POLARIS AIRCRAFT INCOME FUND II, 10-K, 1994-03-31

POLARIS AIRCRAFT INCOME FUND II
10-K, 1994-03-31
EQUIPMENT RENTAL & LEASING, NEC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1993

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to

Commission File No. 33-2794

POLARIS AIRCRAFT INCOME FUND II

(A California Limited Partnership)
(Exact name of registrant as specified in its charter)

California 94-2985086
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)

Four Embarcadero Center, San Francisco, California 94111-4146
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (415) 362-0333

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 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.

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

No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1993.

Documents incorporated by reference: None

This document consists of 43 pages. <PAGE>

<PAGE>

PART I

Item 1. Business

The principal objectives of Polaris Aircraft Income Fund II (PAIF-II or the
Partnership) are to purchase and lease used commercial jet aircraft in order
to provide quarterly 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-II was organized as
a California limited partnership on June 27, 1984 and will terminate no later
than December 2010.

PAIF-II 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 Polaris Aircraft Leasing Corporation (PALC), Polaris Holding
Company (PHC) and GE Capital Corporation (GE Capital), acquire, lease,
finance and sell aircraft for their own accounts and for existing aircraft-
leasing programs sponsored by them. Accordingly, in seeking to re-lease and
sell its aircraft, the Partnership may be in competition with the general
partner and its affiliates.

A brief description of the aircraft owned by the Partnership is set forth in
Item 2, on page 4. The following table describes the material terms of the
Partnership's leases as of December 31, 1993 to Northwest Territorial
Airways, Ltd. (NWT), Trans World Airlines, Inc. (TWA), Viscount Air Services,
Inc. (Viscount) and Continental Micronesia, Inc. (Continental Micronesia):

<TABLE>
<CAPTION>
Number of Lease
Lessee Aircraft Type Aircraft Expiration Renewal Options (1)
<S> <C> <C> <C> <C> <C>
NWT B737-200C 1 3/94 (2) none
TWA DC-9-30 16 2/98 (3) none
DC-9-40 1 11/98 (3) none
DC-9-30 1 11/98 (3) none

Viscount B737-200 1 11/97 (4) none

Continental
Micronesia B727-200A 3 4/98 (5) none
</TABLE>

(1) The rental rate during the renewal term remains the same as the current
rate unless otherwise noted.

(2) This aircraft was previously on lease to Air Zaire, Inc. (Air Zaire).
The aircraft was re-leased at approximately 45% of the prior rental rate
through February 1993, then extended through December 1993 at 80% of the
previous rental rate, and again extended through March 1994 at the same

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<PAGE>

rental rate. The Partnership is currently remarketing this aircraft for
sale or re-lease.

(3) TWA may specify a lease expiration date for each aircraft up to six
months before the date shown, provided the average date for the 16
aircraft is February 1998, and the average expiration date for the
remaining two aircraft is November 1998.

The TWA leases were modified in 1991. The leases for the 16 aircraft
were extended for an aggregate of 75 months beyond the initial lease
expiration date in November 1991 at approximately 46% of the original
lease rates. The leases for the remaining two aircraft were extended
for 72 months beyond the initial lease expiration dates in November 1992
at approximately 42% of the original lease rates. The Partnership also
agreed to share in the costs of certain Airworthiness Directives (ADs).

If such costs are incurred by TWA, they will be credited against rental
payments, subject to annual limitations with a maximum of $500,000 per
aircraft over the lease terms. On January 31, 1992, TWA commenced
reorganization proceedings under Chapter 11 of the federal Bankruptcy
Code as discussed further in Note 7 to the financial statements of the
Partnerships 1993 Annual Report to the Securities and Exchange
Commission on Form 10-K (Form 10-K) (Item 8). TWA emerged from
bankruptcy protection in November 1993. TWA has affirmed all of the
Partnership's aircraft leases.

(4) This aircraft was previously on lease to SABA Airlines, S.A. (SABA).
The lease rate is approximately 56% of the prior lease rate.

(5) The aircraft currently leased to Continental Micronesia were previously
on lease to Alaska Airlines, Inc. (Alaska). The lease rate is
approximately 55% of the prior lease rate. The lease stipulates that
the Partnership will reimburse costs for cockpit modifications up to
$600,000 per aircraft, C-check labor costs up to $300,000 per aircraft
and the actual cost of C-check parts for two of the aircraft. In
addition, the Partnership will provide financing up to $815,000 for new
image modifications to be repaid with interest over the lease term for
each aircraft.

The Partnership also owns one Boeing 727-200 aircraft formerly leased to
Delta Airlines, Inc. (Delta), which is currently being remarketed for sale or
lease, and six Boeing 727-200 aircraft, formerly leased to Pan American World
Airways, Inc. (Pan Am), which were transferred to aircraft inventory and have
been disassembled for sale of their component parts.

