INTERNATIONAL AIRCRAFT INVESTORS, 10-K, 1998-03-20

INTERNATIONAL AIRCRAFT INVESTORS
10-K, 1998-03-20
EQUIPMENT RENTAL & LEASING, NEC

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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

[ ] 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. [ ]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 16, 1998 was approximately $33,958,250
(based on the closing price on Nasdaq National Market as reported by the Wall
Street Journal on such date).

At March 16, 1998, the registrant had issued and outstanding an aggregate of
4,497,584 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, 1997

TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM PART I PAGE
---- ----
<S> <C>
1 Business 3

2 Properties 13

3 Legal Proceedings 13

4 Submission of Matters to a Vote of Securities Holders 13

PART II

5 Market for Registrant's Common Equity and Related Stockholder Matters 14

6 Selected Financial Data 15

7 Management's Discussion and Analysis of Financial Condition and Results of Operation 16

8 Financial Statements and Supplementary Data 18

9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18

PART III

10 Directors and Executive Officers of the Registrant 19

11 Executive Compensation 19

12 Security Ownership of Certain Beneficial Owners and Management 19

13 Certain Relationships and Related Owners and Management 19

PART IV

14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
</TABLE>

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PART I

ITEM 1. BUSINESS.

GENERAL

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. As of December 31, 1997, the
Company had ten aircraft on lease to ten customers. The Company leases its
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 the
Company retains 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 monthly rates.

On November 5, 1997, the Company issued 2.6 million shares of common
stock in an initial public offering (IPO) at $10.00 per share. In connection
with the IPO, the Company effected a 1-for-4.5 reverse stock split of its common
stock which has been applied retroactively in the accompanying consolidated
financial statements. In accordance with the underwriting agreement, the Company
granted the underwiters an option exercisable from November 5, 1997 to December
20, 1997 to purchase a maximum of 390,000 additional shares of common stock to
cover overallotments. In December 1997, options to purchase 80,000 shares were
exercised. After underwriting discount and other offering costs, net proceeds to
the Company as a result of the IPO were $23.9 million. The Company used $1.6
million to repay certain loans. The Company intends to use the remaining net
proceeds, together with debt financing, to acquire additional aircraft for
lease, for working capital and other general purposes.

In December 1997, the Company purchased from International Lease Finance
Corporation (ILFC) a Boeing Model 757- 200ER (Extended Range) on lease to Air
Transat, a Canadian charter airline. The noncancelable lease term runs through
April 2003. The acquisition represents the Company's first purchase of an
overwater aircraft and is powered by two Rolls Royce RB211-535E4 engines. As a
result of the acquisition, the Company's lease portfolio increased to ten
aircraft.

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

STRATEGY

The Company's 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 the Company's
business strategy include the following:

Focus on Operating Leases. The Company believes that airlines are
becoming increasingly 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. The Company believes the operating lease
of jet aircraft, especially used jet aircraft, offers the potential for a higher
rate of return to the Company than other methods of aircraft financing, such as
finance leases.

Focus on Used Commercial Jet Aircraft with a Broad Market Acceptance.
The Company leases used, single-aisle jet aircraft. Aircraft acquired generally
range between five and 15 years old at the time the aircraft is acquired by the
Company. The Company is currently focusing on the acquisition and lease of
single-aisle jet aircraft, primarily aircraft with a seating capacity of 121 to
170 passengers, which, according to the 1997 Current Market Outlook published by
the Boeing Commercial Airplane Group ("Boeing") in March 1997 ("the Boeing
Report"), accounted for approximately 35.9% of the world fleet at December 31,
1996. The Boeing Report estimates that the commercial replacement cycle for this
type of aircraft is 25 to 28 years from manufacturer date. This category of jet
aircraft includes aircraft such as the Boeing 737- 300/-400, the Airbus A320 and
the McDonnell Douglas MD80 series.

Optimize Relationship with ILFC. The Company has had a long and
continuous relationship with ILFC. ILFC was an initial investor in the Company
and currently owns approximately 1.5% of the Company's Common Stock. ILFC is a
major owner-lessor of commercial jet aircraft having contacts with most airlines
worldwide, the aircraft and engine manufacturers and most of the significant
participants in the aircraft industry worldwide. Boeing and Airbus each recently

<PAGE> 4

announced a multi-billion dollar order of aircraft by ILFC. The Company intends
to use its relationship with ILFC to seek 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 commercial jet aircraft. Thus, the Company
believes that its 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. The management of the Company and
the Board of Directors of the Company 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. The Company's objective is to
diversify its customer base to avoid dependence on any one lessee, geographic
area or economic trend.

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

AIRCRAFT LEASING

All of the Company's current leases are operating leases rather than
finance leases. Under an operating lease, the Company retains 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--Ownership Risks."

The Company targets the medium-term operating lease market, which
generally consists of three to eight year initial noncancelable lease terms. The
Company's 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,
the leases contain extensive provisions regarding the remedies and rights of the
Company in the event of a default thereunder by the lessee. The leases have
payment clauses whereby the lessee is required to continue to make the lease
payments regardless of circumstances, including whether or not the aircraft is
in service. Certain of the Company's leases limit the lessee's obligation to
make lease payments if the Company violates the covenant of quiet enjoyment
regarding the aircraft or if the Company enters bankruptcy and does not assume
the lease. During the term of the lease, the Company is 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 asset, as well as the return conditions for the
airframe, engines, landing gears, auxiliary power unit and associated
components.

Generally, the lessee provides the Company 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 a certain amount monthly for each
hour the aircraft and/or engine has flown. These maintenance reserves may be
drawn upon by the lessee to be applied towards the cost of periodic scheduled
overhaul and maintenance checks. At the termination of the lease, the lessee is
required to return the asset to the Company in the same condition as it was
received, normal wear and tear excepted, so the asset is in a proper condition
for re-lease or sale. Normally, any remaining maintenance reserves are retained
by the Company. See "Cautionary Statements--Ownership Risks."

The Company makes an analysis of the credit risk associated with each
lease before entering into a lease. The Company's credit analysis consists of
evaluating the prospective lessee's available financial statements and trade and
banking references, and working with the Company's lender to evaluate country
and political risk, insurance coverage, liability and expropriation risk. The
process for credit approval is a joint undertaking between the Company and the
senior lender providing the debt financing for the lease. The Company obtains
extensive financial information regarding the lessee. See "Cautionary
Statements--Customer Credit Risks" and "--International Risks"

<PAGE> 5

Upon termination of a lease, the objective of the Company is to re-lease
or sell the aircraft. The Company's leases generally require that the lessee
notify the Company 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 the Company to commence its remarketing efforts well in advance of the
termination of a lease. Since January 1, 1995, four of the Company's aircraft
came off lease and were re-leased to new customers. One Boeing 737-200 ADVANCED
went from Britannia Airways (United Kingdom) to New Zealand International
Airlines Limited, a subsidiary of Air New Zealand Limited; one Boeing 737-200
ADVANCED went from New Zealand International Airlines Limited to TACA
International Airlines (El Salvador) and subsequently to its sister company,
Compania Panamena De Aviacion, S.A. ("COPA") (Panama); one Boeing 737-200
ADVANCED went from Air New Zealand Limited to COPA; and one Boeing 737-300 went
from British Midland Airways to Shanghai Airlines. The Company has entered into
an agreement with ILFC pursuant to which ILFC has agreed to assist the Company,
if requested by the Company, in the remarketing of its aircraft for a fee to be
negotiated for each transaction. See "Relationship With ILFC" below. If the
Company is unable to re-lease or sell an aircraft on favorable terms, its
business, financial condition and results of operations may be adversely
affected.

CUSTOMERS

At December 31, 1997, the Company's lessees included four domestic
customers (Alaska Airlines, Inc., Delta Air Lines, Inc., ILFC, and Southwest
Airlines Co.) and six foreign customers (Air Belgium, British Airways Ltd.,
COPA, New Zealand International Airlines Ltd., Shanghai Airlines and Air
Transat). During the years ended December 31, 1995, 1996 and 1997, lease
revenues from flight equipment generated from foreign customers accounted for
approximately 82%, 52% and 61%, respectively, of total revenues.

Many foreign countries have currency and exchange laws regulating the
international transfer of currencies. The Company attempts to minimize its
currency and exchange risks by negotiating all of its aircraft leasing in U.S.
dollars. The Company requires, 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 the Company in U.S. dollars.
Although the Company has 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.

The Company's revenues and income may be affected by, among other
matters, political instability abroad, changes in national policy, competitive
pressures on certain air carriers, fuel shortages, labor stoppages, recessions
and other political or economic events adversely affecting world or regional
trading markets or impacting a particular customer.

The following customers accounted for more than 10% of the Company's
total revenues in one or more of the three years ended December 31, 1997: Alaska
Airlines, Inc. (21% and 17% for the years ended December 31, 1996 and 1997,
respectively), British Airways Ltd. (11% for the year ended December 31, 1997),
British Midland Airways Limited (36%, and 23% for the years ended December 31,
1995 and 1996, respectively), Delta Air Lines, Inc. (11% for the year ended
December 31, 1995), ILFC ( 16% and 10% for the years ended December 31, 1995 and
1996, respectively), New Zealand International Airlines Limited (26%, and 10%
for the years ended December 31, 1995 and 1996 , respectively), Shanghai
Airlines (13% for the year ended December 31, 1997) and Southwest Airlines Co.
(15% and 13% for the years ended December 31, 1996 and 1997, respectively).

FINANCING/SOURCE OF FUNDS

The Company purchases used aircraft and aircraft engines on lease to
airlines directly from other leasing companies or from airlines for leasing back
to the airline. The typical purchase requires both secured debt and an equity
investment by the Company. The Company generally makes 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).
The balance of the purchase price is typically financed with the proceeds of
secured borrowings from banks or other financial institutions (to date with the
support of ILFC as the seller of the flight equipment). The Company maintains
banking relationships primarily with five commercial banks providing long-term
secured equipment financing to the Company at December 31, 1997 in an aggregate
amount of $115.1 million. ILFC has provided certain guarantees and other
financial support with respect to the Company's borrowings which have allowed
the Company to finance its aircraft at more favorable leverage rates than the
Company could have obtained without ILFC's support. See Notes 5 and 6 to
Consolidated Financial Statements.

