POLARIS AIRCRAFT INCOME FUND I, 10-K, 1998-03-30

POLARIS AIRCRAFT INCOME FUND I
10-K, 1998-03-30
EQUIPMENT RENTAL & LEASING, NEC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

FORM 10-K

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

_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission File No. 2-91762

POLARIS AIRCRAFT INCOME FUND I
------------------------------
(Exact name of registrant as specified in its charter)

California 94-2938977
------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)

201 High Ridge Road, Stamford, Connecticut 06927
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (203) 357-3776

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 this
Form 10-K. ____

No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1997.

Documents incorporated by reference: None

This document consists of 44 pages.

<PAGE>

PART I

Item 1. Business

Polaris Aircraft Income Fund I (PAIF-I or the Partnership) was formed primarily
to purchase and lease used commercial jet aircraft in order to provide
distributions of cash from operations, to maximize the residual values of
aircraft upon sale and to protect Partnership capital through experienced
management and diversification. PAIF-I was organized as a California limited
partnership on June 27, 1984 and will terminate no later than December 2010. As
of December 31, 1997, the only assets remaining were cash, three aircraft
engines on lease and spare parts in inventory.

PAIF-I has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other limited partnerships, banks and several other
types of financial institutions. This market is highly competitive and there is
no single competitor who has a significant influence on the industry. In
addition to other competitors, the general partner, Polaris Investment
Management Corporation (PIMC), and its affiliates, including GE Capital Aviation
Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris
Holding Company (PHC) and General Electric Capital Corporation (GE Capital),
acquire, lease, finance, sell and remarket aircraft for their own accounts and
for existing aircraft and aircraft leasing programs managed by them. Further,
GECAS provides a significant range of management services to GPA Group plc, a
public limited company organized in Ireland, together with its consolidated
subsidiaries (GPA), which acquires, leases and sells aircraft. Accordingly, in
seeking to re-lease and sell its aircraft, the Partnership may be in competition
with the general partner, its affiliates, and GPA.

The Partnership leased three engines to CanAir Cargo Ltd. (CanAir) for three
years beginning in May 1994. In 1997, the lease with CanAir was extended for
seven months. In August 1997, the engine lease was transferred to Royal Aviation
Inc. and Royal Cargo, Inc. (Royal Aviation) pursuant to an Aircraft Lease
Purchase Agreement. Under this agreement, the leases were extended to August
2000 at the same rental rate.

The following table describes certain material terms of the Partnership's engine
leases as of December 31, 1997.

Number Lease
Lessee Engine Type of Engines Expiration Renewal Options
------ ----------- ---------- ---------- ---------------

Royal Aviation JT8D-9A 3 8/2000 None

Industry-wide, approximately 330 commercial jet aircraft were available for sale
or lease at December 31, 1997, approximately 50 more than a year ago. At under
3% of the total available jet aircraft fleet, this is still a relatively low
level of availability by industry historic standards. From 1991 to 1994,
depressed demand for travel limited airline expansion plans, with new aircraft
orders and scheduled deliveries being canceled or substantially deferred. As
profitability declined, many airlines took action to downsize or liquidate
assets and some airlines were forced to file for bankruptcy protection.
Following four years of strong traffic growth accompanied by rising yields, this
trend reversed with many airlines reporting substantial profits since 1995. As a
result of this improving trend, just over 1200 new jet aircraft were ordered in
1996 and a further 1300 were ordered in 1997, making this the second highest
ever order year in the history of the industry. To date, this strong recovery
has mainly benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies,
many of which are now being upgraded with hushkits, which, when installed on the
aircraft, bring Stage 2 aircraft into compliance with Federal Aviation
Administration (FAA) Stage 3 noise restrictions as discussed in the Industry
Update section of Item 7. Older Stage 2 narrow-bodies and early wide-bodies have
shown only marginal signs of recovery since the depressed 1991 to 1994 period.
Economic turmoil in Asia in the second half of 1997 has brought about a
significant reduction in traffic growth in much of that region which is
resulting in a number of new aircraft order deferrals and cancellations, mainly
in the wide-body sector of the market with as yet no impact evident in other
world markets. In 1996, several airline accidents also impacted the market for
older Stage 2 aircraft.

<PAGE>

Item 2. Properties

At December 31, 1997, Polaris Aircraft Income Fund I (the Partnership) owned
three engines and certain inventoried aircraft parts out of its original
portfolio of eleven aircraft. The three engines are leased to Royal Aviation. In
addition, the Partnership transferred four aircraft to aircraft inventory during
1992 and 1993. These aircraft have been disassembled for sale of their component
parts. Two engines formerly leased to Viscount, were returned to the Partnership
in 1996 and were sold in March 1997. One additional engine was sold to Viscount
during 1995. The Partnership has sold six aircraft and one airframe from its
original aircraft portfolio: a Boeing 737-200 Convertible Freighter in 1990, a
McDonnell Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993, the airframe from a
Boeing 737-200 aircraft in 1995 and three Boeing 737-200 aircraft in 1997.

Item 3. Legal Proceedings

Viscount Air Services, Inc. (Viscount) Bankruptcy - As previously reported in
the Polaris Aircraft Income Fund I (the Partnership) 1996 Form 10-K, all
disputes between the Partnership and Viscount have been resolved, and there is
no further pending litigation with Viscount. However, one of the Partnership's
engines was located on an airframe (the "306 Aircraft") owned by Polaris
Aircraft Income Fund II and formerly leased by Viscount. When Viscount rejected
its lease of the 306 Aircraft, as authorized by the Bankruptcy Court, the 306
Aircraft was located at a maintenance facility owned by BAE Aviation, Inc. dba
Tucson Aerospace, which asserted a mechanics' lien over the 306 Aircraft and the
Partnership's engine. First Security Bank, National Association (FSB), as owner
trustee of the 306 Aircraft and the Partnership's engine, filed suit to recover
the airframe and engine and to determine the validity of the alleged mechanics'
liens. On May 2, 1997, FSB filed a summary judgment motion and obtained summary
judgment that the alleged liens do not extend to the Partnership's engine. No
further claims are pending concerning the Partnership.

Mercury Air Group v. Aero Costa Rica (ACORI), S.A., et al. - As previously
reported in the Partnership's 1996 Form 10-K, ACORI, Polaris Holding Company
(PHC) and FSB were sued by Mercury Air Group (Mercury) to enforce a foreclosure
lien against an aircraft owned by FSB, as trustee for the Partnership. On June
3, 1997, Mercury filed a Notice of Voluntary Dismissal with Prejudice in respect
of its claims against PHC and FSB and discharged the lien against the aircraft.
No further claims are pending concerning the Partnership.

Nations Air Express (Nations Air) v. First Security Bank, National Association,
et al. - As previously reported in the Partnership's 1996 Form 10-K, Nations Air
filed suit against First Security Bank, National Association (FSB) as trustee
for the Partnership, the Partnership, GE Capital Aviation Services, Inc. (GECAS)
and Polaris Holding Company for allegedly fraudulently misleading Nations Air in
connection with a lease. This action was dismissed with prejudice on February
10, 1997. Nations Air moved to set aside the dismissal, but subsequently
withdrew its motion pursuant to a comprehensive Settlement Agreement dated as of
March 31, 1997 (discussed below) which was entered into by Nations Air, First
Security Bank, National Association, Polaris Holding Company, the Partnership,
Polaris Aircraft Income Fund II, Polaris Investment Management Corporation and
GECAS.

<PAGE>

First Security Bank, National Association, as Owner Trustee v. Nations Air
Express, Inc. - As previously reported in the Partnership's 1996 Form 10-K,
First Security Bank, National Association (FSB) filed suit against Nations Air
Express, Inc. (Nations Air) in connection with Nations Air's possession and use
of two aircraft owned by PHC and FSB as trustee for the Partnership,
respectively. Nations Air returned the Partnership's aircraft in February of
1997. On March 31, 1997, Nations Air entered into a comprehensive Settlement
Agreement with FSB, Polaris Holding Company (PHC), the Partnership, Polaris
Aircraft Income Fund II, Polaris Investment Management Corporation and GE
Capital Aviation Services (GECAS) (collectively the "GECAS Parties"). Pursuant
to the Settlement Agreement, Nations Air filed a Stipulated Judgment whereby
Nations Air agreed, among other things, to purchase the aircraft owned by FSB as
trustee for PHC (the "PHC Aircraft") for $3.3 million payable no later than May
30, 1997. Subsequently, GECAS, on behalf of FSB, and Nations Air agreed to
extend the date by which Nations Air or its designee must purchase the PHC
Aircraft to July 14, 1997. On that date FSB sold the PHC Aircraft to Nations
Air's designee and received the purchase price of $3.3 million. Pending receipt
of certain certificates from Nations Air, FSB will execute a Satisfaction of
Judgment in this action, and the GECAS Parties will execute a release, releasing
Nations Air from any claims related to any transaction between the GECAS Parties
and Nations Air. The Partnership received $690,946 as its share of the
settlement payment before legal expenses in September 1997.

Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's
1996 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Third District of Alaska. On June 11, 1992, the Partnership filed a proof of
claim in the case to recover damages for past due rent and for Markair's failure
to meet return conditions with respect to the Partnership's aircraft that were
leased by Markair. In August 1993, the Bankruptcy Court approved a plan of
reorganization for Markair and a stipulation allowing the Partnership to retain
the security deposits and maintenance reserves previously posted by Markair. The
stipulation also allowed the Partnership an unsecured claim against Markair for
$445,000, which was converted to subordinated debentures during 1994. Markair
has defaulted on its payment obligations on such debentures. On April 14, 1995,
Markair commenced new reorganization proceedings under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Third
District of Alaska. On October 25, 1995, Markair converted its Chapter 11
reorganization proceeding into a proceeding under Chapter 7 of the United States
Bankruptcy Code in the same court. The trustee, Key Bank of Washington, took
steps to protect the interests of the debenture holders, including the
Partnership, by filing proofs of claim in this proceeding.

Braniff, Inc. (Braniff) Bankruptcy - As previously reported in the Partnership's
1996 Form 10-K, in September 1989, Braniff filed a petition under Chapter 11 of
the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Florida, Orlando Division. On September 26, 1990 the Partnership
filed a proof of claim to recover unpaid rent and other damages, and on November
27, 1990, the Partnership filed a proof of administrative claim to recover
damages for detention of aircraft, non-compliance with court orders and
post-petition use of engines as well as liquidated damages. On July 27, 1992,
the Bankruptcy Court approved a stipulation embodying a settlement among the
Partnership, the Braniff creditor committees and Braniff in which it was agreed
that the Partnership would be allowed an administrative claim in the bankruptcy
proceeding of approximately $2,076,923. As the final disposition of the
Partnership's claim in the Bankruptcy proceedings, the Partnership was permitted
by the Bankruptcy Court to exchange a portion of its unsecured claim for
Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the
FAA noise regulations to operate nine Stage 2 aircraft and has been allowed a
net remaining unsecured claim of $6,923,077 in the proceedings.