Approximately 700 commercial aircraft are currently available for sale or
lease. The current surplus has negatively affected market lease rates and
fair market values of both new and used aircraft. Current depressed demand
for air travel has limited airline expansion plans, with new aircraft orders
and scheduled delivery being cancelled or substantially deferred. As
profitability has declined, many airlines have opted to downsize, liquidate
assets or file for bankruptcy protection. The Partnership has been forced to
adjust its estimates of the residual values realizable from its aircraft and

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aircraft inventory, which resulted in an increase in depreciation expense in
1993, 1992 and 1991, as discussed in Note 3 to the financial statements of
the Form 10-K (Item 8). A discussion of the current market condition for the
type of aircraft owned by the Partnership follows:

Boeing 727-200 and Boeing 727-200 Advanced The Boeing 727 was the first
tri-jet introduced into commercial service. The Boeing 727 is a short to
medium range jet used for trips of up to 1,500 miles. The Boeing 727-200
aircraft was introduced in 1967 and 299 were built between 1967 and 1972. In
1972, Boeing introduced the Boeing 727-200 Advanced model, a higher gross
weight version with increased fuel capacity. Noise suppression hardware,
commonly known as a "hushkit," has been developed which, when installed on
the aircraft, bring the Boeing 727-200 and the Boeing 727-200 Advanced into
compliance with Federal Aviation Administration (FAA) Stage 3 noise limits.
The cost of the hushkit is approximately $1.75 million for the Boeing 727-200
aircraft and approximately $2.5 million for the Boeing 727-200 Advanced
aircraft. However, while technically feasible, hushkits may not be cost
effective on all aircraft due to the age of some of the aircraft and the time
required to fully amortize the additional investment. Certain ADs applicable
to all models of the Boeing 727 have been issued to prevent fatigue cracks
and control corrosion. Demand for Boeing 727-200 aircraft is currently very
soft due to the general oversupply of narrowbody aircraft.

Boeing 737-200 The Boeing 737-200 aircraft was introduced in 1967 and 950
were delivered from 1967 through 1971. This two-engine, two-pilot aircraft
provides operators with 107 to 120 seats, meeting their requirements for
economical lift in the 1,100 nautical mile range. A domestic company is
selling hushkits that bring Boeing 737-200 aircraft into compliance with
Stage 3 noise restrictions at a cost of approximately $3.0 million per
aircraft. The market for this type of aircraft, as for all Stage 2
narrowbody aircraft, is currently soft.

McDonnell Douglas DC-9-30/40 The McDonnell Douglas DC-9-30/40 is a short to
medium range twin-engine jet that was introduced in 1967. Providing
reliable, inexpensive lift, these aircraft fill thin niche markets, mostly in
the United States. Hushkits are available to bring these aircraft into
compliance with Stage 3 requirements at a cost of approximately $1.6 million
per aircraft. The market for this type of aircraft, as for all Stage 2
narrowbody aircraft, is currently soft.

It is expected that the FAA will continue to propose and adopt ADs similar to
those discussed above for the Boeing 737s and Boeing 727s, which will require
modifications at some point in the future to prevent fatigue cracks and
control corrosion. Likewise demand, and hence value, of the aircraft may be
diminished to the extent that the costs of bringing McDonnell Douglas DC-9
aircraft into compliance with any ADs reduces the economic efficiency of
operating these aircraft.

The general partner believes that the current soft market reflects, in

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addition to the factors cited above, the airline industry's reaction to the
significant expenditures potentially necessary to bring these aircraft into
compliance with certain ADs issued by the FAA relating to aging aircraft,
corrosion prevention and control and structural inspection and modification.

Item 2. Properties

PAIF-II owns one Boeing 727-200 aircraft formerly leased to Delta, one Boeing
737-200 Combi aircraft leased to NWT, 17 McDonnell Douglas DC-9-30 and one
McDonnell Douglas DC-9-40 aircraft leased to TWA, one Boeing 737-200 aircraft
leased to Viscount and three Boeing 727-200 Advanced aircraft leased to
Continental Micronesia. All leases are operating leases. The Partnership
also owns six Boeing 727-200 aircraft, previously leased to Pan Am, which
were transferred to aircraft inventory and have been disassembled for sale
of their component parts.

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The following table describes the Partnership's aircraft portfolio in greater
detail:

Cycles
Year of As of 10/31/93
Aircraft Type Serial Number Manufacture (1)

Boeing 727-200 19455 1968 52,704
Boeing 727-200 19459 1968 (2)
Boeing 727-200 19463 1968 (2)
Boeing 727-200 19466 1968 (2)
Boeing 727-200 19471 1968 (2)
Boeing 727-200 19472 1968 (2)
Boeing 727-200 19473 1968 (2)
Boeing 727-200A 21426 1977 28,474
Boeing 727-200A 21427 1977 27,212
Boeing 727-200A 21947 1979 23,694
Boeing 737-200 19609 1968 61,119
Boeing 737-200C 19743 1969 62,494
McDonnell Douglas DC-9-30 47082 1967 70,218
McDonnell Douglas DC-9-30 47096 1967 70,722
McDonnell Douglas DC-9-30 47135 1968 71,371
McDonnell Douglas DC-9-30 47137 1968 70,681
McDonnell Douglas DC-9-30 47249 1968 76,783
McDonnell Douglas DC-9-30 47251 1968 75,042
McDonnell Douglas DC-9-30 47343 1969 73,960
McDonnell Douglas DC-9-30 47345 1969 72,112
McDonnell Douglas DC-9-30 47411 1969 69,464
McDonnell Douglas DC-9-30 47412 1969 69,498
McDonnell Douglas DC-9-30 47027 1967 75,530
McDonnell Douglas DC-9-30 47107 1968 75,265
McDonnell Douglas DC-9-30 47108 1968 72,136
McDonnell Douglas DC-9-30 47174 1968 72,821
McDonnell Douglas DC-9-30 47324 1969 69,540
McDonnell Douglas DC-9-30 47357 1969 68,853
McDonnell Douglas DC-9-30 47734 1977 39,957
McDonnell Douglas DC-9-40 47617 1975 38,514

(1) Cycle information as of 12/31/93 is not yet available.
(2) Transferred to aircraft inventory and disassembled for sale of component
parts.

