<PAGE>

================================================================================


           UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                        Washington, D.C. 20549

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

                              FORM 10-Q/A

X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--
                    SECURITIES EXCHANGE ACT OF 1934

             FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
                                        -----------------
                                  OR

__       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

              For the transition period from ____to____.

                  Commission File Number: 0-25880
                                          -------

                       ILM II LEASE CORPORATION
                       ------------------------
        (Exact name of registrant as specified in its charter)

          VIRGINIA                                               04-3248639
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

8180 GREENSBORO DRIVE, SUITE 850, MCLEAN, VA                        22102
--------------------------------------------------------------------------------
   (Address of principal executive office)                        (Zip Code)

Registrant's telephone number, including area code:            (888) 257-3550
                                                      --------------------------

         Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each exchange on
Title Of Each Class                                         Which Registered
-------------------                                    -------------------------
       None                                                      None

          Securities registered pursuant to Section 12(g) of the Act:

                      Shares Of Common Stock $.01 Par Value
                      -------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes    No X
   ---   ---
Shares of common stock outstanding as of November 30, 1998:  5,180,952.

================================================================================

                               Page 1 of 19


<PAGE>



                          ILM II LEASE CORPORATION

                                   INDEX

Part I.  Financial Information                                              PAGE
                                                                            ----
         Item 1.  Financial Statements

            Balance Sheets
            November 30, 1998 (Unaudited) and August 31, 1998................3

            Statements of Income
            For the three-month periods ended November 30, 1998
            and 1997 (Unaudited).............................................4

            Statements of Changes in Shareholders' Equity
            For the three months ended November 30, 1998
            and 1997 (Unaudited).............................................5

            Statements of Cash Flows
            For the three months ended November 30, 1998
            and 1997 (Unaudited).............................................6

            Notes to Financial Statements (Unaudited).......................7-12

         Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations.............................13-16

Part II.  Other Information..................................................17

         Item 6.  Exhibits and Reports on Form 8-K...........................17

Signatures...................................................................18

                                     -2-
<PAGE>



                             ILM II LEASE CORPORATION

                                  BALANCE SHEETS
                  November 30, 1998 (Unaudited) and August 31, 1998
                   (Dollars In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    ASSETS
                                                    ------
                                                                  NOVEMBER 30, 1998           AUGUST 31, 1998
                                                                  -----------------           ---------------
<S>                                                                         <C>                       <C>
Cash and cash equivalents                                                 $  881                    $1,497
Accounts receivable, net                                                     173                        89
Accounts receivable - related party                                          102                       102
Prepaid expenses and other assets                                             73                        50
Tax refund receivable                                                          3                       158
                                                                         -------                  --------
      Total current assets                                                 1,262                     1,896

Furniture, fixtures and equipment                                            854                       783
      Less:  accumulated depreciation                                       (271)                     (225)
                                                                         -------                  --------
                                                                             583                       558

Deposits                                                                       9                         9
Deferred tax asset                                                           198                       270
                                                                        --------                  --------
                                                                          $2,052                    $2,733
                                                                          ======                    ======


                                     LIABILITIES AND SHAREHOLDERS' EQUITY
                                     ------------------------------------

Accounts payable and accrued expenses                                    $   701                   $   789
Termination fee payable                                                        -                       650
Real estate taxes payable                                                      3                       209
Accounts payable - related party                                             447                       287
Security deposits                                                             29                        25
                                                                       ---------                 ---------
      Total current liabilities                                            1,180                     1,960

Deferred rent payable                                                         69                        76
                                                                       ---------                 ---------
      Total liabilities                                                    1,249                     2,036

Shareholders' equity:
       Common stock, $0.01 par value, 20,000,000 shares
         authorized 5,180,952 issued and outstanding                          52                        52
       Additional paid-in capital                                            448                       448
       Retained earnings                                                     303                       197
                                                                        --------                  --------
              Total shareholders' equity                                     803                       697
                                                                        --------                  --------
                                                                          $2,052                    $2,733
                                                                          ======                    ======



</TABLE>



                             See accompanying notes.

                                      -3-
<PAGE>

                                          ILM II LEASE CORPORATION

                                            STATEMENTS OF INCOME

        For the three-month periods ended November 30, 1998 and 1997 (Unaudited)
                     (Dollars In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                     Three Months Ended

                                                                                        NOVEMBER 30
                                                                                        -----------
                                                                                     1998         1997
<S>                                                                                     ----         ----
REVENUES:                                                                                 <C>          <C>
   Rental and other income                                                            $4,037       $3,732
   Interest income                                                                         3            5
                                                                                      ------       ------
                                                                                       4,040        3,737
                                                                                       -----        -----
EXPENSES:

