UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-K

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

             _X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997

                                       OR

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

                           Commission File No.33-2794

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

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

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

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

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

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

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

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

No formal  market  exists  for the units of  limited  partnership  interest  and
therefore there exists no aggregate market value at December 31, 1997.

                    Documents incorporated by reference: None

                       This document consists of 51 pages.


<PAGE>


                                     PART I

Item 1.  Business

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

PAIF-II has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other limited partnerships,  banks and several other
types of financial institutions.  This market is highly competitive and there is
no  single  competitor  who has a  significant  influence  on the  industry.  In
addition  to  other  competitors,   the  general  partner,   Polaris  Investment
Management Corporation (PIMC), and its affiliates, including GE Capital Aviation
Services,  Inc. (GECAS),  Polaris Aircraft Leasing Corporation  (PALC),  Polaris
Holding  Company (PHC) and General  Electric  Capital  Corporation (GE Capital),
acquire,  lease,  finance, sell and remarket aircraft for their own accounts and
for existing  aircraft and aircraft leasing  programs managed by them.  Further,
GECAS  provides a significant  range of 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) as of December  31,
1997.
                                                  Scheduled
                                     Number of      Lease
Lessee        Aircraft Type          Aircraft     Expiration   Renewal Options
------        -------------          --------     ----------   ---------------
TWA      McDonnell Douglas DC-9-30       11       11/04 (1)        none
TWA      McDonnell Douglas DC-9-30        3        2/05 (1)        none

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

         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.  In 1995,  the  Partnership  received  as
         consideration  for the  agreement  $218,071  and  warrants  for 227,133
         shares of TWA Common Stock (Item 7).

         In 1996,  GECAS, on behalf of the Partnership,  negotiated with TWA for
         the  acquisition  of  noise-suppression   devices,  commonly  known  as
         "hushkits", for 14 of the Partnership's aircraft on lease to TWA at the
         time, as well as other  aircraft owned by affiliates of PIMC and leased

                                       2


<PAGE>

         to TWA. The 14 aircraft that received  hushkits were designated by TWA.
         The  hushkits  reconditioned  the  aircraft so as to meet Stage 3 noise
         level restrictions.  Hushkits were installed on 11 of the Partnership's
         aircraft during 1996 and the leases for these 11 aircraft were extended
         for a  period  of  eight  years  until  November  2004.  Hushkits  were
         installed on the remaining  three aircraft during February 1997 and the
         leases for these three  aircraft  were  extended  for a period of eight
         years until February 2005.

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

Industry-wide, approximately 330 commercial jet aircraft were available for sale
or lease at December 31, 1997,  approximately  50 more than a year ago. At under
3% of the total  available jet aircraft  fleet,  this is still a relatively  low
level  of  availability  by  industry  historic  standards.  From  1991 to 1994,
depressed demand for 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 four years of strong traffic growth accompanied by rising yields, this
trend reversed with many airlines reporting substantial profits since 1995. As a
result of this improving trend,  just over 1200 new jet aircraft were ordered in
1996 and a further  1300 were  ordered in 1997,  making this the second  highest
ever order year in the history of the industry.  To date,  this strong  recovery
has mainly  benefited Stage 3 narrow-bodies  and younger Stage 2  narrow-bodies,
many of which are now being upgraded with 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 and early wide-bodies have
shown only marginal  signs of recovery  since the depressed 1991 to 1994 period.
Economic  turmoil  in  Asia in the  second  half of  1997  has  brought  about a
significant  reduction  in  traffic  growth  in  much of that  region  which  is
resulting in a number of new aircraft order deferrals and cancellations,  mainly
in the  wide-body  sector of the market  with as yet no impact  evident in other
world markets.  In 1996,  several airline accidents also impacted the market for
older Stage 2 aircraft.  The  Partnership  has been forced in the past to adjust
its  estimates  of the  residual  values  realizable  from its  aircraft,  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:

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

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


Item 2.  Properties

At December 31, 1997, PAIF-II owned 14 McDonnell Douglas DC-9-30 aircraft leased
to TWA out of its original  portfolio of 30 aircraft.  All leases are  operating
leases. Polaris Aircraft Income Fund II (the Partnership) transferred six Boeing
727-200 aircraft,  previously  leased to Pan Am, to aircraft  inventory in 1992.

                                       3
<PAGE>

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 one engine from the Boeing  737-200  Combi  aircraft in March
1996. The Partnership  sold the remaining  engine along with a Boeing 737-200 in
January 1997. The Partnership sold three Boeing 727-200,  one McDonnell  Douglas
DC-9-40 and three McDonnell Douglas DC-9-30 aircraft to Triton Aviation Services
II LLC in May 1997 and June 1997.

The following table describes the Partnership's  aircraft  portfolio at December
31, 1997 in greater detail:

                                                 Year of             Cycles
Aircraft Type                Serial Number      Manufacture      As of 12/31/97
-------------                -------------      -----------      --------------
McDonnell Douglas DC-9-30       47135              1968              79,114
McDonnell Douglas DC-9-30       47137              1968              78,249
McDonnell Douglas DC-9-30       47249              1968              84,418
McDonnell Douglas DC-9-30       47251              1968              82,872
McDonnell Douglas DC-9-30       47343              1969              81,501
McDonnell Douglas DC-9-30       47345              1969              79,873
McDonnell Douglas DC-9-30       47411              1969              77,243
McDonnell Douglas DC-9-30       47412              1969              77,339
McDonnell Douglas DC-9-30       47027              1967              83,328
McDonnell Douglas DC-9-30       47107              1968              82,753
McDonnell Douglas DC-9-30       47108              1968              79,599
McDonnell Douglas DC-9-30       47174              1968              80,692
McDonnell Douglas DC-9-30       47324              1969              76,925
McDonnell Douglas DC-9-30       47357              1969              76,746


Item 3.  Legal Proceedings

Braniff,  Inc. (Braniff) Bankruptcy - As previously reported in Polaris Aircraft
Income Fund II's (the Partnership) 1996 Form 10-K, the Bankruptcy Court disposed
of the  Partnership's  claim in this  Bankruptcy  proceeding by  permitting  the
Partnership  to exchange a portion of its unsecured  claim for  Braniff's  right
(commonly  referred  to as a "Stage  2 Base  Level  right")  under  the  Federal
Aviation Administration noise regulations to operate one Stage 2 aircraft and by
allowing the  Partnership  a net  remaining  unsecured  claim of $769,231 in the
proceedings.

Viscount Air Services,  Inc.  (Viscount)  Bankruptcy - As previously reported in
the  Partnership's  1996 Form 10-K,  all disputes  between the  Partnership  and
Viscount have been resolved,  and there is no further  pending  litigation  with
Viscount.  However, when Viscount rejected its lease of one of the Partnership's
aircraft  ("306  Aircraft"),  as authorized  by the  Bankruptcy  court,  the 306
Aircraft was located at a maintenance  facility owned by BAE Aviation,  Inc. dba
Tucson Aerospace (BAE). BAE and its subcontractors STS Services, Inc. and Piping
Design Services, Inc., dba PDS Technical Services asserted mechanics' liens over
the 306 Aircraft.  On May 22, 1996,  First Security Bank,  National  Association
(FSB),  as owner  trustee,  filed suit in the Superior  Court of Arizona in Pima
County to recover the 306 Aircraft.

After FSB filed a bond in the penal amount of  $1,371,000,  the claimants in the
action  released  the 306  Aircraft  and filed a claim  against  the  bond.  The
Superior  Court heard  cross-motions  for summary  judgment on July 7, 1997.  On
September 5, 1997, the Superior Court determined that STS Services, Inc. did not

                                       4
<PAGE>

have a lien under a filing in Tennessee.  The Superior Court denied FSB's motion
for summary judgment concerning assignment of the lien, but granted a motion for
summary judgment in part,  ruling that the claim against the bond may not exceed
the  value of the  airframe.  The case  continues  in  discovery  and  pre-trial
preparation. The matter is set for trial on April 14, 1998.

After recovering the 306 Aircraft, the Partnership sold the airframe and certain
engines in January of 1997. In the course of delivering the airframe, GE Capital
Aviation  Services,  Inc.  (GECAS)  determined that a painter,  Thomas Cook, was
holding  the  right  elevator  at his shop due to an  unpaid  bill  incurred  in
connection  with work on the 306  Aircraft by BAE under  contract  to  Viscount,
which at that time was  leasing the 306  Aircraft.  On March 20,  1997,  FSB, as
owner trustee,  filed a lawsuit in the Superior Court of Arizona in Pima County,
Case No. 318585 against Mr. Cook and Hamilton Aviation,  Inc., where his shop is
located,  to recover  possession.  On July 29, 1997,  the Superior  Court denied
FSB's  motion for  summary  judgment  and  determined  that a worker  holding an
aircraft part may claim a lien for the charges  associated  with the  particular
item without complying with Arizona's aircraft lien statute.  The Superior Court
directed Mr. Cook to provide  documentation  of his claim limited to work on the
elevator he is holding. The matter is set for trial on April 14, 1998.

Kepford, et al. v. Prudential Securities, et al. -On April 13, 1994, this action
was  filed in the  District  Court  of  Harris  County,  Texas  against  Polaris
Investment  Management  Corporation,  Polaris  Securities  Corporation,  Polaris
Holding Company, Polaris Aircraft Leasing Corporation, the Partnership,  Polaris
Aircraft  Income Fund I,  Polaris  Aircraft  Income Fund III,  Polaris  Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI,
General Electric Capital Corporation,  Prudential  Securities,  Inc., Prudential
Insurance Company of America and James J. Darr. The complaint alleges violations
of the Texas  Securities Act, the Texas Deceptive Trade Practices Act,  sections
11 and  12 of the  Securities  Act of  1933,  common  law  fraud,  fraud  in the
inducement,  negligent misrepresentation,  negligence,  breach of fiduciary duty
and civil conspiracy arising from the defendants' alleged  misrepresentation and
failure  to  disclose  material  facts in  connection  with the sale of  limited
partnership  units in the  Partnership  and the other  Polaris  Aircraft  Income
Funds.  Plaintiffs seek, among other things, an award of compensatory damages in
an  unspecified  amount plus  interest,  and double and treble damages under the
Texas Deceptive Trade Practices Act. On December 2, 1997, the trial court issued
a scheduling order setting a September 7, 1998 trial date.

Riskind, et al. v. Prudential  Securities,  Inc., et al. - This action was filed
in the District Court of the 165 Judicial District,  Maverick County,  Texas, on
behalf of over  3,000  individual  investors  who  purchased  units in  "various
Polaris  Aircraft  Income Funds,"  including the  Partnership.  A 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, 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.

