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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

(Mark One)

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                      FOR THE YEAR ENDED DECEMBER 31, 2000

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

          For the transition period _______________ to _______________.
                        Commission file number 000-22249

                        INTERNATIONAL AIRCRAFT INVESTORS
             (Exact name of registrant as specified in its charter)

           CALIFORNIA                                          95-4176107
(State or other jurisdiction of                         (I.R.S. Employer ID No.)
 incorporation or organization)

3655 TORRANCE BOULEVARD, SUITE 410, TORRANCE, CALIFORNIA            90503
 (Address of registrant's principal executive offices)            (Zip Code)

       Registrant's telephone number, including area code: (310) 316-3080

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

                                      NONE

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

                          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 registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to Form 10-K. [X]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 19, 2001 was approximately $15,647,535
(based on the closing price on Nasdaq National Market as reported by the Wall
Street Journal on such date).

At March 19, 2001, the registrant had issued and outstanding an aggregate of
3,681,773 shares of its common stock.

                       Documents Incorporated by Reference

Certain information included in the registrant's definitive proxy statement
("Proxy Statement") to be filed with the Securities and Exchange Commission for
the Annual Meeting of Stockholders of the registrant is incorporated by
reference into Part III hereof.

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                        INTERNATIONAL AIRCRAFT INVESTORS
                           ANNUAL REPORT ON FORM 10-K
                      FOR FISCAL YEAR END DECEMBER 31, 2000


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>        <C>                                                                               <C>
  ITEM                                         PART I                                        PAGE
  ----                                                                                       ----
    1.     Business                                                                            3
    2.     Properties                                                                         14
    3.     Legal Proceedings                                                                  14
    4.     Submission of Matters to a Vote of Securities Holders                              14

                                               PART II

    5.     Market for Registrant's Common Stock and Related Shareholder Matters               15
    6.     Selected Financial Data                                                            16
    7.     Management's Discussion and Analysis of Financial Condition and Results of
             Operations                                                                       17
    7A.    Quantitative and Qualitative Disclosures About Market Risk                         21
    8.     Financial Statements and Supplementary Data                                        21
    9.     Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosure                                                                       21

                                              PART III

   10.     Directors and Executive Officers of the Registrant                                 21
   11.     Executive Compensation                                                             21
   12.     Security Ownership of Certain Beneficial Owners and Management                     21
   13.     Certain Relationships and Related Transactions                                     21

                                               PART IV

   14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K                    22
</TABLE>




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                                     PART I

ITEM 1. BUSINESS.

GENERAL

   We are primarily engaged in the acquisition of used, single-aisle jet
aircraft for lease and sale to domestic and foreign airlines and other
customers. As of December 31, 2000, we have sixteen aircraft in our portfolio.
Fourteen aircraft are leased to thirteen airlines worldwide and two aircraft are
being marketed for lease. We lease aircraft under "triple net" operating leases
where the lessee is responsible for all operating costs (i.e., crew, fuel,
insurance, taxes, licenses, landing fees, navigation charges, maintenance,
repairs and associated expenses) and we retain the potential benefit and risk of
the residual value of the aircraft, as distinct from finance leases where the
full cost of the aircraft is recovered over the term of the lease at generally
lower lease rates.

   The Company was incorporated in California in 1988. Our principal executive
offices are located at 3655 Torrance Boulevard, Suite 410, Torrance, California
90503 and our telephone and facsimile numbers are (310) 316-3080 and (310)
316-8145, respectively.

STRATEGY

   Our strategy is to focus on entering into operating leases of used,
single-aisle jet aircraft to a diversified base of customers worldwide, while
employing strict risk management criteria. Key elements of our business strategy
include the following:

   Focus on Operating Leases. We believe that airlines are aware of the benefits
of financing their fleet equipment on an operating lease basis, including
preservation of cash flow and flexibility regarding fleet size and composition.
We believe the operating lease of jet aircraft, especially used jet aircraft,
offers the potential for a higher rate of return to us than other methods of
aircraft financing, such as finance leases.

   Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance. We
lease used, single-aisle jet aircraft which generally range between five and 15
years old at the time the aircraft is acquired by us. We currently focus on the
acquisition and lease of single-aisle jet aircraft, primarily aircraft with a
seating capacity of 121 to 240 passengers. According to the 2000 Current Market
Outlook published by the Boeing Commercial Airplane Group in 2000, that type of
aircraft accounted for approximately 43.6% of the world fleet at December 31,
1999. The Boeing Report estimates that the commercial replacement cycle for this
type of aircraft is 25 to 28 years from manufacture date. This category of jet
aircraft includes the Boeing 737-300/-400, the Boeing Model 757-200, the
McDonnell Douglas MD80 series and the Airbus A320.

   Optimize Relationship with ILFC. We have had a long and continuous
relationship with International Lease Finance Corporation. ILFC was an initial
investor in us and currently owns approximately 1.8% of our common stock. ILFC
is a major owner-lessor of commercial jet aircraft and has contacts with most
airlines worldwide, the aircraft and engine manufacturers and most of the
significant participants in the aircraft industry worldwide. We intend to use
our relationship with ILFC to gain access, where appropriate, to various
airlines and other participants in the market to facilitate the purchase, lease,
re-lease and sale of aircraft. ILFC's primary focus is the acquisition and
leasing of new, rather than used, commercial jet aircraft. Thus, we believe that
our business complements rather than competes with ILFC. See "Relationship With
ILFC" below.

   Leverage Management Experience. The successful purchase and leasing of used
commercial jet aircraft requires skilled management in order to evaluate the
condition and price of the aircraft to be purchased and the current and
anticipated market demand for that aircraft. Our management and our Board of
Directors have significant experience in the aviation industry, with an average
of more than 20 years of experience, especially in the purchase, sale and
financing of commercial jet aircraft, and have extensive contacts with airlines
worldwide.

   Access a Diversified Global Customer Base. Our objective is to diversify our
customer base to avoid dependence on any one lessee, geographic area or economic
trend.


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   Employ Strict Risk Management Criteria. We will only purchase aircraft that
are currently under lease or are subject to a contractual commitment for lease
or purchase. We currently seek to finance our aircraft using a non-recourse loan
structure. We will not purchase aircraft on speculation. We evaluate carefully
the credit risk associated with each of our lessees and the lessee's ability to
operate and properly maintain the aircraft. We also evaluate the return
conditions in each lease since the condition of an aircraft at the end of a
lease can significantly impact the amount we will receive on the re-lease or
sale of an aircraft.

AIRCRAFT LEASING

   All of our current leases are operating leases rather than finance leases.
Under an operating lease, we retain title to the aircraft, thereby retaining the
potential benefits and assuming the risk of the residual value of the aircraft.
Operating leases allow airlines greater fleet and financial flexibility due to
their shorter-term nature, the relatively small initial capital outlay necessary
to obtain use of the aircraft and off-balance sheet treatment. Operating lease
rates are generally priced higher than finance lease rates, in part because of
the risks to the lessor associated with the residual value. See "Cautionary
Statements."

   We target the medium-term operating lease market, which generally consists of
three to eight year initial noncancelable lease terms. Our leases are "triple
net leases" whereby the lessee is responsible for all operating costs (i.e.,
crew, fuel, insurance, taxes, licenses, landing fees, navigation charges,
maintenance, repairs and associated expenses). In addition, our leases contain
extensive provisions regarding our remedies and rights in the event of a default
by the lessee. The leases have payment clauses that require the lessee to
continue to make the lease payments regardless of circumstances, including
whether or not the aircraft is in service. Certain of our leases limit the
lessee's obligation to make lease payments if we violate the covenant of quiet
enjoyment regarding the aircraft or if we enter bankruptcy and do not assume the
lease. During the term of the lease, we are required to be named as an
additional insured on the lessee's aviation hull and liability insurance
policies. Also, the leases contain very specific criteria for the maintenance
and regulatory status of the aircraft, as well as the return conditions for the
airframe, engines, landing gears, auxiliary power unit and associated
components.

   Generally, the lessee provides us with an initial security deposit that is
returnable at the expiration of the lease if all lease return conditions are met
by the lessee and there is no default under the lease. Depending on the
creditworthiness of a lessee, in some instances the lessee will also pay into a
maintenance reserve account monthly a certain amount for each hour the aircraft
and/or engine has flown. The lessee may draw upon these maintenance reserves to
reimburse the cost of periodic scheduled overhaul and maintenance checks. At the
termination of the lease, the lessee is required to return the aircraft to us in
the same condition as it was received, normal wear and tear excepted, so the
aircraft is in a proper condition for re-lease or sale. See "Cautionary
Statements."

   We analyze the credit risk associated with each lease before entering into a
lease and obtain extensive financial information regarding the lessee. We
evaluate the prospective lessee's available financial statements and trade and
banking references, and working with our lender evaluate country and political
risk, insurance coverage, liability and expropriation risk. The process for
credit approval is a joint undertaking between us and the senior lender
providing the debt financing for the leased aircraft. See "Cautionary
Statements."

   Upon termination of a lease, our objective is to re-lease or sell the
aircraft. Our leases generally require that the lessee notify us six to nine
months prior to the termination of the lease as to whether the lessee intends to
exercise any option to extend the lease. This allows us to commence our
remarketing efforts well in advance of the termination of a lease. Since January
1, 1998, we have negotiated eight lease extensions with our lessees, re-leased
three aircraft to new lessees and had two aircraft returned to us as a result of
lessee bankruptcies.


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CUSTOMERS

   At December 31, 2000, our lessees included:


   Domestic Customers:                    Foreign Customers:

   -  Delta Air Lines, Inc.               -  Air Liberte S.A.
   -  ILFC(1)                             -  Air Transat A.T. Inc.
   -  Southwest Airlines Co.              -  British Airways Plc
   -  Trans World Airlines, Inc.          -  Canada 3000 Airlines Limited
                                          -  COPA
                                          -  Flying Colours Airlines Limited
                                          -  GB Airways Limited
                                          -  Islandsflug, HF
                                          -  New Zealand International Airlines
                                             Ltd.
    --------
   (1) subleased to Compania Panamenia de Aviacon, S.A. (COPA)

   During the years ended December 31, 1998, 1999 and 2000, lease revenues from
flight equipment generated from foreign customers accounted for approximately
68%, 76% and 77%, respectively, of total revenues.

   Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. We attempt to minimize our currency and
exchange risks by negotiating all of our aircraft leases in U.S. Dollars. We
require, as a condition to any foreign transaction, that the lessee in a foreign
country first obtain, if required, written approval of the appropriate
government agency, finance ministry or central bank for the remittance of all
funds contractually owed to us in U.S. Dollars. Although we have attempted to
minimize the foreign currency risk, to the extent that significant currency
fluctuations result in materially higher rental costs to a foreign lessee, the
foreign lessee may be unable or unwilling to make the required lease payments.

   At December 31, 2000, we are marketing an A320-200 and a 737-300 for lease.

   We have an MD-82 on lease to TWA with a lease expiring November 2004. On
January 10, 2001, TWA filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. On March 12, 2001, the United States Bankruptcy Court approved
a plan by American Airlines to acquire the assets of TWA. We have subsequently
been paid past due rent from TWA, and we are currently negotiating a lease of
the aircraft to American Airlines.


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   The following customers accounted for more than 10% of our total revenues in
one or more of the three years ended December 31, 2000:


   Air Belgium International N.V.         Air Transat A.T. Inc.
     1998-10%                               1999-11%
                                            1998-15%
   British Airways Plc.                   Canada 3000 Airlines Limited
     1998-12%                               2000-11%

   Shanghai Airlines
     1998-11%

We lease aircraft to British Airways and two of its affiliates (Air Liberte and
GB Airways). During 2000 British Airways sold its investment in Air Liberte. Air
Liberte was not included as an affiliate for 2000. Revenues from British Airways
and its affiliates accounted for 16%, 19% and 14% of total revenues in 1998,
1999 and 2000, respectively.

FINANCING/SOURCE OF FUNDS

   We purchase used aircraft and aircraft engines on lease to airlines directly
from other leasing companies or from airlines for leasing back to the airlines.
Our typical purchase requires both secured debt and an equity investment by us.
We generally make an equity investment of approximately 5% to 15% of the
purchase price of aircraft and engines from internally generated and other cash
and seller financing (primarily from ILFC). We typically finance the balance of
the purchase price with the proceeds of borrowings from banks or other financial
institutions secured by the aircraft being financed (to date with the support of
ILFC as the seller of the flight equipment).

   We maintain banking relationships primarily with four commercial banks
providing secured equipment financing to us in an aggregate amount of $118.7
million at December 31, 2000. ILFC has provided certain guarantees and other
financial support with respect to our borrowings which have allowed us to
finance our aircraft at more favorable leverage than we could have obtained
without ILFC's support. See Notes 4 and 5 to Consolidated Financial Statements.

   At December 31, 2000, $245.8 million (or 96.9%) of our borrowings to finance
aircraft purchases were on a non-recourse basis. Non-recourse loans are
structured as loans to special purpose subsidiaries which only own the assets
which secure the loan. Only the relevant special purpose subsidiary is liable
for the repayment of the non-recourse loan. We are only liable if we breach
certain limited representations and warranties under the applicable loan
documentation. The lender assumes the credit risk of each lease, and its only
recourse upon a default under the lease is against the lessee, the leased
equipment and the special purpose subsidiary. Interest rates under this type of
financing are negotiated on a transaction-by-transaction basis and reflect the
financial condition of the lessee, the terms of the lease, any guarantees and
the amount of the loan. The remaining $7.9 million of our borrowings are on a
recourse basis. ILFC has agreed to indemnify us for any payments under this
recourse loan not funded by lease or sale payments.

   The terms of our current borrowings, other than our ILFC bridge borrowings,
end within 30 to 60 days after the minimum noncancelable period under the
related lease, after which we will be required to renegotiate the loan or obtain
other financing in connection with the re-lease of the aircraft. See "Cautionary
Statements."

   Notes payable due within one year totaled $158.1 million at December 31,
2000, of which $154.2 million represents balloon payments and $3.9 million
represents installment payments. We intend to refinance all of the balloon
payments due in 2001. We have extended or re-leased three aircraft with $38.9
million of associated balloon payments due in 2001, and balloon payments of
$80.5 million relate to leases with terminations from 2002 to 2004. During 1998,
1999 and 2000, we refinanced $29.7 million, $46 million and $101.3 million of
balloon payments, respectively.

   At December 31, 2000, our borrowings had interest rates ranging from 6.0% to
8.125% per annum, with a weighted average interest rate of 7.1% per annum. At
December 31, 2000, 9.6% of our borrowings accrued interest on a floating rate
basis.