<PAGE> 6

At December 31, 1997, $141.9 million (or 91.7%) of the Company's
borrowings to finance aircraft purchases were on a non-recourse basis.
Non-recourse loans are structured as loans to special purpose subsidiaries of
the Company which only own the assets which secure the loan. The Company, other
than the relevant special purpose subsidiary, is not liable for the repayment of
the non-recourse loan unless the Company breaches 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 of the Company. 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 $12.8 million of the Company's borrowings
are on a recourse basis. ILFC has agreed to indemnify the Company for any
payments under this recourse loan not funded by lease or sale payments.

The terms of all of the Company's current borrowings end within 30 to
60 days after the minimum noncancelable period under the related lease, after
which the Company will be required to renegotiate the loan or obtain other
financing in connection with the re-lease of the aircraft. See "Cautionary
Statements--Dependence Upon Availability of Financing."

Notes payable due within one year totaled $19.2 million at December 31,
1997, of which $10.8 million represents balloon payments and $8.4 million
represents installment payments. The Company plans to repay $.9 million of
balloon payments in 1998. Of the remaining balloon payments, $3.7 million
relates to a lease which expires in March 1998, $4.1 million relates to a lease
which was extended to June 1999 and $2.1 million due June 1998 payable to Great
Lakes Holdings, a company owned by the Chief Executive Officer and the President
of the Company ("Great Lakes"), relates to leases which expire subsequent to
December 31, 1998. The Company plans to refinance the balloon payments in
connection with the re-leasing of the aircraft in March 1998 and the aircraft
re-leased to June 1999 and the notes with Great Lakes due in June 1998. During
1997, the Company refinanced $40.4 million of balloon payments.

At December 31, 1997, the Company's borrowings had interest rates
ranging from 6.0% to 8.1% per annum, with a weighted average interest rate of
7.29% per annum. At December 31, 1997, approximately 9.4% of the Company's
borrowings accrued interest on a floating rate basis.

The Company has previously provided for all of its financing needs
through internally generated funds and borrowings. There is no assurance that
such sources will provide the Company with additional capital resources. The
Company's future growth is dependent upon raising additional capital. See
"Cautionary Statements--Dependence Upon Availability of Financing."

RELATIONSHIP WITH ILFC

ILFC was an initial investor in the Company, and owns approximately 1.5%
of the Company's Common Stock. Eight of the Company's ten present aircraft were
acquired from ILFC and ILFC has provided certain guarantees and other financial
support with respect to the Company's borrowings. See "Financing/Source of
Funds" above. ILFC has also paid various fees to the Company for consulting and
remarketing services. The Company has entered into an agreement with ILFC
pursuant to which ILFC has agreed to assist the Company in the remarketing of
its aircraft if requested by the Company. See "Aircraft Leasing" above, "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations," and Note 6 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, depending in part
upon the type of leased aircraft and prospective lessees. Competition is
primarily based upon the availability of the aircraft required by the customer
and the lease rate. The Company believes that only a few comparably sized
companies focus primarily on the same segment of the aircraft leasing market as
the Company. 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 the Company, although their primary focus
is not on the same market segment on which the Company focuses. Many of these
periodic competitors have significantly greater financial resources than the
Company. The Company's competitors may lease aircraft at lower rates than the
Company and provide benefits, such as direct maintenance, crews, support
services and trade-in privileges, which the Company does not intend

<PAGE> 7

to provide. The Company believes that it is able to compete in the leasing of
used jet aircraft due to its experience in the industry and its reputation and
expertise in acquiring and leasing aircraft. See "Cautionary Statements--Risk
Factors."

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 repair and operation of all aircraft operated in
the United States. Its regulations are designed to insure 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 the Company does not operate its aircraft for public transportation of
passengers and property, it is not directly subject to their regulatory
jurisdiction.

To export aircraft from the U.S. to a foreign destination, the Company
is required to obtain an export license from the United States Department of
Commerce. To date, the Company has not experienced any difficulty in obtaining
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 (the "ICAO"). Each signatory has
agreed to comply with airworthiness directives of the country of manufacture of
the aircraft. The Company will not lease its aircraft to any carrier domiciled
in a country which is not a member of ICAO. The Company also requires its
lessees to comply with the most restrictive standards of either the FAA or its
foreign equivalent. In some instances, the Company may have to share in the cost
of complying with regulatory airworthiness directives. For older aircraft, a
special group of airworthiness directives require extensive inspections and
repairs to bring such aircraft into compliance, which are required to be paid by
the lessee.

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. One of the Company's aircraft
had noise compliance work performed at a cost of $2.45 million (all of which was
paid by the Company and the lease rate on the aircraft was increased) and three
of the Company's aircraft will require this work to be performed over the next
three years unless the aircraft is leased to a lessee in an area that does not
require the modifications. Currently, these modifications range in cost from
$1.7 million to $2.5 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--Aircraft Noise Compliance."

INSURANCE

The Company requires its lessees to carry those types of insurance which
are customary in the air transportation industry, including comprehensive
liability insurance and aircraft hull insurance. The Company is named as an
additional insured on liability policies carried by the lessees. All policies
contain a breach of warranty endorsement so that the interests of the Company
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 the Company through an independent insurance broker. The
territorial coverage is, in each case, suitable for its lessee's area of
operations and

<PAGE> 8

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 the Company. Furthermore, the insurance is primary and
not contributory and all insurance carriers are required to waive rights of
subrogation against the Company.

The stipulated loss value schedule under aircraft hull insurance
policies is on an agreed value basis acceptable to the Company, 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. Such 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 the Company.

EMPLOYEES

As of December 31, 1997, the Company had six employees. None of the
Company's employees is covered by a collective bargaining agreement and the
Company believes its 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. 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. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.

Ownership Risks

The Company leases its portfolio of aircraft under operating leases
rather than finance leases. Under an operating lease, the Company retains title
to the aircraft and assumes the risk of not recovering its entire investment in
the aircraft through the re-leasing and remarketing process. Operating leases
require the Company to re-lease or sell aircraft in its portfolio in a timely
manner upon termination of the lease in order to minimize off-lease time and
recover its original investment in the aircraft. Numerous factors, many of which
are beyond the control of the Company, may have an impact on the Company's
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
(particularly those imposing environmental, maintenance and other requirements
on the operation of aircraft), changes in the supply or cost of aircraft and
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, there can be no
assurance that the Company's estimated residual value for aircraft will be
realized. If the Company is unable to re-lease or resell aircraft on favorable
terms, its business, financial condition and results of operations would be
adversely affected.

Industry Risks

The Company is in the business of providing leases of commercial jet
aircraft to international and domestic airlines. Consequently, the Company is
affected by downturns in the air transportation industry in general. Substantial
increases in fuel costs or interest rates, increasing fare competition, slower
growth in air traffic, the number and quality of aircraft available, or any
significant downturn in the general economy could adversely affect the air
transportation industry and may therefore negatively impact the Company's
business, financial condition and results of operations. In recent years, a
number of commercial airlines have experienced financial difficulties, in some
cases resulting in bankruptcy proceedings. While the Company believes that its
lease terms protect its aircraft and the Company's investment in such aircraft,
there

<PAGE> 9

can be no assurance that the financial difficulties experienced by a number of
airlines will not have an adverse effect on the Company's business, financial
condition and results of operations.

Limited Number of Aircraft and Lessees

The Company currently owns and leases ten aircraft to ten lessees. 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 the Company's business,
financial condition and results of operations.

Reliance Upon ILFC

Eight of the Company's current ten aircraft and leases were acquired
from ILFC. See "Relationship With ILFC". In connection with all of the Company's
aircraft, ILFC has provided guarantees or other financial support which have
allowed the Company to finance the aircraft at more favorable leverage than the
Company could have obtained without the guarantees and financial support of
ILFC. In addition, ILFC has provided a portion of the consulting fees reported
by the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." There can be no assurance that the Company 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
acquired from ILFC. If aircraft and leases are acquired from ILFC or others,
there can be no assurance that guarantees or financial support will be given by
the seller or whether the Company will be able to receive as favorable leverage
and interest rates from its lenders. If the Company is unable to acquire
aircraft and leases and to finance the acquired aircraft at competitive rates,
the Company's business, financial condition and results of operations could be
adversely affected. See "Relationship With ILFC," and Note 6 to Consolidated
Financial Statements.

Customer Credit Risks

Certain of the Company's 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 "Industry Risks" above. A lessee may default in
performance of its lease obligations and the Company may be unable to enforce
its remedies under a lease. A number of airlines have experienced financial
difficulties, and certain airlines have filed for bankruptcy and a number of
such airlines have ceased operations. In most cases where a debtor seeks
protection under Chapter 11 of the United States Bankruptcy Code (the
"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 there can be no assurance that the provisions of Section 1110
will protect the Company's 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.

International Risks

Leases to foreign customers may present greater risks to the Company
because certain foreign laws, regulations and judicial procedures may not be as
protective of lessor rights as those which apply in the United States. In
addition, many foreign countries have currency and exchange laws regulating the
international transfer of currencies. The Company attempts to minimize its
currency and exchange risks by negotiating all of its aircraft lease
transactions in U.S. Dollars. The Company is subject to the timing and access to
courts and the remedies local laws impose in order to collect its lease payments
and recover its assets. Political instability abroad and changes in
international policy also present risks associated with expropriation of the
Company's leased aircraft. Although the Company has experienced no problems to
date with its foreign lessees, there can be no assurance that the Company will
not experience problems in collecting accounts due under leases to foreign
customers or reacquiring aircraft from such customers in the future.
International collection problems and problems in recovering aircraft could have
a material adverse effect on the Company's business, financial condition and
results of operations.

<PAGE> 10

required, written approval of the appropriate government agency, finance
ministry or central bank for the remittance of all funds contractually owed to
the Company in U.S. Dollars. Although the Company has 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.

The Company's 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.