Item 3. Legal Proceedings

Air Zaire In 1991 the Partnership commenced legal proceedings in Belgium
and the United States against Air Zaire related to Air Zaire's breach of the
lease of a Boeing 737-200 Convertible Freighter aircraft. The Partnership
has recovered approximately $2,885,000 in damages. Settlement has been
performed in full and the litigation has been terminated.

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<PAGE>

Braniff, Inc. (Braniff) Bankruptcy On July 27, 1992, the Bankruptcy Court
approved a stipulation embodying a settlement among PIMC, on behalf of the
Partnership, the Braniff Creditor committees and Braniff in which it was
agreed that First Security Bank of Utah, National Association, acting as
trustee for the Partnership, would be allowed an administrative claim in the
bankruptcy proceeding of approximately $230,769. The Partnership has
received a check from the Bankruptcy estate in full payment of the allowed
administrative claim, subject, however, to the requirement of the stipulation
that 25% of such proceeds be held by PIMC in a separate, interest-bearing
account pending notification by Braniff that all the allowed administrative
claims have been satisfied. The Partnership recognized 75% of the total
claim in the statement of operations in 1992. As of the end of 1993, the
Partnership had not been advised that the 25% portion of the administrative
claim payment could be released or that any disposition of the Partnership's
general claim in bankruptcy was being considered.

TWA TWA has submitted a plan of reorganization which was approved by the
Bankruptcy Court and became effective November 3, 1993. TWA has affirmed all
of the Partnership's aircraft leases.

Prudential Securities Incorporated (Prudential) Settlement - On October 21,
1993, the U.S. Securities and Exchange Commission announced a settlement with
Prudential of an administrative proceeding alleging violations of the anti-
fraud provisions of the federal securities laws. It is our understanding
that, in connection with this settlement, Prudential has agreed to establish
certain claim resolution procedures and expedited arbitration procedures for
persons with claims against Prudential arising from their purchase of various
limited partnership interests through Prudential. Information regarding the
Prudential settlement and claims procedures may be obtained by calling toll-
free 1-800-774-0700.

Other Proceedings - Item 10 discusses certain actions which have been filed
against the general partner in connection with certain public offerings,
including that of the Partnership. With the exception of Novak, et al v.
Polaris Holding Company, et al, where the registrant is named as a nominal
defendant, the registrant is not a party to these actions.

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

None.

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<PAGE>

PART II

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

a) PAIF-II's limited partnership interests (Units) are not publicly traded.
Currently there is no market for PAIF-II'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, 1993

Limited Partnership Interest: 16,506

General Partnership Interest: 1

c) Dividends:

The Partnership distributed cash to partners on a quarterly basis
beginning July 1986. Cash distributions to limited partners during 1993
and 1992 totalled $9,999,940 and $12,499,925, respectively. Cash
distributions per limited partnership unit were $20.00 and $25.00 in
1993 and 1992, respectively.
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
<S> <C> <C> <C> <C> <C>
1993 1992 1991 1990 1989
Revenues $15,558,866 $17,990,196 $29,673,077 $38,427,157 $39,835,992

Net Income (Loss) 48,114 (1,709,007) (1,596,956) 21,801,650 22,749,940

Net Income (Loss) Allocated to
Limited Partners (952,261) (2,941,785) (3,330,801) 18,364,475 19,146,798

Net Income (Loss) per Limited
Partnership Unit (1.91) (5.88) (6.66) 36.73 38.29

Cash Distributions per Limited
Partnership Unit 20.00 25.00 35.00 64.39 67.52

Total Assets 129,706,547 141,436,928 155,052,097 175,603,651 187,844,252

Partners' Capital 125,396,279 136,459,209 152,057,022 173,098,306 187,068,664
</TABLE>

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

Polaris Aircraft Income Fund II (PAIF-II or the Partnership) owns a portfolio
of 24 used commercial jet aircraft. The portfolio consists of one Boeing
737-200 Combi aircraft leased to Northwest Territorial Airways, Ltd. (NWT),
17 McDonnell Douglas DC-9-30 aircraft and one McDonnell Douglas DC-9-40
aircraft leased to Trans World Airlines, Inc. (TWA), one Boeing 737-200
aircraft leased to Viscount Air Services, Inc. (Viscount) and three Boeing
727-200 Advanced aircraft leased to Continental Micronesia, Inc. (Continental
Micronesia). The Partnership also owns one Boeing 727-200 aircraft,
formerly leased to Delta Airlines, Inc. (Delta) which is being remarketed for
sale or lease, and six Boeing 727-200 aircraft, previously leased to Pan
American World Airways, Inc. (Pan Am), which were transferred to aircraft
inventory and have been disassembled for sale of their component parts.