<PAGE>

Jet Fleet Bankruptcy - As previously reported in the Partnership's 1996 Form
10-K, in September 1992, Jet Fleet, lessee of one of the Partnership's aircraft,
defaulted on its obligations under the lease for the Partnership's aircraft by
failing to pay reserve payments and to maintain required insurance. The
Partnership repossessed its Aircraft on September 28, 1992. Thereafter, Jet
Fleet filed for bankruptcy protection in the United States Bankruptcy Court for
the Northern District of Texas, Dallas Division. On April 13, 1993, the
Partnership filed a proof of claim in the Jet Fleet bankruptcy to recover its
damages. The bankrupt estate was subsequently determined to be insolvent.
Therefore, no payment of the Partnership's claim can be expected. However, no
action on the Partnership's proof of claim has been taken by the Bankruptcy
Court.

Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, this
action was filed in the District Court of Harris County, Texas against Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris
Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris
Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI,
General Electric Capital Corporation, Prudential Securities, Inc., Prudential
Insurance Company of America and James J. Darr. The complaint alleges violations
of the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections
11 and 12 of the Securities Act of 1933, common law fraud, fraud in the
inducement, negligent misrepresentation, negligence, breach of fiduciary duty
and civil conspiracy arising from the defendants' alleged misrepresentation and
failure to disclose material facts in connection with the sale of limited
partnership units in the Partnership and the other Polaris Aircraft Income
Funds. Plaintiffs seek, among other things, an award of compensatory damages in
an unspecified amount plus interest, and double and treble damages under the
Texas Deceptive Trade Practices Act. On December 2, 1997, the trial court issued
a scheduling order setting a September 7, 1998 trial date.

Riskind, et al. v. Prudential Securities, Inc., et al. - This action was filed
in the District Court of the 165 Judicial District, Maverick County, Texas, on
behalf of over 3,000 individual investors who purchased units in "various
Polaris Aircraft Income Funds," including the Partnership. A second amended
original petition names the Partnership, Polaris Investment Management
Corporation, Prudential Securities, Inc. and others as defendants and alleges
that these defendants violated the Texas Securities Act and the Texas Deceptive
Trade Practices Act and committed common law fraud, fraud in the inducement,
negligent misrepresentation, negligent breach of fiduciary duty and civil
conspiracy by misrepresenting and failing to disclose material facts in
connection with the sale of limited partnership units in the Partnership and the
other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an
award of compensatory damages in an unspecified amount plus interest, and double
and treble damages under the Texas Deceptive Trade Practices Act. Kidder,
Peabody & Co. was added as an additional defendant by virtue of an Intervenor's
Amended Plea in Intervention filed on or about April 7, 1995.

The trial of the claims of one plaintiff, Robert W. Wilson, against Polaris
Aircraft Income Funds I-VI, Polaris Investment Management Corporation and
various affiliates of Polaris Investment Management Corporation, including
General Electric Capital Corporation, was commenced on July 10, 1995. On July
26, 1995, the jury returned a verdict in favor of the defendants on all counts.
Subsequent to this verdict, all of the defendants (with the exception of
Prudential Securities, Inc., which had previously settled) entered into a
settlement with the plaintiffs. On February 26, 1997, the court issued an order
notifying the remaining plaintiffs that the action would be dismissed on April
21, 1997 for want of prosecution unless the plaintiffs showed cause why the
action should not be dismissed. This action was dismissed for want of
prosecution in April of 1997.

Howland, et al. v. Polaris Holding Company, et al. - This action was transferred
to the multi-district litigation in the Southern District of New York entitled
In re Prudential Securities Limited Partnerships Litigation, which has been
settled as discussed in Part III, Item 10 below.

<PAGE>

Adams, et al. v. Prudential Securities, Inc., et al. - This action was
transferred to the multi-district litigation on the Southern District of New
York entitled In re Prudential Securities Limited Partnerships Litigation, which
has been settled as discussed in Item 10 of Part III below.

CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act
of Canada - On July 28, 1997, CanAir obtained an order under the Companies'
Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of
Justice, General Division. The CCAA Order restrained CanAir's creditors,
including lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from Polaris Holding Company (PHC) and General Electric Capital Leasing
Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997
engine rent and maintenance reserve payment obligations to the Partnership. On
August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for PHC,
GECL Canada and the Partnership (collectively, the GECAS Parties), entered into
an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo
Inc. for the transfer of CanAir's future lease obligations to Royal Aviation
Inc., as described in Item 7 under the caption "CanAir Default and Transfer of
Engine Lease to Royal Aviation."

CanAir still owes the GECAS Parties a total of approximately $1.5 million. Of
this amount, approximately $30,365 is owed to the Partnership under the engine
lease, exclusive of accrued interest and maintenance reserve payment
obligations. On October 29, 1997, CanAir filed a plan of reorganization with the
court, which is subject to the approval of CanAir's creditors and the court. The
plan was defeated by a vote of the secured creditors on November 24, 1997.

On January 26, 1998, the court appointed receiver on behalf of CanAir's
creditors seized CanAir's assets and offered them for public sale. A number of
offers have been received and are currently being negotiated by the receiver.
However, there can be no assurance that any of the transactions being negotiated
by the receiver will be consummated.

Other Proceedings - Part III, Item 10 discusses certain other actions which have
been filed against the general partner in connection with certain public
offerings, including that of the Partnership. The Partnership is not a party to
these actions.

Item 4. Submission of Matters to a Vote of Security Holders

None.

6
<PAGE>

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

a) Polaris Aircraft Income Fund I's (PAIF-I or the Partnership) limited
partnership interests (Units) are not publicly traded. Currently there
is no formal market for PAIF-I's Units and it is unlikely that any
market will develop.

b) Number of Security Holders:

Number of Record Holders
Title of Class as of December 31, 1997
-------------- ------------------------

Limited Partnership Interest: 6,399

General Partnership Interest: 1

c) Dividends:

Distributions of cash from operations commenced in 1987. The
Partnership made cash distributions to limited partners of $7,466,258
and $2,530,935, or $44.25 and $15.00 per limited partnership unit
during 1997 and 1996, respectively.

<PAGE>

<TABLE>

Item 6. Selected Financial Data

<CAPTION>
For the years ended December 31,
--------------------------------

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>

Revenues $ 3,643,495 $ 2,781,212 $ 3,196,035 $ 3,081,215 $ 2,823,141

Net Income (Loss) 3,188,131 (591,415) 446,293 829,960 (3,084,396)

Net Income (Loss)
allocated to Limited
Partners 1,341,903 (838,569) 298,425 686,691 (3,193,583)

Net Income (Loss) per
Limited Partnership Unit 7.95 (4.97) 1.77 4.07 (18.93)

Cash Distributions per
Limited Partnership
Unit 44.25 15.00 8.50 8.00 8.30

Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit 44.25 15.00 8.50 8.00 8.30

Total Assets 7,366,511 14,254,000 16,288,799 16,487,091 16,831,113

Partners' Capital 5,315,716 10,423,428 13,826,993 14,974,251 15,644,104

</TABLE>

8
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Remarketing Update

Sale of two Boeing 737-200s - In March 1997, the Partnership sold two Boeing
737-200s and two spare engines formerly leased to Viscount for total
consideration of $1,620,000. In addition, the Partnership retained certain
maintenance reserves and deposits received from the former lessee of these
aircraft aggregating approximately $968,000 that had been held by the
Partnership to offset potential future maintenance expenses for these aircraft.
As a result, the Partnership recognized a net gain of $781,504 on the sale of
these aircraft during 1997.

Engine Note Receivable - In April 1997, the Partnership received $408,496, as
prepayment in full, of the outstanding engine finance sale note receivable,
including accrued interest, due from Rock-It Cargo and Riverhorse Investments.

Sale of one Boeing 737-200 - In May 1997, the Partnership sold one Boeing
737-200 formerly leased to Viscount and subleased to Nations Air Express, Inc.
for total consideration of $1,000,000. In addition, the Partnership retained
certain maintenance reserves and deposits received from the former lessee of
this aircraft, aggregating approximately $1,081,000, that had been held by the
Partnership to offset potential future maintenance expenses for this aircraft.
As a result, the Partnership recognized a net gain of $1,051,169 on the sale of
this aircraft during 1997.

CanAir Default and Transfer of Engine Lease to Royal Aviation - In April 1997,
the Partnership and CanAir Cargo Ltd. (CanAir) agreed to extend the engine
leases for seven months beyond the original lease expiration date of May 1997.

On July 28, 1997, CanAir obtained an order under the Companies' Creditors
Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice,
General Division. The CCAA Order restrained CanAir's creditors, including
lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from Polaris Holding Company (PHC) and General Electric Capital Leasing
Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997
engine rent and maintenance reserve payment obligations to the Partnership. On
August 22, 1997, GE Capital Aviation Services, Inc. (GECAS) as agent for PHC,
GECL Canada and the Partnership (together, the GECAS Parties), entered into an
Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc.
for the transfer of CanAir's future lease obligations to Royal Aviation Inc.
(Royal Aviation). Pursuant to this agreement, the leases were extended to August
2000 at the current lease rate and the Partnership received a security deposit
of $45,000 from Royal Aviation.

<PAGE>

During 1997, the Partnership recorded an allowance for credit losses of $30,365
for the outstanding receivables from CanAir through August 21, 1997, after
applying CanAir's security deposit of $20,925 towards the outstanding
receivables due.

Partnership Operations

The Partnership reported net income of $3,188,131, or $7.95 per limited
partnership unit for the year ended December 31, 1997, compared to a net loss of
$591,415, or $4.97 per limited partnership unit for the year ended December 31,
1996, and net income of $446,293, or $1.77 per limited partnership unit for the
year ended December 31, 1995. The improvement in operating results in 1997, as
compared to 1996, was primarily the result of gains on the sale of aircraft of
$1,832,673 and the related lower depreciation expense in 1997. Additionally, the
Partnership received a settlement from Nations Air in the amount of $690,946 in
1997. The decline in operating results in 1996, as compared to 1995, is the
result of increased depreciation expense for declines in the estimated
realizable values of the Partnership's aircraft, as discussed in the Industry
Update section, as well as lower rental and other revenues.