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

                                       5
<PAGE>

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.  On February 26, 1997, the court issued an order
notifying the remaining  plaintiffs  that the action would be dismissed on April
21, 1997 for want of  prosecution  unless the  plaintiffs  showed  cause why the
action  should  not  be  dismissed.  This  action  was  dismissed  for  want  of
prosecution in April of 1997.

Howland, et al. v. Polaris Holding Company, et al. - This action was transferred
to the  multi-district  litigation in the Southern District of New York entitled
In re Prudential  Securities  Limited  Partnerships  Litigation,  which has been
settled as discussed in Part III, Item 10 below.

Mary C. Scott v. Prudential Securities Inc. et al. - This action was transferred
to  the  action  entitled  In  re  Prudential  Securities  Limited  Partnerships
Litigation, which has been settled as discussed in Part III, Item 10 below.

Equity Resources, Inc., et al. v. Polaris Investment Management Corporation,  et
al. - On or about April 18, 1997, an action  entitled  Equity  Resources  Group,
Inc., et al. v. Polaris Investment Management  Corporation,  et al. was filed in
the Superior Court for the County of Middlesex,  Commonwealth of  Massachusetts.
The complaint names each of Polaris Investment  Management  Corporation  (PIMC),
the Partnership,  Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund
IV,  Polaris  Aircraft  Income  Fund V and Polaris  Aircraft  Income Fund VI, as
defendants.  The complaint  alleges that PIMC, as general partner of each of the
partnerships,  committed a breach of its fiduciary duties,  violated  applicable
partnership  law  statutory   requirements   and  breached   provisions  of  the
partnership  agreements  of each of the  foregoing  partnerships  by  failing to
solicit  a vote  of the  limited  partners  in  each  of  such  partnerships  in
connection  with the Sale  Transaction  described  in Item 7, under the  caption
"Remarketing  Update -- Sale of  Aircraft  to Triton" and in failing to disclose
material facts relating to such transaction. The plaintiffs sought to enjoin the
Sale Transaction, but the Superior Court denied their motion on May 6, 1997. The
plaintiffs  appealed the Superior Court's denial of their motion to enjoin,  but
ultimately,  the Supreme Court of  Massachusetts  denied their appeal on May 29,
1997.  On May 23, 1997,  the  defendants  filed a motion to dismiss this action.
Subsequently,  the plaintiffs voluntarily sought dismissal of their suit without
prejudice.  On September 16, 1997, the court dismissed the plaintiffs' complaint
without prejudice.

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

On  September  2,  1997,  an  amended  complaint  was  filed  adding  additional
plaintiffs.  On  September  16,  1997,  the  defendants  filed a motion  to stay
discovery and a demurrer seeking to dismiss the amended  complaint.  On November
5, 1997,  the  Superior  Court  granted the demurrer  with leave to replead.  On

                                       6
<PAGE>

December 18, 1997, the plaintiffs  filed a second  amended  complaint  asserting
their  claims  derivatively.  On January 26, 1998,  defendants  filed a demurrer
seeking to dismiss the second amended  complaint on the grounds that  plaintiffs
had failed to satisfy the  pre-litigation  demand  requirements under California
law for commencing a derivative action.

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


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

None.


                                       7

<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, 1997
         -----------------------            --------------------------------

         Limited Partnership Interest:                   15,200

         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 1997
         and  1996  totaled  $14,349,914  and  $17,499,895,  respectively.  Cash
         distributions  per limited  partnership  unit were $28.70 and $35.00 in
         1997 and 1996, respectively.


                                       8

<PAGE>

<TABLE>

Item 6.  Selected Financial Data
<CAPTION>

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

                                   1997            1996             1995           1994              1993
                                   ----            ----             ----           ----              ----
<S>                          <C>             <C>              <C>             <C>              <C>

Revenues                     $  17,609,635   $  16,304,608    $  21,093,341   $  14,443,902    $  15,558,866

Net Income (Loss)                4,469,336     (14,708,486)       5,717,065      (3,217,172)          48,114

Net Income (Loss)
  Allocated to Limited
  Partners                       4,424,643     (16,311,216)       4,972,468      (4,434,868)        (952,261)

Net Income (Loss) per
  Limited Partnership Unit            8.85          (32.62)            9.94           (8.87)           (1.91)

Cash Distributions per
  Limited Partnership
  Unit                               28.70           35.00            13.75           25.00            20.00

Amount of Cash
  Distributions Included
  Above Representing
  a Return of Capital on
  a Generally Accepted
  Accounting Principle
  Basis per Limited
  Partnership Unit*                  28.70           35.00            13.75           25.00            20.00

Total Assets                    77,546,425      87,622,742      107,820,317     110,568,377      129,706,547

Partners' Capital               60,740,696      72,215,709      106,368,523     108,290,301      125,396,279

</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.

                                       9
<PAGE>


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

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


Remarketing Update

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

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

TWA Lease Extension - GE Capital Aviation Services,  Inc. (GECAS),  on behalf of
the  Partnership,  and TWA negotiated for the  acquisition of  noise-suppression
devices, commonly known as "hushkits," for the 14 Partnership aircraft currently
on  lease to TWA,  as well as  other  aircraft  beneficially  owned  by  Polaris
Aircraft Income Fund III and Polaris Holding Company and leased to TWA.  Hushkit
installation was completed on 11 of the Partnership's aircraft in November 1996.
Installation  of hushkits on the remaining  three aircraft was completed  during
February 1997.

The aggregate cost of the hushkit reconditioning  completed in February 1997 for
the three remaining  aircraft was $4,784,633,  or approximately $1.6 million per
aircraft,  which was capitalized by the Partnership during 1997. The Partnership
paid  $900,000 of the aggregate  hushkit cost and the balance of $3,884,633  was
financed by UT Finance  Corporation (UT Finance),  a wholly owned  subsidiary of
United Technologies Corporation, of which a division is Pratt and Whitney Group,
the hushkit  manufacturer,  over 50 months at an interest rate of  approximately
10% per annum.

The rent  payable  by TWA  under  the  leases  has been  increased  by an amount
sufficient to cover the monthly debt service  payments on the hushkits and fully
repay, during the term of the TWA leases, the amount borrowed.  The loan from UT
Finance is non-recourse to the Partnership and secured by a security interest in

                                       10
<PAGE>

the lease  receivables.  The leases for these three aircraft were extended for a
period of eight years until February 2005.

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

The  General  Partner's  Decision to Approve the  Transaction  - In  determining
whether the  transaction  was in the best interests of the  Partnership  and its
unitholders,  PIMC  evaluated,  among other  things,  the risks and  significant
expenses  associated  with  continuing to own and remarket the Aircraft (many of
which were subject to leases that were nearing expiration).  The General Partner
determined  that such a  strategy  could  require  the  Partnership  to expend a
significant  portion of its cash reserves for  remarketing  and that there was a
substantial  risk that this strategy could result in the  Partnership  having to
reduce or even  suspend  future  cash  distributions  to limited  partners.  The
General  Partner  concluded  that the  opportunity  to sell the  Aircraft  at an
attractive  price would be  beneficial  in the present  market  where demand for
Stage II aircraft  is  relatively  strong  rather  than  attempting  to sell the
aircraft  "one-by-one"  over the coming years when the demand for such  Aircraft
might be weaker. GE Capital Aviation Services,  Inc.  ("GECAS"),  which provides
aircraft  marketing and management  services to the General  Partner,  sought to
obtain the best price and terms  available for these Stage II aircraft given the
aircraft market and the conditions and types of planes owned by the Partnership.
Both the General  Partner and GECAS  approved  the sale terms of the Aircraft as
being in the best interest of the  Partnership and its unit holders because both
believe that this transaction will optimize the potential cash  distributions to
be paid to limited  partners.  To ensure that no better offer could be obtained,
the  terms of the  transaction  negotiated  by  GECAS  included  a  "market-out"
provision  that  permitted the  Partnership  to elect to accept an offer for all
(but not less than all) of the assets to be sold by it to the Purchaser on terms
which it deemed more  favorable,  with the ability of the Purchaser to match the
offer or  decline to match the offer and be  entitled  to be  compensated  in an
amount equal to 1 1/2% of the Purchaser's proposed purchase price. The
Partnership did not receive any other offers and, accordingly,  the General
Partner believes that a valid  market  check  had  occurred  confirming that the
terms of this transaction were the most beneficial that could have been
obtained.

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

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

Neither  PIMC nor GECAS  received  a sales  commission  in  connection  with the
transaction. In addition, PIMC was not paid a management fee with respect to the
collection of the  Promissory  Note or on any rents accruing from or after April

                                      11
<PAGE>

1, 1997 with  respect to the 7  Aircraft.  Neither  PIMC nor GECAS or any of its
affiliates  holds any  interest in Triton  Aviation or any of Triton  Aviation's
affiliates.  John Flynn, the current President of Triton Aviation, was a Polaris
executive  until  May 1996 and has over 15 years  experience  in the  commercial
aviation  industry.  At the time  Mr.  Flynn  was  employed  at PIMC,  he had no
affiliation with Triton Aviation or its affiliates.

Polaris  Aircraft  Income Fund III,  Polaris  Aircraft  Income Fund IV,  Polaris
Aircraft  Income  Fund V and  Polaris  Aircraft  Income  Fund VI have  also sold
certain  aircraft  assets to separate  special  purpose  companies  under common
management with the Purchaser  (collectively,  together with the Purchaser,  the
"SPC's") on terms  similar to those set forth above,  with the  exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.

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

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


Partnership Operations

The  Partnership  reported  net  income  of  $4,469,336,  or $8.85  per  limited
partnership unit for the year ended December 31, 1997, compared to a net loss of
$14,708,486,   or  $32.62  per  limited  partnership  unit  and  net  income  of
$5,717,065,  or $9.94 per limited partnership unit, for the years ended December
31, 1996 and 1995,  respectively.  The improved  income from  operations  during
1997,  as compared to 1996,  is due to a  substantial  decrease in  depreciation
expense related to the sale of aircraft.  A substantial increase in depreciation
expense,  as discussed later in the Industry Update section,  contributed to the
net loss during 1996.

Rental revenues, net of related management fees, increased during 1997, compared
to the same  period  in 1996.  This  increase  was  primarily  the  result of an
increase  in rental  revenues  from TWA.  In November  1996 and  February  1997,
installation  of hushkits was completed on the 14 aircraft leased to TWA and the
leases were  extended for eight years.  The rent payable by TWA under the leases
has been  increased  by an amount  sufficient  to cover the monthly debt service
payments on the hushkits and fully repay, during the term of the TWA leases, the
amount borrowed.

