POLARIS AIRCRAFT INCOME FUND I, 10-K405, 1999-03-29

POLARIS AIRCRAFT INCOME FUND I
10-K405, 1999-03-29
EQUIPMENT RENTAL & LEASING, NEC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

FORM 10-K

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_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998

___ 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. _X_

No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1998.

Documents incorporated by reference: None

This document consists of 40 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, 1998, the only assets remaining were cash, three aircraft
engines on lease and spare parts in inventory (as discussed in Note 8), which
includes one engine .

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 aircraft management services to third
parties, including without limitation AerFi Group plc (formerly GPA Group plc),
a public limited company organized in Ireland, together with its consolidated
subsidiaries (AerFi), and Airplanes Group, together with its subsidiaries (APG),
each of which two groups leases and sells aircraft. Accordingly, in seeking to
re-lease and sell its engines, the Partnership may be in competition with the
General Partner, its affiliates, AerFi, APG, and other third parties to whom
GECAS provides aircraft management services from time to time.

The Partnership leased three JT8D-9A 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, 1998.

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

Royal Aviation JT8D-9A 3 8/2000 None

At year end 1998, there were approximately 12,600 jet aircraft in the world
fleet. Approximately 1,500 aircraft were leased or sold during 1998, an increase
of 14% over 1997. Air travel has grown strongly during the past 28 years, with
the last nineteen years showing better than 5.5% annual growth, and not until
recently has it subsided after what had been a robust period from 1994 to 1997.
This strong period has mainly benefited Stage 3 narrow bodies and younger Stage
2 narrow bodies, many of which have been or are being upgraded with hushkits.
During 1998, the industry saw many alliances taking place. There was more
consolidation in the U.S. Airline Industry via alliances than had been seen in
the previous 20 years since deregulation. Booming traffic demand coupled with
reductions in the price of aviation fuel has resulted in record profits for many
airlines in North America and Europe. However, slower traffic lies ahead, the
cycle has peaked in 1998, as may have airline profits. Manufacturers continue to
produce at high levels compared to what demand will require in the future years.
Asia continues its economic turmoil which has brought about a significant
reduction in traffic growth in that region. This is resulting in a number of new
aircraft order deferrals and cancellations, mainly in the wide body sector, with

2
<PAGE>

over capacity moving from Asia into the other regions around the world. Timing
of when the down cycle ends or how severe it will be is still in question, but
will be closely watched as we move into the next millennium. Several airline
accidents that occurred in 1996, involving older Stage 2 aircraft, continue to
dampen the market for such aircraft.

Item 2. Properties

At December 31, 1998, Polaris Aircraft Income Fund I (the Partnership) owned
three JT8D-9A engines and certain inventoried parts (as discussed in Note 8),
which includes one engine, out of its original portfolio of eleven aircraft.
None of the engines are Stage 3 compliant (see Item 7 "Industry Update -
Aircraft Noise"). The three JT8D-9A engines are leased to Royal. In addition,
the Partnership transferred four aircraft to aircraft inventory during 1992 and
1993. These aircraft were disassembled for sale of their component parts. The
Partnership sold its remaining inventory of aircraft parts from the four
disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two
engines held in inventory was sold to Quantum Aviation Limited during 1998. 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

Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's
1997 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
1997 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

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<PAGE>

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.

Braniff's bankrupt estate made a payment in the amount of $200,000 in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation. Of this amount, $138,462 was allocated to the
Partnership, based on its pro rata share of the total claims, and recognized as
revenue during the quarter ended March 31, 1998. On January 20, 1999, Braniff's
bankrupt estate made an additional payment in the amount of $84,000 in respect
of the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation. Of this amount $58,154 was allocated to the
Partnership based on its pro rata share of the total claims.

Jet Fleet Bankruptcy - As previously reported in the Partnership's 1997 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.

Jet Fleet's bankruptcy proceeding was closed on August 6, 1997, and the
bankruptcy proceeding of Jet Fleet International Airlines, Inc. was closed on
February 10, 1998. Distributions from the bankrupt estate have not been made to
the unsecured creditors, and the Partnership is not likely to receive any
distributions on its proof of claim.

