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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q


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

                For the quarterly period ended September 30, 1996

                         Commission file number 0-17785

                          AIRCRAFT INCOME PARTNERS L.P.
             (Exact name of registrant as specified in its charter)


       DELAWARE                                                  13-3430508
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                   411 West Putnam Avenue, Greenwich, CT 06830
                    (Address of principal executive offices)

                                 (203) 862-7000
              (Registrant's telephone number, including area code)

                                      None
              (Former name, former address and former fiscal year,
                          if changed since last report)


Indicate by check whether the registrant  (1) has filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                    Yes    [ X ]          No [   ]
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                          AIRCRAFT INCOME PARTNERS L.P.
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                         FORM 10-Q - SEPTEMBER 30, 1996



                                      INDEX



PART I - FINANCIAL INFORMATION

     ITEM 1 - FINANCIAL STATEMENTS                                              
                                                                                
          BALANCE SHEETS - September 30, 1996 and December 31, 1995             
                                                                                
                                                                                
          STATEMENTS OF OPERATIONS - For the three months ended September 30,
                 1996 and 1995 and the nine months ended September 30, 1996   
                 and 1995                                                       
                                                                                
          STATEMENT OF PARTNERS' EQUITY - For the nine months ended             
                September 30, 1996                                              
                                                                                
                                                                                
          STATEMENTS OF CASH FLOWS - For the nine months ended                  
                September 30, 1996 and 1995                                     
                                                                                
                                                                                
          NOTES TO FINANCIAL STATEMENTS                                         
                                                                                
     ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                 
                      CONDITION AND RESULTS OF OPERATIONS                       
     

PART II - OTHER INFORMATION

    ITEM 1 - LEGAL PROCEEDINGS

    ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
                                  AIRCRAFT INCOME PARTNERS L.P.

                                          BALANCE SHEETS


                                                                   September 30,    December 31,
                                                                       1996             1995
                                                                    ------------    ------------
<S>                                                                 <C>             <C>
ASSETS

     Leased aircraft, net of accumulated depreciation of
        $70,789,948 and $78,518,396 and allowance for
        equipment impairment of $27,500,000 and $32,225,000 .....   $ 29,386,979    $ 41,868,907
     Cash and cash equivalents ..................................      6,703,629       7,448,455
     Note receivable - installment sale .........................      4,018,662            --   
     Accounts receivable ........................................        882,779       1,388,026
     Restricted cash - security deposits ........................        475,901         458,683
     Deferred rents and modification advances receivable ........        355,038         641,745
     Deferred costs .............................................        255,956         352,226
     Other receivables ..........................................        130,303         116,952
     Prepaid expenses ...........................................         66,314          90,628
                                                                    ------------    ------------
                                                                    $ 42,275,561    $ 52,365,622
                                                                    ============    ============

LIABILITIES AND PARTNERS' EQUITY

Liabilities
     Distributions payable ......................................   $  2,786,369    $  3,429,378
     Maintenance reserves .......................................      1,660,084       1,922,478
     Security deposits payable ..................................        475,901         458,683
     Deferred income ............................................        131,550         179,216
     Accounts payable and accrued expenses ......................         61,351          82,100
     Management fee payable .....................................        111,000         137,000
     Deferred costs payable .....................................         47,894         121,930
                                                                    ------------    ------------
        Total liabilities .......................................      5,274,149       6,330,785
                                                                    ------------    ------------

Commitments and contingencies

Partners' equity
        Limited partners' equity (385,805 units
            issued and outstanding) .............................     52,582,566      60,712,648
        General partners' deficit ...............................    (15,581,154)    (14,677,811)
                                                                    ------------    ------------

        Total partners' equity ..................................     37,001,412      46,034,837
                                                                    ------------    ------------

                                                                    $ 42,275,561    $ 52,365,622
                                                                    ============    ============
</TABLE>
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<TABLE>
<CAPTION>
                                                    AIRCRAFT INCOME PARTNERS L.P.

                                                      STATEMENTS OF OPERATIONS



                                                                   For the three months ended          For the nine months ended
                                                                        September 30,                         September 30,

                                                                     1996              1995              1996              1995
                                                                     ----              ----              ----              ----
<S>                                                              <C>                <C>               <C>                <C>
Revenues
     Rental ..............................................       $ 2,284,428        $ 2,950,584       $ 7,801,049        $ 8,852,144
     Interest ............................................           131,660            129,533           391,627            325,980
     Interest - installment sale .........................            27,012               --              27,012               --  
     Other (expense) income ..............................            (9,416)             2,267           (20,762)           106,906
                                                                 -----------        -----------       -----------        -----------
                                                                   2,433,684          3,082,384         8,198,926          9,285,030
                                                                 -----------        -----------       -----------        -----------


Costs and expenses
     Depreciation ........................................         1,835,203          2,654,118         6,750,979          8,231,449
     Management fee ......................................           111,000            171,000           328,000            411,000
     General and administrative ..........................            59,541             68,612           255,435            244,979
     Provision for bad debt ..............................              --                 --              66,133               --  
     Operating ...........................................            16,844             10,301            49,653            182,239
     Interest expense ....................................              --                3,065             1,570             11,799
                                                                 -----------        -----------       -----------        -----------
                                                                   2,022,588          2,907,096         7,451,770          9,081,466
                                                                 -----------        -----------       -----------        -----------

                                                                     411,096            175,288           747,156            203,564


Gain on sale of aircraft - net ...........................         1,654,880               --           5,222,948               --  

Realized gain on acquisition and sale of
     marketable securities - net .........................              --              120,627              --            1,001,731
                                                                 -----------        -----------       -----------        -----------

                                                                 $ 2,065,976        $   295,915       $ 5,970,104        $ 1,205,295
Net income ...............................................       ===========        ===========       ===========        ===========


Net income attributable to
     Limited partners ....................................       $ 1,859,378        $   266,323       $ 5,373,094        $ 1,084,765
     General partners ....................................           206,598             29,592           597,010            120,530
                                                                 -----------        -----------       -----------        -----------
                                                                 $ 2,065,976        $   295,915       $ 5,970,104        $ 1,205,295
                                                                 ===========        ===========       ===========        ===========

Net income per unit of limited partnership
     interest (385,805 units outstanding) ................       $      4.82        $      0.69       $     13.93        $      2.81
                                                                 ===========        ===========       ===========        ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   AIRCRAFT INCOME PARTNERS L.P.