Rental revenues, net of related management fees, declined in 1996 as compared to
1995 primarily as a result of a decrease in rental revenue recognized in 1996 on
the  Partnership's  leases with TWA. TWA rental revenues were higher in 1995 due
to the receipt,  during 1995, of certain  deferred rental amounts,  as discussed

                                       12
<PAGE>

later under TWA  Restructuring.  Other  factors  contributing  to the  decreased
rental  revenues  in 1996  were  decreases  in  rental  revenue  from  Northwest
Territorial  Airways,  Ltd.  (NWT) and  Viscount.  The lease with NWT expired in
October 1995 and the aircraft was then sold, resulting in higher rental revenues
from this aircraft  during 1995 as compared to 1996.  Additionally,  the default
and bankruptcy by Viscount  resulted in the return of the aircraft and engine to
the  Partnership  during 1996,  resulting in higher  rental  revenues  from this
aircraft during 1995 as compared to 1996.

The increase in interest  income  during 1997, as compared to the same period in
1996, was  attributable to interest earned on the Promissory Note related to the
Triton sale that occurred during the second quarter of 1997.

The Partnership recorded an increase in other revenue during 1997. This increase
in other income was the result of the receipt of $802,443 related to amounts due
under the TWA maintenance credit and rent deferral agreement.

On July 10, 1996, the Partnership entered into a proposed  Stipulation and Order
in  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. In May 1996, the  Partnership  received from Pan Am a payment of $567,500
on the administrative  expense priority claim. In November 1996, the Partnership
received an additional  $9,000 payment on the  administrative  expense  priority
claim.  The  Partnership  has recorded these payments as other revenue in claims
related to lessee  defaults in the 1996 statement of operations.  It is unlikely
that the  Partnership  will receive  additional  payments on the  administrative
expense  priority  claim.  It cannot be  estimated  at this time when and if the
general unsecured claim will be paid.

In   consideration   for  the  rent  deferral  as  discussed   later  under  TWA
Restructuring, 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 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  recognized a
gain on the value of the warrants of $582,028 in 1995. The Partnership  sold its
TWA Common  Stock in 1996.  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 a former lessee for the aircraft that was
sold to AIA in February 1995.

The Partnership  incurred interest expense during 1997 and 1996 as the result of
the Partnership installing hushkits on 11 of its aircraft in November 1996 and 3
of  its  aircraft  in  February   1997.   The  aggregate  cost  of  the  hushkit
reconditioning  for  the 11  and 3  aircraft  was  $17,516,722  and  $4,784,633,
respectively,  or approximately $1.6 million per aircraft, which was capitalized
by the Partnership  during 1996 and 1997. The Partnership  paid $3.3 million and
$900,000 in 1996 and 1997, respectively,  of the aggregate hushkit cost, and the
balance  of  $14,216,722  and  $3,884,633  in 1996 and 1997,  respectively,  was
financed by the  engine/hushkit  manufacturer over 50 months at an interest rate
of 10% per annum.

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 $17.0 million and $2.4 million of this
deficiency as increased depreciation expense in 1996 and 1995, respectively.  In
1996, the impairment loss was the result of several  significant  factors.  As a

                                       13
<PAGE>

result  of  industry  and  market  changes,  a  more  extensive  review  of  the
Partnership's  aircraft  was  completed  in the  fourth  quarter  of 1996  which
resulted in revised  assumptions of future cash flows including  reassessment of
projected re-lease terms and potential future maintenance costs. As discussed in
Note 4, the  Partnership  accepted an offer to  purchase 7 of the  Partnership's
remaining  aircraft subject to each aircraft's  existing lease and certain notes
receivable.  This offer  constituted  an event that required the  Partnership to
review the aircraft  carrying value  pursuant to SFAS 121. In  determining  this
additional  impairment  loss,  the  Partnership  estimated the fair value of the
aircraft based on the proposed  purchase price reflected in the offer,  less the
estimated  costs and expenses of the proposed sale. The Partnership is deemed to
have an impairment  loss to the extent that the carrying value exceeded the fair
value.  Management  believes the  assumptions  related to fair value of impaired
assets  represents  the best  estimates  based  on  reasonable  and  supportable
assumptions and projections.  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.

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  also made downward  adjustments to the estimated  residual value of
certain of its  on-lease  aircraft as of December  31,  1995.  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 1996 an 1995, and the downward  adjustments
to the  estimated  residual  values  recorded in 1995 as discussed  later in the
Industry Update section.

Liquidity and Cash Distributions

Liquidity - The Partnership  received prepayment in full of all amounts due from
Triton and all payments due from  lessees  during 1997,  except for the December
1997 lease payment from TWA. On January 2, 1998,  the  Partnership  received its
$935,000  rental payment from TWA that was due on December 27, 1997. This amount
was included in rent and other  receivables on the balance sheet at December 31,
1997.

As further  discussed in Note 8 to the  financial  statements,  the  Partnership
recorded allowances for credit losses of $241,964 and $100,409 in 1995 and 1996,
respectively, for the aggregate unsecured receivables from Viscount. The line of
credit,  which was  advanced to Viscount in 1994,  was, in  accordance  with the
Compromise and Stipulation,  secured by certain of Viscount's trade  receivables
and spare parts. The Stipulation and Agreement releases the Partnership's  claim
against Viscount's trade receivables.  As a result, the Partnership  recorded an
additional  allowance  for credit  losses of $92,508  during 1996,  representing
Viscount's  outstanding  balance  of the line of credit  and  accrued  interest.
Payments  received by the Partnership  from the sale of the spare aircraft parts
(as discussed  above),  if any, will be recorded as revenue when  received.  The
Stipulation and Agreement  provides that,  upon entry of a final  non-appealable
court order approving it, the Partnership would waive its pre- and post-petition
claims  against  Viscount  for all  amounts  due and  unpaid.  As a result,  the
Partnership  considers all receivables from Viscount to be uncollectible and has
written-off, during 1996, all notes, rents and interest receivable balances from
Viscount.

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

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

                                       14
<PAGE>

March 1995. The  Partnership  has received all scheduled  payments due from AIA.
This note was sold to Triton  during 1997 as part of the  transaction  discussed
previously under the Remarketing Update section.

In March 1996, the Partnership sold its Boeing 737-200 Combi aircraft to Westjet
for cash and a note due 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.  This note was sold to Triton during 1997 as
part of the  transaction  discussed  previously  under  the  Remarketing  Update
section.

Payments of $214,749,  $260,234 and $275,130 were received during 1997, 1996 and
1995, respectively, from the sale of inventoried parts from the six disassembled
aircraft.

PIMC has  determined  that the  Partnership  maintain cash reserves as a prudent
measure to ensure that the Partnership has available funds in the event that the
aircraft  presently  on  lease  to  TWA  require  remarketing,   and  for  other
contingencies  including  expenses of the Partnership.  The  Partnership's  cash
reserves  will be  monitored  and may be  revised  from time to time as  further
information becomes available in the future.

Cash  Distributions - Cash  distributions to limited partners were  $14,349,914,
$17,499,895,  and  $6,874,959  in  1997,  1996  and  1995,  respectively.   Cash
distributions  per limited  partnership unit were $28.70,  $35.00 and $13.75 per
limited  partnership unit in 1997, 1996 and 1995,  respectively.  The timing and
amount of future  cash  distributions  are not yet known and will  depend on the
Partnership's  future cash requirements  (including expenses of the Partnership)
and need to retain  cash  reserves  as  previously  discussed  in the  Liquidity
section;  the receipt of rental  payments from TWA; and payments  generated from
the aircraft disassembly process.

TWA 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 were 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  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

                                       15
<PAGE>

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.

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. TWA has been current with its obligation to the  Partnership  since August
1995. While TWA has committed to an uninterrupted flow of lease payments,  there
can be 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 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  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

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

During 1995,  Viscount delivered the Partnership's  Boeing 737-200 aircraft to a
repair facility operated by BAE Aviation, Inc., d/b/a Tucson Aerospace,  located
in  Arizona,  to  perform  a  heavy  maintenance  check  on  the  aircraft.  The
Partnership has paid to Tucson Aerospace approximately $565,000 from maintenance
reserves  and cash  reserves  for this  aircraft  as  progress  payments on this
maintenance  check.  Work on the  maintenance  check was suspended  prior to the

                                       16
<PAGE>

filing of the Chapter 11 petition by  Viscount.  Tucson  Aerospace  asserts that
Viscount owes it approximately $866,000 for work done on the aircraft,  which is
in addition to the  approximately  $565,000 already paid by the Partnership from
maintenance  reserves. In addition, a third party vendor, who claims it provided
personnel to work on the aircraft, is asserting a claim against Tucson Aerospace
and a lien against the aircraft in the amount of $720,000.  Another  third-party
vendor,  who claims it provided  inspectors,  is claiming  $185,000  from Tucson
Aerospace.  On May 22, 1996, First Security Bank, National Association (formerly
known  as  First  Security  Bank  of  Utah,  National   Association)  (FSB),  as
owner/trustee,  filed suit in the Superior  Court of Arizona in Pima County,  to
recover the airframe  from BAE  Aviation,  Inc. and certain  creditors  alleging
mechanics liens and to determine the validity of the claimed liens.

Pursuant to a stipulated  order of the Superior  Court  entered on July 9, 1996,
FSB  filed  a bond  in the  penal  sum of  $1,371,000  for  the  benefit  of the
lienholders,  who subsequently  released the aircraft to the Partnership on July
11,  1996 and filed a claim  against  the bond.  The  matter is set for trial on
April 14, 1998.

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

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

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

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

The Partnership  recorded  provisions for credit losses of $100,409 and $241,964
in 1996 and 1995,  respectively,  for the aggregate  unsecured  receivables from
Viscount.  The line of credit,  which was advanced to Viscount in 1994,  was, in
accordance with the Compromise and Stipulation, secured by certain of Viscount's
trade  receivables and spare parts.  The Stipulation and Agreement  releases the
Partnership's  claim against  Viscount's  trade  receivables.  As a result,  the
Partnership recorded an additional provision for credit losses of $92,508 during
1996,  representing  Viscount's  outstanding  balance  of the line of credit and
accrued  interest.  Payments  received by the  Partnership  from the sale of the
spare aircraft parts (as discussed  above),  if any, will be recorded as revenue
when received.  The  Stipulation  and Agreement  provides that,  upon entry of a
final  non-appealable  court order approving it, the Partnership would waive its
pre- and  post-petition  claims against Viscount for all amounts due and unpaid.
As a result,  the  Partnership  considers  all  receivables  from Viscount to be
uncollectible  and has written-off,  during 1996, all notes,  rents and interest
receivable balances from Viscount.