During 1997, 1996 and 1995, the Partnership recorded allowances for credit
losses of $30,365, $1,055,050 and $956,015, respectively for outstanding
receivables from CanAir, Viscount and Nations Air. GECAS, on behalf of the
Partnership, entered into a Stipulation and Agreement with Viscount on September
18, 1996. This Stipulation and Agreement provides that, upon entry of a final
non-appealable court order approving it, the Partnership would waive its pre-
and post-petition claims against Viscount for all amounts due and unpaid. As a
result, the Partnership considers all receivables from Viscount to be
uncollectible and has written-off, during the third quarter of 1996, all notes,
rents and interest receivable balances from Viscount.

Depreciation adjustments in 1996 and 1995 were approximately $400,000 and
$115,000, respectively, for declines in the estimated realizable values of the
Partnership's aircraft and aircraft inventory, as discussed later in the
Industry Update section. In determining the 1996 impairment loss, the
Partnership estimated the fair value of the aircraft and equipment based on the
estimated sale price less cost to sell, and then deducted this amount from the
carrying value of the aircraft.

In 1995, the Partnership agreed to share in the cost of certain heavy
maintenance work performed on the Boeing 737-200 aircraft sub-leased to Nations
Air by Viscount. The Partnership recognized approximately $574,000 of this heavy
maintenance work as operating expense in 1995. The Partnership recorded legal
expenses of approximately $414,000 related to the Viscount defaults and Chapter
11 bankruptcy filing, which are included in operating expense in the
Partnership's 1996 statement of operations.

Liquidity and Cash Distributions

Liquidity - As discussed in Note 8 to the financial statements, the Viscount
Stipulation and Agreement specifies, among other things, that the Partnership
waive its pre- and post-petition claims against Viscount for amounts due and
unpaid. As a result, the Partnership recorded an additional allowance for credit

<PAGE>

losses of $643,600 in 1996, representing Viscount's outstanding balance of
rents, the line of credit and accrued interest. In addition, the Partnership
considers all receivables from Viscount to be uncollectible and has written-off,
during the third quarter of 1996, all notes, rents and interest receivable
balances from Viscount. Viscounts affiliates, Rock-It Cargo and Riverhorse
Investments, assumed the engine finance sale note from Viscount and agreed to
pay the note balance, including past due interest, in 45 installments beginning
on October 31, 1996. This note was prepaid in full in April 1997.

As discussed in Notes 7 and 8 to the financial statements, Nations Air was
delinquent on its maintenance cost-sharing payments to the Partnership. In
addition, under the prior Nations Air sublease with Viscount, Nations Air paid
rent and maintenance reserve payments directly to the Partnership. These
payments continued through September 1996 and Nations Air had not paid the rent
and maintenance reserve payments since October 1996. Nations Air returned the
aircraft to the Partnership in February 1997. As a result, the Partnership has
recorded an allowance for credit losses of $411,450, representing the
outstanding amounts due from Nations Air at December 31, 1996. In September
1997, the Partnership received $690,946 as its share of a settlement with
Nations Air, as discussed in Note 7.

The Partnership receives maintenance reserve payments from certain lessees that
may be reimbursed to the lessee or applied against certain costs incurred by the
Partnership for maintenance work performed on the Partnership's engines, as
specified in the leases. Maintenance reserve balances remaining at the
termination of the lease, if any, may be used by the Partnership to offset
future maintenance expenses or recognized as revenue. The net maintenance
reserves balances aggregate $1,466,687 as of December 31, 1997.

The Partnership received payments of $252,112 in 1997 from the sale of parts
from the four disassembled aircraft. The remaining net book value of the
aircraft inventory was fully recovered during 1995. Payments of approximately
$477,832 and $604,562 had been received during 1996 and 1995, respectively, from
the sales of parts from the four disassembled aircraft.

PIMC has determined that the Partnership maintain cash reserves as a prudent
measure to insure that the Partnership has available funds in the event that the
engines presently on lease to Royal Aviation require remarketing and for other
contingencies, including expenses of the Partnership. The Partnership's cash
reserves will be monitored and may be revised from time to time as further
information becomes available in the future.

Cash Distributions - Cash distributions to limited partners during 1997, 1996
and 1995 were $7,466,258, $2,530,935 and $1,434,196, respectively. Cash
distributions per limited partnership unit were $44.25, $15.00 and $8.50 during
1997, 1996 and 1995, respectively. The timing and amount of future cash
distributions to partners are not yet known and will depend upon the
Partnership's future cash requirements, including the receipt of rental payments
from Royal Aviation.

Viscount Restructuring Agreement and Default

On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. Among
other things, the Compromise and Stipulation provided that in the event that
Viscount failed to promptly and timely perform its monetary obligations under
the Leases and the Compromise and Stipulation, without further order of the
Bankruptcy Court, GECAS would be entitled to immediate possession of the
aircraft for which Viscount failed to perform and Viscount would deliver such
aircraft and all records related thereto to GECAS.

<PAGE>

Viscount defaulted on and was unable to cure its September 1996 rent
obligations. However, Viscount took the position that it was entitled to certain
offsets and asserted defenses to the September rent obligations. On September
18, 1996, GECAS (on behalf of the Partnership and other entities) and Viscount
entered into a Stipulation and Agreement by which Viscount agreed to voluntarily
return all of the Partnership's aircraft and engines, turn over possession of
the majority of its aircraft parts inventory, and cooperate with GECAS in the
transition of aircraft equipment and maintenance, in exchange for which, upon
Bankruptcy Court approval of the Stipulation and Agreement, the Partnership
would waive its right to pre- and post-petition claims against Viscount for
amounts due and unpaid.

The Stipulation and Agreement provided that upon the return and surrender of
possession of the Partnership's three airframes and eight engines (two of which
were spare engines), Viscount's rights and interests therein would terminate. As
of October 1, 1996, Viscount had returned (or surrendered possession of) all of
the Partnership's airframes and engines. One of the returned airframes (together
with one installed engine) was in the possession of and being operated by
Nations Air. Six of the seven returned engines were in the possession of certain
maintenance facilities and required maintenance work in order to be made
operable. Viscount returned the Partnership's remaining airframe and one
installed engine on October 1, 1996. Nations Air returned this airframe and one
installed engine to the Partnership in February 1997. These three airframes and
six of the engines were sold in 1997.

A consignment agreement has been entered into with a sales agent for the
disposal of the spare parts inventory recovered from Viscount. Given that many
of the parts require repair/overhaul, the cost of which is not accurately
determinable in advance, and the inherent uncertainty of sales prices for used
spare parts, there remains uncertainty as to whether the Partnership will derive
further proceeds from the sale of this inventory.

The Stipulation and Agreement also provided that the Polaris Entities, GECAS and
FSB would release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.

As discussed in Note 4, in October 1996, Viscount's affiliates, Rock-It Cargo
USA, Inc. and Riverhorse Investments, Inc., assumed Viscount's engine finance
sale note to the Partnership as provided under the Compromise and Stipulation.

During 1996 and 1995, the Partnership recorded allowances for credit losses of
$1,055,050 and $956,015, respectively for outstanding receivables from Viscount
and Nations Air. The Stipulation and Agreement provides that, upon entry of a
final non-appealable court order approving it, the Partnership would waive its
pre- and post-petition claims against Viscount for all amounts due and unpaid.
As a result, the Partnership considers all receivables from Viscount to be
uncollectible and had written-off, during the third quarter of 1996, all notes,
rents and interest receivable balances from Viscount. Payments received by the
Partnership from the sale of the spare aircraft parts (as discussed above), if
any, will be recorded as revenue when received.

The Partnership evaluated the condition of the returned equipment and estimated
that very substantial maintenance and refurbishment costs aggregating
approximately $3.2 million would be required if the Partnership decided to
re-lease the returned aircraft and spare engines. Alternatively, if the
Partnership decided to sell the returned aircraft and spare engines, such sale
could be made on an "as is, where is" basis, without the Partnership incurring
substantial maintenance costs. Based on its evaluation, the Partnership
concluded that a sale of the remaining aircraft and spare engines on an "as is,
where is" basis would maximize the economic return on this equipment to the
Partnership. These aircraft were subsequently sold in 1997.

<PAGE>

As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the
Partnership has incurred legal costs of approximately $180,000 and $414,000,
which are reflected in operating expense in the Partnership's 1997 and 1996
statement of operations, respectively.

Claims Related to Lessee Defaults

Receipt of Nations Air Settlement - First Security Bank, National Association
(FSB), as owner trustee for the Partnership, filed an action against Nations Air
Express, Inc. (Nations Air) to recover damages arising from Nations Air's
possession and use of the Partnership's aircraft. On March 31, 1997, Nations Air
entered into a comprehensive Settlement Agreement with FSB, Polaris Holding
Company (PHC), the Partnership, Polaris Aircraft Income Fund II, Polaris
Investment Management Corporation (General Partner) and GE Capital Aviation
Services (GECAS) (collectively, the "GECAS Parties"). Pursuant to the Settlement
Agreement, Nations Air filed a Stipulated Judgment whereby Nations Air agreed,
among other things, to purchase PHC's aircraft (the "PHC Aircraft") for $3.3
million payable no later than May 30, 1997. Subsequent to March 31, 1997, GECAS,
on behalf of FSB, and Nations Air agreed to extend the date by which Nations Air
or its designee must purchase the PHC Aircraft to July 14, 1997. On that date
FSB, as owner trustee for PHC, sold the PHC Aircraft to Nations Air's designee
and received the purchase price of $3.3 million. On September 29, 1997 the
Partnership received $690,946 as its share of the settlement payment before
legal expenses.

Receipt of American Air Lease, Inc. (American Air Lease) Claim - The Partnership
filed suit in 1991 seeking damages for unpaid rent and other defaults against
lessee American Air Lease and guarantor Americom Leasing Group, Inc. (Americom).
In November 1994, the Partnership received $91,452 representing settlement of
Americom's and American Air Lease's obligation to pay the original settlement
judgement. The Partnership was also entitled to retain security deposits in the
amount of $74,075. The Partnership settled its claim against the insurers of
American Air Lease for payment of insurance proceeds of $400,000. The
Partnership received the $400,000 in July 1995 and recognized the full amount as
revenue in claims related to lessee defaults in the 1995 statement of
operations.

