INDEPENDENT AUDITORS' REPORT






The Owners
Canadian Air Trust #2

We have audited the accompanying balance sheet of the Canadian Air Trust #2 (the
Trust) as of December 31, 1998, and the statements of income, changes in owners'
equity,  and cash flows for the years ended  December  31, 1998 and 1997.  These
financial  statements  are the  responsibility  of the owner's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As described  in Note 1 to the  financial  statements,  the Trust is expected to
liquidate in 2000, as the aircraft in the Trust has been sold.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of the Trust as of December 31,
1998,  and the results of its  operations and its cash flows for the years ended
December 31, 1998 and 1997 in  conformity  with  generally  accepted  accounting
principles.  The accompanying 1999 financial  statements were not audited by us,
and accordingly, we express no opinion or any other form of assurance on them.



/s/ KPMG
SAN FRANCISCO, CALIFORNIA
June 9, 2000



<PAGE>

<TABLE>
<CAPTION>


                                            CANADIAN AIR TRUST #2
                                                  (A Trust)
                                                Balance Sheets
                                                 December 31,
                                          (in thousands of dollars)





                                                                               1999               1998
                                                                           (unaudited)
                                                                         -------------------------------------
  ASSETS

  <S>                                                                     <C>               <C>
  Accounts receivable                                                     $            244  $            438
                                                                          --------------------------------------

        Total assets                                                      $            244  $            438
                                                                          =====================================


  LIABILITIES AND OWNERS' EQUITY

  Liabilities:
  Due to affiliates                                                       $               5  $              --
                                                                          ------------------------------------
    Total liabilities                                                                    5                 --

  Owners' equity                                                                       239                438
                                                                          ------------------------------------

        Total liabilities and owner's equity                              $            244  $             438
                                                                          ====================================


</TABLE>













      See accompanying auditors' report and notes to financial statements.



<PAGE>
<TABLE>
<CAPTION>


                                            CANADIAN AIR TRUST #2
                                                  (A Trust)
                                             STATEMENTS OF INCOME
                                       For the Years Ended December 31,
                                          (in thousands of dollars)


                                                             1999                1998                1997
                                                                                               -----------------
                                                          (unaudited)
                                                       ---------------------------------------------------------
  REVENUES

  <S>                                                  <C>                  <C>                          <C>
  Lease revenue                                        $            --      $        1,599               5,765
  Interest income                                                   29                  47                  86
  Gain from the sale of aircraft                                    --               8,196               6,802
                                                       ---------------------------------------------------------
    Total revenues                                                  29               9,842              12,653
                                                       ---------------------------------------------------------

  Expenses

  Depreciation and amortization expense                             --                 853               5,393
  Management fees to affiliate                                      --                  26                 113
  Repairs and maintenance expense                                   --                  --                   4
  Insurance expense                                                 --                  16                  33
  Administrative expenses to affiliates                             --                  37                  92
  Administrative expenses                                           --                   5                  22
                                                       ---------------------------------------------------------
    Total expenses                                                  --                 937               5,657
                                                       ---------------------------------------------------------

        Net income                                     $            29      $        8,905               6,996
                                                       =========================================================


</TABLE>









      See accompanying auditors' report and notes to financial statements.


<PAGE>



                              CANADIAN AIR TRUST #2
                                    (A Trust)
                     STATEMENTS OF CHANGES IN OWNERS' EQUITY
             For the Years Ended December 31, 1999 , 1998, and 1997
                            (in thousands of dollars)







   Owners' equity at December 31, 1996 (unaudited)          $        15,816

  Net income                                                          6,996

  Distributions paid                                                 (7,213)
                                                            -----------------

   Owners' equity at December 31, 1997                               15,599

  Net income                                                          8,905

  Distributions paid                                                (24,066)
                                                            -----------------

   Owners' equity at December 31, 1998                                  438

  Net income                                                             29

  Distributions paid                                                   (228)
                                                            -----------------

    Owners' equity at December 31, 1999 (unaudited)         $           239
                                                            =================










      See accompanying auditors' report and notes to financial statements.


<PAGE>

<TABLE>
<CAPTION>


                                            CANADIAN AIR TRUST #2
                                                  (A Trust)
                                           STATEMENTS OF CASH FLOWS
                                       For the Years Ended December 31,
                                          (in thousands of dollars)


                                                                      1999                1998              1997
                                                                  (unaudited)
                                                               ---------------------------------------------------------

  OPERATING ACTIVITIES

  <S>                                                           <C>                <C>               <C>
  Net income                                                    $            29    $         8,905   $          6,996
  Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
    Depreciation and amortization                                            --                853              5,393
    Gain from the sale of aircraft                                           --             (8,196)            (6,802 )
    Changes in operating assets and liabilities:
      Accounts receivable                                                   194                958               (603 )
      Prepaid deposits                                                       --                  6                  1
      Accounts payable and accrued expenses                                  --                (23)                14
      Due to affiliates                                                       5                (41)                32
      Lessee deposits                                                        --               (288)            (1,152)
                                                                -------------------------------------------------------
        Net cash provided by operating activities                           228              2,174              3,879
                                                                -------------------------------------------------------