                                       17
<PAGE>


The Partnership evaluated the airframe and engines previously leased to Viscount
for potential  re-lease or sale and estimated that maintenance and refurbishment
costs aggregating  approximately  $1.6 million would be required to re-lease the
airframe and engines.  Alternatively,  a sale of the airframe and engines  would
likely be made on an "as is, where is" basis, without the Partnership  incurring
substantial  maintenance  costs.  The  aircraft  was  sold in  January  1997 for
$660,000. As discussed in Note 3, the Partnership  recognized an impairment loss
of $300,000 on this  aircraft  which was  recorded  as  additional  depreciation
expense during 1996.

As a result of  Viscount's  defaults  and  Chapter  11  bankruptcy  filing,  the
Partnership  has incurred  legal costs of  approximately  $107,000 and $147,000,
which are  reflected in  operating  expense in the  Partnership's  1997 and 1996
statement of operations, respectively.

Industry Update

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

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

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

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

The   Partnership's   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,  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.

                                       18
<PAGE>


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

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

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

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

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

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

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

Demand for Aircraft - Industry-wide,  approximately  330 commercial jet aircraft
were  available  for sale or lease at December 31, 1997,  approximately  50 more
than a year ago. At under 3% of the total available jet aircraft fleet,  this is
still a relatively low level of  availability  by industry  historic  standards.
From 1991 to 1994,  depressed demand for 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 four years of strong traffic growth accompanied
by rising yields,  this trend reversed with many airlines reporting  substantial
profits since 1995. As a result of this improving trend,  just over 1200 new jet
aircraft  were ordered in 1996 and a further  1300 were ordered in 1997,  making
this the second highest ever order year in the history of the industry. To date,
this strong  recovery has mainly  benefited  Stage 3  narrow-bodies  and younger
Stage 2  narrow-bodies,  many of which are now  being  upgraded  with  hushkits,
whereas  older  Stage 2  narrow-bodies  and early  wide-bodies  have  shown only
marginal  signs of recovery  since the depressed  1991 to 1994 period.  Economic
turmoil  in Asia in the  second  half of 1997 has  brought  about a  significant
reduction  in traffic  growth in much of that  region  which is  resulting  in a
number  of  new  aircraft  order  deferrals  and  cancellations,  mainly  in the
wide-body  sector of the market  with as yet no impact  evident  in other  world
markets.

                                       19
<PAGE>


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.

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. 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  impairments  on  aircraft  to be held  and  used by the
Partnership of approximately $17.0 million and $2.4 million, or $33.97 and $4.75
per limited  Partnership  unit,  in 1996 and 1995,  respectively.  In 1996,  the
impairment loss was the result of several  significant  factors.  As a result of
industry  and  market  changes,  a more  extensive  review of the  Partnership's
aircraft was completed in the fourth  quarter of 1996 which  resulted in revised
assumptions of future cash flows including  reassessment  of projected  re-lease
terms and  potential  future  maintenance  costs.  As  discussed  in Note 4, the
Partnership  accepted an offer to purchase seven of the Partnership's  remaining
aircraft subject to each aircraft's existing lease and certain notes receivable.
This offer  constituted  an event that  required the  Partnership  to review the
aircraft  carrying value pursuant to SFAS 121. In  determining  this  additional
impairment loss, the Partnership  estimated the fair value of the aircraft based
on the proposed  purchase price reflected in the offer, less the estimated costs
and expenses of the proposed sale. The  Partnership  recorded an impairment loss
to the extent  that the  carrying  value  exceeded  the fair  value.  Management
believes the assumptions related to fair value of impaired assets represents the
best estimates based on reasonable and supportable  assumptions and projections.
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.  The  increased  depreciation  expense  reduced  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 1996 and 1995
(which  has the  effect  of  decreasing  future  depreciation  expense)  and the
downward  adjustments to the estimated  residual  values recorded in 1995 (which
has the effect of increasing future depreciation expense). 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.

The Partnership  periodically  reviews its aircraft for impairment in accordance
with SFAS No. 121. 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.

                                       20

<PAGE>


Item 8.  Financial Statements and Supplementary Data











                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership




              FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996


                                  TOGETHER WITH

                                AUDITORS' REPORT


                                       21

<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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.


                                                             ARTHUR ANDERSEN LLP


San Francisco, California,
    January 23, 1998

                                       22

<PAGE>



                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                                       1997             1996
                                                       ----             ----
ASSETS:

CASH AND CASH EQUIVALENTS                          $ 31,587,494    $ 22,224,813

RENT AND OTHER RECEIVABLES                              935,629           6,648

NOTES RECEIVABLE                                           --         1,522,956

AIRCRAFT, net of accumulated depreciation of
  $70,346,578 in 1997 and $120,260,981 in 1996       45,016,731      63,638,062

AIRCRAFT INVENTORY                                         --           113,248

OTHER ASSETS                                              6,571         117,015
                                                   ------------    ------------

                                                   $ 77,546,425    $ 87,622,742
                                                   ============    ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES                              $    142,761    $     66,631

ACCOUNTS PAYABLE AND ACCRUED
  LIABILITIES                                           317,799         209,781

SECURITY DEPOSITS                                        50,000         116,000

MAINTENANCE RESERVES                                       --           223,528

DEFERRED INCOME                                         627,660         597,915

NOTES PAYABLE                                        15,667,509      14,193,178
                                                   ------------    ------------

       Total Liabilities                             16,805,729      15,407,033
                                                   ------------    ------------

PARTNERS' CAPITAL (DEFICIT):
  General Partner                                    (3,030,600)     (1,480,858)
  Limited Partners, 499,997 units
     issued and outstanding                          63,771,296      73,696,567
                                                   ------------    ------------

       Total Partners' Capital                       60,740,696      72,215,709
                                                   ------------    ------------

                                                   $ 77,546,425    $ 87,622,742
                                                   ============    ============

        The accompanying notes are an integral part of these statements.

                                       23
<PAGE>




                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                            STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                                       1997            1996             1995
                                       ----            ----             ----
REVENUES:
    Rent from operating leases     $ 14,792,071    $ 14,172,153    $ 16,114,000
    Receipt of lessee stock
      warrants                             --              --         1,772,206
    Gain on trading securities             --            49,974         582,028
    Interest                          1,939,699       1,505,981       1,667,397
    Claims related to lessee
      defaults                             --           576,500            --
    Loss on sale of aircraft            (26,079)           --              --
    Gain on sale of aircraft
      inventory                         101,501            --              --
    Other                               802,443            --           957,710
                                   ------------    ------------    ------------

         Total Revenues              17,609,635      16,304,608      21,093,341
                                   ------------    ------------    ------------

EXPENSES:
    Depreciation                     10,435,053      29,470,353      13,895,184
    Management fees to general
      partner                           531,135         667,678         752,384
    Provision for credit losses            --           192,917         241,964
    Operating                           145,905         244,494         150,161
    Interest                          1,659,897         134,341            --
    Administration and other            368,309         303,311         336,583
                                   ------------    ------------    ------------

         Total Expenses              13,140,299      31,031,094      15,376,276
                                   ------------    ------------    ------------

NET INCOME (LOSS)                  $  4,469,336    $(14,708,486)   $  5,717,065
                                   ============    ============    ============

NET INCOME ALLOCATED TO
    THE GENERAL PARTNER            $     44,693    $  1,602,730    $    744,597
                                   ============    ============    ============

NET INCOME (LOSS) ALLOCATED
    TO LIMITED PARTNERS            $  4,424,643    $(16,311,216)   $  4,972,468
                                   ============    ============    ============

NET INCOME (LOSS) PER LIMITED
    PARTNERSHIP UNIT               $       8.85    $     (32.62)   $       9.94
                                   ============    ============    ============

        The accompanying notes are an integral part of these statements.

                                       24
<PAGE>




                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

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

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

    Net income (loss)               1,602,730      (16,311,216)     (14,708,486)

    Cash distributions to
      partners                     (1,944,433)     (17,499,895)     (19,444,328)
                                -------------    -------------    -------------

Balance, December 31, 1996         (1,480,858)      73,696,567       72,215,709

    Net income                         44,693        4,424,643        4,469,336

    Cash distributions to
      partners                     (1,594,435)     (14,349,914)     (15,944,349)
                                -------------    -------------    -------------

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


        The accompanying notes are an integral part of these statements.

                                       25
<PAGE>


                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                            STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

                                                            1997            1996            1995
                                                            ----            ----            ----
<S>                                                    <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net income (loss)                                    $  4,469,336    $(14,708,486)   $  5,717,065
  Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
     Depreciation                                        10,435,053      29,470,353      13,895,184
     Provision for credit losses                               --           192,917         241,964
     Loss on sale of aircraft                                26,079            --              --
     Gain on sale of aircraft inventory                    (101,501)           --              --
     Changes in operating assets and liabilities:
       Decrease (increase) in marketable securities,
          trading                                              --         2,356,506      (2,356,506)
       Decrease (increase) in rent and other
          receivables                                      (929,403)       (101,959)         41,132
       Decrease (Increase) in other assets                  110,444         (87,245)           --
       Increase (decrease) in payable to affiliates          76,130         (25,880)       (610,330)
       Increase in accounts payable and
          accrued liabilities                                42,619         122,425          48,693
       Increase (decrease) in security deposits             (66,000)       (334,000)        278,860
       Increase (decrease) in maintenance reserves           (6,453)         44,343        (543,505)
       Increase (decrease) in deferred income                29,745         (44,827)           --
                                                       ------------    ------------    ------------

          Net cash provided by operating activities      14,086,049      16,884,147      16,712,557
                                                       ------------    ------------    ------------

INVESTING ACTIVITIES:
  Proceeds from sale of aircraft                          2,519,495            --              --
  Increase in aircraft capitalized costs                 (4,784,633)    (17,516,722)           --
  Principal payments on notes receivable                 12,798,106       1,963,561       1,873,751
  Payments to Purchaser related to sale of aircraft      (1,001,067)           --              --
  Net proceeds from sale of aircraft inventory              214,749         260,235         275,130
                                                       ------------    ------------    ------------

          Net cash provided by (used in)
            investing activities                          9,746,650     (15,292,926)      2,148,881
                                                       ------------    ------------    ------------

FINANCING ACTIVITIES:
  Increase in note payable                                3,884,633      14,216,722            --
  Principal payments on notes payable                    (2,410,302)        (23,544)           --
  Cash distributions to partners                        (15,944,349)    (19,444,328)     (7,638,843)
                                                       ------------    ------------    ------------

          Net cash used in financing activities         (14,470,018)     (5,251,150)     (7,638,843)
                                                       ------------    ------------    ------------

CHANGES IN CASH AND CASH
  EQUIVALENTS                                             9,362,681      (3,659,929)     11,222,595

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                      22,224,813      25,884,742      14,662,147
                                                       ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT
  END OF YEAR                                          $ 31,587,494    $ 22,224,813    $ 25,884,742
                                                       ============    ============    ============
</TABLE>
        The accompanying notes are an integral part of these statements.