                                   STATEMENT OF PARTNERS' EQUITY





                                                        Limited        General          Total
                                                       Partners'       Partners'      Partners'
                                                        Equity         Deficit         Equity
                                                        ------         -------         ------
<S>                                                 <C>             <C>             <C>
Balance, January 1, 1996 ........................   $ 60,712,648    $(14,677,811)   $ 46,034,837

Net income for the nine months
     ended September 30, 1996 ...................      5,373,094         597,010       5,970,104
                                                                                         
Distributions to partners for the nine months
     ended September 30, 1996 ($35.00 per limited
     partnership unit) ..........................    (13,503,176)     (1,500,353)    (15,003,529)
                                                    ------------    ------------    ------------

Balance, September 30, 1996 .....................   $ 52,582,566    $(15,581,154)   $ 37,001,412
                                                    ============    ============    ============

See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                AIRCRAFT INCOME PARTNERS L.P.

                                  STATEMENTS OF CASH FLOWS

                                                                For the nine months ended
                                                                       September 30,

                                                                   1996            1995
                                                                   ----            ----
<S>                                                           <C>             <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS

Cash flows from operating activities
     Net income ...........................................   $  5,970,104    $  1,205,295
     Adjustments to reconcile net income to net
        cash provided by operating activities
            Depreciation ..................................      6,750,979       8,231,449
            Realized gain on acquisition and sale
               of marketable securities ...................           --        (1,001,731)
            Gain on sale of aircraft - net ................     (5,222,948)           --
            Amortization of installment note discount .....        (27,012)           --


     Changes in assets and liabilities
        Accounts receivable ...............................        505,247         205,278
        Deferred rents and modification advances receivable        286,707         918,251
        Restricted cash - security deposits ...............        (17,218)        (16,938)
        Deferred costs ....................................         96,270          96,272
        Prepaid expenses ..................................         24,314          17,978
        Other receivables .................................        (13,351)         91,735
        Maintenance reserves ..............................       (262,394)        614,751
        Security deposits payable .........................         17,218          16,938
        Deferred income ...................................        (47,666)           --   
        Management fee payable ............................        (26,000)         51,000
        Accounts payable and accrued expenses .............        (20,749)        (56,576)
                                                              ------------    ------------
               Net cash provided by operating activities ..      8,013,501      10,373,702
                                                              ------------    ------------


Cash flows from investing activities
     Proceeds from sale of aircraft - net .................      6,784,400            --
     Proceeds from installment sale .......................        177,847            --   
     Proceeds from sale of marketable securities ..........           --         1,045,941
     Additions and modifications to leased aircraft, net ..        (74,036)       (124,293)
                                                              ------------    ------------
               Net cash provided by investing activities ..      6,888,211         921,648  
                                                              ------------    ------------
<PAGE>
<CAPTION>
                                AIRCRAFT INCOME PARTNERS L.P.

                                  STATEMENTS OF CASH FLOWS
                                        (continued)

                                                                For the nine months ended
                                                                       September 30,

                                                                   1996            1995
                                                                   ----            ----
<S>                                                           <C>             <C>

Cash flows from financing activities
     Distributions to partners ............................    (15,646,538)     (9,002,117)
                                                              ------------    ------------

Net (decrease) increase in cash equivalents ...............       (744,826)      2,293,233


Cash and cash equivalents, beginning of period ............      7,448,455       6,350,177
                                                              ------------    ------------

Cash and cash equivalents, end of period ..................   $  6,703,629    $  8,643,410
                                                              ============    ============

Supplemental disclosure of cash flow information
     Interest paid ........................................   $      1,570    $     11,799
                                                              ============    ============
 See notes to financial statements.
</TABLE>
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS

1        INTERIM FINANCIAL INFORMATION

         The summarized  financial  information  contained  herein is unaudited;
         however, in the opinion of management, all adjustments (consisting only
         of normal recurring accruals) necessary for a fair presentation of such
         financial  information have been included.  The accompanying  financial
         statements, footnotes and discussion should be read in conjunction with
         the financial  statements,  related footnotes and discussions contained
         in the Aircraft Income Partners L.P. (the "Partnership")  annual report
         on Form 10-K for the year  ended  December  31,  1995.  The  results of
         operations  for the  nine  months  ended  September  30,  1996  are not
         necessarily indicative of the results to be expected for the full year.

2        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Leased aircraft

         The cost of leased aircraft represents the initial cost of the aircraft
         to the Partnership plus miscellaneous acquisition and closing costs and
         is carried at the lower of depreciated cost or net realizable value.

         Depreciation  is  computed  using the  straight-line  method,  over the
         estimated useful lives of such aircraft (15 years for McDonnell Douglas
         DC9-32 aircraft, 12 to 12.5 years for Boeing 737-200 Advanced aircraft,
         Boeing  727-200   Advanced   aircraft  and  McDonnell   Douglas  DC9-51
         aircraft).  The Partnership capitalizes major additions to its aircraft
         and depreciates such capital  improvements over the remaining estimated
         useful life of the aircraft.

         When  aircraft  are  sold  or  otherwise  disposed  of,  the  cost  and
         accumulated  depreciation  (and any  related  allowance  for  equipment
         impairment)  are removed from the accounts and any gain or loss on such
         sale or disposal is reflected in  operations.  Normal  maintenance  and
         repairs are charged to operations as incurred. The Partnership provides
         allowances for equipment  impairment  based upon a quarterly  review of
         all aircraft in its portfolio,  when  management  believes that,  based
         upon market analysis,  appraisal  reports and leases currently in place
         with respect to specific aircraft,  the investment in such aircraft may
         not be recoverable.

         Maintenance reserves

         Maintenance  reserves  represent  cash received in accordance  with the
         terms of the leases of certain  aircraft,  which has been set aside for
         certain required repairs or scheduled maintenance on the aircraft.

         Deferred costs

         Deferred  costs  represent  amounts  paid,  directly  or  through  rent
         credits,  based upon the terms of certain leases, for maintenance which
         enhances  the  marketability  of  such  aircraft.  Deferred  costs  are
         amortized over the terms of a remarketed lease.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS

3        CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES

         The  general  partner  of the  Partnership,  Integrated  Aircraft  Fund
         Management  Corp.  ("IAFM"),  is a wholly owned  subsidiary of Presidio
         Capital  Corp.  ("Presidio").  Other limited  partnerships  and similar
         investment  programs  have been formed by affiliates of IAFM to acquire
         equipment and, accordingly, conflicts of interest may arise between the
         Partnership  and such other  limited  partnerships.  Affiliates of IAFM
         have also engaged in businesses  related to the management of equipment
         and the sale of various  types of equipment  and may transact  business
         with the Partnership.