Markair, Inc. (Markair) Claim - As discussed in Item 3, the Partnership
terminated the leases and repossessed the two aircraft in June 1992 and Markair
filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. The Partnership filed a proof of claim in the case to recover
damages for past-due rent and for Markair's failure to meet return conditions
with respect to the Partnership's aircraft. In August 1993, the Bankruptcy Court
approved a plan of reorganization for Markair and a stipulation allows the
Partnership to retain the security deposits and maintenance reserves and an
unsecured claim against Markair for $445,000 which was converted to 10%
subordinated debentures during 1994. During 1995, the Partnership received
nominal principal and interest payments, which were recorded as revenue in the
1995 statement of operations. Markair has defaulted on its payment obligations
on the debentures, and the trustee, Key Bank of Washington, took steps to
protect the interests of the debenture holders, including the Partnership, by
filing proofs of claim in the proceeding.

Industry Update

Maintenance of Aging Aircraft - The process of aircraft maintenance begins at
the aircraft design stage. For aircraft operating under Federal Aviation
Administration (FAA) regulations, a review board consisting of representatives
of the manufacturer, FAA representatives and operating airline representatives
is responsible for specifying the aircraft's initial maintenance program. The
general partner understands that this program is constantly reviewed and
modified throughout the aircraft's operational life.

The Partnership's existing leases require the lessee to maintain the
Partnership's engines in accordance with an FAA-approved maintenance program
during the lease term.

13
<PAGE>

Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft meet current FAA requirements, subject to the phase-out rules discussed
below. Stage 3 aircraft are the most quiet and is the standard for all new
aircraft.

On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2
aircraft by the end of this decade. The key features of the rule include:

- Compliance can be accomplished through a gradual process of
phase-in or phase-out (see below) on each of three interim
compliance dates: December 31, 1994, 1996 and 1998. All Stage 2
aircraft must be phased out of operations in the contiguous United
States by December 31, 1999, with waivers available in certain
specific cases to December 31, 2003.

- All operators have the option of achieving compliance through a
gradual phase-out of Stage 2 aircraft (i.e., eliminate 25% of its
Stage 2 fleet on each of the compliance dates noted above), or a
gradual phase-in of Stage 3 aircraft (i.e., 55%, 65% and 75% of an
operator's fleet must consist of Stage 3 aircraft by the
respective interim compliance dates noted above).

The federal rule does not prohibit local airports from issuing more stringent
phase-out rules. In fact, several local airports have adopted more stringent
noise requirements which restrict the operation of Stage 2 and certain Stage 3
aircraft.

Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.

At December 31, 1997, the Partnership's portfolio consisted of three Stage 2
engines. Hushkit modifications, which allow Stage 2 engines to meet Stage 3
requirements, are available for the Partnership's aircraft engines. However,
while technically feasible, hushkits may not be cost effective due to the age
and maintenance condition of the engines and the time required to fully amortize
the additional investment.

Demand for Aircraft - Industry-wide, approximately 330 commercial jet aircraft
were available for sale or lease at December 31, 1997, approximately 50 more
than a year ago. At under 3% of the total available jet aircraft fleet, this is
still a relatively low level of availability by industry historic standards.
From 1991 to 1994, depressed demand for travel limited airline expansion plans,
with new aircraft orders and scheduled deliveries being canceled or
substantially deferred. As profitability declined, many airlines took action to
downsize or liquidate assets and some airlines were forced to file for
bankruptcy protection. Following four years of strong traffic growth accompanied
by rising yields, this trend reversed with many airlines reporting substantial
profits since 1995. As a result of this improving trend, just over 1200 new jet
aircraft were ordered in 1996 and a further 1300 were ordered in 1997, making
this the second highest ever order year in the history of the industry. To date,
this strong recovery has mainly benefited Stage 3 narrow-bodies and younger
Stage 2 narrow-bodies, many of which are now being upgraded with hushkits,
whereas older Stage 2 narrow-bodies and early wide-bodies have shown only
marginal signs of recovery since the depressed 1991 to 1994 period. Economic
turmoil in Asia in the second half of 1997 has brought about a significant
reduction in traffic growth in much of that region which is resulting in a
number of new aircraft order deferrals and cancellations, mainly in the
wide-body sector of the market with as yet no impact evident in other world
markets.

14
<PAGE>

The General Partner believes that, in addition to the factors cited above, the
deteriorated market for these aircraft reflects the airline industry's reaction
to the significant expenditures potentially necessary to bring these aircraft
into compliance with certain ADs issued by the FAA relating to aging aircraft,
corrosion prevention and control and structural inspection and modification as
previously discussed.

15
<PAGE>

Item 8. Financial Statements and Supplementary Data

POLARIS AIRCRAFT INCOME FUND I

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996

TOGETHER WITH

AUDITORS' REPORT

16
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Polaris Aircraft Income Fund I:

We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
I (a California limited partnership) as of December 31, 1997 and 1996, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund I
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Francisco, California,
January 23, 1998

17
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

1997 1996
---- ----
ASSETS:

CASH AND CASH EQUIVALENTS $ 6,466,511 $ 10,065,652

RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $30,365 in 1997
and $233,913 in 1996 -- 18,816

NOTES RECEIVABLE, net of allowance for credit
losses of $177,537 in 1996 -- 418,145

AIRCRAFT AND AIRCRAFT ENGINES, net of
accumulated depreciation of $60,000 in 1997 and
$20,823,462 in 1996 900,000 3,751,387
------------ ------------

$ 7,366,511 $ 14,254,000
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 42,286 $ 77,676

ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 446,822 464,603

SECURITY DEPOSITS 95,000 70,925

MAINTENANCE RESERVES 1,466,687 3,217,368
------------ ------------

Total Liabilities 2,050,795 3,830,572
------------ ------------

PARTNERS' CAPITAL (DEFICIT):

General Partner 392,302 (624,341)
Limited Partners, 168,729 units
issued and outstanding 4,923,414 11,047,769
------------ ------------

Total Partners' Capital 5,315,716 10,423,428
------------ ------------

$ 7,366,511 $ 14,254,000
============ ============

The accompanying notes are an integral part of these statements.

18
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1997 1996 1995
---- ---- ----
REVENUES:
Rent from operating leases $ 360,000 $ 1,763,400 $ 2,073,250
Interest 506,984 524,479 592,382
Gain on sale of aircraft and
equipment 1,832,673 -- 17,849
Gain on sale of aircraft inventory 252,112 477,832 558
Lessee settlement and other 691,726 15,501 511,996
----------- ---------- -----------

Total Revenues 3,643,495 2,781,212 3,196,035
----------- ---------- -----------

EXPENSES:
Depreciation 15,000 1,656,729 896,176
Management fees to general partner 18,000 63,337 63,294
Provision for credit losses 30,365 1,055,050 956,015
Operating 215,384 425,146 650,685
Administration and other 176,615 172,365 183,572
----------- ---------- -----------

Total Expenses 455,364 3,372,627 2,749,742
----------- ---------- -----------

NET INCOME (LOSS) $ 3,188,131 $ (591,415) $ 446,293
=========== =========== ===========

NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 1,846,228 $ 247,154 $ 147,868
=========== =========== ===========

NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 1,341,903 $ (838,569) $ 298,425
=========== =========== ===========

NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ 7.95 $ (4.97) $ 1.77
=========== =========== ===========

The accompanying notes are an integral part of these statements.

19
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

General Limited
Partner Partners Total
------- -------- -----

Balance, December 31, 1994 $ (578,793) $ 15,553,044 $ 14,974,251

Net income 147,868 298,425 446,293

Cash distributions to
partners (159,355) (1,434,196) (1,593,551)
------------ ------------ ------------

Balance, December 31, 1995 (590,280) 14,417,273 13,826,993

Net income (loss) 247,154 (838,569) (591,415)

Cash distributions to
partners (281,215) (2,530,935) (2,812,150)
------------ ------------ ------------

Balance, December 31, 1996 $ (624,341) $ 11,047,769 $ 10,423,428

Net income 1,846,228 1,341,903 3,188,131

Cash distributions to
partners (829,585) (7,466,258) (8,295,843)
------------ ------------ ------------

Balance, December 31, 1997 $ 392,302 $ 4,923,414 $ 5,315,716
============ ============ ============

The accompanying notes are an integral part of these statements.

20
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----
<S> <C> <C> <C>

OPERATING ACTIVITIES:
Net income (loss) $ 3,188,131 $ (591,415) $ 446,293
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 15,000 1,656,729 896,176
Gain on sale of aircraft inventory (252,112) (477,832) (558)
Gain on sale of aircraft and equipment (1,832,673) -- (17,849)
Provision for credit losses 30,365 1,055,050 956,015
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables (11,549) (524,243) 261,849
Increase (decrease) in payable to affiliates (35,390) 25,919 (50,531)
Increase (decrease) in accounts payable and
accrued liabilities (17,781) 366,193 52,453
Increase (decrease) in lessee security deposits 24,075 (75,000) 20,925
Increase in maintenance reserves 298,379 1,051,654 926,119
------------ ------------ ------------

Net cash provided by operating activities 1,406,445 2,487,055 3,490,892
------------ ------------ ------------

INVESTING ACTIVITIES:
Proceeds from sale of aircraft 2,620,000 -- --
Proceeds from sale of airframe -- -- 300,000
Increase in capitalized costs -- -- (244,000)
Increase in notes receivable -- -- (418,216)
Principal payments on notes receivable 418,145 105,600 180,676
Net proceeds from sale of aircraft inventory 252,112 477,832 604,562
------------ ------------ ------------

Net cash provided by investing activities 3,290,257 583,432 423,022
------------ ------------ ------------

FINANCING ACTIVITIES:
Cash distributions to partners (8,295,843) (2,812,150) (1,593,551)
------------ ------------ ------------

Net cash used in financing activities (8,295,843) (2,812,150) (1,593,551)
------------ ------------ ------------

CHANGES IN CASH AND CASH
EQUIVALENTS (3,599,141) 258,337 2,320,363

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,065,652 9,807,315 7,486,952
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 6,466,511 $ 10,065,652 $ 9,807,315
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

21
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. Accounting Principles and Policies

Accounting Method - Polaris Aircraft Income Fund I (PAIF-I or the Partnership),
a California limited partnership, maintains its accounting records, prepares its
financial statements and files its tax returns on the accrual basis of
accounting. The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates. The most significant estimates with regard to
these financial statements are related to the projected cash flows analysis in
determining the fair value of assets.

Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and Cash Equivalents are stated at cost, which
approximates fair value.

Aircraft and Depreciation - Prior to disposition, aircraft were recorded at
cost, which included acquisition costs. Depreciation to an estimated residual
value was computed using the straight-line method over the estimated economic
life of the aircraft which was originally estimated to be 12 years. Depreciation
in the year of acquisition was calculated based upon the number of days that the
aircraft were in service. The remaining aircraft engines are being depreciated
to an estimated residual value using the straight line method over their
estimated economic life.