Partnership Operations

For the year ended December 31, 1993, the Partnership recorded net income of
$48,114, or an allocated net loss of $1.91 per limited partnership unit, a
significant improvement over net losses of $1,709,007 and $1,596,956, or
$5.88 and $6.66 per limited partnership unit, for the years ended December
31, 1992 and 1991 respectively. The losses in 1992 and 1991 resulted
primarily from adjustments to depreciation expense for declines in estimates
of the residual values realizable from the Partnership's aircraft, reflecting
industry-wide declines in demand, as discussed in the industry update
section. Depreciation adjustments for 1992 and 1991 were approximately $5.8
million and $13.7 million, respectively, compared to $300,000 in 1993.

Rental revenues, net of related management fees, continued to decline in 1993
as compared to 1992 and 1991 due to lower lease rates following the lessee
defaults and bankruptcy filings discussed in the following sections. The
Partnership received lower revenue from TWA at the renegotiated lease rates
during 1993 than in 1992 (1992 revenues included two months at the higher
pre-bankruptcy rates, whereas all rent from TWA in 1993 is at the lower
renegotiated rates). No rental revenue was earned on six of the former Pan
Am aircraft during 1993 and 1992, compared to income for nine and one-half
months in 1991. The Partnership's two Boeing 727-200 Advanced aircraft
formerly on lease to Alaska Airlines, Inc. (Alaska) were re-leased in April
and May 1993 to Continental Micronesia at approximately 55% of the prior rate
with Alaska. The Boeing 727-200 formerly leased to Delta from September
1991, was returned to the Partnership in September 1993. Partially
offsetting these rental reductions are 1993 revenues from Viscount and NWT
leases on aircraft that were idle for much of 1992.

During 1993, the Partnership sold one of its hushkit sets at a gain of
approximately $260,000, one used engine which resulted in a loss of
approximately $375,000, and two additional hushkit sets which resulted in a
loss of approximately $398,000. This resulted in a net loss of approximately
$513,000 for 1993. No equipment sales were concluded in 1992 or 1991.

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<PAGE>

The Air Zaire, Inc. (Air Zaire) settlement was finalized during 1993. Of the
approximately $2.9 million that the Partnership received from Air Zaire,
approximately $1.6 million was applied to legal and maintenance expenses
relating to the lessee default and approximately $915,000 was reflected as
other income in the statement of operations of the Form 10-K (Item 8) during
1993. The balance of $400,000 is included in maintenance reserve at December
31, 1993.

The lessee defaults as described below also resulted in higher
administrative, operating and remarketing expenses, particularly in 1992.
During the off-lease period, the Partnership bears the operating costs of all
routine expenses associated with the aircraft, including storage, insurance
and maintenance, in addition to non-routine costs to prepare the aircraft for
re-lease. In 1992, the Partnership incurred substantial operating costs for
maintenance and remarketing of the Boeing 737-200 aircraft prior to its lease
to Viscount, and for costs associated with the disassembly of the former Pan
Am aircraft. In 1993, the Partnership's operating expenses increased from
1992 due primarily to expenses incurred relating to the TWA and Continental
Micronesia cost sharing agreements as discussed later.

Liquidity and Cash Distributions

Liquidity The Partnership continues to receive all the lease payments due
from NWT, TWA, Viscount and Continental Micronesia in a timely manner, and
has received all payments due from Alaska and Delta through their lease
terminations. During 1993, payments of $1,169,483 have been received from
sales of parts from the disassembled aircraft.

Cash reserves of approximately $13.5 million as of December 31, 1993 will be
retained to cover potential costs of maintaining and remarketing the
Partnership's off-lease aircraft in addition to meeting obligations under the
TWA and Continental Micronesia lease agreements. In accordance with the TWA
cost sharing arrangement described later, during 1993, TWA offset expenses
for Airworthiness Directives (ADs) against rental payments due the

Partnership totalling $2.7 million. TWA may offset rent up to an additional
amount of $6.3 million, subject to limitations over the lease terms. In
accordance with the Continental Micronesia cost sharing agreement as
discussed in Note 3 to the financial statements of the Form 10-K (Item 8), in
January 1994, the Partnership reimbursed Continental Micronesia $1.8 million
for cockpit modifications and $742,325 for C-check labor and parts. In
addition, the Partnership financed $2,177,533 for new image modifications to
be repaid with interest over the lease terms of the aircraft.

Cash Distributions The cash distributed to limited partners during 1993
totalled $9,999,940, or $20.00 per limited partnership unit, reduced from
$12,499,925 or $25.00 per unit in 1992. This reduction reflects the lower
cash available for distribution resulting from the lower renegotiated NWT,
Continental Micronesia and Viscount lease rates following the lessee defaults
and the termination of the Alaska leases discussed in later sections. The
timing and amount of future cash distributions will depend on the general
partners' success in remarketing the off-lease aircraft, including the NWT

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Boeing 737-200 Combi aircraft scheduled to return from lease in March 1994,
receipt of rental payments, payments generated from sales of parts of the six
disassembled aircraft and the Partnership's future cash requirements.

