussions of the Viscount
           default,  lease  termination  notification and Viscount's  subsequent
           bankruptcy filing.

           During 1995,  Viscount delivered the aircraft to Tucson Aerospace,  a
           maintenance   facility  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.  The aircraft is currently in the  possession of Tucson
           Aerospace  and it may assert a lien  against  the  aircraft to secure
           payment of its claim. 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,  which  claims it
           provided inspectors,  is claiming $185,000 from Tucson Aerospace. The
           Partnership  has been in  discussions  with the  various  parties  to
           resolve  these  disputes  and  is  currently  evaluating  all  of its
           options,  including alternative  procedures to obtain repossession of
           this aircraft.

(3)        This aircraft, previously on lease to Alaska Airlines, Inc. (Alaska),
           was  leased  to   Continental  in  April  1993.  The  lease  rate  is
           approximately  55% of the prior lease rate. The lease stipulates that
           Continental  may  assign  the  lease  to  its  affiliate  Continental
           Micronesia under certain  conditions.  The lease also stipulates that
           the Partnership will reimburse costs for cockpit  modifications up to
           $600,000,  C-check  labor costs up to $300,000 and the actual cost of
           C-check parts for the aircraft.  In addition,  the  Partnership  will
           provide  financing up to $815,000 for new image  modifications  to be
           repaid with interest over the lease term. In accordance with the cost
           sharing  agreement,  in  January  1994,  the  Partnership  reimbursed
           Continental  $600,000  for cockpit  modifications  and  $338,189  for
           C-check  labor and  parts.  In  addition,  the  Partnership  financed
           

                                        3

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           $719,784  for new image  modifications,  which is being  repaid  with
           interest  over  the  lease  term  of the  aircraft.  The  lease  also
           stipulates that the Partnership  share in the cost of meeting certain
           ADs, which cannot be estimated at this time.

(4)        These two  aircraft,  previously  on lease to Alaska,  were leased to
           Continental  Micronesia  in May and June  1993.  The lease  rates are
           approximately 55% of the prior lease rates. The leases stipulate that
           the Partnership will reimburse costs for cockpit  modifications up to
           $600,000 per aircraft,  C-check labor costs up to $300,000 for one of
           the  aircraft  and the actual  cost of  C-check  parts for one of the
           aircraft.  In addition,  the Partnership will provide financing up to
           $815,000 for new image  modifications to be repaid with interest over
           the lease term for each aircraft. In accordance with the cost sharing
           agreement,  in January 1994, the Partnership  reimbursed  Continental
           (on behalf of its affiliate Continental  Micronesia) $1.2 million for
           cockpit  modifications  and $404,136 for C-check labor and parts.  In
           addition,   the  Partnership   financed   $1,457,749  for  new  image
           modifications,  which is being  repaid with  interest  over the lease
           terms of the aircraft. The leases also stipulate that the Partnership
           share in the cost of meeting  certain ADs,  which cannot be estimated
           at this time.

The Partnership transferred six Boeing 727-200 aircraft,  formerly leased to Pan
American  World  Airways,  Inc. (Pan Am), to aircraft  inventory in 1992.  These
aircraft were  disassembled  for sale of their  component  parts as discussed in
Note 5 to the financial  statements  (Item 8). The  Partnership  sold one Boeing
727-200 aircraft equipped with a hushkit (described  below),  formerly leased to
Delta Airlines,  Inc. (Delta), to American  International Airways, Inc. (AIA) in
February 1995 as discussed in Item 7.

The lease of one Boeing 737-200 Combi aircraft to Northwest Territorial Airways,
Ltd. (NWT) expired in October 1995. As specified in the lease,  NWT was required
to perform  certain  maintenance  work on the aircraft prior to its return.  NWT
returned the aircraft without  performing the required  maintenance  work, which
constituted  a default under the lease.  The  Partnership  and NWT  subsequently
reached an  agreement  by which NWT paid to the  Partnership  in  December  1995
approximately $457,000 and the Partnership was entitled to retain NWT's security
deposit of  approximately  $101,000  in lieu of NWT's  performing  the  required
maintenance work on the aircraft. The airframe and one engine from this aircraft
were  subsequently  sold to Westjet  Airlines,  Ltd.  (Westjet) in March 1996 as
discussed  in  Items 7 and 8.  The  Partnership  is  currently  remarketing  the
remaining engine for sale.

Industry-wide, approximately 475 commercial aircraft are currently available for
sale or lease,  approximately  125 less than a year ago. From 1991 through 1994,
depressed  demand for air  travel  limited  airline  expansion  plans,  with new
aircraft  orders  and  scheduled  deliveries  being  canceled  or  substantially
deferred.  As profitability  declined,  many airlines took action to downsize or
liquidate   assets  and  some  airlines  were  forced  to  file  for  bankruptcy
protection.  Following two years of good traffic  growth  accompanied  by rising
yields,  this trend is improving  with new aircraft  orders last year  exceeding
deliveries  for the first time since 1990.  To date,  this  recovery  has mainly
benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies, many of which
are now being  upgraded  with  noise  suppression  hardware,  commonly  known as
"hushkits,"  which, when installed on the aircraft,  bring Stage 2 aircraft into
compliance with Federal Aviation Administration (FAA) Stage 3 noise restrictions
as  discussed  in  the  Industry  Update  section  of  Item  7.  Older  Stage  2
narrow-bodies  have shown marginal signs of recovery.  The  Partnership has been
forced to adjust  its  estimates  of the  residual  values  realizable  from its
aircraft and aircraft  inventory,  which resulted in an increase in depreciation
expense,  as  discussed  in Items 7 and 8. A  discussion  of the current  market
condition for the type of aircraft owned by the Partnership follows:

                                        4

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Boeing 727-200  Advanced - The Boeing 727 was the first tri-jet  introduced into
commercial  service.  The  Boeing 727 is a short- to  medium-range  jet used for
trips of up to 1,500  nautical  miles.  In 1972,  Boeing  introduced  the Boeing
727-200  Advanced  model,  a higher gross weight  version  with  increased  fuel
capacity as  compared  with the  non-advanced  model.  Hushkits  which bring the
Boeing 727-200 Advanced into compliance with FAA Stage 3 noise restrictions, are
now  available at an average cost of  approximately  $2.6 million per  aircraft.
Hushkits may not be cost effective on all aircraft due to the age of some of the
aircraft  and the time  required to fully  amortize the  additional  investment.
Certain  ADs  applicable  to all models of the  Boeing  727 have been  issued to
prevent fatigue cracks and control  corrosion as discussed in Item 7. The market
for this type of aircraft, as for all Stage 2 narrowbody aircraft,  has improved
over the previous year.

Boeing 737-200 - The Boeing 737-200 aircraft was introduced in 1967 and 150 were
delivered from 1967 through 1971. This two-engine,  two-pilot  aircraft provides
operators with 107 to 130 seats,  meeting their requirements for economical lift
in the 1,100 nautical mile range.  Hushkits which bring Boeing 737-200  aircraft
into compliance with FAA Stage 3 noise restrictions, are now available at a cost
of approximately  $1.5 million per aircraft.  Hushkits may not be cost effective
on all aircraft due to the age of some of the aircraft and the time  required to
fully amortize the additional  investment.  Certain ADs applicable to all models
of the  Boeing  737 have been  issued to  prevent  fatigue  cracks  and  control
corrosion as  discussed in Item 7. The market for this type of aircraft,  as for
all Stage 2 narrowbody aircraft, has improved over the previous year.

McDonnell Douglas  DC-9-30/40 - The McDonnell Douglas  DC-9-30/40 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  $1.7  million per  aircraft.
Hushkits may not be cost effective on all aircraft due to the age of some of the
aircraft  and the time  required to fully  amortize the  additional  investment.
Certain ADs applicable to the McDonnell Douglas DC-9 have been issued to prevent
fatigue cracks and control corrosion as discussed in Item 7. The market for this
type of aircraft, as for all Stage 2 narrowbody aircraft,  has improved over the
previous year.

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

PAIF-II owns 17 McDonnell  Douglas  DC-9-30 and one  McDonnell  Douglas  DC-9-40
aircraft  leased  to  TWA,  one  Boeing  727-200  Advanced  aircraft  leased  to
Continental,   two  Boeing  727-200  Advanced  aircraft  leased  to  Continental
Micronesia and one Boeing 737-200 aircraft currently in the possession of Tucson
Aerospace, a maintenance facility located in Arizona, as discussed in Items 1, 7
and 8. The Partnership's  entire fleet consists of Stage 2 aircraft.  All leases
are operating leases.  The Partnership  transferred six Boeing 727-200 aircraft,
previously  leased to Pan Am, to aircraft  inventory  in 1992.  These  aircraft,
which are not included in the following table,  have been  disassembled for sale
of their  component  parts.  The  Partnership  sold one Boeing 727-200  aircraft
equipped with a hushkit in February 1995.  The Partnership sold the airframe and

                                        5

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one engine from the Boeing 737-200 Combi aircraft in March 1996. The Partnership
is currently remarketing the remaining engine for sale or lease.

The following table describes the  Partnership's  current aircraft  portfolio in
greater detail:

                                               Year of       Cycles
Aircraft Type                 Serial Number  Manufacture  As of 11/30/95 (1)
-------------                 -------------  -----------  ------------------
Boeing 727-200 Advanced           21426         1977         31,219
Boeing 727-200 Advanced           21427         1977         29,839
Boeing 727-200 Advanced           21947         1979         26,478
Boeing 737-200                    19609         1968         63,364
McDonnell Douglas DC-9-30         47082         1967         74,237
McDonnell Douglas DC-9-30         47096         1967         74,827
McDonnell Douglas DC-9-30         47135         1968         75,617
McDonnell Douglas DC-9-30         47137         1968         74,503
McDonnell Douglas DC-9-30         47249         1968         80,841
McDonnell Douglas DC-9-30         47251         1968         78,987
McDonnell Douglas DC-9-30         47343         1969         77,813
McDonnell Douglas DC-9-30         47345         1969         76,153
McDonnell Douglas DC-9-30         47411         1969         73,554
McDonnell Douglas DC-9-30         47412         1969         73,532
McDonnell Douglas DC-9-30         47027         1967         79,456
McDonnell Douglas DC-9-30         47107         1968         79,422
McDonnell Douglas DC-9-30         47108         1968         76,136
McDonnell Douglas DC-9-30         47174         1968         76,809
McDonnell Douglas DC-9-30         47324         1969         73,349
McDonnell Douglas DC-9-30         47357         1969         73,009
McDonnell Douglas DC-9-30         47734         1977         43,628
McDonnell Douglas DC-9-40         47617         1975         42,691

(1)        Cycle information as of 12/31/95  is not yet available.



Item 3.         Legal Proceedings

Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition
under  Chapter  11 of the United  States  Bankruptcy  Code in the United  States
Bankruptcy  Court for the Middle  District  of  Florida,  Orlando  Division.  On
September 26, 1990 the Partnership filed a proof of claim to recover unpaid rent
and other damages,  and on November 27, 1990, the  Partnership  filed a proof of
administrative   claim  to  recover   damages   for   detention   of   aircraft,
non-compliance  with court  orders and  post-petition  use of engines as well as
liquidated   damages.  On  July  27,  1992,  the  Bankruptcy  Court  approved  a
stipulation  embodying a settlement among the Partnership,  the Braniff creditor
committees  and  Braniff in which it was agreed  that the  Partnership  would be
allowed an  administrative  claim in the bankruptcy  proceeding of approximately
$230,769.  The  Partnership  has received a check from the bankruptcy  estate in
full  payment of the allowed  administrative  claim,  subject,  however,  to the
requirement of the stipulation  that 25% of such proceeds be held in a separate,
interest-bearing  account  pending  notification by Braniff that all the allowed
administrative  claims have been  satisfied.  In the third quarter of 1994,  the
Partnership  was  authorized  to  release  one-half  of the 25%  portion  of the
Partnership's  administrative  claim  segregated  pursuant  to  the  stipulation
approved in 1992.  At the end of 1994,  the  Partnership  was  advised  that the

                                        6

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remaining  one-half balance of the 25% segregated  portion of the administrative
claim payment could be released.  As the final  disposition of the Partnership's
claim in the  Bankruptcy  proceedings,  the  Partnership  was  permitted  by the
Bankruptcy  Court 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 has been allowed a net remaining
unsecured claim of $769,231 in the proceedings.  The unsecured claim will not be
recorded  as  revenue  by the  Partnership  until it is  received.  It cannot be
estimated at this time when and if this claim will be paid.

Pan American  World Airways,  Inc. (Pan Am) - As discussed in the  Partnership's
1990 and 1991 Forms 10-K,  Pan Am  commenced  reorganization  proceedings  under
Chapter 11 of the United States  Bankruptcy Code in the United States Bankruptcy
Court for the Southern  District of New York on January 8, 1991.  On November 8,
1991, the Partnership filed a proof a claim in Pan Am's bankruptcy proceeding to
recover damages for lost rent and for Pan Am's failure to meet return conditions
with  respect  to the  Partnership's  aircraft  on  lease  to Pan Am.  Pan  Am's
reorganization under Chapter 11 was ultimately  unsuccessful,  and Pan Am ceased
operations in December  1991.  On July 10, 1995,  Pan Am entered into a proposed
Stipulation  and Order with the  Partnership  pursuant to which Pan Am agreed to
allow the Partnership $2.5 million as an  administrative  expense priority claim
and $56 million as a general  unsecured  claim.  This  Stipulation and Order was
approved by the  Bankruptcy  Court,  at a hearing held on August 17,  1995.  The
claims  will not be  recorded  as  revenue  by the  Partnership  until  they are
received.  It cannot be  estimated at this time when and if these claims will be
paid.

Trans World Airlines,  Inc. (TWA) - On June 30, 1995, TWA filed a reorganization
proceeding  under Chapter 11 of the United States  Bankruptcy Code in the United
States Bankruptcy Court for the Eastern District of Missouri. Immediately before
the filing, the Partnership and TWA entered into an Amended Deferral  Agreement,
pursuant  to which TWA  agreed to bring  lease  rents  current  over a period of
several months and to confirm all of its leases with the Partnership. As agreed,
TWA proposed a plan of reorganization in which, among other things, it confirmed
all of its  leases  with the  Partnership,  and the plan  was  confirmed  by the
Bankruptcy  Court on  August  4,  1995.  TWA has  emerged  from  its  bankruptcy
proceeding and has repaid all outstanding  rent deferrals in accordance with its
commitment to the Partnership and in accordance with its plan of reorganization.
TWA  has  since  remained  current  on  all of its  payment  obligations  to the
Partnership.

Viscount  Air  Services,  Inc.  (Viscount)  Bankruptcy  - 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 for the  District  of
Arizona. Polaris Holding Company, the Partnership,  Polaris Aircraft Income Fund
II,  Polaris  Aircraft  Income Fund IV, and  Polaris  Aircraft  Investors  XVIII
(collectively,  Polaris  Entities)  lease a total of ten  aircraft and two spare
engines to Viscount.  The aggregate  outstanding  obligations of Viscount to the
Polaris Entities is approximately  $11.0 million.  GE Capital Aviation Services,
Inc.  (GECAS),  as agent for the Polaris  Entities,  terminated the aircraft and
engine  leases  pre-petition,  but Viscount  disputes the  effectiveness  of the
termination  and currently has possession of the aircraft and engines,  with the
exception of the Partnership's aircraft, which is currently in the possession of
Tucson Aerospace,  a maintenance facility located in Arizona. GECAS and Viscount
are currently  negotiating to determine if they can resolve their differences by
agreement. The outcome of this Chapter 11 proceeding cannot be predicted.