  Investing activities

  Transfer of equipment to owner                                             --              1,413                 --
  Proceeds from the sale of aircraft                                         --             13,313             10,500
                                                                -------------------------------------------------------
        Net cash provided by investing activities                            --             14,726             10,500
                                                                -------------------------------------------------------

  Financing activities

  Payments due from affiliates                                               --                 --             (7,166)
  Proceeds from affiliates                                                   --              7,166                 --
  Distributions paid                                                       (228)           (24,066)            (7,213)
                                                                ---------------------------------------------------------
        Net cash used in financing activities                              (228)           (16,900)           (14,379)
                                                                -------------------------------------------------------

  Net change in cash and cash equivalents                                    --                 --                 --
  Cash and cash equivalents at beginning of year                             --                 --                 --
                                                                --------------------------------------------------------
  Cash and cash equivalents at end of year                      $            --    $            --   $             --
                                                                =======================================================


  Supplemental information
  Noncash transfer of equipment at net book value to
    owner                                                       $            --    $         1,413   $             --





</TABLE>


      See accompanying auditors' report and notes to financial statements.


<PAGE>



                              CANADIAN AIR TRUST #2
                                    (A TRUST)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION

In 1995,  PLM  Equipment  Growth  Fund  III  (EGF  III),  a  California  limited
partnership,  PLM  Equipment  Growth  Fund IV (EGF  IV),  a  California  limited
partnership,  PLM  Equipment  Growth  Fund  V  (EGF  V),  a  California  limited
partnership,  PLM  Equipment  Growth  Fund VI (EGF  VI),  a  California  limited
partnership,  PLM  Equipment  Growth & Income Fund VII (EGF VII),  a  California
limited partnership, and Professional Lease Management Income Fund I (Fund I), a
Delaware Limited Liability Company,  (the Owners) entered into a Trust Agreement
(the  Trust) with PLM  Transportation  Equipment  Corp.  (TEC),  a  wholly-owned
subsidiary  of PLM  International,  Inc.,  by the  terms of  which  TEC is owner
trustee for the benefit of the Owners as equal  co-beneficiaries.  The Trust was
established  for the  purpose of  purchasing  seven  Boeing  737-200  commercial
aircraft.  The Trust has no employees nor operations other than the operation of
the seven Boeing 737-200's.

The  Trust  contained  a  provision  for  allocating  specific  aircraft  to the
beneficial owners under certain  circumstances.  Two of the commercial aircraft,
one owned by EGF III and another owned by EGF V, were transferred to the owner's
limited  partnership  during 1998 and 1996,  respectively.  All of the remaining
aircraft  in the Trust  had been  sold as of  December  31,  1998.  The Trust is
expected to liquidate in 2000.

PLM Financial  Services Inc.,  (FSI) is the General  Partner of EGFs III, IV, V,
VI, and VII and the Manager of Fund I. FSI is a  wholly-owned  subsidiary of PLM
International, Inc.

The aircraft were purchased during 1995 for $30.1 million.  EGF III, EGF IV, EGF
V, EGF VI,  and EGF VII (the  EGF's)  collectively  paid  acquisition  and lease
negotiation fees of $1.4 million to PLM Worldwide  Management  Services (WMS), a
wholly-owned  subsidiary of PLM International,  Inc., based on the prorata share
of the cost of the  aircraft  purchased.  No fees  were paid by Fund I. Upon the
purchase of the  aircraft,  a lease with  Canadian  Airlines  International  was
entered into with a term expiring in September 2001.

These accompanying  financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles.  This
requires  management to make estimates and assumptions  that affect the reported
amounts  of  assets  and  liabilities,  disclosures  of  contingent  assets  and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

     OPERATIONS

The aircraft in the Trust are managed under a continuing management agreement by
PLM Investment  Management,  Inc.  (IMI), a wholly-owned  subsidiary of FSI. IMI
receives a monthly management fee from the Trust for managing the aircraft (Note
2). FSI, in conjunction with its subsidiaries, sells transportation equipment to
investor programs and third parties,  manages pools of transportation  equipment
under agreements with the investor programs, and is a general partner in limited
partnerships.

     CASH AND CASH EQUIVALENTS

All cash  generated from  operations is distributed to the owners,  accordingly,
the Trust has no cash balance at December 31, 1999 and 1998.



<PAGE>



                              CANADIAN AIR TRUST #2
                                    (A TRUST)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     ACCOUNTING FOR LEASES

The  aircraft  under the Trust was leased under an  operating  lease.  Under the
operating  lease method of accounting,  the leased asset is recorded at cost and
depreciated  over its  estimated  useful life.  Rental  payments are recorded as
revenue over the lease term in accordance  with Financial  Accounting  Standards
Board Statement No. 13 "Accounting  for Leases".  Lease  origination  costs were
amortized equally over 36 months.