                                       26
<PAGE>



                        POLARIS AIRCRAFT INCOME FUND II,
                        A California Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


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  (GAAP) requires  management to make
estimates and assumptions that affect reported amounts and related  disclosures.
Actual results could differ from those estimates. The most significant estimates
with regard to these  financial  statements  are related to the  projected  cash
flows analysis in determining the fair value of assets.

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

Marketable Securities, trading - Marketable Securities, trading, were carried at
fair value, which was determined based on quoted market prices. These securities
were 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,  an impairment
loss is  recognized.  Pursuant to Statement of  Financial  Accounting  Standards
(SFAS) No. 121, as discussed in Note 3,  measurement of an impairment  loss will
be based on the "fair value" of the asset as defined in the statement.

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

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

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

                                       27
<PAGE>


Maintenance  Reserves - The Partnership  received  maintenance  reserve payments
from certain of its lessees that were to be  reimbursed to the lessee or applied
against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's  aircraft or engines, as specified in the leases.
Maintenance   reserve  payments  were  recognized  when  received  and  balances
remaining at the  termination of the lease, if any, were used by the Partnership
to offset future maintenance expenses or recognized as revenue.

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

Net Income (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, 1997, 1996
and 1995.

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

Receivables  - The  Partnership  recorded  an  allowance  for credit  losses for
certain  impaired  note  and  rents  receivable  as a  result  of  uncertainties
regarding their  collection as discussed in Note 8. The  Partnership  recognizes
revenue on impaired notes and receivables only as payments are received.

                                                         1996
                                                         ----

      Allowance for credit losses,
         beginning of year                          $   (241,964)
      Provision for credit losses                       (192,917)
      Write-downs                                        434,881
      Collections                                           -
                                                     -----------
      Allowance for credit losses,
         end of year                                $       -
                                                    ============


2.    Organization and the Partnership

The  Partnership  was formed on June 27, 1984 for the purpose of  acquiring  and
leasing  aircraft.  The Partnership  will terminate no later than December 2010.
Upon  organization,  both the general  partner and the initial  limited  partner
contributed  $500.  The  Partnership  recognized no profits or losses during the
periods ended  December 31, 1985 and 1984.  The offering of limited  partnership
units  terminated on December 31, 1986, at which time the  Partnership  had sold
499,997 units of $500, representing $249,998,500.  All partners were admitted to
the Partnership on or before December 1, 1986.

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 11.


                                       28

<PAGE>


3.    Aircraft

At December 31, 1997,  Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of 14 used  commercial jet aircraft and certain  inventoried  aircraft
parts out of its original portfolio of 30 aircraft, which were acquired,  leased
or sold as  discussed  below.  All  aircraft  acquired  from an  affiliate  were
purchased  within one year of the  affiliate's  acquisition  at the  affiliate's
original price paid. The aircraft leases are net operating leases, requiring the
lessees to pay all operating  expenses  associated  with the aircraft during the
lease term.  While the leases  require the lessees to comply with  Airworthiness
Directives  (ADs)  which  have  been or may be issued  by the  Federal  Aviation
Administration  and require  compliance during the lease term, in certain of the
leases the  Partnership  has agreed to share in the cost of compliance with ADs.
In addition to basic rent, one lessee was 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.

The following table describes the Partnership's  aircraft  portfolio at December
31, 1997 in greater detail:

                                                           Year of
Aircraft Type                       Serial Number         Manufacture
-------------                       -------------         -----------
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

14 McDonnell Douglas DC-9-30 - Initially there were 17 McDonnell Douglas DC-9-30
and one McDonnell  Douglas DC-9-40 which were acquired for  $122,222,040  during
1986 and leased to Ozark Air Lines, Inc. (Ozark). In 1987, Trans World Airlines,
Inc.  (TWA) merged with Ozark and assumed the leases.  The leases were  modified
and  extended in 1991 prior to TWA's  bankruptcy  filing as discussed in Note 6.
Two of the aircraft had a lease  expiration  date of February 1998 and two other
aircraft had a lease  expiration date of November 1998. These four aircraft were
sold to Triton  Aviation  Services II LLC in June 1997,  as discussed in Note 4.
The leases for 11 of the aircraft that previously had lease  expiration dates in
1998 were extended for eight years until  November 2004. The leases for three of
the aircraft that previously had lease expiration dates in 1998 were extended in
February 1997 for eight years until February 2005.

                                       29

<PAGE>


The following is a schedule by year of future  minimum  rental revenue under the
existing leases:

              Year                                     Amount
              ----                                     ------
              1998                               $      14,280,000
              1999                                      14,280,000
              2000                                      14,280,000
              2001                                      14,280,000
              2002 and thereafter                       29,675,000
                                                 -----------------

              Total                              $      86,795,000
                                                 =================

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.

The  Partnership's  future  earnings  are  impacted  by the  net  effect  of the
adjustments  to the  carrying  values of the  aircraft  (which has the effect of
decreasing  future  depreciation  expense) and the downward  adjustments  to the
estimated   residual   values  (which  has  the  effect  of  increasing   future
depreciation expense).

As discussed above,  the Partnership uses information  obtained from third party
valuation  services in arriving  at its  estimate of fair value for  purposes of
determining residual values. The Partnership will use similar information,  plus
available  information and estimates related to the Partnership's  aircraft,  to
determine  an  estimate of fair value to measure  impairment  as required by 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.

The Partnership  recognized impairment losses on aircraft to be held and used by
the Partnership  aggregating  approximately  $17.0 million and $2.4 million,  or
$33.97 and $4.75 per limited Partnership unit, as increased depreciation expense
in 1996 and 1995,  respectively.  In 1996, the impairment loss was the result of
several significant  factors. As a result of industry and market changes, a more
extensive  review of the  Partnership's  aircraft  was  completed  in the fourth
quarter  of 1996 which  resulted  in revised  assumptions  of future  cash flows
including   reassessment  of  projected  re-lease  terms  and  potential  future
maintenance costs. As discussed in Note 4, the Partnership  accepted an offer to
purchase  seven  of  the  Partnership's   remaining  aircraft  subject  to  each
aircraft's  existing  lease.  This offer  constitutes an event that required the
Partnership  to review the  aircraft  carrying  value  pursuant  to SFAS 121. In
determining this additional  impairment loss, the Partnership estimated the fair
value of the aircraft  based on the  proposed  purchase  price  reflected in the
offer,  less  the  estimated  costs  and  expenses  of the  proposed  sale.  The
Partnership  recorded an impairment  loss to the extent that the carrying  value
exceeded the fair value.  Management  believes the  assumptions  related to fair
value of impaired  assets  represents the best estimates based on reasonable and
supportable assumptions and projections.  The 1995 downward adjustments were the
result  of  reductions  in the net  book  value  of  certain  aircraft  to their
estimated net realizable value. 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  General  Partner  evaluates,  from  time to time,  whether  the  investment
objectives  of the  Partnership  are  better  served by  continuing  to hold the
Partnership's  remaining  portfolio of Aircraft or marketing  such  Aircraft for
sale. This evaluation  takes into account the current and potential  earnings of

                                       30
<PAGE>

the  Aircraft,  the  conditions  in the  markets  for lease and sale and  future
outlook  for such  markets,  and the tax  consequences  of selling  rather  than
continuing  to  lease  the  Aircraft.  Recently,  the  General  Partner  has had
discussions with third parties  regarding the possibility of selling some or all
of these Aircraft.  While such discussions may continue, and similar discussions
may occur again in the future,  there is no assurance that such discussions will
result  in the  Partnership  receiving  a  purchase  offer for all or any of the
Aircraft which the General Partner would regard as acceptable.


4.       Sale of Aircraft

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

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

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

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

Neither  PIMC nor GECAS  received  a sales  commission  in  connection  with the
transaction. In addition, PIMC was not paid a management fee with respect to the
collection of the  Promissory  Note or on any rents accruing from or after April
1, 1997 with  respect to the 7  Aircraft.  Neither  PIMC nor GECAS or any of its
affiliates  holds any  interest in Triton  Aviation or any of Triton  Aviation's
affiliates.  John Flynn, the current President of Triton Aviation, was a Polaris
executive  until  May 1996 and has over 15 years  experience  in the  commercial
aviation  industry.  At the time  Mr.  Flynn  was  employed  at PIMC,  he had no
affiliation with Triton Aviation or its affiliates.

Polaris  Aircraft  Income Fund III,  Polaris  Aircraft  Income Fund IV,  Polaris
Aircraft  Income  Fund V and  Polaris  Aircraft  Income  Fund VI have  also sold
certain  aircraft  assets to separate  special  purpose  companies  under common
management with the Purchaser  (collectively,  together with the Purchaser,  the
"SPC's") on terms  similar to those set forth above,  with the  exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.

                                       31
<PAGE>


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

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


5.       Disassembly of aircraft

In an attempt to maximize the economic  return from the  remaining  six aircraft
formerly  leased to Pan Am,  the  Partnership  entered  into an  agreement  with
Soundair,  Inc.  (Soundair) in October  1992,  for the  disassembly  and sale of
certain of the Partnership's  aircraft. The Partnership has incurred the cost of
disassembly  and 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.  The  Partnership  has  received  net
proceeds from the sale of aircraft inventory of $214,749,  $260,234 and $275,130
during  1997,  1996 and 1995,  respectively,  reducing the net book value of the
Partnership's  aircraft inventory to zero during 1997.  Payments received by the
Partnership of $100,501 in excess of the aircraft  inventory net book value were
recorded as gain on sale of aircraft inventory during 1997.

During 1995, the Partnership  recorded  additional  downward  adjustments to the
inventory  value of  $200,000,  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

The Partnership renegotiated the TWA leases after TWA defaulted under its leases
with the Partnership during 1991. The renegotiated agreement stipulated that the
Partnership share in the cost of certain ADs after TWA successfully reorganized.
Pursuant  to  this   cost-sharing   agreement,   since  TWA  emerged   from  its
reorganization  proceedings  in 1993,  expenses  totaling $6.6 million have been
offset against rental  payments or credited to other amounts due from TWA. Under

                                       32
<PAGE>

the terms of this  agreement,  TWA may offset up to an  additional  $1.7 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 the rents 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 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 deferred rents were paid in
full by October 1995. While TWA has committed to an uninterrupted  flow of lease
payments,  there  can be no  assurance  that TWA  will  continue  to  honor  its
obligations in the future.