         Subject  to the  rights  of the  Limited  Partners  under  the  Limited
         Partnership  Agreement,  Presidio will control the Partnership  through
         its  indirect  ownership  of all of the  shares  of IAFM.  Presidio  is
         managed by Presidio Management Company, LLC ("Presidio Management"),  a
         company controlled by a director of Presidio. Presidio is also party to
         an  administrative  services  agreement  with  Wexford  Management  LLC
         ("Wexford") pursuant to which Wexford is responsible for the day-to-day
         management  of Presidio  and,  among other  things,  has  authority  to
         designate directors of IAFM. During the nine months ended September 30,
         1996,  reimbursable  expenses to Wexford by the Partnership amounted to
         $24,140.

         Presidio is a liquidating  company.  Although Presidio has no immediate
         plans to do so, it will  ultimately seek to dispose of the interests it
         acquired  from  Integrated  Resources,  Inc.  including  IAFM,  through
         liquidation;  however,  there can be no assurance of the timing of such
         transaction or the effect it may have on the Partnership.
         
         IAFM is entitled to a 10 percent  interest in the net income,  loss and
         distributions  from operations and cash from sales. For the nine months
         ended   September   30,  1996  and  1995,   IAFM  received  or  accrued
         distributions totaling $1,500,353 and $1,028,813, respectively.

         In  June  1992,  IAFM  assumed   responsibilities  to  provide  certain
         management services previously provided by Citicorp Aircraft Management
         Inc. ("CAMI").  IAFM has also retained the aviation  consulting firm of
         Simat,  Helliesen  &  Eichner,  Inc.  ("SH&E")  to  provide  consulting
         services  with respect to the  Partnership.  Services to be provided by
         SH&E  include  advice  as to  commercial  aviation  market  conditions,
         long-term marketing and financial strategies,  as well as technical and
         financial advice on the sale or re-lease of the Partnership's aircraft.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS

3        CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)

         IAFM has also entered into an agreement  with  Aviation  Capital  Group
         ("ACG"),  an entity comprised  primarily of former  management of IAFM,
         pursuant to which ACG will perform remarketing services with respect to
         the sale or re-lease of certain of the Partnership's  aircraft. ACG has
         previously performed certain administrative services for IAFM.

         All costs  associated  with the  retention  of SH&E and ACG (other than
         normal competitive aircraft sales commissions,  if any) will be paid by
         IAFM.

         As  compensation  for  the  foregoing   services,   IAFM  receives  the
         management fee provided for in the Limited Partnership  Agreement which
         is equal to 4% of  Distributions of Cash from Operations from Operating
         Leases and 2% of Distributions of Cash from Operations from Full Payout
         Leases, as such terms are defined in the Limited Partnership Agreement.
         In  conjunction  with such  services,  IAFM earned  management  fees of
         $328,000 and $411,000 for the nine months ended  September 30, 1996 and
         1995, respectively.

         Upon ultimate  liquidation of the Partnership,  IAFM may be required to
         remit to the Partnership certain payments  representing capital account
         deficit  restoration  based upon a formula  provided within the Limited
         Partnership  Agreement.  Such  restoration  amount may be less than the
         recorded IAFM's  deficit,  which could result in  distributions  to the
         limited partners of less than their recorded equity.

         In April 1995,  IAFM and certain  affiliates  entered into an agreement
         with Fieldstone Private Capital Group, L.P.  ("Fieldstone") pursuant to
         which  Fieldstone   performs  certain   management  and  administrative
         services   relating  to  the  Partnership.   Substantially   all  costs
         associated with the retention of Fieldstone will be paid by IAFM.

4        DISTRIBUTIONS TO PARTNERS

         Distributions  payable to Limited  Partners and the General  Partner of
         $2,507,732 ($6.50 per unit) and $278,637 respectively, at September 30,
         1996, were paid in November 1996.

5        COMMITMENTS AND CONTINGENCIES

         a.     Hawaiian Airlines, Inc.

         On September 21, 1993, Hawaiian Airlines, Inc. ("Hawaiian"), the lessee
         of a McDonnell Douglas Model DC9-51 aircraft (the "Hawaiian Aircraft"),
         filed  a  voluntary  petition  for   reorganization   pursuant  to  the
         provisions  of Chapter  11 of the United  States  Bankruptcy  Code.  On
         August 30, 1994 the United  States  Bankruptcy  Court  entered an order
         confirming  Hawaiian's  plan of  reorganization.  On September 12, 1994
         (the  "Effective  Date"),  Hawaiian's  plan  of  reorganization  became
         effective.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


5        COMMITMENTS AND CONTINGENCIES (continued)

         a.     Hawaiian Airlines, Inc. (continued)

         The  Partnership  and  Hawaiian had entered into an agreement to settle
         both the  Partnership's  proof of claim  and its  administrative  claim
         filed in the  Hawaiian  bankruptcy  case with  respect to the  Hawaiian
         Aircraft.  Hawaiian has since settled such claims  through the issuance
         of Hawaiian Class A Common stock to the Partnership (Note 6).

         In September 1994, the  Partnership  entered into a new lease (the "New
         Lease") with Hawaiian  which  commenced on the Effective  Date. The New
         Lease  provided  for monthly  rentals of  $60,000,  payable on a weekly
         basis,  which stepped up to $65,000 per month effective August 1, 1995.
         To date,  Hawaiian has continued to make its scheduled weekly payments.
         The New Lease was scheduled to expire in November 1999.

         On  September 1, 1996,  the  Partnership  and  Hawaiian  have agreed in
         principle for the sale of the Hawaiian Aircraft. Under the terms of the
         agreement, Hawaiian will pay the Partnership a down payment of $450,000
         and the balance  will be paid in monthly  installments  (39 payments of
         $72,000 and then 36 payments of $50,000)  until  November 30, 2002,  at
         which time Hawaiian has a bargain purchase option on the aircraft.  The
         Partnership has treated this transaction as an installment sale and has
         classified the net present value of the  anticipated  future cash flows
         of   approximately   $4,019,000   on  the   balance   sheet   as   note
         receivable-installment  sale.  As of September 1, 1996 the  Partnership
         removed the associated cost of the equipment and the net carrying value
         from the books of the Partnership, and recognized a gain on the sale of
         approximately $1,655,000.

         b.     Continental Airlines, Inc.