   Facilities lease  rent expense                                                      1,311        1,192
   Dietary salaries, wages and food service expenses                                     691          662
   Administrative salaries, wages and expenses                                           282          283
   Marketing salaries, wages and expenses                                                170          167
   Utilities                                                                             274          269
   Repairs and maintenance                                                               129          120
   Real estate taxes                                                                     134          115
   Property management fees                                                              224          205
   Other property operating expenses                                                     359          352
   General and administrative expenses                                                    64           43
   Directors compensation                                                                 13           16
   Professional fees                                                                     165          122
   Depreciation expense                                                                   46           23
                                                                                       -----        -----
                                                                                       3,862        3,569
                                                                                       -----        -----

Income before taxes                                                                      178          168

Income tax expense:
   Current                                                                                 -           59
   Deferred                                                                               72            8
                                                                                       -----        -----
                                                                                          72           67
                                                                                       -----        -----

NET INCOME                                                                             $ 106        $ 101
                                                                                       =====        =====

Basic earnings per share of common stock                                               $0.02        $0.02
                                                                                       =====        =====

</TABLE>

The above earnings per share of common stock is based upon the 5,180,952 shares
outstanding for each period.

                             See accompanying notes.


                                      -4-

<PAGE>





                                   ILM II LEASE CORPORATION

                         STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
              For the three months ended November 30, 1998 and 1997 (Unaudited)
                        (Dollars In thousands, except per share data)

<TABLE>
<CAPTION>

                                                  Common Stock             Additional
                                                 $.01 PAR VALUE              Paid-in        Retained
                                                 --------------
                                               SHARES        AMOUNT          CAPITAL        EARNINGS      TOTAL
                                               ------        ------          -------        --------      -----
<S>                                              <C>           <C>             <C>             <C>          <C>
Balance at August 31, 1997                    5,180,952        $52             $448            $219        $719

Net income                                            -          -                -             101         101
                                              ---------        ---             ----            ----        ----
Balance at November 30, 1997                  5,180,952        $52             $448            $320        $820
                                              =========        ===             ====            ====        ====


Balance at August 31, 1998                    5,180,952        $52             $448            $197        $697

Net income                                            -          -                -             106         106
                                              ---------        ---             ----            ----        ----
Balance at November 30, 1998                  5,180,952        $52             $448            $303        $803
                                              =========        ===             ====            ====        ====


</TABLE>

























                            See accompanying notes.

                                      -5-

<PAGE>




                                ILM II LEASE CORPORATION

                                STATEMENTS OF CASH FLOWS
             For the three months ended November 30, 1998 and 1997 (Unaudited)
                                  (Dollars In thousands)

<TABLE>
<CAPTION>
                                                                            Three Months Ended
                                                                                NOVEMBER 30
                                                                                -----------

                                                                          1998              1997
                                                                          ----              ----
<S>                                                                        <C>                <C>
Cash flows from operating activities:
    Net income                                                          $   106           $   101
    Adjustments to reconcile net income to
      net cash provided by (used in) operating activities:
        Depreciation expense                                                 46                23
        Deferred tax expense (benefit)                                       72                (7)
        Changes in assets and liabilities:
             Accounts receivable, net                                       (84)               52
             Accounts receivable - related party                              -              (391)
             Prepaid expenses and other assets                              (23)               69
             Tax refund receivable                                          125                 -
             Accounts payable and accrued expenses                          (88)              122
             Accounts payable - related party                               160             1,198
             Termination fee payable                                       (650)                -
             Real estate taxes payable                                     (206)             (199)
             Security deposits                                                4                 -
             Deferred rent payable                                           (7)               (8)
                                                                        --------           -------
                 Net cash (used in) provided by operating activities       (545)              960
                                                                        --------           -------

Cash flows from investing activities:

    Additions to furniture, fixtures and equipment                          (71)              (29)
                                                                         -------           ------
                       Net cash used in investing activities                (71)              (29)
                                                                         -------           ------

Net increase (decrease) in cash and cash equivalents                       (616)              931

Cash and cash equivalents, beginning of period                            1,497             1,156
                                                                         ------            ------

Cash and cash equivalents, end of period                                 $  881            $2,087
                                                                         ======            ======


Supplemental Disclosure:
------------------------

Cash paid during the period for state income taxes                     $      -         $       -
                                                                       =========        =========

</TABLE>






                            See accompanying notes.

                                      -6-

<PAGE>
                                   ILM II LEASE CORPORATION
                          Notes to Financial Statements (Unaudited)

1.    GENERAL

         The accompanying financial statements, footnotes and discussions should
     be read in conjunction with the financial statements and footnotes
     contained in ILM II Lease Corporation's ("the Company") Annual Report on
     Form 10-K for the year ended August 31, 1998. In the opinion of management,
     the accompanying interim financial statements, which have not been audited,
     reflect all adjustments necessary to present fairly the results for the
     interim period. All of the accounting adjustments reflected in the
     accompanying interim financial statements are of a normal recurring nature.