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   Our future growth is dependent upon raising additional capital. We have
previously provided for all of our financing needs through internally generated
funds, borrowings and equity capital. There is no assurance that those sources
will provide us with additional capital resources in the future. See "Cautionary
Statements."

RELATIONSHIP WITH ILFC

   ILFC was an initial investor in the Company, and owns approximately 1.8% of
our common stock. Fourteen of our sixteen present aircraft were acquired from
ILFC and ILFC has provided certain guarantees and other financial support with
respect to our borrowings. See "Financing/Source of Funds" above. ILFC has also
paid various fees to us for consulting and remarketing services. We have entered
into an agreement with ILFC pursuant to which ILFC has agreed to assist us in
the remarketing of our aircraft if requested by us. See "Aircraft Leasing"
above, "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations," and Note 5 to Consolidated
Financial Statements. ILFC is a wholly owned subsidiary of American
International Group, Inc. and is a major owner-lessor of commercial jet
aircraft.

COMPETITION

   The aircraft leasing industry is highly competitive. The level of competition
depends in part upon the type of aircraft being leased and prospective lessees
for the aircraft. Competition is primarily based upon the availability of the
aircraft required by the customer and the lease rate. We believe that only a few
comparably sized companies focus primarily on the same segment of the aircraft
leasing market as we do. In addition, a number of aircraft manufacturers,
airlines and other operators, distributors, equipment managers, leasing
companies (including ILFC), financial institutions and other parties engaged in
leasing, managing, marketing or remarketing aircraft compete with us, although
their primary focus is not on the same market segment on which we focus. Many of
these periodic competitors have significantly greater financial resources than
we have. Our competitors may lease aircraft at lower rates than we do and
provide benefits, such as direct maintenance, crews, support services and
trade-in privileges, which we do not intend to provide. We believe that we are
able to compete in the leasing of used jet aircraft due to our experience in the
industry and our reputation and expertise in acquiring and leasing aircraft. See
"Cautionary Statements."

GOVERNMENT REGULATION

   The Federal Aviation Administration ("the FAA"), the Department of
Transportation and the Department of State exercise regulatory authority over
the air transportation industry in the United States. Most other countries have
similar regulatory agencies. The FAA has regulatory jurisdiction over
registration and flight operations of aircraft operating in the United States,
including equipment use, ground facilities, maintenance, communications and
other matters.

   The FAA regulates the operation and maintenance of all aircraft operated in
the United States. Its regulations are designed to ensure that all aircraft and
aviation equipment are continuously maintained in proper condition to ensure
safe operation of the aircraft. Similar rules apply in most other countries. All
aircraft must be maintained under a continuous condition monitoring program and
must periodically undergo thorough inspection and maintenance. The inspection,
maintenance and repair procedures for the various types of aircraft equipment
are prescribed by regulatory authorities and can be performed only by certified
repair facilities utilizing certified technicians. The FAA can suspend or revoke
the authority of air carriers or their licensed personnel for failure to comply
with its regulations and can ground aircraft if their airworthiness is in
question.

   The Department of State and the Department of Transportation, in general,
have jurisdiction over economic regulation of air transportation, but since we
do not operate our aircraft for public transportation of passengers and
property, we are not directly subject to their regulatory jurisdiction.

   To export aircraft from the U.S. to a foreign destination, we are required to
obtain an export license from the United States Department of Commerce. To date,
we have not experienced any difficulty in obtaining the required certificates,
licenses and approvals either from the FAA, the Department of Commerce or any
other regulatory agency or their foreign counterparts.

   Member countries of the United Nations are signatories to the International
Civil Aviation Organization. Each signatory has agreed to comply with
airworthiness directives of the country of manufacture of the aircraft. We will
not lease our aircraft to any carrier domiciled in a country which is not a
member of ICAO. We also require our lessees to comply


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with the most restrictive standards of either the FAA or its foreign equivalent.
For older aircraft, a special group of airworthiness directives require
extensive inspections and repairs to bring the aircraft into compliance, which
are required to be paid by the lessee. In some instances, we may have to share
in the cost of complying with regulatory airworthiness directives.

   The FAA and the civil aviation authorities of most countries and
international entities issue regulations limiting permitted noise and other
emissions from aircraft. In most instances, older non-complying aircraft may be
brought into compliance by modifying the engines. Fourteen of our aircraft
currently comply with these regulations. Our remaining two aircraft, currently
on lease to June and August 2001, are leased in areas not requiring
modification. These two aircraft may require modification if moved to a
jurisdiction requiring compliance. Currently, these modifications range in cost
from $1.2 million to $2 million per aircraft. In some instances, it is necessary
to perform noise compliance work to lease the aircraft into a new jurisdiction.
For example, Western Europe and the United States have non-addition rules which
state that an aircraft which does not meet specified noise compliance
regulations cannot be brought into the region and operated by an airline
licensed by one of these governments. A non-complying aircraft can only be
leased or sold into a market that does not require compliance with the stricter
standards. See "Cautionary Statements."

INSURANCE

   We require our lessees to carry those types of insurance which are customary
in the air transportation industry, including comprehensive third party
liability insurance and aircraft hull insurance. We are named as an additional
insured on both the liability and hull policies carried by our lessees. All
policies contain a breach of warranty endorsement so that our interests are not
prejudiced by any act or omission of the operator-lessee.

   Insurance premiums are prepaid by the lessee on a periodic basis, with
payment acknowledged to us through an independent insurance broker. The
territorial coverage is, in each case, suitable for our lessee's area of
operations and the policies contain, among other provisions, a "no co-insurance"
clause and a provision prohibiting cancellation or material change without at
least 30 days advance written notice to us. Furthermore, the insurance is
primary and not contributory and all insurance carriers are required to waive
rights of subrogation against us.

   The stipulated loss value schedule under aircraft hull insurance policies is
on an agreed value basis, which usually exceeds the book value of the aircraft.
Aircraft hull policies contain standard clauses covering aircraft engines with
deductibles required to be paid by the lessee. Furthermore, the aircraft hull
policies contain full war risk endorsements, including, but not limited to,
confiscation, seizure, hijacking and similar forms of retention or terrorist
acts, subject to certain specified exclusions. All losses under such policies
are payable in U.S. Dollars.

   The comprehensive liability insurance policies include provisions for bodily
injury, property damage, passenger liability, cargo liability and such other
provisions reasonably necessary in commercial passenger and cargo airline
operations with minimal deductibles. These policies generally have combined
comprehensive single liability limits of not less than $200 million and require
all losses to be paid in U.S. Dollars.

   Insurance policies are generally placed or reinsured in the Lloyds of London
or U.S. markets. The insurance carrier under the insurance policies must be
approved by us.

EMPLOYEES

   As of December 31, 2000, we had eight employees. None of our employees is
covered by a collective bargaining agreement and we believe our employee
relations are good.

CAUTIONARY STATEMENTS

   This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are intended to be
covered by the safe harbors created thereby. In some instances, forward-looking
statements maybe identified by the use of forward-looking terminology such as
"may," "will," "expect," "believe," "estimate," "anticipate," "continue,"
'target" or similar terms. The cautionary statements made in this Report on Form
10-K should be read as being applicable to all related forward-looking
statements wherever they appear in this Report on Form 10-K. Our actual results
could differ


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materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this Report.

We retain the residual value risk and the risk of the re-lease or sale of the
aircraft.

   We lease our portfolio of aircraft under operating leases rather than finance
leases. Under an operating lease, we retain title to the aircraft and assume the
risk of not recovering our entire investment in the aircraft through the
re-leasing and remarketing process. Operating leases require us to re-lease or
sell aircraft in our portfolio in a timely manner upon termination of the lease
in order to minimize off-lease time and recover our original investment in the
aircraft. Numerous factors, many of which are beyond our control, may have an
impact on our ability to re-lease or sell an aircraft on a timely basis or to
re-lease at a satisfactory lease rate. Among the factors are:

   - the demand for various types of aircraft

   - general market and economic conditions

   - regulatory changes, including those imposing environmental, maintenance or
     operational requirements

   - changes in supply or cost of aircraft

   - technological developments

   Currently, two of our aircraft are not on lease. The A320-200 aircraft has
been off lease since October 2000 and the Boeing Model 737-300 has been off
lease since February 2000.

   In addition, the success of an operating lease depends in significant part
upon having the aircraft returned by the lessee in marketable condition as
required by the lease. Consequently, we cannot assure you that our estimated
residual value for aircraft will be realized. See Note 1 to Consolidated
Financial Statements. If we are unable to re-lease or resell aircraft on
favorable terms, our business, financial condition and results of operations
could be adversely affected.

We depend on the airline industry.

   We are in the business of providing leases of commercial jet aircraft to
international and domestic airlines. Consequently, we are affected by downturns
in the air transportation industry in general. We could be negatively impacted
by any of the following factors affecting the air transportation industry:

   - substantial increases in fuel costs or interest rates

   - fare competition

   - slower growth in traffic

   - the number and quality of available aircraft

   - significant downturn in the general economy

   In recent years, a number of commercial airlines have experienced financial
difficulties, in some cases resulting in bankruptcy proceedings. While we
believe that our lease terms protect our aircraft and our investment in our
aircraft, we cannot assure you that the financial difficulties experienced by
airlines will not have an adverse effect on our business, financial condition
and results of operations.

We have a limited number of aircraft and lessees.

   We have sixteen aircraft in our portfolio. Fourteen aircraft are leased to
thirteen airlines worldwide and two aircraft are being marketed for lease. The
loss of any one aircraft or the financial difficulty of or lease default by any
one lessee could have a material adverse effect on our business, financial
condition and results of operations.

We depend upon ILFC.

   Fourteen of our current sixteen aircraft were acquired from ILFC. See
"Relationship With ILFC". In connection with all of our aircraft, ILFC has
provided guarantees or other financial support which have allowed us to finance
the aircraft at more favorable leverage than we could have obtained without the
guarantees and financial support of ILFC. In addition, ILFC has provided a
portion of the consulting fees reported by us. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We cannot assure you
that we will be able to continue to acquire from ILFC or from other entities
aircraft and leases of the type and on terms as favorable as or better than the
aircraft and leases


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<PAGE>   10

acquired from ILFC. If aircraft and leases are acquired from ILFC or others, we
cannot assure you that guarantees or financial support will be given by the
seller or whether we will be able to receive as favorable leverage and interest
rates from its lenders. If we are unable to acquire aircraft and leases and to
finance the acquired aircraft at competitive rates, our business, financial
condition and results of operations could be adversely affected. See
"Relationship With ILFC," and Note 5 to Consolidated Financial Statements.

We are exposed to our lessees' credit risk.

   Certain of our existing and prospective customers are smaller domestic and
foreign passenger airlines which, together with major passenger airlines, may
suffer from the factors which have historically affected the airline industry.
See "We depend on the airline industry" above. A lessee may default in
performance of its lease obligations and we may be unable to enforce our
remedies under a lease. A number of airlines have experienced financial
difficulties, and certain airlines have filed for bankruptcy. A number of these
airlines have ceased operations. In most cases where a debtor seeks protection
under Chapter 11 of the United States Bankruptcy Code, creditors are stayed
automatically from enforcing their rights. In the case of United States
certificated airlines, Section 1110 of the Bankruptcy Code provides certain
relief to lessors of aircraft. Specifically, the airline has 60 days from the
date the lessor makes its claim to agree to perform its obligations and to cure
any defaults before the lessor may repossess the aircraft. The scope of Section
1110 has been the subject of significant litigation and we cannot assure you
that the provisions of Section 1110 will protect our investment in an aircraft
in the event of a lessee's bankruptcy. In addition, Section 1110 does not apply
to lessees located outside of the United States and applicable foreign laws may
not provide comparable protection.

   During 2000, two of our lessees filed for bankruptcy protection under the
laws of Mexico and Ireland. We have repossessed both aircraft. We have moved
both aircraft to the United States and we are currently marketing the aircraft
for lease. We have an MD-82 on lease to TWA with a lease expiring November 2004.
On January 10, 2001, TWA filed for bankruptcy under Chapter 11 of the United
States Bankruptcy Code. On March 12, 2001, the United States Bankruptcy Court
approved a plan by American Airlines to acquire the assets of TWA. We have
subsequently been paid past due rent from TWA, and we are currently negotiating
a lease of the aircraft to American Airlines.

We face special risks because of the number of foreign customers.

   Leases to foreign customers may present greater risks to us because certain
foreign laws, regulations and judicial procedures may not be as protective of
lessor rights as those which apply in the United States. We are subject to the
timing and access to courts and the remedies local laws impose in order to
collect our lease payments and recover our assets. Political instability abroad
and changes in international policy also present risks associated with
expropriation of our leased aircraft. We cannot assure you that we will not
experience problems in collecting amounts due under leases to foreign customers
or reacquiring aircraft from customers in the future. International collection
problems and problems in recovering aircraft could have a material adverse
effect on our business, financial condition and results of operations.

   Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. We attempt to minimize currency and
exchange risks by negotiating all of our aircraft leases in U.S. Dollars. We
require, as a condition to any foreign transaction, that the lessee in a foreign
country first obtain, if required, written approval of the appropriate
government agency, finance ministry or central bank for the remittance in U.S.
Dollars of all funds contractually owed to us. Although we have attempted to
minimize the foreign currency risk, to the extent that significant currency
fluctuations result in materially higher rental costs to a foreign lessee, the
foreign lessee may be unable or unwilling to make the required lease payments.

   Our revenues and income may be affected by political instability abroad,
changes in national policy and other political or economic events adversely
affecting world or regional trading markets or impacting a particular customer.

   Our aircraft can be subject to certain foreign taxes and airport fees.
Unexpected liens on an aircraft could be imposed in favor of a foreign entity,
such as Eurocontrol or the airports of the United Kingdom.


                                       10
<PAGE>   11

We may need to comply with certain aircraft noise requirements for some of our
aircraft.

   The Airport Noise and Capacity Act of 1990, referred to as ANCA, required the
phaseout of Stage 2 aircraft (defined as aircraft that comply with the Stage 2
noise levels prescribed in Part 36 of the Federal Aviation Regulations) by
December 31, 1999, subject to certain exceptions. Similar rules exist in other
countries, including the countries in Western Europe, Australia, New Zealand and
Japan, which either require compliance with regulations substantially identical
to Stage 3 or which forbid the operation of additional non-Stage 3 aircraft by
carriers based in those jurisdictions. This has the effect of limiting our
ability to place our Stage 2 aircraft on lease in those jurisdictions until they
have been modified to meet Stage 3 requirements.