         The Partnership  originally owned three McDonnell  Douglas Model DC9-32
         aircraft  (the  "DC9-32  Aircraft")  and  three  Boeing  Model  727-100
         aircraft   which   were   leased   to   Continental   Airlines,    Inc.
         ("Continental")  for terms  originally  scheduled to expire in November
         1993. On December 3, 1990, Continental Airlines Holdings,  Inc. and its
         subsidiary  companies,  including  Continental,  filed a  petition  for
         reorganization  under the United States Bankruptcy Code. In April 1993,
         Continental's  plan of  reorganization  was confirmed by the Bankruptcy
         Court.

         In October 1991,  the  Partnership  and  Continental  restructured  the
         leases of the three  DC9-32  Aircraft  (the  "Continental  Restructured
         Leases"),  under  which the leases  were  extended to December 1, 1997.
         Pursuant to the  restructuring,  rents accrued at a rate of $76,500 per
         aircraft  per month  effective  September  1, 1990 for 13 months,  with
         simple interest  accruing at a rate of 12% per annum (the  "Continental
         Deferred  Rents"),  and were repaid over a 36 month  period  commencing
         July 1, 1992. The accrual of such interest is included in other revenue
         on the statements of operations and the related  receivable is included
         in deferred rents and modification  advances  receivable on the balance
         sheets.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


5        COMMITMENTS AND CONTINGENCIES (continued)

          b.     Continental Airlines, Inc. (continued)
         

         The Continental Restructured Leases provide for monthly rental payments
         of $64,500 per  aircraft  per month to December 1, 1997.  Additionally,
         either Continental or the Partnership may fund certain improvements and
         modifications  to such DC9-32  Aircraft;  however,  if such amounts are
         funded by Continental,  the Partnership will allow Continental a rental
         credit with simple interest accruing at a rate of 12% per annum.

         Continental  is obligated to repay the aggregate  rental credits taken,
         as  well as any  modifications  funded  by the  Partnership,  over  the
         remaining term of the Continental Restructured Leases accruing interest
         at a rate of 12% per  annum.  To date,  such  credits  and  Partnership
         fundings  have  aggregated  approximately  $762,400  and the  remaining
         amounts to be recovered are included in deferred rents and modification
         advances receivable on the balance sheets.

         In October  1992,  the  Partnership  and  Continental  entered  into an
         agreement  to defer  rentals  due  under the  Continental  Restructured
         Leases for a three month period beginning  January 1, 1993 (the "Second
         Continental  Rent  Deferral").  Pursuant  to the  terms  of the  Second
         Continental Rent Deferral,  the deferred rents (aggregating  $580,500),
         plus  interest  accruing at a rate equal to 8.64% per annum,  are being
         repaid over a 42 month period commencing October 1, 1993.

         In November 1991,  Continental  rejected the leases of the three Boeing
         727-100 aircraft,  which had been out of service since 1991. Due to the
         condition and the related  market for such  aircraft,  the  Partnership
         provided aggregate allowances for equipment impairment of approximately
         $6,483,000.  During 1993, the Partnership sold all three Boeing 727-100
         aircraft.  The  Partnership  retains its rights  pursuant to a proof of
         claim and an administrative  claim filed in the Continental  Bankruptcy
         case with respect to such  aircraft.  The amount of recovery under such
         claims, if any, is impossible to predict at this time.

         c.     Continental Air Micronesia

         On January 20, 1993, the Partnership  leased a Boeing 727-200  Advanced
         aircraft to  Continental  for a term of  approximately  71 months to be
         used by Continental Air Micronesia (the "Air Mike Lease"). The Air Mike
         Lease  provides  for  a  monthly  base  rent  of  $76,750,  subject  to
         adjustments  for  rental  credits  relating  to  initial  modifications
         (including Traffic Collision  Avoidance Systems,  windshear  detection,
         upgrade  avionics and auxiliary  fuel tank)  aggregating  approximately
         $794,000,  of which approximately  $300,000 was contributed in cash and
         the balance was  contributed in the form of rental credits  provided to
         Continental.  Continental  was  allowed  to take  such  rental  credits
         ($13,741  per month  through  May 1996) such that they  recouped  their
         aggregate cost of the initial modifications over a 36 month period with
         interest at 9.31% per annum. Further, the Partnership agreed to provide
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


5        COMMITMENTS AND CONTINGENCIES (continued)

          C.     Continental Airlines Micronesia (continued)

         up to $813,500 of financing for certain new image modifications through
         credits  ("Lessor  Financing")  against  base rental  payments due from
         Continental.  Continental  is  repaying  the Lessor  Financing  credits
         through  monthly  installments  which will be  amortized at the rate of
         9.31% per annum over the remaining  lease term.  Through  September 30,
         1996, the Partnership had provided financing of approximately $755,000.
         Such amounts, net of amounts repaid, are included within deferred costs
         on the balance sheets.

         d.     Ladeco S.A.

         During 1993, the  Partnership  consummated  two leases with Ladeco S.A.
         ("Ladeco"),  each for a Boeing 737-200 Advanced aircraft,  for terms of
         48 and 60 months. Both leases provide for, among other things,  monthly
         rentals of $47,500 each, plus certain maintenance  reserves for engines
         and landing gear, based upon the number of hours flown. As of September
         30,  1996,   such   maintenance   reserves   aggregated   approximately
         $1,260,000.  At lease  inception,  Ladeco  paid a  security  deposit of
         $125,000  per  aircraft.  Pursuant to the terms of the above  mentioned
         leases, the Partnership removed the two aircraft from the United States
         Federal  Aviation   Administration  ("FAA")  Registry  and  caused  the
         aircraft to be re-registered  under Chilean  Registry.  The Partnership
         may be obligated  to  contribute  in the form of rental  credits to the
         completion  of certain  airworthiness  directives  and FAA  regulations
         based on certain thresholds.  The amount of such obligation, if any, is
         undeterminable  at this time.  Ladeco has  recently  filed a  voluntary
         petition  in the  Chilean  Courts  for a  reorganization  similar  to a
         Chapter 11 proceeding in an American  bankruptcy court. The Partnership
         engaged  Chilean  counsel to monitor  the court  proceedings.  To date,
         Ladeco has remained  current on all of its  payments  under the leases,
         and based on information provided to the Partnership by Chilean counsel
         and by Ladeco itself,  the  Partnership is fairly  confident that there
         will be no adverse consequences as a result of this situation.

         e.     Aloha Airlines, Inc.