Kepford, et al. v. Prudential Securities,  et al. - On April 13, 1994, an action
entitled  Kepford,  et al.  v.  Prudential  Securities,  Inc.  was  filed in the
District Court of Harris County,  Texas. The complaint names Polaris  Investment
Management Corporation, Polaris Securities Corporation, Polaris Holding Company,
Polaris Aircraft Leasing Corporation,  the Partnership,  Polaris Aircraft Income

                                        7

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Fund I,  Polaris  Aircraft  Income Fund III,  Polaris  Aircraft  Income Fund IV,
Polaris  Aircraft  Income  Fund V,  Polaris  Aircraft  Income  Fund VI,  General
Electric Capital Corporation,  Prudential Securities, Inc., Prudential Insurance
Company of America and James J. Darr, as  defendants.  Certain  defendants  were
served with a summons and original petition on or about May 2, 1994. Plaintiffs'
original petition alleges that defendants violated the Texas Securities Act, the
Texas Deceptive Trade Practices Act, sections 11 and 12 of the Securities Act of
1933  and  committed  common  law  fraud,  fraud  in the  inducement,  negligent
misrepresentation,  negligence, breach of fiduciary duty and civil conspiracy by
misrepresenting  and failing 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 thereon, and double
and treble damages under the Texas Deceptive Trade Practices Act.

Certain defendants,  including Polaris Investment Management Corporation and the
Partnership,  filed a general  denial on June 29,  1994 and a motion for summary
judgment  on June 17,  1994 on the basis  that the  statute of  limitations  has
expired.  On June 29, 1994 and July 14,  1994,  respectively,  plaintiffs  filed
their first amended original petition and second amended original petition, both
of which added plaintiffs. On July 18, 1994, plaintiffs filed their response and
opposition to defendants' motion for partial summary judgment and also moved for
a continuance on the motion for partial  summary  judgment.  On August 11, 1994,
after  plaintiffs again amended their petition to add numerous  plaintiffs,  the
defendants  withdrew their summary judgment motion and motion to stay discovery,
without prejudice to refiling these motions at a later date.

Riskind,  et al. v.  Prudential  Securities,  Inc., et al. - An action  entitled
Riskind,  et al. v.  Prudential  Securities,  Inc., et al. has been filed in the
District Court of the 165 Judicial District, Maverick County, Texas. This action
is on behalf of over 3,000 individual  investors who purchased units in "various
Polaris Aircraft Income Funds,"  including the Partnership.  The Partnership and
Polaris Investment Management Corporation received service of plaintiffs' second
amended  original  petition  and, on June 13,  1994,  filed an  original  answer
containing a general denial.

The second amended original petition names the Partnership,  Polaris  Investment
Management Corporation, Prudential Securities, Inc. and others as defendants and
alleges that these  defendants  violated the Texas  Securities Act and the Texas
Deceptive  Trade  Practices  Act and  committed  common law fraud,  fraud in the
inducement, negligent misrepresentation,  negligent breach of fiduciary duty and
civil conspiracy by  misrepresenting  and failing 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  thereon,
and double and treble  damages under the Texas  Deceptive  Trade  Practices Act.
Kidder,  Peabody & Co.  was  added as an  additional  defendant  by virtue of an
Intervenor's Amended Plea in Intervention filed on or about April 7, 1995.

Prudential Securities,  Inc. reached a settlement with the plaintiffs. The trial
of the claims of one  plaintiff,  Robert W.  Wilson,  against  Polaris  Aircraft
Income  Funds  I-VI,  Polaris  Investment  Management  Corporation  and  various
affiliates  of Polaris  Investment  Management  Corporation,  including  General
Electric Capital Corporation,  was commenced on July 10, 1995. On July 26, 1995,
the jury returned a verdict in favor of the defendants on all counts. Subsequent
to this  verdict,  all of the  defendants  (with  the  exception  of  Prudential
Securities,  Inc., which had previously  settled) entered into a settlement with
the  plaintiffs.  None of the Polaris  Aircraft  Income  Funds were  required to
contribute to this settlement.

Howland,  et al. v. Polaris  Holding  Company,  et al. - On or about February 4,
1994,  a purported  class action  entitled  Howland,  et al. v. Polaris  Holding


                                        8

<PAGE>



Company,  et al. was filed in the United States  District Court for the District
of Arizona on behalf of investors  in Polaris  Aircraft  Income Funds I-VI.  The
complaint  names  each of 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  Securities Group,  Inc.,  Prudential
Insurance Company of America,  George W. Ball, Robert J. Sherman, James J. Darr,
Paul J. Proscia, Frank W. Giordano,  William A. Pittman, Joseph H. Quinn, Joe W.
Defur, James M. Kelso and Brian J. Martin, as defendants.  The complaint alleges
that   defendants   violated   federal  RICO   statutes,   committed   negligent
misrepresentations,  and breached their fiduciary duties by misrepresenting  and
failing  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 accounting of all monies invested
by plaintiffs and the class and the uses made thereof by defendants, an award of
compensatory,  punitive and treble damages in unspecified  amounts plus interest
thereon,  rescission,  attorneys'  fees and costs. On August 3, 1994, the action
was transferred to the Multi-District Litigation in the Southern District of New
York  entitled In re  Prudential  Securities  Limited  Partnerships  Litigation,
discussed in Part III, Item 10 below.

Mary C. Scott v.  Prudential  Securities  Inc. et al. - On or around  August 15,
1995, a complaint  entitled Mary C. Scott v.  Prudential  Securities Inc. et al.
was filed in the Court of Common Pleas,  County of Summit,  Ohio.  The complaint
names  as  defendants  Prudential  Securities  Inc.,  the  Partnership,  Polaris
Aircraft  Income Fund III,  Polaris  Aircraft  Income Fund IV, Polaris  Aircraft
Income   Fund  VI,   P-Bache/A.G.   Spanos   Genesis   Income   Partners  LP  1,
Prudential-Bache  Properties,  Inc.,  A.G.  Spanos  Residential  Partners  - 86,
Polaris Securities  Corporation and Robert Bryan Fitzpatrick.  Plaintiff alleges
claims of fraud and violation of Ohio  securities  law arising out of the public
offerings of the Partnership, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund VI, and P-Bache/A.G. Spanos Genesis
Income  Partners  LP  1.  Plaintiff   seeks   compensatory   damages,   general,
consequential  and incidental  damages,  punitive  damages,  rescission,  costs,
attorneys' fees and other and further relief as the Court deems just and proper.
On September  15,  1995,  defendants  removed  this action to the United  States
District  Court,  Eastern  District of Ohio. On September  18, 1995,  defendants
sought the transfer of this action to the Multi-District Litigation and sought a
stay of all  proceedings  by the  district  court,  which  stay was  granted  on
September  25,  1995.  The  Judicial  Panel   transferred  this  action  to  the
Multi-District Litigation on or about February 7, 1996.

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. With the exception of Novak, et al
v.  Polaris  Holding  Company,  et al,  where  the  Partnership  is  named  as a
defendant,  the  Partnership  is not a party  to  these  actions.  In  Novak,  a
derivative  action,  the  Partnership  is named as a  defendant  for  procedural
purposes  but the  plaintiffs  in such  lawsuit  do not seek an  award  from the
Partnership.



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

None.


                                        9

<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, 1995
           -----------------------------                ------------------------

           Limited Partnership Interest:                        16,426
           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
           1995 and 1994 totaled $6,874,959 and $12,499,925,  respectively. Cash
           distributions per limited  partnership unit were $13.75 and $25.00 in
           1995 and 1994, respectively.




                                       10

<PAGE>


<TABLE>
Item 6.         Selected Financial Data


                                                           For the years ended December 31,
                                                           --------------------------------
<CAPTION>
                                   1995              1994               1993               1992                1991
                                   ----              ----               ----               ----                ----
<S>                            <C>              <C>                <C>                <C>                <C>
Revenues                       $ 21,093,341     $  14,443,902      $  15,558,866      $  17,990,196      $  29,673,077


Net Income (Loss)                 5,717,065        (3,217,172)            48,114         (1,709,007)        (1,596,956)

Net Income (Loss)
  Allocated to Limited
  Partners                        4,972,468        (4,434,868)          (952,261)        (2,941,785)        (3,330,801)

Net Income (Loss) per
  Limited Partnership Unit             9.94             (8.87)             (1.91)             (5.88)             (6.66)

Cash Distributions per
  Limited Partnership
  Unit                                13.75             25.00              20.00              25.00              35.00

Amount of Cash
  Distributions Included
  Above Representing
  a Return of Capital on
  a Generally Accepted
  Accounting Principle
  Basis per Limited
  Partnership Unit*                   13.75             25.00              20.00              25.00              35.00


Total Assets                    107,820,317       110,568,377        129,706,547        141,436,928        155,052,097

Partners' Capital               106,368,523       108,290,301        125,396,279        136,459,209        152,057,022

</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.


                                       11

<PAGE>



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

Polaris  Aircraft Income Fund II (the  Partnership)  owns a portfolio of 22 used
commercial jet aircraft, one spare engine and certain inventoried aircraft parts
out of its  original  portfolio  of 30 aircraft.  The  portfolio  consists of 17
McDonnell  Douglas DC-9-30  aircraft and one McDonnell  Douglas DC-9-40 aircraft
leased to Trans  World  Airlines,  Inc.  (TWA);  one  Boeing  737-200  aircraft,
previously leased to Viscount Air Services,  Inc. (Viscount) which has filed for
Chapter 11 bankruptcy  protection  in January  1996,  as discussed  below and in
Items 3 and 8, is currently in the possession of Tucson Aerospace, a maintenance
facility  located in Arizona;  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).  The
Partnership  transferred six Boeing 727-200  aircraft,  previously leased to Pan
American World Airways, Inc., to aircraft inventory in 1992. These aircraft have
been  disassembled  for sale of their component  parts. The Partnership sold one
Boeing 727-200 aircraft,  formerly leased to Delta Airlines,  Inc.  (Delta),  in
February  1995 as discussed  below.  The  Partnership  sold the airframe and one
engine from the Boeing  737-200  Combi  aircraft,  formerly  leased to Northwest
Territorial  Airways,  Ltd.  (NWT),  in  March  1996  as  discussed  below.  The
Partnership is currently remarketing the remaining engine for sale.


Remarketing Update

Sale of Boeing  727-200  Aircraft  - The  Partnership  sold one  Boeing  727-200
aircraft  equipped with a hushkit,  formerly leased to Delta, to AIA in February
1995 for a sales price of approximately $1.77 million. The Partnership agreed to
accept payment of the sales price in 36 monthly  installments  of $55,000,  with
interest at a rate of 7.5% per annum, beginning in March 1995.

Sale  of  Boeing  737-200  Combi  Airframe  and  Engine  - In  March  1996,  the
Partnership  sold the  airframe  and one engine  from the Boeing  737-200  Combi
Aircraft,  formerly on lease to NWT, to Westjet Airlines,  Ltd.  (Westjet).  The
Partnership is currently remarketing the remaining engine for sale or lease. The
security  deposit of  approximately  $88,000,  received from Westjet in December
1995, was applied to the sales price of approximately  $896,000. The Partnership
agreed  to accept  payment  of the  balance  of the  sales  price in 22  monthly
installments, with interest at a rate of 10% per annum beginning in March 1996.


Partnership Operations

The  Partnership  recorded  net  income  of  $5,717,065,  or $9.94  per  limited
partnership  unit for the year ended  December 31, 1995,  compared a net loss of
$3,217,172,  or $8.87 per limited partnership unit and net income of $48,114, or
an allocated net loss of $1.91 per limited partnership unit, for the years ended
December  31,  1994  and  1993,  respectively.  The net  loss  in 1994  resulted
primarily from a decrease in rental revenue  recognized  from the  Partnership's
leases with TWA combined with maintenance expenses incurred from the TWA leases.
Further  impacting the decline in operating results in 1994 as compared to 1993,
depreciation  expense was  substantially  increased  in 1994 for declines in the
estimated   realizable  values  of  the  Partnership's   aircraft  and  aircraft
inventory,  as discussed later in the Industry  Update section.  The significant
improvement   in  operating   results  in  1995  was  primarily  the  result  of
substantially  increased revenues combined with lower operating expenses in 1995
as compared to 1994.


                                       12

<PAGE>



Rental  revenues,  net of  related  management  fees,  declined  during  1994 as
compared  to  1993  primarily  as a  result  of a  decrease  in  rental  revenue
recognized in 1994 on the  Partnership's  leases with TWA. In December  1994, GE
Capital Aviation Services,  Inc. (GECAS) negotiated a standstill  agreement with
TWA. That agreement  provided for a deferral of the rent due the  Partnership in
November  1994 and 75% of the  rents  due the  Partnership  from  December  1994
through March 1995. The Partnership did not recognize the rental amount deferred
in 1994 of  $1,575,000  as rental  revenue  until it was  received in 1995.  The
Partnership has received from TWA all scheduled rent payments beginning in April
1995 and all scheduled  deferred rental  payments  beginning in May 1995 through
October  1995,  including  interest at a rate of 12% per annum.  The increase in
rental  revenues  in 1995,  as  compared  to 1994,  was  partially  offset  by a
provision  for credit  losses of $241,964  recorded  in 1995 for  certain  rent,
deferred rent and accrued interest receivables from Viscount as discussed below.

In consideration for the rent deferral, TWA agreed to make a lump sum payment of
$1,000,000  to GECAS for the TWA  lessors  for whom  GECAS  provides  management
services  and who agreed to the Deferral  Agreement.  The  Partnership  received
$218,171 in January  1995 as its share of such  payment by TWA.  This amount was
recognized as other revenue in 1995. In addition,  TWA agreed to issue  warrants
to the Partnership for TWA Common Stock.  The Partnership  received  warrants to
purchase  227,133  shares of TWA Common Stock from TWA in November  1995 and has
recognized  the net  warrant  value as of the date of receipt of  $1,772,206  as
revenue in 1995. The Partnership exercised the warrants on December 29, 1995 for
the strike  price of $0.01 per share and has  recognized  a gain on the value of
the warrants of $582,028 in 1995.  In addition,  the  Partnership  recognized as
other  revenue in 1995  payments  received  from NWT  aggregating  approximately
$647,000 in lieu of NWT performing required  maintenance work on the aircraft it
was  leasing  prior to its  return  to the  Partnership.  The  Partnership  also
recognized  as  other   revenue  in  1995   maintenance   reserves   aggregating
approximately  $91,000 that were previously paid to the Partnership by Delta for
the aircraft that was sold to AIA in February 1995.

Operating expenses significantly decreased in 1995 as compared to 1994 and 1993.
As part of the  TWA  lease  extension  in  1991  as  discussed  in Note 6 to the
financial  statements  (Item  8),  the  Partnership  agreed to share the cost of
meeting  certain   Airworthiness   Directives   (ADs)  after  TWA   successfully
reorganized  in 1993. The agreement  stipulated  that such costs incurred by TWA
may be credited  against monthly  rentals,  subject to annual  limitations and a
maximum of $500,000 per aircraft  through the end of the leases.  In  accordance
with the cost sharing agreement, the Partnership recognized as operating expense
$3.6  million  and $2.7  million  of these AD  expenses  during  1994 and  1993,
respectively. No operating expenses relating to the TWA aircraft were recognized
by the Partnership during 1995.

As discussed  later in the Industry  Update  section,  if the projected net cash
flow for each aircraft  (projected rental revenue,  net of management fees, less
projected maintenance costs, if any, plus the adjusted 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  approximately  $2.4 million and  approximately  $1.6 million of this
deficiency as increased depreciation expense in 1995 and 1994, respectively. The
1995 downward  adjustment  was the result of the reduction of the net book value
to the estimated net realizable  value of the Boeing 737-200 Combi aircraft sold
to Westjet in 1996 as previously  discussed.  Approximately $1.03 million of the
1994  adjustment  was the result of the  reduction  of the net book value to the
estimated net  realizable  value of the Boeing  727-200  aircraft sold to AIA in
February 1995 as previously discussed.