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  pro-rata  share of such
payment by TWA. This amount was recognized as other revenue in the  accompanying
1995 statement of operations.

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 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 Partnership received warrants to purchase 227,133 shares of TWA Common Stock
from TWA in November  1995. The  Partnership  exercised the warrants on December
29, 1995 for the strike  price of $0.01 per share.  The fair market value of the
TWA stock at December  31, 1995 of  $2,356,506,  which was  determined  based on
quoted market prices, is reflected in the accompanying December 31, 1995 balance
sheet. The Partnership sold the TWA Common Stock by February 1996, net of broker
commissions,  for  $2,406,479  and  recognized a gain on trading  securities  of
$49,974 in 1996.


7.       TWA Lease Extension

GECAS, on behalf of the Partnership,  negotiated with TWA for the acquisition of
noise-suppression  devices, commonly known as "hushkits", for the 14 Partnership
aircraft  currently  on  lease  to TWA,  as  well as  other  aircraft  owned  by
affiliates  of PIMC and leased to TWA. The 14 aircraft  that  received  hushkits
were  designated  by TWA.  The hushkits  recondition  the aircraft so as to meet
Stage  3  noise  level  restrictions.  Hushkits  were  installed  on 11  of  the
Partnership's  aircraft  during 1996 and the leases for these 11  aircraft  were
extended  for a  period  of eight  years  until  November  2004.  Hushkits  were
installed  on 3 of the  Partnership's  aircraft  during  1997 and the leases for
these 3 aircraft were extended for a period of eight years until February 2005.

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

                                       33
<PAGE>


The aggregate cost of the hushkit reconditioning  completed in February 1997 for
the 3 remaining  aircraft  was  $4,784,633,  or  approximately  $1.6 million per
aircraft,  which was capitalized by the Partnership during 1997. The Partnership
paid  $900,000 of the aggregate  hushkit cost and the balance of $3,884,633  was
financed by UT Finance  Corporation (UT Finance),  a wholly owned  subsidiary of
United Technologies Corporation, of which a division is Pratt and Whitney Group,
the hushkit  manufacturer,  over 50 months at an interest rate of  approximately
10% per annum.

The rent payable by TWA under the leases was  increased by an amount  sufficient
to cover the monthly  debt  service  payments on the  hushkits  and fully repay,
during  the term of the TWA  leases,  the  amount  borrowed.  The loans from the
hushkit  manufacturer  are  non-recourse  to the  Partnership  and  secured by a
security interest in the lease  receivables.  Cash paid for interest expenses on
the loans was $1,551,093 and $236,848 in 1997 and 1996, respectively.


8.       Viscount Restructuring Agreement and Default

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

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

Pursuant to a stipulated  order of the Superior  Court  entered on July 9, 1996,
FSB  filed  a bond  in the  penal  sum of  $1,371,000  for  the  benefit  of the
lienholders,  who subsequently  released the aircraft to the Partnership on July
11,  1996 and filed a claim  against  the bond.  The  matter is set for trial on
April 14, 1998.

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

                                       34
<PAGE>


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

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

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

The Partnership  recorded  allowances for credit losses of $241,964 and $100,409
in 1995 and 1996,  respectively,  for the aggregate  unsecured  receivables from
Viscount.  The line of credit,  which was advanced to Viscount in 1994,  was, in
accordance with the Compromise and Stipulation, secured by certain of Viscount's
trade  receivables and spare parts.  The Stipulation and Agreement  releases the
Partnership's  claim against  Viscount's  trade  receivables.  As a result,  the
Partnership recorded an additional allowance for credit losses of $92,508 during
1996,  representing  Viscount's  outstanding  balance  of the line of credit and
accrued  interest.  Payments  received by the  Partnership  from the sale of the
spare aircraft parts (as discussed  above),  if any, will be recorded as revenue
when received.  The  Stipulation  and Agreement  provides that,  upon entry of a
final  non-appealable  court order approving it, the Partnership would waive its
pre- and  post-petition  claims against Viscount for all amounts due and unpaid.
As a result,  the  Partnership  considers  all  receivables  from Viscount to be
uncollectible  and has written-off,  during 1996, all notes,  rents and interest
receivable balances from Viscount.

The  Partnership  has  evaluated the airframe and engines  previously  leased to
Viscount for  potential  re-lease or sale and  estimated  that  maintenance  and
refurbishment  costs aggregating  approximately $1.6 million will be required to
re-lease the airframe  and  engines.  Alternatively,  a sale of the airframe and
engines  would  likely  be made on an "as  is,  where  is"  basis,  without  the
Partnership  incurring  substantial  maintenance costs. The aircraft was sold in
January 1997 for $660,000.  As discussed in Note 3, in accordance  with SFAS No.
121, the Partnership  recognized an impairment loss of $300,000 on this aircraft
which was recorded as additional depreciation expense during 1996.

Viscount's  failure to perform its financial  obligations to the Partnership has
had a material  adverse effect on the  Partnership's  financial  position.  As a
result of Viscount's  defaults and Chapter 11 bankruptcy filing, the Partnership
has  incurred  legal costs of  approximately  $107,000 and  $147,000,  which are
reflected in operating expense in the  Partnership's  1997 and 1996 statement of
operations, respectively.


9.       ALG Default and Restructuring

In 1995, ALG paid to the Partnership $19,138 of the $897,932 balloon payment due
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,

                                       35
<PAGE>

eleven  monthly  payments of $25,600  beginning in February  1995, and a balloon
payment in January 1996 of $416,631.  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 a lump sum payment in January 1996 of $135,258 and eleven payments of
$27,272  beginning in February 1996 through  December 1996. ALG paid the note in
full during 1996.


10.      Claims Related to Lessee Defaults

Pan Am - The Partnership entered into a proposed  Stipulation and Order in 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.  In May 1996, the
Partnership  received  from Pan Am a payment of $567,500  on the  administrative
expense priority claim. In November 1996, the Partnership received an additional
$9,000 payment on the administrative expense priority claim. The Partnership has
recorded these  payments as revenue in claims related to lessee  defaults in the
1996 statement of operations.  It is unlikely that the Partnership  will receive
additional  payments on the administrative  expense priority claim. It cannot be
estimated at this time when and if the general unsecured claim will be paid.


11.      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 1997, 1996 and 1995, the  Partnership  paid management fees to
         PIMC of $440,295, $652,417 and $763,774, respectively.  Management fees
         payable  to PIMC at  December  31,  1997 and 1996 were  $76,330  and $0
         respectively.

b.       Reimbursement of certain out-of-pocket  expenses incurred in connection
         with the management of the  Partnership  and supervision of its assets.
         In 1997, 1996 and 1995, $375,486, $316,061 and $299,588,  respectively,
         were  reimbursed  by  the  Partnership  for  administrative   expenses.
         Administrative  reimbursements  of $50,286 and $65,594  were payable at
         December   31,  1997  and  1996,   respectively.   Reimbursements   for
         maintenance  and  remarketing  costs of $82,633,  $153,699 and $972,284
         were paid by the  Partnership  in 1997,  1996 and  1995,  respectively.
         Maintenance and remarketing  reimbursements  of $16,145 and $1,037 were
         payable at December 31, 1997 and 1996, respectively.

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

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

                                       36
<PAGE>


e.       One engine owned by Polaris  Aircraft Income Fund I (PAIF-I) was leased
         to Viscount  beginning in April 1993  through a joint  venture with the
         Partnership.  The rental  payments  of  $146,000  per year were  offset
         against rent from operating leases in the 1995 statement of operations.

f.       In the event that, immediately prior to the dissolution and termination
         of the Partnership, the General Partner shall have a deficit balance in
         its  tax  basis  capital  account,   then  the  General  Partner  shall
         contribute in cash to the capital of the Partnership an amount which is
         equal to such deficit (see Note 12).


12.      Partners' Capital

The Partnership  Agreement (the Agreement) stipulates different methods by which
revenue,  income  and  loss  from  operations  and  gain or loss on the  sale of
aircraft  are to be allocated  to the General  Partner and the Limited  Partners
(see Note 11). Such  allocations are made using income or loss calculated  under
GAAP for book purposes,  which,  as more fully described in Note 14, varies from
income or loss calculated for tax purposes.

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

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

Had all the assets of the  Partnership  been  liquidated at December 31, 1997 at
the current  carrying  value,  the tax basis capital  (deficit)  accounts of the
General  Partner and the Limited  Partners is  estimated  to be  ($723,727)  and
$61,464,423, respectively.


13.      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,  1997 and 1996 are as
follows:

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

1997:    Assets       $     77,546,425      $      84,836,496  $     (7,290,071)
         Liabilities        16,805,729             16,232,563           573,166

1996:   Assets        $     87,622,742      $      98,431,900  $    (10,809,158)
         Liabilities        15,407,033             14,654,469           752,564

                                       37


<PAGE>


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

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

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

                                             1997         1996       1995
                                             ----         ----       ----

Book net income (loss) per limited
  partnership unit                        $    8.85   $  (32.62)  $   9.94
Adjustments for tax purposes represent
  differences between book and tax
  revenue and expenses:
     Rental and maintenance reserve
       revenue recognition                    (1.18)       0.03      (2.60)
     Management fee expense                    0.06        0.03       0.14
     Depreciation                            (11.31)      30.16      (0.78)
     Gain or loss on sale of aircraft         (0.02)      (0.19)     (1.60)
     Capitalized costs                          --          --        0.93
     Basis in inventory                       (0.07)      (0.08)     (1.08)
     Other revenue and expense items          (0.01)      (0.16)     (0.36)
                                          ---------   ---------   --------

Taxable net income (loss) per limited
  partnership unit                        $   (3.68)  $   (2.83)  $   4.59
                                          =========   =========   ========

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.   The   Partnership   also   periodically   evaluates   the   ultimate
recoverability of the carrying values and the economic lives of its aircraft for
book purposes and,  accordingly,  recognized  adjustments  which  increased book
depreciation  expense. As a result, the current year tax depreciation expense is
greater than the book  depreciation  expense.  These differences in depreciation
methods result in book to tax differences on the sale of aircraft.  In addition,
certain costs were capitalized for tax purposes and expensed for book purposes.

Differences in book and tax revenue from inventory  result from the  differences
in the book and tax carrying value of the inventory.


