<PAGE>

AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

    Annual Report to the Partners, December 31, 1996


<PAGE>

                  AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

                     INDEX TO ANNUAL REPORT TO THE PARTNERS

<TABLE>
<CAPTION>
                                                                                          PAGE
                                                                                        ---------
<S>                                                                                     <C>
SELECTED FINANCIAL DATA...............................................................          2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
  OPERATIONS..........................................................................        3-7

FINANCIAL STATEMENTS:
Report of Independent Auditors........................................................          8
Statement of Financial Position at December 31, 1996 and 1995.........................          9
Statement of Operations for the years ended December 31, 1996, 1995 and 1994..........         10
Statement of Changes in Partners' Capital for the years ended December 31, 1996, 1995
  and 1994............................................................................         11
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994..........         12
Notes to the Financial Statements.....................................................      13-22

ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment
  Disposed............................................................................         23

Statement of Cash and Distributable Cash From Operations, Sales and Refinancings......         24

Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required
  Section 10.4 of the Amended and Restated Agreement and Certificate of Limited
  Partnership.........................................................................         25
</TABLE>

                                      -1-

<PAGE>

                            SELECTED FINANCIAL DATA

    The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.

    For each of the years in the five year period ended December 31, 1996:

<TABLE>
<CAPTION>
              SUMMARY OF
              OPERATIONS                    1996           1995           1994           1993           1992
--------------------------------------  -------------  -------------  -------------  -------------  -------------
<S>                                     <C>            <C>            <C>            <C>            <C>
Lease revenue.........................  $   4,706,774  $   6,585,836  $   9,001,993  $   7,976,109  $   8,366,019
Net income (loss).....................  $  (3,649,940) $  (5,286,053) $  (1,474,819) $  (4,686,207) $   2,184,789
Per Unit:
  Net income (loss)...................  $       (1.28) $       (1.85) $       (0.52) $       (1.64) $        0.76
  Cash distributions declared.........  $        2.25  $        1.75  $        2.50  $        2.50  $        2.56

FINANCIAL POSITION
--------------------------------------
Total assets..........................  $  13,163,812  $  21,432,133  $  31,553,833  $  40,195,205  $  51,782,365
Total long-term obligations...........  $   3,419,785  $   1,432,396       --             --             --
Partners' capital.....................  $   8,602,879  $  18,637,361  $  28,924,079  $  37,542,705  $  49,372,719
</TABLE>

                                      -2-


<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    Year ended December 31, 1996 compared to the year ended December 31, 1995
and the year ended December 31, 1995 compared to the year ended December 31,
1994

OVERVIEW

    As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. In 1995, the Partnership transferred its
proportionate ownership interest in one aircraft to the existing lessee, United
Airlines, Inc.("United"), in exchange for proportionate interests in three
aircraft leased to Southwest Airlines, Inc., pursuant to lease agreements which
expire in 1999. During the first quarter of 1996, the Partnership completed the
replacement of the United Aircraft with proportionate interests in two aircraft
leased to Finnair OY, pursuant to lease agreements which also expire in 1999.
One of the four commercial aircraft held in the Partnership's original portfolio
was returned to the Partnership in 1995, upon the expiration of its lease term
and in September 1996, upon completion of refurbishments, was re-leased to
Transmeridian Airlines (see below). The Partnership continues to own a
proportionate interest in an aircraft which was returned by the lessee on June
30, 1996 and is currently undergoing heavy maintenance. The Partnership entered
into a new 12-month lease agreement with Aer Lease Limited with respect to its
interest in this aircraft, effective upon completion of the heavy maintenance.
In 1996, the Partnership sold one of its original aircraft to the lessee,
Northwest Airlines, Inc.("Northwest"). At December 31, 1996, the Partnership
also owned a complete interest in two other aircraft, one of which is being
leased pursuant to a re-lease agreement which will expire in January 1997 (see
below), and the second which is currently undergoing heavy maintenance. The
second aircraft was returned by the lessee, upon completion of its renewal lease
term, in September 1996. The General Partner is actively seeking the re-lease of
this aircraft. Upon expiration of the current lease agreements, each aircraft
will be re-leased or sold depending on prevailing market conditions and the
assessment of such conditions by Equis Financial Group Limited Partnership
(formerly American Finance Group) a Massachusetts limited partnership ("EFG") to
obtain the most advantageous economic benefit. Ultimately, all aircraft will be
sold and the net proceeds will be distributed to the Partners, after all
liabilities and obligations of the Partnership have been satisfied.

RESULTS OF OPERATIONS

    For the year ended December 31, 1996, the Partnership recognized lease
revenue of $4,706,774 compared to $6,585,836 and $9,001,993 for the same
periods in 1995 and 1994, respectively. The decrease in lease revenue from
1995 to 1996 was due primarily to lease term expirations related to the
Partnership's Lockheed L-1011-100 and its proportionate interest in a
Lockheed L-1011-50 and the sale of a 727-200 ADV aircraft (discussed below).
The decrease was partially offset by the effects of the Partnership's
aircraft exchange (discussed below) which was concluded late in the first
quarter of 1996. As a result of the exchange, the Partnership replaced its
ownership interest in a Boeing 747-SP aircraft, having aggregate quarterly
lease revenues of $149,640, with interests in five other aircraft (three
Boeing 737 aircraft leased by Southwest Airlines, Inc. and two McDonnell
Douglas MD-82 aircraft leased by Finnair OY) having aggregate quarterly lease
revenues of $254,373. The Finnair Aircraft were exchanged into the
Partnership on March 25, 1996. Accordingly, revenue for year ended December
31, 1996 did not fully reflect the annual rents ultimately anticipated from
the like-kind exchange. The decrease in lease revenue from 1994 to 1995 was
due primarily to the receipt in 1994, of lease termination rents of
$1,966,511 (see below).

    The Partnership's Boeing 727-251 ADV aircraft, formerly on a renewal rental
agreement with Northwest was returned upon expiration of its lease term on
November 30, 1995. This aircraft has undergone heavy maintenance, approximately
$984,000 of which was incurred or accrued during the year ended

                                      -3-


<PAGE>

December 31, 1996. During 1996, the Partnership received $468,133 from the
former lessee of this aircraft, representing a reimbursement of additional
heavy maintenance costs. In September 1996, the Partnership entered into a
new 28-month lease agreement with Transmeridian Airlines, to re-lease this
aircraft for aggregate rents over the lease term of approximately $1,941,000.