The increased  depreciation  expense  reduces the aircraft's  carrying value and
reduces the amount of future  depreciation  expense  that the  Partnership  will


                                       13

<PAGE>



recognize  over the  projected  remaining  economic  life of the  aircraft.  The
Partnership  also made downward  adjustments to the estimated  residual value of
certain of its on-lease aircraft as of December 31, 1995, 1994 and 1993. For any
downward  adjustment  to the  estimated  residual  values,  future  depreciation
expense over the projected remaining economic life of the aircraft is increased.
The Partnership's  earnings are impacted by the net effect of the adjustments to
the  aircraft  carrying  values  recorded  in 1995  and  1994  and the  downward
adjustments to the estimated  residual values recorded in 1995, 1994 and 1993 as
discussed later in the Industry Update section.


Liquidity and Cash Distributions

Liquidity  -  The  Partnership   received  all  lease  payments  due  from  NWT,
Continental,  Continental Micronesia and TWA. As discussed above, TWA repaid its
deferred  rents in full with  interest by October  1995.  The  Partnership  also
received from TWA warrants to purchase  227,133 shares of TWA Common Stock and a
payment of $218,171 in  consideration  for the rent  deferral.  The  Partnership
exercised  the  warrants  in 1995  and sold the TWA  Common  Stock in the  first
quarter of 1996, net of broker commissions, for $2,406,479.

As  discussed  below,  prior to  January 1, 1996,  the  Partnership  had been in
discussions  with  Viscount  to  restructure   certain  of  Viscount's  existing
financial obligations to the Partnership.  While such discussions were underway,
Viscount had  undertaken to pay in full, by the end of each month,  beginning in
June 1995, the current month's  obligations by making partial periodic  payments
during that month. Viscount is presently in default on its financial obligations
to the Partnership, and as discussed below, the aircraft Viscount was leasing is
currently in the  possession of a maintenance  facility  located in Arizona.  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.  Legal  counsel has been  retained and the general  partner is
evaluating  the  rights,  remedies  and  courses  of  action  available  to  the
Partnership  with  respect to  Viscount's  default and  bankruptcy  filing.  All
payments due from Viscount may be affected by Viscount's  filing for  protection
under Chapter 11.

As of December 31, 1995, the Partnership's rent,  maintenance reserve,  loan and
interest receivables from Viscount aggregated approximately $336,000. Viscount's
failure to perform on its financial obligations with the Partnership is expected
to have an adverse effect on the Partnership's  financial position.  As a result
of Viscount's  defaults and Chapter 11 bankruptcy  filing,  the  Partnership may
incur  maintenance,  remarketing,  transition  and legal  costs  related  to the
Partnership's aircraft.

As  discussed  above,  the  Partnership  agreed to share in the cost of  meeting
certain ADs with TWA. In accordance  with the  cost-sharing  agreement,  TWA may
offset up to an additional  $2.7 million  against  rental  payments,  subject to
annual limitations, over the remaining lease terms.

As  specified  in the  Partnership's  leases  with  Continental  Micronesia  and
Continental,  in January 1994, the Partnership reimbursed Continental (partially
on behalf of its affiliate Continental  Micronesia) an aggregate of $1.8 million
for cockpit modifications and $742,325 for C-check labor and parts for the three
aircraft. In addition, in January 1994, the Partnership financed an aggregate of
$2,177,533 for new image modifications, which is being repaid with interest over
the terms of the aircraft  leases.  The leases with  Continental and Continental
Micronesia  also  stipulate  that the  Partnership  share in the cost of meeting
certain ADs, which cannot be estimated at this time.


                                       14

<PAGE>



ALG,  Inc.  (ALG) was  required  to pay the  Partnership  a balloon  payment  of
$897,932 in January 1995 on their  promissory  note. ALG paid to the Partnership
$19,138 of the balloon payment in January 1995,  originating an event of default
under the note. The Partnership and ALG  subsequently  restructured the terms of
the promissory note. The renegotiated terms specified payment by ALG of the note
balance  with  interest  at a rate of 13% per annum with one lump sum payment in
January  1995 of  $254,733,  eleven  monthly  payments of $25,600  beginning  in
February  1995,  and  a  balloon  payment  in  January  1996  of  $416,631.  The
Partnership  received all scheduled  renegotiated  payments due from ALG through
December 31, 1995. ALG did not pay the balloon  payment due in January 1996. The
Partnership and ALG once again  restructured  the terms of the promissory  note.
The renegotiated  terms specify payment by ALG of the note balance with interest
at a rate of 13% per annum with one lump sum payment in January 1996 of $135,258
and eleven payments of $27,272 beginning in February 1996 through December 1996.
ALG is current on the renegotiated payments.

The Partnership sold one Boeing 727-200 aircraft  equipped with a hushkit to AIA
in February  1995 as  previously  discussed.  The  agreement  with AIA specifies
payment of the sales price in 36 monthly  installments  of $55,000  beginning in
March 1995. The Partnership has received all scheduled payments due from AIA.

In March 1996, the Partnership  sold the airframe and one engine from its Boeing
737-200  Combi  aircraft to Westjet as  previously  discussed.  The  Partnership
received a security  deposit of  approximately  $88,000 from Westjet in December
1995  which  was  applied  to the sales  price of  approximately  $896,000.  The
Partnership  agreed to accept  payment of the  balance of the sales  price in 22
monthly  installments,  with  interest at a rate of 10% per annum  beginning  in
March 1996. The Partnership has received all scheduled payments from Westjet.

The  Partnership  receives  maintenance  reserve  payments  from  certain of its
lessees that may be  reimbursed to the lessee or applied  against  certain costs
incurred by the Partnership for maintenance work performed on the  Partnership's
aircraft,  as specified in the leases.  Maintenance  reserve  balances,  if any,
remaining  at the  termination  of the lease may be used by the  Partnership  to
offset future maintenance expenses or recognized as revenue. The net maintenance
reserves balances aggregate $179,185 as of December 31, 1995.

Payments of $275,130 have been received during 1995 from the sale of inventoried
parts from the six  disassembled  aircraft.  The  Partnership  is retaining cash
reserves  to  meet  obligations  under  the  TWA,  Continental  and  Continental
Micronesia   lease  agreements  and  to  cover  the  potential  costs  that  the
Partnership  may incur relating to the Viscount  default and bankruptcy  filing,
including potential aircraft maintenance, remarketing and transition costs.

Cash  Distributions - Cash  distributions  to limited  partners were $6,874,959,
$12,499,925  and  $9,999,940  in  1995,  1994  and  1993,   respectively.   Cash
distributions  per limited  partnership unit were $13.75,  $25.00 and $20.00 per
limited  partnership unit in 1995, 1994 and 1993,  respectively.  The timing and
amount of future  cash  distributions  are not yet known and will  depend on the
Partnership's future cash requirements including the potential costs that may be
incurred relating to the Viscount default and bankruptcy;  the receipt of rental
payments  from TWA,  Continental  and  Continental  Micronesia;  the  receipt of
modification financing payments from Continental and Continental Micronesia; the
receipt of sales  proceeds  from AIA and  Westjet;  the receipt of  renegotiated
promissory  note payments from ALG; the receipt of payments  generated  from the
aircraft  disassembly  process; and the receipt of current and delinquent rental
and loan payments from Viscount.



                                       15

<PAGE>



TWA Restructuring

In October  1994,  TWA notified its  creditors,  including the  Partnership,  of
another  proposed  restructuring of its debt.  Subsequently,  GECAS negotiated a
standstill  arrangement,  as set forth in a letter  agreement dated December 16,
1994 (the Deferral Agreement),  with TWA for the 46 aircraft that are managed by
GECAS, 18 of which are owned by the  Partnership.  As required by its terms, the
Deferral  Agreement  (which  has since  been  amended  as  discussed  below) was
approved by PIMC on behalf of the Partnership with respect to the  Partnership's
aircraft.

The Deferral  Agreement provided for (i) a moratorium on all the rent due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred  rents,  together
with interest  thereon,  to be repaid in monthly  installments  beginning in May
1995 and ending in  December  1995.  The  repayment  schedule  was  subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership recorded
a note  receivable  and  corresponding  allowance for credit losses equal to the
total of the  1994  deferred  rents  of  $1.575  million,  the net of which  was
reflected in the Partnership's  1994 balance sheet (Item 8). The Partnership did
not recognize  either the $1.575 million  rental amount  deferred in 1994 or the
$2.025 million rental amount deferred during the first quarter of 1995 as rental
revenue  until  the  deferred  rents  were  received.  The note  receivable  and
corresponding  allowance for credit losses were reduced by the principal portion
of the payments received.  The Partnership  received all scheduled rent payments
beginning in April 1995 and all scheduled  deferred rental payments beginning in
May  1995,  including  interest  at a rate of 12% per  annum,  from  TWA and has
recognized  the $3.6 million  deferred  rents as rental revenue during 1995. The
deferred rents were paid in full by October 1995.

In consideration for the partial rent moratorium  described above, TWA agreed to
make a lump sum  payment of  $1,000,000  to GECAS for the TWA  lessors  for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership  received  $218,171 in January  1995 as its share of such payment by
TWA.  This amount was  recognized  as other  revenue in the  Partnership's  1995
statement of operations  (Item 8). In addition,  TWA agreed to issue warrants to
the Partnership for TWA Common Stock.

In order to  resolve  certain  issues  that  arose  after the  execution  of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995,  pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended,  the Amended  Deferral  Agreement).  The effect of the
Amended  Deferral  Agreement,  which was  approved  by PIMC with  respect to the
Partnership's  aircraft,  is that TWA,  in  addition  to  agreeing  to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants,  the number of which was determined by a formula) in  consideration
for the aircraft owners'  agreement to defer rent under the Deferral  Agreement,
and,  (ii) to the  extent  the  market  value of the  warrants  is less than the
payment amount, to supply  maintenance  services to the aircraft owners having a
value equal to such deficiency. The payment amount was determined by subtracting
certain  maintenance  reimbursements  owed to TWA by  certain  aircraft  owners,
including the  Partnership,  from the aggregate  amount of deferred  rents.  The
amount of such maintenance reimbursement has not been finally determined.

TWA  agreed  that,  upon  filing  of its  prepackaged  plan,  it would  take all
reasonable  steps to implement the terms of the Amended  Deferral  Agreement and
would immediately assume all of the Partnership's  leases. TWA also agreed that,
not  withstanding  the 60-day cure period provided by section 1110 of the United
States  Bankruptcy  Code,  it would  remain  current on the  performance  of its
obligations under the leases, as amended by the Amended Deferral Agreement.

                                       16

<PAGE>



On June 30, 1995, TWA filed its prepackaged  Chapter 11 bankruptcy in the United
States Bankruptcy Court for the Eastern District of Missouri. On August 4, 1995,
the  Bankruptcy  Court  confirmed  TWA's plan of  reorganization,  which  became
effective on August 23, 1995. Pursuant to the Amended Deferral Agreement, on the
confirmation  date of the plan,  August 4,  1995,  the  Partnership  received  a
payment of  $1,217,989  from TWA which  represented  fifty  percent (50%) of the
deferred rent outstanding  plus interest as of such date. The remaining  balance
of deferred rent plus interest was paid in full to the Partnership on October 2,
1995. While TWA has committed to an uninterrupted flow of lease payments,  there
is no assurance that TWA will continue to honor its obligations in the future.

The Partnership received warrants to purchase 227,133 shares of TWA Common Stock
from TWA in November  1995 and has  recognized  the net warrant  value as of the
date of receipt of  $1,772,206 as revenue in the 1995  statement of  operations.
The Partnership exercised the warrants on December 29, 1995 for the strike price
of $0.01 per share and has  recognized  a gain on the value of the  warrants  of
$582,028 in the 1995 statement of operations. The TWA Common Stock is classified
as trading securities  because the Partnership  intends to sell the stock in the
near  term.  The fair  market  value of the TWA stock at  December  31,  1995 of
$2,356,506  is reflected in the  Partnership's  December 31, 1995 balance  sheet
(Item 8).  The  Partnership  sold the TWA Common  Stock in the first  quarter of
1996, net of broker commissions, for $2,406,479.


Viscount Default and Bankruptcy Filing

In July 1994,  the  Partnership  entered  into a  restructuring  agreement  with
Viscount to defer certain rents due the Partnership  which aggregated  $196,800;
to  extend a line of  credit  to  Viscount  for a total of  $127,000  to be used
primarily for maintenance expenses relating to the Partnership's  aircraft;  and
to give the Partnership the option to acquire  approximately  0.6% of the issued
and outstanding shares of Viscount stock as of July 26, 1994 for an option price
of approximately  $91,000.  It was not practicable to estimate the fair value of
the stock  options as of December  31, 1995,  as they are not  publicly  traded,
although Viscount's recent bankruptcy filing would have an adverse impact on the
value of the stock options, if any.

The deferred rents,  which were being repaid by Viscount with interest at a rate
of 6% per annum over the  remaining  terms of the  leases,  were  recognized  as
revenue in the period earned.  The unpaid balances of the deferred rents,  which
are  reflected in rent and other  receivables  in the December 31, 1995 and 1994
balance sheets (Item 8), were $130,511 and $182,982,  respectively.  The line of
credit, which was advanced to Viscount during 1994, was being repaid by Viscount
over a 30-month  period,  beginning in January 1995,  with interest at a rate of
11.53% per annum.  The line of credit  balances,  which are  reflected  in notes
receivable  in the December 31, 1995 and 1994 balance  sheets,  were $88,641 and
$127,000, respectively.

During  1995,  the  Partnership  had  been  in  discussions   with  Viscount  to
restructure  additional  existing  financial  obligations  of  Viscount  to  the
Partnership.  While such discussions  were underway,  Viscount had undertaken to
pay in full,  by the end of each  month,  beginning  in June 1995,  the  current
month's  obligations  by making  partial  periodic  payments  during that month.
Viscount  is  presently  in  default  on  these  financial  obligations  to  the
Partnership. On December 13, 1995, the Partnership issued a notice of default to
Viscount  demanding,  within 10 days, full payment of all delinquent amounts due
the Partnership.  On January 9, 1996, Viscount was notified that the Partnership
had elected to terminate the lease and the  Partnership  demanded  return of the
aircraft.  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. As discussed below,  Tucson Aerospace,  a maintenance


                                       17

<PAGE>



facility  located in Arizona,  presently  has  possession  of the  Partnership's
aircraft.  Legal counsel has been retained and the general partner is evaluating
the rights,  remedies and courses of action  available to the  Partnership  with
respect to  Viscount's  default  and  bankruptcy  filing.  The  Partnership  has
received no additional payments from Viscount subsequent to December 31, 1995.

One of the Partnership's  Boeing 737-200 commercial jet aircraft was on lease to
Viscount prior to the lease termination  notification.  As of December 31, 1995,
the  Partnership's  aggregate  rent,  maintenance  reserve,  loan  and  interest
receivable  from  Viscount  was  approximately  $336,000.  All payments due from
Viscount may be affected by Viscount's filing for protection under Chapter 11.

During 1995, Viscount delivered the aircraft to Tucson Aerospace,  a maintenance
facility  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. The aircraft is currently in the possession of Tucson Aerospace and it
may assert a lien  against  the  aircraft  to secure  payment  of its claim.  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. The Partnership
has been in discussions  with the various  parties to resolve these disputes and
is currently evaluating all of its options,  including alternative procedures to
obtain repossession of this aircraft.

The  balance of the line of credit  advanced  to  Viscount in 1994 of $88,641 at
December 31, 1995, plus accrued interest, is guaranteed by certain affiliates of
the principal shareholder of Viscount and an allowance for credit losses has not
been  provided for this note.  The  Partnership  has  recorded an allowance  for
credit  losses for the  remaining  unsecured  receivable  balances from Viscount
including the aggregate of the unpaid rents,  outstanding  deferred rent balance
and accrued interest as of December 31, 1995. The aggregate allowance for credit
losses of $241,964  for these  obligations  is reflected  in the  provision  for
credit  losses in the  Partnership's  1995  statement  of  operations  (Item 8).
Viscount's failure to perform on its financial  obligations with the Partnership
is expected to have an adverse effect on the Partnership's  financial  position.
As a result of  Viscount's  defaults  and  Chapter  11  bankruptcy  filing,  the
Partnership  may incur  maintenance,  remarketing,  transition  and legal  costs
related to the Partnership's  aircraft and engines, which cannot be estimated at
this time. The outcome of Viscount's Chapter 11 proceeding cannot be predicted.