         The accompanying financial statements have been prepared on the accrual
     basis of accounting in accordance with U.S. generally accepted accounting
     principles, which require management to make estimates and assumptions that
     affect the reported amounts of assets and liabilities and disclosures of
     contingent assets and liabilities as of November 30, 1998 and August 31,
     1998, and revenues and expenses for the three-month periods ended November
     30, 1998 and 1997. Actual results could differ from the estimates and
     assumptions used. Certain numbers in the prior period's financial
     statements have been reclassified to conform to the current period's
     presentation. The results of operations for the three-month period ended
     November 30, 1998, are not necessarily indicative of the results to be
     expected for the full year.

         The Company was incorporated on September 12, 1994 under the laws of
     the state of Virginia by ILM II Senior Living, Inc., a Virginia finite-life
     corporation ("ILM II"), formerly PaineWebber Independent Living Mortgage
     Inc. II, to operate six rental housing projects that provide
     independent-living and assisted-living services for senior citizens ("the
     Senior Housing Facilities") under a facilities lease agreement dated
     September 1, 1995 (the "Facilities Lease Agreement"), between the Company,
     as lessee, and ILM II Holding, Inc. ("ILM II Holding"), as lessor, and a
     direct subsidiary of the Company. The Company's sole business is the
     operations of the Senior Housing Facilities. ILM II made mortgage loans to
     Angeles Housing Concepts, Inc. ("AHC") secured by the Senior Housing
     Facilities between July 1990 and July 1992. In March 1993, AHC defaulted
     under the terms of such mortgage loans and in connection with the
     settlement of such default, title to the Senior Housing Facilities was
     transferred, effective April 1, 1994, to certain indirect subsidiaries of
     ILM II, subject to the mortgage loans. Subsequently, these property owning
     subsidiaries were merged into ILM II Holding. As part of the fiscal 1994
     settlement agreement with AHC, AHC was retained as the property manager for
     all of the Senior Housing Facilities pursuant to the terms of a management
     agreement, which was assigned to the Company as of September 1, 1995 and
     subsequently terminated in July 1996. The Company is a public company
     subject to the reporting obligations of the Securities and Exchange
     Commission.

         In July 1996, following termination of the property management
     agreement with AHC, the Company entered into a property management
     agreement (the "Management Agreement") with Capital Senior Management 2,
     Inc. ("Capital") to handle the day-to-day operations of the Senior Housing
     Facilities. Lawrence A. Cohen, who served through July 28, 1998 as a
     Director of the Company and President, Chief Executive Officer and Director
     of ILM II, has also served as Vice Chairman and Chief Financial officer of
     Capital Senior Living Corporation, an affiliate of Capital, since November
     1996. As a result, through July 28, 1998, the Management Agreement with
     Capital was considered a related party transaction (see Note 3).


                                      -7-
<PAGE>




                            ILM II LEASE CORPORATION
                    Notes to Financial Statements (Unaudited)
                                   (continued)

2.   THE FACILITIES LEASE AGREEMENT
     ------------------------------

         ILM II Holding (the "Lessor") leases the Senior Housing Facilities to
     the Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such
     lease is scheduled to expire on December 31, 2000 (December 31, 1999 with
     respect to the Santa Barbara Facility), unless earlier terminated at the
     election of the Lessor in connection with the sale by the Lessor of the
     Senior Housing Facilities to a non-affiliated third party, upon 30 days'
     notice to the Company. The lease is accounted for as an operating lease in
     the Company's financial statements.

         Descriptions of the properties covered by the Facilities Lease
     Agreement between the Company and ILM II Holding are summarized as follows:

<TABLE>

                                                                     Year

                                                                   Facility         Rentable           Resident

Property Name And Location               Type Of Property           Built           Units (2)       Capacities (2)
---------------------------              ----------------           -----           ---------       --------------
<S>                                            <C>                    <C>               <C>                  <C>
The Palms
Fort Myers, FL                       Senior Housing Facility         1988                 205                255

Crown Villa
Omaha, NE                            Senior Housing Facility         1992                  73                 73

Overland Park Place
Overland Park, KS                    Senior Housing Facility         1994                 141                153

Rio Las Palmas
Stockton, CA                         Senior Housing Facility         1988                 164                190

The Villa at Riverwood
St. Louis County, MO                 Senior Housing Facility         1986                 120                140

Villa Santa Barbara (1)
Santa Barbara, CA                    Senior Housing Facility         1979                 125                125

</TABLE>

   (1) The Company operates Villa Santa Barbara under a co-tenancy
       arrangement with an affiliated company, ILM I Lease Corporation ("Lease
       I"). The Company has entered into an agreement with Lease I regarding
       such joint tenancy. Lease I was formed for similar purposes as the
       Company by an affiliated company, ILM Senior Living, Inc. ("ILM I"), a
       subsidiary of which owns 25% of the Villa Santa Barbara property. The
       portion of the Senior Housing Facility leased by the Company represents
       75% of the total project. Villa Santa Barbara is 25% owned by ILM Holding
       Inc. and 75% by ILM II Holding, Inc., a direct subsidiary of ILM II, as
       tenants in common. Upon the sale of ILM I or ILM II, arrangements would
       be made to transfer the Santa Barbara facility to the non-selling joint
       tenant (or one of its subsidiaries). The property was extensively
       renovated in 1995.