Pan Am Lease Modification and Termination

In July 1990, the Partnership and Pan Am signed an amendment to their
original lease agreement which (i) extended the scheduled lease termination
dates; (ii) obligated the Partnership to pay for hushkit modification of the
seven aircraft; (iii) required Pan Am to pay supplemental rent to the
Partnership after each hushkit was installed; and (iv) required the
Partnership to share in the cost of compliance with certain aging aircraft
ADs, up to a cost of $500,000 per aircraft. The Partnership paid $415,444 in
1991 to reimburse Pan Am for work done under such ADs and reported that
amount as aircraft improvements on the accompanying balance sheets. Four of
the seven hushkit modifications were installed in 1990 for a total cost of
$7,082,576, financed by the proceeds of a loan from a related party, as
discussed in Note 9 to the financial statements of the 1993 Form 10-K (Item
8), and cash reserves. The remaining three hushkits were not installed due
to market conditions and Pan Am's bankruptcy filing as described below.

Pan Am commenced reorganization proceedings under Chapter 11 of the federal
Bankruptcy Code in January 1991. Subsequently, the Partnership and Pan Am
agreed to renegotiated lease rates of approximately 75% of the original rates
and Pan Am paid rent through mid-September 1991. Pan Am's reorganization
under Chapter 11 was ultimately unsuccessful, and Pan Am ceased operations in
December 1991. Delta had leased one of the former Pan Am aircraft, including
a hushkit, until September 1993 and the remaining six aircraft have been
disassembled for sale of their component parts as discussed below. Three
hushkits removed from the disassembled aircraft have been sold as discussed
below.

Sale of Equipment

One hushkit set from the aircraft formerly leased to Pan Am was sold in
January 1993 to ALG, Inc. (ALG) for $1,750,000, which resulted in a $259,809
gain. ALG paid cash for a portion of the price and issued an interest-
bearing promissory note for the balance of $1,132,363, which specifies 23
equal payments and a balloon payment due in January 1995. During 1993, the
partnership received all payments due under the note. The note balance as of
December 31, 1993 was $1,022,308.

In September 1993, two additional hushkit sets from the disassembled Pan Am
aircraft were sold to Emery Worldwide Airlines for $1,250,000 each, which
resulted in a $398,192 loss. The decline in sales price from the previous
hushkit sale in January 1993 reflects a softening market for this equipment.

The Partnership sold one used engine, removed from the Partnership's Boeing
737-200 aircraft, to International Aircraft Support, L.P. in July 1993 for
$85,000, which resulted in a $375,012 loss. The engine, along with its

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airframe, was repossessed from the former lessee, SABA Airlines, S.A. (SABA),
in February 1992. At the time of its default, SABA had not maintained the
aircraft as required under the lease agreement, rendering the engine
inoperable. The Partnership determined the costs to repair the engine were
excessive in comparison to amounts recoverable from sale or lease. As a
result, the engine was sold for its component parts.

Disassembly of Aircraft

In an attempt to maximize the economic return from the remaining six aircraft
formerly leased to Pan Am, the Partnership entered into an agreement with
Soundair, Inc. (Soundair) on October 31, 1992, for the disassembly and sale
of certain of the Partnership's aircraft. It is anticipated that the
disassembly and sales process will take at least three years. The
Partnership has borne the cost of disassembly and will receive the proceeds
from the sale of such parts net of overhaul expenses, if necessary, and
commissions paid to Soundair. Disassembly of the six aircraft is complete.
Through December 31, 1993, the Partnership paid approximately $571,000 for
aircraft disassembly costs, of which $463,500 was reflected in the book value
of aircraft inventory in 1992. The Partnership has received net proceeds
from the sale of aircraft inventory of $1,201,943 through December 31, 1993.

These aircraft have been recorded as aircraft inventory in the amount of $3.0
million in the balance sheet of the Form 10-K (Item 8) as of December 31,
1992. During 1993, the Partnership recorded downward adjustments of
$300,000, which are included in depreciation expense in the statement of
operations of the Form 10-K (Item 8), to reflect the current estimate of net
realizable aircraft inventory value.

TWA Lease Modification

During 1991, TWA defaulted under its leases with the Partnership when it
failed to pay its March lease payments. On March 28, 1991, TWA and the
Partnership entered into lease amendments which specified (i) renegotiated
lease rates equal to approximately 70% of the original rates; (ii) payment of
the March and April lease payments at the renegotiated rates on March 27,
1991; and (iii) an advance lump sum payment on March 29, 1991 representing
the present value of the remaining lease payments due through the end of the
leases at the renegotiated rate. The Partnership recorded the lump sum
payment from TWA as deferred income, and recognized the rental revenue as it
was earned over the lease term. The Partnership also recognized interest
expense equal to the difference between the cash received and the rental
revenue earned over the lease term. The 16 leases that expired in November
1991 were extended for three months at 57% of the original rates.

In December 1991, the leases for all 18 aircraft were amended further, with
extensions into various dates in 1998. The renegotiated lease rates
represent approximately 46% of the initial lease rates. In addition, the
Partnership agreed to share in the costs of certain ADs. If such costs are
incurred by TWA, they will be credited against rentals due to the

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Partnership, subject to annual limitations with a maximum of $500,000 per
aircraft over the term of the leases.

In January 1992, TWA commenced reorganization proceedings under Chapter 11 of
the federal Bankruptcy Code. TWA made all payments due under the leases.

TWA received court approval to emerge from bankruptcy protection effective
November 3, 1993. TWA notified the partnership of its intention to affirm
its leases for all 18 DC-9 aircraft. In addition, while the court had
originally granted TWA an additional 90-day period subsequent to its
emergence from bankruptcy during which it could exercise its right to reject
the Partnerships's leases, TWA has elected to waive that right with respect
to the Partnership's aircraft. As previously agreed with TWA, August and
September 1993 rentals were drawn from a security deposit held by the
Partnership, which had been posted for this purpose by TWA prior to its
bankruptcy filing.