         In December  1993,  Aloha  Airlines,  Inc.  ("Aloha"),  the lessee of a
         Boeing  737-200  Advanced  aircraft  (the  "Aloha  Aircraft"),  and the
         Partnership agreed to amend the terms of its lease which was originally
         scheduled to  terminate  on  September  1, 1994.  Pursuant to the lease
         amendment,  Aloha agreed to extend the term of the lease to February 1,
         1996,  providing for rentals of approximately 66% of the original lease
         rate plus maintenance  reserves,  both payable quarterly in arrears. As
         of September  30, 1996,  the balance for such  maintenance  reserves is
         approximately  $400,000. The Aloha Aircraft is subject to a tax benefit
         transfer lease ("TBT Lease") under which Allied Signal, the TBT Lessor,
         retains the  federal  income tax  benefits  that  normally  accrue from
         ownership  of  the  aircraft  other  than  lease  rentals.   There  are
         approximately five years remaining on the TBT Lease.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


5        COMMITMENTS AND CONTINGENCIES (continued)

          b.     Aloha Airlines, Inc. (continued)

         Prior to the  expiration  of the Aloha lease on  February 1, 1996,  the
         Partnership and Aloha agreed to a three month lease extension with rent
         based on $300 per flight hour. The Partnership  and Aloha  subsequently
         agreed on a further short-term lease extension, to October 15, 1996, on
         the same  terms,  and on  October  15,  1996,  the Aloha  Aircraft  was
         returned by Aloha to the Partnership at a facility in Marana, Arizona.

         At Marana,  the Aloha  Aircraft is  undergoing  significant  repair and
         modification  work  required to bring it into  compliance  with certain
         current  FAA  standards  and  to  make  it  more  readily  able  to  be
         remarketed. The Partnership is currently engaged and actively seeking a
         new  lessee  or,  possibly  a  purchaser  for the Aloha  Aircraft.  The
         Partnership  anticipates  a lengthy  remarketing  process for the Aloha
         Aircraft.

         f.    American Trans Air, Inc.

         In  October  1994,  USAir,  Inc.  ("USAir"),  the  lessee of two Boeing
         727-200 Advanced aircraft (the "Aircraft"), notified the Partnership of
         its  intention  to  terminate  the  leases  relating  to such  Aircraft
         effective December 31, 1994. In light of USAir's intention to terminate
         its  leases,  the  Partnership  entered  into lease  negotiations  with
         American  Trans Air  ("ATA") in an effort to remarket  the  Aircraft to
         ATA. To meet certain ATA fleet scheduling needs, USAir agreed, pursuant
         to an early termination  agreement,  to return one Aircraft in November
         1994  and  the  second  Aircraft  in  December  1994.  The  Partnership
         consummated  the lease of one of the  Aircraft to ATA in November  1994
         and the lease of the second Aircraft in December 1994 (collectively the
         "ATA  Leases").  Each  of the  ATA  Leases,  with  an  initial  term of
         approximately 39 months ("Basic Term"), provides for monthly rentals of
         $59,000. In addition, at lease inception, ATA paid security deposits of
         $59,000  per  Aircraft.  In early  1995,  the  Partnership  contributed
         $75,000  per  aircraft  in the form of cash or rental  credits  towards
         bridging "C" check inspections. In addition, if the transition to ATA's
         maintenance  program requires the Aircraft to undergo heavy maintenance
         checks during the Basic Term, an additional  $150,000 per Aircraft will
         be contributed by the Partnership towards the completion of such work.

         Additionally,   during  the  Basic  Term,  ATA  may  request  that  the
         Partnership  retrofit  the  Aircraft to comply with the Stage III noise
         emission standards pursuant to FAR Part 36 of the Federal Aviation Act.
         In the event that the Partnership  consents to the  retrofitting of the
         Aircraft,  ATA will  perform such work (the  "Improvements")  as may be
         required to bring such Aircraft into  compliance  with such  standards.
         Upon completion of the  Improvements  and the return of the Aircraft to
         revenue service, the Partnership will reimburse ATA for the cost of the
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


5        COMMITMENTS AND CONTINGENCIES (continued)

         f.     American Trans Air, Inc. (continued)


         Improvements.  In consideration for the Partnership's consenting to the
         Improvements,  the ATA Leases will be extended for a term of five years
         from the date such  Aircraft are returned to service.  During this five
         year  period,  the  monthly  rentals  will be  increased  by an  amount
         reflecting   the  enhanced   value  of  the  Aircraft   including   the
         Improvements.

         In May 1996,  ATA exercised its renewal option for the lease of a third
         Boeing  727-200  Advanced  aircraft  in which  the  Partnership  has an
         undivided  47.92231%  joint  venture  interest.  The lease,  originally
         scheduled to expire in November 1996, was renewed for an additional two
         years at the same lease rate.

         g.     Southwest Airlines Co.

         In July 1994, Southwest Airlines Co. ("Southwest") agreed to extend the
         lease of another Boeing 737-200 Advanced aircraft, originally scheduled
         to  terminate  in November  1994,  for an  additional  one year period.
         During the extension  period,  the lease  provided for reduced  rentals
         equal to approximately 29% of the original lease rate.