       (2) Rentable units represent the number of apartment units and is a
       measure commonly used in the real estate industry. Resident capacity
       equals the number of bedrooms contained within the apartment units and
       corresponds to measures commonly used in the healthcare industry.


                                      -8-

<PAGE>
                            ILM II LEASE CORPORATION
                     Notes to Financial Statements (Unaudited)
                                  (continued)

2.  THE FACILITIES LEASE AGREEMENT (CONTINUED)
    ------------------------------------------
         Pursuant to the Facilities Lease Agreement, the Company pays annual
     base rent for the use of the Senior Housing Facilities in the aggregate
     amount of $4,035,600. The lease is a "triple-net" lease whereby the Lessee
     pays all operating expenses, governmental taxes and assessments, utility
     charges and insurance premiums, as well as the costs of all required
     maintenance, personal property and non-structural repairs in connection
     with the operation of the Senior Housing Facilities. ILM II Holding, as
     Lessor, is responsible for all major capital improvements and structural
     repairs to the Senior Housing Facilities. Also, any fixed assets of the
     Company at a Senior Housing Facility would remain with the Senior Housing
     Facility at the termination of the lease. The Company also pays variable
     rent, on a quarterly basis, for each facility in an amount equal to 40% of
     the excess of aggregate total revenues for the Senior Housing Facilities,
     on an annualized basis, over $13,021,000. Variable rent expense amounted to
     $310,000 and $191,000 for the three-month periods ended November 30, 1998
     and 1997, respectively.

         The Company's use of the properties is limited to use as Senior Housing
     Facilities. The Company has responsibility to obtain and maintain all
     licenses, certificates and consents needed to use and operate each Senior
     Housing Facility, and to use and maintain each Senior Housing Facility in
     compliance with all local board of health and other applicable governmental
     and insurance regulations. The Senior Housing Facilities located in
     California, Florida and Kansas are licensed by such states to provide
     assisted living services. Also, various health and safety regulations and
     standards, which are enforced by state and local authorities, apply to the
     operation of all the Senior Housing Facilities. Violations of such health
     and safety standards could result in fines, penalties, closure of a
     facility, or other sanctions.

     RECENT DEVELOPMENTS
     -------------------

         On February 7, 1999, ILM II entered into an agreement and plan of
     merger with Capital Senior Living Corporation, the corporate parent of
     Capital, and certain affiliates of Capital. Consummation of the merger is
     presently anticipated in October 1999. In connection with the merger, ILM
     II has agreed to cause ILM II Holding to cancel and terminate the
     Facilities Lease Agreement immediately prior to the effective time of the
     merger. Although there can be no assurance as to whether the merger will be
     consummated or, if consummated, as to the timing thereof, the Company's
     operations would not be expected to continue beyond the effective time of
     the merger.

                                      -9-
<PAGE>




                            ILM II LEASE CORPORATION
                   Notes to Financial Statements (Unaudited)
                                   (continued)

3.  RELATED PARTY TRANSACTIONS
    --------------------------
         Subject to the supervision of the Company's Board of Directors,
     assistance in managing the business of the Company was provided by
     PaineWebber. As previously discussed in the Company's Annual Report,
     PaineWebber resigned effective as of June 18, 1997.

         The Company has retained Capital to be the property manager of the
     Senior Housing Facilities pursuant to the Management Agreement, which
     commenced on July 29, 1996. Lawrence A. Cohen, who served through July 28,
     1998 as a Director of the Company as well as President, Chief Executive
     Officer and Director of ILM II, has also served as Vice Chairman and Chief
     Financial Officer of Capital Senior Living Corporation, an affiliate of
     Capital, since November 1996. The Management Agreement is co-terminous with
     the Facilities Lease Agreement. If, for any reason, the Facilities Lease
     Agreement is extended beyond December 31, 2000, the scheduled expiration
     date of the Management Agreement would be extended as well, but not beyond
     July 29, 2001. There is no present intention to extend the term of the
     Facilities Lease Agreement or the term of the Management Agreement (see
     "Recent Developments" in Note 2). Under the terms of the Management
     Agreement, Capital earns a base management fee equal to 4% of the gross
     operating revenues of the Senior Housing Facilities, as defined. Capital
     also earns an incentive management fee equal to 25% of the amount by which
     the "net cash flow" of the Senior Housing Facilities, as defined, exceeds a
     specified base amount. Each August 31, the base amount is increased based
     on the percentage increase in the Consumer Price Index as well as 15% of
     Senior Housing Facility expansion costs. ILM II has guaranteed the payment
     of all fees due to Capital under the terms of the Management Agreement. For
     the three-month periods ended November 30, 1998 and 1997, Capital earned
     property management fees from the Company of $224,000 and $205,000,
     respectively.