15.      Subsequent Events

The Partnership made a cash distribution,  to limited partners, of $2,424,869 or
$4.85 per limited  partnership  unit,  and  $269,430  to the General  Partner on
January 15, 1998.

The  Partnership  made a special  cash  distribution,  to limited  partners,  of
$10,624,426,  or $21.25 per limited  partnership  unit,  and  $1,180,492  to the
General  Partner on February  23,  1998,  as a result of the  prepayment  of the
Promissory Note by Triton, as discussed in Note 4.

                                       38

<PAGE>


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

None.

                                       39
<PAGE>


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

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

The officers and directors of PIMC are:

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

         Eric M. Dull               President; Director
         Marc A. Meiches            Chief Financial Officer
         Richard J. Adams           Director
         Norman C. T. Liu           Vice President; Director
         Ray Warman                 Secretary
         Robert W. Dillon           Assistant Secretary

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

Mr. Dull,  37,  assumed the position of President and Director of PIMC effective
January 1, 1997. Mr. Dull  previously was a Director of PIMC from March 31, 1995
to July 31, 1995. Mr. Dull holds the position of Executive Vice President - Risk
and  Portfolio  Management  of GECAS,  having  previously  held the positions of
Executive  Vice  President - Portfolio  Management  and Senior Vice  President -
Underwriting  Risk  Management of GECAS.  Prior to joining GECAS,  Mr. Dull held
various positions with Transportation and Industrial Funding Corporation (TIFC).

Mr.  Meiches,  45,  assumed  the  position  of Chief  Financial  Officer of PIMC
effective October 9, 1995. Previously, he held the position of Vice President of
PIMC  from  October  1995 to  October  1997.  Mr.  Meiches  presently  holds the
positions of Executive Vice President and Chief Financial and Operating  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.

Mr. Adams,  64, held the position of Senior Vice  President - Aircraft Sales and
Leasing of PIMC and PALC from August 1992 until October 1997,  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  assumed the position of Director of
PIMC.  Mr. Adams  presently  holds the position of Senior Vice President - Fleet
Advisory  Services of GECAS,  having previously held the position of Senior Vice
President - Stage II Aircraft.

Mr. Liu, 40,  assumed the position of Vice  President of PIMC  effective  May 1,
1995 and Director of PIMC effective  July 31, 1995. Mr. Liu presently  holds the
position of  Executive  Vice  President - Marketing  and  Structured  Finance of
GECAS, having previously held the position of Executive Vice President - Capital

                                       40
<PAGE>

Funding and Portfolio  Management of GECAS.  Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management
positions in corporate Business  Development and in Syndications and Leasing for
TIFC.  Mr. Liu  previously  held the  position of  managing  director of Kidder,
Peabody & Co., Incorporated.

Mr. Warman,  49,  assumed the position of Secretary of PIMC effective  March 23,
1998.  Mr.  Warman has served as a GECAS  Senior Vice  President  and  Associate
General  Counsel since March 1996, and for 13 years  theretofore  was a partner,
with an air-finance  and corporate  practice of the national law firm of Morgan,
Lewis & Bockius LLP.

Mr.  Dillon,  56,  held the  position  of Vice  President  - Aviation  Legal and
Insurance  Affairs,  from April 1989 to October 1997.  Previously,  he served as
General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994,
Mr.  Dillon  assumed the position of Assistant  Secretary  of PIMC.  Mr.  Dillon
presently  holds the position of Senior Vice  President and Managing  Counsel of
GECAS.

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 Partnership is not named as a defendant in this action.
The complaint seeks an award of compensatory and other damages and remedies.  On
July 20, 1994, the court entered an order dismissing almost all of the claims in
the  complaint  and amended  complaint.  Plaintiffs  filed a notice of appeal on
September  2, 1994.  On April 25,  1996,  the  Appellate  Division for the First
Department  affirmed  the  trial  court's  order  which  had  dismissed  most of
plaintiffs'  claims.  On September 25, 1997, this action was  discontinued  with
prejudice by stipulation of the parties.

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

                                       41
<PAGE>

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.

Moross,  et  al.  v.  Polaris  Holding  Company,  et al was  transferred  to the
Multi-District Litigation which has been settled as described below.

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
Prudential,  including  Polaris  Holding  Company,  one of its former  officers,
Polaris Aircraft Leasing Corporation,  Polaris Investment Management Corporation
and Polaris Securities Corporation.  The Partnership is not named as a defendant
in this action.  The complaint alleges that the Prudential  defendants created a
scheme for the sale of approximately $8-billion of limited partnership interests
in 700 allegedly 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 April 22, 1997, the Polaris  defendants  entered into a settlement  agreement
with plaintiffs  pursuant to which,  among other things,  the Polaris defendants
agreed to make a payment to a class of unitholders  previously  certified by the
Court. On August 1, 1997, the Court approved a class settlement with the Polaris
defendants.

Adams,  et al. v.  Prudential  Securities,  Inc. et al. was  transferred  to the
Multi-District  Litigation  filed in the United  States  District  Court for the
Southern District of New York, which has been settled as discussed above.

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 Partnership is not named as a defendant in this action.  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

                                       42
<PAGE>

attorneys'  fees,  as well as any other  relief the court deems just and proper.
Plaintiffs  filed a motion for leave to file a second amended  complaint,  which
was granted on October 3, 1995.  On March 18, 1996,  plaintiffs  moved for class
certification.  On the eve of class discovery,  April 26, 1996, plaintiffs moved
for a voluntary  dismissal  of Counts I and II (claims  brought  pursuant to the
Securities Act of 1933) of the Second Amended Complaint and simultaneously filed
a motion to remand this action to state court for lack of federal  jurisdiction.
Plaintiff's motion for voluntary  dismissal of the federal securities law claims
and motion for remand were granted on July 10, 1996.  On December 18, 1997,  the
Court  ordered  that  plaintiffs  show good cause why the  action  should not be
dismissed  without  prejudice  for lack of  prosecution.  On January 14, 1998, a
hearing  was held  with  respect  to the  order  to show  cause,  and the  Court
determined  that the action  should be dismissed  without  prejudice for lack of
prosecution.

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 Partnership is not named as a defendant in
this action.  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  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 August 16, 1996,  defendants  filed a motion to dismiss  plaintiffs'  amended
complaint.  On October 8, 1997, this action was  discontinued  with prejudice by
stipulation of the parties.

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

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

In or around  November  1994,  a  complaint  entitled  Lucy R.  Neeb,  et al. v.
Prudential Securities  Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants

                                       43
<PAGE>

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

In or about  January of 1995,  a complaint  entitled  Albert B.  Murphy,  Jr. v.
Prudential Securities, Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential  Securities  Incorporated  and Stephen  Derby  Gisclair.  On or about
January 18, 1996,  plaintiff filed a First  Supplemental  and Amending  Petition
adding  defendants   General  Electric  Company  and  General  Electric  Capital
Corporation.  The  Partnership  is not  named  as a  defendant  in this  action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract,  violation  of  sections  of the  Louisiana  Blue  Sky  Law  and
violation of the Louisiana  Civil Code in connection with the public offering of
Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory  damages,
attorneys' fees, interest, costs and general relief.

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

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

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

On or about May 7, 1996, a petition  entitled  Charles  Rich,  et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District  Court for the Parish of Orleans,  State of  Louisiana.  The  complaint

                                       44
<PAGE>

names as  defendants  General  Electric  Company  and General  Electric  Capital
Corporation.  The  Partnership  is not  named  as a  defendant  in this  action.
Plaintiffs  allege claims of tort concerning the inducement and  solicitation of
purchases  arising out of the public  offering of Polaris  Aircraft Income Funds
III and IV. Plaintiffs seek  compensatory  damages,  attorneys' fees,  interest,
costs and general relief.

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

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

The following  actions were settled pursuant to a settlement  agreement  entered
into on June 6, 1997. An additional  settlement was entered into on November 19,
1997  with  certain  plaintiffs  who had  refused  to  participate  in the first
settlement:

A complaint  entitled Joyce H. McDevitt,  et al. v. Polaris Holding Company,  et
al., which was filed in the Superior Court of the State of California, County of
Sacramento, on or about October 15, 1996, by individual plaintiffs who purchased
limited  partnership  units in Polaris Aircraft Income Funds I-VI. The complaint
names Polaris Holding Company,  Polaris Aircraft  Leasing  Corporation,  Polaris
Investment Management Corporation,  Polaris Securities Corporation,  Polaris Jet
Leasing,  Inc.,  Polaris  Technical  Services,  Inc.,  General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General  Electric  Credit   Corporation  and  Does  1-100  as  defendants.   The
Partnership  is not named as a defendant in this action.  The complaint  alleges
violations of state common law,  including fraud,  negligent  misrepresentation,
breach  of  fiduciary  duty,  and  violations  of  the  rules  of  the  National
Association of Securities Dealers.  The complaint seeks to recover  compensatory
damages and punitive damages in an unspecified amount,  interest, and rescission
with respect to Polaris Aircraft Income Funds I-VI.

A complaint  entitled Mary Grant Tarrer,  et al. v. Kidder Peabody & Co. (Kidder
Peabody),  et al.,  which  was  filed  in the  Superior  Court  of the  State of
California,  County of  Sacramento,  on or about October 16, 1996, by individual
plaintiffs who purchased  limited  partnership  units in Polaris Aircraft Income
Funds  III-VI  and  other  limited  partnerships  sold by  Kidder  Peabody.  The
complaint names Kidder,  Peabody & Co. Incorporated,  KP Realty Advisors,  Inc.,
Polaris  Holding  Company,   Polaris  Aircraft  Leasing   Corporation,   Polaris
Investment Management Corporation,  Polaris Securities Corporation,  Polaris Jet
Leasing,  Inc.,  Polaris  Technical  Services,  Inc.,  General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General  Electric  Credit   Corporation  and  Does  1-100  as  defendants.   The
Partnership  is not named as a defendant in this action.  The complaint  alleges
violations of state common law,  including fraud,  negligent  misrepresentation,
breach  of  fiduciary  duty,  and  violations  of  the  rules  of  the  National
Association of Securities Dealers.  The complaint seeks to recover  compensatory

                                       45
<PAGE>

damages and punitive damages in an unspecified amount,  interest, and rescission
with  respect to Polaris  Aircraft  Income  Funds  III-VI and all other  limited
partnerships alleged to have been sold by Kidder Peabody to the plaintiffs.