The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each asset's economic life based on estimated
residual values obtained from independent parties. For any downward adjustment
in estimated residual value or decrease in the projected remaining economic
life, the depreciation expense over the projected remaining economic life of the
asset is increased.

If the projected net cash flow for each aircraft or engine (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) is less than the carrying value of the aircraft or
engine, an impairment loss is recognized.

Capitalized Costs - Modification and maintenance costs which are determined to
increase the value or extend the useful life of the remaining assets are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation for impairment as discussed above.

Aircraft Inventory - Proceeds from sales had been applied against inventory
until the book value was fully recovered. The remaining book value of the
inventory was recovered in 1995. Proceeds in excess of the inventory net book
value are recorded as revenue when received.

Operating Leases - The remaining leases are accounted for as operating leases.
Operating lease revenues are recognized in equal installments over the terms of
the leases.

Maintenance Reserves - The Partnership receives maintenance reserve payments
from certain of its lessees that may be reimbursed to the lessee or applied

22
<PAGE>

against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.
Maintenance reserve payments are recognized when received and balances remaining
at the termination of the lease, if any, may be used by the Partnership to
offset future maintenance expenses or recognized as revenue.

Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.

Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited
partnership unit is based on the limited partners' share of net income (loss),
and the number of units outstanding for the years ended December 31, 1997, 1996
and 1995.

Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.

Receivables - The Partnership has recorded an allowance for credit losses for
certain impaired note and rents receivable as a result of uncertainties
regarding their collection as discussed in Note 6 and Note 8. The Partnership
recognizes revenue on impaired notes and receivables only as payments are
received.

1997 1996
---- ----
Allowance for credit losses,
beginning of year $ (411,450) $ (956,015)
Provision for credit losses (30,365) (1,055,050)
Write-downs 411,450 1,585,362
Collections - 14,253
------------- -------------
Allowance for credit losses,
end of year $ (30,365) $ (411,450)
============= =============

2. Organization and the Partnership

The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. It will terminate no later than December 2010. Upon
organization, both the general partner and the initial limited partner
contributed $500. The offering of limited partnership units terminated on
December 31, 1985, at which time the Partnership had sold 168,729 units of $500,
representing $84,364,500. All unit holders were admitted to the Partnership on
or before January 1, 1986.

Polaris Investment Management Corporation (PIMC), the sole general partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Note 9.

23
<PAGE>

3. Aircraft and Aircraft Engines

At December 31, 1997, the Partnership owned three engines and certain
inventoried aircraft parts from its original portfolio of eleven used commercial
jet aircraft. The remaining leases are net operating leases, requiring the
lessees to pay all operating expenses associated with the engines during the
lease term. In addition, the leases require the lessees to comply with
Airworthiness Directives which have been or may be issued by the Federal
Aviation Administration and require compliance during the lease term. In
addition to basic rent, the lessees are generally required to pay supplemental
amounts based on flight hours or cycles into a maintenance reserve account, to
be used for heavy maintenance of the engines. The leases generally state a
minimum acceptable return condition for which the lessee is liable under the
terms of the lease agreement. In the event of a lessee default, these return
conditions are not likely to be met.

Three Aircraft Engines - The Partnership leased two engines from an airframe
previously sold and one engine previously leased to Viscount, to CanAir Cargo
Ltd. (CanAir) beginning in May 1994 for 36 months. The rental rate was variable
based on usage through August 1994. Beginning in September 1994 through the end
of the lease term in May 1997, the rental rate was fixed at $10,000 per engine
per month. In April 1997, the engine lease with CanAir was extended for seven
months at the same lease rate. CanAir defaulted on its lease obligations to the
Partnership in July 1997. In August 1997 the lease was transferred to Royal
Aviation Inc. and Royal Air Cargo, Inc. (Royal Air) and the lease term was
extended to August 2000 at the current lease rate (see Note 6).

The following is a schedule by year of future minimum rental revenue under the
existing leases:

Year Amount
---- ------
1998 $ 360,000
1999 360,000
2000 240,000
2001 -
2002 and thereafter -
--------------

Total $ 960,000
==============

The Partnership recognized impairment losses aggregating approximately $400,000
and $115,000, or $2.37 and $0.67 per limited Partnership unit, as increased
depreciation expense in 1996 and 1995, respectively. In 1996, the Partnership
concluded that a sale of the returned aircraft and spare engines on an "as is,
where is" basis would maximize the economic return on this equipment to the
Partnership. In determining the impairment loss, the Partnership estimated the
fair value of the aircraft and equipment based on the estimated sale price less
cost to sell, and then deducted this amount from the carrying value of the
aircraft.

The Partnership used information obtained from third party valuation services in
arriving at its estimate of fair value for purposes of determining residual
values of its aircraft. The Partnership will use similar information, plus
available information and estimates related to the Partnership's engines, to
determine an estimate of fair value to measure impairment. The estimates of fair
value can vary dramatically depending on the condition of the specific engine
and the actual marketplace conditions at the time of the actual disposition of
the asset. If assets are deemed impaired, there could be substantial write-downs
in the future.

<PAGE>

4. Sale of Aircraft and Engines

Sale of Engine - In 1995, the Partnership sold an engine to Viscount for a sales
price of $461,849 and recorded a gain on sale of $17,849. The Partnership
recorded a note receivable for the sales price and agreed to accept payment in
57 installments of $10,500, with interest at a rate of 11.265% per annum. As
discussed in Note 8, Viscount defaulted on certain payments due the Partnership,
including payments on this note receivable. In October 1996, Viscount's
affiliates, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc., assumed
Viscount's engine finance sale note to the Partnership as discussed in Note 8.
In April 1997, the Partnership received $408,496, as a prepayment in full, of
the outstanding engine finance sale note receivable, including accrued interest,
due from Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc.

Sale of two Boeing 737-200s - In March 1997, the Partnership sold two Boeing
737-200s and two spare engines formerly leased to Viscount Air Services, Inc.
(Viscount) for total consideration of $1,620,000. In addition, the Partnership
retained certain maintenance reserves and deposits received from the former
lessee of these aircraft aggregating approximately $968,000 that had been held
by the Partnership to offset potential future maintenance expenses for these
aircraft. As a result, the Partnership recognized a net gain of $781,504 on the
sale of these aircraft during the first quarter of 1997.

Sale of one Boeing 737-200 - In May 1997, the Partnership sold one Boeing
737-200 formerly leased to Viscount and subleased to Nations Air Express, Inc.
for total consideration of $1,000,000. The Partnership received the remaining
$750,000 in May 1997. In addition, the Partnership retained certain maintenance
reserves and deposits received from the former lessee of this aircraft,
aggregating approximately $1,081,000, that had been held by the Partnership to
offset potential future maintenance expenses for this aircraft. As a result, the
Partnership recognized a net gain of $1,051,169 on the sale of this aircraft
during the second quarter of 1997.

5. Disassembly of Aircraft

In an attempt to maximize the economic return from its off-lease aircraft, the
Partnership entered into an agreement with Soundair, Inc. (Soundair) on October
31, 1992, for the disassembly of certain of the Partnership's aircraft and the
sale of their component parts.

The Partnership had incurred the cost of disassembly and receives the proceeds
from the sale of such parts, net of overhaul expenses if necessary, and
commissions paid to Soundair. Disassembly of the aircraft has been completed.

During 1995, the Partnership recorded a downward adjustment to the inventory
value of $115,000, to reflect the current estimate of net realizable aircraft
inventory value. This adjustment was reflected as increased depreciation expense
in the corresponding years' statement of operations.

The Partnership received net proceeds from the sale of aircraft inventory of
$252,112, $477,832 and $604,562, during 1997, 1996 and 1995, respectively. The
net book value of the aircraft inventory was recovered during 1995. As a result,
the excess proceeds from the sale of aircraft inventory have been recorded as
gain on sale of aircraft inventory in the corresponding years' statement of
operations.

25
<PAGE>

6. CanAir Default and Transfer of Engine Lease to Royal Aviation

In April 1997, the Partnership and CanAir agreed to extend the existing engine
leases for seven months beyond the original lease expiration date of May 1997.

CanAir still owes the GECAS Parties a total of approximately $1.5 million. Of
this amount, approximately $30,365 is owed to the Partnership under the engine
lease, exclusive of accrued interest and maintenance reserve payment
obligations. On October 29, 1997, CanAir filed a plan of reorganization with the
court, which was subject to the approval of CanAir's creditors and the court.
The plan was defeated by a vote of the secured creditors on November 24, 1997.

7. Claims Related to Lessee Defaults

Nations Air - First Security Bank, National Association (FSB), as owner trustee
for the Partnership, filed an action against Nations Air Express, Inc. (Nations
Air) to recover damages arising from Nations Air's possession and use of the
Partnership's aircraft. On March 31, 1997, Nations Air entered into a
comprehensive Settlement Agreement with FSB, Polaris Holding Company (PHC), the
Partnership, Polaris Aircraft Income Fund II, Polaris Investment Management
Corporation (General Partner) and GE Capital Aviation Services (GECAS)
(collectively, the "GECAS Parties"). Pursuant to the Settlement Agreement,
Nations Air filed a Stipulated Judgment whereby Nations Air agreed, among other
things, to purchase PHC's aircraft (the "PHC Aircraft") for $3.3 million payable
no later than May 30, 1997. Subsequent to March 31, 1997, GECAS, on behalf of
FSB, and Nations Air agreed to extend the date by which Nations Air or its
designee must purchase the PHC Aircraft to July 14, 1997. On that date FSB, as
owner trustee for PHC, sold the PHC Aircraft to Nations Air's designee and
received the purchase price of $3.3 million. On September 29, 1997 the
Partnership received $690,946 as its share of the settlement payment before
legal expenses.

26
<PAGE>

American Air Lease - The Partnership filed suit in 1991 seeking damages for
unpaid rent and other defaults against lessee American Air Lease and guarantor
Americom Leasing Group, Inc. (Americom). American Air Lease and the Partnership
reached a settlement consisting of certain cash payments, return of the aircraft
and participation in any recovery proceeds of American Air Lease's default
judgment against its lessee, Pan African Airways. Concurrent with the
court-approved settlement agreement, in December 1992, the lease was terminated
and the Partnership took possession of the aircraft. The Partnership proceeded
to recover under the judgment through collection of insurance claim proceeds
from insurers and judicial enforcement in New York against American Air Lease.
The aircraft was transferred to aircraft inventory in 1993 and has been
disassembled for sale of its component parts (Note 5). In November 1994, the
Partnership received $91,452 representing settlement of Americom's and American
Air Lease's obligation to pay the original settlement judgement. The Partnership
was also entitled to retain security deposits in the amount of $74,075. Both
amounts were recognized as revenue in claims related to lessee defaults in the
1994 statement of operations. The Partnership settled its claim against the
insurers of American Air Lease for payment of insurance proceeds of $400,000.
The Partnership received the $400,000 in July 1995 and recognized the full
amount as revenue in claims related to lessee defaults in the 1995 statement of
operations.