   Fourteen of our aircraft currently meet Stage 3 requirements. Our remaining
two aircraft are currently leased in an area not imposing Stage 3 requirements.
These two aircraft may require modification if moved to a jurisdiction requiring
Stage 3 compliance. Currently, these modification costs range from $1.2 million
to $2 million per aircraft. See "Government Regulation." We cannot assure you
that we will be able to obtain financing for any of these modifications.

   ANCA also recognizes the right of airport operators with special noise
problems to implement local noise abatement procedures as long as these
procedures do not interfere unreasonably with the interstate and foreign
commerce of the national air transportation system. ANCA generally requires FAA
approval of local noise restrictions on Stage 3 aircraft and establishes a
regulatory notice and review process for local restrictions on Stage 2 aircraft
first proposed after October 1990. As the result of litigation and pressure from
airport area residents, airport operators have taken local actions over the
years to reduce aircraft noise. These actions have included regulations
requiring aircraft to meet prescribed decibel limits by designated dates,
curfews during night time hours, restrictions on frequency of aircraft
operations and various operational procedures for noise abatement.

   The imposition of and the cost of compliance by us with statutory and
regulatory requirements concerning noise restriction and abatement could have a
material adverse effect on our business, financial condition and results of
operations.

We depend on our ability to obtain financing.

   The operating lease business is a capital intensive business. Our typical
operating lease transaction requires a cash investment by us of approximately 5%
to 15% of the aircraft purchase price, commonly known as an "equity investment."
Our equity investments have historically been financed from internally generated
funds and other cash, seller financing (primarily from ILFC) and proceeds from
our initial public offering. The balance of the purchase price of an aircraft is
typically financed with the proceeds of non-recourse, secured borrowings from
banks or other financial institutions (to date with the support of ILFC as the
seller of the flight equipment). Accordingly, our ability to successfully
execute our business strategy and to sustain our operations is dependent, in
part, on the availability of debt and equity capital.

   In addition, the terms of our loans generally require a substantial balloon
payment at the end of the noncancelable portion of the lease of the related
aircraft, at which time we will be required to re-lease the aircraft and
renegotiate the loan with the lender or obtain other financing. Refinancing the
balloon amount of the loan is dependent upon our re-leasing the related
aircraft. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." We cannot assure you
that the necessary amount of capital will continue to be available to us on
favorable terms, or at all. If we are unable to continue to obtain any portion
of required financing on favorable terms, our ability to add new leases to our
lease portfolio, renew leases, re-lease an aircraft, repair or recondition an
aircraft if required or retain ownership of an aircraft on which financing has
expired could be limited, which could have a material adverse effect on our
business, financial condition and results of operations. In addition, our
financing arrangements to date have been dependent in part upon ILFC. See
"Reliance Upon ILFC" above and "Relationship With ILFC," and Note 5 to
Consolidated Financial Statements.


                                       11
<PAGE>   12

We face risks of changes in interest rates.

   Our leases are generally structured at fixed rental rates for specified
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." We cannot assure you
that we will be able to finance or refinance our borrowings at fixed rates which
result in acceptable interest rate spreads to the applicable leases, or at fixed
rates at all. Increases in interest rates could narrow or eliminate the spread,
or result in a negative spread, between the lease rates we realize under our
leases and the interest rate that we pay under our loans. Our business,
financial condition and operating results could be adversely affected during any
period of increases in interest rates.

We face actual and potential competition from many sources.

   The aircraft leasing industry is highly competitive. The level of competition
depends in part upon the type of aircraft being leased and prospective lessees
for the aircraft. We believe that only a few comparably sized companies on a
worldwide basis focus primarily on the same segment of the aircraft leasing
market as we do. In addition, a number of aircraft manufacturers, airlines and
other operators, distributors, equipment managers, leasing companies (including
ILFC), financial institutions and other parties engaged in leasing, managing,
marketing or remarketing aircraft compete with us, although their primary focus
is not on the market segment on which we focus. Many of these periodic
competitors have significantly greater financial resources than we have. Our
competitors may lease aircraft at lower rates than we do and provide benefits,
such as direct maintenance, crews, support services and trade-in privileges,
which we do not intend to provide. We cannot assure you that we will continue to
compete effectively against present and future competitors or that competitive
pressures will not have a material adverse effect on our business, financial
condition and results of operations.

Foreign ownership of companies owning U.S. registered aircraft is limited.

   We intend to maintain United States registration of some of the aircraft
which we own. Aircraft may not be registered in the United States unless the
registered owner is a citizen of the United States or other permissible persons
under the Federal Aviation Act. If a corporation is the registered owner of an
aircraft, the corporation must be organized under the laws of the United States
or any State, and the president and two-thirds or more of the board of directors
and at least 75% of the voting interest of the corporation must be controlled by
persons who are citizens of the United States. Non-U.S. citizens may hold stock
in a U.S. corporation through an appropriate voting trust. Any failure to meet
the registration requirements of the FAA may result in substantial penalties,
including the forced sale of the aircraft, the potential for uninsured
casualties to the aircraft, the loss of the benefits of the central recording
system under federal law (thereby leaving the aircraft exposed to liens or other
interests not of record with the FAA), and a breach by us of any leases or
financing agreements with respect to the aircraft.

The limits on liability of lessors are uncertain.

   Section 44112 of Title 49 of the United States Code provides that a lessor of
aircraft generally will not be liable for any personal injury or death, or
damage to or loss of property, provided that the lessor is not in actual
possession or control of the aircraft at the time of such injury, death or
damage. Under certain circumstances, however, courts have interpreted Section
44112 narrowly, limiting its protection to certain aircraft lessors and have
held that state common law remedies may apply, notwithstanding the limitations
on liability under Section 44112. Under common law, the owner of an aircraft may
be held liable for injuries or damage to passengers or property, and damage
awards can be substantial. Because there is little case law interpreting Section
44112, we cannot assure you that the provisions of Section 44112 would fully
protect us from all liabilities in connection with any injury, death, damage or
loss that may be caused by any aircraft we own. For example, Section 44112 may
not preempt state law with respect to liability for third party injuries arising
from a lessor's or owner's own negligence. It is anticipated that each lessee
under the terms of each lease to be entered into by us will be obligated to
indemnify us for, or insure us against, virtually all claims by third parties;
however, in the event that Section 44112 were not applicable, we cannot assure
you that the lessees could fulfill their indemnity obligations under any such
leases or that any insurance obtained will be sufficient.


                                       12
<PAGE>   13

We could be subject to substantial costs if lessees do not properly maintain
their leased aircraft.

   The maintenance and operation of aircraft are strictly regulated by the FAA
and foreign aviation authorities. The cost of complying with these requirements
is significant. We will seek to lease our aircraft to lessees that agree to bear
all or a significant portion of the costs of complying with governmental
regulations. All of our current leases require the lessee to bear all of the
costs of complying with governmental regulations. However, in the event a lessee
fails to maintain aircraft in accordance with the terms of a lease or a lease
terminates shortly before a major required overhaul, we may be required to spend
substantial sums to repair or recondition the aircraft and may be required to
borrow funds for the purpose. The FAA issued several Airworthiness Directives in
1990 mandating changes to the maintenance programs for older aircraft. These ADs
were issued to ensure that the oldest portion of the United States' transport
aircraft fleet remains airworthy. The FAA is requiring that these aircraft
undergo extensive structural modifications. These modifications are required
upon accumulation of 20 years' time in service or prior to the accumulation of a
designated number of flight-cycles, whichever occurs later. Future regulatory
changes may also increase the cost of operating or maintaining the aircraft and
may adversely affect the residual value of the aircraft. The failure of a lessee
to comply with lease maintenance and operation obligations or the imposition of
governmental requirements involving substantial compliance costs could have a
material adverse effect on our business, financial condition and results of
operations.

Changes in tax laws or accounting principles could adversely affect us.

   Our leasing activities generate significant depreciation allowances that
provide us with substantial tax benefits on an ongoing basis. In addition, some
of our lessees currently enjoy favorable accounting and tax treatment by
entering into operating leases. Any change to current tax laws or accounting
principles that make operating lease financing less attractive could adversely
affect our business, financial condition and results of operations.

We are dependent on key management

   Our business operations are dependent in part upon the expertise of certain
key employees. The loss of the services of those employees, particularly William
E. Lindsey and Michael P. Grella, would have a material adverse effect on our
business, financial condition and results of operations.

Our quarterly operating results fluctuate.

   We have experienced fluctuations in our quarterly operating results and
anticipate that these fluctuations may continue. The factors causing
fluctuations include:

   - the timing of purchases or sales of aircraft

   - the timing and extent of consulting and remarketing fees

   - unanticipated early lease terminations

   - termination of a lease and the subsequent re-lease of an aircraft at a
     different lease rate

   - default by a lessee

   Given the possibility of fluctuations, we believe that comparisons of the
results of our operations for preceding quarters are not necessarily meaningful
and that results for any one quarter should not be relied upon as an indication
of future performance. In the event our revenues or earnings for any quarter are
less than the level expected by securities analysts or the market in general,
the shortfall could have an immediate and significant adverse impact on the
market price of our common stock.


                                       13
<PAGE>   14

ITEM 2. PROPERTIES

FLIGHT EQUIPMENT

   We review opportunities to acquire suitable jet aircraft that meet our
portfolio strategy based on market demand and customer airline requirements, as
well as our portfolio mix and planning strategies. Before committing to purchase
an aircraft, we take into consideration factors such as estimates of future
values, potential for remarketing, trends in supply and demand for the
particular type, make and model of aircraft and engines and anticipated
obsolescence. As a result, certain types and vintages of aircraft do not meet
the profile for inclusion in our portfolio of aircraft. At December 31, 1999 and
2000, the average age of our flight equipment was 12.6 and 13.6 years,
respectively. As of December 31, 1999 and 2000, our portfolio contained fourteen
aircraft that were Stage 3 compliant. See "Item 1. Business--Cautionary
Statements."

   The following table shows the scheduled lease terminations (for the minimum
noncancellable period) by aircraft type for our lease portfolio at December 31,
2000:

<TABLE>
<CAPTION>
AIRCRAFT TYPE                        2001    2002    2003   2004    2005  TOTAL
-------------                        ----    ----    ----   ----    ----  -----
<S>                                  <C>     <C>     <C>    <C>     <C>   <C>
A320-200........................      --      --      1      --      --     1
727-200.........................      --      --      1      --      --     1
737-200.........................       2       1     --      --      --     3
737-300.........................      --       2     --      --      --     2
737-400.........................      --      --      2       1      --     3
757-200.........................      --       1      1      --      --     2
MD-82...........................      --      --     --       1      --     1
MD-83...........................      --       1     --      --      --     1
                                     ----    ----    ----   ----    ----  -----
   Total........................       2       5      5       2      --    14
                                     ====    ====    ====   ====    ====  =====
</TABLE>

   At December 31, 2000, we are marketing an A320-200 and a 737-300 for lease.

   We have an MD-82 on lease to TWA with a lease expiring November 2004. On
January 10, 2001, TWA filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. On March 12, 2001, the United States Bankruptcy Court approved
a plan by American Airlines to acquire the assets of TWA. We have subsequently
been paid past due rent from TWA, and we are currently negotiating a lease of
the aircraft to American Airlines.

FACILITIES

   Our principal offices are located at 3655 Torrance Boulevard, Suite 410,
Torrance, California. We occupy space in Torrance under a lease that covers
approximately 3,254 square feet of office space and expires on May 31, 2004. We
believe that our current facilities are adequate for our needs and do not
anticipate any difficulty replacing those facilities or locating additional
facilities, if needed. See Note 7 to Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS.

   We are not currently involved in any litigation.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

   None.


                                       14
<PAGE>   15

                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
        MATTERS.

   Our common stock is listed on the National Association of Securities Dealers
Automated Quotation National Market (Nasdaq National Market) under the trading
symbol "IAIS." The high and low sale prices, as reported by The Nasdaq Stock
Market, Inc., for the years ended December 31, 1999 and 2000 were as follows:

<TABLE>
<CAPTION>
                                   1999                     2000
                           --------------------      -------------------
                            HIGH         LOW          HIGH         LOW
<S>                        <C>         <C>           <C>          <C>
   First Quarter           $8 1/4      $6  1/8       $6 7/8       $4 3/4
   Second Quarter          $7 1/8      $6  3/16      $6 5/16      $5
   Third Quarter           $7 3/4      $6  7/16      $6 3/16      $5 1/8
   Fourth Quarter          $7 1/4      $5 11/16      $5 7/8       $5 5/16
</TABLE>

   On March 19, 2001, the number of holders of record of our common stock was
53.

   We have not paid any cash dividends on our capital stock. The payment of cash
dividends in the future will be made at the discretion of the Board of Directors
and will depend on a number of factors, including future earnings, capital
requirements, our financial condition and future prospects and such other
factors as the Board of Directors may deem relevant. We intend to retain all
available funds for use in our business. Accordingly, we do not anticipate
declaring or paying any dividends on our common stock in the foreseeable future.


                                       15
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA

    The following selected consolidated financial and operating data should be
read in conjunction with the accompanying Consolidated Financial Statements and
the related notes thereto and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.