Aircraft Noise Compliance

The Airport Noise and Capacity Act of 1990 ("ANCA") requires 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. The Federal Aviation
Administration ("FAA") regulations which implement the ANCA require carriers to
modify or reduce the number of Stage 2 aircraft operated by 50% by the end of
1996, 75% by the end of 1998 and 100% by the end of 1999. Alternatively, a
carrier could satisfy these compliance requirements by phasing in aircraft
meeting the stricter Stage 3 requirements (set forth in Part 36 of the Federal
Aviation Regulations) so that it has at least 75% Stage 3 aircraft by the end of
1998 and 100% of Stage 3 aircraft by the end of 1999.

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 such
jurisdictions, which has the effect of limiting the Company's ability to place
aircraft on lease in such jurisdictions unless they have been modified to meet
Stage 3 requirements.

Seven of the Company's aircraft currently meet Stage 3 requirements. Two
of the Company's remaining three aircraft are currently leased in areas not
imposing Stage 3 requirements. The Company may be required to modify one or more
of its aircraft to meet Stage 3 requirements, which currently could cost in the
range of $1.7 million to $2.5 million per aircraft. See "Government Regulation."
The Company has no assurance that it will be able to obtain financing for any
such modifications. See "Dependence Upon Availability of Financing" below.

The ANCA also recognizes the right of airport operators with special
noise problems to implement local noise abatement procedures as long as such
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 the Company with
statutory and regulatory requirements concerning noise restriction and abatement
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Dependence Upon Availability of Financing

The operating lease business is a capital intensive business. The
Company's typical operating lease transaction requires a cash investment by the
Company of approximately 5% to 15% of the aircraft purchase price, commonly
known as an "equity investment." The Company's equity investments have
historically been financed from internally generated funds and other cash and
seller financing (primarily from ILFC), and in the future will include a
substantial portion of the net proceeds of its recent 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, the Company's ability to successfully execute its
business strategy and to sustain its operations is dependent, in part, on the
availability of debt and equity capital. In addition, the terms of the Company's
loans generally require a substantial balloon payment at the end of the
noncancelable portion of the lease of

<PAGE> 11

the related aircraft, at which time the Company will be required to re-lease the
aircraft and renegotiate the loan with its lender or obtain other financing.
Refinancing the balloon amount of the loan is dependent upon the Company
re-leasing the related aircraft. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Liquidity and Capital
Resources." There can be no assurance that the necessary amount of such capital
will continue to be available to the Company on favorable terms, or at all. If
the Company were unable to continue to obtain any portion of required financing
on favorable terms, the Company's ability to add new leases to its lease
portfolio, renew leases, release an aircraft, repair or recondition an aircraft
if required or retain ownership of an aircraft on which financing has expired
would be limited, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's financing arrangements to date have been dependent in part upon ILFC.
See "Reliance Upon ILFC" above and "Relationship With ILFC," and Note 6 to
Consolidated Financial Statements.

Interest Rate Risk

The Company's leases are generally structured at fixed rental rates for
specified terms. See "Lease Portfolio" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." There can be no assurance that the Company will be able to finance
or refinance its 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 rental revenue the Company realizes under its leases and the
interest rate that the Company pays under its loans. There can be no assurance
that the Company's business, financial condition and operating results will not
be adversely affected during any period of increases in interest rates.

Substantial Competition

The aircraft leasing industry is highly competitive, depending in part
upon the type of leased aircraft and prospective lessees. The Company believes
that only a few comparably sized companies on a worldwide basis focus primarily
on the same segment of the aircraft leasing market as the Company. 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 the Company, although their primary focus is not on the
market segment on which the Company focuses. Many of these periodic competitors
have significantly greater financial resources than the Company. The Company's
competitors may lease aircraft at lower rates than the Company and provide
benefits, such as direct maintenance, crews, support services and trade-in
privileges, which the Company does not intend to provide. There can be no
assurance that the Company will continue to compete effectively against present
and future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations.

Stock Ownership Affecting Aircraft Registration

The Company intends to maintain United States registration of some of
the aircraft which it owns. 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 successful challenge to registration of an aircraft by 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
the Company of any leases or financing agreements with respect to the aircraft.

Uncertainty Regarding Limits on Liability of Lessors

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 such 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 such damage
awards can be substantial. Because

<PAGE> 12

there is little case law interpreting Section 44112, there can be no assurance
that the provisions of Section 44112 would fully protect the Company from all
liabilities in connection with any injury, death, damage or loss that may be
caused by any aircraft it owns. 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 the Company will be obligated to indemnify the
Company for, or insure the Company against, virtually all claims by third
parties; however, in the event that Section 44112 were not applicable, no
assurance can be given that the lessees could fulfill their indemnity
obligations under any such leases or that any insurance obtained will be
sufficient.

Requirements and Costs Associated With the Maintenance and Operation of Aircraft

The maintenance and operation of aircraft are strictly regulated by the
FAA and foreign aviation authorities which oversee such matters as aircraft
certification, inspection, maintenance, certification of personnel, and
record-keeping. The cost of complying with such requirements are significant.
The Company will seek to lease its aircraft to lessees that agree to bear all or
a significant portion of the costs of complying with governmental regulations.
All of the Company's 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, the Company may be required
to spend substantial sums to repair or recondition the aircraft and may be
required to borrow funds for the purpose. See "Customer Credit Risks" above. The
FAA issued several Airworthiness Directives ("ADs") in 1990 mandating changes to
the maintenance program for older aircraft. These ADs were issued to ensure that
the oldest portion of the nation's 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 the Company's business, financial condition and
results of operations.

Risk of Changes in Tax Laws or Accounting Principles

The Company's leasing activities generate significant depreciation
allowances that provide the Company with substantial tax benefits on an ongoing
basis. In addition, the Company's 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 would adversely affect the Company's business, financial condition
and results of operations.

Dependence on Key Management

The Company's business operations are dependent in part upon the
expertise of certain key employees. Loss of the services of such employees,
particularly William E. Lindsey and Michael P. Grella, would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Quarterly Fluctuations in Operating Results

The Company has experienced fluctuations in its quarterly operating
results and anticipates that these fluctuations may continue. Such fluctuations
may be due to a number of factors, including 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 at a different lease rate or a default by a lessee. Given
the possibility of such fluctuations, the Company believes that comparisons of
the results of its 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 the Company's revenues or
earnings for any quarter are less than the level expected by securities analysts
or the market in general, such shortfall could have an immediate and significant
adverse impact on the market price of the Company's Common Stock.

<PAGE> 13

ITEM 2. PROPERTIES

FLIGHT EQUIPMENT

The Company's management reviews opportunities to acquire suitable jet
aircraft that meet the Company's portfolio strategy based on market demand and
customer airline requirements, as well as the Company's portfolio mix and
planning strategies. Before committing to purchase an aircraft, the Company
takes 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 the
Company's portfolio of aircraft owned and used in its leasing operations. At
December 31, 1997, the average age of the Company's flight equipment was 12.8
years. As of December 31, 1997, the Company's portfolio contained seven aircraft
that were Stage 3. See "Item 1. Business--Cautionary Statements--Aircraft Noise
Compliance."

The following table shows the scheduled lease terminations (for the
minimum noncancellable period) by aircraft type for the Company's lease
portfolio at December 31, 1997:

<TABLE>
<CAPTION>
AIRCRAFT TYPE 1998 1999 2000 2001 2002 2003 TOTAL
- ------------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
727-200 ... 1 -- -- -- -- -- 1
737-200 ... 1 2 -- -- -- -- 3
737-300 ... -- -- 2 -- 1 -- 3
737-400 ... -- -- -- 1 -- -- 1
757-200 ... -- -- -- -- -- 1 1
MD-82 ..... 1 -- -- -- -- -- 1
------ ------ ------ ------ ------ ------ ------
Total 3 2 2 1 1 1 10
====== ====== ====== ====== ====== ====== ======
</TABLE>

FACILITIES

The Company's principal offices are located at 3655 Torrance Boulevard,
Suite 410, Torrance, California. The Company occupies space in Torrance under a
lease that covers approximately 1,845 square feet of office space and expires on
February 1, 1999. The Company believes that its current facilities are adequate
for its needs and does not anticipate any difficulty replacing such facilities
or locating additional facilities, if needed. See Note 8 to Consolidated
Financial Statements.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not currently involved in any litigation.

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

None.

<PAGE> 14

PART II

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

The Company's common stock is listed on the National Association of
Securities Dealers Automated Quotation National Market (Nasdaq National Market)
under the trading symbol "IAIS." The Company's stock began trading on November
5, 1997 after the Company completed an initial public offering of 2.6 million
shares at $10 per share. The high and low sale prices, as reported by The Nasdaq
Stock Market, Inc., for the period November 5, 1997 to December 31, 1997 were
$10 15/16 and $9 per share, respectively.

On March 16, 1998, the number of holders of record of the Company's
common stock was 82.

The Company has not paid any cash dividends on its capital stock. The
payment of cash dividends in the future will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including future earnings, capital requirements, financial condition and future
prospects of the Company and such other factors as the Board of Directors may
deem relevant. The Company intends to retain all available funds for use in its
business. Accordingly, the Company does not anticipate declaring or paying any
dividends on the Common Stock in the foreseeable future.