Markair - The Partnership terminated the leases and repossessed the two aircraft
in June 1992, and Markair filed a petition for reorganization under Chapter 11
of the United States Bankruptcy Code. The Partnership filed a proof of claim in
the case to recover damages for past-due rent and for Markair's failure to meet
return conditions with respect to the Partnership's aircraft. In August 1993,
the Bankruptcy Court approved a plan of reorganization for Markair and a
stipulation allowed the Partnership an unsecured claim against Markair for
$445,000 which was converted to 10% subordinated debentures during 1994. During
1994 and 1995, the Partnership received nominal principal and interest payments
on the debentures. Markair defaulted on its payment obligations on the
debentures, and the trustee, Key Bank of Washington, took steps to protect the
interests of the debenture holders, including the Partnership, by filing proofs
of claim on the proceeding.

8. Viscount Restructuring Agreement and Default

On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. The
Compromise and Stipulation provided that in the event that Viscount failed to
promptly and timely perform its monetary obligations under the Leases and the
Compromise and Stipulation, without further order of the Bankruptcy Court, GECAS
would be entitled to immediate possession of the aircraft for which Viscount
failed to perform and Viscount would deliver such aircraft and all records
related thereto to GECAS.

Viscount defaulted on and was unable to cure its September 1996 rent
obligations. However, Viscount took the position that it was entitled to certain

27
<PAGE>

offsets and asserted defenses to the September rent obligations. On September
18, 1996, GECAS (on behalf of the Partnership and other entities) and Viscount
entered into a Stipulation and Agreement by which Viscount agreed to voluntarily
return all of the Partnership's aircraft and engines, turn over possession of
the majority of its aircraft parts inventory, and cooperate with GECAS in the
transition of aircraft equipment and maintenance, in exchange for which, upon
Bankruptcy Court approval of the Stipulation and Agreement, the Partnership
would waive its right to pre- and post-petition claims against Viscount for
amounts due and unpaid.

The Stipulation and Agreement provided that upon the return and surrender of
possession of the Partnership's three airframes and eight engines (two of which
were spare engines), Viscount's rights and interests therein would terminate. As
of October 1, 1996, Viscount had returned (or surrendered possession of) all of
the Partnership's airframes and engines. One of the returned airframes (together
with one installed engine) was in the possession of and operated by Nations Air.
Six of the seven returned engines were in the possession of certain maintenance
facilities and required maintenance work in order to be made operable. Viscount
returned the Partnership's remaining airframe and one installed engine on
October 1, 1996. Nations Air returned this airframe and one installed engine to
the Partnership in February 1997. These three airframes and six of the engines
were sold in 1997.

The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB shall release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.

During 1996 and 1995, the Partnership recorded allowances for credit losses of
$1,055,050 and $956,015, respectively, for outstanding receivables from Viscount
and Nations Air. The Stipulation and Agreement provides that, upon entry of a
final non-appealable court order approving it, the Partnership would waive its
pre- and post-petition claims against Viscount for all amounts due and unpaid.
As a result, the Partnership considers all receivables from Viscount to be
uncollectible and had written-off, during the third quarter of 1996, all notes,
rents and interest receivable balances from Viscount. Payments received by the
Partnership from the sale of the spare aircraft parts (as discussed above), if
any, will be recorded as revenue when received.

28
<PAGE>

9. Related Parties

Under the Limited Partnership Agreement (Partnership Agreement), the Partnership
paid or agreed to pay the following amounts to PIMC and/or its affiliates in
connection with services rendered:

a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases of the Partnership, payable upon receipt of
the rent. In 1997, 1996 and 1995, the Partnership paid management fees
to PIMC of $16,987, $64,396 and $98,922, respectively. Management fees
payable to PIMC at December 31, 1997 and 1996 were $1,954 and $941,
respectively.

b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and its assets. In 1997, 1996
and 1995, $201,731, $203,253 and $146,375 were reimbursed to PIMC by
the Partnership for administrative expenses. Administrative
reimbursements of $37,633 and $47,052 were payable to PIMC at December
31, 1997 and 1996, respectively. Partnership reimbursements to PIMC for
maintenance and remarketing costs of $104,066, $200,032 and $302,657
were paid in 1997, 1996, and 1995, respectively. Maintenance and
remarketing reimbursements of $2,699 and $29,683 were payable to PIMC
at December 31, 1997 and 1996, respectively.

c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement. After the
Partnership has sold or disposed of aircraft representing 50% of the
total aircraft cost, gains from the sale or other disposition of
aircraft are generally allocated first to the General Partner until
such time that the General Partner's capital account is equal to the
amount to be distributed to the General Partner from the proceeds of
such sale or disposition.

d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after limited partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.

e. One engine from the Partnership's aircraft was leased to Viscount
through a joint venture agreement with Polaris Aircraft Income Fund II
from April 1993 through March 1996 at a fair market rental rate. The
Partnership recognized rental revenue on this engine of $46,400 and
$146,000 in 1996 and 1995, respectively.

29
<PAGE>

f. In the event that, immediately prior to the dissolution and termination
of the Partnership, the General Partner shall have a deficit balance in
its tax basis capital account, then the General Partner shall
contribute in cash to the capital of the Partnership an amount which is
equal to such deficit (see Note 10).

10. Partners' Capital

The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the Limited Partners
(see Note 9). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 12, varies from
income or loss calculated for tax purposes.

Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the General Partner and 90% to the Limited
Partners.

The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.

Had all the assets of the Partnership been liquidated at December 31, 1997 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be ($1,573,015) and
$6,888,731 respectively.

11. Income Taxes

Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the accompanying financial statements.

The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1997 and 1996 are as
follows:

Reported Amounts Tax Basis Net Difference
---------------- --------- --------------

1997: Assets $ 7,366,511 $ 18,316,164 $ (10,949,653)
Liabilities 2,050,795 584,108 1,466,687

1996: Assets $ 14,254,000 $ 28,676,857 $ (14,422,857)
Liabilities 3,830,572 766,709 3,063,863

30
<PAGE>

12. Reconciliation of Book Net Income (Loss) to Taxable Net Income (Loss)

The following is a reconciliation between net income (loss) per limited
partnership unit reflected in the financial statements and the information
provided to limited partners for federal income tax purposes:

For the years ended December 31,
--------------------------------

1997 1996 1995
---- ---- ----

Book net income (loss) per limited
partnership unit $ 7.95 $ (4.97) $ 1.77
Adjustments for tax purposes represent
differences between book and tax
revenue and expenses:
Rental and maintenance reserve revenue
recognition 1.34 8.91 6.10
Depreciation (1.18) 6.71 2.85
Gain or loss on sale of aircraft (18.26) -- (6.83)
Capitalized costs -- -- 4.24
Basis in inventory (0.73) (2.86) 0.90
Other revenue and expense items (0.16) (0.84) (2.44)
---------- -------- --------

Taxable net income (loss) per limited
partnership unit $ (11.04) $ 6.95 $ 6.59
========= ======== ========

The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.

For book purposes, rental revenue is generally recorded as it is earned. For tax
purposes, certain temporary differences exist in the recognition of revenue.
Increases in the Partnership's book maintenance reserve liability were
recognized as rental revenue for tax purposes. Disbursements from the
Partnership's book maintenance reserves are capitalized or expensed for tax
purposes, as appropriate.

The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. The Partnership also periodically evaluates the ultimate
recoverability of the carrying values and the economic lives of its aircraft for
book purposes and, accordingly recognized adjustments which increased book
depreciation expense. As a result, the current year tax depreciation expense is
greater than the book depreciation expense. These differences in depreciation
methods result in book to tax differences on the sale of aircraft. In addition,
certain costs were capitalized for tax purposes and expensed for book purposes.

13. Subsequent Event

The Partnership made a cash distribution of $1,349,832 or $8.00 per limited
partnership unit, to limited partners, and $149,981 to the General Partner on
January 15, 1998.

31
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

32
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

Polaris Aircraft Income Fund I (PAIF-I or the Partnership) has no directors or
officers. Polaris Holding Company (PHC) and its subsidiaries, including Polaris
Aircraft Leasing Corporation (PALC) and Polaris Investment Management
Corporation (PIMC), the general partner of the Partnership (collectively
Polaris), restructured their operations and businesses (the Polaris
Restructuring) in 1994. In connection therewith, PIMC entered into a services
agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital
Aviation Services, Inc. (GECAS), a Delaware corporation which is a wholly owned
subsidiary of General Electric Capital Corporation, a New York corporation (GE
Capital). GE Capital has been PHC's parent company since 1986. As subsidiaries
of GE Capital, the Servicer and PIMC are affiliates.

The officers and directors of PIMC are:

Name PIMC Title
------------ ----------------------

Eric M. Dull President; Director
Marc A. Meiches Chief Financial Officer
Richard J. Adams Director
Norman C. T. Liu Vice President; Director
Ray Warman Secretary
Robert W. Dillon Assistant Secretary

Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.

Mr. Dull, 37, assumed the position of President and Director of PIMC effective
January 1, 1997. Mr. Dull previously was a Director of PIMC from March 31, 1995
to July 31, 1995. Mr. Dull holds the position of Executive Vice President - Risk
and Portfolio Management of GECAS, having previously held the positions of
Executive Vice President - Portfolio Management and Senior Vice President -
Underwriting Risk Management of GECAS. Prior to joining GECAS, Mr. Dull held
various positions with Transportation and Industrial Funding Corporation (TIFC).

Mr. Meiches, 45, assumed the position of Chief Financial Officer of PIMC
effective October 9, 1995. Previously, he held the position of Vice President of
PIMC from October 1995 to October 1997. Mr. Meiches presently holds the
positions of Executive Vice President and Chief Financial and Operating Officer
of GECAS. Prior to joining GECAS, Mr. Meiches has been with General Electric
Company (GE) and its subsidiaries since 1978. Since 1992, Mr. Meiches held the
position of Vice President of the General Electric Capital Corporation Audit
Staff. Between 1987 and 1992, Mr. Meiches held Manager of Finance positions for
GE Re-entry Systems, GE Government Communications Systems and the GE Astro-Space
Division.