The Partnership had been holding deposits and maintenance reserves pending the
outcome of the Jet Fleet bankruptcy proceedings. Consequently, the Partnership
recognized revenue of $92,610 that had been held as deposits and maintenance
reserves.

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. The trial court has issued a revised
scheduling order setting the trial date for this action for September 7, 1999.

4
<PAGE>

(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 Polaris, 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.

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.

The receiver appointed by the Ontario Court of Justice on behalf of CanAir's
creditors has sold the remaining five Convair 280 aircraft owned by CanAir, as
well as all of CanAir's other assets, including spare parts and accounts
receivable. The sales have been approved by the court, and all sales proceeds
have been paid to the receiver.

The sales proceeds will be distributed to CanAir's creditors according to
priorities under the receivership order and Canada's Personal Property Security
Act (Ontario). The receiver's fees and expenses will be paid ahead of the
secured creditors, with the balance to be distributed to the secured creditors,
including the GECAS Parties. There are currently issues between the GECAS
Parties and one of CanAir's other creditors, Newcourt Credit Group, as to
priority over some of CanAir's assets and the proceeds therefrom, and the
allocation of the proceeds for distribution has yet to be determined by the
court.

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.

5
<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, 1998
------------------ --------------------------------

Limited Partnership Interest: 6,149

General Partnership Interest: 1

c) Dividends:

Distributions of cash from operations commenced in 1987. The
Partnership made cash distributions to Limited Partners of $1,349,832
and $7,466,258, or $8.00 and $44.25 per Limited Partnership unit during
1998 and 1997, respectively.

6
<PAGE>

Item 6. Selected Financial Data
<TABLE>
<CAPTION>

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

1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 1,464,953 $ 3,643,495 $ 2,781,212 $ 3,196,035 $ 3,081,215

Net Income (Loss) 1,304,160 3,188,131 (591,415) 446,293 829,960

Net Income (Loss)
allocated to Limited
Partners 1,053,059 1,341,903 (838,569) 298,425 686,691

Net Income (Loss) per
Limited Partnership Unit 6.24 7.95 (4.97) 1.77 4.07

Cash Distributions per
Limited Partnership
Unit 8.00 44.25 15.00 8.50 8.00

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

Total Assets 7,361,736 7,366,511 14,254,000 16,288,799 16,487,091

Partners' Capital 5,120,063 5,315,716 10,423,428 13,826,993 14,974,251
</TABLE>

7
<PAGE>

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

At December 31, 1998, Polaris Aircraft Income Fund I (the Partnership) owned
three JT8D-9A engines and certain inventoried aircraft parts (as discussed in
Note 8), which includes one engine, out of its original portfolio of eleven
aircraft. None of the engines are Stage 3 compliant (see Item 7 "Industry Update
- - Aircraft Noise"). The three JT8D-9A engines are leased to Royal Aviation. In
addition, the Partnership transferred four aircraft to aircraft inventory during
1992 and 1993. These aircraft were disassembled for sale of their component
parts. The Partnership sold its remaining inventory of aircraft parts from the
four disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two
engines held in inventory was sold to Quantum Aviation Limited during 1998. 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.

Remarketing Update

General - Polaris Investment Management Corporation (the General Partner or
PIMC) evaluates, from time to time, whether the investment objectives of the
Partnership are better served by continuing to hold the Partnership's remaining
portfolio of engines or marketing such engines for sale. This evaluation takes
into account the current and potential earnings of the engines, the conditions
in the markets for lease and sale and future outlook for such markets, and the
tax consequences of selling rather than continuing to lease the engines.

Sale of aircraft inventory - The Partnership sold its remaining inventory of
aircraft parts from the four disassembled aircraft, to Soundair, Inc. The
remaining inventory, with a net carrying value of $-0-, was sold effective
February 1, 1998 for $100,000, less amounts previously received for sales as of
that date. The net purchase price of $98,145 was paid in September 1998.

Sale of engines in inventory - In November 1998, the Partnership sold one of two
engines held in inventory for net proceeds of $290,000 to Quantum Aviation
Limited (Quantum). It was anticipated that the second engine would be sold to
Quantum. However, that sale did not occur, and the Partnership continues to
re-market the remaining JT8D-9A engine. The two engines had a net book value of
$-0-.