<TABLE>
<CAPTION>
                                                                At and For the Year Ended December 31,
                                                     -------------------------------------------------------------
                                                      1996         1997         1998         1999           2000
                                                     -------     --------     --------     ---------      --------
STATEMENT OF INCOME DATA                             (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER DATA)
<S>                                                  <C>         <C>          <C>          <C>            <C>
 Revenues:
    Rental of flight equipment .................     $12,681     $ 15,433     $ 26,985     $  38,088      $ 41,450
    Consulting and other fees ..................         461          212          605           200           200
    Gain on sale of aircraft equipment .........         141           --           --            --            --
    Interest income ............................         169          483        1,727         1,454         1,550
                                                     -------     --------     --------     ---------      --------
        Total revenues .........................      13,452       16,128       29,317        39,742        43,200
  Expenses .....................................      12,380       15,028       24,596        33,686        42,909
                                                     -------     --------     --------     ---------      --------
  Income before income taxes and
      cumulative effect of accounting change
      and extraordinary loss ...................       1,072        1,100        4,721         6,056           291
  Income tax expense ...........................          37          433        1,542         2,263           195
                                                     -------     --------     --------     ---------      --------
  Income before cumulative effect
     of accounting change and extraordinary
     loss ......................................       1,035          667        3,179         3,793            96
  Cumulative effect of accounting change .......          --           --          209            --            --
  Extraordinary loss on debt extinguishment ....          --           --           --          (214)           --
                                                     -------     --------     --------     ---------      --------
  Net income ...................................     $ 1,035     $    667     $  3,388     $   3,579      $     96
                                                     =======     ========     ========     =========      ========
  Basic earnings per share:
    Income before cumulative effect
        of accounting change and
        extraordinary loss .....................     $ 14.79     $    .88     $    .72     $     .90      $    .02
    Cumulative effect of accounting change .....          --           --          .04            --            --
    Extraordinary loss on debt extinguishment ..          --           --           --          (.05)           --
                                                     -------     --------     --------     ---------      --------
    Net income .................................     $ 14.79     $    .88     $    .76     $     .85      $    .02
                                                     =======     ========     ========     =========      ========
  Diluted earnings per share:
    Income before cumulative effect
        of accounting change and
        extraordinary loss .....................     $   .56     $    .30     $    .70     $     .88      $    .02
    Cumulative effect of accounting change .....          --           --          .05            --            --
    Extraordinary loss on debt extinguishment ..          --           --           --          (.05)           --
                                                     -------     --------     --------     ---------      --------
    Net income .................................     $   .56     $    .30     $    .75     $     .83      $    .02
                                                     =======     ========     ========     =========      ========
  Weighted average number of common
      shares outstanding .......................          70          754        4,430         4,212         3,961
  Weighted average number of common
      shares outstanding-assuming dilution .....       1,837        2,207        4,545         4,323         4,071

BALANCE SHEET DATA
  Flight equipment .............................     $89,885     $172,506     $236,909     $ 314,083      $295,292
  Total assets .................................      92,620      204,552      267,891       342,497       320,356
  Debt financing ...............................      82,710      154,720      208,002       271,971       253,700
  Shareholders' equity .........................       5,084       33,095       34,751        38,296        35,862
OTHER DATA
  Aircraft equipment owned at period end .......           7           10           13            16            16
</TABLE>


                                       16
<PAGE>   17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS. (DOLLARS IN THOUSANDS)

   We are primarily engaged in the acquisition of used, single-aisle jet
aircraft for lease and sale to domestic and foreign airlines and other
customers. We lease aircraft under short-term to medium-term operating leases
where the lessee is responsible for all operating costs and we retain the
potential benefit or risk of the residual value of the aircraft. This is
distinct from finance leases where the full cost of the aircraft is generally
recovered over the term of the lease.

   Rental amounts are accrued evenly over the lease term and are recognized as
revenue from the rental of flight equipment. Our flight equipment is recorded on
the balance sheet at cost and is depreciated on a straight-line basis over the
estimated useful life to our estimated salvage value. Revenue, depreciation
expense and resultant profit from operating leases are recorded evenly over the
life of the lease. Initial direct costs related to the origination of leases are
capitalized and amortized over the lease terms.

REPOSSESSION

   In the first quarter of 2000, we repossessed one of our Boeing Model 737-300
aircraft from a Mexican airline. In the second quarter of 2000, we entered into
an agreement to lease the aircraft to a foreign airline. We subsequently
canceled the lease and wrote off $207 of lease initiation costs. We have also
incurred repossession, maintenance and legal expenses of $900 in 2000. We
entered into an agreement to sell the aircraft to a third party and have
obtained a $200 non-refundable deposit from the purchaser. The deposit required
us to hold the plane available to the purchaser for a specific time period. The
time period that we were required to hold the plane available was completed in
2000 and we recorded the deposit as fee revenue. We are remarketing the aircraft
to several airlines for lease or sale. We have two notes payable to ILFC related
to the aircraft of $13,515 bearing interest at 7.96% due April 2001 and $202
bearing interest at 6% due February 2002. We expect to refinance the notes
payable as they come due.

   We repossessed one of our Airbus A320-200 aircraft from an Irish carrier two
weeks prior to its lease termination of October 31, 2000. We incurred $161 of
repossession costs related this lease. We are in discussion with several
airlines about leasing the aircraft. Related to the aircraft, we have a note
payable due to a bank of $15,113 bearing interest at 7.1% due November 2001 and
a note payable to ILFC of $8,987 bearing interest of 6.15% due December 2003. We
expect to refinance the notes payable as they come due.

EXTRAORDINARY ITEM

   In May 1999, we repaid a note with a principal amount of $15,745 prior to
maturity. The note was due May 2000 with a rate of 7.96%. The repayment resulted
in an extraordinary charge of $214, net of a $131 income tax benefit.

ACCOUNTING CHANGE

   Effective January 1, 1998, we changed our method of accounting for income
recognition for ancillary payments under lease agreements to a full accrual
method from recognition upon lease termination. This new method, which was
treated as a change in accounting method, was made to better reflect the
earnings process under lease agreements. The effects of this change on income,
before cumulative effect of accounting change, for the years ended December 31,
1998, 1999 and 2000, were increases of $983, $2,055 and $709, respectively. The
cumulative effect on retained earnings at January 1, 1998 of the accounting
change was an increase of $209, net of related income taxes of $139.

RESULTS OF OPERATIONS

Years Ended December 31, 1998, 1999 and 2000

   Revenues from rental of flight equipment increased by 41% to $38,088 in 1999
from $26,985 in 1998 primarily as a result of the acquisition of three aircraft
under lease in 1999. Our lease portfolio increased from thirteen aircraft with a
book value of $236,909 at December 31, 1998 to sixteen aircraft with a book
value of $314,083 at December 31, 1999. The 9% increase in rental revenues in
2000 to $41,450 from $38,088 in 1999 was primarily the result of a full year's
effect of three aircraft purchased in 1999, offset by the repossession of two
aircraft, as discussed above. Our lease portfolio


                                       17
<PAGE>   18

consisted of sixteen aircraft with a book value of $295,292 at December 31, 2000
compared to sixteen aircraft with a book value of $314,083 at December 31, 1999.

   Year to year comparisons of consulting and other fees are impacted by their
timing and amount. In 1998 and 1999, consulting fee revenue of $605 and $200
were earned related to marketing activities. In 2000, we earned $200 from the
non-refundable deposit on an agreement to sell a 737-300, as discussed above.

   Interest income decreased to $1,454 in 1999 from $1,727 in 1998 primarily as
a result of lower average interest rates on our cash and restricted cash
balances. Interest income increased to $1,550 in 2000 from $1,454 in 1999
primarily as a result of higher average interest rates on our cash, restricted
cash and short-term investments.

   Expenses as a percent of total revenues were 83.9%, 84.7% and 99.3% in 1998,
1999 and 2000, respectively. The increase in the percent of total revenues from
1998 to 1999 was due to the effect of a 36% increase in total revenues and a 37%
increase in total expenses. The increase in the percent of total revenues from
1999 to 2000 was due to the effect of a 9% increase in total revenues and a 27%
increase in total expenses.

   Interest expense increased from $11,969 in 1998 to $16,143 in 1999 and
$18,845 in 2000. Interest expense increased in 1999 as a result of interest on
financing related to the acquisition of three additional aircraft and a charge
related to the early termination of a lease, offset by loan paydowns. Interest
expense increased in 2000 as a result of a full year's effect of the financing
of three aircraft acquired in 1999. Our weighted average interest rate was 7%
and 7.1% at December 31, 1999 and 2000, respectively.

   Depreciation expense increased from $10,848 in 1998 to $15,411 in 1999 and
$18,636 in 2000. The increase of $4,563 in 1999 from 1998 resulted from the
acquisition of three additional aircraft in 1999. The increase of $3,225 in 2000
from 1999 resulted from a full year's effect of the acquisition of three
aircraft in 1999. In the fourth quarter of 2000, we recorded a $2,000 charge for
the write-down of the value of a 1978 and a 1980 Boeing Model 737-200ADV stage 2
aircraft based on current estimated residual values and estimated future
economic values of these aircraft. These are the last remaining aircraft in our
portfolio that do not meet stage 3 noise compliance regulations. These aircraft
are leased in an area which does not require compliance with noise regulations.
However, they may require modification if moved to a jurisdiction requiring
stage 3 compliance. Currently, the modifications range in cost from $1.2 million
to $2 million per aircraft.

   In 2000, we recorded $1,268 of repossession, maintenance and lease
cancellation costs related to the repossessions of the two aircraft as discussed
above. No repossession, maintenance and lease cancellation costs were incurred
in 1998 and 1999.

   General and administrative expenses were $1,529, $1,882 and $1,910 in 1998,
1999 and 2000, respectively. The increase from 1998 to 1999 was primarily the
result of additional compensation expense. The increase from 1999 to 2000 was
primarily the result of increases in benefits and legal costs in 2000. In 1998,
1999 and 2000, we incurred $250 of non- cash compensation expense related to the
vesting of options. No additional compensation expense will be recorded in
future periods related to the vesting of these options. See Note 8 to
Consolidated Financial Statements.

   We recognized income tax expense of $1,542, $2,263 and $195, representing
effective income tax rates of 33%, 37% and 67%, during 1998, 1999 and 2000,
respectively. The $721 increase in income tax expense in 1999 primarily
represents a non-cash provision for deferred income taxes as our effective tax
rate increased to 37%. The $2,068 decrease in income tax expense in 2000 is
primarily the result of a $5,764 decrease in taxable income. The increase in the
effective rate resulted from a greater marginal effect of the expiration of
state tax net operating loss carryforwards. During 2000, we continued to
generate substantial federal net operating loss carryforwards. At December 31,
2000, we had $31,579 of federal net operating loss carryforwards. Our ability to
utilize our federal net operating loss carryforwards is dependant on our ability
to generate taxable income through the sale of aircraft in our portfolio. See
Note 3 to Consolidated Financial Statements.

   Net income increased from $3,388 in 1998 to $3,579 in 1999 and decreased to
$96 in 2000 due to the factors described above and the effects of the
extraordinary item and the change in accounting method.


                                       18
<PAGE>   19

LIQUIDITY AND CAPITAL RESOURCES

   Our principal external sources of funds have been term loans from banks and
seller financing secured by aircraft. As a result, a substantial amount of our
cash flow from the rental of flight equipment is applied to principal and
interest payments on secured debt. The terms of our loans generally require a
substantial balloon payment at the end of the noncancellable portion of the
lease of the related aircraft, at which time we will be required to re-lease the
aircraft and renegotiate the balloon amount of the loan or obtain other
financing. Refinancing of the balloon amount is dependent upon re-leasing the
related aircraft. Accordingly, we begin lease remarketing efforts well in
advance of the lease termination. See "Item 1. Business -- Financing/Source of
Funds." The principal use of cash is for financing the acquisition of our
aircraft portfolio, which are financed by loans secured by the applicable
aircraft. We entered into a $5,000 line of credit with a bank in February 2000.
The line of credit bears interest at LIBOR plus 2.5% and expires June 30, 2001.
No borrowings have been made against the line of credit.

   At December 31, 1999 and 2000, we had cash and cash equivalents of $13,045
and $11,164, respectively.

    Net cash provided by operating activities increased from $15,900 in 1998 to
$25,639 in 1999 and decreased to $19,338 in 2000. In 1998, the movements in
restricted cash and lease and other deposits were primarily due to the receipt
of lease and other deposits related to the leases on three aircraft purchased in
that year. Restricted cash represents lease deposits received from our lessees
that are restricted by the lenders on those aircraft. The increase in cash flows
from operating activities of $9,739 in 1999 was primarily the result of the
acquisition of three additional aircraft and their related leases in 1999 and a
full year's income from the three aircraft purchased in 1998. In 1999 the
movement in lease and other deposits was due to the receipt of lease deposits
related to the leases on the aircraft purchased in that year. The movement in
lease and other deposits was lower in 1999 than in 1998 because the aircraft
purchased in 1999 were purchased primarily with seller financing and as such,
they were not restricted. In 2000 the decrease in cash flows from operating
activities of $6,301 was primarily the result of the effects of our repossession
of two aircraft in 2000, partially offset by a full years' income from the three
aircraft acquired in 1999. The movement in restricted cash and lease and other
deposits in 2000 was due to lease deposit reimbursements to several lessees in
2000. The timing and amount of these reimbursements vary as a result of the type
and usage of the aircraft on lease.

   In 1998, cash of $75,100 was used in investing activities to purchase three
additional aircraft. In 1999, cash of $92,203 was used in investing activities
primarily to purchase three additional aircraft. In 2000, we used $169 of cash
for the purchase of equipment on a Boeing Model 737-300.

   In 1998, net cash provided by financing activities was $51,285, including
proceeds from borrowings of $64,384 to finance the purchase of three aircraft,
offset by repayments of $11,116 and $1,983 of common stock repurchases. In 1999,
net cash provided by financing activities was $63,686, including proceeds from
borrowings of $110,127 to finance the purchase of three aircraft and refinance
existing borrowings, offset by repayments of $46,159 and $283 of common stock
repurchases. In 2000, net cash used in financing activities was $21,050,
including repayments of notes payable of $18,270 and $2,780 of common stock
repurchases.

   Notes payable due within one year totaled $158.1 million at December 31,
2000, of which $154.2 million represents balloon payments and $3.9 million
represents installment payments. We intend to refinance all of the balloon
payments due in 2001. We have extended or re-leased three aircraft with $38.9
million of associated balloon payments due in 2001. During 1998, 1999 and 2000,
we refinanced $29.7 million, $46 million and $101.3 million of balloon payments,
respectively.

   Cash and cash equivalents vary from year to year principally as a result of
the timing of the purchase and sale of aircraft.

   From time to time, we use interest rate swap arrangements to reduce the
potential impact of increases in interest rates on floating rate long-term debt.
We do not enter into swap arrangements for trading purposes. Premiums paid for
purchased interest rate swap agreements are amortized to interest expense over
the terms of the swap agreements. At December 31, 2000, we had no swap
agreements.

   Our ability to execute our business strategy successfully and to sustain our
operations is dependent, in part, on our ability to obtain financing and to
raise equity capital. We cannot assure you that the necessary amount of capital
will


                                       19
<PAGE>   20

continue to be available to us on favorable terms or at all. If we are unable to
continue to obtain any portion of required financing on favorable terms, our
ability to add new aircraft to our lease portfolio, renew leases, re-lease
aircraft, repair or recondition aircraft if required, or retain ownership of
aircraft on which financing has expired would be impaired, which could have a
material adverse effect on our business, financial condition and results of
operations. In addition, our financing arrangements to date have been dependent
in part upon ILFC. See "Item 1. Business--Cautionary Statements."

MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

Lease Portfolio

   We lease our portfolio of aircraft under operating leases rather than finance
leases. Under an operating lease, we retain title to the aircraft and assume the
risk of not recovering our entire investment in the aircraft through the
re-leasing and remarketing process. Operating leases require us to re-lease or
sell aircraft in our portfolio in a timely manner upon termination of the lease
in order to minimize off-lease time and recover our original investment in the
aircraft. Numerous factors, many of which are beyond our control, may have an
impact on our ability to re-lease or sell an aircraft on a timely basis or to
re-lease at a satisfactory lease rate. Among the factors are:

-     the demand for various types of aircraft

-     general market and economic conditions

-     regulatory changes, including those imposing environmental, maintenance or
      operational requirements

-     changes in supply or cost of aircraft

-     technological developments

   In addition, the success of an operating lease depends in significant part
upon having the aircraft returned by the lessee in marketable condition as
required by the lease. Consequently, we cannot assure you that our estimated
residual value for aircraft will be realized. If we are unable to re-lease or
resell aircraft on favorable terms, our business, financial condition and
results of operations could be adversely affected. A hypothetical 10% decrease
in lease rates of those leases which expire within a one-year period would
reduce our lease revenue by $762 annually.