Mr. Adams, 64, held the position of Senior Vice President - Aircraft Sales and
Leasing of PIMC and PALC from August 1992 until October 1997, having previously
served as Vice President - Aircraft Sales & Leasing, Vice President, North
America, and Vice President - Corporate Aircraft since he joined PALC in August
1986. Effective July 1, 1994, Mr. Adams assumed the position of Director of
PIMC. Mr. Adams presently holds the position of Senior Vice President - Fleet
Advisory Services of GECAS, having previously held the position of Senior Vice
President - Stage II Aircraft.

33
<PAGE>

Mr. Liu, 40, assumed the position of Vice President of PIMC effective May 1,
1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the
position of Executive Vice President - Marketing and Structured Finance of
GECAS, having previously held the position of Executive Vice President - Capital
Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management
positions in corporate Business Development and in Syndications and Leasing for
TIFC. Mr. Liu previously held the position of managing director of Kidder,
Peabody & Co., Incorporated.

Mr. Warman, 49, assumed the position of Secretary of PIMC effective March 23,
1998. Mr. Warman has served as a GECAS Senior Vice President and Associate
General Counsel since March 1996, and for 13 years theretofore was a partner,
with an air-finance and corporate practice of the national law firm of Morgan,
Lewis & Bockius LLP.

Mr. Dillon, 56, held the position of Vice President - Aviation Legal and
Insurance Affairs, from April 1989 to October 1997. Previously, he served as
General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994,
Mr. Dillon assumed the position of Assistant Secretary of PIMC. Mr. Dillon
presently holds the position of Senior Vice President and Managing Counsel of
GECAS.

Certain Legal Proceedings:

On October 27, 1992, a class action complaint entitled Weisl, Jr. et al. v.
Polaris Holding Company, et al. was filed in the Supreme Court of the State of
New York for the County of New York. The complaint sets forth various causes of
action which include allegations against certain or all of the defendants (i)
for alleged fraud in connection with certain public offerings, including that of
the Partnership, on the basis of alleged misrepresentation and alleged omissions
contained in the written offering materials and all presentations allegedly made
to investors; (ii) for alleged negligent misrepresentation in connection with
such offerings; (iii) for alleged breach of fiduciary duties; (iv) for alleged
breach of third party beneficiary contracts; (v) for alleged violations of the
NASD Rules of Fair Practice by certain registered broker dealers; and (vi) for
alleged breach of implied covenants in the customer agreements by certain
registered brokers. The Partnership is not named as a defendant in this action.
The complaint seeks an award of compensatory and other damages and remedies. On
July 20, 1994, the court entered an order dismissing almost all of the claims in
the complaint and amended complaint. Plaintiffs filed a notice of appeal on
September 2, 1994. On April 25, 1996, the Appellate Division for the First
Department affirmed the trial court's order which had dismissed most of
plaintiffs' claims. On September 25, 1997, this action was discontinued with
prejudice by stipulation of the parties.

On or around February 17, 1993, a civil action entitled Einhorn, et al. v.
Polaris Public Income Funds, et al. was filed in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against, among others, Polaris
Investment Management Corporation and Polaris Depositary Company. The
Partnership is not named as a defendant in this action. Plaintiffs seek class
action certification on behalf of a class of investors in Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund
VI who purchased their interests while residing in Florida. Plaintiffs allege
the violation of Section 517.301, Florida Statutes, in connection with the
offering and sale of units in such Polaris Aircraft Income Funds. Among other

<PAGE>

things, plaintiffs assert that the defendants sold interests in such Polaris
Aircraft Income Funds while "omitting and failing to disclose the material facts
questioning the economic efficacy of" such Polaris Aircraft Income Funds.
Plaintiffs seek rescission or damages, in addition to interest, costs, and
attorneys' fees. On April 5, 1993, defendants filed a motion to stay this action
pending the final determination of a prior filed action in the Supreme Court for
the State of New York entitled Weisl v. Polaris Holding Company. On that date,
defendants also filed a motion to dismiss the complaint on the grounds of
failure to attach necessary documents, failure to plead fraud with particularity
and failure to plead reasonable reliance. On April 13, 1993, the court denied
the defendants' motion to stay. On May 7, 1993, the court stayed the action
pending an appeal of the denial of the motion to stay. Defendants subsequently
filed with the Third District Court of Appeal a petition for writ of certiorari
to review the lower court's order denying the motion to stay. On October 19,
1993, the Court of Appeal granted the writ of certiorari, quashed the order, and
remanded the action with instruction to grant the stay.

Moross, et al. v. Polaris Holding Company, et al. was transferred to the
Multi-District Litigation, which has been settled as described below.

On June 8, 1994, a consolidated complaint captioned In re Prudential Securities
Inc. Limited Partnerships Litigation was filed in the United States District
Court for the Southern District of New York, purportedly consolidating cases
that had been transferred from other federal courts by the Judicial Panel on
Multi-District Litigation. The consolidated complaint names as defendants
Prudential entities and various other sponsors of limited partnerships sold by
Prudential, including Polaris Holding Company, one of its former officers,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation
and Polaris Securities Corporation. The Partnership is not named as a defendant
in this action. The complaint alleges that the Prudential defendants created a
scheme for the sale of approximately $8-billion of limited partnership interests
in 700 allegedly high-risk limited partnerships, including the Partnership, to
approximately 350,000 investors by means of false and misleading offering
materials; that the sponsoring organizations (including the Polaris entities)
participated with the Prudential defendants with respect to, among other things,
the partnerships that each sponsored; and that all of the defendants conspired
to engage in a nationwide pattern of fraudulent conduct in the marketing of all
limited partnerships sold by Prudential. The complaint alleges violations of the
federal Racketeer Influenced and Corrupt Organizations Act and the New Jersey
counterpart thereof, fraud, negligent misrepresentation, breach of fiduciary
duty and breach of contract. The complaint seeks rescission, unspecified
compensatory damages, treble damages, disgorgement of profits derived from the
alleged acts, costs and attorneys fees.

On April 22, 1997, the Polaris defendants entered into a settlement agreement
with plaintiffs pursuant to which, among other things, the Polaris defendants
agreed to make a payment to a class of unitholders previously certified by the
Court. On August 1, 1997, the Court approved a class settlement with the Polaris
defendants.

On or about January 12, 1995, a class action complaint entitled Cohen, et al. v.
Kidder Peabody & Company, Inc., et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida, and on March

35
<PAGE>

31, 1995 the case was removed to the United States District Court for the
Southern District of Florida. An amended class action complaint (the "amended
complaint"), which re-named this action Bashein, et al. v. Kidder, Peabody &
Company Inc., et al. was filed on June 13, 1995. The amended complaint names
Kidder Peabody & Company, Inc., General Electric Capital Corporation, General
Electric Financial Services, Inc., and General Electric Company as defendants.
The Partnership is not named as a defendant in this action. The action purports
to be on behalf of "approximately 20,000 persons throughout the United States"
who purchased units in Polaris Aircraft Income Funds III through VI. The amended
complaint sets forth various causes of action purportedly arising in connection
with the public offerings of Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, and Polaris Aircraft Income Fund
VI. Specifically, plaintiffs assert claims for violation of Sections 12(2) and
15 of the Securities Act of 1933, fraud, negligent misrepresentation, breach of
fiduciary duty, breach of third party beneficiary contract, violation of NASD
Rules of Fair Practice, breach of implied covenant, and breach of contract.
Plaintiffs seek compensatory damages, interest, punitive damages, costs and
attorneys' fees, as well as any other relief the court deems just and proper.
Plaintiffs filed a motion for leave to file a second amended complaint, which
was granted on October 3, 1995. On March 18, 1996, plaintiffs moved for class
certification. On the eve of class discovery, April 26, 1996, plaintiffs moved
for a voluntary dismissal of Counts I and II (claims brought pursuant to the
Securities Act of 1933) of the Second Amended Complaint and simultaneously filed
a motion to remand this action to state court for lack of federal jurisdiction.
Plaintiff's motion for voluntary dismissal of the federal securities law claims
and motion for remand were granted on July 10, 1996.

On December 18, 1997, the Court ordered that plaintiffs show good cause why the
action should not be dismissed without prejudice for lack of prosecution. On
January 14, 1998, a hearing was held with respect to the order to show cause,
and the Court determined that the action should be dismissed without prejudice
for lack of prosecution.

On or around April 13, 1995, a class action complaint entitled B & L Industries,
Inc., et al. v. Polaris Holding Company, et al. was filed in the Supreme Court
of the State of New York. The complaint names as defendants Polaris Holding
Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management
Corporation, Polaris Securities Corporation, Peter G. Pfendler, Marc P.
Desautels, General Electric Capital Corporation, General Electric Financial
Services, Inc., General Electric Company, Prudential Securities Inc., and Kidder
Peabody & Company Incorporated. The Partnership is not named as a defendant in
this action. The complaint sets forth various causes of action purportedly
arising out of the public offerings of Polaris Aircraft Income Fund III and
Polaris Aircraft Income Fund IV. Plaintiffs allege claims of fraud, negligent
misrepresentation, breach of fiduciary duty, knowingly inducing or participating
in breach of fiduciary duty, breach of third party beneficiary contract,
violation of NASD Rules of Fair Practice, breach of implied covenant, and unjust
enrichment. Plaintiffs seek compensatory damages, interest, general,
consequential and incidental damages, exemplary and punitive damages,
disgorgement, rescission, costs, attorneys' fees, accountants' and experts'
fees, and other legal and equitable relief as the court deems just and proper.
On August 16, 1996, defendants filed a motion to dismiss plaintiffs' amended
complaint. On October 8, 1997, this action was discontinued with prejudice by
stipulation of the parties.

<PAGE>

Mary C. Scott v. Prudential Securities Inc. et al. was transferred to the
Multi-District Litigation, which has been settled as described above.

On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. The Partnership is not
named as a defendant in this action. Plaintiff alleges claims of tort, breach of
fiduciary duty in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning
the inducement and solicitation of purchases arising out of the public offering
of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages,
attorney's fees, interest, costs and general relief.

On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. The Partnership is not named
as a defendant in this action. Plaintiffs allege claims of tort, breach of
fiduciary duty, in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in
connection with the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.

In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. The Partnership is not named as a
defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary
duty, in tort, contract and quasi-contract, violation of sections of the
Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection
with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs
seek compensatory damages, attorneys' fees, interest, costs and general relief.

In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities, Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities Incorporated and Stephen Derby Gisclair. On or about
January 18, 1996, plaintiff filed a First Supplemental and Amending Petition
adding defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of sections of the Louisiana Blue Sky Law and
violation of the Louisiana Civil Code in connection with the public offering of
Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages,
attorneys' fees, interest, costs and general relief.

On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Fund IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.