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.


                                       18

<PAGE>



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

In addition,  an AD adopted in 1990  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
FAA  estimates  the cost of  compliance  with this AD to be  approximately  $1.0
million and $900,000 per Boeing 727 and Boeing 737  aircraft,  respectively,  if
none of the required work had been done previously.  The FAA also issued several
ADs in 1993 updating  inspection and  modification  requirements  for Boeing 737
aircraft.  The FAA estimates the cost of these  requirements to be approximately
$90,000 per  aircraft.  In general,  the new  maintenance  requirements  must be
completed  by the later of March  1994,  or 75,000  and  60,000  cycles for each
Boeing 737 and 727,  respectively.  A similar AD was  adopted on  September  24,
1990, applicable to McDonnell Douglas aircraft. The AD requires specific work to
be performed at various cycle thresholds  between 50,000 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 December 1990, 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 December 31, 1991 on Boeing aircraft.

The   Partnership's   existing  leases  require  the  lessees  to  maintain  the
Partnership's  aircraft in accordance with an FAA-approved  maintenance  program
during  the lease  term.  At the end of the  leases,  each  lessee is  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.  The Partnership has agreed to bear a portion
of the costs of compliance  with certain ADs with respect to the aircraft leased
to TWA,  Continental  and  Continental  Micronesia,  as  described in Item 1. In
negotiating   subsequent   leases,   market  conditions  may  require  that  the
Partnership  bear some or all of the costs of compliance  with future ADs or ADs
that have been  issued,  but which did not require  action  during the  previous
lease term. The ultimate  effect on the  Partnership of compliance  with the FAA
maintenance  standards  is not  determinable  at this time and will  depend on a
variety of factors, including the state of the commercial aircraft industry, the
timing of the  issuance of ADs,  and the status of  compliance  therewith at the
expiration of the current leases.

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 current  U.S.  fleet is  comprised  of
approximately 68% Stage 3 aircraft and 32% Stage 2 aircraft. The key features of
the rule include:


                                       19

<PAGE>



           -         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.

The   Partnership's   entire  fleet  consists  of  Stage  2  aircraft.   Hushkit
modifications,  which allow Stage 2 aircraft to meet Stage 3  requirements,  are
currently available for the Partnership's  aircraft.  However, while technically
feasible,  hushkits may not be cost effective due to the age of the aircraft and
the time  required to fully  amortize  the  additional  investment.  The general
partner will  evaluate,  as  appropriate,  the potential  benefits of installing
hushkits on some or all of the Partnership's aircraft. It is unlikely,  however,
that the  Partnership  would incur such costs  unless they can be  substantially
recovered through a lease.

Implementation  of the Stage 3 standards  has  adversely  affected  the value of
Stage 2 aircraft,  as these aircraft will require  eventual  modification  to be
operated  in the U.S.  or other  countries  with  Stage 3  standards  after  the
applicable dates.

Demand for Aircraft - Industry-wide,  approximately 475 commercial  aircraft are
currently  available for sale or lease,  approximately 125 less than a year ago.
From  1991  through  1994,  depressed  demand  for air  travel  limited  airline
expansion  plans,  with new  aircraft  orders  and  scheduled  deliveries  being
canceled or substantially  deferred.  As profitability  declined,  many airlines
took action to downsize or  liquidate  assets and some  airlines  were forced to
file for  bankruptcy  protection.  Following  two years of good  traffic  growth
accompanied  by rising  yields,  this trend is now  improving  with new aircraft
orders last year  exceeding  deliveries  for the first time since 1990. To date,
this recovery has mainly  benefited  Stage 3  narrow-bodies  and younger Stage 2
narrow-bodies, many of which are now being ungraded with hushkits, whereas older
Stage 2 narrow-bodies have shown marginal signs of recovery.

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 previously discussed.


                                       20

<PAGE>



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.  The  Partnership  made downward  adjustments to the estimated
residual value of certain of its on-lease aircraft as of December 31, 1995, 1994
and 1993. 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, the Partnership
recognizes  the  deficiency  currently as increased  depreciation  expense.  The
Partnership  recognized   approximately  $2.4  million  and  approximately  $1.6
million,  or $4.75 and $3.18 per limited Partnership unit, of this deficiency as
increased depreciation expense in 1995 and 1994, respectively. The 1995 downward
adjustment  was the  result  of the  reduction  of the  net  book  value  to the
estimated net  realizable  value of the Boeing  737-200  Combi  aircraft sold to
Westjet in 1996.  Approximately  $1.03  million of the 1994  adjustment  was the
result of the reduction of the net book value to the  estimated  net  realizable
value of the Boeing 727-200 aircraft sold to AIA in February 1995. The increased
depreciation  expense  reduces  the  aircraft's  carrying  value and reduces the
amount of future  depreciation  expense that the Partnership will recognize over
the projected remaining economic life of the aircraft.

The  Partnership's  future  earnings  are  impacted  by the  net  effect  of the
adjustments  to the  carrying  value of the  aircraft  recorded in 1995 and 1994
(which  has the  effect  of  decreasing  future  depreciation  expense)  and the
downward adjustments to the estimated residual values recorded in 1995, 1994 and
1993  (which has the  effect of  increasing  future  depreciation  expense).  No
additional  depreciation expense was recorded in 1993. Therefore, as a result of
the downward  adjustments  to the residual  values in 1993,  the  Partnership is
recognizing  increased  depreciation expense of approximately  $514,000 per year
beginning  in  1994  through  the end of the  estimated  economic  lives  of the
aircraft.  The net  effect of the 1994  adjustments  to the  estimated  residual
values and the  adjustments  to the carrying  value of the aircraft  recorded in
1994 is to cause the Partnership to recognize increased  depreciation expense of
approximately  $626,000  per  year  beginning  in  1995  through  the end of the
estimated economic lives of the aircraft. The net effect of the 1995 adjustments
to the estimated  residual  values and the  adjustments to the carrying value of
the aircraft recorded in 1995 is to cause the Partnership to recognize increased
depreciation  expense  of  approximately  $866,000  per year  beginning  in 1996
through the end of the estimated economic lives of the aircraft.

Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of." This statement  requires that long-lived  assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be  recoverable.  In performing the review for  recoverability,
the statement  provides  that the  Partnership  should  estimate the future cash
flows expected to result from the use of the asset and its eventual disposition.
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 the statement, measurement of an impairment loss
for long-lived  assets will be based on the "fair value" of the asset as defined
in the statement.

SFAS No. 121  states  that the fair value of an asset is the amount at which the
asset could be bought or sold in a current  transaction between willing parties,

                                       21

<PAGE>



i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets  are the best  evidence  of fair value and will be used as the basis for
the measurement,  if available.  If quoted market prices are not available,  the
estimate of fair value will be based on the best  information  available  in the
circumstances.  Pursuant  to the  statement,  the  estimate  of fair  value will
consider  prices for similar  assets and the results of valuation  techniques to
the extent  available in the  circumstances.  Examples of  valuation  techniques
include  the  present  value of  estimated  expected  future  cash flows using a
discount  rate  commensurate  with the risks  involved,  option-pricing  models,
matrix pricing, option-adjusted spread models, and fundamental analysis.

Beginning in 1996, the  Partnership  will  periodically  review its aircraft for
impairment in accordance  with SFAS No. 121. Using an estimate of the fair value
of the  Partnership's  aircraft  to  measure  impairment  may  result in greater
write-downs  than would be  recognized  under the  accounting  method  currently
applied by the Partnership. 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 the
statement.  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.

To the extent  that the  Partnership's  Boeing and  McDonnell  Douglas  aircraft
continue to be  adversely  affected by industry  events,  the  Partnership  will
evaluate each  aircraft as it comes off lease or is returned to the  Partnership
to determine whether a re-lease or a sale at the then-current market rates would
be most beneficial for unit holders.


                                       22

<PAGE>



Item 8.         Financial Statements and Supplementary Data











                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership




              FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1994


                                  TOGETHER WITH


                                AUDITORS' REPORT

































                                       23

<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, 1995 and 1994, 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, 1995.
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  generally   accepted  auditing
standards.  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, 1995 and 1994, and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.


                                                             ARTHUR ANDERSEN LLP


San  Francisco, California, 
  January 31, 1996 (except with 
  respect to the matters discussed
  in Note 12 , as to which the
  date is March 22, 1996)

                                       24

<PAGE>



                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                                 BALANCE SHEETS

                           DECEMBER 31, 1995 AND 1994

                                                     1995             1994
                                                     ----             ----
ASSETS:

CASH AND CASH EQUIVALENTS                       $  25,884,742    $  14,662,147

MARKETABLE SECURITIES, trading                      2,356,506             --

RENT AND OTHER RECEIVABLES, net of
  allowance for credit losses of $241,964 in
  1995 and $0 in 1994                                   8,965          292,061

NOTES RECEIVABLE, net of allowance for credit
  losses of $0 in 1995 and $1,575,000 in 1994       2,679,486        2,781,432

AIRCRAFT, net of accumulated depreciation of
  $97,407,528 in 1995 and $90,004,933 in 1994      76,487,365       91,954,354

AIRCRAFT INVENTORY                                    373,483          848,613

OTHER ASSETS                                           29,770           29,770
                                                -------------    -------------

                                                $ 107,820,317    $ 110,568,377
                                                =============    =============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES                           $      92,511    $     702,841

ACCOUNTS PAYABLE AND ACCRUED
  LIABILITIES                                          87,356           38,663

SECURITY DEPOSITS                                     450,000          171,140

MAINTENANCE RESERVES                                  179,185          722,690

DEFERRED INCOME                                       642,742          642,742
                                                -------------    -------------

        Total Liabilities                           1,451,794        2,278,076
                                                -------------    -------------

PARTNERS' CAPITAL (DEFICIT):
  General Partner                                  (1,139,155)      (1,119,868)
  Limited Partners, 499,997 units
     issued and outstanding                       107,507,678      109,410,169
                                                -------------    -------------

        Total Partners' Capital                   106,368,523      108,290,301
                                                -------------    -------------

                                                $ 107,820,317    $ 110,568,377
                                                =============    =============

        The accompanying notes are an integral part of these statements.

                                       25

<PAGE>


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

                            STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993


<CAPTION>
                                             1995           1994            1993
                                             ----           ----            ----
REVENUES:
<S>                                       <C>           <C>             <C>
     Rent from operating leases           $16,114,000   $ 12,933,795    $ 14,397,683
     Net loss on sale of equipment               --             --          (513,395)
     Receipt of lessee stock warrants       1,772,206           --              --
     Gain on trading securities               582,028           --              --
     Interest                               1,667,397        820,362         736,719
     Other                                    957,710        689,745         937,859
                                          -----------   ------------    ------------

           Total Revenues                  21,093,341     14,443,902      15,558,866
                                          -----------   ------------    ------------

EXPENSES:
     Depreciation                          13,895,184     13,045,238      11,114,846
     Management fees to general partner       752,384        615,940         685,950
     Provision for credit losses              241,964           --              --
     Operating                                150,161      3,738,938       3,445,325
     Administration and other                 336,583        260,958         264,631
                                          -----------   ------------    ------------

           Total Expenses                  15,376,276     17,661,074      15,510,752
                                          -----------   ------------    ------------

NET INCOME (LOSS)                         $ 5,717,065   $ (3,217,172)   $     48,114
                                          ===========   ============    ============

NET INCOME ALLOCATED TO
     THE GENERAL PARTNER                  $   744,597   $  1,217,696    $  1,000,375
                                          ===========   ============    ============

NET INCOME (LOSS) ALLOCATED
     TO LIMITED PARTNERS                  $ 4,972,468   $ (4,434,868)   $   (952,261)
                                          ===========   ============    ============

NET INCOME (LOSS) PER LIMITED
     PARTNERSHIP UNIT                     $      9.94   $      (8.87)   $      (1.91)
                                          ===========   ============    ============

</TABLE>
        The accompanying notes are an integral part of these statements.

                                       26

<PAGE>


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

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993


<CAPTION>
                                          General         Limited
                                          Partner        Partners          Total
                                          -------        --------          -----
<S>                                   <C>            <C>              <C>
Balance, December 31, 1992            $  (837,954)   $ 137,297,163    $ 136,459,209

     Net income (loss)                  1,000,375         (952,261)          48,114

     Cash distributions to partners    (1,111,104)      (9,999,940)     (11,111,044)
                                      -----------    -------------    -------------

Balance, December 31, 1993               (948,683)     126,344,962      125,396,279

     Net income (loss)                  1,217,696       (4,434,868)      (3,217,172)

     Cash distributions to partners    (1,388,881)     (12,499,925)     (13,888,806)
                                      -----------    -------------    -------------

Balance, December 31, 1994             (1,119,868)     109,410,169      108,290,301

     Net income                           744,597        4,972,468        5,717,065

     Cash distributions to partners      (763,884)      (6,874,959)      (7,638,843)
                                      -----------    -------------    -------------

Balance, December 31, 1995            $(1,139,155)   $ 107,507,678    $ 106,368,523
                                      ===========    =============    =============

</TABLE>
        The accompanying notes are an integral part of these statements.

                                       27

<PAGE>

<TABLE>

                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                            STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<CAPTION>
                                                            1995            1994            1993
                                                            ----            ----            ----
OPERATING ACTIVITIES:
<S>                                                    <C>             <C>             <C>
  Net income (loss)                                    $  5,717,065    $ (3,217,172)   $     48,114
  Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
     Depreciation                                        13,895,184      13,045,238      11,114,846
     Net loss on sale of equipment                             --              --           513,395
     Provision for credit losses                            241,964            --              --
     Changes in operating assets and liabilities:
        Increase in marketable securities, trading       (2,356,506)           --              --
        Decrease (increase) in rent and other
           receivables                                       41,132        (254,328)        339,579
        Decrease in other assets                               --              --             6,420
        Increase (decrease) in payable to affiliates       (610,330)        650,567      (1,141,850)
        Increase (decrease) in accounts payable
           and accrued liabilities                           48,693      (2,517,662)        694,921
        Increase (decrease) in security deposits            278,860         (18,424)          3,244
        Decrease in maintenance reserves                   (543,505)       (146,673)       (215,383)
        Decrease in deferred income                            --              --        (1,808,383)
                                                       ------------    ------------    ------------

           Net cash provided by operating activities     16,712,557       7,541,546       9,554,903
                                                       ------------    ------------    ------------

INVESTING ACTIVITIES:
  Increase in notes receivable                                 --        (2,304,533)           --
  Net proceeds from sale of aircraft equipment                 --              --         2,585,000
  Principal proceeds from notes receivable                1,873,751         545,409         727,692
  Net proceeds from sale of aircraft inventory              275,130         323,448       1,169,483
  Inventory disassembly costs                                  --              --          (327,750)
                                                       ------------    ------------    ------------
           Net cash provided by (used in)
              investing activities                        2,148,881      (1,435,676)      4,154,425
                                                       ------------    ------------    ------------

FINANCING ACTIVITIES:
  Cash distributions to partners                         (7,638,843)    (13,888,806)    (11,111,044)
                                                       ------------    ------------    ------------

           Net cash used in financing activities         (7,638,843)    (13,888,806)    (11,111,044)
                                                       ------------    ------------    ------------

CHANGES IN CASH AND CASH
  EQUIVALENTS                                            11,222,595      (7,782,936)      2,598,284

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                      14,662,147      22,445,083      19,846,799
                                                       ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT
  END OF YEAR                                          $ 25,884,742    $ 14,662,147    $ 22,445,083
                                                       ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       28

<PAGE>



                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1995


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,
prepares its financial statements and files its tax returns on the accrual basis
of  accounting.  The  preparation  of financial  statements in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  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 assets.