Financial Instruments

   This analysis presents the hypothetical loss in earnings, cash flows or fair
value of the financial instruments which we held at December 31, 2000 and which
are sensitive to changes in interest rates. In the normal course of business, we
also face risks that are either nonfinancial or non-quantifiable. These risks
principally include country risk, credit risk and legal risk and are not
included in the following analysis.

   From time to time, we enter into interest rate swaps with financial
institutions under terms that provide payment of interest on the notional amount
of the swap. In accordance with these arrangements, we pay interest at a fixed
rate and the financial institution pays interest at variable rates pursuant to
terms of the related loans. We had no swap agreements at December 31, 2000.

   The carrying amounts of cash and cash equivalents and short-term investments
approximate fair market value because of the short-term nature of these items.
Market risk was estimated as the potential decrease in fair value resulting from
a hypothetical 10% increase in interest rates for our cash equivalents and was
not materially different from the period-end carrying value.

   The fair values of our debt instruments, including the related asset value
guarantees, approximate the carrying values because (1) the rates currently
offered to us are similar to the rates for these items, or (2) the yields to
maturity approximate the rates for these items. Market risk associated with our
debt instruments primarily results from our ability to refinance balloon
payments at comparable or lower interest rates. Market risk was estimated as the
potential increase in interest expense for a one year period from December 31,
2000 resulting from a hypothetical 10% increase in our weighted average
borrowing rate at December 31, 2000 or $1,804.


                                       20
<PAGE>   21

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Market--Sensitive Instruments and Risk Management.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The response to this item is submitted as a separate section of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

   During the two fiscal periods prior to the date of our most recent financial
statements, we have not reported a change in accountants nor have there been any
disagreements reported on any matter of accounting principles or practices or
financial statement disclosure.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

   The section entitled "Election of Directors" in the Proxy Statement is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

   The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

   The section entitled "Beneficial Ownership of Shares" in the Proxy Statement
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

   The section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement is incorporated herein by reference.


                                       21
<PAGE>   22

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS:

        See Index to Consolidated Financial Statements on page 23 of this
report.

FINANCIAL STATEMENT SCHEDULES:

        None.

EXHIBITS:

<TABLE>
<CAPTION>
        NUMBER                                          DESCRIPTION
        ------                                          -----------
<S>                <C>
         3.1       Amended and Restated Articles of Incorporation of the
                   Company. Filed as Exhibit 3.1 to Form 10-Q for the quarterly
                   period ended September 30, 1997, and incorporated herein by
                   reference

         3.2       Amended and Restated Bylaws of the Company. Filed as Exhibit
                   3.2 to Form 10-Q for the quarterly period ended September 30,
                   1997, and incorporated herein by reference

         4.1       Senior Term Loan Agreement, dated December 10, 1997, between
                   IAI V, Inc. and City National Bank. Filed as Exhibit 4.11 to
                   Form 10-Q for the quarterly period ended September 30, 1997,
                   and incorporated herein by reference

         4.2       The Company hereby agrees to furnish to the Commission upon
                   request a copy of any instrument with respect to long-term
                   debt where the total amount of securities authorized
                   thereunder does not exceed 10% of the consolidated assets of
                   the Company

    *   10.1       Employment Agreement with William E. Lindsey. Filed as
                   Exhibit 10.1 to Form 10-Q for the quarterly period ended
                   September 30, 1997, and is incorporated herein by reference

    *   10.2       Employment Agreement with Michael P. Grella. Filed as Exhibit
                   10.2 to Form 10-Q for the quarterly period ended September
                   30, 1997, and is incorporated herein by reference

    *   10.3       1997 Stock Option and Award Plan. Filed as Exhibit 6 to
                   Registration Statement No. 333-46411, and incorporated
                   herein by reference

    *   10.4       1997 Eligible Director Stock Option Plan. Filed as Exhibit 6
                   to Registration Statement No. 333-46413, and incorporated
                   herein by reference

    *   10.5       Form of Indemnity Agreement. Filed as Exhibit 10.3 to
                   Registration Statement No. 333-19875, and incorporated herein
                   by reference

        23.1       Consent of KPMG LLP, independent certified public accountants
</TABLE>

-------

*  Management contracts.

REPORTS ON FORM 8-K:

During the quarter ended December 31, 2000, we did not file any reports on Form
8-K.


                                       22
<PAGE>   23

                            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                                                       PAGE
                                                                                       ----
<S>                                                                                    <C>
Independent Auditors' Report........................................................    24

Consolidated Balance Sheets as of December 31, 2000 and 1999........................    25

Consolidated Statements of Income for the Years Ended December 31, 2000,
  1999 and 1998.....................................................................    26

Consolidated Statements of Shareholders' Equity for the Years Ended
  December 31, 1998, 1999 and 2000..................................................    27

Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
  1999 and 1998.....................................................................    28

Notes to Consolidated Financial Statements..........................................    29
</TABLE>






                                       23
<PAGE>   24


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
International Aircraft Investors:

   We have audited the accompanying consolidated balance sheets of International
Aircraft Investors and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Aircraft Investors and subsidiaries as of December 31, 2000 and
1999 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.

                                        KPMG LLP

Los Angeles, California
   January 17, 2001,
   Except for Notes 4, 7 and 9
   which are as of March 21, 2001




                                       24
<PAGE>   25


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                     ASSETS
                                                                              December 31,
                                                                      -----------------------------
                                                                          2000            1999
                                                                      ------------    -------------
<S>                                                                   <C>             <C>
Cash and cash equivalents ..........................................  $ 11,164,227    $  13,045,392
Short-term investments .............................................     1,393,450               --
Flight equipment, at cost, net .....................................   295,292,436      314,083,293
Cash, restricted ...................................................    11,479,649       13,908,097
Other assets .......................................................     1,026,667        1,460,218
                                                                      ------------    -------------
                                                                      $320,356,429    $ 342,497,000
                                                                      ============    =============

                     LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued interest and other accrued expenses ........................  $  2,121,279    $   1,727,635
Notes payable ......................................................   253,700,338      271,970,620
Lease and other deposits ...........................................    20,011,609       23,282,834
Deferred rent ......................................................     3,884,090        2,624,534
Deferred taxes, net ................................................     4,777,053        4,594,927
                                                                      ------------    -------------
                                                                       284,494,369      304,200,550
Commitments and contingencies (Note 7)
Shareholders' equity :
  Preferred stock, $.01 par value. Authorized 15,000,000
     shares; none issued and outstanding ...........................            --               --
  Common stock, $.01 par value. Authorized 20,000,000 shares;
     issued and outstanding 3,696,573 shares at December 31, 2000
     and 4,173,784 shares at December 31, 1999 .....................        36,966           41,738
  Additional paid-in capital .......................................    28,234,506       31,009,749
  Deferred stock compensation ......................................            --         (250,000)
  Retained earnings ................................................     7,590,588        7,494,963
                                                                      ------------    -------------
          Net shareholders' equity .................................    35,862,060       38,296,450
                                                                      ------------    -------------
                                                                      $320,356,429    $ 342,497,000
                                                                      ============    =============
</TABLE>


           See accompanying notes to consolidated financial statements


                                       25
<PAGE>   26

                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                         -----------------------------------------
                                                            2000           1999           1998
                                                         -----------   ------------    -----------
<S>                                                      <C>           <C>             <C>
Revenues:
  Rental of flight equipment ........................... $41,450,207   $ 38,088,180    $26,985,395
  Consulting and other fees ............................     200,000        200,000        605,000
  Interest income ......................................   1,550,014      1,453,726      1,727,480
                                                         -----------   ------------    -----------
          Total revenues ...............................  43,200,221     39,741,906     29,317,875
Expenses:
  Interest .............................................  18,844,906     16,143,194     11,968,886
  Depreciation and amortization ........................  18,635,756     15,410,964     10,848,344
  Repossession, maintenance and lease cancellation .....   1,267,835             --             --
  Write-down of flight equipment .......................   2,000,000             --             --
  General and administrative ...........................   1,910,373      1,881,867      1,529,200
  Stock compensation ...................................     250,000        250,000        250,000
                                                         -----------   ------------    -----------
          Total expenses ...............................  42,908,870     33,686,025     24,596,430
Income before income taxes and cumulative effect of
  accounting change and extraordinary loss .............     291,351      6,055,881      4,721,445
Income tax expense .....................................     195,726      2,262,773      1,541,906
                                                         -----------   ------------    -----------
Income before cumulative effect of accounting change
  and extraordinary loss ...............................      95,625      3,793,108      3,179,539
Cumulative effect of accounting change, net of income
     tax of $139,000 ...................................          --             --        209,000
Extraordinary loss on debt extinguishment, net of
     income tax benefit of $131,322 ....................          --       (214,263)            --
                                                         -----------   ------------    -----------
Net income ............................................. $    95,625   $  3,578,845    $ 3,388,539
                                                         ===========   ============    ===========

Basic earnings per share:
  Income before cumulative effect of accounting change
     and extraordinary loss ............................ $       .02   $        .90    $       .72
  Cumulative effect of accounting change ...............          --             --            .04
  Extraordinary loss on debt extinguishment ............          --           (.05)            --
                                                         -----------   ------------    -----------
  Net income ........................................... $       .02   $        .85    $       .76
                                                         ===========   ============    ===========
Diluted earnings per share:
  Income before cumulative effect of accounting change
     and extraordinary loss ............................ $       .02   $        .88    $       .70
  Cumulative effect of accounting change ...............          --             --            .05
  Extraordinary loss on debt extinguishment ............          --           (.05)            --
                                                         -----------   ------------    -----------
  Net income ........................................... $       .02   $        .83    $       .75
                                                         ===========   ============    ===========

Weighted average common shares outstanding .............   3,960,680      4,211,534      4,430,183
                                                         ===========   ============    ===========
Weighted average common shares--assuming dilution ......   4,070,794      4,322,711      4,545,191
                                                         ===========   ============    ===========
</TABLE>


           See accompanying notes to consolidated financial statements


                                       26
<PAGE>   27

                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                 COMMON STOCK           ADDITIONAL      DEFERRED
                                PREFERRED   -----------------------      PAID-IN        STOCK          RETAINED
                                  STOCK       SHARES        AMOUNT       CAPITAL      COMPENSATION     EARNINGS        TOTAL
                                ---------   ----------     --------    ------------   ------------    ----------    ------------
<S>                             <C>         <C>            <C>         <C>            <C>             <C>           <C>
Balance at December 31, 1997       --        4,497,584     $ 44,976    $ 33,272,435    $(750,000)     $  527,579    $ 33,094,990
  Repurchase of common stock       --         (281,300)      (2,813)     (1,980,111)          --              --      (1,982,924)
  Stock compensation .......       --               --           --              --      250,000              --         250,000
  Net income ...............       --               --           --              --           --       3,388,539       3,388,539
                                   --       ----------     --------    ------------    ---------      ----------    ------------

Balance at December 31, 1998       --        4,216,284       42,163      31,292,324     (500,000)      3,916,118      34,750,605
  Repurchase of common stock       --          (42,500)        (425)       (282,575)          --              --        (283,000)
  Stock compensation .......       --               --           --              --      250,000              --         250,000
  Net income ...............       --               --           --              --           --       3,578,845       3,578,845
                                   --       ----------     --------    ------------    ---------      ----------    ------------

Balance at December 31, 1999       --        4,173,784       41,738      31,009,749     (250,000)      7,494,963      38,296,450
  Repurchase of common stock       --         (477,211)      (4,772)     (2,775,243)          --              --      (2,780,015)
  Stock compensation .......       --               --           --              --      250,000              --         250,000
  Net income ...............       --               --           --              --           --          95,625          95,625
                                   --       ----------     --------    ------------    ---------      ----------    ------------

Balance at December 31, 2000       --        3,696,573     $ 36,966    $ 28,234,506    $      --      $7,590,588    $ 35,862,060
                                   ==       ==========     ========    ============    =========      ==========    ============
</TABLE>


           See accompanying notes to consolidated financial statements


                                                27
<PAGE>   28


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                             YEARS ENDED DECEMBER 31,
                                                                                  ----------------------------------------------
                                                                                      2000             1999             1998
                                                                                  ------------     ------------     ------------
<S>                                                                               <C>              <C>              <C>
Cash flow from operating activities:
Net income ...................................................................    $     95,625     $  3,578,845     $  3,388,539
                                                                                  ------------     ------------     ------------
Adjustments to reconcile net income to
  Net cash provided by operating activities:
  Cumulative effect of accounting change .....................................              --               --          209,000
  Depreciation of flight equipment ...........................................      18,360,000       15,028,867       10,697,484
  Amortization of deferred fees and debt issuance costs ......................         388,249          624,511          257,647
  Write-down of flight equipment .............................................       2,000,000               --               --
  Deferred taxes .............................................................         182,126        2,117,051        1,654,076
  Stock compensation .........................................................         250,000          250,000          250,000

 (Increase) decrease in assets:
    Short-term investments ...................................................      (1,393,450)              --               --
    Cash, restricted .........................................................       2,428,448         (520,219)      (6,410,904)
    Other assets .............................................................          45,302         (414,346)        (683,191)

  Increase (decrease) in liabilities:
    Accrued interest and other accrued expenses ..............................         393,644          727,344         (343,386)
    Lease deposits and other deposits ........................................      (3,271,225)       4,653,310        7,184,411
    Deferred rent ............................................................        (140,444)        (406,278)        (303,188)
                                                                                  ------------     ------------     ------------
      Net cash provided by operating activities ..............................      19,338,275       25,639,085       15,900,488

Cash flows from investing activities:
  Purchase of flight equipment ...............................................        (169,143)     (92,203,387)     (75,100,000)
    Net cash used in investing activities ....................................        (169,143)     (92,203,387)     (75,100,000)
                                                                                  ------------     ------------     ------------

Cash flows from financing activities:
  Repayment of notes payable .................................................      (9,222,070)     (25,254,014)      (8,152,498)
  Repayment of notes payable to International Lease Finance Corporation ......      (8,968,712)     (20,904,747)      (2,880,390)
  Repayment of notes payable to great lakes holdings .........................         (79,500)              --          (83,000)
  Proceeds from notes payable ................................................              --       14,600,000       31,250,000
  Proceeds from notes payable to International Lease Finance Corporation .....              --       95,527,473       33,134,000
  Repurchase of common stock .................................................      (2,780,015)        (283,000)      (1,982,924)
                                                                                  ------------     ------------     ------------
    Net cash provided by (used in) financing activities ......................     (21,050,297)      63,685,712       51,285,188
    Net decrease in cash and cash equivalents ................................      (1,881,165)      (2,878,590)      (7,914,324)
Cash and cash equivalents at beginning of year ...............................      13,045,392       15,923,982       23,838,306
                                                                                  ------------     ------------     ------------
Cash and cash equivalents at end of year .....................................    $ 11,164,227     $ 13,045,392     $ 15,923,982
                                                                                  ============     ============     ============
Supplemental disclosure of cash flow information --
    Cash paid for interest ...................................................    $ 18,796,399     $ 15,298,845     $ 12,205,485
                                                                                  ============     ============     ============
    Cash paid for taxes ......................................................    $     14,400     $     12,800     $     26,830
                                                                                  ============     ============     ============
</TABLE>


Supplemental disclosure of noncash investing and financing activities:

During the year ended December 31, 2000, the Company received a $1,400,000
hushkit for its Boeing model 727-200 as partial consideration for future rent



           See accompanying notes to consolidated financial statements


                                       28
<PAGE>   29


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 2000, 1999 AND 1998


(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

   International Aircraft Investors (the Company) is primarily engaged in the
acquisition of used, single-aisle jet aircraft for lease and sale to domestic
and foreign airlines and other customers. The Company leases aircraft under
short-term to medium-term operating leases where the lessee is responsible for
all operating costs and the Company retains the potential benefit and risk of
the residual value of the aircraft, as distinct from finance leases where the
cost of the aircraft is generally recovered over the term of the lease.