         In July 1995, Southwest agreed to a second lease extension on the lease
         scheduled to terminate in November  1995,  for an  additional  two year
         period.  During the second  lease  extension,  the lease  provides  for
         increased rentals of approximately 125% of the prior lease rate.

         h.     Complaints

         In December  1993, a class action  complaint was filed by Carla Wright,
         Plato Kinias, Gertrude E. Boland and Hilda Duarte purportedly on behalf
         of the limited  partners of the Partnership  (the  "Plaintiffs") in the
         Supreme  Court of the State of New  York,  County of New York (the "New
         York  Action").  This  action was  substantially  identical  to a class
         action filed by certain of the same  plaintiffs  in March 1993,  in the
         District of Columbia  Superior  Court,  which  action was  dismissed in
         October  1993.  The New  York  Action  also  named  as  defendants  the
         Partnership,  IAFM, Dean Witter Reynolds,  Inc.,  Integrated  Resources
         Marketing,  Inc., Integrated Resources Equity Corporation and CAMI. The
         complaint alleged,  among other things, that the offering material used
         in connection  with the  Partnership's  1988 public offering of limited
         partnership  units  contained  false  and  misleading   representations
         constituting  common law fraud, breach of fiduciary duty and negligence
         on the part of the defendants.  The complaint sought  rescission of the
         plaintiffs'  investment  in  the  Partnership  plus  rescissionary  and
         compensatory damages, plus interest and punitive damages.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


5        COMMITMENTS AND CONTINGENCIES (continued)

         h.     Complaints (continued)

         On February 8, 1994, the Partnership  filed a motion to dismiss the New
         York  Action.  In  response to such  motion,  the  Plaintiffs  filed an
         Amended  Complaint which,  among other things,  removed the Partnership
         and  CAMI  as  defendants.  Subsequent  to the  filing  of the  Amended
         Complaint, the defendants filed a motion to dismiss.

         In October  1995,  the New York Action was  dismissed  in its  entirety
         without leave to replead.  Plaintiffs  filed a Notice of Appeal of that
         decision on or about January 26, 1996.  However, in a stipulation dated
         June 26,1996,  Plaintiffs  agreed not to perfect their appeal,and their
         appeal expired as of October 26, 1996.

         i.      Tax assessment

         In  September  1996,  the  Partnership  received  proposed  notices  of
         assessment  from the State of Hawaii with respect to general excise tax
         ("GET") of approximately  $1,338,000 (including interest and penalties)
         for the years 1991, 1992, 1993 and 1994. The state is alleging that GET
         is owed by the  Partnership  with respect to rents  received from Aloha
         Airlines, Inc. and Hawaiian Airlines, Inc. under the leases between the
         Partnership and each of the airlines.

         The   leases   with  both   Aloha  and   Hawaiian   provide   for  full
         indemnification  of the Partnership for such taxes,  but the bankruptcy
         of Hawaiian may relieve Hawaiian of its indemnification  obligation for
         any  periods  prior  to  September  12,  1994,  when  Hawaiian  and its
         affiliates   emerged  from   bankruptcy.   In  any  event,  it  is  the
         Partnership, as taxpayer, which is ultimately liable for the GET, if it
         is applicable.

         The state has never previously applied the GET to rentals received by a
         lessor of aircraft  where the  lessor's  only contact with the state of
         Hawaii is the fact that it has leased its  aircraft to  airlines  which
         are based in the state. Aloha and Hawaiian, as well as the Partnership,
         have  separately  engaged  tax  counsel  and are  cooperating  with the
         Partnership to vigorously contest the proposed assessments.

         Final notices of assessment  have not yet been issued.  Although  there
         can be no  assurance  that  the  contest  of the  assessments  will  be
         successful,  the Partnership  believes that the state's position on the
         applicability of GET in this instance is without merit. The Partnership
         has not recorded any  liability as a result of the proposed  notices of
         assessment.
<PAGE>
                          AIRCRAFT INCOME PARTNERS L.P.

                          NOTES TO FINANCIAL STATEMENTS


6        MARKETABLE SECURITIES

         In June 1995, the Partnership received  approximately 227,000 shares of
         Class A Common  stock in the  reorganized  Hawaiian  Airlines,  Inc. in
         consideration of its general  unsecured claims filed against  Hawaiian.
         During  1995,  the  Partnership   sold  all  shares  for  net  proceeds
         aggregating $1,045,941.

7        MANAGEMENT FEE PAYABLE

         The amount due to IAFM of $111,000 and  $137,000 at September  30, 1996
         and December 31, 1995, respectively,  represents Partnership management
         fees.

8        AIRCRAFT SALE

         On April 15, 1996, the  Partnership  sold to Southwest a Boeing 737-200
         Advanced  aircraft  leased  to  Southwest  through  May 1996 and  early
         terminated   such  lease.   The   Partnership   received   proceeds  of
         approximately   $6,784,000,   net  of  an  associated   aircraft  sales
         commission and other related costs. The net proceeds from the sale were
         distributed  to partners in August  1996.  The  Southwest  aircraft was
         originally purchased by the Partnership in July, 1988 for approximately
         $12,804,377 inclusive of associated  acquisition costs. As of April 15,
         1996,  when it was sold,  the net  carrying  value of the  aircraft was
         approximately  $3,216,000 (net of allowance for equipment impairment of
         $2,300,000).

         On  September 1, 1996,  the  Partnership  and  Hawaiian  have agreed in
         principle for the sale of the Hawaiian Aircraft. Under the terms of the
         agreement, Hawaiian will pay the Partnership a down payment of $450,000
         and the balance  will be paid in monthly  installments  (39 payments of
         $72,000 and then 36 payments of $50,000)  until  November 30, 2002,  at
         which time Hawaiian has a bargain purchase option on the aircraft.  The
         Partnership has treated this transaction as an installment sale and has
         classified the net present value of the  anticipated  future cash flows
         of   approximately   $4,019,000   on  the   balance   sheet   as   note
         receivable-installment  sale.  As of September 1, 1996 the  Partnership
         removed the associated cost of the equipment and the net carrying value
         from the books of the Partnership, and recognized a gain on the sale of
         approximately $1,655,000.
<PAGE>
ITEM 2 - MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS


         Liquidity and Capital Resources

         The  Partnership  declared  a cash  distribution  of $6.50  per unit of
         limited  partnership  interest ("Unit") for the quarter ended September
         30, 1996,  as compared to a cash  distribution  of $10.00 per Unit with
         respect to the  quarter  ended  September  30,  1995.  The  Partnership
         generated cash from  operations  (before rent credits and proceeds from
         the sale of the Southwest aircraft) of approximately $8,382,000 for the
         nine  months  ended   September   30,  1996  (the  "1996   Period")  or
         approximately  $19.55 per Unit, as compared to $9,673,000  for the nine
         months ended  September 30, 1995 (the "1995  Period") or  approximately
         $22.57 per Unit.