         On September 18, 1997, the Company entered into an agreement with
     Capital Senior Development, Inc., an affiliate of Capital, to manage the
     development process for the potential expansions of the Senior Housing
     Facilities. Capital Senior Development, Inc. would receive a fee equal to
     7% of the total development costs of these potential expansions including
     fees to Capital Senior Development, Inc. For the three-month periods ended
     November 30, 1998 and 1997, Capital Senior Development, Inc. earned fees
     from the Company of $0 and $40,000, respectively for managing
     pre-construction development activities for potential expansions of the
     Senior Housing Facilities.

         Jeffry R. Dwyer, Secretary and Director of the Company, is a
     shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
     since 1997. For the three-month periods ended November 30, 1998 and 1997,
     Greenberg Traurig earned fees from the Company of $34,000 and $36,000,
     respectively.

         Accounts receivable - related party at November 30, 1998 and August 31,
     1998 includes an insurance refund due to the Company from Lease I in the
     amount of $102,140. Accounts payable - related party at November 30, 1998
     and August 31, 1998 includes $447,000 and $152,000, respectively, for base
     rent and variable rent due to ILM II Holding.

4.  LEGAL PROCEEDINGS AND CONTINGENCIES

         A property management agreement between ILM II Holding and AHC, which
     covered the management of all six Senior Housing Facilities, was assigned
     to the Company effective September 1, 1995. On July 29, 1996, the Company
     and ILM II Holding ("the Companies") terminated the property management
     agreement with AHC. The management agreement was terminated for "cause"
     pursuant to the terms of the contract. Simultaneously with the termination
     of the management agreement, the Companies, together with certain
     affiliated entities, filed suit against AHC in the United States District
     Court for the Eastern District of Virginia for breach of contract, breach
     of fiduciary duty and fraud. The Company and ILM II Holding alleged, among
     other things, that AHC willfully performed actions specifically in
     violation of the management agreement and that such actions caused damages
     to the Companies.

                                     -10-
<PAGE>

                           ILM II LEASE CORPORATION
                   Notes to Financial Statements (Unaudited)
                                  (continued)

4.  LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)

         Due to the termination of the agreement for cause, no termination fee
     was paid to AHC. Subsequent to the termination of the management agreement,
     AHC filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
     its domestic State of California. The Companies challenged the filing, and
     the Bankruptcy Court dismissed AHC's case effective October 15, 1996. In
     November 1996, AHC filed with the Virginia District Court an answer in
     response to the litigation initiated by the Companies and a counterclaim
     against ILM II Holding. The counterclaim alleged that the agreement was
     wrongfully terminated for cause and requested damages, which included the
     payment of a termination fee in the amount of $750,000, payment of
     management fees pursuant to the contract from August 1, 1996 through
     October 15, 1996, which is the earliest date the management agreement could
     have been terminated without cause, and recovery of attorney's fees and
     expenses. The aggregate amount of damages against all parties as requested
     in AHC's counterclaim exceeded $2,000,000. ILM II had guaranteed the
     payment of the termination fee at issue in these proceedings to the extent
     that any termination fee would be deemed payable by the court and in the
     event that the Company failed to perform pursuant to its contractual
     obligations. On June 13, 1997 and July 8, 1997, the court issued orders to
     enter judgment against ILM II and ILM I in the aggregate amount of
     $1,000,000 (the "Orders"). The Orders do not contain any findings of fact
     or conclusions of law. On July 10, 1997, the Company, ILM I, ILM II, and
     Lease I filed a notice of appeal to the United States Court of Appeals for
     the Fourth Circuit from the orders.

         On February 4, 1997, AHC filed a complaint in the Superior Court of the
     State of California against Capital, Lawrence Cohen, and others alleging
     that the defendants intentionally interfered with AHC's property agreement
     with ILM II Holding by inducing ILM II Holding to terminate the agreement
     (the "California litigation"). The complaint sought damages of at least
     $2,000,000. On March 4, 1997, the defendants removed the case to Federal
     District Court in the Central District of California. At a Board meeting on
     February 26, 1997, the Company's Board of Directors concluded that since
     all of Mr. Cohen's actions relating to the California litigation were taken
     either on behalf of the Company under the direction of the Board or as a
     PaineWebber employee, the Company or its affiliates should indemnify Mr.
     Cohen with respect to any expenses arising from the California litigation,
     subject to any insurance recoveries for those expenses. Legal fees paid by
     the Company and Lease I on behalf of Mr. Cohen totaled $228,000 as of
     November 30, 1998. The Company's Board also concluded that, subject to
     certain conditions, the Company or its affiliates should advance up to
     $20,000 to pay reasonable legal fees and expenses incurred by Capital and
     its affiliates in the California litigation. Subsequently, the Boards of
     the Company and Lease I voted to increase the maximum amount of the advance
     to $100,000. By the end of November 1997, Capital had incurred $100,000 of
     legal expenses in the California litigation. On February 2, 1998, the
     amount to be advanced to Capital was increased to include 75% of the
     California litigation legal fees and costs incurred by Capital for December
     1997 and January 1998, plus 75% of such legal fees and costs incurred by
     Capital thereafter, not to exceed $500,000. At November 30, 1998, $293,553
     of legal fees have been either advanced or accrued in the Company's
     financial statements and $317,000 of legal fees have been either advances
     or accrued in Lease I's financial statements for Capital's litigation
     costs, although the final amount to be reimbursed to Capital has not yet
     been determined.