   Fourteen of the Company's sixteen aircraft at December 31, 2000 were acquired
from International Lease Finance Corporation (ILFC), a 1.8% shareholder of the
Company. In connection with certain of these aircraft acquisitions, ILFC has
provided loan guarantees or other financial support which have provided more
favorable borrowing arrangements than the Company could otherwise have obtained.
Additionally, the Company has derived certain consulting fees from ILFC for
providing remarketing and other services.

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year amounts to conform to current
year presentation.

Extraordinary Item

   In May 1999, the Company repaid a note with a principal amount of $15,745,473
prior to maturity. The note was due May 2000 with a rate of 7.96%. The repayment
resulted in an extraordinary charge of $214,263, net of a $131,322 income tax
benefit.

Accounting Change

   Effective January 1, 1998, the Company changed its method of accounting for
income recognition for ancillary payments under lease agreements to a full
accrual method from recognition upon lease termination. This new method, which
was treated as a change in accounting method, was made to better reflect the
earnings process under lease agreements. The effects of this change on income
and earnings per share, before cumulative effect of accounting change, for the
years ended December 31, 2000, 1999 and 1998, were increases of $708,500 ($.18
per basic and $.17 per diluted share), $2,055,000 ($.30 per basic and diluted
share) and $983,000 ($.22 per basic and diluted share), respectively. The
cumulative effect on retained earnings at January 1, 1998 of the accounting
change was an increase of $209,000 ($.04 per basic share and $.05 per diluted
share), net of related income taxes of $139,000.

Cash and Cash Equivalents and short-term investments

   Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of less than 90 days. Short-term investments
consist of securities invested for periods longer than 90 days. Short-term
investments are stated at cost. Certain cash and short-term investments for the
repayment of a security deposit and maintenance reserves are restricted pursuant
to certain loan agreements. Such security deposit and maintenance reserves
mature through November 2004.


                                       29
<PAGE>   30

                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Deferred Fees

   The direct costs related to purchase and lease agreements are capitalized and
amortized to expense using the straight-line method, which approximates the
effective interest method, over the term of the related lease.

   The costs related to asset value guarantees (AVGs) are capitalized and
amortized to expense using the straight-line method over the term of the AVG,
generally ten years. At December 31, 2000 and 1999, deferred fees related to
AVGs were $207,605 and $247,890, respectively.

Rentals

   The Company leases flight equipment under operating leases. Accordingly,
income is recognized over the life of noncancelable lease terms under the
straight-line method.

Flight Equipment and Depreciation

   Flight equipment is stated at cost. Major additions and modifications are
capitalized. Depreciation of flight equipment is generally computed on a
straight-line method over the estimated remaining useful lives (25 year original
life less years in service at the date of acquisition) assuming a 15% estimated
residual value.

Maintenance Reserves

   Normal maintenance and repairs of flight equipment on lease are provided by
and paid for by the lessee. Maintenance reserves received under certain leases
amounted to $5,689,802, $13,197,538 and $5,959,306 during the years ended
December 31, 2000, 1999 and 1998, respectively.

Impairment of Long-Lived Assets

   Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," issued in March 1995 and effective for fiscal years beginning
after December 15, 1995, establishes accounting standards for the recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill either to be held or disposed of. The Company adopted
SFAS No. 121 during 1996.

   The Company evaluates the carrying value of its flight equipment using
undiscounted operating cash flows and when required provides for any permanent
impairment of long-lived assets. During 2000, the Company determined that the
value of two of its Boeing Model 737-200ADV aircraft had been impaired. The two
aircraft were the last two remaining aircraft in the Company's portfolio that
did not meet the stage 3 noise compliance regulations. The Company recorded a
write-down of $2,000,000 related to these two aircraft based on current
estimated residual values and estimated future economic values of the aircraft.
In connection with the writedown, the Company reduced the estimated residual
value of each of the two aircraft to approximately $1,500,000.

Interest Rate Swap Agreements

   The Company uses interest rate swap arrangements to reduce the potential
impact of increases in interest rates on certain floating rate long-term debt
and does not use them for trading purposes. Premiums paid for purchased interest
rate swap agreements are amortized to interest expense over the terms of the
swap agreements. At December 31, 2000, we had no swap agreements.

   All outstanding swap agreements are hedges and, therefore, are not marked to
market.


                                       30
<PAGE>   31

                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Fair Values of Financial Instruments

   The carrying amounts of cash and cash equivalents and accrued interest and
other accrued expenses approximate fair market value because of the short-term
nature of these items.

   The fair values of the Company's interest rate swaps approximate unamortized
costs as the remaining amortization periods are short-term. The fair value of
the amount due from ILFC approximates the carrying value as the fair value was
determined using the present value method with the Company's internal rate of
return. The fair values of the Company's debt instruments, including the related
AVGs, approximate the carrying values because (1) the rates currently offered to
the Company are similar to the rates for these items, or (2) the yields to
maturity approximate the rates for these items.

Management Estimates

   The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These affect the reported amounts of assets, liabilities, revenues
and expenses and the amount of any contingent assets or liabilities disclosed in
the financial statements. Actual results could differ from the estimates made.

   The Company leases aircraft to various commercial airlines, on short-term to
medium-term operating leases, generally three to five years. The related
aircraft are generally financed by borrowings that become due at or near the end
of the lease term through a balloon payment. As a result, the Company's
operating results depend on management's ability to roll over debt facilities,
renegotiate favorable leases and realize estimated salvage values.

Stock Compensation

   Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," issued in October 1995 and effective
for fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair-value-based method of accounting for employee stock options or
similar equity instruments. SFAS No. 123 allows an entity to elect to continue
to measure compensation cost under Accounting Principles Board Opinion No. 25
(APBO No. 25), "Accounting for Stock Issued to Employees," but requires pro
forma disclosures of net earnings and earnings per share as if the fair-value
based method of accounting had been applied. The Company elected to continue to
measure compensation cost under APBO No. 25. Had compensation cost been
determined using the fair value at the grant date for awards during 2000, 1999
and 1998, consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share for 2000, 1999 and 1998 would have been reduced
to the pro forma amount as indicated below.

<TABLE>
<CAPTION>
                                                   2000          1999          1998
                                                 ---------    ----------    ----------
<S>                                              <C>          <C>           <C>
Net earnings as reported .................       $  95,625    $3,578,845    $3,388,537

Pro forma net earnings (loss) ............        (325,000)    3,251,167     3,281,442

Net earnings per share, as reported:
  Basic ..................................             .02           .85           .76
  Diluted ................................             .02           .83           .75
Pro forma net earnings (loss) per share:
  Basic ..................................            (.08)          .77           .74
  Diluted ................................       $    (.08)   $      .75    $      .72
</TABLE>




                                       31
<PAGE>   32


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


   The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during the year ended December 31, 2000: dividend
yield of 0%; expected volatility of 39%; risk-free interest rate of 6% and
expected lives of five years.

   The weighted average fair value per share of options granted during the years
ended December 31, 2000 is $2.26.

Income Taxes

   The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences for differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years when such temporary differences are expected to be recovered
or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income at the enactment date.

Comprehensive Income

   In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
which established standards for reporting and display of comprehensive income
and its components. The Company has no items of comprehensive income and as a
result SFAS. No. 130 has no impact on the Company's financial reporting.

Earnings per Share

   In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share." SFAS No. 128 replaced the calculation of primary and
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to SFAS No. 128 requirements.

   The following table sets forth the computation of the weighted average number
of shares used to calculate basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                  -----------------------------------
                                                                    2000         1999         1998
                                                                  ---------    ---------    ---------
<S>                                                               <C>          <C>          <C>
Basic earnings per share-weighted average shares outstanding ..   4,211,534    4,430,183    3,960,680
Effect of dilutive securities:
  Employee stock options ......................................     109,842      115,008      110,114
  Non-employee stock options ..................................       1,335           --           --
                                                                  ---------    ---------    ---------
Dilutive potential common shares ..............................     111,177      115,008      110,114
                                                                  ---------    ---------    ---------
Diluted earnings per share-adjusted average shares
  and assumed conversions .....................................   4,322,711    4,545,191    4,070,794
                                                                  =========    =========    =========
</TABLE>

   The Company issued to its underwriters warrants to purchase 260,000 shares of
its common stock at $12 per share in connection with its initial public
offering. These warrants were excluded from the compensation computation of
diluted net income per common share because they were anti-dilutive. The
warrants are exercisable through November 10, 2001.

   In 1998, the Company issued options to purchase 25,000 shares of common stock
at $10.25 per share under its Eligible Directors Option Plan. These options were
excluded from the compensation computation of diluted net income per common
share because they were anti-dilutive. The options are exercisable through May
21, 2003.


                                       32
<PAGE>   33


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Significant Customers

   The Company currently owns sixteen aircraft. Fourteen aircraft are leased to
thirteen airlines worldwide and two are being marketed for lease. The loss of
any one aircraft or the financial difficulty of or lease default by any one
lessee could have a material adverse effect on its business, financial condition
and results of operations.

   We have an MD-82 on lease to TWA with a lease expiring November 2004. On
January 10, 2001, TWA filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. On March 12, 2001, the United States Bankruptcy Court approved
a plan by American Airlines to acquire the assets of TWA. We have subsequently
been paid past due rent from TWA, and we are currently negotiating a lease of
the aircraft to American Airlines.

   The following customers individually accounted for 10% or more of revenues:

<TABLE>
<CAPTION>
                                       NUMBER OF
                                      SIGNIFICANT   PERCENTAGE OF REVENUES BY
                                       CUSTOMERS     SIGNIFICANT CUSTOMERS
                                      -----------   -------------------------
<S>                                   <C>           <C>
 Year ended December 31:
   2000...........................         1         11%
   1999...........................         1         11%
   1998...........................         4         10%, 11%, 12% and 15%
</TABLE>

Segment Information

   In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes previous reporting
requirements for reporting on segments of a business enterprise. The Company's
operations are in one business segment, aircraft leasing. These operations
include the acquisition of used single- aisle jet aircraft and engines for lease
and sale to domestic and foreign airlines and other customers. Revenues include
rentals of flight equipment to foreign airlines of $33,268,254, $30,306,055 and
$19,824,984 in 2000, 1999 and 1998, respectively.

   The following table sets forth the dollar amount and percentage of rentals of
flight equipment attributable to the indicated geographic areas for the years
indicated:

<TABLE>
<CAPTION>
                                  2000                        1999                       1998
                               -----------                 -----------                -----------
<S>                            <C>               <C>       <C>               <C>      <C>                <C>
United States and Canada ....  $17,264,415       41.7%     $14,075,897       37.0%     $11,624,832       43.1%
Europe ......................   18,049,392       43.5%      14,322,696       37.6%       7,797,163       28.9%
Central America and Mexico ..    1,860,000        4.5%       3,636,187        9.5%       2,112,000        7.8%
Asia and the Pacific ........    4,276,400       10.3%       6,053,400       15.9%       5,451,400       20.2%
                               -----------       ----      -----------       ----      -----------       ----
                               $41,450,207        100%     $38,088,180        100%     $26,985,395        100%
                               ===========       ====      ===========       ====      ===========       ====
</TABLE>



                                       33
<PAGE>   34


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(2) FLIGHT EQUIPMENT

The Company's investment in flight equipment (primarily purchased from ILFC) as
of December 31, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                        ------------------------------
                                            2000              1999
                                        ------------      ------------
<S>                                     <C>               <C>
      Flight equipment, at cost ...     $366,780,787      $365,211,644
      Accumulated depreciation ....      (71,488,351)      (51,128,351)
                                        ------------      ------------
      Flight equipment, net .......     $295,292,436      $314,083,293
                                        ============      ============
</TABLE>

(3) INCOME TAXES

   Provision for taxes on income consisted of the following:

<TABLE>
<CAPTION>
                                    TOTAL         CURRENT        DEFERRED
                                  ----------     ----------     ----------
<S>                               <C>            <C>            <C>
      Year ended December 31:
        2000:
           Federal ..........     $   12,347     $       --     $   12,347
           State ............        183,379         14,400        168,979
                                  ----------     ----------     ----------
                                  $  195,726     $   14,400     $  181,326
                                  ==========     ==========     ==========
        1999:
           Federal ..........     $1,941,500     $       --     $1,941,500
           State ............        189,951         12,800        177,151
                                  ----------     ----------     ----------
                                  $2,131,451     $   12,800     $2,118,651
                                  ==========     ==========     ==========
        1998:
           Federal ..........     $1,184,560     $   16,430     $1,168,130
           State ............        357,346         10,400        346,946
                                  ----------     ----------     ----------
                                  $1,541,906     $   26,830     $1,515,076
                                  ==========     ==========     ==========
</TABLE>

   As of December 31, 2000, the Company had net operating loss carryforwards
("NOL") for Federal and state income tax purposes as follows:

<TABLE>
<CAPTION>
      EXPIRES                        FEDERAL NOL     STATE NOL
      -------                        -----------     ----------
<S>                                  <C>             <C>
      2001 ....................               --     $  387,328
      2002 ....................               --        166,750
      2003 ....................               --        445,126
      2004 ....................               --        798,376
      2005 ....................      $ 4,251,245        965,067
      2006-2010 ...............        7,924,754             --
      2011-2015 ...............        3,703,960             --
      2016-2020 ...............       15,699,212             --
                                     -----------     ----------
                                     $31,579,171     $2,762,647
                                     ===========     ==========
</TABLE>




                                       34
<PAGE>   35

                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


   The Company has fully reserved its deferred tax assets associated with its
state net operating loss carryforwards. The Company's ability to utilize its
federal net operating loss carryforwards is dependent on its ability to generate
taxable income through the sale of aircraft in its flight equipment portfolio. A
limitation on the usage of the federal net operating losses requires the Company
to generate taxable gains on the sale of certain aircraft in the Company's
portfolio by November 4, 2002. The Company's accounting for its deferred taxes
assumes the Company will generate sufficient taxable gains by November 4, 2002.