Cash and Cash  Equivalents - This includes  deposits at banks and investments in
money market funds.

Marketable Securities, trading - Marketable Securities,  trading, are carried at
fair value, which was determined based on quoted market prices. These securities
are held for sale in the near term (Note 6).

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.
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 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, the Partnership
recognizes the deficiency currently as increased depreciation expense. Off-lease
aircraft  are  carried  at the  lower  of  depreciated  cost  or  estimated  net
realizable value.

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.


                                       29

<PAGE>



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.

Operating  Leases - The aircraft  leases are accounted for as operating  leases.
Lease  revenues  are  recognized  in equal  installments  over the  terms of the
leases.

Maintenance  Reserves - The Partnership  receives  maintenance  reserve payments
from  certain of its  lessees  that may be  reimbursed  to the lessee or applied
against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's  aircraft or engines, as specified in the leases.
Maintenance reserve payments are recognized when received and balances remaining
at the  termination  of the lease,  if any,  may be 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 (Loss) Per Limited  Partnership  Unit - Net income (loss) per limited
partnership  unit is based on the limited  partners' share of net income or loss
and the number of units  outstanding for the years ended December 31, 1995, 1994
and 1993.

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

Reclassification  - Certain 1994 and 1993  balances  have been  reclassified  to
conform to the 1995 presentation.

Financial  Accounting  Pronouncements  - The  Partnership  adopted  Statement of
Financial  Accounting  Standards  (SFAS) No. 114,  "Accounting  by Creditors for
Impairment of a Loan," and the related SFAS No. 118 as of January 1, 1995.  SFAS
No. 114 and SFAS No. 118 require that certain  impaired  loans be measured based
on the present value of expected cash flows  discounted at the loan's  effective
interest rate; or,  alternatively,  at the loan's observable market price or the
fair  value  of  the  collateral  if  the  loan  is  collateral  dependent.  The
Partnership  had  previously  measured  the  allowance  for credit  losses using
methods similar to that  prescribed in SFAS No. 114. As a result,  no additional
provision was required by the adoption of this  pronouncement.  The  Partnership
has recorded an allowance for credit losses for certain  impaired loan and rents
receivable  as  a  result  of  uncertainties  regarding  their  collection.  The
Partnership  recognizes  revenue  on  impaired  loans  and  receivables  only as
payments are received.


                                       30

<PAGE>




                                                                        1995
                                                                        ----
Impaired loans or receivables with
    allowances for credit losses                                    $   241,964
Impaired loans or receivables without
    allowances for credit losses                                        412,761
                                                                    -----------
Total impaired loans                                                    654,725
Allowance for credit losses                                            (241,964)
                                                                    -----------

                                                                    $   412,761
                                                                    ===========

Allowance for credit losses,
    beginning of year                                               $(1,575,000)
Provision for credit losses                                            (241,964)
Write-downs                                                                --
Collections                                                           1,575,000
                                                                    -----------
Allowance for credit losses,
    end of year                                                     $  (241,964)
                                                                    ===========


SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
the  Partnership to disclose the fair value of financial  instruments.  Cash and
Cash Equivalents are stated at cost, which  approximates fair value.  Marketable
Securities,  trading  (Note 6) are carried at fair value,  which was  determined
based on  quoted  market  prices.  The fair  value of the  notes  receivable  is
estimated by  discounting  future  estimated  cash flows using current  interest
rates at which  similar  loans would be made to borrowers  with  similar  credit
ratings and remaining maturities. The carrying value of the note receivable from
Continental  Airlines,   Inc.  (Continental)  discussed  in  Note  3,  the  note
receivable from American  International  Airways, Inc. (AIA) discussed in Note 3
and the note  receivable  from ALG, Inc.  (ALG)  discussed in Note 4 approximate
their  estimated  fair  value.  The  carrying  value of the line of credit  note
receivable  from Viscount  discussed in Note 7  approximates  its estimated fair
value as this note is guaranteed by certain affiliates of Viscount. The carrying
value of the rents receivable from Viscount is zero due to a recorded  allowance
for credit losses equal to the balance of the outstanding  rents. As of December
31, 1995,  the estimated  fair value of the rents  receivable  from Viscount was
also zero.

SFAS No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to Be  Disposed  Of,"  requires  that  long-lived  assets and
certain  identifiable  intangibles  to be held and used by an entity be reviewed
for impairment  whenever  events or changes in  circumstances  indicate that the
carrying  amount  of an asset may not be  recoverable.  This  statement  will be
adopted  by  the  Partnership  as  of  January  1,  1996  and  will  be  applied
prospectively. The Partnership estimates that the adoption of this pronouncement
will  not have an  immediate  material  impact  on the  Partnership's  financial
position or results of  operations  unless events or  circumstances  change that
would cause projected net cash flows to be adjusted.  The estimate of fair value
and measurement of impairment loss is described in Note 3.


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

                                       31

<PAGE>



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.

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 Note 9.


3.         Aircraft

The Partnership owns 23 aircraft and certain inventoried aircraft parts from its
original  portfolio of 30 used  commercial  jet aircraft,  which were  acquired,
leased or sold as discussed below,  including one airframe and engine which were
sold in March  1996 as  discussed  in Note 12.  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  (FAA) 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. In addition to basic rent,  certain lessees are required to
pay  supplemental  amounts  based on flight  hours or cycles into a  maintenance
reserve  account,  to be used for heavy  maintenance of the engines or airframe.
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.



                                       32

<PAGE>



The following table describes the  Partnership's  current aircraft  portfolio in
greater detail:

                                                             Year of
Aircraft Type                              Serial Number   Manufacture
-------------                              -------------   -----------
Boeing 727-200 Advanced                       21426          1977
Boeing 727-200 Advanced                       21427          1977
Boeing 727-200 Advanced                       21947          1979
Boeing 737-200                                19609          1968
Boeing 737-200 Combi (1)                      19743          1969
McDonnell Douglas DC-9-30                     47082          1967
McDonnell Douglas DC-9-30                     47096          1967
McDonnell Douglas DC-9-30                     47135          1968
McDonnell Douglas DC-9-30                     47137          1968
McDonnell Douglas DC-9-30                     47249          1968
McDonnell Douglas DC-9-30                     47251          1968
McDonnell Douglas DC-9-30                     47343          1969
McDonnell Douglas DC-9-30                     47345          1969
McDonnell Douglas DC-9-30                     47411          1969
McDonnell Douglas DC-9-30                     47412          1969
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                     47174          1968
McDonnell Douglas DC-9-30                     47324          1969
McDonnell Douglas DC-9-30                     47357          1969
McDonnell Douglas DC-9-30                     47734          1977
McDonnell Douglas DC-9-40                     47617          1975

(1) Aircraft sold in 1996 (Note 12) 


One Boeing  737-200 - This  aircraft  was acquired  for  $6,766,166  in 1986 and
leased to various lessees until 1989, when Braniff,  Inc. (Braniff) defaulted on
its lease.  The aircraft  remained off lease until March 1991.  The aircraft was
then leased to SABA Airlines, S.A. (SABA) at approximately 70% of the prior rate
until February 1992, when the aircraft was repossessed by the Partnership  after
SABA defaulted under its lease. In November 1992, the aircraft was re-leased for
five years to Viscount Air Services, Inc. (Viscount) at approximately 56% of the
prior lease rate. The lease specifies that Viscount,  a charter carrier based in
Arizona,  has the option to purchase  the  aircraft  for the  then-current  fair
market  value at the end of the lease term.  As discussed in Note 7, at December
31, 1995  Viscount was in default on certain  payments  due to the  Partnership.
Note 12 contains a further  discussion of the Viscount  situation  subsequent to
December 31, 1995.  An engine for the aircraft has been leased from an affiliate
(Note 9) following the return of an inoperable  engine from SABA as discussed in
Note 4. The  Partnership  has an agreement  with Viscount to defer certain rents
due the  Partnership  and to  provide  financing  to  Viscount  for  maintenance
expenses relating to the Partnership's aircraft (Note 7).

Seven Boeing 727-200 - These aircraft were acquired for $38,986,145  during 1986
and leased to Pan American  World  Airways,  Inc. (Pan Am) until 1991,  when the
lease was terminated due to Pan Am's  bankruptcy  filing.  The  Partnership  has
transferred  six of these  aircraft to aircraft  inventory and has  disassembled
them for sale of the component parts (Note 5). One hushkit set from the aircraft
was sold in January 1993 and two additional  hushkit sets from the aircraft were
sold in September 1993 (Note 4).

                                       33

<PAGE>



The remaining  aircraft was leased to Delta Airlines,  Inc. (Delta) in September
1991.  Delta  returned  the  aircraft at the end of  September  1993,  following
several  month-by-month  lease extensions  since the original lease  termination
date in April 1993. The Partnership has adjusted the book value of this aircraft
to its  estimated  net  realizable  value  by  increasing  depreciation  expense
approximately $1.03 million in 1994. During 1995, the Partnership  recognized as
other revenue maintenance reserves aggregating  approximately  $91,000 that were
previously  paid to the  Partnership  by Delta.  The aircraft was sold to AIA in
February 1995 for a sales price of $1,771,805.  The Partnership recorded no gain
or loss on the  sale,  as the  sales  price  equaled  the net book  value of the
aircraft  and hushkit.  The  Partnership  agreed to accept  payment of the sales
price in 36 monthly installments of $55,000, with interest at a rate of 7.5% per
annum,  beginning in March 1995. The Partnership  recorded a note receivable for
the sales price and has received all scheduled  principal and interest  payments
due from AIA through  December  31, 1995,  including  one  additional  principal
payment of $410,229  received  in May 1995.  The note  receivable  balance as of
December 31, 1995 was $889,351.

One Boeing 737-200 Combi - This aircraft was acquired for $7,582,572 in 1986 and
leased  to  Presidential  Airways,  Inc.  (Presidential),  until  Presidential's
default in 1989.  The aircraft  remained off lease until June 1990,  when it was
leased  to Air  Zaire,  Inc.  (Air  Zaire).  The lease  required  that Air Zaire
maintain the aircraft in accordance with FAA  requirements.  However,  Air Zaire
was unable to obtain FAA  approval for its proposed  maintenance  program,  thus
prompting  the early  termination  of the lease in 1991.  Air Zaire  provided  a
$610,000  letter of credit,  the  proceeds of which the  Partnership  applied to
outstanding  rent,  reserves and interest due in 1991. Air Zaire paid additional
amounts  in  1993  and  1992  as a  result  of  legal  action  commenced  by the
Partnership (Note 8).

In August 1992,  the  Partnership  leased the aircraft to Northwest  Territorial
Airways,  Ltd. (NWT) through March 1993 at approximately 45% of the prior rental
rate,  then extended the lease through  March 1994 at  approximately  80% of the
previous  rental  rate.  An engine for the aircraft was leased from an affiliate
through  April 1994 (Note 9). The aircraft was  returned to the  Partnership  in
April 1994 and NWT subsequently paid to the Partnership  approximately  $860,000
in lieu of meeting  return  conditions  as  specified  in the lease.  During the
off-lease period, the Partnership performed certain maintenance and modification
work on the  aircraft  which was offset by the payment  received  from NWT.  The
Partnership  recognized the balance of approximately $89,000 as other revenue in
the accompanying 1995 statement of operations.

The Partnership negotiated a new lease with NWT for 16 months commencing in June
1994. The new lease rate was approximately  108% of NWT's prior rental rate. The
new lease expired in October  1995. As specified in the lease,  NWT was required
to perform  certain  maintenance  work on the aircraft prior to its return.  NWT
returned the aircraft without  performing the required  maintenance  work, which
constituted  a default under the lease.  The  Partnership  and NWT  subsequently
reached an  agreement  by which NWT paid to the  Partnership  in  December  1995
approximately $457,000 and the Partnership was entitled to retain NWT's security
deposit  of  approximately  $101,000  in lieu  of NWT  performing  the  required
maintenance  work on the aircraft.  The  Partnership  recorded  these amounts as
other revenue in the accompanying 1995 statement of operations.

The airframe and one engine from this aircraft were subsequently sold to Westjet
Airlines,  Ltd. (Westjet) in March 1996 as discussed in Note 12. The Partnership
has adjusted the net book value of this aircraft to its estimated net realizable
value by increasing  depreciation expense approximately $2.4 million in the 1995
statement of operations.  The Partnership is currently remarketing the remaining
engine for sale.


                                       34

<PAGE>



17 McDonnell  Douglas DC-9-30 and One McDonnell Douglas DC-9-40 - These aircraft
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
bankruptcy filing as discussed in Note 6.

Three Boeing  727-200  Advanced - These  aircraft were acquired for  $36,364,929
during 1987 and leased to Alaska Airlines,  Inc.  (Alaska) until September 1992.
Upon return of the aircraft,  an additional amount of $509,000 was received from
Alaska for deferred  maintenance and applied in 1993 as an offset to maintenance
expenses  incurred  on the  aircraft.  One  of the  aircraft  was  re-leased  to
Continental  from April 1993 until April 1998.  The  remaining two aircraft were
released to Continental Micronesia,  Inc. (Continental Micronesia), an affiliate
of  Continental,  from May and June  1993  until  April  1998.  All three of the
aircraft are leased at  approximately  55% of the prior lease  rates.  The three
leases   stipulate  that  the  Partnership  will  reimburse  costs  for  cockpit
modifications  up to $600,000 per  aircraft,  C-check labor costs up to $300,000
per aircraft  for two of the  aircraft and the actual cost of C-check  parts for
these two aircraft. In addition, the Partnership will provide financing of up to
$815,000 for new image modifications,  to be repaid with interest over the lease
term for each  aircraft.  In  accordance  with the cost  sharing  agreement,  in
January 1994, the Partnership reimbursed Continental (partially on behalf of its
affiliate Continental  Micronesia) $1.8 million for cockpit  modifications.  The
Partnership  also reimbursed  Continental  $742,325 for C-check labor and parts,
which was included in operating  expense in the statement of operations  for the
year ended December 31, 1993. In addition,  the Partnership  financed $2,177,533
for new image modifications,  which is being repaid with interest over the lease
terms of the aircraft,  beginning in February 1994. The Partnership has received
all  scheduled   principal  and  interest  payments  due  from  Continental  and
Continental  Micronesia through December 31, 1995. The aggregate note receivable
balance  as of  December  31,  1995  and  1994 was  $1,289,328  and  $1,764,167,
respectively.  The leases  with  Continental  and  Continental  Micronesia  also
stipulate that the  Partnership  share in the cost of meeting certain ADs, which
cannot be estimated at this time.

The following is a schedule by year of future  minimum  rental revenue under the
existing  leases  but  excluding  rental  payments  for one  aircraft  leased to
Viscount due to the bankruptcy filing discussed in Notes 7 and 12:

           Year                                                  Amount
           ----                                                  ------
           1996                                               $13,680,000
           1997                                                13,680,000
           1998                                                 3,410,000
           1999 and thereafter                                       -
                                                              -----------

           Total                                              $30,770,000
                                                              ===========

Future  minimum  rental  payments  may be offset or reduced  by future  costs as
described above and in Note 6.

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 made downward  adjustments to the estimated residual value
of certain of its on-lease  aircraft as of December 31, 1995, 1994 and 1993. For
any downward adjustment in estimated residual value or decrease in the projected

                                       35

<PAGE>



remaining economic life, the depreciation  expense over the projected  remaining
economic life of the aircraft is increased.