    The Partnership owns a whole and a partial interest in two Lockheed L-1011
aircraft formerly leased to Cathay Pacific Airways Limited ("Cathay"). The
Partnership's original lease agreements with Cathay provided for semi-annual
rent adjustments based on the six month London Inter-Bank Offered Rate
("LIBOR"). Accordingly, rents generated from these leases fluctuated in relation
to the prevailing LIBOR rate on a semi-annual basis. The Partnership's renewal
lease agreements with Cathay (having adjusted semi-annual rents aggregating
$1,353,599) expired on February 14, 1996 and were extended until April 11, 1996.
Subsequent to this extension, Cathay again extended the lease on one of the
aircraft until June 30, 1996 and on the other until September 30, 1996, both at
fixed rates. The Partnership recognized aggregate revenue from the extensions of
both of these aircraft of $576,814 in 1996. Cathay subsequently returned both
aircraft to the Partnership upon the expiration of the extensions and both
aircraft are currently undergoing heavy maintenance. The heavy maintenance on
the Lockheed L-1011-50 is expected to cost the Partnership approximately
$362,000, all of which was accrued or incurred during the year ended December
31, 1996. The Partnership entered into a new 12-month lease agreement with Aer
Lease Limited, with respect to its interest in the L-1011-50 aircraft, at a base
rent to the Partnership of $39,550 per month, effective upon completion of the
heavy maintenance. The heavy maintenance on the Lockheed L-1011-100 is expected
to cost the Partnership approximately $400,000 all of which was accrued or
incurred during the year ended December 31, 1996. The General Partner is
actively seeking the re-lease of this aircraft. Currently, the demand for L-1011
aircraft is weak, limited principally to air cargo carriers and operators of
passenger charters. Several major airlines have reduced their commitment to the
L-1011. Such circumstances have inhibited the remarketing of the Partnership's
L-1011 aircraft and have required the Partnership to incur costs to meet the
needs of Aer Lease Limited and other potential successor lessees. Accordingly,
until the Partnership's L-1011 aircraft are sold, the General Partner will
continue to reserve a portion of the Partnership's cash for such purposes.

    The Partnership's portfolio includes an aircraft currently leased to
American Trans Air, Inc. ("ATA") pursuant to a re-lease agreement which was
originally scheduled to expire on January 31, 1997. ATA has renewed this lease
for an additional twenty-four months through January 31, 1999, at the existing
rent of $63,500 per month. In 1994, the Partnership received $1,966,511 from the
former lessee of this aircraft as part of an agreement to terminate its lease.

    The Partnership holds a proportionate ownership interest in the Cathay,
Southwest and Finnair Aircraft discussed above. The remaining interests are
owned by other affiliated partnerships sponsored by EFG. All partnerships
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues and expenses
associated with the aircraft. (See Notes 2 and 3 to the financial statements.)

    Interest income for the year ended December 31, 1996 was $265,820 compared
to $172,530 and $140,762 for the years ended December 31, 1995 and 1994,
respectively. Generally, interest income is generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments. The
increase in interest income in 1996 compared to 1995 and 1994 is a result of
interest of $39,346 earned on cash held in a special-purpose escrow account in
connection with the like-kind exchange transactions discussed below and interest
earned on sale proceeds associated with the Boeing 727-200 ADV aircraft prior to
the time such proceeds were distributed to the Recognized Owners.

    During July 1996, the Partnership sold a Boeing 727-200 ADV jet aircraft
with an original cost and net book value of $11,164,679 and $3,074,680,
respectively, to the existing lessee. In connection with this sale, the
Partnership realized sale proceeds of $3,535,649, which resulted in a net gain,
for financial statement purposes, of $460,969. The Partnership also realized
lease termination rents of $429,351 in connection with this sale as the aircraft
was sold prior to the expiration of the related lease term.

                                      -4-


<PAGE>

    In September 1995, the Partnership transferred its entire ownership interest
(23.19%) in a Boeing 747-SP aircraft (the "United Aircraft") to its lessee,
United. The transaction was structured as a like-kind exchange for income tax
reporting purposes. The Partnership received aggregate cash consideration of
$1,910,907, including $106,411 for rent accrued through the transfer date. The
net cash consideration of $1,804,496 was deposited into a special-purpose escrow
account through a third-party exchange agent pending the completion of the
aircraft exchange. The Partnership's interest in the United Aircraft had a net
book value of $2,301,510 at the date of transfer and resulted in a net loss for
financial reporting purposes of $497,014.

    In November 1995, the Partnership partially replaced the United Aircraft
with a 13.11% ownership interest in the Southwest Aircraft, at an aggregate cost
of $1,919,500. To acquire the interest in the Southwest Aircraft, the
Partnership obtained financing of $1,432,396 from a third-party lender and
utilized $487,104 of the cash consideration received from the transfer of the
United Aircraft. The remaining ownership interest of 86.89% in the Southwest
Aircraft is held by affiliated equipment leasing programs sponsored by EFG.

    Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in two Finnair Aircraft
at a total cost to the Partnership of $4,157,280. To acquire the ownership
interest in the Finnair Aircraft, the Partnership paid $1,389,942, including
the remaining balance of the United cash consideration, and obtained
financing of $2,767,338 from a third-party lender. The remaining ownership
interest of 85.15% of the Finnair Aircraft is held by affiliated equipment
leasing programs sponsored by EFG. The like-kind exchange, involving the
United, Southwest and Finnair Aircraft, was undertaken, in part, to mitigate
the Partnership's economic risk resulting from the United Aircraft being
returned to the Partnership upon its lease expiration in April 1996 and
remaining off-lease for an extended period. The exchange enabled the
Partnership to replace a specialized aircraft with other aircraft which are
used more widely in the industry and also to significantly extend its rental
stream with two creditworthy lessees.

    The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1996, 1995
and 1994. The resulting charges, $2,832,800 ($0.99 per limited partnership unit)
in 1996, $6,139,040 ($2.15 per limited partnership) in 1995 and $3,721,000
($1.30 per limited partnership unit) in 1994 were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.

    Net realizable values were estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) EFG's assessment of prevailing market
conditions for similar aircraft. Market values for the Partnership's used
commercial jet aircraft have continued to deteriorate. Consistent price
competition and other pressures within the airline industry have inhibited
sustained profitability for many carriers. Most major airlines have had to
re-evaluate their aircraft fleets and operating strategies. Such issues
complicate the determination of net realizable value for specific aircraft,
and particularly used aircraft, because cost-benefit and market
considerations may differ significantly between the major airlines. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors also influence market demand and market values for passenger
jet aircraft.