37
<PAGE>

In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of section of the Louisiana Blue Sky Law and violation
of the Louisiana Civil Code concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund
III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.

On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
concerning the inducement and solicitation of purchases arising out of the
public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek
compensatory damages, attorneys' fees, interest, costs and general relief.

On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiffs allege claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Funds
III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief.

On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.

On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
The Partnership is not named as a defendant in this action. Plaintiff alleges
claims of tort concerning the inducement and solicitation of purchases arising
out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks
compensatory damages, attorneys' fees, interest, costs and general relief.

The following actions were settled pursuant to a settlement agreement entered
into on June 6, 1997. An additional settlement was entered into on November 19,
1997 with certain plaintiffs who had refused to participate in the first
settlement:

<PAGE>

A complaint entitled Joyce H. McDevitt, et al. v. Polaris Holding Company, et
al., which was filed in the Superior Court of the State of California, County of
Sacramento, on or about October 15, 1996, by individual plaintiffs who purchased
limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint
names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and Does 1-100 as defendants. The
Partnership is not named as a defendant in this action. The complaint alleges
violations of state common law, including fraud, negligent misrepresentation,
breach of fiduciary duty, and violations of the rules of the National
Association of Securities Dealers. The complaint seeks to recover compensatory
damages and punitive damages in an unspecified amount, interest, and rescission
with respect to Polaris Aircraft Income Funds I-VI.

A complaint entitled Mary Grant Tarrer, et al. v. Kidder Peabody & Co. (Kidder
Peabody), et al., which was filed in the Superior Court of the State of
California, County of Sacramento, on or about October 16, 1996, by individual
plaintiffs who purchased limited partnership units in Polaris Aircraft Income
Funds III-VI and other limited partnerships sold by Kidder Peabody. The
complaint names Kidder, Peabody & Co. Incorporated, KP Realty Advisors, Inc.,
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and Does 1-100 as defendants. The
Partnership is not named as a defendant in this action. The complaint alleges
violations of state common law, including fraud, negligent misrepresentation,
breach of fiduciary duty, and violations of the rules of the National
Association of Securities Dealers. The complaint seeks to recover compensatory
damages and punitive damages in an unspecified amount, interest, and rescission
with respect to Polaris Aircraft Income Funds III-VI and all other limited
partnerships alleged to have been sold by Kidder Peabody to the plaintiffs.

A complaint entitled Janet K. Johnson, et al. v. Polaris Holding Company, et
al., which was filed in the Superior Court of the State of California, County of
Sacramento, on or about November 6, 1996, by individual plaintiffs who purchased
limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint
names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and Does 1-100 as defendants. The
Partnership is not named as a defendant in this action. The complaint alleges
violations of state common law, including fraud, negligent misrepresentation,
breach of fiduciary duty, and violations of the rules of the National
Association of Securities Dealers. The complaint seeks to recover compensatory
damages and punitive damages in an unspecified amount, interest, and rescission
with respect to Polaris Aircraft Income Funds I-VI.

A complaint entitled Wayne W. Kuntz, et al. v. Polaris Holding Company, et al.,
which was filed in the Superior Court of the State of California, County of
Sacramento, on or about November 13, 1996, by individual plaintiffs who
purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation,
Polaris Investment Management Corporation, Polaris Securities Corporation,
Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric
Company, General Electric Financial Services, Inc., General Electric Capital
Corporation, General Electric Credit Corporation and Does 1-100 as defendants.
The Partnership is not named as a defendant in this action. The complaint

<PAGE>

alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

A complaint entitled Thelma Abrams, et al. v. Polaris Holding Company, et al.,
which was filed in the Superior Court of the State of California, County of
Sacramento, on or about November 26, 1996, by individual plaintiffs who
purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation,
Polaris Investment Management Corporation, Polaris Securities Corporation,
Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric
Company, General Electric Financial Services, Inc., General Electric Capital
Corporation, General Electric Credit Corporation and Does 1-100 as defendants.
The Partnership is not named as a defendant in this action. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

A complaint entitled Enita Elphick, et al. v. Kidder Peabody & Co.,et al., which
was filed in the Superior Court of the State of California, County of
Sacramento, on or about January 16, 1997, by individual plaintiffs who purchased
limited partnership units in Polaris Aircraft Income Funds III-VI and other
limited partnerships sold by Kidder Peabody. The complaint names Kidder, Peabody
& Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company, Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc., General Electric Company, General Electric Financial Services, Inc.,
General Electric Capital Corporation, General Electric Credit Corporation and
Does 1-100 as defendants. The Partnership is not named as a defendant in this
action. The complaint alleges violations of state common law, including fraud,
negligent misrepresentation, breach of fiduciary duty, and violations of the
rules of the National Association of Securities Dealers. The complaint seeks to
recover compensatory damages and punitive damages in an unspecified amount,
interest, and rescission with respect to Polaris Aircraft Income Funds III-VI
and all other limited partnerships alleged to have been sold by Kidder Peabody
to the plaintiffs.

A complaint entitled George Zicos, et al. v. Polaris Holding Company, et al.,
which was filed in the Superior Court of the State of California, County of
Sacramento, on or about February 14, 1997, by individual plaintiffs who
purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation,
Polaris Investment Management Corporation, Polaris Securities Corporation,
Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric
Company, General Electric Financial Services, Inc., General Electric Capital
Corporation, General Electric Credit Corporation and Does 1-100 as defendants.
The Partnership is not named as a defendant in this action. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

Three complaints which were filed on or about March 21, 1997, in the Superior
Court of the State of California, County of Sacramento, naming as defendants
Kidder, Peabody & Company, Incorporated, Polaris Holding Company, Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris

<PAGE>

Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc., General Electric Company, General Electric Capital Services, General
Electric Capital Corporation, GE Capital Aviation Services and Does 1-100. The
first complaint, entitled Michael J. Ouellette, et al. v. Kidder Peabody & Co.,
et al., was filed by over 50 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I-VI. The
second complaint, entitled Thelma A. Rolph, et al. v. Polaris Holding Company,
et al., was filed by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I-VI. The
third complaint, entitled Carl L. Self, et al. v. Polaris Holding Company, et
al., was filed by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in any of these actions. Each complaint
alleges violations of state common law, including fraud, negligent
misrepresentation and breach of fiduciary duty, and violations of the rules of
the National Association of Securities Dealers, Inc. Each complaint seeks to
recover compensatory damages and punitive damages in an unspecified amount,
interest and rescission with respect to Polaris Aircraft Income Funds I-VI and
all other limited partnerships alleged to have been sold by Kidder Peabody to
the plaintiffs.

A complaint entitled Wilson et al. v. Polaris Holding Company et al., which was
filed in the Superior Court of the State of California for the County of
Sacramento, on October 1, 1996, by over 500 individual plaintiffs who purchased
limited partnership units in one or more of Polaris Aircraft Income Funds I
through VI. The complaint names Polaris Holding Company, Polaris Aircraft
Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc., General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation, GE Capital Aviation Services, Inc. and Does 1-100
as defendants. The Partnership has not been named as a defendant. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs.

A summons and First Amended Complaint entitled Sara J. Bishop, et al. v. Kidder
Peabody & Co., et al., which was filed in the Superior Court of the State of
California, County of Sacramento, on or about April 9, 1996, by over one hundred
individual plaintiffs who purchased limited partnership units in Polaris
Aircraft Income Funds III, IV, V and VI and other limited partnerships sold by
Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP
Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Financial Services, Inc., General
Electric Capital Corporation, General Electric Credit Corporation and Does 1-100
as defendants. The Partnership is not named as a defendant in this action. The
complaint alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and rescission with respect to Polaris Aircraft Income Funds III-VI and all
other limited partnerships alleged to have been sold by Kidder Peabody to the
plaintiffs.

Other Proceedings - Part I, Item 3 discusses certain other actions arising out
of certain public offerings, including that of the Partnership, to which both
the Partnership and its general partner are parties.

<PAGE>

Disclosure pursuant to Section 16, Item 405 of Regulation S-K:

Based solely on its review of the copies of such forms received or written
representations from certain reporting persons that no Forms 3, 4, or 5 were
required for those persons, the Partnership believes that, during 1997 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.

Item 11. Executive Compensation

PAIF-I has no directors or officers. PAIF-I is managed by PIMC, the General
Partner. In connection with management services provided, management and
advisory fees of $16,987 were paid to PIMC in 1997 in addition to a 10% interest
in all cash distributions as described in Note 9 to the financial statements
(Item 8).

Item 12. Security Ownership of Certain Beneficial Owners and Management

a) No person owns of record, or is known by PAIF-I to own beneficially,
more than five percent of any class of voting securities of PAIF-I.

b) The General Partner of PAIF-I owns the equity securities of PAIF-I as
set forth in the following table:

Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
-------- ---------------- -------------------- --------

General Polaris Investment Represents a 10.0% interest of 100%
Partner Management all cash distributions, gross
Interest Corporation income in an amount equal to
9.09% of distributed cash
available from operations, and
a 1% interest in net income or loss

c) There are no arrangements known to PAIF-I, including any pledge by any
person of securities of PAIF-I, the operation of which may at a
subsequent date result in a change in control of PAIF-I.

Item 13. Certain Relationships and Related Transactions

None.

42
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

1. Financial Statements.

The following are included in Part II of this report:
Page No.
--------

Report of Independent Public Accountants 17
Balance Sheets 18
Statements of Operations 19
Statements of Changes in Partners' Capital (Deficit) 20
Statements of Cash Flows 21
Notes to Financial Statements 22

2. Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter ended December 31,
1997.

3. Exhibits required to be filed by Item 601 of Regulation S-K.

27. Financial Data Schedule (in electronic format only).

4. Financial Statement Schedules.

All financial statement schedules are omitted because they are not
applicable, not required or because the required information is included in
the financial statements or notes thereto.

43
<PAGE>

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.

POLARIS AIRCRAFT INCOME FUND I
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner

March 27, 1998 By: /S/ Eric M. Dull
-------------- -------------------------
Date Eric M. Dull, 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.

Signature Title Date
--------- ----- ----

/S/Eric M. Dull President and Director of Polaris March 27, 1998
--------------- Investment Management Corporation, --------------
(Eric M. Dull) General Partner of the Registrant

/S/Marc A. Meiches Chief Financial Officer of Polaris March 27, 1998
------------------ Investment Management Corporation, --------------
(Marc A. Meiches) General Partner of the Registrant

/S/Richard J. Adams Director of Polaris Investment March 27, 1998
------------------- Management Corporation, General --------------
(Richard J. Adams) Partner of the Registrant

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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<ALLOWANCES> 30365
<INVENTORY> 0
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