As  discussed  in Note 1, 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  approximately $2.4
million  and  approximately  $1.6  million,  or  $4.75  and  $3.18  per  limited
Partnership unit, of this deficiency as increased  depreciation  expense in 1995
and 1994,  respectively.  The 1995  downward  adjustment  was the  result of the
reduction of the net book value to the  estimated  net  realizable  value of the
Boeing  737-200 Combi  aircraft sold to Westjet in 1996 as discussed in Note 12.
Approximately  $1.03  million  of the  1994  adjustment  was the  result  of the
reduction of the net book value to the  estimated  net  realizable  value of the
Boeing  727-200  aircraft sold to AIA in February 1995 as previously  discussed.
The increased  depreciation  expense  reduces the  aircraft's net book value and
therefore reduces the amount of future depreciation expense that the Partnership
will recognize over the projected remaining economic life of the aircraft.

The  Partnership's  future  earnings  are  impacted  by the  net  effect  of the
adjustments  to the carrying  values of the  aircraft  recorded in 1995 and 1994
(which  has the  effect  of  decreasing  future  depreciation  expense)  and the
downward adjustments to the estimated residual values recorded in 1995, 1994 and
1993  (which has the  effect of  increasing  future  depreciation  expense).  No
additional  depreciation expense was recorded in 1993. Therefore, as a result of
the downward  adjustments  to the residual  values in 1993,  the  Partnership is
recognizing  increased  depreciation expense of approximately  $514,000 per year
beginning  in  1994  through  the end of the  estimated  economic  lives  of the
aircraft.  The net  effect of the 1994  adjustments  to the  estimated  residual
values and the  adjustments to the carrying  values of the aircraft  recorded in
1994 is to cause the Partnership to recognize increased  depreciation expense of
approximately  $626,000  per  year  beginning  in  1995  through  the end of the
estimated economic lives of the aircraft. The net effect of the 1995 adjustments
to the estimated  residual  values and the adjustments to the carrying values of
the aircraft recorded in 1995 is to cause the Partnership to recognize increased
depreciation  expense  of  approximately  $866,000  per year  beginning  in 1996
through the end of the estimated economic lives of the aircraft.

Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of." This statement  requires that long-lived  assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be  recoverable.  In performing the review for  recoverability,
the statement  provides  that the  Partnership  should  estimate the future cash
flows expected to result from the use of the asset and its eventual disposition.
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 the statement, measurement of an impairment loss
for long-lived  assets will be based on the "fair value" of the asset as defined
in the statement.

SFAS No. 121  states  that the fair value of an asset is the amount at which the
asset could be bought or sold in a current  transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets  are the best  evidence  of fair value and will be used as the basis for
the measurement,  if available.  If quoted market prices are not available,  the
estimate of fair value will be based on the best  information  available  in the
circumstances.  Pursuant  to the  statement,  the  estimate  of fair  value will
consider  prices for similar  assets and the results of valuation  techniques to

                                       36

<PAGE>



the extent  available in the  circumstances.  Examples of  valuation  techniques
include  the  present  value of  estimated  expected  future  cash flows using a
discount  rate  commensurate  with the risks  involved,  option-pricing  models,
matrix pricing, option-adjusted spread models, and fundamental analysis.

Beginning in 1996, the  Partnership  will  periodically  review its aircraft for
impairment in accordance  with SFAS No. 121. Using an estimate of the fair value
of the  Partnership's  aircraft  to  measure  impairment  may  result in greater
write-downs  than would be  recognized  under the  accounting  method  currently
applied by the Partnership. 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 the
statement.  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.


4.         Sale of Equipment

One hushkit set from the aircraft formerly leased to Pan Am (Note 3) was sold in
January 1993 to ALG for  $1,750,000,  which resulted in a $259,809 gain in 1993.
ALG  paid  cash  for  a  portion   of  the  sales   price  and   issued  an  11%
interest-bearing promissory note for the balance of $1,132,363,  which specified
23 equal monthly payments and a balloon payment of $897,932 due in January 1995.
ALG paid to the  Partnership  $19,138 of the  balloon  payment in January  1995,
originating  an event  of  default  under  the  note.  The  Partnership  and ALG
subsequently  restructured  the terms of the promissory  note. The  renegotiated
terms specify  payment by ALG of the note balance with interest at a rate of 13%
per annum with one lump sum payment in January 1995 of $254,733,  eleven monthly
payments of $25,600 beginning in February 1995, and a balloon payment in January
1996 of  $416,631.  The  Partnership  has received  all  scheduled  renegotiated
payments due from ALG through December 31, 1995. The note receivable balances as
of December  31, 1995,  1994 and 1993 were  $412,166,  $890,265 and  $1,022,308,
respectively.  In January 1996, the Partnership and ALG once again  restructured
the terms of the  promissory  note as  discussed  in Note 12. No  allowance  for
credit losses is provided for ALG receivables in 1995 or 1994.

In September  1993, two  additional  hushkit sets from the  disassembled  Pan Am
aircraft  were sold to Emery  Worldwide  Airlines  for  $1,250,000  each,  which
resulted  in a $398,192  aggregate  loss.  The  decline in sales  price from the
previous  hushkit  sale in January  1993  reflected a softening  market for this
equipment.

The Partnership sold one used engine to International  Aircraft Support, L.P. in
July 1993 for $85,000, which resulted in a $375,012 loss. The engine, along with
its airframe,  was repossessed from the former lessee, SABA in February 1992. At
the time of its default,  SABA had not maintained the aircraft as required under
the lease agreement, rendering the engine inoperable. The Partnership determined
the costs to repair the  engine  would be in excess of the  amounts  recoverable
from sale or lease. As a result, the engine was sold for its component parts.


5.         Disassembly of aircraft

In an attempt to maximize the economic  return from the  remaining  six aircraft
formerly  leased to Pan Am,  the  Partnership  entered  into an  agreement  with

                                       37

<PAGE>



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 will receive the proceeds  from the sale of such parts,  net of
overhaul expenses if necessary, and commissions paid to Soundair. Disassembly of
the six aircraft has been completed.  During 1993 and 1992, the Partnership paid
$327,750  and  $135,750,  respectively,  for  aircraft  disassembly  costs.  The
Partnership  has received net  proceeds  from the sale of aircraft  inventory of
$275,130, $323,448 and $1,169,483 during 1995, 1994 and 1993, respectively.

The six  aircraft  were  recorded  as aircraft  inventory  in the amount of $3.0
million  in 1992 as  discussed  in Note 3.  During  1995,  1994  and  1993,  the
Partnership  recorded  downward  adjustments to the inventory value of $200,000,
$72,000 and $300,000,  respectively, to reflect the then current estimate of net
realizable   aircraft  inventory  value.  These  adjustments  are  reflected  as
increased depreciation expense in the accompanying statements of operations.


6.         TWA Reorganization

During 1991, TWA defaulted under its leases with the Partnership  when it failed
to pay its March  lease  payments.  In  December  1991,  the  leases  for all 18
aircraft  were  amended,   with   extensions  to  various  dates  in  1998.  The
renegotiated lease rates represent approximately 46% of the initial lease rates.
In addition,  the Partnership  agreed to share in the costs of certain ADs after
TWA successfully reorganized.  The agreement stipulated that such costs incurred
by TWA may be credited  against monthly rentals,  subject to annual  limitations
and a maximum of $500,000 per aircraft through the end of the applicable  lease.
Pursuant  to  this   cost-sharing   agreement,   since  TWA  emerged   from  its
reorganization proceedings in 1993, expenses totaling $6.3 million ($2.7 million
in 1993 and $3.6  million in 1994) have been  offset  against  rental  payments.
Under the terms of this  agreement,  TWA may  offset  up to an  additional  $2.7
million  against  rental  payments,  subject  to  annual  limitations,  over the
remaining lease terms.

In October  1994,  TWA notified its  creditors,  including the  Partnership,  of
another  proposed  restructuring of its debt.  Subsequently,  GECAS negotiated a
standstill  arrangement,  as set forth in a letter  agreement dated December 16,
1994 (the Deferral Agreement),  with TWA for the 46 aircraft that are managed by
GECAS, 18 of which are owned by the  Partnership.  As required by its terms, the
Deferral  Agreement  (which  has since  been  amended  as  discussed  below) was
approved by PIMC on behalf of the Partnership with respect to the  Partnership's
aircraft.

The Deferral  Agreement provided for (i) a moratorium on all the rent due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred  rents,  together
with interest  thereon,  to be repaid in monthly  installments  beginning in May
1995 and ending in  December  1995.  The  repayment  schedule  was  subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership recorded
a note  receivable  and  corresponding  allowance for credit losses equal to the
total of the  1994  deferred  rents  of  $1.575  million,  the net of which  was
reflected  in the  accompanying  1994 balance  sheet.  The  Partnership  did not
recognize either the $1.575 million rental amount deferred in 1994 or the $2.025
million  rental  amount  deferred  during  the first  quarter  of 1995 as rental
revenue  until  the  deferred  rents  were  received.  The note  receivable  and
corresponding  allowance for credit losses were reduced by the principal portion
of the payments received.  The Partnership  received all scheduled rent payments
beginning in April 1995 and all scheduled  deferred rental payments beginning in
May  1995,  including  interest  at a rate of 12% per  annum,  from  TWA and has
recognized  the $3.6 million  deferred  rents as rental revenue during 1995. The
deferred rents were paid in full by October 1995.


                                       38

<PAGE>



In consideration for the partial rent moratorium  described above, TWA agreed to
make a lump sum  payment of  $1,000,000  to GECAS for the TWA  lessors  for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership  received  $218,171 in January  1995 as its share of such payment by
TWA.  This  amount was  recognized  as other  revenue in the  accompanying  1995
statement  of  operations.  In  addition,  TWA agreed to issue  warrants  to the
Partnership for TWA Common Stock.

In order to  resolve  certain  issues  that  arose  after the  execution  of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995,  pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended,  the Amended  Deferral  Agreement).  The effect of the
Amended  Deferral  Agreement,  which was  approved  by PIMC with  respect to the
Partnership's  aircraft,  is that TWA,  in  addition  to  agreeing  to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants,  the number of which was determined by a formula) in  consideration
for the aircraft owners'  agreement to defer rent under the Deferral  Agreement,
and,  (ii) to the  extent  the  market  value of the  warrants  is less than the
payment amount, to supply  maintenance  services to the aircraft owners having a
value equal to such deficiency. The payment amount was determined by subtracting
certain  maintenance  reimbursements  owed to TWA by  certain  aircraft  owners,
including the  Partnership,  from the aggregate  amount of deferred  rents.  The
amount of such maintenance reimbursement has not been finally determined.

The Partnership received warrants to purchase 227,133 shares of TWA Common Stock
from TWA in November  1995 and has  recognized  the net warrant  value as of the
date of receipt of  $1,772,206 as revenue in the 1995  statement of  operations.
The Partnership exercised the warrants on December 29, 1995 for the strike price
of $.01 per share and has  recognized  a gain on the  value of the  warrants  of
$582,028 in the 1995 statement of operations. The TWA Common Stock is classified
as trading securities  because the Partnership  intends to sell the stock in the
near  term.  The fair  market  value of the TWA stock at  December  31,  1995 of
$2,356,506 is reflected in the accompanying  December 31, 1995 balance sheet. As
discussed  in Note 12, the  Partnership  sold the TWA Common  Stock in the first
quarter of 1996.

TWA  agreed  that,  upon  filing  of its  prepackaged  plan,  it would  take all
reasonable  steps to implement the terms of the Amended  Deferral  Agreement and
would immediately assume all of the Partnership's  leases. TWA also agreed that,
not  withstanding  the 60-day cure period provided by section 1110 of the United
States  Bankruptcy  Code,  it would  remain  current on the  performance  of its
obligations under the leases, as amended by the Amended Deferral Agreement.

On June 30, 1995, TWA filed its prepackaged  Chapter 11 bankruptcy in the United
States Bankruptcy Court for the Eastern District of Missouri. On August 4, 1995,
the  Bankruptcy  Court  confirmed  TWA's plan of  reorganization,  which  became
effective on August 23, 1995. Pursuant to the Amended Deferral Agreement, on the
confirmation  date of the plan,  August 4,  1995,  the  Partnership  received  a
payment of  $1,217,989  from TWA which  represented  fifty  percent (50%) of the
deferred rent outstanding  plus interest as of such date. The remaining  balance
of deferred rent plus interest was paid in full to the Partnership on October 2,
1995. While TWA has committed to an uninterrupted flow of lease payments,  there
is no assurance that TWA will continue to honor its obligations in the future.




                                       39

<PAGE>



7.         Viscount Restructuring Agreement and Default

In July 1994,  the  Partnership  entered  into a  restructuring  agreement  with
Viscount to defer certain rents due the Partnership  which aggregated  $196,800;
to  extend a line of  credit  to  Viscount  for a total of  $127,000  to be used
primarily for maintenance expenses relating to the Partnership's  aircraft;  and
to give the Partnership the option to acquire  approximately  0.6% of the issued
and outstanding shares of Viscount stock as of July 26, 1994 for an option price
of approximately  $91,000.  It was not practicable to estimate the fair value of
the stock  options as of December  31, 1995,  as they are not  publicly  traded,
although  Viscount's  recent  bankruptcy  filing (Note 12) would have an adverse
impact on the value of the stock options, if any.

The deferred rents,  which were being repaid by Viscount with interest at a rate
of 6% per annum over the  remaining  terms of the  leases,  were  recognized  as
revenue in the period earned.  The unpaid balances of the deferred rents,  which
are  reflected in rent and other  receivables  in the December 31, 1995 and 1994
balance sheets,  were $130,511 and $182,982,  respectively.  The line of credit,
which was advanced to Viscount  during 1994, was being repaid by Viscount over a
30- month period,  beginning in January 1995,  with interest at a rate of 11.53%
per annum. The line of credit balances,  which are reflected in notes receivable
in the  December 31, 1995 and 1994 balance  sheets,  were $88,641 and  $127,000,
respectively.

During  1995,  the  Partnership  had  been  in  discussions   with  Viscount  to
restructure  additional  existing  financial  obligations  of  Viscount  to  the
Partnership.  While such discussions  were underway,  Viscount had undertaken to
pay in full,  by the end of each  month,  beginning  in June 1995,  the  current
month's  obligations  by making  partial  periodic  payments  during that month.
Viscount  is  presently  in  default  on  these  financial  obligations  to  the
Partnership. On December 13, 1995, the Partnership issued a notice of default to
Viscount  demanding,  within 10 days, full payment of all delinquent amounts due
the Partnership. Note 12 contains a further discussion of the Viscount situation
subsequent  to  December  31,  1995  including  the   Partnership's   notice  of
termination  of the lease with  Viscount and  Viscount's  subsequent  filing for
protection under Chapter 11 of the United States Bankruptcy Code.

One of the Partnership's  Boeing 737-200 commercial jet aircraft was on lease to
Viscount prior to the lease termination  notification.  As of December 31, 1995,
the  Partnership's  aggregate  rent,  maintenance  reserve,  loan  and  interest
receivable  from  Viscount  was  approximately  $336,000.  All payments due from
Viscount may be affected by Viscount's filing for protection under Chapter 11.

The  balance of the line of credit  advanced  to  Viscount in 1994 of $88,641 at
December 31, 1995, plus accrued interest, is guaranteed by certain affiliates of
the principal  shareholder  of Viscount.  An allowance for credit losses has not
been  provided for this note.  The  Partnership  has  recorded an allowance  for
credit losses for the remaining unsecured  receivable balances from Viscount for
the aggregate of the unpaid rents, outstanding deferred rent balance and accrued
interest as of December 31, 1995.  The aggregate  allowance for credit losses of
$241,964 for these  obligations  is reflected in the provision for credit losses
in the accompanying 1995 statement of operations.  Viscount's failure to perform
on its financial obligations with the Partnership is expected to have an adverse
effect on the Partnership's financial position.