Partnership Operations

The Partnership reported net income of $1,304,160 and $3,188,131, or $6.24 and
$7.95 per Limited Partnership unit for the years ended December 31, 1998 and
1997, respectively, compared to a net loss of $591,415, or $4.97 per Limited
Partnership unit for the year ended December 31, 1996. The decrease in operating
results in 1998, as compared to 1997, was primarily the result of gains on the
sale of aircraft of $1,832,673 as well as the receipt, by the Partnership, of a
settlement from Nations Air in the amount of $690,946 in 1997, partially offset
by decreased operating expenses in 1998, primarily due to a decrease in legal
expenses related to Viscount. The improvement in operating results in 1997, as
compared to 1996, was primarily the result of the gains on the sale of aircraft,
the related lower depreciation expense in 1997, and the settlement from Nations
Air.

During 1997 and 1996, the Partnership recorded allowances for credit losses of
$30,365 and $1,055,050, 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

8
<PAGE>

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 were approximately $400,000, related to
declines in the estimated realizable values of the Partnership's aircraft and
aircraft inventory. 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.

The Partnership recorded legal expenses of approximately $414,000 in 1996
related to the Viscount defaults and Chapter 11 bankruptcy filing, which are
included in operating expense in the Partnership's statement of operations.

Liquidity and Cash Distributions

Liquidity - The Partnership receives maintenance reserve payments from its
lessee 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 $1,814,393 as of December 31, 1998.

The Partnership received payments of $162,454, $252,112 and $477,832, in 1998,
1997 and 1996, respectively, from the sale of parts from the four disassembled
aircraft. This includes the sale of remaining inventory of aircraft parts from
the four disassembled aircraft to Soundair in 1998 for $100,000.

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 1998, 1997
and 1996 were $1,349,832, $7,466,258 and $2,530,935, respectively. Cash
distributions per Limited Partnership unit were $8.00, $44.25 and $15.00 during
1998, 1997 and 1996, 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.

Impact of the Year 2000 Issue

The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. As discussed in prior filings with the Securities
and Exchange Commission, the General Partner has engaged GE Capital Aviation
Services, Inc. ("GECAS") to provide certain management services to the
Partnership. Both the General Partner and GECAS are wholly-owned subsidiaries
(either direct or indirect) of General Electric Capital Corporation ("GECC").
All of the Partnership's operational functions are handled either by the General
Partner and GECAS or by third parties (as discussed in the following
paragraphs), and the Partnership has no information systems of its own.

9
<PAGE>

GECC and GECAS have undertaken a global effort to identify and mitigate Year
2000 issues in their information systems, products and services, facilities and
suppliers as well as to assess the extent to which Year 2000 issues will impact
their customers. Each business has a Year 2000 leader who oversees a
multi-functional remediation project team responsible for applying a Six Sigma
quality approach in four phases: (1) define/measure -- identify and inventory
possible sources of Year 2000 issues; (2) analyze -- determine the nature and
extent of Year 2000 issues and develop project plans to address those issues;
(3) improve -- execute project plans and perform a majority of the testing; and
(4) control -- complete testing, continue monitoring readiness and complete
necessary contingency plans. The progress of this program is monitored at each
business, and company-wide reviews with senior management are conducted monthly.
GECC and GECAS management plan to have completed the first three phases of the
program for a substantial majority of mission-critical systems by the end of
1998 and to have nearly all significant information systems, products and
services, facilities and suppliers in the control phase of the program by
mid-1999.

As noted elsewhere, the Partnership has sold all of its aircraft-related assets
other than three aircraft engines on lease and the spare parts inventory, which
includes one engine. Three of the remaining engines are on lease with Royal
Aviation, Inc. and Royal Cargo, Inc., and under the terms of the leases, the
lessees have the obligation to repair and maintain the engines. GECAS is
requesting information from the lessees about the status of their Year 2000
program.

Aside from maintenance and other matters relating to the Partnership's
aircraft-related assets discussed above, the principal third-party vendors to
the Partnership are those providing the Partnership with services such as
accounting, auditing, banking and investor services. GECAS intends to apply the
same standards in determining the Year 2000 capabilities of the Partnership's
third-party vendors as GECAS will apply with respect to its outside vendors
pursuant to its internal Year 2000 program.