         During the 1996 Period,  the Partnership  decreased its gross aggregate
         cash reserves, inclusive of collected maintenance reserves and original
         working capital (1% of original offering proceeds),  by an aggregate of
         approximately  $222,000 from  approximately  $4,296,000 at December 31,
         1995 to  approximately  $4,074,000 at September 30, 1996. The aggregate
         cash  reserves  were   comprised  of   approximately   $485,000   which
         represented  undistributed cash from operations and cash from sales, as
         well as original working capital of $1,929,000 (1% of original offering
         proceeds)  and  approximately   $1,660,000  of  collected   maintenance
         reserves.

         During the first  quarter of 1995,  the  Partnership  provided ATA with
         $150,000 of  aggregate  rent  credits  representing  the  Partnerships'
         obligation  to  contribute  $75,000 per aircraft  towards  bridging "C"
         check inspections with respect to the aircraft leased to ATA during the
         1994 Period.  Further,  if the transition to ATA's maintenance  program
         requires that the aircraft undergo heavy maintenance  checks during the
         lease term (the "Basic  Term"),  the  Partnership  will  contribute  an
         additional  $150,000 per aircraft  towards the completion of such heavy
         maintenance  checks.  Additionally,  during  the  Basic  Term,  ATA may
         request that the  Partnership  retrofit the aircraft to comply with the
         Stage  III noise  emission  standards  pursuant  to FAR Part 36. In the
         event that the Partnership  consents to retrofitting the aircraft,  ATA
         will make  Improvements  as may be required to bring the aircraft  into
         compliance  with such standards.  Upon completion of the  Improvements,
         the Partnership will reimburse ATA for the cost of the Improvements. In
         consideration for the Partnership's consenting to the Improvements, the
         ATA leases will be extended  for a term of five years from the date the
         aircraft  are returned to service.  During this five year  period,  the
         lease  rentals will be increased by an amount  reflecting  the enhanced
         value of the aircraft including the Improvements.

         As the  Partnership's  aircraft  come  off-lease  (one  of  which  came
         off-lease on October 15, 1996), it may be necessary for the Partnership
         to use a portion  of its  operating  reserves  and/or  its  anticipated
         future cash flow, which would otherwise be available for  distribution,
         to  upgrade  or  enhance  these  aircraft  or  related  engines  if the
         Partnership determines that such expenditures are in its best interests
         in order to maximize  remarketing  value.  The Partnership is currently
         evaluating strategies,  including potential engine upgrades for certain
<PAGE>
         Liquidity and Capital Resources (continued)

         aircraft,  to increase  marketability  and is  reviewing  its  possible
         future  obligations  to pay for bridging  costs in order to  facilitate
         such  remarketing.  Furthermore,  because  of  market  conditions,  the
         Partnership  may be  required  to bear  some of the  related  costs  of
         compliance  with  recent   mandatory   federal   regulations   covering
         maintenance and upgrading of aging aircraft.  The Partnership's ability
         to make  distributions  may be impacted by its  obligation  to pay such
         costs.

         The  Partnership has  encountered  severe  competition in attempting to
         re-lease its aircraft as they have come  off-lease  due to a surplus in
         the market of  narrow-body  aircraft  similar to the types owned by the
         Partnership.  The substantial costs required to maintain and bring used
         aircraft into compliance  with FAA noise and  maintenance  requirements
         adopted  since  1990  are the  primary  factors  which  have  adversely
         affected the narrow body aircraft market. In addition,  the Partnership
         will also have to compete  with  newer,  more fuel  efficient  aircraft
         which  comply  with  recently  adopted  FAA  noise  requirements.   The
         Partnership  also believes that as a result of the factors listed above
         there  has  been  a  significant   decline  in  the  re-sale  value  of
         narrow-body aircraft similar to the types owned by the Partnership.

         Although the Partnership  believes that its anticipated gross cash flow
         during the remainder of 1996 will be less than previous gross cash flow
         generated  (approximately  71% of the 1995 cash flow  based  upon gross
         firm  term  leases  plus the net  amounts  due  under  notes  issued by
         Continental  Airlines,  Inc.  ("Continental") as repayment for deferred
         rent and  modification  advances),  the  anticipated  cash flow for the
         remainder of 1996 and the  foreseeable  future  should be sufficient to
         pay its operating expenses and make distributions.

         Of  the  18  aircraft  originally  purchased  by  the  Partnership;  at
         September  30,  1996,  the  Partnership  had an  interest  in 12 of the
         aircraft (inclusive of an undivided 47.92231% joint venture interest in
         one aircraft) which had an original cost of approximately  $127,677,000
         (net book value of approximately $29,387,000).  During the remainder of
         1996,   excluding  rents  from  renewals  and  sales,  the  Partnership
         anticipates   receiving   approximately   $2,088,000   of   rentals  on
         non-cancelable  leases  (inclusive  of amounts  which may be set-off by
         lessees against basic rent as reimbursement  for certain  modifications
         required  under  the  applicable  leases).  After  deducting  operating
         expenses,  the  foregoing  aggregate  rentals  are  not  sufficient  to
         maintain previous distribution levels.

         Of the remaining 12 aircraft,  one aircraft which  generated  aggregate
         gross rental revenues of approximately $60,000 per month came off-lease
         in October  1996.  The  Partnership  is currently  engaged and actively
         seeking a new  lessee  or,  possibly  a  purchaser.  The  Partnership's
         remaining  aircraft are leased  pursuant to leases which expire in 1997
         (6 aircraft), 1998 (5 aircraft).

         On  September 1, 1996,  the  Partnership  and  Hawaiian  have agreed in
         principle for the sale of the Hawaiian Aircraft. Under the terms of the
         agreement, Hawaiian will pay the Partnership a down payment of $450,000
         and the balance  will be paid in monthly  installments  (39 payments of
         $72,000 and then 36 payments of $50,000)  until  November 30, 2002,  at
<PAGE>
         Liquidity and Capital Resources (continued)

         which time Hawaiian has a bargain purchase option on the aircraft.  The
         Partnership has treated this transaction as an installment sale and has
         classified the net present value of the  anticipated  future cash flows
         of   approximately   $4,019,000   on  the   balance   sheet   as   note
         receivable-installment  sale.  As of September 1, 1996 the  Partnership
         removed the associated cost of the equipment and the net carrying value
         from the books of the Partnership, and recognized a gain on the sale of
         approximately $1,655,000.