         On August 18, 1998, the Company and its affiliates along with Capital
     and its affiliates entered into a settlement agreement with AHC. The
     Company and Lease I agreed to pay $1,625,000 and Capital and its affiliates
     agreed to pay $625,000 to AHC in settlement of all claims, including those
     related to the Virginia litigation and the California litigation. The
     Company and its affiliates also entered into an agreement with Capital and
     its affiliates to mutually release each other from all claims that any such
     parties may have against each other, other than any claims under the
     property management agreements. The Company's Board of Directors believed
     that settling the AHC litigation was a prudent course of action because the
     settlement amount represented a small percentage of the increases in cash
     flow and value achieved for the Company and its affiliates over the past
     two years.

         On September 4, 1998, the full settlement amounts were paid to AHC and
     its affiliates with the Company paying $650,000 and Lease I paying $975,000
     to AHC and its affiliates.


                                     -11-
<PAGE>

                            ILM II LEASE CORPORATION
                    Notes to Financial Statements (Unaudited)
                                  (continued)

5.  SUBSEQUENT EVENT
    ----------------
         On February 11, 1999, the Company's Board of Directors elected Jeffry
     R. Dwyer to the office of Chief Operating Officer.



                                     -12-
<PAGE>


                           ILM II LEASE CORPORATION

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

     GENERAL

         The Facilities Lease Agreement is a "triple-net" lease whereby the
     Lessee pays all operating expenses, governmental taxes and assessments,
     utility charges and insurance premiums, as well as the costs of all
     required maintenance, personal property and non-structural repairs in
     connection with the operation of the Senior Housing Facilities. ILM II
     Holding, as Lessor, is responsible for all major capital improvements and
     structural repairs to the Senior Housing Facilities. If the Company and ILM
     II Holding decide that any of the Senior Housing Facilities should be
     expanded, the Facilities Lease Agreement between the Company and ILM II
     Holding would be amended to include such expansion. Pursuant to the
     Facilities Lease Agreement, the Company pays annual base rent for use of
     all the Senior Housing Facilities in the aggregate amount of $4,035,600.
     The Company also pays variable rent, on a quarterly basis, for each Senior
     Housing Facility in an amount equal to 40% of the excess, if any, of the
     aggregate total revenues for the Senior Housing Facilities, on an
     annualized basis, over $13,021,000. For the three-month period ended
     November 30, 1998 and 1997, variable rent expense was $310,000 and
     $191,000, respectively.

         The Facilities Lease Agreement is scheduled to expire on December 31,
     2000 (December 31, 1999, with respect to Santa Barbara). This period
     coincides with the present corporate finite-life of ILM II. Accordingly,
     since the Company does not have any current plans to operate or own any
     other facilities or engage in any other business outside of its
     relationship with ILM II, there is no assurance that the Company's
     operations will continue beyond December 2000. Moreover, the Facilities
     Lease Agreement is subject to termination at any time by ILM II Holding
     upon 30 days' notice to the Company in connection with the sale to a
     non-affiliated third party of the Senior Housing Facilities.

     RECENT DEVELOPMENTS

         On February 7, 1999, ILM II entered into an agreement and plan of
     merger with Capital Senior Living Corporation, the corporate parent of
     Capital, and certain affiliates of Capital. Consummation of the merger is
     presently anticipated in October 1999. In connection with the merger, ILM
     II has agreed to cause ILM II Holding to cancel and terminate the
     Facilities Lease Agreement immediately prior to the effective time of the
     merger. Although there can be no assurance as to whether the merger will be
     consummated or, if consummated, as to the timing thereof, the Company's
     operations would not be expected to continue beyond the effective time of
     the merger.

     LIQUIDITY AND CAPITAL RESOURCES

         Occupancy levels for the six properties which the Company leases from
     ILM II Holding averaged 96% and 94%, respectively, for the three-month
     periods ended November 30, 1998 and 1997. Base rent payments of $4,035,600
     will remain in effect throughout the remaining term of the lease. As noted
     above, the Facilities Lease Agreement also provides for the payment of
     variable rent. The Senior Housing Facilities are currently generating gross
     revenues, which are in excess of the specified threshold in the variable
     rent calculation. Current annualized operating income levels are sufficient
     to cover the Company's base and variable rent obligations to ILM II
     Holding.