In accordance with the cost sharing arrangement described above, in 1993, TWA
submitted to the Partnership invoices for expenses paid to date by TWA to
meet the ADs. These expenses, which are included in operating expense in the
statement of operations of the Partnership's 1993 Form 10-K (Item 8), were
offset against rental payments totalling $2.7 million that were due the
Partnership in 1993. TWA may offset rental payments up to an additional
amount of $6.3 million, subject to limitations over the lease terms.

Refund of Hushkit Deposits

On August 30, 1990, the Partnership agreed to acquire up to seven hushkits
for Boeing 727 aircraft from Federal Express Corporation (Federal Express),
four of which were purchased and installed on the Pan Am aircraft. Because
certain conditions related to the purchase of the remaining three hushkits
were not satisfied, the Partnership requested return of its deposit of
$270,000 plus interest as provided in the purchase documents. Federal
Express refused the Partnership's request, pending resolution with the
Partnership of certain allegedly disputed contractual issues. On April 16,
1992, the general partner, on behalf of the Partnership, commenced legal
action to require Federal Express to refund the remaining balance of the
deposit, with interest, plus legal fees and other damages, and Federal
Express filed a cross-complaint against the Partnership alleging breach of
contract. A settlement was reached and repayment of the deposit, with
interest, was received by the Partnership in November 1992.

Claims Related to Lessee Defaults

Braniff, Inc. (Braniff) Bankruptcy Claim In July 1992, the Bankruptcy Court
approved a stipulation embodying a settlement among Polaris Investment
Management Corporation (PIMC), on behalf of the Partnership, the Braniff
Creditor committees and Braniff in which it was agreed that First Security
Bank of Utah, National Association, acting as trustee for the Partnership,
would be allowed an administrative claim in the bankruptcy proceeding of

13
<PAGE>

<PAGE>

approximately $230,769. In 1992, the Partnership received full payment of
the claim, subject, however, to the requirement that 25% of total proceeds be
held by PIMC in a separate, interest-bearing account pending notification by
Braniff that all of the allowed administrative claims have been satisfied.
The Partnership recognized 75% of the total claim in the statement of
operations in 1992. As of the end of 1993, the Partnership had not been
advised that the 25% portion of the administrative claim payment could be
released or that any disposition of the Partnership's general claim in
bankruptcy was being considered.

Air Zaire As a result of legal action commenced by the general partner, a
final settlement was reached with Air Zaire. Air Zaire paid to the
Partnership approximately $2,885,000, of which approximately $1,570,000 has
been applied to legal and maintenance expenses related to the default. The
final expenses were paid in 1993 and approximately $915,000 was reflected as
other income in the 1993 statement of operations. The remaining amount of
$400,000 is included in maintenance reserves in the December 31, 1993 balance
sheet.

SABA SABA defaulted under its lease and, in February 1992, the aircraft was
repossessed and returned to the United States by the Partnership, although
not in compliance with the return conditions specified under the lease.

Reconciliation of Book Loss to Taxable Loss

The following is a reconciliation between net loss per limited partnership
unit reflected in the financial statements of Form 10-K (Item 8) and the
information provided to limited partners for federal income tax purposes:
<TABLE>
<S> <C>
1993 book net loss per limited partnership unit $ (1.91)

Adjustments for tax purposes:
Reversal of book rental income previously recognized for tax (3.58)
Management fee recognized for tax purposes and deferred for

book purposes (.06)
Recognition of income from increase in maintenance reserves .40
Tax depreciation in excess of book depreciation (5.39)
Tax gain on sale in excess of book gain on sale 1.49
Net tax loss on sale of inventory and writedown of inventory (19.17)
Items capitalized for tax and expensed for book 5.35
Book expenses deferred for tax 1.47

1993 taxable loss per limited partnership unit $ (21.40)
</TABLE>
The difference between net loss for book purposes and net loss for tax
purposes result from timing differences of certain income and deductions.
Rentals paid by lessees in advance are deferred as unearned revenue for book
purposes but must be recognized as income, when received, for tax purposes.
When deferred income is recognized for book purposes, such income is reversed
for tax purposes. Certain increases in the Partnership's book maintenance
reserve liability were recognized as income for tax purposes.

14
<PAGE>

<PAGE>

The Partnership computes depreciation using the straight-line method for
financial reporting purposes and an accelerated method, switching to the
straight-line method in later years, for tax purposes. This difference
resulted in a larger tax gain on sale of aircraft than the book gain. The
current year tax depreciation expense is greater than the book depreciation
expense. Certain aircraft have been disassembled and held in inventory until
their component parts can be sold. A net tax loss resulted from the sale of
these component parts along with a writedown to tax basis inventory value.
For book purposes, such assets are reflected at estimated net realizable
value. Finally, certain costs were capitalized for tax purposes and expensed
for book purposes.

Industry Update

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

Since 1988, the FAA, working with the aircraft manufacturers and operators,
has issued a series of ADs which mandate that operators conduct more
intensive inspections, primarily of the aircraft fuselages. The results of
these mandatory inspections may uncover the need for repairs or structural
modifications that may not have been required under previously mandated
maintenance programs.