The scope of the global Year 2000 effort encompasses many thousands of
applications and computer programs; products and services; facilities and
facilities-related equipment; suppliers; and, customers. The Partnership, like
all business operations, is also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utility, communications,
transportation and other services. In this environment, there will likely be
instances of failure that could cause disruptions in business processes or that
could affect customers' ability to repay amounts owed to the Partnership or
vendors' ability to provide services without interruption. The likelihood and
effects of failures in infrastructure systems, over which the Partnership has no
control, cannot be estimated. However, aside from the impact of any such
possible failures or the possibility of a disruption of the Partnership's
lessees' business caused by Year 2000 failures, the General Partner does not
believe that occurrences of Year 2000 failures will have a material adverse
effect on the financial position, results of operations or liquidity of the
Partnership.

To date, the Partnership has not incurred any Year 2000 expenditures nor does it
expect to incur any material costs in the future. However, the activities
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.

Viscount Restructuring Agreement and Default

10
<PAGE>

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.

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. One of the engines was sold to Quantum in
November 1998.

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 Notes 4 and 8, 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, the Partnership recorded an allowance for credit losses of
$1,055,050 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.

11
<PAGE>

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.

As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the
Partnership had accrued 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. In 1998, the Partnership revised its
estimate of legal costs and reduced the accrual for legal costs by $60,071.

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.

The Partnership had been holding deposits and maintenance reserves pending the
outcome of the Jet Fleet bankruptcy proceedings. Consequently, the Partnership
recognized, during the quarter ended March 31, 1998, revenue of $92,610 that had
been held as deposits and maintenance reserves, which is included in lessee
settlement and other income.

Braniff, Inc. (Braniff) Bankruptcy - As previously reported, 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

12
<PAGE>

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.

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, in order to obtain protection from its creditors
while it attempted to develop a plan of reorganization and compromise with its
creditors. 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 (Polaris) 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 Polaris, 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.

13
<PAGE>

Industry Update

Maintenance of Aging Aircraft - The process of aircraft maintenance, including
engines, 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 three JT8D-9A engines are on lease to a Canadian operator
pursuant to a lease that requires the lessee to maintain such engines during the
lease term in accordance with a maintenance program that satisfies the
requirements of the Canadian airworthiness authority.

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, 1998, 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.

Currently, legislation has been drafted and is under review by the EU to adopt
anti-hushkitting regulations within member states. The legislation seeks to ban
hushkitted aircraft from being added to member states registers after April 1,
1999 and will preclude all operation of hushkitted aircraft within the EU by
April 1, 2002. The effect of this proposal has been to reduce the demand for
hushkitted aircraft within the EU and its neighboring states, including the
former Eastern Block states.

14
<PAGE>

Demand for Aircraft - At year end 1998, there were approximately 12,600 jet
aircraft in the world fleet. Approximately 1,500 aircraft were leased or sold
during 1998, an increase of 14% over 1997. Air travel has grown strongly during
the past 28 years, with the last nineteen years showing better than 5.5% annual
growth, and not until recently has it subsided after what had been a robust
period from 1994 to 1997. This strong period has mainly benefited Stage 3 narrow
bodies and younger Stage 2 narrow bodies, many of which have been or are being
upgraded with hushkits. During 1998, the industry saw many alliances taking
place. There was more consolidation in the U.S. Airline Industry via alliances
than had been seen in the previous 20 years since deregulation. Booming traffic
demand coupled with reductions in the price of aviation fuel has resulted in
record profits for many airlines in North America and Europe. However, slower
traffic lies ahead, the cycle has peaked in 1998, as may have airline profits.
Manufacturers continue to produce at high levels compared to what demand will
require in the future years. Asia continues its economic turmoil which has
brought about a significant reduction in traffic growth in that region. This is
resulting in a number of new aircraft order deferrals and cancellations, mainly
in the wide body sector, with over capacity moving from Asia into the other
regions around the world. Timing of when the down cycle ends or how severe it
will be is still in question, but will be closely watched as we move into the
next millennium.