    A significant consideration in evaluating used commercial aircraft is
compliance with The Airport Capacity Act of 1990 (the "Airport Act"), which
prohibits the operation of Stage 2 commercial jet aircraft to or from U.S.
airports after December 31, 1999. Stage designations range from Stage 1 to Stage
3 and are indicative of an aircraft's compliance with noise level regulations
promulgated by the Federal Aviation Administration. Stage 3 designates the
highest level of compliance. The Partnership's two Boeing 727 aircraft leased to
Transmeridian and ATA are Stage 2 aircraft. Various hush kit and re-engineering
programs are available to retrofit Stage 2 aircraft to comply with the Airport
Act; however, the cost to effect such improvements is estimated to range from $2
million to $3 million per aircraft. Accordingly, this factor is a major
consideration in assessing estimated net realizable value for used aircraft and
is the principal reason for the write-down which the Partnership recognized in
1994. The write-downs in 1996 and 1995 resulted from the deterioration in the
market value of the Partnership's interest in the L-1011 aircraft (see
discussion above).

    Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft will be dependent upon many factors, including EFG's ability to
sell and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any

                                      -5-


<PAGE>

given time. Accordingly, EFG will attempt to monitor changes in the airline
industry in order to identify opportunities which may be advantageous to the
Partnership and which will maximize total cash returns for each aircraft.

    The total economic value realized upon final disposition of each aircraft
will be comprised of all primary lease term revenue generated from that
aircraft, together with its residual value. The latter consists of cash proceeds
realized upon the aircraft's sale in addition to all other cash receipts
obtained from renting the aircraft on a re-lease, renewal or month-to-month
basis. Consequently, the amount of any future gain or loss reported in the
financial statements may not necessarily be indicative of the total residual
value the Partnership achieved from leasing the aircraft

    Interest expense was $264,200 or 5.6% of lease revenue in 1996 and $19,198
or less than 1% of lease revenue in 1995. Interest expense resulted from
financing obtained from third-party lenders in connection with the Southwest
Aircraft and the Finnair Aircraft, described above. Interest expense in future
periods will decline as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding debt.

    Management fees were 5% of lease revenue during 1996, 1995 and 1994 and will
not change as a percentage of lease revenue in future periods.

    Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as
insurance, printing, distribution and remarketing expenses The increase in
operating expenses during 1996 compared to 1995 and 1994 is due primarily to
heavy maintenance costs incurred in connection with the Boeing 727-251 ADV
aircraft and the two Lockheed L-1011 aircraft, discussed above. In addition,
in 1996 the Partnership incurred legal costs associated with Transmeridian
Airlines legal proceedings (see Note 7 to the financial statements, herein)
Operating expenses increased in 1995 compared to 1994 due to an increase in
professional service costs. The amount of future operating expenses cannot be
predicted with certainty; however, such expenses are usually higher during
the acquisition and liquidation phases of a partnership. Other fluctuations
will occur in relation to the volume and timing of aircraft remarketing
activities. Depreciation and amortization expense was $3,650,745, $4,902,840
and $6,317,773 for the years ended December 31, 1996, 1995 and 1994,
respectively.

LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS

    The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
aircraft rental transactions. Accordingly, the Partnership's principal source of
cash from operations is generally provided by the collection of periodic rents.
These cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $3,205,567, $6,010,056 and $8,649,676
in 1996, 1995 and 1994, respectively. The expiration of the Partnership's lease
agreements related to its Lockheed L-1011-100 and its proportionate interest in
the Lockheed L-1011-50 and the sale of a Boeing 727-200 Advanced aircraft will
cause a decline in the Partnership's future lease revenue and corresponding
sources of operating cash. This will be partially offset by rents generated in
connection with the Southwest Aircraft, the Finnair Aircraft and the aircraft on
lease to Transmeridian Airlines. Overall, expenses associated with rental
activities, such as management fees, and net cash flow from operating activities
will decline as the Partnership remarkets its aircraft. Ultimately, the
Partnership will dispose of all aircraft under lease. This will occur
principally through sale transactions whereby each aircraft will be sold to the
existing lessee or to a third party. Generally, this will occur upon expiration
of each aircraft's primary or renewal/re-lease term.

    Cash expended for equipment acquisitions and cash realized form asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. For the year ended December 31, 1996, the
Partnership expended $72,550 in cash in connection with the like-kind exchange
transactions referred to above. During year ended December 31, 1996, the
Partnership realized $3,535,649 in proceeds from the sale of a Boeing 727-200
ADV aircraft. Future inflows of cash from asset disposals will vary in

                                      -6-


<PAGE>

timing and amount and will be influenced by many factors including, but not
limited to, the frequency and timing of lease expirations, the equipment's
condition and age, and future market conditions.

    As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership has a balloon payment
obligation at the expiration of the primary lease term related to the Finnair
Aircraft of $1,411,035 (see Note 5 to the financial statements, included
herein).

    Cash distributions to the General Partner and Recognized Owners are declared
and generally paid within fifteen days following the end of each calendar
quarter. The payment of such distributions is presented as a component of
financing activities. For the year ended December 31, 1996, the Partnership
declared total cash distributions of Distributable Cash From Operations and
Distributable Cash From Sales and Refinancings of $6,384,542. Of the total
distributions, $6,107,955 was allocated to the Recognized Owners and $276,587
was allocated to the General Partner. The was no fourth quarter 1996 cash
distribution.

    Cash distributions paid to the Recognized Owners consist of both a return of
and a return on capital. To the extent that cash distributions consist of Cash
From Sales or Refinancings, substantially all of such cash distributions should
be viewed as a return of capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each aircraft
at its disposal date. Future market conditions, technological changes, the
ability of EFG to manage and remarket the aircraft, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's aircraft portfolio.

    Overall, the future liquidity of the Partnership will be greatly dependent
upon the collection of contractual rents and the outcome of residual activities.
The General Partner anticipates that cash proceeds resulting from these sources
will satisfy the Partnership's future expense obligations. However, the amount
of cash available for distribution in future periods is expected to fluctuate
widely as the General Partner attempts to remarket the Partnership's aircraft
and possibly upgrade certain aircraft to meet the standards of potential
successor lessees.

    The Partnership has incurred and accrued significant heavy maintenance
costs in connection with its remarketing efforts related to the two Cathay
aircraft and the Transmeridian aircraft. The Partnership also expects to
incur additional costs in future years as the Partnership's remaining
aircraft are remarketed. The amount of such costs will depend upon the extent
of upgrades or refurbishments necessary to prepare these aircraft for sale or
re-lease. These costs have presented, and will continue to present, demands
on the Partnership's cash position. Accordingly, the General Partner will
continue to reserve a significant portion of the Partnership's cash for such
purposes. The General Partner anticipates that future cash distributions will
be contingent primarily upon the realization of sale proceeds generated from
remarketing the Partnership's remaining aircraft and the extent of the
Partnership's cash reserve requirements. Accordingly, the General Partner
expects to continue to suspend the declaration of quarterly cash
distributions between the periods corresponding to major remarketing events.