<PAGE> 15

ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE 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,
----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Revenues:
Rental of flight equipment ............. $ 6,098 $ 8,108 $ 7,765 $ 12,681 $ 15,433
Consulting fees ........................ 742 213 491 461 212
Gain on sale of aircraft equipment ..... -- -- -- 141 --
Interest income ........................ 7 68 118 169 483
-------- -------- -------- -------- --------
Total revenues ..................... 6,847 8,389 8,374 13,452 16,128
Expenses ................................. 4,754 7,261 7,656 12,380 15,028
Equity in earnings of affiliates ......... -- -- 183 -- --
-------- -------- -------- -------- --------
Income before income taxes ............... 2,093 1,128 901 1,072 1,100
Income tax expense ....................... 45 59 30 37 433
-------- -------- -------- -------- --------
Net income ............................... $ 2,048 $ 1,069 $ 871 $ 1,035 $ 667
======== ======== ======== ======== ========
Basic earnings per share (1) ............. $ 42.67 $ 22.27 $ 17.88 $ 14.79 $ .88
Weighted average number of common
shares outstanding ................... 48 48 49 70 754
Diluted earnings per share(1) ............ $ 1.16 $ .59 $ .48 $ .56 $ .30
Weighted average number of common
shares outstanding-assuming dilution . 1,772 1,826 1,826 1,837 2,207

BALANCE SHEET DATA
Flight equipment under operating lease ... $ 56,346 $ 56,162 $ 95,450 $ 89,885 $172,506
Total assets ............................. 57,036 57,131 96,779 92,620 204,552
Debt financing ........................... 52,873 51,688 87,825 82,710 154,720
Shareholders' equity ..................... 2,008 3,078 4,048 5,084 33,095
OTHER DATA
Aircraft equipment owned at period end (2) 5 5 8 7 10
</TABLE>

- ----------

(1) The earnings per share amounts have been restated as required to comply
with Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." For further discussion of earnings per share and
the impact of SFAS No. 128, see Note 1 to Consolidated Financial
Statements.

(2) Aircraft equipment owned at end of period includes one auxiliary power
unit which was purchased in 1995 and sold for a gain of $141,000 in
December 1996.

<PAGE> 16

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

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 or risk of the residual value of the
aircraft, as 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. The Company's flight equipment
is recorded on the balance sheet at cost and is depreciated on a straight-line
basis over the estimated useful life to the Company's estimated salvage value.
Revenue, depreciation expense and resultant profit for 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.

RESULTS OF OPERATIONS

Years Ended December 31, 1995, 1996 and 1997

Revenues from rental of flight equipment increased by 63% to $12,681 in
1996 from $7,765 in 1995 principally due to the full year's effect of the
acquisition in 1995 of two aircraft and their related leases. The increase of
22% to $15,433 in 1997 from $12,681 was primarily a result of the acquisition in
1997 of three aircraft under lease and the re-lease of flight equipment at a
higher lease rate.

In 1995, consulting revenues totaled $491, including $144 paid by Great
Lakes and $347 paid by ILFC. In 1996, consulting revenues totaled $461,
including $144 paid by Great Lakes, $78 paid by ILFC and $239 paid by unrelated
parties. In 1997, consulting revenues totaled $212, including $12 from Great
Lakes, $25 from ILFC and $175 from unrelated parties. The decrease in consulting
fees of $249 in 1997 was partly the result of the termination in January 1997 of
an arrangement with Great Lakes. No further consulting fees are expected to be
received from Great Lakes.

In 1996, the Company realized a gain on sale of aircraft equipment of
$141 for the sale of an auxiliary power unit previously on lease. The Company
did not realize any gains on the sale of aircraft equipment in 1995 or 1997.

Interest income increased from $118 in 1995 to $169 in 1996 principally
as a result of interest earned on receivables from ILFC relating to an aircraft
acquired from ILFC in 1995. The increase in interest income of $314 to $483 in
1997 was primarily due to interest on maintenance reserves related to three
aircraft acquired in 1997 and cash received from the sale of 2,680,000 shares of
common stock in an initial public offering and the exercise of stock options to
acquire 488,501 shares of common stock. The Company intends to use the proceeds
from the public offering primarily for additional investment in aircraft.

Expenses as a percent of total revenues were 91.4%, 92.0% and 93.2% in
1995, 1996 and 1997, respectively. Interest expense increased from $3,776 in
1995 to $6,277 in 1996 and $7,480 in 1997. The increase from 1995 to 1996 was
principally the result of $39,288 of additional debt to acquire two aircraft in
1995. The increase in 1997 resulted from $80,462 of additional debt to acquire
three aircraft in 1997. Depreciation expense increased from $3,354 in 1995 to
$5,550 in 1996 and $6,550 in 1997. The increase from 1995 to 1996 principally
resulted from the full year's effect of the acquisition of two aircraft in 1995.
The increase in 1997 from 1996 resulted from the acquisition of three aircraft
in 1997. General and administrative expenses were $526, $553 and $747 in 1995,
1996 and 1997, respectively. The increase from 1995 to 1996 was due mainly to
travel and marketing expenses. The increase from 1996 to 1997 was primarily the
result of the addition of two employees.

As a result of the completion of the Company's initial public offering
in November 1997, the Company expects increased general and administrative
expenses as a result of additional requirements imposed due to maintaining the
Company's status as a public company and additional compensation as a result of
new employment agreements with the Company's Chief Executive Officer and
President.

<PAGE> 17

In 1997, the Company incurred $250 of non-cash compensation expense
related to the vesting of options. The Company expects to incur $250 of non-cash
compensation expense related to the vesting of these options in each of 1998,
1999 and 2000. See Note 9 to Consolidated Financial Statements.

Equity in earnings of affiliates in 1995 consisted of the Company's
share of income of $66 of International Engine Investors ("IEI"), a company
formed exclusively for the acquisition of one engine, and the Company's share of
the gain of $118 on the sale of the aircraft engine which constituted the sole
asset of IEI. See Note 3 to Consolidated Financial Statements. IEI was
liquidated in November 1995.

The Company recognized income tax expense of $30, $37 and $433,
representing effective income tax rates of 3%, 3% and 40%, during 1995, 1996 and
1997, respectively. The difference between the effective rates and the federal
statutory rate in 1995 and 1996 was primarily due to the recognition of deferred
tax assets. The increase in income tax expense in 1997 represents a non-cash
provision for deferred income taxes at an effective rate of 40%. The Company
paid no federal income taxes in 1995, 1996 and 1997 due to substantial operating
loss carryforwards primarily resulting from accelerated tax depreciation. See
Note 4 to Consolidated Financial Statements.

Net income increased from $871 in 1995 to $1,035 in 1996 and decreased
to $667 in 1997 due to the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal external sources of funds have been term loans
from banks and seller financing secured by aircraft. As a result, a substantial
amount of the Company's cash flow from rental of flight equipment is applied to
principal and interest payments on secured debt. The terms of the Company's
loans generally require a substantial balloon payment at the end of the
noncancellable portion of the lease of the related aircraft, at which time the
Company 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 the Company re-leasing the related aircraft. Accordingly, the
Company begins 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 the Company's aircraft
portfolio, which are financed by loans secured by the applicable aircraft. The
Company does not currently maintain a line of credit.

At December 31, 1996 and 1997, the Company had cash and cash equivalents
of $1,174 and $23,838, respectively.

Net cash provided by operating activities increased from $3,939 in 1995
to $6,796 in 1996 and to $12,775 in 1997. The increase in 1996 was principally
the result of a full year's effect of the cash flow from the acquisition in 1995
of two aircraft and their related leases. The increase in 1997 was primarily the
result of the acquisition of three aircraft and their related leases.

In 1995, net cash used in investing activities was $40,967,
substantially all of which was used to purchase aircraft. In 1996, $156 was
provided by investing activities as a result of the sale of aircraft equipment
for $355, offset by flight equipment purchases of $199. In 1997, net cash used
in investing activities was $89,171, primarily used to purchase three aircraft.

In 1995, net cash provided by financing activities was $36,755,
including the proceeds of borrowings of $39,805 offset by repayments of notes of
$3,150. In 1996, net cash used in financing activities was $5,812, consisting of
repayments of notes and other payables of $6,544 offset by the proceeds of
additional borrowings of $732. In 1997, net cash provided by financing
activities was $99,059 including the proceeds of borrowings of $80,463 offset by
repayments of notes of $7,768, as well as $26,365 from both the issuance of
2,680,000 shares in the Company's initial public offering and the issuance of
488,501 shares upon the exercise of stock options.

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

The Company uses interest swap arrangements to reduce the potential
impact of increases in interest rates on floating rate long-term debt and does
not use them for trading purposes. Premiums paid for purchased interest rate
swaps agreements are amortized to interest expense over the terms of the swap
agreements.

<PAGE> 18

Notes payable due within one year totaled $19,179 at December 31, 1997,
of which $10,818 represents balloon payments and $8,361 represents installment
payments. The Company plans to repay $885 of balloon payments in 1998. Of the
remaining balloon payments, $3,731 relates to a lease which expires in March
1998, $4,143 relates to a lease which was extended to June 1999 and $2,059 due
June 1998 payable to Great Lakes which relates to leases which expire subsequent
to 1998. The Company plans to refinance the balloon payments in connection with
the re-leasing of the aircraft in March 1998 and the aircraft re-leased to June
1999 and the notes with Great Lakes due in June 1998. During 1997, the Company
refinanced $40,411 of balloon payments.

The Company's ability to execute successfully its business strategy and
to sustain its operations is dependent, in part, on its ability to obtain
financing and to raise equity capital. There can be no assurance that the
necessary amount of such capital will continue to be available to the Company on
favorable terms or at all. If the Company were unable to continue to obtain any
portion of required financing on favorable terms, the Company's ability to add
new aircraft to its 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 would be impaired, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's financing arrangements to date have been
dependent in part upon ILFC. See "Item 1. Business--Cautionary
Statements--Reliance Upon ILFC" and "--Dependence Upon Availability of
Financing."

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 131 supersedes previous
reporting requirements for reporting on segments of a business enterprise. SFAS
No. 130 and SFAS No. 131 are effective for periods beginning after December 15,
1997. Accordingly, the Company plans to implement these two standards during
1998.

IMPACT OF YEAR 2000 ISSUE

The Year 2000 issue results from computer programs written using two
digits to identify the year in the date field. These computer programs were
designed and developed without consideration of the impact of the upcoming
change in the century. If not corrected, these programs could create erroneous
information by or at the year 2000.

The Company has performed a review and assessment of its internal
computer system to determine the effect of the Year 2000 issue. Based on the
results of this review, the Company believes that the internal effects of the
Year 2000 issue will not materially affect future financial results or financial
condition of the Company and the related cost for compliance will be
insignificant.