In addition, an AD adopted in 1990 requires replacement or modification of
certain structural items on a specific timetable. These structural items
were formerly subject to periodic inspection, with replacement when
necessary. The FAA estimates the cost of compliance with this AD to be
approximately $1.0 million and $0.9 million per Boeing 727 and Boeing 737
aircraft, respectively, if none of the required work had been done
previously. The FAA also issued several ADs in 1993 updating inspection and
modification requirements for Boeing 737 aircraft. The FAA estimates the
cost of these requirements to be approximately $90,000 per aircraft. In
general, the new maintenance requirements must be completed by the later of
March 1994, or 75,000 and 60,000 cycles for each Boeing 737 and 727,
respectively.

In December 1990, the FAA adopted another AD intended to mitigate corrosion
of structural components, which would require repeated inspections from 5
years of age throughout the life of an aircraft, with replacement of corroded
components as needed. Integration of the new inspections into each aircraft
operator's maintenance program was required by December 31, 1991 on Boeing
aircraft.

The Partnership's existing leases require the lessees to maintain the
Partnership's aircraft in accordance with an FAA-approved maintenance program

15
<PAGE>

<PAGE>

during the lease term. At the end of the leases, each lessee is generally
required to return the aircraft in airworthy condition including compliance
with all ADs for which action is mandated by the FAA during the lease term,
except for certain instances. In negotiating subsequent leases, market
conditions generally require that the Partnership bear some or all of the
costs of compliance with future ADs or ADs that have been issued, but which
did not require action during the previous lease term. The ultimate effect
on the Partnership of compliance with the FAA maintenance standards is not
determinable at this time and will depend on a variety of factors, including
the state of the commercial aircraft market, the timing of the issuance of
ADs, and the status of compliance therewith at the expiration of the current
leases.

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, with few exceptions, no longer allowed to operate from civil airports in
the United States. Stage 2 aircraft meet current FAA requirements. Stage 3
aircraft are the most quiet and Stage 3 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 current U.S. fleet is comprised of
approximately 51% Stage 3 aircraft and 49% Stage 2 aircraft. 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 (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
compliance dates noted above).

Carryforward credits will be awarded to operators for early
additions of Stage 3 aircraft to their fleets. These credits may
be used to reduce either the number of Stage 2 aircraft it must
phase-out or the number of Stage 3 aircraft it must phase-in by the
next interim compliance date. The credits must be used by that
operator, however, and cannot be transferred or sold to another
operator.

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 Economic
Community (EEC) adopted a non-addition rule in 1989, which directed each

16
<PAGE>

<PAGE>

member country to pass the necessary legislation to prohibit airlines from
adding Stage 2 aircraft to their fleets after November 1, 1990. The rule has
specific exceptions for leased aircraft and does allow the continued use of
Stage 2 aircraft which were in operation before November 1, 1990, although
adoption of rules requiring the eventual phase-out of Stage 2 aircraft is
anticipated.

Except for one 727-200 with a hushkit, the Partnership's entire fleet
consists of Stage 2 aircraft. Hushkit modifications, which allow Stage 2
aircraft to meet Stage 3 requirements, are currently available for the
Partnership's aircraft. However, while technically feasible, hushkits may not
be cost effective on all models due to the age of some of the aircraft and
the time required to fully amortize the additional investment. The general
partner will evaluate, as appropriate, the potential benefits of hushkitting
some or all of the Partnership's aircraft. It is unlikely, however, that the

Partnership will incur such costs unless they can be recovered through a
lease.

Implementation of the Stage 3 standards have adversely affected the value of
Stage 2 aircraft, as these aircraft will require eventual modification to be
operated in the U.S. or other countries with Stage 3 standards.

Demand for Aircraft Approximately 700 commercial aircraft are currently
available for sale or lease. The current surplus has negatively affected
market lease rates and fair market values of both new and used aircraft.
Current depressed demand for air travel has limited airline expansion plans,
with new aircraft orders and scheduled delivery being cancelled or
substantially deferred. As profitability has declined, many airlines have
opted to downsize, liquidate assets, or file for bankruptcy protection.

Effects on the Partnership's Aircraft The Partnership has made downward
adjustments to its estimates of aircraft value for certain of its on-lease
aircraft. To ensure that the carrying value of each asset equals its
estimated residual value at the end of its expected holding period, where
appropriate the Partnership has increased depreciation expense. The

Partnership also made downward adjustments to the carrying values of certain
of its off-lease aircraft and aircraft inventory where depreciated cost
exceeded the estimated net realizable value. During 1993, 1992 and 1991, the
Partnership recognized downward adjustments totalling $300,000, $5.8 million
and $13.7 million, respectively, for certain of its aircraft and aircraft
inventory in the case of the 1993 adjustment. These adjustments are included
in depreciation expense in the statement of operations.

The Partnership's leases expire between March 1994 and November 1998.
Current market studies indicate that the Partnership's Boeing and McDonnell
Douglas aircraft continue to be adversely affected by industry events.
Therefore, the Partnership will evaluate each aircraft as it comes off lease
to determine whether a re-lease or a sale at the then current market rates
would be most beneficial for unit holders.