                                      -7-


<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Partners of AIRFUND II International Limited Partnership:

    We have audited the accompanying statements of financial position of AIRFUND
II International Limited Partnership as of December 31, 1996 and 1995, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management. 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
management, 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 AIRFUND II International
Limited Partnership at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

    Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

                               ERNST & YOUNG LLP

Boston, Massachusetts
March 14, 1997

                                      -8-


<PAGE>

            AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

    STATEMENT OF FINANCIAL POSITION December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                     1996           1995
                                                                 -------------  ------------
<S>                                                              <C>            <C>
ASSETS
Cash and cash equivalents......................................  $ 2,347,762  $ 3,557,968
Contractual right for equipment................................       --        1,317,392
Rents receivable...............................................       --          169,906
Accounts receivable--affiliate.................................      146,567      316,439
Equipment at cost, net of accumulated depreciation of
  $39,961,731 and $41,568,185 at December 31, 1996 and 1995,
  respectively.................................................   10,669,483   16,070,428
                                                                 -----------  -----------
  Total assets.................................................  $13,163,812  $21,432,133
                                                                 -----------  -----------
                                                                 -----------  -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable..................................................  $ 3,419,785  $ 1,432,396
Accrued interest...............................................       35,929       19,197
Accrued liabilities............................................      541,534       93,140
Accrued liabilities--affiliate.................................      489,018       58,152
Deferred rental income.........................................       74,667      477,506
Cash distributions payable to partners.........................       --          714,381
                                                                 -----------  -----------
  Total liabilities............................................    4,560,933    2,794,772
                                                                 -----------  -----------
Partners' capital (deficit):
General Partner................................................   (2,565,312)  (2,106,228)
Limited Partnership Interests (2,714,647 Units; initial
  purchase price of $25 each)..................................   11,168,191   20,743,589
                                                                 -----------  -----------
  Total partners' capital......................................    8,602,879   18,637,361
                                                                 -----------  -----------
  Total liabilities and partners' capital......................  $13,163,812  $21,432,133
                                                                 -----------  -----------
                                                                 -----------  -----------
</TABLE>

                The accompanying notes are an integral part of
                         these financial statements.


                                       9

<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

                          STATEMENT OF OPERATIONS
             for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                           1996        1995         1994
                                                                       -----------  -----------  -----------
<S>                                                                    <C>          <C>          <C>
Income:
  Lease revenue...................................................     $ 4,706,774  $ 6,585,836  $ 9,001,993
  Interest income.................................................         265,820      172,530      140,762
  Gain on sale of equipment.......................................         460,969        --           --
  Loss on exchange of equipment...................................           --        (497,014)       --
                                                                       -----------  -----------  -----------
    Total income..................................................       5,433,563    6,261,352    9,142,755
                                                                       -----------  -----------  -----------
Expenses:
  Depreciation and amortization...................................       3,650,745    4,902,840    6,317,773
  Write-down of equipment.........................................       2,832,800    6,139,040    3,721,000
  Interest expense................................................         264,200       19,198        --
  Equipment management fees--affiliate............................         235,339      329,292      450,100
  Operating expenses--affiliate...................................       2,100,419      157,035      128,701
                                                                       -----------  -----------  -----------

    Total expenses................................................       9,083,503   11,547,405   10,617,574
                                                                       -----------  -----------  -----------

Net loss..........................................................     $(3,649,940) $(5,286,053) $(1,474,819)
                                                                       -----------  -----------  -----------
                                                                       -----------  -----------  -----------

Net loss per limited partnership unit.............................     $     (1.28) $     (1.85) $     (0.52)
                                                                       -----------  -----------  -----------
                                                                       -----------  -----------  -----------

Cash distributions declared per limited partnership unit..........     $      2.25  $      1.75  $      2.50
                                                                       -----------  -----------  -----------
                                                                       -----------  -----------  -----------

</TABLE>

                The accompanying notes are an integral part of
                         these financial statements.

                                      -10-


<PAGE>


                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
             for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                          GENERAL        RECOGNIZED OWNERS
                                                          PARTNER     -----------------------
                                                          AMOUNT        UNITS        AMOUNT        TOTAL
                                                       -------------  ----------  -----------  -----------
<S>                                                      <C>           <C>        <C>          <C>
Balance at December 31, 1993...........................  $(1,160,961)  2,714,647  $38,703,666  $37,542,705
Net loss--1994.........................................      (73,741)     --       (1,401,078)  (1,474,819)
Cash distributions declared............................     (357,190)     --       (6,786,617)  (7,143,807)
                                                         -----------  ----------  -----------  -----------
Balance at December 31, 1994...........................   (1,591,892)  2,714,647   30,515,971   28,924,079
Net loss--1995.........................................     (264,303)     --       (5,021,750)  (5,286,053)
Cash distributions declared............................     (250,033)     --       (4,750,632)  (5,000,665)
                                                         -----------  ----------  -----------  -----------
Balance at December 31, 1995...........................   (2,106,228)  2,714,647   20,743,589   18,637,361
Net loss--1996.........................................     (182,497)     --       (3,467,443)  (3,649,940)
Cash distributions declared............................     (276,587)     --       (6,107,955)  (6,384,542)
                                                         -----------  ----------  -----------  -----------
Balance at December 31, 1996...........................  $(2,565,312)  2,714,647  $11,168,191  $ 8,602,879
                                                         -----------  ----------  -----------  -----------
                                                         -----------  ----------  -----------  -----------
</TABLE>

                The accompanying notes are an integral part of
                         these financial statements.