The Company has also initiated formal communications with lessees,
manufacturers of its aircraft and business partners to determine the extent to
which the Company and its aircraft are vulnerable to those third parties'
failure to address their own Year 2000 issues. The Company has not yet completed
its review of responses from lessees, manufacturers of its aircraft and business
partners. As a result, the Company can not determine at this time the extent, if
any, the Company may be exposed to financial risk from the inability of the
Company's lessees, manufacturers of its aircraft and business partners to
remediate their own Year 2000 issues.

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 the Company's most
recent financial statements, the Company has not reported a change in
accountants nor have their been any disagreements reported on any matter of
accounting principles or practices or financial statement disclosure.

<PAGE> 19

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.

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

FINANCIAL STATEMENTS:

See Index to Consolidated Financial Statements on page 21 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 Specimen of Common Stock certificate. Filed as Exhibit 4.1 to
Registration Statement No. 333- 19875, and incorporated herein
by reference

4.2 Amended and Restated Aircraft Loan Agreement dated November 4,
1996 between SWA I Corporation and Wells Fargo Bank, N.A.. Filed
as Exhibit 4.2 to Registration Statement No. 333-19875, and
incorporated herein by reference

4.3 Secured Promissory Note in the original principal amount of
$13,700,000 made November 4, 1996 by SWA I Corporation in favor
of Wells Fargo Bank, N.A.. Filed as Exhibit 4.3 to Registration
Statement No. 333-19875, and incorporated herein by reference
</TABLE>

<PAGE> 20

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.4 Amended and Restated Guaranty Agreement dated as of November 4,
1996 made by International Aircraft Investors in favor of Wells
Fargo Bank, N.A.. Filed as Exhibit 4.4 to Registration Statement
No. 333-19875, and incorporated herein by reference

4.5 Senior Term Loan Agreement dated as of May 17, 1996 between IAI
Alaska I Corporation and City National Bank. Filed as Exhibit
4.5 to Registration Statement No. 333-19875, and incorporated
herein by reference

4.6 Aircraft Secured Promissory Note in the original principal
amount of $14,650,000 made May 17, 1996 by IAI Alaska I
Corporation in favor of City National Bank. Filed as Exhibit 4.6
to Registration Statement No. 333-19875, and incorporated herein
by reference

4.7 Secured Credit Agreement dated as of December 21, 1993 between
IAI II, Inc. and Continental Bank, N.A.. Filed as Exhibit 4.7 to
Registration Statement No. 333-19875, and incorporated herein by
reference

4.8 Note in the original principal amount of $21,976,677 made by IAI
II, Inc. in favor of Continental Bank, N.A.. Filed as Exhibit
4.8 to Registration Statement No. 333-19875, and incorporated
herein by reference

4.9 Loan Agreement, dated as of September 26, 1997, between IAI IV,
Inc. and International Lease Finance Corporation. Filed as
Exhibit 4.9 to Registration Statement No. 333-19875, and
incorporated herein by reference

4.10 Senior Term Loan Agreement, dated June 23, 1997, between IAI
III, Inc. and City National Bank. Filed as Exhibit 4.10 to
Registration Statement No. 333-19875, and incorporated herein by
reference

4.11 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

4.12 Senior Term Loan Agreement, dated December 10, 1997, between IAI
V, Inc. and International Lease Finance Corporation.. Filed as
Exhibit 4.12 to Form 10-Q for the quarterly period ended
September 30, 1997, and incorporated herein by reference

*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

10.6 Letter Agreement, dated November 6, 1996 between the Company and
ILFC. Filed as Exhibit 10.4 to Registration Statement No.
333-19875, and incorporated herein by reference
</TABLE>

<PAGE> 21

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.7 Letter Agreement, dated January 14, 1997, between the Company
and ILFC. Filed as Exhibit 10.5 to Registration Statement No.
333-19875, and incorporated herein by reference

23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accountants

27.1 Financial Data Schedule for the year ended December 31, 1997

27.2 Financial Data Schedule for the year ended December 31, 1996

27.3 Financial Data Schedule for the year ended December 31, 1995
</TABLE>

- ----------

* Management contracts.

REPORTS ON FORM 8-K:

During the quarter ended December 31, 1997, the Company did not file any
reports on Form 8-K.

<PAGE> 22

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.................................................................. 23
Consolidated Balance Sheets as of December 31, 1997 and 1996.................................. 24
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995........ 25
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
1996 and 1997............................................................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.... 27
Notes to Consolidated Financial Statements.................................................... 28
</TABLE>

<PAGE> 23

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, 1997 and 1996 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, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the 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, 1997 and
1996 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Los Angeles, California
January 16, 1998

<PAGE> 24

INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
ASSETS
December 31,
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents ........................................... $ 23,838,306 $ 1,174,369
Flight equipment, at cost, net ...................................... 172,506,257 89,884,974
Deferred fees ....................................................... 628,103 268,776
Cash, restricted .................................................... 6,976,974 210,827
Other assets ........................................................ 602,486 1,080,641
------------- -------------
$ 204,552,126 $ 92,619,587
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued interest and other accrued expenses ......................... $ 1,343,677 $ 827,693
Notes payable ....................................................... 154,719,546 82,710,293
Lease deposits ...................................................... 3,624,000 835,000
Maintenance reserves ................................................ 7,612,113 468,060
Deferred rent ....................................................... 3,334,000 2,295,000
Deferred taxes, net ................................................. 823,800 400,000
------------- -------------
171,457,136 87,536,046
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value. Authorized 15,000,000
shares; issued and outstanding 4,941,000 shares
at December 31, 1996; liquidation value of $1 per share ........ -- 49,410
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 4,497,584 shares at December 31, 1997
and 70,000 shares at December 31, 1996 ......................... 44,976 700
Additional paid-in capital ........................................ 33,272,435 5,172,548
Deferred stock compensation ....................................... (750,000) --
Retained earnings (accumulated deficit) ........................... 527,579 (139,117)
------------- -------------
Net shareholders' equity .................................. 33,094,990 5,083,541
------------- -------------
$ 204,552,126 $ 92,619,587
============= =============
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE> 25

INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental of flight equipment .................... $15,432,631 $12,681,153 $ 7,764,763
Consulting fees ............................... 212,000 460,950 491,045
Gain on sale of aircraft equipment ............ -- 141,000 --
Interest income ............................... 482,842 169,023 117,961
----------- ----------- -----------
Total revenues ........................ 16,127,473 13,452,126 8,373,769
Expenses:
Interest ...................................... 7,480,490 6,277,388 3,776,165
Depreciation .................................. 6,550,000 5,549,700 3,354,400
General and administrative .................... 747,287 552,778 526,021
Stock compensation ............................ 250,000 -- --
----------- ----------- -----------
Total expenses ........................ 15,027,777 12,379,866 7,656,586
----------- ----------- -----------
Operating income .................... 1,099,696 1,072,260 717,183
Equity in earnings of affiliate:
Earnings from operations ...................... -- -- 66,028
Gain on sale of aircraft engine ............... -- -- 117,500
----------- ----------- -----------
Total equity in earnings .............. -- -- 183,528
----------- ----------- -----------
Income before income taxes ...................... 1,099,696 1,072,260 900,711
Income tax expense .............................. 433,000 37,000 30,000
----------- ----------- -----------
Net income ............................ $ 666,696 $ 1,035,260 $ 870,711
=========== =========== ===========
Basic earnings per share ........................ $ .88 $ 14.79 $ 17.88
=========== =========== ===========
Weighted average common shares outstanding ...... 754,131 70,000 48,690
=========== =========== ===========
Diluted earnings per share ...................... $ .30 $ .56 $ .48
=========== =========== ===========
Weighted average common shares--assuming dilution 2,206,863 1,836,762 1,826,319
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE> 26

INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
CONVERTIBLE COMMON STOCK ADDITIONAL DEFERRED RETAINED EARNINGS
PREFERRED ------------------------- PAID-IN STOCK (ACCUMULATED
STOCK SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) NET
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ... $ 49,410 215,000 $ 2,150 $ 5,071,098 $ -- $(2,045,088) $ 3,077,570
Reverse stock split ............ -- (167,222) (1,672) 1,672 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Adjusted balance at December
31, 1994 ..................... 49,410 47,778 478 5,072,770 -- (2,045,088) 3,077,570
Issuance of common stock
from exercise of stock options -- 22,222 222 99,778 -- -- 100,000
Net income ..................... -- -- -- -- -- 870,711 870,711
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 ... 49,410 70,000 700 5,172,548 -- (1,174,377) 4,048,281
Net income ..................... -- -- -- -- -- 1,035,260 1,035,260
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 ... 49,410 70,000 700 5,172,548 -- (139,117) 5,083,541
Issuance of common stock from
exercise of stock options .... -- 488,501 4,885 2,418,374 -- -- 2,423,259
Issuance of common stock from
conversion of convertible
preferred stock ............. (49,410) 1,103,528 11,035 38,375 -- -- --
Issuance of common stock from
conversion of convertible note
payable ...................... -- 155,555 1,556 727,844 -- -- 729,400
Issuance of common stock, net
of stock issuance costs ...... -- 2,680,000 26,800 23,915,294 -- -- 23,942,094
Stock compensation ............. -- -- -- 250,000 -- -- 250,000
Deferred stock compensation .... -- -- -- 750,000 (750,000) -- --
Net income ..................... -- -- -- -- -- 666,696 666,696
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 ... $ -- 4,497,584 $ 44,976 $33,272,435 $ (750,000) $ 527,579 $33,094,990
=========== =========== =========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE> 27

INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income ............................................. $ 666,696 $ 1,035,260 $ 870,711
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of flight equipment ..................... 6,550,000 5,549,700 3,354,400
Amortization of deferred fees ........................ 235,653 158,410 101,082
Stock compensation ................................... 250,000 -- --
Gain on sale of aircraft equipment ................... -- (141,000) --
Equity in earnings of affiliate ...................... -- -- (183,528)
(Increase) decrease in assets:
Deferred fees ...................................... (550,432) (60,671) (225,811)
Cash, restricted ................................... (6,766,147) (33,819) (177,006)
Other assets ....................................... 478,155 (328,894) (76,566)
Increase (decrease) in liabilities:
Accrued interest and other accrued expenses ........ 515,984 547,381 62,000
Lease deposits ..................................... 2,789,000 -- 475,000
Maintenance reserves ............................... 7,144,053 286,634 181,426
Deferred rent ...................................... 1,039,000 (247,850) (103,396)
Deferred taxes, net ................................ 423,800 30,983 23,395
Due to lessee ...................................... -- -- (363,122)
------------ ------------ ------------
Net cash provided by operating activities ........ 12,775,762 6,796,134 3,938,585
Cash flows from investing activities:
purchase of flight equipment ......................... (89,171,283) (198,974) (41,472,695)
Proceeds from sale of flight equipment ............... -- 355,000 --
Investment in (dividends and sale of iei) ............ -- -- 505,778
------------ ------------ ------------
Net cash provided by (used in) investing activities (89,171,283) 156,026 (40,966,917)
cash flows from financing activities:
Repayment of notes payable ........................... (6,293,592) (5,322,926) (2,749,082)
Repayment of notes payable to ILFC ................... (1,274,803) (524,292) (400,800)
Repayment of notes payable to GLH .................... (200,000) -- --
Proceeds from notes payable .......................... 52,500,000 244,724 29,725,000
Proceeds from notes payable to ILFC .................. 27,762,500 -- 7,950,000
Proceeds from notes payable to GLH ................... 200,000 487,500 1,612,500
Issuance of common stock ............................. 26,365,353 -- 100,000
Payable to ILFC ...................................... -- (696,695) 517,067
------------ ------------ ------------
Net cash provided by (used in) financing activities 99,059,458 (5,811,689) 36,754,685
------------ ------------ ------------
net increase (decrease) in cash and cash equivalents 22,663,937 1,140,471 (273,647)
cash and cash equivalents at beginning of year ......... 1,174,369 33,898 307,545
------------ ------------ ------------
Cash and cash equivalents at end of year ............... $ 23,838,306 $ 1,174,369 $ 33,898
============ ============ ============
Supplemental disclosure of cash flow information --
cash paid for interest ............................. $ 6,772,358 $ 5,722,256 $ 3,548,054
============ ============ ============
</TABLE>

Supplemental disclosure of noncash investing and financing activities:
During 1997, the 5% convertible note with a balance of $729,400 was converted to
common stock.

During 1995, the Company earned $311,000 of consulting fees from
ILFC which were applied to amounts owed ILFC.

See accompanying notes to consolidated financial statements

<PAGE> 28

INTERNATIONAL AIRCRAFT INVESTORS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997, 1996 AND 1995

(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.

Eight of the Company's ten aircraft at December 31, 1997 were acquired
from International Lease Finance Corporation (ILFC), a 1.5% 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.

Cash and Cash Equivalents

Cash and cash equivalents includes cash and highly liquid investments
purchased with an original maturity of less than 90 days. Certain cash and
short-term investments for the repayment of a security deposit and maintenance
reserves are restricted pursuant to certain lease agreements. Such security
deposit and maintenance reserves mature through April 30, 2003.

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, 1997 and 1996, deferred fees related to
AVGs were $291,417 and $207,500, 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) to a 15% estimated
residual value.

<PAGE> 29

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

Maintenance Reserves and Interest Income

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 $7,672,043 and $268,581 and 181,426 during the years
ended December 31, 1997, 1996 and 1995, respectively. Additionally, one of the
Company's lessees held a related maintenance reserve with ILFC in accordance
with an agreed-upon arrangement. The Company received interest earned on this
reserve held with ILFC which amounted to $40,699, $62,100 and $95,116 during
1997, 1996 and 1995, respectively. The lease and related arrangement expired
April 1997.

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 adoption of SFAS No. 121 did not have a material
impact on the Company's financial position or results of operations.

The Company evaluates the carrying value of its flight equipment using
undiscounted operating cash flows and when required will provide for any
permanent impairment of long-lived assets.

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.

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 1997,
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amount as indicated
below. No options were issued in 1996.

<TABLE>
<S> <C>
Net earnings as reported..................... $ 666,696

Pro forma net earnings....................... 618,696

Net earnings per share, as reported:
Basic................................ .88
Diluted.............................. .30
Pro forma net earnings per share:
Basic................................ .82
Diluted.............................. $ .28
============
</TABLE>

<PAGE> 30

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 period ended December 31, 1997; dividend
yield of 0%; expected volatility of 32.3%; risk-free interest rate of 6.6% and
expected lives of five years.

The weighted average fair value of options granted during the periods
ended December 31, 1997 is $2.66.

Earnings per Share

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (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 basic and diluted earnings
per share:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income .............................................. $ 666,696 $1,035,260 $ 870,711

Denominator:
Denominator for basic earnings per share-weighted average
shares outstanding .................................... 754,131 70,000 48,690
Effect of dilutive securities:
Employee stock options .................................. 187,267 273,165 284,032
Non-employee stock options .............................. 202,580 240,069 240,069
Convertible preferred stock ............................. 931,196 1,097,973 1,097,973
Convertible note payable ................................ 131,689 155,555 155,555
---------- ---------- ----------
Dilutive potential common shares .......................... 1,452,732 1,766,762 1,777,629
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions ....... 2,206,863 1,836,762 1,826,319
========== ========== ==========
Basic earnings per share .................................. $ .88 $ 14.79 $ 17.88
========== ========== ==========
Diluted earnings per share ................................ $ .30 $ .56 $ .48
========== ========== ==========
</TABLE>

The Company issued 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 5, 2000.

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.

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

Fair Values of Financial Instruments

<PAGE> 31

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

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 it 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.

Significant Customers

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:
1997.............................. 4 11%, 13%, 13% and 17%
1996.............................. 5 10%, 10%, 15%, 21% and 23%
1995.............................. 4 11%, 16%, 26% and 36%
</TABLE>

Segment Information

The Company's operations are generally limited to the aircraft leasing
industry. These operations included 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 $9,407,081, 6,605,700, and 6,345,400 in 1997, 1996 and 1995,
respectively.

New Accounting Standards

The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS No. 131
supersedes previous reporting requirements for reporting on segments of a
business enterprise. SFAS No. 130 and SFAS No. 131 are effective for periods
beginning after December 15, 1997. Accordingly, the Company plans to implement
these two standards during 1998. As the new accounting standards only require
additional disclosures, the Company expects there will be no material impact on
its financial condition or results of operations due to their implementation.

<PAGE> 32

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, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Flight equipment, at cost $ 197,908,257 $ 108,736,974
Accumulated depreciation (25,402,000) (18,852,000)
------------- -------------
Flight equipment, net ... $ 172,506,257 $ 89,884,974
============= =============
</TABLE>

(3) INVESTMENT IN JOINT VENTURE

During 1994, the Company purchased a 50% non-controlling interest in
International Engine Investors (IEI) for $322,250. IEI was formed in December
1994 between the Company and Partimande Holding Anstalt (wholly owned by a
shareholder of the Company) for the purpose of acquiring an aircraft engine. The
Company used the equity method to account for its investment. The Company's
share of IEI's income for 1995 was $66,028. On November 11, 1995, the engine was
sold by IEI, and IEI was liquidated. The Company's share of the gain on sale was
$117,500. At December 31, 1995, the Company had a payable to Partimande Holding
Anstalt of $36,750 related to the sale of the engine.

(4) INCOME TAXES

Provision for taxes on income consisted of the following:

<TABLE>
<CAPTION>
TOTAL CURRENT DEFERRED
---------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31:
1997:
Federal.................... $ 423,800 $ -- $ 423,800
State ..................... 9,200 9,200 --
---------- ---------- ----------
$ 433,000 $ 9,200 $ 423,800
========== ========== ==========
1996:
Federal ................... $ 31,000 $ -- $ 31,000
State ..................... 6,000 6,000 --
---------- ---------- ----------
$ 37,000 $ 6,000 $ 31,000
========== ========== ==========
1995:
Federal ................... $ 23,000 $ -- $ 23,000
State ..................... 7,000 7,000 --
---------- ---------- ----------
$ 30,000 $ 7,000 $ 23,000
========== ========== ==========
</TABLE>

<PAGE> 33

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

As of December 31, 1997, the Company had net operating loss
carryforwards ("NOL") for Federal and state income tax purposes as follows:

EXPIRES FEDERAL NOL STATE NOL
------- ----------- -----------
1998................................ -- --
1999 ............................... -- --
2000 ............................... -- --
2001 ............................... -- 660,000
2002 ............................... -- 172,000
2003-2007 .......................... $17,741,000 565,000
2008-2012 .......................... 5,836,000 --
----------- -----------
$23,577,000 1,397,000
=========== ===========

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,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforward ................ $ 8,097,839 $ 7,847,880
Deferred and advanced rent ..................... 1,205,850 691,832
Flight equipment, principally due to differences
in depreciation .............................. (10,030,992) (8,542,840)
Other .......................................... 60,945 (113,539)
------------ ------------
(666,358) (116,667)
Valuation allowance ............................ (157,442) (283,333)
------------ ------------
$ (823,800) $ (400,000)
============ ============
</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 earnings
before income taxes follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" Federal tax expense ............ $ 375,000 $ 364,000 $ 306,000
State taxes, net of Federal income tax benefit ..... 64,000 10,000 17,000
Expiration of state net operating loss carryforwards 207,000 -- --
Change in valuation allowance ...................... (126,000) (361,000) (284,000)
Other .............................................. (87,000) 24,000 (9,000)
--------- --------- ---------
$ 433,000 $ 37,000 $ 30,000
========= ========= =========
</TABLE>