15
<PAGE>

Item 8. Financial Statements and Supplementary Data

POLARIS AIRCRAFT INCOME FUND I

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997

AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

TOGETHER WITH THE

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Francisco, California,
January 25, 1999

17
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

BALANCE SHEETS

DECEMBER 31, 1998 AND 1997

1998 1997
---- ----
ASSETS:

CASH AND CASH EQUIVALENTS $6,418,582 $6,466,511

RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $30,365 in 1998
and 1997 58,154 --

AIRCRAFT ENGINES, net of accumulated
depreciation of $75,000 in 1998 and
$60,000 in 1997 885,000 900,000
---------- ----------

$7,361,736 $7,366,511
========== ==========

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 10,538 $ 42,286

ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 371,742 446,822

SECURITY DEPOSITS 45,000 95,000

MAINTENANCE RESERVES 1,814,393 1,466,687
---------- ----------

Total Liabilities 2,241,673 2,050,795
---------- ----------

PARTNERS' CAPITAL (DEFICIT):

General Partner 493,422 392,302
Limited Partners, 168,729 units
issued and outstanding 4,626,641 4,923,414
---------- ----------

Total Partners' Capital 5,120,063 5,315,716
---------- ----------

$7,361,736 $7,366,511
========== ==========

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, 1998, 1997 AND 1996

1998 1997 1996
---- ---- ----
REVENUES:
Rent from operating leases $ 360,000 $ 360,000 $ 1,763,400
Interest 303,203 506,984 524,479
Gain on sale of aircraft and equipment -- 1,832,673 --
Gain on sale of aircraft inventory 452,454 252,112 477,832
Lessee settlement and other 349,296 691,726 15,501
----------- ----------- -----------

Total Revenues 1,464,953 3,643,495 2,781,212
----------- ----------- -----------

EXPENSES:
Depreciation 15,000 15,000 1,656,729
Management fees to General Partner 18,000 18,000 63,337
Provision for credit losses -- 30,365 1,055,050
Operating 3,960 215,384 425,146
Administration and other 123,833 176,615 172,365
----------- ----------- -----------

Total Expenses 160,793 455,364 3,372,627
----------- ----------- -----------

NET INCOME (LOSS) $ 1,304,160 $ 3,188,131 $ (591,415)
=========== =========== ===========

NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 251,101 $ 1,846,228 $ 247,154
=========== =========== ===========

NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 1,053,059 $ 1,341,903 $ (838,569)
=========== =========== ===========

NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ 6.24 $ 7.95 $ (4.97)
=========== =========== ===========

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, 1998, 1997 AND 1996

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

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

Net income 251,101 1,053,059 1,304,160

Cash distributions to partners (149,981) (1,349,832) (1,499,813)
------------ ------------ ------------

Balance, December 31, 1998 $ 493,422 $ 4,626,641 $ 5,120,063
============ ============ ============

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, 1998, 1997 AND 1996

1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,304,160 $ 3,188,131 $ (591,415)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 15,000 15,000 1,656,729
Gain on sale of aircraft inventory (452,454) (252,112) (477,832)
Gain on sale of aircraft -- (1,832,673) --
Provision for credit losses -- 30,365 1,055,050
Changes in operating assets and liabilities:
Increase in rent and other receivables (58,154) (11,549) (524,243)
Increase (decrease) in payable to affiliates (31,748) (35,390) 25,919
Increase (decrease) in accounts payable and
accrued liabilities (75,080) (17,781) 366,193
Increase (decrease) in security deposits (50,000) 24,075 (75,000)
Increase in maintenance reserves 347,706 298,379 1,051,654
------------ ------------ ------------

Net cash provided by operating activities 999,430 1,406,445 2,487,055
------------ ------------ ------------

INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 2,620,000 --
Principal payments on notes receivable -- 418,145 105,600
Net proceeds from sale of aircraft inventory 452,454 252,112 477,832
------------ ------------ ------------

Net cash provided by investing activities 452,454 3,290,257 583,432
------------ ------------ ------------

FINANCING ACTIVITIES:
Cash distributions to partners (1,499,813) (8,295,843) (2,812,150)
------------ ------------ ------------

Net cash used in financing activities (1,499,813) (8,295,843) (2,812,150)
------------ ------------ ------------

CHANGES IN CASH AND CASH
EQUIVALENTS (47,929) (3,599,141) 258,337

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 6,466,511 10,065,652 9,807,315
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 6,418,582 $ 6,466,511 $ 10,065,652
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

21
<PAGE>

POLARIS AIRCRAFT INCOME FUND I

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998

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. 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 will be 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
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.