                                       11


<PAGE>
                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

                           STATEMENT OF CASH FLOWS
             for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                           1996           1995         1994
                                                                       -------------  -------------  ---------
<S>                                                                    <C>            <C>            <C>
Cash flows from (used in) operating activities:
Net loss.............................................................  $(3,649,940)   $(5,286,053)   $(1,474,819)
Adjustments to reconcile net loss to net cash from operating
  activities:
 Depreciation and amortization.......................................    3,650,745      4,902,840      6,317,773
 Write-down of equipment.............................................    2,832,800      6,139,040      3,721,000
 Gain on sale of equipment...........................................     (460,969)      --               --
 Loss on exchange of equipment......................................     --              497,014         --
Changes in assets and liabilities:
 Decrease (increase) in:
  Rents receivable...................................................      169,906        (65,982)      --
  Accounts receivable--affiliate.....................................      169,872         19,004        108,468
 Increase (decrease) in:
  Accrued interest...................................................       16,732         19,197       --
  Accrued liabilities................................................      448,394       (178,101)       (38,881)
  Accrued liabilities--affiliate.....................................      430,866         33,241         16,843
  Deferred rental income.............................................     (402,839)       (70,144)          (708)
                                                                       -----------    -----------  -------------
   Net cash from operating activities................................    3,205,567      6,010,056      8,649,676
                                                                       -----------    -----------  -------------
Cash flow from (used in) investing activities:
 Purchase of equipment...............................................      (72,550)      --             --
 Proceeds from equipment sales.......................................    3,535,649       --             --
                                                                       -----------    -----------  -------------
   Net cash from investing activities................................    3,463,099       --             --
                                                                       -----------    -----------  -------------
                                                                       -----------    -----------  -------------
Cash flow used in financing activities:
 Principal payments--notes payable...................................     (779,949)      --             --
 Distributions paid..................................................   (7,098,923)    (6,072,236)    (7,143,807)
                                                                       -----------    -----------  -------------
Net cash used in financing activities................................   (7,878,872)    (6,072,236)    (7,143,807)
                                                                       -----------    -----------  -------------
Net increase (decrease) in cash and cash equivalents.................   (1,210,206)       (62,180)     1,505,869
Cash and cash equivalents at beginning of year.......................    3,557,968      3,620,148      2,114,279
                                                                       -----------    -----------  -------------
Cash and cash equivalents at end of year.............................  $ 2,347,762    $ 3,557,968  $   3,620,148
                                                                       -----------    -----------  -------------
                                                                       -----------    -----------  -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest...............................  $   247,468       --             --
                                                                       -----------    -----------  -------------
                                                                       -----------    -----------  -------------
</TABLE>

     Supplemental disclosure of non-cash investing and financing activities:
       See Note 3 to the Financial Statements

                The accompanying notes are an integral part of
                         these financial statements.

                                      -12-


<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                     NOTES TO THE FINANCIAL STATEMENTS

                               DECEMBER 31, 1996

NOTE 1--ORGANIZATION AND PARTNERSHIP MATTERS

    The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on July 20,
1989 for the purpose of acquiring and leasing to third parties a specified
portfolio of used commercial aircraft. Partners' capital initially consisted
of contributions of $1,000 from the General Partner (AFG Aircraft Management
Corporation, a Massachusetts corporation) and $100 from the Initial Limited
Partner (AFG Assignor Corporation, a Massachusetts corporation). The
Partnership issued 2,714,647 units, representing assignments of limited
partnership interests (the "Units"), to 4,192 investors. Unitholders and
Limited Partners (other than the Initial Limited Partner) are collectively
referred to as Recognized Owners. The General Partner is an affiliate of
Equis Financial Group Limited Partnership (formerly American Finance Group),
a Massachusetts limited partnership ("EFG"). The common stock of the General
Partner is owned by AF/AIP Programs Limited Partnership. EFG and a
wholly-owned affiliate are the 99% limited partners and AFG Programs, Inc., a
Massachusetts corporation which is wholly-owned by Geoffrey A. MacDonald, is
the 1% general partner. The General Partner is not required to make any other
capital contributions to the Partnership except as may be required under the
Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and
Certificate of Limited Partnership (the "Restated Agreement, as amended").

    EFG is a Massachusetts partnership formerly known as American Finance Group
("AFG"). AFG was established in 1988 as a Massachusetts general partnership and
succeeded American Finance Group, Inc., a Massachusetts corporation organized in
1980. EFG and its subsidiaries (collectively, the "Company") are engaged in
various aspects of the equipment leasing business, including EFG's role as
Equipment Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.

    The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.

    In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (the "Buyer"). AFG changed its name to
Equis Financial Group Limited Partnership after the sale was concluded. Pursuant
to terms of the sale agreements, EFG agreed not to compete with the Buyer's
lease origination business for a period of five years; however, EFG is permitted
to originate certain equipment leases, principally those involving
non-investment grade lessees and ocean-going vessels, which are not in
competition with the Buyer. In addition, the sale agreements specifically
reserved to EFG the rights to continue using the name American Finance Group and
its acronym in connection with the Partnership and the Other Investment Programs
and to continue managing all assets owned by the Partnership and the Other
Investment Programs, including the right to satisfy all required equipment
acquisitions utilizing either brokers or the Buyer. Geoffrey A. MacDonald,
Chairman of Equis Corporation and Gary D. Engle agreed not to compete with the
sold business on terms and conditions similar to those for the Company.

    In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority owned subsidiary, AIRFUND Corporation, for
the provision of aircraft remarketing services.

                                      -13-


<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                      NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

NOTE 1--ORGANIZATION AND PARTNERSHIP MATTERS (CONTINUED)

    On June 28, 1991, the Offering of Units of the Partnership was concluded.
The Partnership issued an aggregate of 2,714,647 Units in six Interim Closings
during the period May 17, 1990 through June 28, 1991. The initial purchase of
the aircraft and the associated lease commitments occurred on May 18, 1990.
Additional purchases of aircraft (or proportionate interests in aircraft)
occurred subsequent to each Closing. The six Interim Closings which occurred in
1990 and 1991 and the associated Units issued, purchase price and number of
investors who became Recognized Owners of the Partnership are summarized below.

                                                                  RECOGNIZED
CLOSING DATE                      UNITS ISSUED   PURCHASE PRICE     OWNERS
--------------------------------  ------------   --------------   ---------

May 17, 1990....................    1,725,100     $43,127,500      2,600
August 2, 1990..................      317,986       7,949,650        494
October 1, 1990.................      159,510       3,987,750        251
December 27, 1990...............      246,845       6,171,125        398
February 15, 1991...............      112,796       2,819,900        173
June 28, 1991...................      152,410       3,810,250        276
                                  -----------   -------------      -----
Totals..........................    2,714,647     $67,866,175      4,192
                                  -----------   -------------      -----
                                  -----------   -------------      -----

    Pursuant to the Restated Agreement, as amended, distributions of
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Partnership shall be made as follows: Prior to Payout, (i)
Distributable Cash From Operations will be distributed 95% to the Recognized
Owners and 5% to the General Partner and (ii) Distributable Cash From Sales or
Refinancings shall be distributed 99% to the Recognized Owners and 1% to the
General Partner. After Payout, (i) all Distributions will be distributed 99% to
the General Partner and 1% to the Recognized Owners until the General Partner
has received an amount equal to 5% of all Distributions made by the Partnership
and (ii) thereafter, all Distributions will be made 90% to the Recognized Owners
and 10% to the General Partner. Payout will occur when the Recognized Owners
have received distributions equal to their original investment plus a cumulative
annual return of 10% (compounded quarterly) on undistributed invested capital.

    Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services. (Also see Note
4.)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STATEMENT OF CASH FLOWS

    The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities. At December 31,
1996 the Partnership had $2,245,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.

                                       -14-


<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                       NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

STATEMENT OF CASH FLOWS (CONTINUED)

REVENUE RECOGNITION

    Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are noncancellable. Rents received prior
to their due dates are deferred. Future minimum rents are $5,838,915 are due as
follow:


For the year ending December 31, 1997.................  $2,739,492
                                 1998.................   2,466,911
                                 1999.................     601,048
                                 2000.................      31,464
                                                         ---------
                                 Total................  $5,838,915
                                                        ----------
                                                        ----------

    Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 is as
follows:

<TABLE>
<CAPTION>
                                                                                1996            1995            1994
                                                                            ----------      ----------      ----------
<S>                                                                         <C>             <C>             <C>
Northwest Airlines, Inc. (One Boeing 727-251 ADV and one Boeing 727-200
  ADV)                                                                      $1,421,629      $2,493,823      $3,223,153
Alaska Airlines, Inc./American Trans Air, Inc. (One Boeing 727-208 ADV)     $  762,000      $  762,000      $2,126,511
Cathay Pacific Airways Limited (Two Lockheed L-1011)                        $1,419,024      $2,775,726      $2,373,018
</TABLE>

    In September 1995, the Partnership transferred its ownership interest in a
Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft") to the existing
lessee, United Air Lines, Inc., pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes. In November 1995, the Partnership
partially replaced the United Aircraft with a 13.11% interest in three Boeing
737-2H4 aircraft leased to Southwest Airlines, Inc. (the "Southwest Aircraft").
The Partnership will receive approximately $378,000 of rental revenue in each of
the years in the period ending December 31, 1999, and approximately $31,000 in
the year ending December 31, 2000, pursuant to the Southwest Aircraft lease
agreement.

    Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% interest in two McDonnell-Douglas MD-82
Aircraft leased by Finnair OY (the "Finnair Aircraft"). The Partnership will
receive approximately $640,000 of rental revenue in each of the years in the
period ending December 31, 1998, and approximately $160,000 in the year ending
December 31, 1999, pursuant to the Finnair Aircraft lease agreement.

    Effective September 1996, the Partnership re-leased a Boeing 727-251 ADV
aircraft, formerly on a renewal rental agreement with Northwest Airlines,
Inc.("Northwest"), to Transmeridian Airlines. The Partnership will receive
approximately $960,000 of rental revenue in the year ended December 31, 1997 and
$687,000 in the year ended December 31, 1998.

    Effective January 1997, the Partnership renewed its lease agreement with
American Trans Air, Inc. for an additional twenty-four months. The Partnership
will receive approximately $698,500 of rental revenue in the year

                                      -15-


<PAGE>

                  AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                        NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

STATEMENT OF CASH FLOWS (CONTINUED)

ending December 31, 1997, $762,000 in the year ending December 31, 1998 and
$63,500 in the year ending December 31, 1999.


USE OF ESTIMATES

    The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

EQUIPMENT ON LEASE

    All aircraft were acquired from EFG or one of its Affiliates. Equipment cost
represents asset base price plus acquisition fees and was determined in
accordance with the Restated Agreement, as amended, and certain regulatory
guidelines. Asset base price was the lower of (i) the actual price paid for the
aircraft by EFG or the Affiliate plus all actual costs accrued by EFG or the
Affiliate while carrying the aircraft less, (a) for all aircraft other than the
Alaska Aircraft, the amount of all rents received by EFG or the Affiliate prior
to selling the aircraft or, (b) with respect to the Alaska Aircraft, rents
received from the date of the commencement of the lease of the aircraft until
the date of the sale to the Partnership or ii) fair market value as determined
by the General Partner in its best judgment, including all liens and
encumbrances on the aircraft, carrying costs and acquisition costs.

DEPRECIATION AND AMORTIZATION

    The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. Adjustments to reduce the net carrying value of equipment
are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.

    The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.

    Organization costs were amortized using the straight-line method over a
period of five years.

ACCRUED LIABILITIES--AFFILIATE

    Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges are reported as Accrued
Liabilities--Affiliate. (See Note 4.) At December 31, 1996, Accrued
Liabilities--Affiliate includes $468,133, representing aircraft reserves
funded by the lessee and used to pay maintenance costs which were advanced by
EFG (see Note 3).


                                      -16-


<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                       NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

STATEMENT OF CASH FLOWS (CONTINUED)

ALLOCATION OF PROFITS AND LOSSES

    For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.

NET LOSS AND CASH DISTRIBUTIONS PER UNIT

    Net loss and cash distributions per Unit are based on 2,714,647 Units
outstanding during each of the three years in the period ended December 31, 1996
and computed after allocation of the General Partner's 5% share of net loss and
share of cash distributions (see Note 1).

PROVISION FOR INCOME TAXES

    No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

    In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership adopted Statement 121 in the first quarter of 1996. The adoption of
Statement 121 did not have a material effect on the financial statements of the
Partnership.

NOTE 3--EQUIPMENT

    The following is a summary of equipment owned by the Partnership at December
31, 1996. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.

<TABLE>
<CAPTION>
                                                                            LEASE TERM      EQUIPMENT
EQUIPMENT TYPE                                                               (MONTHS)        AT COST      LOCATION
-------------------------------------------------------------------------  -------------  -------------   ---------
<S>                                                                        <C>            <C>             <C>
One Lockheed L-1011-100..................................................        --        $15,879,518    Foreign
One Boeing 727-208 ADV (ATA).............................................            36     12,928,710    IN
One Boeing 727-251 ADV (Transmeridian)...................................            28      9,732,714    MN
One Lockheed L-1011-50...................................................        --          6,013,492    Foreign
Two McDonnell-Douglas MD-82 (Finnair)....................................            36      4,157,280    Foreign
Three Boeing 737-2H4 (Southwest).........................................            49      1,919,500    TX
                                                                                           -----------
     Total equipment cost................................................                   50,631,214
     Accumulated depreciation............................................                  (39,961,731)
                                                                                           -----------
     Equipment, net of accumulated depreciation..........................                 $ 10,669,483
                                                                                           -----------
                                                                                           -----------
</TABLE>

                                      -17-


<PAGE>
                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                       NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

NOTE 3--EQUIPMENT (CONTINUED)

    The costs of the Lockheed L-1011-50 aircraft, the two McDonnell-Douglas
MD-82 aircraft, and the three Boeing 737-2H4 aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.