   Temporary differences which give rise to net deferred tax liabilities result
primarily from timing differences for depreciation and net operating losses. The
net deferred tax liabilities are comprised of the following:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                        ----------------------------
                                                            2000            1999
                                                        ------------    ------------
<S>                                                     <C>             <C>
    Net operating loss carryforward ................... $ 10,898,102    $  8,076,666
    Deferred and advanced rent ........................    1,376,146       1,203,507
    Flight equipment, principally due to differences
      in depreciation .................................  (17,277,164)    (14,006,504)
    Other .............................................      388,989         339,108
                                                        ------------    ------------
                                                          (4,613,927)     (4,387,223)
    Valuation allowance ...............................     (163,126)       (207,704)
                                                        ------------    ------------
                                                        $ (4,777,053)   $ (4,594,927)
                                                        ============    ============
</TABLE>

   Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets net of the valuation allowance.

   A reconciliation of total income tax expense with the expected amount
computed by applying the Federal and state statutory tax rates to income before
income taxes, extraordinary loss and cumulative effect of accounting change
follows:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                            ---------------------------------------------
                                                               2000             1999             1998
                                                            -----------      -----------      -----------
<S>                                                         <C>              <C>              <C>
   Computed "expected" Federal tax expense ...............  $    99,059      $ 1,931,544      $ 1,605,291
   State taxes, net of Federal income tax benefit ........        5,335          198,835           86,391
   Expiration of state net operating loss carryforwards ..      114,616           31,587            7,407
   Change in valuation allowance .........................      (44,578)          (2,536)         (47,726)
   Other .................................................       21,294          (27,979)        (109,457)
                                                            -----------      -----------      -----------
                                                            $   195,726      $ 2,131,451      $ 1,541,906
                                                            ===========      ===========      ===========
</TABLE>



                                                     35

<PAGE>   36


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(4) LONG-TERM DEBT AND LIQUIDITY

      Long-term debt as of December 31, 2000 and 1999 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                       ---------------------------
                                                                                           2000           1999
                                                                                       ------------   ------------
<S>                                                                                    <C>            <C>
Note payable to bank bearing interest at 7% on $4,500,000 and LIBOR plus 1.125%
  (6.7% at December 31, 2000) on $65,782, secured by flight equipment, 33 1/3%
  guaranteed by ILFC, payable in monthly installments of $130,000 including
  interest, balloon payment of
  $3,901,338, due August 2001.......................................................   $  4,565,782   $  5,695,976

Note payable to bank bearing interest at 7.125% on $3,000,000 and LIBOR
  plus 1.125% (6.71% at December 31, 2000) on $295,816,  secured by flight
  equipment, 33 1/3% guaranteed by ILFC, payable in monthly installments
  of $30,000 including interest, balloon payment of $3,235,886, due
  June 2001.........................................................................      3,295,816      3,411,061

Notes payable to bank bearing interest at 7.1% secured by flight equipment,
  payable in monthly installments of $40,000 including interest, balloon
  payment of $1,740,120, due May 2003...............................................      2,504,520      2,795,392

Notes payable to bank bearing interest at 7%, secured by flight equipment,
  50% guaranteed by ILFC, payable in quarterly installments of $276,000
  including interest, balloon payment of $1,557,246, due April 2001.................      1,801,716      2,738,256

Note payable to bank, bearing interest at LIBOR plus 1.2 (6.82% at
  December 31, 2000), secured by flight equipment, 100% guaranteed by ILFC,
  payable in quarterly installments of $445,000 including interest, balloon
  payment of $7,560,618, due January 2003...........................................      9,934,517     10,908,835

Note payable to bank, bearing interest at 7.75% to May 18, 2001, then 8.375%,
  secured by flight equipment, guaranteed up to $2,600,000 by ILFC,
  payable in monthly installments of $160,000  including interest,
  balloon payment of  $4,904,929, due November 2004.................................      9,861,596     10,970,234

Note payable to bank bearing interest at 7.6%, secured by flight equipment,
  guaranteed up to $5,000,000 by ILFC, payable in quarterly installments of
  $598,000 including interest, balloon payment of $19,806,718, due May 2001.........     20,024,257     20,854,601

Note payable to bank bearing interest at 7.3%, secured by flight equipment,
  guaranteed up to $6,000,000 by ILFC, payable in monthly installments of
  $263,000 through April 2001, $266,000 through April 2002, and $270,000
  thereafter, balloon payment of $22,536,481, due May 2003..........................     25,875,953     27,078,538

Note payable to bank bearing interest at 6.7%, secured by flight equipment,
  payable in monthly installments of $180,000 including interest, balloon
  payment of $10,026,502, due April 2002............................................     11,681,662     12,992,149

Note payable to bank bearing interest at 7.1%, secured by flight equipment,
  payable in monthly installments of $152,000 including interest, balloon
  payment of $14,470,694, due November 2001.........................................     15,113,412     15,836,259

Note payable to bank bearing interest at LIBOR plus 1.5%% (6.625% at
  December 31, 2000), secured by flight equipment, guaranteed up to
  $3,000,000 by ILFC, payable in monthly installments of $50,000 plus interest,
  balloon  payment of $13,800,000, due May 2001.....................................     14,000,000     14,600,000

Note payable to ILFC bearing interest at 7.25%, secured by flight equipment,
  payable in quarterly installments of $12,000 through October 2001 and $13,000
  through October 2002 plus interest, balloon payment
  of $3,320,000, due January 2003...................................................      3,420,000      3,464,000

Note payable to ILFC bearing interest at 6.0%, secured by flight equipment,
  payable in quarterly installments of $50,000 plus interest, due February 2002.....        201,757        401,757

Note payable to ILFC bearing interest at 8%, secured by flight equipment,
  payable in monthly installments of $35,000 including interest, balloon
  payment of $3,188,123, due November 2004..........................................      3,726,432      3,845,733
</TABLE>


                                       36
<PAGE>   37


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                       ---------------------------
                                                                                           2000           1999
                                                                                       ------------   ------------
<S>                                                                                    <C>            <C>
Note payable to ILFC bearing interest at 7.25% payable in monthly installments
  of $180,000, including interest, secured by flight equipment,
  balloon payment of  $14,305,887, due April 2001...................................     14,583,130     15,617,687

Note payable to ILFC bearing interest at an effective rate of 6.9%, secured
  by flight equipment,  payable in monthly installments of $20,000, including
  interest, balloon payment of $1,394,891, due September 2002.......................      1,612,340      1,732,557

Note payable to ILFC bearing interest at an effective rate of 6.93%, secured
  by flight equipment,  payable in monthly installments of  $32,000,
  including interest, balloon payment of $2,361,994, due May 2003...................      2,822,166      3,003,157

Note payable to ILFC bearing interest at 7.25%, secured by flight equipment,
  payable in quarterly installments of $126,500, including interest, balloon
  payment of $3,725,840, due May 2001...............................................      3,782,261      3,999,383

Note payable to ILFC bearing interest at 6.5%, secured by flight equipment,
  payable in monthly installments of $30,000, including interest, balloon
 payment of $1,750,025, due May 2002................................................      2,061,881      2,277,813

Note payable to ILFC bearing interest at 7%, secured by flight equipment,
  payable in monthly installments of $181,200, including interest, balloon
  payment of $15,422,034, due April 2001............................................     15,692,483     16,710,403

Note payable to ILFC bearing interest at 6%, secured by flight equipment,
  payable in monthly installments of $30,000, including interest, balloon
  payment of $122,362, due February 2007............................................      1,911,136      2,146,696

Note payable to ILFC bearing interest at 6.15%, secured by flight equipment,
  payable in monthly installments of $92,000, including interest, balloon
  payment of $7,253,151, due December 2003..........................................      8,986,789      9,510,954

Note payable to ILFC bearing interest at 7.96%, secured by flight equipment,
  payable in monthly installments of $220,000, including interest, balloon
  payment of  $13,121,330, due April 2001...........................................     13,514,983     14,995,794

Note payable to ILFC bearing interest at 6.25%, secured by flight equipment,
  payable in monthly installments of $47,489, including interest, balloon payment
  of  $3,416,505, due July 2004.....................................................      4,522,948      4,795,926

Note payable to ILFC bearing interest at 6.5%, secured by flight equipment,
  payable in monthly installments of $325,450, including interest, balloon
  payment of $27,100,791, due April 2001............................................     27,562,176     29,463,901

Note payable to ILFC bearing interest at 6.25%, secured by flight equipment,
  payable in monthly installments of $40,308, including interest, balloon
  payment of $2,663,073, due August 2004............................................      3,670,316      3,924,558
Note payable to ILFC bearing interest at 6.5%, secured by flight equipment,
  payable in monthly installments of $224,228, including interest, balloon
  payment of $21,783,368, due May 2001..............................................     22,198,197     23,182,000

Note payable to ILFC bearing interest at 6.25%, secured by flight equipment,
  payable in monthly installments of $29,000, including interest, balloon payment
  of  $2,088,634, due December 2004.................................................      2,834,612      3,000,000

Note payable to Great Lakes Holdings (affiliated company) bearing interest
  at 6.5%, secured by flight equipment, due March 31, 2001..........................        592,500        672,000

Notes payable to Great Lakes Holdings (affiliated company) bearing interest
  at 6.5%, secured by flight equipment, due March 31, 2001..........................      1,345,000      1,345,000
                                                                                       ------------   ------------
          Total.....................................................................   $253,700,338   $271,970,620
                                                                                       ============   ============
</TABLE>

   Notes payable due within one year totaled $158,071,713 at December 31, 2000,
of which $154,177,282 represents balloon payments and $3,894,431 represents
installment payments due within one year. The Company intends to refinance all
of the balloon payments due in 2001. The Company has extended or re-leased three
aircraft with $38,889,802 of associated balloon payments due in 2001, and
balloon payments of $80,549,579 relate to leases with terminations from 2002 to
2004.


                                       37
<PAGE>   38

                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 2000, 1999 and 1998, the Company refinanced $101,304,379, $45,979,203 and
$29,725,000 of balloon payments, respectively.

   The terms of our loans generally require a substantial balloon payment at the
end of the noncancelable portion of the lease of the related aircraft, at which
time we will be required to re-lease the aircraft and renegotiate the loan with
the lender or obtain other financing. Refinancing the balloon amount of the loan
is dependent upon our re-leasing the related aircraft. We cannot assure you that
the necessary amount of capital will continue to be available to us on favorable
terms, or at all. If we are unable to continue to obtain any portion of required
financing on favorable terms, our ability to add new leases to our lease
portfolio, renew leases, re-lease an aircraft, repair or recondition an aircraft
if required or retain ownership of an aircraft on which financing has expired
could be limited, which could have a material adverse effect on our business,
financial condition and results of operations. In addition, our financing
arrangements to date have been dependent in part upon ILFC.

   Scheduled future repayments of notes payable subsequent to December 31, 2000
are as follows:

<TABLE>
<S>                                            <C>
          YEAR ENDING DECEMBER 31:
               2001........................    $165,764,097
               2002........................      19,728,667
               2003........................      48,939,716
               2004........................      18,457,270
               2005........................         319,513
               Thereafter..................         491,075
                                               ------------
                                               $253,700,338
                                               ============
</TABLE>

   Certain notes payable contain various financial covenants including
maintaining specified minimum tangible net worth and delivery of audited
financial statements. The Company was in compliance with these covenants at
December 31, 2000.

   The Company entered into a $5,000,000 line of credit with a bank in February
2000. The line of credit bears interest at LIBOR plus 2.5% and expires June 30,
2001. No borrowings have been made against the line of credit.

   From time to time, the Company enters into interest rate swaps with financial
institutions under terms that provide payment of interest on the notional amount
of the swap. In accordance with these arrangement, the Company pays interest at
a fixed rate and the financial institution pays interest at variable rates
pursuant to terms of the loans. The Company had no swap agreements at December
31, 2000.

(5) RELATED PARTY TRANSACTIONS

   During 1999 and 1998, the Company purchased aircraft from ILFC aggregating
$91,700,000 and $75,100,000, respectively. At December 31, 2000 and 1999, 94% of
the Company's gross fleet cost was comprised of aircraft acquired from ILFC. The
Company financed these acquisitions through bank loans, partially guaranteed by
ILFC, as well as loans from ILFC. ILFC provides these guarantees to lenders
through an AVG. ILFC's financial support has allowed the Company to finance
aircraft purchases at more favorable leverage than the Company could otherwise
obtain. The Company's typical operating lease transaction with an AVG requires a
cash investment by the Company of approximately 5% to 15% of the aircraft
purchase price while the industry standard ranges from 20% to 30%. At December
31, 2000 and 1999, $30,055,909 or 12% and $31,913,643 or 12%, of long-term debt
was covered by AVGs and $133,103,607, or 52%, and $142,072,319, or 52%, was due
to ILFC, respectively.

   The Company had one aircraft leased to ILFC which is subleased to an airline
at December 31, 2000 and 1999. The Company recognized rental income of $940,000,
$942,500 and $960,000 from this lease in each of the years ended 2000, 1999 and
1998, respectively. The lease expires in August 2001.

   During 2000 and 1999 the Company leased aircraft to third parties for which
ILFC guaranteed certain rental revenue. In connection with one of the leases,
ILFC also guaranteed repayment of the related lease deposit to the lessee of
$1,632,000 included in the accompanying consolidated balance sheet. The lease
terminated in 1999.