<PAGE> 34

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

(5) LONG-TERM DEBT

Long-term debt as of December 31, 1997 and 1996 is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Note payable to bank, refinanced August 1997, bearing interest at 7.275% on
$6,500,000 and LIBOR plus 1.125% (5.6125% at December 31, 1997) on $799,812,
secured by flight equipment, 33 1/3% guaranteed by ILFC, payable in monthly
installments of $75,000 including interest, balloon
payment of $6,690,600, due August 29, 1999 .................................... $ 7,299,812 $ 7,649,079
Note payable to bank bearing interest at 7.3125% $3,500,000 and LIBOR plus
1.125% (5.6125% at December 31, 1997) on $946,551, secured by flight
equipment, 33 1/3% guaranteed by ILFC, payable in monthly installments of
$87,000 including interest, balloon payment of $4,142,500, due June 15, 1998 . 4,446,551 5,141,600
Notes payable to bank, refinanced March 26, 1997, bearing interest at 8.10%
(Floating plus Swap), secured by flight equipment, 65% guaranteed by ILFC,
balloon payment of $3,570,400, due March 1998 ................................. 3,829,704 4,401,028
Notes payable to bank, refinanced April 24, 1997, bearing interest at 7.60%,
secured by flight equipment, 50% guaranteed by ILFC, balloon, payment of
$3,410,500, due April 1999 .................................................... 4,408,879 3,307,000
Note payable to bank, repaid April 24, 1997 ..................................... -- 1,804,300
Note payable to bank, refinanced May 12, 1997, bearing interest at 7.96%,
secured by flight equipment, 53.4% guaranteed by ILFC, balloon payment
of $14,998,420, due May 2000 .................................................. 17,666,617 18,582,417
Note payable to bank, bearing interest at LIBOR plus 1.2 (5.8125% at
December 31, 1997), secured by flight equipment, 100% guaranteed by ILFC,
payable in quarterly installments of $445,000 including interest, balloon
payment of $7,689,039, due January 2003 ....................................... 12,842,892 13,700,000
Note payable to bank, bearing interest at 7.75%, secured by flight equipment,
guaranteed up to $2,175,000 by ILFC, payable in quarterly installments of
$510,000 including interest, balloon payment of $9,514,719, due May 2001 ..... 13,225,980 14,193,403
Note payable to bank with interest accrued at 6%, payment is based on profit
sharing agreements on, certain flight equipment, principal due August 1998 ... 885,556 887,608
Convertible note payable to bank, converted November 6, 1997 .................... -- 757,000
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
$510,000 including interest, balloon payment of $19,806,718, due May 2001 ..... 22,339,000 --
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 including
interest of $238,000 through April 1998, $256,000 through April 1999, $259,000
through April 2000, $263,000 through April 2001, $266,000 through April 2002,
and $270,000 thereafter, balloon payment of $22,536,481,
due May 2003 .................................................................. 29,000,000 --
Note payable to ILFC, refinanced July 22, 1997, bearing interest at 7.25%
payable in quarterly installments of $9,000 including interest, balloon
payment of $3,320,000, due January 2003 ....................................... 3,540,000 3,572,000
Note payable to ILFC, repaid December 1997 ...................................... -- 441,600
Note payable to ILFC, refinanced July 25, 1997, bearing interest at 6.0%,
secured by flight equipment, payable in quarterly installments including interest,
balloon payment of $301,757, due May 2000 ..................................... 801,757 982,330
Note payable to ILFC bearing interest at 6.0%, payable in monthly installments of
$15,000 plus interest, balloon payment of $496,845, due August 1999 ........... 796,845 976,845
</TABLE>

<PAGE> 35

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Note payable to ILFC bearing interest at 7.8%, payable in quarterly installments
of $110,000 including interest, balloon payment of $3,718,293,
due December 2000 .............................................................. 4,104,103 4,214,083
Note payable to ILFC bearing interest at an effective rate of 6.7%, payable in
monthly installments of $180,000, including interest, balloon payment of
$15,641,286, due December 1999 ................................................. 17,743,401 --
Note payable to ILFC bearing interest at an effective rate of 6.9%, payable in
monthly installments of $20,000, including interest, balloon payment of
$1,394,891, due September 2002 ................................................. 1,968,530 --
Note payable to ILFC bearing interest at an effective rate of 6.93%, payable in
monthly installments of $32,000, including interest, balloon payment of
$2,361,994, due May 2003 ....................................................... 3,329,500 --
Note payable to ILFC bearing interest at 7.25%, payable in quarterly installments
of $126,500, including interest, balloon payment of $3,725,840, due May 2001 ... 4,390,419 --
Note payable to Great Lakes Holdings (affiliated company), refinanced
December 31, 1997, bearing interest at 6.5%, due June 1998 ................... 700,000 700,000
Notes payable to Great Lakes Holdings (affiliated company), refinanced
December 31, 1997, bearing interest at 6.5%, due June 1998 .................... 1,400,000 1,400,000
------------ ------------
Total .................................................................. $154,719,546 $ 82,710,293
============ ============
</TABLE>

The terms of the Company's loans generally require a substantial balloon
payment at the end of the noncancellable portions of the lease of the related
aircraft, at which time the Company will be required to re-lease the aircraft
and renegotiate the balloon amount of the loan on a long-term basis or obtain
other long-term financing. Refinancing of the balloon amount is dependent upon
the Company re-leasing the related aircraft; accordingly, the Company begins
lease remarketing efforts well in advance of the lease termination. Notes
payable due within one year totaled $19.2 million at December 31, 1997, of which
$10.8 million represents balloon payments and $8.4 million represents
installment payments were due within one year. The Company plans to repay $.9
million of balloon payments in 1998. Of the remaining balloon payments, $3.7
million relates to a lease which expires in March 1998, $4.1 million relates to
a lease which was extended to June 1999 and $2.1 million due June 1998 payable
to Great Lakes Holdings, a company owned by the Chief Executive Officer and the
President of the Company ("Great Lakes"), relates to leases which expire
subsequent to December 31, 1998. The Company plans to refinance the balloon
payments in connection with the re-leasing of the aircraft in March 1998 and the
aircraft re-leased to June 1999 and the notes with Great Lakes in June 1998.
During 1997, the Company refinanced $40.4 million of balloon payments.

At December 31, 1997 and 1996, $44,067,000, or 28%, and $34,186,000, or
41%, of the Company's notes payable were guaranteed by ILFC and $36,675,000, or
24%, and $10,186,000, or 12%, of the Company's notes payable were due to ILFC,
respectively.

Scheduled future repayments of notes payable subsequent to December 31,
1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1998................. $ 19,179,088
1999................. 34,046,298
2000................. 24,162,584
2001................. 36,450,238
2002................. 4,406,057
Thereafter........... 36,475,281
-------------------
$ 154,719,546
===================
</TABLE>

<PAGE> 36

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

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, 1997.

The Company has entered 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 following table presents the Company's
interest rate swap agreements at December 31, 1997 and 1996:

DECEMBER 31, 1997

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TYPE NOTIONAL AMOUNT INTEREST RATE (%) MATURITY
- ---- --------------- ----------------- ------------
<S> <C> <C> <C>
Fixed/variable............... $ 3,829,000 7.60/7.20 5/98
</TABLE>

DECEMBER 31, 1996

The net effect of swaps was to record $109,000, $265,000 and $131,000 of
additional interest expense during 1997, 1996 and 1995, respectively.

(6) RELATED PARTY TRANSACTIONS

During 1997 and 1995, the Company purchased aircraft from ILFC
aggregating $89,090,000 and $41,473,000, respectively. No aircraft were
purchased in 1996. At December 31, 1997 and 1996, 88% and 79%, respectively, 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 (note 5). 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, 1997 and 1996, 44,067,000 or 28% and $34,186,000, or 41%, of
long-term debt was covered by AVGs and $36,674,555, or 24%, and $10,186,000, or
12%, was due to ILFC, respectively.

During 1996, the Company sold certain aircraft equipment in connection
with an ILFC transaction to a third party. The Company recognized a gain on sale
of this equipment of $141,000.

The Company has one aircraft leased to ILFC at December 31, 1997 and
1996. The lease originated in August 1994 and provides for monthly rents of
$80,000 through August 1999. The Company recognized rental income of $960,000
from this lease in each of the years ended 1997, 1996 and 1995.

During 1997, the Company leased an aircraft to a third party for a three-year
period for which ILFC guaranteed certain rental revenue. In connection with the
lease, ILFC also guaranteed repayment of the related lease deposit to the lessee
of $1,632,000 included in the accompanying consolidated balance sheet.

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. The Company estimates this loss will be incurred
through 1999. 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 amount due from ILFC at December 31, 1997 and
1996 was $238,000 and $441,000, which includes accrued interest of $12,000 and
$87,000, respectively. The loss stems from

<PAGE> 37

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

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, 1997 and 1996, deferred rent from the lease was $1,247,000 and 1,497,000,
respectively.

The Company realized consulting fee revenues of $25,000, $78,000 and
$347,000 during the years 1997, 1996 and 1995, respectively, for services to
ILFC.

The Company's Chairman and President collectively own Great Lakes
Holdings (GLH), an affiliated company. From time to time, these officers provide
consulting services to GLH. GLH paid the Company $12,000 during 1997 from Great
Lakes. Additionally, the Company earned consulting fees of $175,000 and $239,000
during 1997 and 1996 from unrelated parties; however, $190,000 of the 1996
amount was derived from a transaction in which the Company provided services in
connection with a sale by ILFC of aircraft equipment to a third party.

During 1995, ILFC advanced the Company $696,000 to assist the financing
of an aircraft purchase. The advance was repaid in early 1996.

(7) RENTAL INCOME

Minimum future rental income on noncancelable operating leases of flight
equipment at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1998.......................... $ 21,314,000
1999.......................... 16,870,000
2000.......................... 12,891,000
2001.......................... 7,213,000
2002.......................... 6,358,000
Thereafter.................... 1,427,000
-----------------
$ 66,073,000
=================
</TABLE>

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

(8) COMMITMENTS AND CONTINGENCIES

Operating Leases

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1998......................... $ 29,900
1999......................... 2,500
-----------
$ 32,400
===========
</TABLE>

Total rent expense under operating leases for the years ended December
31, 1997, 1996 and 1995 was $27,285, $20,460 and $20,665, respectively.

<PAGE> 38

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. These 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
(all of which was paid by the Company). Three aircraft may require this work to
be performed over the next two years unless the aircraft are leased and operated
in an area that does not require the modification. At December 31, 1997, two of
these aircraft were on lease to airlines which operate in jurisdictions which do
not require these modifications.