8.         Claims Related to Lessee Defaults

Receipt  of  Braniff  Bankruptcy  Claim - In July  1992,  the  Bankruptcy  Court
approved a stipulation embodying a settlement among the Partnership, the Braniff
creditor  committees  and  Braniff in which it was agreed  that the  Partnership

                                       40

<PAGE>



would be  allowed  an  administrative  claim  in the  bankruptcy  proceeding  of
approximately  $230,769.  In 1992, the Partnership  received full payment of the
claim subject to the requirement that 25% of total proceeds be held by PIMC in a
separate,  interest-bearing  account pending notification by Braniff that all of
the  allowed   administrative  claims  have  been  satisfied.   The  Partnership
recognized  75% of the total claim as other  revenue in 1992.  During 1994,  the
Partnership  was  advised  that  the 25%  portion  of the  administrative  claim
proceeds  with  interest  could be  released  by PIMC to the  Partnership.  As a
result,  the  Partnership  recognized  $67,958  as  other  revenue  in the  1994
statement of operations.

Air Zaire - As a result of legal  action  commenced  by the general  partner,  a
final  settlement was reached with Air Zaire.  Air Zaire paid to the Partnership
approximately  $2,885,000, of which approximately $1,570,000 has been applied to
legal and maintenance  expenses related to the default.  The final expenses were
paid in 1993 and  approximately  $915,000 was  reflected as other revenue in the
1993 statement of operations. The remaining amount of $400,000 was recognized as
other revenue in 1994.


9.         Related Parties

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

a.         An aircraft  management fee equal to 5% of gross rental revenues with
           respect  to  operating  leases or 2% of gross  rental  revenues  with
           respect  to full  payout  leases  of the  Partnership,  payable  upon
           receipt of the rent. In 1995,  1994 and 1993,  the  Partnership  paid
           management   fees  to  PIMC  of  $763,774,   $604,551  and  $681,241,
           respectively.  Management  fees  payable to PIMC at December 31, 1995
           and 1994 were zero and $11,389, respectively.

b.         Reimbursement   of  certain   out-of-pocket   expenses   incurred  in
           connection  with the management of the Partnership and supervision of
           its assets. In 1995, 1994 and 1993, $299,588,  $228,357 and $407,582,
           respectively,  were reimbursed by the Partnership for  administrative
           expenses. Administrative reimbursements of $63,159, and $101,277 were
           payable at December 31, 1995 and 1994,  respectively.  Reimbursements
           for  maintenance  and  remarketing  costs of  $972,284,  $305,200 and
           $2,608,523  were  paid by the  Partnership  in 1995,  1994 and  1993,
           respectively.  Maintenance and remarketing  reimbursements of $29,352
           and   $590,175   were   payable  at  December   31,  1995  and  1994,
           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.

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.


                                       41

<PAGE>



e.         One engine owned by Polaris Aircraft Income Fund I (PAIF-I) is leased
           to Viscount  beginning in April 1993 through a joint venture with the
           Partnership.  The rental  payments of $146,000,  $146,000 and $98,000
           were offset against rent from operating  leases in the 1995, 1994 and
           1993 statement of operations,  respectively. Viscount is currently in
           default with respect to this lease  agreement as discussed in Notes 7
           and 12.

f.         One engine was leased from PHC from September 1993 through April 1994
           for use on the aircraft leased to NWT. The rental payments of $38,400
           and $42,000  were offset  against rent from  operating  leases in the
           1994 and 1993 statement of operations, respectively.

10.        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,  1995 and 1994 are as
follows:

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

1995:      Assets       $107,820,317     $103,582,640       $4,237,677
           Liabilities     1,451,794          698,747          753,047

1994:      Assets       $110,568,377     $108,560,932       $2,007,445
           Liabilities     2,278,076        1,049,849        1,228,227



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

<TABLE>

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,
<CAPTION>
                                                                 1995       1994        1993
                                                                 ----       ----        ----
<S>                                                          <C>        <C>        <C>
Book net income (loss) per limited partnership unit          $   9.94   $  (8.87)  $   (1.91)
Adjustments for tax purposes represent differences
   between book and tax revenue and expenses:
      Rental and maintenance reserve revenue recognition        (2.60)      5.18       (3.18)
      Management fee expense                                     0.14      (0.27)      (0.06)
      Depreciation                                              (0.78)     (2.76)      (5.39)
      Gain or loss on sale of aircraft                          (1.60)       --         1.49
      Capitalized costs                                          0.93       7.13        5.35
      Basis in inventory                                        (1.08)     (0.39)     (19.17)
      Other revenue and expense items                           (0.36)     (1.18)       1.47
                                                                -----      -----      ------

Taxable net income (loss) per limited partnership unit       $   4.59   $  (1.16)  $  (21.40)
                                                                =====      =====      ======

</TABLE>

                                       42

<PAGE>



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. Disbursements from
the Partnership's book maintenance  reserves are capitalized or expensed for tax
purposes, as appropriate.

The  Partnership  computes  depreciation  using  the  straight-line  method  for
financial  reporting  purposes  and  generally  an  accelerated  method  for tax
purposes. As a result, the current year tax depreciation expense is greater than
the book depreciation  expense. 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.  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.

For book  purposes,  aircraft  held in inventory  are  reflected at the lower of
depreciable cost or estimated net realizable value.  Differences in book and tax
revenue and loss from inventory  result from the differences in the book and tax
carrying value of the inventory.


12.        Subsequent Events

Sale  of  Boeing  737-200  Combi  Airframe  and  Engine  - In  March  1996,  the
Partnership  sold the  airframe  and one engine  from the Boeing  737-200  Combi
Aircraft,  formerly  on lease to NWT as  discussed  in Note 3, to  Westjet.  The
security deposit of approximately $88,000 received from Westjet in December 1995
was applied to the sales price of approximately $896,000. The Partnership agreed
to accept payment of the balance of the sales price in 22 monthly  installments,
with  interest at a rate of 10% per annum,  beginning in March 1996.  Westjet is
current on its scheduled payments to the Partnership.

Sale of TWA Common Stock - As discussed in Note 6, the Partnership exercised the
TWA  warrants on December  29,  1995.  The fair market value of the TWA stock at
December 31, 1995 was $2,356,506.  The Partnership  sold the TWA Common Stock by
February 1996 for $2,406,479 and will recognize a gain on trading  securities of
$49,973 in the first quarter of 1996.

Promissory  Note from ALG - As discussed in Note 4, the promissory note from ALG
required a balloon  payment of $416,631 due in January 1996. The Partnership and
ALG  restructured  the terms of the  promissory  note.  The  renegotiated  terms
specify  payment by ALG of the note balance  with  interest at a rate of 13% per
annum with a lump sum payment in January 1996 of $135,258 and eleven payments of
$27,272 beginning in February 1996 through December 1996.
ALG is current on the renegotiated payments.

Viscount Default and Bankruptcy  Filing - As discussed in Note 7, as of December
31, 1995 Viscount was  delinquent on certain rent,  deferred  rent,  maintenance
reserve and note payments due the Partnership.  On January 9, 1996, Viscount was
notified  that the  Partnership  had elected to  terminate  the lease  (which is
disputed by Viscount) and the Partnership  demanded  return of the aircraft.  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

                                       43

<PAGE>



Tucson,  Arizona.  Legal  counsel has been  retained and the general  partner is
evaluating  the  rights,  remedies  and  courses  of  action  available  to  the
Partnership  with  respect to  Viscount's  default and  bankruptcy  filing.  The
Partnership  has received no additional  payments  from  Viscount  subsequent to
December 31, 1995. As a result of Viscount's  defaults and Chapter 11 bankruptcy
filing, the Partnership may incur maintenance,  legal,  remarketing,  transition
and sale costs related to the Partnership's  aircraft and engines,  which cannot
be  estimated  at this time.  The outcome of  Viscount's  Chapter 11  proceeding
cannot be predicted.

During 1995, Viscount delivered the aircraft to Tucson Aerospace,  a maintenance
facility  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. The aircraft is currently in the possession of Tucson Aerospace and it
may assert a lien  against  the  aircraft  to secure  payment  of its claim.  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. The Partnership
has been in discussions  with the various  parties to resolve these disputes and
is currently evaluating all of its options,  including alternative procedures to
obtain repossession of this aircraft.



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

None.

                                       44

<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. (the Servicer or 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, the Servicer and PIMC are affiliates.

The officers and directors of PIMC are:

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

           James W. Linnan                   President; Director
           Richard J. Adams                  Vice President; Director
           Norman C. T. Liu                  Vice President; Director
           Edward Sun                        Vice President
           John E. Flynn                     Vice President
           Robert W. Dillon                  Vice President; Assistant Secretary
           Marc A. Meiches                   Chief Financial Officer
           Richard L. Blume                  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. Linnan, 54, assumed the position of President and Director of PIMC effective
March 31, 1995. Mr. Linnan had  previously  held the positions of Vice President
of PIMC  effective July 1, 1994,  Vice President - Financial  Management of PIMC
and PALC effective  April 1991, and Vice President - Investor  Marketing of PIMC
and PALC since July 1986.

Mr. Adams, 62, Senior Vice President - Aircraft Marketing, North America, served
as Senior Vice President - Aircraft Sales and Leasing of PIMC and PALC effective
August  1992,  having  previously  served as Vice  President - Aircraft  Sales &
Leasing - Vice President, North America, and Vice President - Corporate Aircraft
since he joined PALC in August 1986.  Effective July 1, 1994, Mr. Adams held the
positions of Vice President and Director of PIMC.

Mr. Liu, 38, has assumed the position of Vice President of PIMC effective May 1,
1995 and has assumed the position of Director of PIMC  effective  July 31, 1995.
Mr. Liu presently  holds the position of Executive Vice President - Marketing of
GECAS, having previously held the position of Executive Vice President - Capital
Funding and Portfolio  Management of GECAS.  Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management
positions in corporate Business  Development and in Syndications and Leasing for
Transportation  and Industrial  Funding  Corporation  (TIFC). Mr. Liu previously
held the position of managing director of Kidder, Peabody & Co., Incorporated.


                                       45

<PAGE>



Mr. Sun, 46, has assumed the position of Vice President of PIMC effective May 1,
1995. Mr. Sun presently holds the position of Senior Vice President - Structured
Finance of GECAS.  Prior to joining GECAS,  Mr. Sun held various  positions with
TIFC since 1990.

Mr.  Flynn,  55,  Vice  President -  Marketing  of GECAS,  served as Senior Vice
President - Aircraft  Marketing for PIMC and PALC effective  April 1991,  having
previously  served as Vice  President  North America of PIMC and PALC  effective
July 1989.  Mr. Flynn joined PALC in March 1989 as Vice  President - Cargo.  For
the two years prior to joining PALC, Mr. Flynn was a transportation  consultant.
Effective July 1, 1994, Mr. Flynn held the position of Vice President of PIMC.

Mr. Dillon,  54, became Vice  President - Aviation Legal and Insurance  Affairs,
effective April 1989. Previously,  he served as General Counsel of PIMC and PALC
effective January 1986. Effective July 1, 1994, Mr. Dillon held the positions of
Vice President and Assistant  Secretary of PIMC. Mr. Dillon  presently holds the
position of Senior Vice President of GECAS.

Mr.  Blume,  54, has assumed the position of Secretary of PIMC  effective May 1,
1995.  Mr. Blume  presently  holds the position of Executive  Vice President and
General  Counsel of GECAS.  Prior to joining GECAS,  Mr. Blume was counsel at GE
Aircraft Engines since 1987.

Mr.  Meiches,  43, has assumed the position of Chief  Financial  Officer of PIMC
effective  October  9,  1995.  Mr.  Meiches  presently  holds the  positions  of
Executive Vice President and Chief Financial Officer of GECAS.  Prior to joining
GECAS,  Mr.  Meiches  has  been  with  General  Electric  Company  (GE)  and its
subsidiaries  since 1978.  Since 1992,  Mr.  Meiches  held the  position of Vice
President of the General Electric Capital Corporation Audit Staff.  Between 1987
and 1992, Mr. Meiches held Manager of Finance positions for GE Re-entry Systems,
GE Government Communications Systems and the GE Astro-Space Division.





                                       46

<PAGE>



Certain Legal Proceedings:

On October 27, 1992, a class action  complaint  entitled  Weisl,  Jr. et al., v.
Polaris Holding  Company,  et al. was filed in the Supreme Court of the State of
New York for the County of New York.  The complaint sets forth various causes of
action which include  allegations  against  certain or all of the defendants (i)
for alleged fraud in connection with certain public offerings, including that of
the Partnership, on the basis of alleged misrepresentation and alleged omissions
contained in the written offering materials and all presentations allegedly made
to investors;  (ii) for alleged negligent  misrepresentation  in connection with
such offerings;  (iii) for alleged breach of fiduciary duties;  (iv) for alleged
breach of third party beneficiary  contracts;  (v) for alleged violations of the
NASD Rules of Fair Practice by certain  registered broker dealers;  and (vi) for
alleged  breach of  implied  covenants  in the  customer  agreements  by certain
registered  brokers.  The  complaint  seeks an award of  compensatory  and other
damages and remedies.  On January 19, 1993,  plaintiffs filed a motion for class
certification.  On March 1,  1993,  defendants  filed  motions  to  dismiss  the
complaint on numerous grounds,  including failure to state a cause of action and
statute of limitations.  On July 20, 1994, the court entered an order dismissing
almost all of the claims in the complaint and amended complaint. Certain claims,
however,  remain  pending.  Plaintiffs  filed a notice of appeal on September 2,
1994. The Partnership is not named as a defendant in this action.

On or around  February  17, 1993, a civil  action  entitled  Einhorn,  et al. v.
Polaris Public Income Funds,  et al., was filed in the Circuit Court of the 11th
Judicial Circuit in and for Dade County,  Florida against, among others, Polaris
Investment  Management  Corporation and Polaris Depositary  Company.  Plaintiffs
seek class  action  certification  on behalf of a class of  investors in Polaris
Aircraft  Income Fund IV, Polaris  Aircraft  Income Fund V and Polaris  Aircraft
Income  Fund  VI who  purchased  their  interests  while  residing  in  Florida.
Plaintiffs  allege  the  violation  of Section  517.301,  Florida  Statutes,  in
connection  with the offering and sale of units in such Polaris  Aircraft Income
Funds. Among other things,  plaintiffs assert that the defendants sold interests
in such Polaris  Aircraft  Income Funds while  "omitting and failing to disclose
the material facts  questioning the economic  efficacy of" such Polaris Aircraft
Income Funds.  Plaintiffs seek  rescission or damages,  in addition to interest,
costs, and attorneys' fees. On April 5, 1993,  defendants filed a motion to stay
this action  pending  the final  determination  of a prior  filed  action in the
Supreme  Court  for the  State of New York  entitled  Weisl v.  Polaris  Holding
Company.  On that date,  defendants also filed a motion to dismiss the complaint
on the grounds of failure to attach necessary documents,  failure to plead fraud
with particularity and failure to plead reasonable reliance.  On April 13, 1993,
the court  denied the  defendants'  motion to stay.  On May 7,  1993,  the court
stayed  the  action  pending  an  appeal of the  denial  of the  motion to stay.
Defendants subsequently filed with the Third District Court of Appeal a petition
for writ of  certiorari  to review the lower court's order denying the motion to
stay. On October 19, 1993,  the Court of Appeal  granted the writ of certiorari,
quashed the order,  and remanded the action with  instruction to grant the stay.
The Partnership is not named as a defendant in this action.

On or around May 14, 1993, a purported class action entitled Moross,  et al., v.
Polaris Holding  Company,  et al., was filed in the United States District Court
for the District of Arizona.  This purported class action was filed on behalf of
investors  in Polaris  Aircraft  Income  Funds I - VI by nine  investors in such
Polaris  Aircraft Income Funds. The complaint  alleges that defendants  violated
Arizona state securities statutes and committed negligent  misrepresentation and
breach of fiduciary  duty by  misrepresenting  and failing to disclose  material
facts  in  connection  with  the  sale  of  limited  partnership  units  in  the
above-named funds. An amended complaint was filed on September 17, 1993, but has
not been served upon defendants.  On or around October 4, 1993, defendants filed
a notice of removal to the United  States  District  Court for the  District  of
Arizona.  Defendants  also filed a motion to stay the action  pending  the final

                                       47

<PAGE>



determination  of a prior filed action in the Supreme Court for the State of New
York entitled Weisl v. Polaris Holding Company ("Weisl") and to defendants' time
to respond to the  complaint  until 20 days after  disposition  of the motion to
action pending resolution of the motions for class  certification and motions to
dismiss  pending in Weisl.  On January 20, 1994, the court stayed the action and
required  defendants  to file status  reports every sixty days setting forth the
status of the motions in Weisl.  On April 18, 1995,  this action was transferred
to the Multi-District  Litigation  described below. The Partnership is not named
as a defendant in this action.