                                       38
<PAGE>   39


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


   The Company has an agreement with ILFC related to the December 1995 purchase
of an aircraft which provides for recovery of an operating loss, as defined, in
the acquired lease. Accordingly, the Company reduced the purchase price of the
related aircraft and recognized a receivable for the present value of the
estimated recovery aggregating $579,000. The balance was paid at December 31,
1999. The loss stems from a stated lease rate which was less than the market
lease rate at the date of acquisition. Accordingly, the Company allocated
additional cost to the purchase price and recognized deferred rent aggregating
$1,747,000 for the present value of the difference between the market and stated
rent. Deferred rent will be amortized on the straight-line method over the
remaining lease term. At December 31, 2000 and 1999, deferred rent from the
lease was $497,000 and $747,000, respectively.

(6) RENTAL INCOME

   Minimum future rental income on noncancelable operating leases of flight
equipment at December 31, 2000 is as follows:

<TABLE>
<S>                                                             <C>
            YEAR ENDING DECEMBER 31:
            2001..........................................      $34,734,204
            2002..........................................       26,613,702
            2003..........................................        8,730,584
            2004..........................................        3,221,000
            2005..........................................               --
            Thereafter....................................               --
                                                                -----------
                                                                $73,299,490
                                                                ===========
</TABLE>

   The Company's aircraft are leased under short-term to medium-term leases with
remaining terms expiring within one to four years.

(7) COMMITMENTS AND CONTINGENCIES

Operating Leases

   The Company leases offices from a third party under a noncancelable operating
lease. Future minimum lease payments are:

<TABLE>
<S>                                                            <C>
            YEAR ENDING DECEMBER 31:
            2001..........................................     $ 59,966
            2002..........................................       62,688
            2003..........................................       64,928
            2004..........................................       27,220
            2005..........................................           --
            Thereafter....................................           --
                                                               --------
                                                               $214,802
                                                               ========
</TABLE>

   Total rent expense under operating leases for the years ended December 31,
2000, 1999 and 1998 was $44,313, $40,559 and $33,107, respectively.

Commercial Paper

   At December 31, 2000, the Company held $400,000 of Pacific Gas and Electric
commercial paper. As a result of the energy crisis in California, Pacific Gas
and Electric stopped making payments to its commercial paper holders. In March
2001, the Company received full payment and back interest on its holdings of
Pacific Gas and Electric commercial paper.


                                       39
<PAGE>   40


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Government Regulations

   The maintenance and operation of aircraft are regulated by the Federal
Aviation Administration (FAA) and foreign aviation authorities which oversee
such matters as aircraft certification, inspection, maintenance, certification
of personnel, and record-keeping. All current leases require the lessee to bear
the costs of complying with governmental regulations. However, in the event a
lessee fails to maintain aircraft in accordance with the terms of a lease, the
Company could be required to repair or recondition the aircraft. Failure of a
lessee to fulfill lease maintenance and operation obligations could have a
material adverse effect on the Company's financial condition and results of
operations.

   The FAA and civil aviation authorities of most countries and international
entities issue regulations limiting permitted noise and other emissions from
aircraft. Older non-complying aircraft can be brought into compliance by
modifying the engines. One of the Company's aircraft had noise compliance work
performed at a cost of approximately $2.4 million during 1994 (paid by the
Company). At December 31, 2000, two of the Company's aircraft were on lease to
an airline which operate in jurisdictions which do not require these
modifications. These two aircraft may require this work to be performed after
their leases expire in June and August 2001, unless the aircraft are re-leased
and operated in an area that does not require the modification.

(8) SHAREHOLDERS' EQUITY

   The Company's Board of Directors has authorized the repurchase of up to
1,027,379 shares of the Company's common stock. During 2000, 1999 and 1998, the
Company repurchased 477,211, 42,500 and 281,300 shares, respectively of its
common stock. At December 31, 2000, the Company had remaining authorization to
repurchase 226,368 shares of the Company's common stock.

   In accordance with the underwriting agreement related to the Company's
November 1997 initial public offering, the Company granted the underwriters
warrants to purchase 260,000 shares of common stock at $12 per share exercisable
through November 10, 2001.

   During March 1997, the Company extended the expiration date on 496,664
employee stock options to March 31, 2007, which vested 25% in 1997 and 25% in
each of the following three years. Accordingly, the Company recognized aggregate
compensation expense of approximately $1 million for the difference between the
value of the options on the extension date and the exercise price. The Company
recognized $250,000 in stock compensation during the years ended December 31,
2000, 1999 and 1998 related to the amortization of such cost. If the related
employee is terminated, the respective stock options will vest in full. At
December 31, 2000, 485,554 options with an exercise price of $4.50 per share
were outstanding and exercisable.

   During 1997, the Company adopted the 1997 Employee Stock Option and Award
Plan (the Employee Plan). The Employee Plan was amended in 1999. A maximum of
325,000 shares of common stock (subject to certain anti-dilutive adjustments)
may be issued pursuant to grants and awards under the Employee Plan. The maximum
number of shares that may be subject to qualifying share-based awards, either
individually or in aggregate, that can be granted under the Employee Plan to any
one participant during any calendar year will not exceed 150,000 (subject to
certain anti-dilutive adjustments). During 2000, 1999 and 1998, options to
purchase 121,000 and 55,000 and 5,000 shares, respectively of the Company's
common stock at $5.50, between $6.38 and $7.25 and $5.88 per share, respectively
have been granted under the Employee Plan. At December 31, 2000, 65,348 of the
options are vested and the remainder vest through 2003. The options expire from
2003 to 2005.

   During 1997, the Company adopted the 1997 Eligible Directors Stock Option
Plan (the Directors Plan). The Directors Plan was amended in 1999. The Directors
Plan provides that annually an Eligible Director will receive an option to
purchase 10,000 shares of common stock at an exercise price equal to the market
price of common stock on the date of grant. Under the Directors Plan 125,000
shares of common stock are authorized for issuance. During 2000, 1999 and 1998,
options to purchase 50,000, 50,000 and 25,000 shares, respectively of the
Company's common stock at $5.875, $6.38 and $10.25 per share, respectively had
been granted under the Directors Plan. At December 31, 2000, 58,220 of the
options are vested and the remainder vest through 2003. The options expire from
2003 to 2005.


                                       40
<PAGE>   41


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

   Changes in outstanding options under the Company's stock option plans during
the three years ended December 31, 2000 and options exercisable at December 31
2000 are as follows:


<TABLE>
<CAPTION>
                                                                    WEIGHTED
                                                       NUMBER        AVERAGE
                                                     OF SHARES    EXERCISE PRICE
                                                     ---------    --------------
<S>                                                    <C>           <C>
      Outstanding at December 31, 1997 ...........     485,554       $4.50
         Granted at $5.875 to $10.25 .............      30,000       $9.52
                                                       -------
      Outstanding at December 31, 1998 ...........     515,554       $4.79
         Granted at $6.375 to $7.25 ..............     105,000       $6.75
                                                       -------
      Outstanding at December 31, 1999 ...........     620,554       $5.12
         Granted at $5.50 to $5.875 ..............     171,000       $5.61
                                                       -------
      Outstanding at December 31, 2000 at $4.50 to
         $10.25 (weighted average remaining
         contractual life of 5.4 years) ..........     791,554       $5.23
                                                       =======
</TABLE>

   The number of options exercisable at December 31, 2000, 1999 and 1998 was
609,122, 438,796 and 297,531, respectively at weighted average exercise prices
of $5.06, $5.63 and $8.57, respectively.

   The weighted average grant date fair value of options granted during the
years ended December 31, 2000, 1999 and 1998 was $2.46, $3.12 and 3.57,
respectively. The exercise price of all options granted in 2000, 1999 and 1998
was equal to market price at the date of grant.

   At December 31, 2000, options outstanding are as follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                   WEIGHTED          AVERAGE
                                                    AVERAGE          REMAINING
     OPTIONS OUTSTANDING:            NUMBER     EXERCISE PRICE   CONTRACTUAL LIFE
                                     ------     --------------   ----------------
<S>                                  <C>        <C>              <C>
     At $4.50 to $6.38............   721,554         $4.93           5.6 years
     At $7.25 to 10.25............    70,000         $8.32           2.9 years
                                     -------
     Total                           791,554         $5.23           5.4 years
                                     =======
</TABLE>

   At December 31, 2000, options outstanding are as follows:

<TABLE>
<CAPTION>
                                                       WEIGHTED
                                                       AVERAGE
     OPTIONS EXERCISABLE:              NUMBER       EXERCISE PRICE
                                       ------       --------------
<S>                                    <C>          <C>
     At $4.50 to $6.38                 542,362          $4.67
     At $7.25 to $10.25                 66,760          $8.23
                                       -------
     Total                             609,122          $5.06
                                       =======
</TABLE>




                                       41
<PAGE>   42


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(9) SUBSEQUENT EVENTS

   In March 2001, the Company leased one of its Boeing Model 737-400 aircraft to
National Jet Italia, a British Airways franchisee operating out of Italy to
April 2004 with an option to extend the lease for two years. The aircraft is
expected to be delivered in April 2001 at the termination of the Company's lease
with GB Airways.

   On March 12, 2001, the United States Bankruptcy Court approved a plan by
American Airlines to acquire the assets of TWA. We have an MD-82 on lease to TWA
with a lease expiring November 2004. We have subsequently been paid past due
rent from TWA, and we are currently negotiating a lease of the aircraft to
American Airlines.

   In March 2001, the Company extended a $1,801,716 note payable to a bank to
February 2002 at LIBOR plus 1.5%.

   In March 2001, the Company received full payment and back interest on
$400,000 of Pacific Gas and Electric commercial paper it held at December 31,
2000.






                                       42
<PAGE>   43


                INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                             ------------------------------------------------------------
2000:                                         MARCH 31         JUNE 30       SEPTEMBER 30    DECEMBER 31
                                             -----------     -----------     ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
Revenues ...............................     $11,053,484     $10,784,541     $11,035,682     $ 10,326,514
Expenses ...............................      10,305,036      10,576,954      10,198,874       11,828,006
                                             -----------     -----------     -----------     ------------
Income (loss) before income taxes ......         748,448         207,587         836,808       (1,501,492)
Income tax expense (benefit) ...........         280,668          77,845         313,803         (476,590)
                                             -----------     -----------     -----------     ------------
Net income (loss) ......................     $   467,780     $   129,742     $   523,005     $ (1,024,902)
                                             ===========     ===========     ===========     ============

Basic earnings (loss) per share* .......     $       .11     $       .03     $       .13     $       (.27)
                                             ===========     ===========     ===========     ============
Diluted earnings (loss) per share* .....     $       .11     $       .03     $       .13     $       (.27)
                                             ===========     ===========     ===========     ============
Weighted average number of common shares
outstanding ............................       4,164,792       3,987,757       3,876,231        3,816,428
Weighted average number of common shares
outstanding-assuming dilution ..........       4,293,965       4,066,541       3,960,267        3,816,428
</TABLE>

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                  -----------------------------------------------------------
1999:                                              MARCH 31        JUNE 30        SEPTEMBER 30    DECEMBER 31
                                                  ----------     -----------      ------------    -----------
<S>                                               <C>            <C>              <C>             <C>
Revenues .....................................    $9,244,625     $ 8,941,682      $10,597,947     $10,957,652
Expenses .....................................     7,712,009       7,475,848        8,921,774       9,576,394
                                                  ----------     -----------      -----------     -----------
Income before income taxes and
  extraordinary loss .........................     1,532,616       1,465,834        1,676,173       1,381,258
Income tax expense ...........................       582,389         557,015          636,946         486,423
                                                  ----------     -----------      -----------     -----------
Income before extraordinary loss .............       950,227         908,819        1,039,227         894,835
Extraordinary loss on debt extinguishment ....            --        (214,263)              --              --
                                                  ----------     -----------      -----------     -----------
Net income ...................................    $  950,227     $   694,556      $ 1,039,227     $   894,835
                                                  ==========     ===========      ===========     ===========
Basic earnings per share:*
  Income before extraordinary loss ...........    $      .23     $       .21      $       .25             .21
  Extraordinary loss on debt extinguishment ..            --            (.05)              --              --
                                                  ----------     -----------      -----------     -----------
  Net income .................................    $      .23     $       .16      $       .25     $       .21
                                                  ==========     ===========      ===========     ===========
Diluted earnings per share*
  Income before extraordinary loss ...........    $      .22     $       .21      $       .24     $       .21
  Extraordinary loss on debt extinguishment ..            --            (.05)              --              --
                                                  ----------     -----------      -----------     -----------
  Net income .................................    $      .22     $       .16      $       .24     $       .21
                                                  ==========     ===========      ===========     ===========
Weighted average number of common shares
  outstanding ................................     4,212,462       4,212,284        4,211,040       4,196,959
Weighted average number of common shares
  outstanding-assuming dilution ..............     4,326,277       4,329,024        4,340,606       4,318,915
</TABLE>

*Per share data may not always add up to the total for the year since each
figure is independently calculated.



                                       43
<PAGE>   44


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.

                                        INTERNATIONAL AIRCRAFT INVESTORS

Date: March 29, 2001                    By: /s/ MICHAEL P. GRELLA
                                        Michael P. Grella
                                        President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
           SIGNATURE                              TITLE                           DATE
<S>                                    <C>                                    <C>

     /s/ WILLIAM E. LINDSEY               Chairman of the Board,              March 29, 2001
--------------------------------        Chief Executive Officer and
         William E. Lindsey                 Director (Principal
                                            Executive Officer)

      /s/ MICHAEL P. GRELLA                     President,                    March 29, 2001
--------------------------------        Chief Operating Officer and
        Michael P. Grella              Director (Principal Operating
                                                 Officer)

       /s/ RICK O. HAMMOND                Vice President--Finance,            March 29, 2001
--------------------------------         Chief Financial Officer
         Rick O. Hammond               (Principal Financial Officer)

    /s/ ALAN G. STANFORD, JR.            Vice President--Controller           March 29, 2001
--------------------------------           (Principal Accounting
      Alan G. Stanford, Jr.                      Officer)

      /s/ MAGNUS GUNNARSSON                      Director                     March 29, 2001
--------------------------------
        Magnus Gunnarsson

      /s/ RALPH O. HELLMOLD                      Director                     March 29, 2001
--------------------------------
        Ralph O. Hellmold

       /s/ AARON MENDELSOHN                      Director                     March 29, 2001
--------------------------------
        Aaron Mendelsohn

       /s/ CHRISTER SALEN                        Director                     March 29, 2001
--------------------------------
         Christer Salen

       /s/ KENNETH TAYLOR                        Director                     March 29, 2001
--------------------------------
         Kenneth Taylor

      /s/ STUART M. WARREN                       Director                     March 29, 2001
--------------------------------
        Stuart M. Warren
</TABLE>



                                       44