    The Partnership's portfolio includes a Boeing 727-251 ADV aircraft formerly
on a renewal rental agreement with Northwest. This aircraft was returned upon
expiration of its lease term on November 30, 1995 and has undergone heavy
maintenance, approximately $984,000 of which was incurred or accrued during the
year ended December 31, 1996. During the quarter ended September 30, 1996, the
Partnership received $468,133 from the former lessee of this aircraft,
representing a reimbursement of additional maintenance costs. The Partnership
entered into a new 28-month lease agreement with Transmeridian Airlines, to
re-lease the aircraft effective September 1996.

    In September 1995, the Partnership transferred its 23.19% ownership interest
in the United Aircraft, pursuant to the rules for a like-kind exchange for
income tax reporting purposes. In November 1995, the Partnership partially
replaced the United Aircraft with a 13.11% ownership interest in the Southwest
Aircraft, at an aggregate cost to the Partnership of $1,919,500. To acquire the
interest in the Southwest Aircraft, the Partnership obtained financing of
$1,432,396 from a third-party lender and utilized $487,104 of the cash
consideration received from the transfer of the United Aircraft. The remaining
ownership interest of 86.89% in the Southwest Aircraft is held by affiliated
equipment leasing programs sponsored by EFG.

    Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in the Finnair Aircraft at
a total cost to the Partnership of $4,157,280. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $1,389,942, including the balance
of the cash consideration, and obtained financing of $2,767,338 from a
third-party lender. The remaining ownership interest of 85.15% in the Finnair
Aircraft is held by affiliated equipment leasing programs sponsored by EFG.

    On June 30 and September 30, 1996, the Lockheed L-1011-50 and L-1011-100
aircraft were returned by the lessee. Currently, both aircraft are undergoing
heavy maintenance. The heavy maintenance on the Lockheed L-1011-50 is expected
to cost the Partnership approximately $362,000, all of which was accrued or
incurred during the year ended December 31, 1996. The Partnership entered into a
new 12-month lease agreement with Aer Lease Limited at a base rent to the
Partnership of $39,550 per month, effective upon completion of the heavy
maintenance. The heavy maintenance on the Lockheed L-1011-100 is expected to
cost the Partnership approximately $400,000 all of which was accrued or incurred
during the year ended December 31, 1996. The General Partner is actively seeking
the re-lease of this aircraft.

    Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $6,077,000
and a net book value of approximately $5,543,000 at December 31, 1996. (See Note
5.)

    Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to
reduce the economic risk arising from certain losses. Specifically, the
Partnership is insured under supplemental policies for "Aircraft Hull Total
Loss Only" and "Aircraft Hull Total Loss Only War and Other Perils."

    As aircraft are sold to third parties, or otherwise disposed of, the
Partnership will recognize a gain or loss equal to the difference between the
net book value of the aircraft at the time of sale or disposition and the

                                      -18-


<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                    NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

NOTE 3--EQUIPMENT (CONTINUED)

proceeds realized upon sale or disposition. The ultimate realization of
estimated residual value in the aircraft is dependent upon, among other
things, EFG's ability to maximize proceeds from selling or re-leasing the
aircraft upon the expiration of the primary lease terms.

    The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1996, 1995
and 1994. The resulting charges, $2,832,800 ($0.99 per limited partnership unit)
in 1996, $6,139,040 ($2.15 per limited partnership unit) in 1995 and $3,721,000
($1.30 per limited partnership unit) in 1994 were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.

NOTE 4--RELATED PARTY TRANSACTIONS

    All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1996, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:

<TABLE>
<CAPTION>
                                                                                 1996         1995      1994
                                                                             ----------    ----------  --------
<S>                                                                          <C>           <C>         <C>
Equipment management fees..................................................  $  235,339    $329,292    $450,100
Administrative charges.....................................................      28,694      21,000      12,000
Reimbursable operating expenses due to third parties.......................   2,071,725     136,035     116,701
                                                                             ----------    --------    --------
Total......................................................................  $2,335,758    $486,327    $578,801
                                                                             ----------    --------    --------
                                                                             ----------    --------    --------
</TABLE>

    As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG was
compensated by an amount equal to 3.07% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross
full payout lease rental revenue received by the Partnership or (ii) fees which
the General Partner reasonably believes to be competitive for similar services
for similar equipment. Both of these fees are subject to certain limitations
defined in the Management Agreement. Compensation to EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.

    Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG.

    All equipment was purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2.

    All rents and proceeds from the sale of equipment are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At

                                      -19-



<PAGE>
                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                      NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)


December 31, 1996, the Partnership was owed $146,567 by EFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
January 1997.

NOTE 5--NOTES PAYABLE

    Notes payable at December 31, 1996 consisted of installment notes payable to
banks of $3,419,785. The installment notes are non-recourse, with interest rates
ranging between 8.65% and 8.76% and are collateralized by the equipment and
assignment of the related lease payments. All of the notes were originated in
connection with the Southwest Aircraft and the Finnair Aircraft. The installment
notes related to the Southwest Aircraft will be fully amortized by
noncancellable rents. The Partnership has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$1,411,035. The carrying amount of notes payable approximates fair value at
December 31, 1996.

     THE ANNUAL MATURITIES OF THE INSTALLMENT NOTES PAYABLE ARE AS FOLLOWS:

     For the year ending December 31, 1997.................  $  715,783
                                      1998.................     807,335
                                      1999.................   1,865,428
                                      2000.................      31,239
                                                             ----------
                                      Total................  $3,419,785
                                                             ----------
                                                             ----------

NOTE 6--INCOME TAXES

    The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.

    For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner will be
required to contribute to the Partnership an amount equal to any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 1996, the General Partner had a negative tax capital account
balance of approximately $763,000.

                                      -20-


<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                     NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

NOTE 6--INCOME TAXES (CONTINUED)

    The following is a reconciliation between net loss reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
                                                                           1996           1995           1994
                                                                       -----------    -----------    -----------
<S>                                                                    <C>            <C>            <C>
Net loss.............................................................  $(3,649,940)   $(5,286,053)   $(1,474,819)
  Tax depreciation in excess of financial statement depreciation.....   (3,015,164)    (1,959,389)      (704,217)
  Write-down of equipment............................................    2,832,800      6,139,040      3,721,000
  Prepaid rental income..............................................     (402,839)       (70,144)          (708)
  Other..............................................................    1,501,218        521,195        (73,144)
                                                                       -----------    ------------   -----------
Net income (loss) for federal income tax reporting purposes..........  $(2,733,925)   $  (655,351)   $1,468,112
                                                                       -----------    -----------    -----------
                                                                       -----------    -----------    -----------
</TABLE>

    The principal component of "Other" consists of the difference between the
tax gain on equipment disposals and the financial statement gain on equipment
disposals. It also includes reversal of the maintenance reserves.