On September 21, 1993, a purported  derivative action entitled Novak, et al., v.
Polaris Holding Company,  et al., was filed in the Supreme Court of the State of
New  York,  County  of New  York.  This  action  was  brought  on  behalf of the
Partnership,  Polaris  Aircraft  Income Fund I and Polaris  Aircraft Income Fund
III. The complaint names as defendants  Polaris Holding Company,  its affiliates
and others. Each of the Partnership,  Polaris Aircraft Income Fund I and Polaris
Aircraft Income Fund III is named as a defendant for procedural purposes, but no
recovery is sought from these  defendants.  The complaint  alleges,  among other
things,  that  defendants  mismanaged  the  Partnership  and the  other  Polaris
Aircraft  Income  Funds,   engaged  in  self-dealing   transactions   that  were
detrimental to the Partnership  and the other Polaris  Aircraft Income Funds and
failed to make required  disclosure in connection  with the sale of the units in
the  Partnership  and the other Polaris  Aircraft  Income  Funds.  The complaint
alleges  claims of breach of fiduciary  duty and  constructive  fraud and seeks,
among  other  things  an  award  of  compensatory  and  punitive  damages  in an
unspecified  amount,  re-judgment  interest,  and attorneys'  fees and costs. On
January 13, 1994, certain of the defendants,  including Polaris Holding Company,
filed motions to dismiss the complaint on the grounds of, among others,  failure
to state a cause of action and failure to plead the alleged wrong in detail.  On
August  11,  1994,  the court  denied in part and  granted  in part  defendants'
motions to dismiss.  Specifically, the court denied the motions as to the claims
for breach of fiduciary duty, but dismissed  plaintiffs'  claim for constructive
fraud with leave to replead.  On October 7, 1994,  defendants  filed a notice of
appeal.  On November 15, 1994,  defendants  submitted an answer to the remaining
causes of action.  On July 7, 1995,  defendants filed briefs in support of their
appeal  from that  portion  of the trial  court's  order  denying  the motion to
dismiss. On March 14, 1996, the appellate court reversed the trial court's order
denying the motion to dismiss, and dismissed the complaint.

On or around March 13, 1993, a purported  class action  entitled Kahn v. Polaris
Holding  Company,  et al.,  was filed in the  Supreme  Court of the State of New
York,  County of New York. This purported class action on behalf of investors in
Polaris  Aircraft  Income  Fund V was filed by one  investor  in the  fund.  The
complaint names as defendants Polaris Investment Management Corporation, Polaris
Holding Company,  its affiliates and others.  The complaint  charges  defendants
with common law fraud, negligent  misrepresentation and breach of fiduciary duty
in connection with certain  misrepresentations  and omissions  allegedly made in
connection  with  the sale of  interests  in  Polaris  Aircraft  Income  Fund V.
Plaintiffs seek compensatory and consequential damages in an unspecified amount,
plus interest,  disgorgement and restitution of all earnings,  profits and other
benefits  received by  defendants as a result of their  alleged  practices,  and
attorneys' fees and costs.  Defendants' time to move,  answer or otherwise plead
with respect to the  complaint was extended by  stipulation  up to and including
April  24,  1995.  On April  18,  1995,  the  action  was  discontinued  without
prejudice. The Partnership is not named as a defendant in this action.

On June 8, 1994, a consolidated  complaint captioned In re Prudential Securities
Inc.  Limited  Partnerships  Litigation was filed in the United States  District
Court for the Southern  District of New York,  purportedly  consolidating  cases
that had been  transferred  from other federal  courts by the Judicial  Panel on
Multi-District  Litigation.  The  consolidated  complaint  names  as  defendants
Prudential entities and  various other sponsors of  limited partnerships sold by

                                       48

<PAGE>



Prudential,  including  Polaris  Holding  Company,  one of its former  officers,
Polaris Aircraft Leasing Corporation,  Polaris Investment Management Corporation
and Polaris  Securities  Corporation.  The complaint alleges that the Prudential
defendants created a scheme for the sale of approximately  $8-billion of limited
partnership   interests  in  700  assertedly  high-risk  limited   partnerships,
including the Partnership,  to approximately 350,000 investors by means of false
and misleading offering materials;  that the sponsoring organizations (including
the Polaris entities)  participated with the Prudential  defendants with respect
to, among other things,  the partnerships  that each sponsored;  and that all of
the defendants conspired to engage in a nationwide pattern of fraudulent conduct
in the marketing of all limited  partnerships sold by Prudential.  The complaint
alleges violations of the federal Racketeer Influenced and Corrupt Organizations
Act and the New Jersey counterpart thereof, fraud, negligent  misrepresentation,
breach of fiduciary duty and breach of contract. The complaint seeks rescission,
unspecified  compensatory  damages,  treble  damages,  disgorgement  of  profits
derived from the alleged acts,  costs and  attorneys  fees. On October 31, 1994,
Polaris  Investment  Management  Corporation and other Polaris  entities filed a
motion to dismiss the  consolidated  complaint  on the  grounds of,  inter alia,
statute of  limitations  and failure to state a claim.  The  Partnership  is not
named as a defendant in this action.  Prudential Securities,  Inc., on behalf of
itself  and its  affiliates  has made an Offer of  Settlement.  A class has been
certified for purposes of the Prudential  Settlement and notice to the class has
been sent. Any questions  concerning  Prudential's Offer of Settlement should be
directed to 1-800- 327-3664, or write to the Claims Administrator at:

           Prudential Securities Limited Partnerships
           Litigation Claims Administrator
           P.O. Box 9388
           Garden City, New York 11530-9388

A further  litigation  captioned  Romano v. Ball et. al, an action by Prudential
Insurance Company  policyholders  against many of the same defendants (including
Polaris   Investment   Management   Corporation  and  Polaris  Aircraft  Leasing
Corporation),  has also been  commenced  by  policy  holders  of the  Prudential
Insurance  Company as a purported  derivative action on behalf of the Prudential
Insurance  Company.  The complaint  alleges  claims under the federal  Racketeer
Influenced  and  Corrupt  Organizations  Act,  as  well  as  claims  for  waste,
mismanagement  and  intentional  and  negligent  misrepresentation,   and  seeks
unspecified  compensatory,  treble  and  punitive  damages.  The  case is  being
coordinated with In re Prudential.

On or about February 13, 1995, an action  entitled  Adams,  et al. v. Prudential
Securities,  Inc. et al. was filed in the Court of Common  Pleas,  Stark County,
Ohio. The action names Prudential Securities, Inc., Prudential Insurance Company
of  America,  Polaris  Investment  Management  Corporation,  Polaris  Securities
Corporation,  Polaris  Aircraft  Leasing  Corporation,  Polaris Holding Company,
General  Electric Capital  Corporation,  Polaris Aircraft Income Fund I, Polaris
Aircraft  Income  Fund IV,  Polaris  Aircraft  Income  Fund V and James  Darr as
defendants.  The complaint  alleges that defendants  committed common law fraud,
fraud in the  inducement,  negligent  misrepresentation,  negligence,  breach of
fiduciary duty and civil conspiracy by  misrepresenting  and failing to disclose
material  facts in  connection  with the sale of  limited  partnership  units in
Polaris  Aircraft  Income Fund I, Polaris  Aircraft  Income Fund IV, and Polaris
Aircraft Income Fund V. Plaintiffs seek, among other things, rescission of their
investments  in the Polaris  Aircraft  Income  Funds,  an award of  compensatory
damages in an unspecified amount plus interest thereon,  and punitive damages in
an unspecified  amount.  On or about March 15, 1995,  this action was removed to
the United  States  District  Court for the Northern  District of Ohio,  Eastern
Division.  Subsequently,  the  Judicial  Panel  transferred  this  action to the
Multi-District  Litigation  filed in the United  States  District  Court for the
Southern District of New York,  discussed above. The Partnership is not named as
a defendant in this action.

                                       49

<PAGE>



On or about February 6, 1995, a class action complaint entitled Cohen, et al. v.
J.B.  Hanauer & Company,  et al. was filed in the Circuit Court of the Fifteenth
Judicial Circuit in and for Palm Beach County, Florida. The complaint names J.B.
Hanauer &  Company,  General  Electric  Capital  Corporation,  General  Electric
Financial Services, Inc., and General Electric Company as defendants. The action
purports to be on behalf of "approximately  5,000 persons  throughout the United
States" who purchased  units in Polaris  Aircraft Income Funds I through VI. The
complaint sets forth various causes of action which include  allegations against
certain or all of the  defendants  (i) for  violation  of  Section  12(2) of the
Securities  Act of 1933,  as  amended,  by a  registered  broker  dealer and for
violation of Section 15 of such act by all defendants in connection with certain
public  offerings,  including that of the  Partnership,  on the basis of alleged
misrepresentation  and  alleged  omissions  contained  in the  written  offering
materials and all  presentations  allegedly made to investors;  (ii) for alleged
fraud  in  connection   with  such  offerings;   (iii)  for  alleged   negligent
misrepresentation in connection with such offerings;  (iv) for alleged breach of
fiduciary duties;  (v) for alleged breach of third party beneficiary  contracts;
(vi) for alleged  violations  of the NASD Rules of Fair Practice by a registered
broker dealer; and (vii) for alleged breach of implied covenants in the customer
agreements  by a  registered  broker  dealer.  The  complaint  seeks an award of
compensatory  and  punitive  damages  and  other  remedies.  On  June  7,  1995,
plaintiffs  filed an  amended  complaint  which did not  include  as  defendants
General Electric Capital Corporation, General Electric Financial Services, Inc.,
and General Electric Company, thus effectively  dismissing without prejudice the
case against these entities. The Partnership is not named as a defendant in this
action.

On or about January 12, 1995, a class action complaint entitled Cohen, et al. v.
Kidder  Peabody & Company,  Inc.,  et al. was filed in the Circuit  Court of the
Fifteenth Judicial Circuit in and for Palm Beach County,  Florida,  and on March
31,  1995 the case was  removed  to the  United  States  District  Court for the
Southern  District of Florida.  An amended class action  complaint (the "amended
complaint"),  which re-named this action  Bashein,  et al. v. Kidder,  Peabody &
Company Inc., et al., was filed on June 13, 1995.  The amended  complaint  names
Kidder Peabody & Company,  Inc., General Electric Capital  Corporation,  General
Electric Financial  Services,  Inc., and General Electric Company as defendants.
The action purports to be on behalf of "approximately  20,000 persons throughout
the United  States" who  purchased  units in Polaris  Aircraft  Income Funds III
through  VI.  The  amended   complaint  sets  forth  various  causes  of  action
purportedly  arising in connection with the public offerings of Polaris Aircraft
Income Fund III,  Polaris  Aircraft Income Fund IV, Polaris Aircraft Income Fund
V, and Polaris Aircraft Income Fund VI.  Specifically,  plaintiffs assert claims
for violation of Sections  12(2) and 15 of the  Securities  Act of 1933,  fraud,
negligent  misrepresentation,  breach of fiduciary  duty,  breach of third party
beneficiary  contract,  violation  of NASD  Rules of Fair  Practice,  breach  of
implied covenant, and breach of contract.  Plaintiffs seek compensatory damages,
interest,  punitive  damages,  costs and  attorneys'  fees, as well as any other
relief the court deems just and proper.  Defendants moved to dismiss the amended
complaint on June 26, 1995. On October 2, 1995, the court denied the defendants'
motion to dismiss. The Partnership is not named as a defendant in this action.

On or around April 13, 1995, a class action complaint entitled B & L Industries,
Inc., et al. v. Polaris Holding  Company,  et al. was filed in the Supreme Court
of the State of New York.  The  complaint  names as defendants  Polaris  Holding
Company,  Polaris Aircraft Leasing  Corporation,  Polaris Investment  Management
Corporation,   Polaris  Securities  Corporation,  Peter  G.  Pfendler,  Marc  P.
Desautels,  General Electric  Capital  Corporation,  General Electric  Financial
Services, Inc., General Electric Company, Prudential Securities Inc., and Kidder
Peabody & Company  Incorporated.  The  complaint  sets forth  various  causes of
action  purportedly  arising  out of the public  offerings  of Polaris  Aircraft
Income Fund III and Polaris Aircraft Income Fund IV. Plaintiffs allege claims of
fraud, negligent misrepresentation, breach of fiduciary duty, knowingly inducing
or participating in breach of fiduciary duty,  breach of third party beneficiary

                                       50

<PAGE>



contract,  violation of NASD Rules of Fair Practice, breach of implied covenant,
and unjust enrichment.  Plaintiffs seek compensatory damages, interest, general,
consequential   and  incidental   damages,   exemplary  and  punitive   damages,
disgorgement,  rescission,  costs,  attorneys'  fees,  accountants' and experts'
fees,  and other legal and equitable  relief as the court deems just and proper.
On October 2, 1995,  defendants moved to dismiss the complaint.  The Partnership
is not named as a defendant in this action.

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.  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.
The Partnership is not named as a defendant in this action.

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.  Plaintiffs  allege claim 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. The Partnership is not named as a defendant in this action.

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.  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. The Partnership is not named as a defendant in this action.

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. Plaintiff alleges claims of tort, breach of fiduciary duty in tort,
contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law
and violation of the Louisiana Civil Code in connection with the public offering
of  Polaris  Aircraft  Income  Funds III and IV.  Plaintiffs  seek  compensatory
damages, attorneys' fees, interest, costs and general relief. The Partnership is
not named as a defendant in this action.

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.  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

                                       51

<PAGE>



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.  The  Partnership is not named as a defendant in this
action.

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.



Disclosure pursuant to Section 16, Item 405 of Regulation S-K:

Based  solely on its  review of the  copies of such  forms  received  or written
representations  from  certain  reporting  persons that no Forms 3, 4, or 5 were
required for those  persons,  the  Partnership  believes  that,  during 1995 all
filing requirements  applicable to its officers,  directors and greater than ten
percent beneficial owners were met.


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  $763,773  were  paid to  PIMC  in 1995 in  addition  to a 10%
interest  in all cash  distributions  as  described  in Note 9 to the  financial
statements (Item 8).


Item 12.   Security Ownership of Certain Beneficial Owners and Management

      a)   No person owns of record, or is known by 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                        24
           Balance Sheets                                                  25
           Statements of Operations                                        26
           Statements of Changes in Partners' Capital (Deficit)            27
           Statements of Cash Flows                                        28
           Notes to Financial Statements                                   29


2.         Reports on Form 8-K.

           None.


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

           27.       Financial Data Schedules (Filed electronically 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.



                                       53

<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 25, 1996                      By:      /S/ James W. Linnan
-------------------------------                       -------------------
             Date                                     James W. Linnan, 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/James W. Linnan       President and Director of Polaris        March 25, 1996
------------------       Investment Management Corporation,       --------------
(James W. Linnan)        General Partner of the Registrant
                         
                         

/S/Norman C. T. Liu      Vice President and Director of Polaris   March 25, 1996
-------------------      Investment Management Corporation,       --------------
(Norman C. T. Liu)       General Partner of the Registrant
                         
                         

/S/Marc A. Meiches       Chief Financial Officer of Polaris       March 25, 1996
------------------       Investment Management Corporation,       --------------
(Marc A. Meiches)        General Partner of the Registrant
                         
                         



                                       54