(9) SHAREHOLDERS' EQUITY

In November 1997, the Company issued 2.6 million shares of common stock
in an initial public offering (IPO) at $10.00 per share. In connection with the
IPO, the Company effected a 1-for-4.5 reverse stock split of its common stock
which has been applied retroactively in the accompanying consolidated financial
statements. In accordance with the underwriting agreement, the Company granted
the underwiters warrants to purchase 260,000 shares of common stock at $12 per
share exercisable through November 5, 2000 and an overallotment option
exercisable through December 20, 1997 to purchase 390,000 additional shares of
common stock of which 80,000 shares were exercised. After underwriting discount
and other offering costs, net proceeds to the Company were $23,942,094 for these
issuances. Concurrent with the Company's IPO, all of the outstanding convertible
preferred stock was converted to 1,103,528 shares of common stock.

Through March 1993, the Company granted options to purchase 647,493
shares of common stock at management's estimated fair value, $4.50 per share.
During 1997 and 1995, 139,717 and 22,222 options were exercised, respectively.
Through May 1991, the Company also granted options to purchase 348,784 shares of
convertible preferred stock at management's estimate of fair value, primarily
$5.18 per share. Concurrent with the IPO, all of these options were exercised
and converted to common stock.

During March 1997, the Company extended the expiration date on 496,664
employee stock options described in the preceding paragraph to March 31, 2007,
which will vest 25% in 1997 and 25% in each of the following three years.
Accordingly, the Company will recognize 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 year ended December 31, 1997 related to the
amortization of such cost. If the related employee is terminated, the respective
stock options will vest in full. At December 31, 1997, 485,554 options with an
exercise price of $4.50 per share were outstanding and 121,388 were exercisable.

During 1997, the Company adopted the 1997 Employee Stock Option and
Award Plan (the Employee Plan). A maximum of 50,000 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 during any calendar year are granted under the Employee Plan to any one
participant will not exceed 20,000 (subject to certain anti-dilutive
adjustments). At December 31, 1997, no options had been granted under the
Employee Plan.

During 1997, the Company adopted the 1997 Eligible Directors Stock
Option Plan (the Directors Plan). The Directors Plan provides that annually an
Eligible Director will receive an option to purchase 5,000 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 50,000 shares of common stock are authorized
for issuance. At December 31, 1997, no options had been granted under the
Directors Plan.

In November 1997, the convertible note payable was converted to 155,555
shares of common stock.

<PAGE> 39

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

(10) QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
1997: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental of flight equipment ........... $ 3,161,149 $ 3,317,732 $ 4,048,850 $ 4,904,900
Consulting fees ........................ 12,000 -- -- 200,000
Interest income ........................ 43,425 55,450 102,334 281,633
------------ ------------ ------------ ------------
Total revenues .................... 3,216,574 3,373,182 4,151,184 5,386,533
Expenses ............................. 3,018,416 3,152,153 3,984,587 4,872,621
------------ ------------ ------------ ------------
Income before income taxes ............. 198,158 221,029 166,597 513,912
Income taxes ........................... 72,000 88,000 66,600 206,400
------------ ------------ ------------ ------------
Net income ............................. $ 126,158 $ 133,029 $ 99,997 $ 307,512
============ ============ ============ ============
Basic earnings per share * ............. $ 1.80 $ 1.90 $ 1.23 $ .11
Weighted average number of common shares
outstanding ............................ 70,000 70,000 81,110 2,773,104
Diluted earnings per share* ............ $ .07 $ .08 $ .06 $ .09
Weighted average number of common shares
outstanding-assuming dilution .......... 1,780,470 1,720,470 1,755,512 3,509,838
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
1996: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental of flight equipment ........... $ 3,160,894 $ 3,169,214 $ 3,171,749 $ 3,179,296
Consulting fees ........................ 66,000 116,750 52,000 226,200
Interest income ........................ 45,255 36,617 39,101 48,050
Gain on sale ........................... -- -- -- 141,000
------------ ------------ ------------ ------------
Total revenues ................... 3,272,149 3,322,581 3,262,850 3,594,546
Expenses ............................. 3,141,790 3,128,647 3,099,135 3,010,294
------------ ------------ ------------ ------------
Income before income taxes ............. 130,359 193,934 163,715 584,252
Income taxes ........................... 10,000 10,000 13,000 4,000
------------ ------------ ------------ ------------
Net income ............................. $ 120,359 $ 183,934 $ 150,715 $ 580,252
============ ============ ============ ============
Basic earnings per share * ............. $ 1.72 $ 2.63 $ 2.15 $ 8.29
Weighted average number of common shares
outstanding ............................ 70,000 70,000 70,000 70,000
Diluted earnings per share* ............ $ .07 $ .10 $ .08 $ .32
Weighted average number of common shares
outstanding-assuming dilution .......... 1,836,762 1,836,762 1,836,762 1,836,762
</TABLE>

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

<PAGE> 40

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

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 20, 1998
- -------------------------- Chief Executive Officer
William E. Lindsey Director (Principal
Executive Officer)

/s/ MICHAEL P. GRELLA President and Director March 20, 1998
- --------------------------
Michael P. Grella

/s/ RICK HAMMOND Vice President--Finance March 20, 1998
- -------------------------- and Treasurer (Principal
Rick Hammond Financial Officer)

/s/ ALAN G. STANFORD, JR. Vice President--Controller March 20, 1998
- -------------------------- (Principal Accounting
Alan G. Stanford, Jr. Officer)

/S/ MAGNUS GUNNARSSON Director March 20, 1998
- --------------------------
Magnus Gunnarsson

/s/ RALPH O. HELLMOLD Director March 20, 1998
- --------------------------
Ralph O. Hellmold

/s/ AARON MENDELSOHN Director March 20, 1998
- --------------------------
Aaron Mendelsohn

/s/ CHRISTER SALEN Director March 20, 1998
- --------------------------
Christer Salen

/s/ KENNETH TAYLOR Director March 20, 1998
- --------------------------
Kenneth Taylor

/s/ STUART M. WARREN Director March 20, 1998
- --------------------------
Stuart M. Warren
</TABLE>

<PAGE> 41

EXHIBIT INDEX

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 Specimen of Common Stock certificate. Filed as Exhibit 4.1 to
Registration Statement No. 333- 19875, and incorporated herein
by reference

4.4 Amended and Restated Guaranty Agreement dated as of November 4,
1996 made by International Aircraft Investors in favor of Wells
Fargo Bank, N.A.. Filed as Exhibit 4.4 to Registration Statement
No. 333-19875, and incorporated herein by reference

4.10 Senior Term Loan Agreement, dated June 23, 1997, between IAI
III, Inc. and City National Bank. Filed as Exhibit 4.10 to
Registration Statement No. 333-19875, and incorporated herein by
reference

4.13 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
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
*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

10.6 Letter Agreement, dated November 6, 1996 between the Company and
ILFC. Filed as Exhibit 10.4 to Registration Statement No.
333-19875, and incorporated herein by reference

10.7 Letter Agreement, dated January 14, 1997, between the Company
and ILFC. Filed as Exhibit 10.5 to Registration Statement No.
333-19875, and incorporated herein by reference

23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accountants

27.1 Financial Data Schedule for the year ended December 31, 1997

27.2 Financial Data Schedule for the year ended December 31, 1996

27.3 Financial Data Schedule for the year ended December 31, 1995
</TABLE>

- -----------
* Management contracts.

<PAGE> 1

Exhibit 23.1

Accountants's Consent

Board of Directors
International Aircraft Investors:

We consent to incorporation by reference in the registration statements (No.
333-46411 an 333-46413) on Form S-8 of International Aircraft Investors and
subsidiaries of our report dated January 16, 1998 relating to the consolidated
balance sheets of International Aircraft Investors and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the 1997 report on Form
10-K of International Aircraft Investors and subsidiaries.

KPMG PEAT MARWICK LLP

Los Angeles, California
March 20, 1998

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 23,838,306
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 197,908,257
<DEPRECIATION> 25,402,000
<TOTAL-ASSETS> 204,552,126
<CURRENT-LIABILITIES> 0
<BONDS> 154,719,546
0
0
<COMMON> 44,976
<OTHER-SE> 33,050,014
<TOTAL-LIABILITY-AND-EQUITY> 204,552,126
<SALES> 0
<TOTAL-REVENUES> 16,127,473
<CGS> 0
<TOTAL-COSTS> 7,547,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,480,490
<INCOME-PRETAX> 1,099,696
<INCOME-TAX> 433,000
<INCOME-CONTINUING> 666,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 666,696
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.30

</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,174,369
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 108,736,974
<DEPRECIATION> 18,852,000
<TOTAL-ASSETS> 92,619,587
<CURRENT-LIABILITIES> 0
<BONDS> 82,710,293
0
49,410
<COMMON> 700
<OTHER-SE> 5,033,438
<TOTAL-LIABILITY-AND-EQUITY> 5,083,541
<SALES> 0
<TOTAL-REVENUES> 13,452,126
<CGS> 0
<TOTAL-COSTS> 6,102,478
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,277,388
<INCOME-PRETAX> 1,072,260
<INCOME-TAX> 37,000
<INCOME-CONTINUING> 1,035,260
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,035,260
<EPS-PRIMARY> 14.79
<EPS-DILUTED> 0.56

</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 33,898
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 108,788,000
<DEPRECIATION> 13,338,300
<TOTAL-ASSETS> 96,778,868
<CURRENT-LIABILITIES> 0
<BONDS> 87,825,287
0
49,410
<COMMON> 700
<OTHER-SE> 3,998,171
<TOTAL-LIABILITY-AND-EQUITY> 96,778,868
<SALES> 0
<TOTAL-REVENUES> 8,373,769
<CGS> 0
<TOTAL-COSTS> 3,880,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,776,165
<INCOME-PRETAX> 900,711
<INCOME-TAX> 30,000
<INCOME-CONTINUING> 870,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870,711
<EPS-PRIMARY> 17.88
<EPS-DILUTED> 0.48

</TABLE>