A complaint  entitled Janet K. Johnson,  et al. v. Polaris Holding  Company,  et
al., which was filed in the Superior Court of the State of California, County of
Sacramento, on or about November 6, 1996, by individual plaintiffs who purchased
limited  partnership  units in Polaris Aircraft Income Funds I-VI. The complaint
names Polaris Holding Company,  Polaris Aircraft  Leasing  Corporation,  Polaris
Investment Management Corporation,  Polaris Securities Corporation,  Polaris Jet
Leasing,  Inc.,  Polaris  Technical  Services,  Inc.,  General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General  Electric  Credit   Corporation  and  Does  1-100  as  defendants.   The
Partnership  is not named as a defendant in this action.  The complaint  alleges
violations of state common law,  including fraud,  negligent  misrepresentation,
breach  of  fiduciary  duty,  and  violations  of  the  rules  of  the  National
Association of Securities Dealers.  The complaint seeks to recover  compensatory
damages and punitive damages in an unspecified amount,  interest, and rescission
with respect to Polaris Aircraft Income Funds I-VI.

A complaint entitled Wayne W. Kuntz, et al. v. Polaris Holding Company,  et al.,
which was filed in the  Superior  Court of the  State of  California,  County of
Sacramento,  on or  about  November  13,  1996,  by  individual  plaintiffs  who
purchased  limited  partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company,  Polaris Aircraft Leasing  Corporation,
Polaris  Investment  Management  Corporation,  Polaris  Securities  Corporation,
Polaris Jet Leasing,  Inc., Polaris Technical  Services,  Inc., General Electric
Company,  General Electric  Financial  Services,  Inc., General Electric Capital
Corporation,  General Electric Credit  Corporation and Does 1-100 as defendants.
The  Partnership  is not named as a  defendant  in this  action.  The  complaint
alleges   violations   of  state   common  law,   including   fraud,   negligent
misrepresentation,  breach of fiduciary duty, and violations of the rules of the
National  Association  of Securities  Dealers.  The  complaint  seeks to recover
compensatory  damages and punitive damages in an unspecified  amount,  interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

A complaint  entitled Thelma Abrams, et al. v. Polaris Holding Company,  et al.,
which was filed in the  Superior  Court of the  State of  California,  County of
Sacramento,  on or  about  November  26,  1996,  by  individual  plaintiffs  who
purchased  limited  partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company,  Polaris Aircraft Leasing  Corporation,
Polaris  Investment  Management  Corporation,  Polaris  Securities  Corporation,
Polaris Jet Leasing,  Inc., Polaris Technical  Services,  Inc., General Electric
Company,  General Electric  Financial  Services,  Inc., General Electric Capital
Corporation,  General Electric Credit  Corporation and Does 1-100 as defendants.
The  Partnership  is not named as a  defendant  in this  action.  The  complaint
alleges   violations   of  state   common  law,   including   fraud,   negligent
misrepresentation,  breach of fiduciary duty, and violations of the rules of the
National  Association  of Securities  Dealers.  The  complaint  seeks to recover
compensatory  damages and punitive damages in an unspecified  amount,  interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

A complaint entitled Enita Elphick, et al. v. Kidder Peabody & Co.,et al., which
was  filed  in the  Superior  Court  of  the  State  of  California,  County  of
Sacramento, on or about January 16, 1997, by individual plaintiffs who purchased
limited  partnership  units in Polaris  Aircraft  Income  Funds III-VI and other
limited partnerships sold by Kidder Peabody. The complaint names Kidder, Peabody
& Co. Incorporated,  KP Realty Advisors,  Inc., Polaris Holding Company, Polaris

                                       46
<PAGE>

Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities  Corporation,  Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc.,  General Electric  Company,  General Electric  Financial  Services,  Inc.,
General Electric Capital  Corporation,  General Electric Credit  Corporation and
Does 1-100 as  defendants.  The  Partnership is not named as a defendant in this
action.  The complaint alleges  violations of state common law, including fraud,
negligent  misrepresentation,  breach of fiduciary  duty,  and violations of the
rules of the National  Association of Securities Dealers. The complaint seeks to
recover  compensatory  damages and punitive  damages in an  unspecified  amount,
interest,  and rescission  with respect to Polaris  Aircraft Income Funds III-VI
and all other limited  partnerships  alleged to have been sold by Kidder Peabody
to the plaintiffs.

A complaint  entitled George Zicos, et al. v. Polaris Holding  Company,  et al.,
which was filed in the  Superior  Court of the  State of  California,  County of
Sacramento,  on or  about  February  14,  1997,  by  individual  plaintiffs  who
purchased  limited  partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company,  Polaris Aircraft Leasing  Corporation,
Polaris  Investment  Management  Corporation,  Polaris  Securities  Corporation,
Polaris Jet Leasing,  Inc., Polaris Technical  Services,  Inc., General Electric
Company,  General Electric  Financial  Services,  Inc., General Electric Capital
Corporation,  General Electric Credit  Corporation and Does 1-100 as defendants.
The  Partnership  is not named as a  defendant  in this  action.  The  complaint
alleges   violations   of  state   common  law,   including   fraud,   negligent
misrepresentation,  breach of fiduciary duty, and violations of the rules of the
National  Association  of Securities  Dealers.  The  complaint  seeks to recover
compensatory  damages and punitive damages in an unspecified  amount,  interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

Three  complaints  which were filed on or about March 21, 1997,  in the Superior
Court of the State of  California,  County of  Sacramento  naming as  defendants
Kidder,  Peabody &  Company,  Incorporated,  Polaris  Holding  Company,  Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities  Corporation,  Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc.,  General Electric  Company,  General Electric  Capital  Services,  General
Electric Capital  Corporation,  GE Capital Aviation Services and Does 1-100. The
first complaint,  entitled Michael J. Ouellette, et al. v. Kidder Peabody & Co.,
et al.,  was  filed  by over 50  individual  plaintiffs  who  purchased  limited
partnership  units in one or more of Polaris  Aircraft  Income  Funds I-VI.  The
second  complaint,  entitled Thelma A. Rolph, et al. v. Polaris Holding Company,
et al.,  was  filed by over 500  individual  plaintiffs  who  purchased  limited
partnership  units in one or more of Polaris  Aircraft  Income  Funds I-VI.  The
third complaint,  entitled Carl L. Self, et al. v. Polaris Holding  Company,  et
al.,  was  filed  by  over  500  individual  plaintiffs  who  purchased  limited
partnership  units in one or more of Polaris  Aircraft  Income  Funds I-VI.  The
Partnership is not named as a defendant in any of these actions.  Each complaint
alleges   violations   of  state   common  law,   including   fraud,   negligent
misrepresentation  and breach of fiduciary  duty, and violations of the rules of
the National  Association of Securities  Dealers,  Inc. Each complaint  seeks to
recover  compensatory  damages and punitive  damages in an  unspecified  amount,
interest and rescission  with respect to Polaris  Aircraft Income Funds I-VI and
all other limited  partnerships  alleged to have been sold by Kidder  Peabody to
the plaintiffs.

A complaint  entitled Wilson et al. v. Polaris Holding Company et al., which was
filed  in the  Superior  Court of the  State of  California  for the  County  of
Sacramento on October 1, 1996, by over 500  individual  plaintiffs who purchased
limited  partnership  units in one or more of Polaris  Aircraft  Income  Funds I
through VI. The  complaint  names  Polaris  Holding  Company,  Polaris  Aircraft
Leasing  Corporation,   Polaris  Investment  Management   Corporation,   Polaris
Securities  Corporation,  Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc., General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation,  GE Capital Aviation Services, Inc. and Does 1-100

                                       47
<PAGE>

as defendants.  The Partnership has not been named as a defendant. The complaint
alleges   violations   of  state   common  law,   including   fraud,   negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover  compensatory  damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs.

A summons and First Amended Complaint  entitled Sara J. Bishop, et al. v. Kidder
Peabody & Co.,  et al.,  which was filed in the  Superior  Court of the State of
California, County of Sacramento, on or about April 9, 1996, by over one hundred
individual  plaintiffs  who  purchased  limited  partnership  units  in  Polaris
Aircraft Income Funds III, IV, V and VI and other limited  partnerships  sold by
Kidder  Peabody.  The complaint  names Kidder,  Peabody & Co.  Incorporated,  KP
Realty  Advisors,  Inc.,  Polaris  Holding  Company,  Polaris  Aircraft  Leasing
Corporation,  Polaris  Investment  Management  Corporation,  Polaris  Securities
Corporation,  Polaris Jet  Leasing,  Inc.,  Polaris  Technical  Services,  Inc.,
General Electric Company,  General Electric  Financial  Services,  Inc., General
Electric Capital Corporation, General Electric Credit Corporation and Does 1-100
as defendants.  The Partnership is not named as a defendant in this action.  The
complaint  alleges  violations of state common law,  including fraud,  negligent
misrepresentation,  breach of fiduciary duty, and violations of the rules of the
National  Association  of Securities  Dealers.  The  complaint  seeks to recover
compensatory  damages and punitive damages in an unspecified  amount,  interest,
and  rescission  with  respect to Polaris  Aircraft  Income Funds III-VI and all
other limited  partnerships  alleged to have been sold by Kidder  Peabody to the
plaintiffs.

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 1997 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  $440,295  were  paid to  PIMC  in 1997 in  addition  to a 10%
interest in all cash  distributions  as  described  in Note 11 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.

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<PAGE>


     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     100%
   Partner      Management           all cash distributions, gross
   Interest     Corporation          income in an 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.

                                       49
<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             22
                  Balance Sheets                                       23
                  Statements of Operations                             24
                  Statements of Changes in Partners' Capital
                    (Deficit)                                          25
                  Statements of Cash Flows                             26
                  Notes to Financial Statements                        27

2.       Reports on Form 8-K.

         No reports on Form 8-K were filed during the quarter ended December 31,
         1997.

         A current report on Form 8-K was filed on January 5, 1998 to report the
         prepayment  in full of the  Promissory  Note due from  Triton  Aviation
         Services II LLC on December 30, 1997.

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

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

4.       Financial Statement Schedules.

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

                                       50

<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 27, 1998                   By:  /S/ Eric M. Dull
           --------------                        -------------------------
                Date                             Eric M. Dull, 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/Eric M. Dull       President and Director of Polaris       March 27, 1998
    ---------------       Investment Management Corporation,      --------------
    (Eric M. Dull)        General Partner of the Registrant

    /S/Marc A. Meiches    Chief Financial Officer of Polaris      March 27, 1998
    ------------------    Investment Management Corporation,      --------------
    (Marc A. Meiches)     General Partner of the Registrant

    /S/Richard J. Adams   Director of Polaris Investment          March 27, 1998
    -------------------   Management Corporation, General         --------------
    (Richard J. Adams)    Partner of the Registrant

                                       51