    The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                     1996             1995
                                                                 -----------      -----------
<S>                                                              <C>              <C>
Partners' capital..............................................  $ 8,602,879      $18,637,361
  Add back selling commissions and organization and offering
    costs........................................................  7,085,240        7,085,240
  Financial statement distributions in excess of tax
    distributions................................................        --            35,719
  Cumulative difference between federal income tax and financial
    statement income (loss)......................................  1,833,651          917,636
                                                                 -----------      -----------
Partners' capital for federal income tax reporting purposes....  $17,521,770      $26,675,956
                                                                 -----------      -----------
                                                                 -----------      -----------
</TABLE>

    Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.

NOTE 7--LEGAL PROCEEDINGS

    On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and various other affiliated investment
programs, filed an action in the United States District Court for the District
of Massachusetts against Northwest, a former lessee of the Partnership. The
trustees are seeking damages from Northwest and a declaratory judgment
concerning Northwest's maintenance and return obligations for certain aircraft
owned by the Partnership. In addition to filing its Answer to the Plaintiffs'
Complaint, Northwest

                                      -21-


<PAGE>


                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
                      NOTES TO THE FINANCIAL STATEMENTS
                                  (CONTINUED)

NOTE 7--LEGAL PROCEEDINGS (CONTINUED)

also filed a motion to transfer the venue of this proceeding to Minnesota.
The Court denied such motion. The parties have completed the initial phase of
discovery, and motions for partial summary judgment are due on March 28,
1997. At present, it is not possible to determine the ultimate outcome of
this matter.

    On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines
("Transmeridian") filed an action in the 61st Judicial District Court of Harris
County, Texas entitled Prime Air, Inc. d/b/a Transmeridian Airlines v. Investors
Asset Holding Corp., as Trustee for Airfund II International Limited
Partnership, PLM International, and NavCom Aviation, Inc. In that action,
Transmeridian claims damages of more that $3,000,000 for alleged breach of
contract, fraud, civil conspiracy, tortious interference of business relations,
negligent misrepresentation, negligence and gross negligence, and punitive
damages against Investors Asset Holding Corp., as Trustee for Airfund II
International Limited Partnership ("Investors Asset") and its co-defendants. On
November 7, 1996, PLM removed the action to the United Sates District Court for
the Southern District of Texas; Investors Asset intends to seek a transfer of
venue to United States District Court for the District of Massachusetts. On
February 14, 1997, Investors Asset answered the Complaint generally denying the
allegations made therein and asserting various defenses. At a March 21, 1997
Scheduling Conference, the Court established a discovery deadline of December 1,
1997 and placed this action on the trial calendar for March/April 1998. At
present, it is not possible to determine the ultimate outcome of this matter.


                                      -22-


<PAGE>

                        ADDITIONAL FINANCIAL INFORMATION



<PAGE>

                 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

        SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
                             OF EQUIPMENT DISPOSED

                     for the year ended December 31, 1996

    The Partnership classifies all rents from leasing aircraft as lease revenue.
Upon expiration of the primary lease terms, aircraft may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the aircraft,
in addition to any month-to-month revenue, represent the total residual value
realized for each aircraft. Therefore, the financial statement gain or loss,
which reflects the difference between the net book value of the aircraft at the
time of sale or disposition and the proceeds realized upon sale or disposition
may not reflect the aggregate residual proceeds realized by the Partnership for
such aircraft.

    The following is a summary of cash excess associated with the aircraft
disposition which occurred in the year ended December 31, 1996. No aircraft were
disposed of during the years ended December 31, 1995 or 1994.

                                                1996
                                             -----------
Rents earned prior to disposal of
  aircraft, net of interest charges........  $11,072,532

Sale proceeds realized upon disposition
  of aircraft..............................    3,535,649
                                             -----------
Total cash generated from rents
  and aircraft sale proceeds...............   14,608,181

Original acquisition cost of aircraft
  disposed.................................   11,164,679
                                             -----------
Excess of total cash generated to cost
  of aircraft disposed.....................  $ 3,443,502
                                             -----------
                                             -----------

                                       23


<PAGE>
 AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS

           STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
                             SALES AND REFINANCINGS

                     for the year ended December 31, 1996

<TABLE>
<CAPTION>
                                                                                        SALES AND
                                                                         OPERATIONS    REFINANCINGS      TOTAL
                                                                        -----------    ------------  -------------
<S>                                                                     <C>             <C>           <C>
Net income (loss).....................................................  $(4,110,909)    $  460,969   $(3,649,940)

Add:
  Depreciation........................................................    3,650,745        --          3,650,745
  Write-down of equipment.............................................    2,832,800        --          2,832,800
  Management fees.....................................................      235,339        --            235,339
  Book value of disposed equipment....................................     --            3,074,680     3,074,680

Less:
  Principal repayment of notes payable................................     (779,949)       --           (779,949)
                                                                        -----------     ----------   -----------
  Cash from operations, sales and refinancings........................    1,828,026      3,535,649     5,363,675

Less:
  Management fees.....................................................     (235,339)       --           (235,339)
                                                                        -----------     ----------    -----------
  Distributable cash from operations, sales and refinancings..........    1,592,687      3,535,649     5,128,336

Other sources and uses of cash:
  Cash at beginning of year...........................................    3,557,968          --        3,557,968
  Purchase of equipment...............................................      (72,550)         --          (72,550)
  Net change in receivables and accruals..............................      832,931          --          832,931

Less:
  Cash distributions paid.............................................   (5,911,036)    (1,187,887)   (7,098,923)
                                                                        -----------    ----------    -----------
Cash at end of year...................................................       --         $2,347,762   $ 2,347,762
                                                                        -----------     ----------   -----------
                                                                        -----------     ----------   -----------
</TABLE>
                                      -24-

<PAGE>

                AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP

                      SCHEDULE OF COSTS REIMBURSED TO THE
                 GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
                  BY SECTION 10.4 OF THE AMENDED AND RESTATED
                AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP

                               December 31, 1996

    For the year ended December 31, 1996, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:

Operating expenses..............................................  $1,126,982


                                       -25-