22
<PAGE>

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),
allocated in accordance with the Partnership Agreement, and the number of units
outstanding for the years ended December 31, 1998, 1997 and 1996.

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.

1998 1997
---- ----
Allowance for credit losses,
beginning of year $ (30,365) $(411,450)
Provision for credit losses -- (30,365)
Write-downs -- 411,450
--------- ---------
Allowance for credit losses,
end of year $ (30,365) $ (30,365)
========= =========

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 Notes 9 & 10.

3. Aircraft and Aircraft Engines

At December 31, 1998, the Partnership owned three JT8D-9A engines and certain
inventoried aircraft parts (as discussed in Note 8), which includes one engine,
out of 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.

23
<PAGE>

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
---- ------
1999 $360,000
2000 240,000
--------

Total $600,000
========

The Partnership recognized impairment losses aggregating approximately $400,000,
or $2.37 per Limited Partnership unit, as increased depreciation expense in
1996. 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.

4. Sale of Aircraft and Engines

Sale of Aircraft Inventory - The Partnership sold its remaining inventory of
aircraft parts from the four disassembled aircraft, to Soundair, Inc. The
remaining inventory, with a net carrying value of $-0-, was sold effective
February 1, 1998 for $100,000, less amounts previously received for sales as of
that date. The net purchase price of $98,145 was paid in September, 1998. The
total proceeds received from Soundair during 1998, including the proceeds for
the sale of the remaining inventory, was $162,454.

Sale of Engine in Inventory - In November, 1998, the Partnership sold one of two
engines held in inventory for net proceeds of $290,000 to Quantum Aviation
Limited (Quantum). The Partnership continues to remarket the remaining engine.
The two engines had a net book value of $-0- .

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
installments. 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.

24
<PAGE>

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 incurred the cost of disassembly and received the proceeds from
the sale of such parts, net of overhaul expenses, and commissions paid to
Soundair.

The Partnership sold its remaining inventory of aircraft parts from the four
disassembled aircraft, to Soundair, Inc., in 1998. The remaining inventory, with
a net carrying value of $-0-, was sold effective February 1, 1998 for $100,000,
less amounts previously received for sales as of that date. The net purchase
price of $98,145 was paid in September 1998.

The Partnership received net proceeds from the sale of aircraft inventory of
$452,454, $252,112 and $477,832, during 1998, 1997 and 1996, 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.

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.

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, in order to obtain protection from its creditors while it
attempted to develop a plan of reorganization and compromise with its creditors.
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

25
<PAGE>

at the current lease rate and the Partnership received a security deposit of
$45,000 from Royal Aviation.

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.

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.

Jet Fleet Bankruptcy - As previously reported, in September 1992, Jet Fleet,
former 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. The bankruptcy proceeding of Jet
Fleet Corporation was closed on August 6, 1997, and the bankruptcy proceeding of
Jet Fleet International Airlines, Inc. was closed on February 10, 1998.
Distributions from the bankrupt estate have not been made to the unsecured
creditors, and the Partnership is not likely to receive any distributions on its
Proof of Claim.

The Partnership had been holding deposits and maintenance reserves pending the
outcome of the Jet Fleet bankruptcy proceedings. Consequently, the Partnership
recognized, during the first quarter of 1998, revenue of $92,610 that had been
held as deposits and maintenance reserves, which is included in lessee
settlement and other income.

26
<PAGE>

$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.

27
<PAGE>

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.

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. One of the engines was sold to Quantum in November 1998.

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.

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

28
<PAGE>

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, as discussed in Note
4.