         On April 15,  1996,  the  Partnership  sold to  Southwest  Airlines Co.
         ("Southwest") a Boeing 737-200 Aircraft leased to Southwest through May
         1996 and early terminated such lease. The Partnership received proceeds
         of  approximately  $6,784,000,  net  of an  associated  aircraft  sales
         commission and other related  closing costs.  The net proceeds from the
         sale of the Southwest  aircraft were  distributed to partners in August
         1996.

         Inflation has not had any material effect on the Partnership's revenues
         since its inception nor does the  Partnership  anticipate  any material
         effect on its  business  from this  factor.  The prior  softness in the
         aircraft  industry and resulting  declines in the value of the types of
         aircraft  owned by the  Partnership  have  resulted in the  Partnership
         providing allowances for equipment impairment. Additionally, because of
         the  financial  troubles of certain  airlines  which are lessees of the
         Partnership's  aircraft,  cash flow and, therefore,  distributions have
         been reduced.

         In  September  1996,  the  Partnership  received  proposed  notices  of
         assessment  from the State of Hawaii with respect to general excise tax
         of approximately  $1,338,000 (including interest and penalties) for the
         years 1991, 1992,  1993, and 1994,  relating to the lease rents paid by
         Hawaiian and Aloha.  While the leases with Hawaiian and Aloha indemnify
         the  Partnership  for such taxes,  the  obligation  is  ultimately  the
         Partnership's  as lessor.  The  Partnership  believes the assessment is
         without merit and is contesting the assessment vigorously.  There is no
         assurance  that the  Partnership  will be successful in contesting  the
         assessment.  The Partnership has not recorded any liability as a result
         of their assessment.

         In April 1995, the General Partner and certain  affiliates entered into
         an agreement  with  Fieldstone  pursuant to which  Fieldstone  performs
         certain  management  and   administrative   services  relating  to  the
         Partnership.  Substantially  all costs associated with the retention of
         Fieldstone will be paid by the General Partner.

         Results of Operations

         Net income  increased  for the nine months ended  September 30, 1996 as
         compared to the nine months ended September 30, 1995,  primarily due to
         the gain on sale of the Southwest  aircraft and the installment sale of
         the Hawaiian aircraft.
<PAGE>
         Results of Operations (continued)

         Rental revenues  decreased  overall for the nine months ended September
         30, 1996 compared to the corresponding  period of the prior year due to
         reduced rentals  pertaining to leases with Aloha Airlines,  Inc., which
         was renewed past its originally  scheduled  expiration date of February
         1, 1996 for an aggregate of eight and one-half months  generating rents
         based on actual usage, and Southwest  Airlines (N702ML) which was early
         terminated and sold effective  April 15, 1996 and which generated rents
         through May 15, 1996. This was partially offset by a rental increase on
         the renewal by Southwest  Airlines,  Inc.  (N28SW) in November 1995 for
         two years at 125% of the prior lease rate.

         Expenses  decreased  for the nine months  ended  September  30, 1996 as
         compared to the corresponding  period of the prior year as follows: (i)
         operating  expenses  decreased  due  to  the  expense  of a  "C"  check
         performed on both Aircraft in the 1995 Period which were  remarketed to
         ATA;  (ii)  reduced  depreciation  on aircraft  which have been sold or
         depreciated  to its salvage  value prior to the current  period;  (iii)
         management  fees  decreased  due to the  decrease in rental  revenue on
         which  such  fees are  based;  and (iv)  such  reductions  were  offset
         partially by an increase in bad debt expense in the current period used
         to recognize a write off of the receivable from Midway  Airlines,  Inc.
         which was deemed to have no value in litigation.

         A gain was recognized  during the quarter ended  September 30, 1996 due
         to the Hawaiian aircraft sale. No gain was recognized in the comparable
         prior period.
<PAGE>
PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

          In December 1993, a class action  complaint was filed by Carla Wright,
          Plato  Kinias,  Gertrude E. Boland and Hilda  Duarte,  purportedly  on
          behalf of the limited partners of the Partnership (the  "Plaintiffs"),
          in the Supreme Court of the State of New York, County of New York (the
          "New York Action"). This action was substantially identical to a class
          action  filed by certain of the same  plaintiffs  in March 1993 in the
          District of Columbia  Superior  Court,  which action was  dismissed in
          October 1993. The New York Action named as defendants the Partnership,
          IAFM, Dean Witter  Reynolds,  Inc.,  Integrated  Resources  Marketing,
          Inc.,  Integrated  Resources Equity  Corporation and Citicorp Aircraft
          Management,  Inc. ("CAMI"). The complaint alleged, among other things,
          that the offering  material used in connection with the  Partnership's
          1988  public   offering  of  Units   contained  false  and  misleading
          representations  constituting  common law fraud,  breach of  fiduciary
          duty and  negligence  on the  part of the  defendants.  The  complaint
          sought  rescission of the  plaintiffs'  investment in the  Partnership
          including  rescissionary and compensatory  damages,  plus interest and
          punitive damages.

          On February 8, 1994, the Partnership filed a motion to dismiss the New
          York Action.  In response to such motion,  Plaintiffs filed an Amended
          Complaint which, among other things,  removed the Partnership and CAMI
          as  defendants.  Subsequent to the Amended  Complaint,  the defendants
          filed a motion to dismiss that pleading.

         In October  1995,  the New York Action was  dismissed  in its  entirety
         without leave to replead.  Plaintiffs  filed a Notice of Appeal of that
         decision on or about January 26, 1996.  However, in a stipulation dated
         June 26, 1996, Plaintiffs agreed not to perfect their appeal, and their
         appeal expired as of October 26, 1996.


ITEM 5 - OTHER INFORMATION

         In September  1996,  Equity  Resource Bay Fund, an  unaffiliated  third
         party commenced an unsolicited  offer to purchase up to 18,000 units of
         limited  partnership  interest  ("Units") of the Partnership for $22.50
         per Unit. As required by Rule 14e-2 under the  Securities  Exchange Act
         of 1934, the Partnership  provided  limited  partners with its position
         with respect to this offer.  The Partnership  recommends  rejecting the
         offer due to its inadequacy in price.


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

     (a)   Exhibits:        None
     (b)   Reports on Form 8-K:  None



<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Partnership  has duly  caused  this  report to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                      AIRCRAFT INCOME PARTNERS L.P.
                             By:      Integrated Aircraft Fund Management Corp.,
                                      General Partner



Dated:   November 12, 1996         /s/Douglas J. Lambert
                                      ------------------
                                      Douglas J. Lambert
                                      President and Chief Financial Officer