         At November 30, 1998, the Company had cash and cash equivalents of
     $881,000 compared to $1,497,000 at August 31, 1998. The decrease of
     $616,000 is primarily attributable to the September 4, 1998, payment of the
     AHC litigation settlement of $650,000 (see Note 4). Remaining amounts of
     cash will be used for the Company's working capital requirements. As noted
     above, under the terms of the Facilities Lease Agreement, the Lessor is
     responsible for major capital improvements and structural repairs to the
     Senior Housing Facilities. Consequently, the Company does not have any
     material commitments for capital expenditures. Furthermore, the Company
     does not currently anticipate the need to engage in any borrowing
     activities. As a result, substantially all of the Company's cash flow will
     be generated from operating activities. The Company did not pay cash
     dividends in fiscal 1998, 1997 or 1996.

                                     -13-

<PAGE>



                           ILM II LEASE CORPORATION

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
           OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (continued)

     LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

         The Company intends to review this policy during fiscal 1999 and may or
     may not determine to pay cash dividends in the future. Payment of
     dividends, if any, will be at the discretion of the Company's Board of
     Directors and will depend upon such factors as the Company's financial
     condition, earnings, anticipated investments and other relevant factors.
     The source of future liquidity is expected to be from operating cash flows
     from the Senior Housing Facilities, net of the Facilities Lease Agreement
     payments to ILM II Holding, and interest income earned on invested cash
     reserves. Such sources of liquidity are expected to be adequate to meet the
     Company's operating requirements on both a short-term and long-term basis.

     YEAR 2000

         The Year 2000 issue is the result of computer programs being written
     using two digits rather than four to define the applicable year. Any of the
     Company's computer programs or hardware that have date-sensitive software
     or embedded chips may recognize the year 2000 as a date other than the year
     2000. This could result in a system failure or miscalculations causing
     disruptions of operations, including, among other things, a temporary
     inability to process transactions, send invoices or engage in similar
     normal business activities.

         Based on ongoing assessments, the Company, through Capital, its
     property manager, has developed a program to modify or replace portions of
     its software and certain hardware, which are generally PC-based systems, so
     that those systems will properly recognize and utilize dates beyond
     December 31, 1999. While there can be no assurance, as of November 30,
     1998, the Company believes that it will substantially complete all software
     and hardware upgrades as of December 31, 1998. The Company believes that
     these modifications and replacements of existing software and certain
     hardware will mitigate the Year 2000 issue. However, if such modifications
     and replacements are not completed timely, the Year 2000 issue could have a
     material impact on the operations of the Company. The costs of Year 2000
     remediation are not expected to be material based on the Company's
     operations.

         The Company has assessed its exposure to operating equipment, and such
     exposure is not significant due to the nature of the Company's business.

         The Company is not aware of any external agent with a Year 2000 issue
     that would materially impact the Company's results of operations, liquidity
     or capital resources. However, the Company has no means of determining
     whether or ensuring those external agents will be Year 2000 ready. The
     inability of external agents to complete their Year 2000 resolution process
     in a timely fashion could impact the Company.

         Management of the Company believes it has an effective program in place
     to resolve the Year 2000 issue in a timely manner. As noted above, the
     Company has substantially completed all necessary phases of its Year 2000
     program. In addition, disruptions in the economy generally resulting from
     Year 2000 issues could also adversely affect the Company. Although the
     amount of potential liability and lost revenue cannot be reasonably
     estimated at this time, in a worst case situation, if Capital, the
     Company's most significant third party contractor, were to experience a
     year 2000 problem, it is likely that the Company would not receive rental
     income as it became due from Senior Living Facility residents. The Company
     in turn would fail to pay ILM II Holding lease payments as they arise under
     the master lease, and ILM II Holding in turn would fail to pay ILM II
     mortgage payments due it. However, the Company believes that given the
     nature of its business, such problem would be temporary and is easily
     remedied with a simple accounting.

                                     -14-
<PAGE>



                          ILM II LEASE CORPORATION

                     MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (continued)

     RESULTS OF OPERATIONS

    THREE MONTHS ENDED NOVEMBER 30, 1998 VERSUS THREE MONTHS ENDED NOVEMBER 30,
    1997

    REVENUES

         Total revenues were $4,040,000 for the quarter ended November 30, 1998
     compared to $3,737,000 for the same period of the prior year, representing
     an increase of $303,000, or 8.1%, primarily as a result of improved
     occupancies and increased rental rates at certain of the facilities located
     in strong markets.

    EXPENSES

         Total expenses were $3,862,000 for the quarter ended November 30, 1998
     compared to $3,569,000 for the same period of the prior year representing
     an increase of $293,000 or 8.2%. This increase was primarily attributable
     to an increase in Facilities lease rent expense of $119,000 or 10%. The
     increase in Facilities lease rent expense is the result of variable rent
     payments due under the Facilities Lease Agreement. General and
     administrative expenses increased $21,000 or 48.8%, principally as a result
     of the AHC litigation expenses. Depreciation expense increased $23,000 or
     100% when compared to the quarter ended November 30, 1997, due to changes
     in the remaining useful life of assets purchased in 1997 and prior to
     conform to the lease termination date, as such assets are not subject to
     repurchase by ILM II Holding.