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 1998, 1997 and 1996, the Partnership paid management fees
to PIMC of $16,935, $16,987, and $64,396, respectively. Management fees
payable to PIMC at December 31, 1998 and 1997 were $3,018 and $1,954,
respectively.

b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and its assets. In 1998, 1997
and 1996, $171,930, $201,731, and $203,253 were reimbursed by the
Partnership to PIMC for administrative expenses. Administrative
reimbursements of $7,320 and $37,633 were payable to PIMC at December
31, 1998 and 1997, respectively. Partnership reimbursements to PIMC for
maintenance and remarketing costs of $3,590, $104,066, and $200,032
were paid in 1998, 1997, and 1996, respectively. Maintenance and
remarketing reimbursements of $200 and $2,699 were payable to PIMC at
December 31, 1998 and 1997, 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.

29
<PAGE>

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 in
1996.

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, are 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, 1998 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be ($697,163) and
$5,817,226, 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.

30
<PAGE>

The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1998 and 1997 are as
follows:

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

1998: Assets $ 7,361,736 $ 18,311,389 $(10,949,653)
Liabilities 2,241,673 427,281 1,814,392

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

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,

1998 1997 1996
---- ---- ----

Book net income (loss) per Limited
Partnership unit $ 6.24 $ 7.95 $ (4.97)
Adjustments for tax purposes represent
differences between book and tax revenue
and expenses:
Rental and maintenance reserve revenue
recognition 2.04 1.34 8.91
Depreciation - (1.18) 6.71
Gain or loss on sale of aircraft (0.29) (18.26) -
Basis in inventory - (0.73) (2.86)
Other revenue and expense items - (0.16) (0.84)
------- ------- -------

Taxable net income (loss) per Limited
Partnership unit $ 7.99 $(11.04) $ 6.95
======= ======= =======

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. 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 Events

The Partnership made a cash distribution of $2,488,753 or $14.75 per Limited
Partnership unit, to Limited Partners, and $276,528 to the General Partner on
January 15, 1999.

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, GECAS 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
Barbara Macholl 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, 38, 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, 46, 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.

Ms. Macholl, 45, assumed the position of Director of PIMC effective February 27,
1999. Ms. Macholl presently holds the position of Senior Vice President,
Marketing Finance for GECAS. Prior to joining GECAS, Ms. Macholl has been with
the General Electric Company (GE) and its subsidiaries since 1977. Ms. Macholl
previously held the position of Vice President Finance for CBSI Inc., a wholly
owned subsidiary of the General Electric Company. Ms. Macholl has also held
various financial management positions for the GE Lighting business.

33
<PAGE>

Mr. Liu, 41, 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, 50, 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, 57, 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 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. Plaintiffs
seek rescission or damages, in addition to interest, costs, and attorneys' fees.
On May 7, 1993, the court granted the defendants' motion to stay this action,
and subsequently this suit was dismissed.

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

34
<PAGE>

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.

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

35
<PAGE>

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.

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.

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 $16,935 were paid to PIMC in 1998 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:

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

General Polaris Represents a 10.0% interest of 100%
Partner Investment all cash distributions, gross
Interest Management income in an amount equal to
Corporation 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.

36
<PAGE>

Item 13. Certain Relationships and Related Transactions

None.

37
<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,
1998.

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.

38
<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 24, 1999 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 24, 1999
--------------- Investment Management Corporation, --------------
(Eric M. Dull) General Partner of the Registrant

/S/Marc A. Meiches Chief Financial Officer of Polaris March 24, 1999
------------------ Investment Management Corporation, --------------
(Marc A. Meiches) General Partner of the Registrant

/S/Barbara Macholl Director of Polaris Investment March 24, 1999
------------------- Management Corporation, General --------------
(Barbara Macholl) Partner of the Registrant

/S/Norman C. T. Liu Vice President and Director of March 24, 1999
------------------- Polaris Investment Management --------------
(Norman C. T. Liu) Corporation, General Partner
of the Registrant

<ARTICLE>5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6418582
<SECURITIES> 0
<RECEIVABLES> 58154
<ALLOWANCES> 30365
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 960000
<DEPRECIATION> 75000
<TOTAL-ASSETS> 7361736
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 5120063
<TOTAL-LIABILITY-AND-EQUITY> 7361736
<SALES> 0
<TOTAL-REVENUES> 1464953
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 160793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1304160
<INCOME-TAX> 0
<INCOME-CONTINUING> 1304160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1304160
<EPS-PRIMARY> 6.24
<EPS-DILUTED> 0

</TABLE>