     DEPRECIATION

Depreciation  of aircraft  equipment  was  computed  using the  double-declining
balance method,  taking a full month's depreciation in the month of acquisition,
based  upon an  estimated  useful  life of 12  years.  Acquisition  fees of $1.2
million  were  paid  to WMS and  were  capitalized  as  part of the  cost of the
equipment and amortized over the life of the aircraft.

     AIRCRAFT

In accordance with the Financial  Accounting  Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", FSI reviewed the carrying value of the aircraft under the Trust
at least quarterly, and whenever circumstances indicated that the carrying value
of the aircraft may not be  recoverable  in relation to expected  future  market
conditions for the purpose of assessing  recoverability of the recorded amounts.
If  projected  undiscounted  future cash flows and fair value were less than the
carrying value of the aircraft,  a loss on revaluation would have been recorded.
No reductions to the carrying  value of the aircraft were required  during 1999,
1998, or 1997.

     REPAIRS AND MAINTENANCE

Repair and  maintenance  for the  aircraft  are  usually the  obligation  of the
lessee.

     Net Income and Cash Distributions to Owners

The net income and cash  distributions of the Trust are allocated to the Owners.
The net income are generally allocated to the Owners based on number of aircraft
owned. Certain depreciable and amortizable amounts are allocated specifically to
the EGF's,  such as depreciation on acquisition  fees and  amortization on lease
negotiation  fees.  Cash  distributions  are  allocated  based on the  number of
aircraft owned.

     COMPREHENSIVE INCOME

The  Trust's  net income is equal to  comprehensive  income for the years  ended
December 31, 1999, 1998, and 1997.

2.   TRANSACTIONS WITH AFFILIATES

Under the equipment management agreement,  IMI receives a monthly management fee
equal to the  lessor of (i) the fees that  would be  charged  by an  independent
third party for similar  services for similar  equipment or (ii) 5% of the gross
lease revenues  attributable  to equipment that is subject to operating  leases.
The Trust's  management  fee expense to affiliate  was $-0-,  $26,000,  and $0.1
million during 1999, 1998, and 1997, respectively.


<PAGE>



                              CANADIAN AIR TRUST #2
                                    (A TRUST)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

2.   TRANSACTIONS WITH AFFILIATES (CONTINUEd)

The Trust reimbursed FSI $-0-, $37,000,  and $0.1 million during 1999, 1998, and
1997,  respectively,  for data processing and  administrative  expenses directly
attributable to the Trust.

Trust management fees payable to IMI was $5,000 as of December 31, 1999.

3.   AIRCRAFT ON LEASE

Revenues  were earned by placing the  aircraft in operating  leases.  A six-year
lease with Canadian  Airlines  International  was signed upon the acquisition of
the aircraft in 1995.

During 1997, the lessee was having financial  difficulties and was unable to pay
the Trust 3 months  rent.  The Trust  negotiated a repayment  schedule  starting
October 1998 in which the lessee would make 10 equal quarterly installments plus
interest of 12% on the unpaid balance  secured by a  letter-of-credit.  The last
quarterly  installment  is due January 2001. As of July 2000, the lessee remains
current with the repayment plan.

The  aircraft  lease is  accounted  for as an operating  lease.  Future  minimum
rentals under  noncancelable  operating  leases, as of December 31, 1999, during
each of the next five years are approximately $7.5 million in 2000, $5.6 million
in 2001, and $0 thereafter.

4.   GEOGRAPHIC INFORMATION

The aircraft were leased and operated in Canada.

5.   INCOME TAXES

The Trust is not subject to income  taxes,  as any income or loss is included in
the tax returns of the Owners of the Trust. Accordingly, no provision for income
taxes has been made in the financial statements of the Trust.

As of  December  31,  1999,  there were no  temporary  differences  between  the
financial statements carrying value of assets and the income tax basis.

6.   CONCENTRATIONS OF CREDIT RISK

Financial instruments,  which potentially subject the Trust to concentrations of
credit risk, consist principally of lease receivables.

The  aircraft  in the Trust were on lease to only one  customer  during 1998 and
1997. This lessee,  Canadian  Airlines  International,  accounted for all of the
lease  revenue.  Triton  Aviation  Services,  Ltd.  purchased  three  commercial
aircraft with the existing  lease  attached from the Trust and the gain from the
sale accounted for 83% of total  consolidated  revenues during 1998.  Bahamasair
Holdings,  Ltd.  purchased  two  commercial  aircraft  with the  existing  lease
attached  from the Trust and the gain from the sale  accounted  for 54% of total
consolidated revenues during 1997.

As of December 31, 1999, the manager believes the Trust had no other significant
concentrations  of credit risk that could have a material  adverse effect on the
Trust.