     INCOME TAX EXPENSE

         Income tax expense increased by $5,000 or 7.5% as compared to the same
     period in the prior year as a result of an increase in income before taxes
     of $10,000 or 5.6%.

     NET INCOME

         Primarily as a result of the factors noted above, net income increased
     $5,000 or 5%, to $106,000 for the quarter ended November 30, 1998 from net
     income of $101,000 for the quarter ended November 30, 1997.

                                     -15-
<PAGE>


                           ILM II LEASE CORPORATION

                     MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     FORWARD-LOOKING INFORMATION

         CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
     ("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO
     QUALIFY FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF
     THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION
     21E OF THE SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE
     FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE
     CONTEXT OF THE STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD,"
     "MAY BE," "SHOULD," "ENABLE," "LIKELY TO," "PROSPECTS," "SEEK," "PREDICTS,"
     "POSSIBLE," "FORECASTS," "PROJECTS," "ANTICIPATES," "EXPECTS" AND WORDS OF
     ANALOGOUS IMPORT AND CORRELATIVE EXPRESSIONS THEREOF, AS WELL AS STATEMENTS
     PRECEDED OR OTHERWISE QUALIFIED BY: "THERE CAN BE NO ASSURANCE" OR "NO
     ASSURANCE CAN BE GIVEN." SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S
     FUTURE PLANS, OBJECTIVES, STRATEGIES OR GOALS ALSO ARE FORWARD-LOOKING
     STATEMENTS. SUCH STATEMENTS MAY ADDRESS FUTURE EVENTS AND CONDITIONS
     CONCERNING, AMONG OTHER THINGS, THE COMPANY'S CASH FLOWS, RESULTS OF
     OPERATIONS AND FINANCIAL CONDITION; THE CONSUMMATION OF ACQUISITION AND
     FINANCING TRANSACTIONS AND THE EFFECT THEREOF ON THE COMPANY'S BUSINESS,
     ANTICIPATED CAPITAL EXPENDITURES, PROPOSED OPERATING BUDGETS AND ACCOUNTING
     RESERVES; LITIGATION; PROPERTY EXPANSION AND DEVELOPMENT PROGRAMS OR PLANS;
     REGULATORY MATTERS; AND THE COMPANY'S PLANS, GOALS, STRATEGIES AND
     OBJECTIVES FOR FUTURE OPERATIONS AND PERFORMANCE. ANY SUCH FORWARD-LOOKING
     STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE
     ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH
     FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
     A NUMBER OF ASSUMPTIONS REGARDING, AMONG OTHER THINGS, GENERAL ECONOMIC,
     COMPETITIVE AND MARKET CONDITIONS. SUCH ASSUMPTIONS NECESSARILY ARE BASED
     ON FACTS AND CONDITIONS AS THEY EXIST AT THE TIME SUCH STATEMENTS ARE MADE,
     THE PREDICTION OR ASSESSMENT OF WHICH MAY BE DIFFICULT OR IMPOSSIBLE AND,
     IN ANY CASE, BEYOND THE COMPANY'S CONTROL. FURTHER, THE COMPANY'S BUSINESS
     IS SUBJECT TO A NUMBER OF RISKS THAT MAY AFFECT ANY SUCH FORWARD-LOOKING
     STATEMENTS AND ALSO COULD CAUSE ACTUAL RESULTS OF THE COMPANY TO DIFFER
     MATERIALLY FROM THOSE PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING
     STATEMENTS. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY
     REPORT ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
     STATEMENTS IN THIS PARAGRAPH. MOREOVER, THE COMPANY DOES NOT INTEND TO
     UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN
     GENERAL ECONOMIC, COMPETITIVE OR MARKET CONDITIONS AND DEVELOPMENTS BEYOND
     ITS CONTROL.

         READERS OF THIS QUARTERLY REPORT ARE CAUTIONED NOT TO PLACE UNDUE
     RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THE
     COMPANY MAKES ABSOLUTELY NO PROMISES, GUARANTEES, REPRESENTATIONS OR
     WARRANTIES AS TO THE ACCURACY THEREOF.

                                     -16-
<PAGE>




                           ILM II LEASE CORPORATION

                           PART II-OTHER INFORMATION

Item 1. Through 5.                  NONE
------------------

Item 6. Exhibits And Reports On Form 8-K
----------------------------------------

(a)      Exhibits:         27. Financial Data Schedule

(b)      Reports on Form 8-K:  NONE


                                     -17-
<PAGE>



                           ILM II LEASE CORPORATION

                                  SIGNATURES

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

                                        BY:  ILM II LEASE CORPORATION
                                             ------------------------



                                        By: /S/ JEFFRY R. DWYER
                                            -------------------------
                                            Jeffry R. Dwyer
                                            Chief Operating Officer
                                            (Principal Accounting Officer)



Dated: NOVEMBER 12, 1999
       -----------------


                                     -18-