Other Event

17
<PAGE>

<PAGE>

Effective October 18, 1993, James F. Walsh resigned as Senior Vice President
and Chief Financial Officer of Polaris Investment Management Corporation to
assume new responsibilities at GE Capital Corporation. Bobbe V. Sabella has
assumed the position of Vice President and Chief Financial Officer. Ms.
Sabella has served the general partner in various capacities since September
1986, most recently as Vice President-Finance of Polaris Investment
Management Corporation.

18
<PAGE>

<PAGE>

Item 8. Financial Statements and Supplementary Data

POLARIS AIRCRAFT INCOME FUND II

(A California Limited Partnership)

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1993 AND 1992

TOGETHER WITH

AUDITORS' REPORT

19
<PAGE>

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Polaris Aircraft Income Fund II:

We have audited the accompanying balance sheets of Polaris Aircraft Income
Fund II (a California Limited Partnership) as of December 31, 1993 and 1992,
and the related statements of operations, changes in partners' capital
(deficit) and cash flows for each of the three years ended December 31, 1993.
These financial statements and the schedules referred to below are the
responsibility of the general partner. Our responsibility is to express an
opinion on these financial statements and schedules 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
II as of December 31, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years ended December 31, 1993, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
the financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN & CO.

San Francisco, California,
January 21, 1994 (except with respect
to the matters discussed in Note 13 as
to which the date is January 28, 1994)

20
<PAGE>

<PAGE>

<TABLE>
POLARIS AIRCRAFT INCOME FUND II
(A California Limited Partnership)

BALANCE SHEETS

DECEMBER 31, 1993 AND 1992

<CAPTION>
1993 1992
ASSETS:
<S> <C> <C>
CASH $ 97,473 $ 4,806

SHORT-TERM INVESTMENTS, at cost which approximates market value 22,347,610 19,841,993

Total Cash and Short-Term Investments 22,445,083 19,846,799

RENT AND OTHER RECEIVABLES 37,733 377,312

NOTE RECEIVABLE (Note 4) 1,022,308 -

AIRCRAFT at cost, net of accumulated depreciation of $77,031,695 in
1993 and $68,378,317 in 1992 104,927,592 118,790,833

AIRCRAFT INVENTORY (Note 6) 1,244,061 2,385,794

OTHER ASSETS, net of accumulated amortization of $459,928 in 1993
and 1992 29,770 36,190
$ 129,706,547 $ 141,436,928

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 52,274 $ 1,194,124

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2,556,325 61,404

LESSEE SECURITY DEPOSITS 189,564 186,320

MAINTENANCE RESERVES 869,363 1,084,746

DEFERRED INCOME 642,742 2,451,125

Total Liabilities 4,310,268 4,977,719

PARTNERS' CAPITAL (DEFICIT):
General Partner (948,683) (837,954)
Limited Partners, 499,997 units issued and outstanding 126,344,962 137,297,163

Total Partners' Capital 125,396,279 136,459,209

$ 129,706,547 $ 141,436,928

</TABLE>
[FN]
The accompanying notes are an integral part of these statements.
21 <PAGE>

POLARIS AIRCRAFT INCOME FUND II
(A California Limited Partnership)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991

<S> <C> <C> <C>
1993 1992 1991
REVENUES:
Rent from operating leases $ 14,397,683 $ 17,170,434 $ 28,990,704
Net loss on sale of equipment (513,395) - -
Interest 736,719 615,178 682,373
Other income 937,859 204,584 -
Total Revenues 15,558,866 17,990,196 29,673,077

EXPENSES:
Depreciation and amortization 11,114,846 16,556,938 28,368,967
Management and advisory fees 685,950 805,411 1,388,930
Operating 3,445,325 2,001,445 674,259
Interest - 63,057 452,837
Administration and other 264,631 272,352 385,040
Total Expenses 15,510,752 19,699,203 31,270,033

NET INCOME (LOSS) $ 48,114 $ (1,709,007) $ (1,596,956)

NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 1,000,375 $ 1,232,778 $ 1,733,845

NET LOSS ALLOCATED TO LIMITED PARTNERS $ (952,261) $ (2,941,785) $ (3,330,801)

NET LOSS PER LIMITED PARTNERSHIP UNIT $ (1.91 ) $ (5.88) $ (6.66)

</TABLE>
[FN]
The accompanying notes are an integral part of these statements.
22 <PAGE>

POLARIS AIRCRAFT INCOME FUND II
(A California Limited Partnership)

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991

<CAPTION>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balance, December 31, 1990 $ (471,263) $ 173,569,569 $ 173,098,306

Net income (loss) 1,733,845 (3,330,801) (1,596,956)

Cash distributions to partners (1,944,433) (17,499,895) (19,444,328)

Balance, December 31, 1991 (681,851) 152,738,873 152,057,022

Net income (loss) 1,232,778 (2,941,785) (1,709,007)

Cash distributions to partners (1,388,881) (12,499,925) (13,888,806)

Balance, December 31, 1992 (837,954) 137,297,163 136,459,209

Net income (loss) 1,000,375 (952,261) 48,114

Cash distributions to partners (1,111,104) (9,999,940) (11,111,044)

Balance, December 31, 1993 $ (948,683) $ 126,344,962 $ 125,396,279

</TABLE>
[FN]
The accompanying notes are an integral part of these statements.
23 <PAGE>

<PAGE>
<TABLE> POLARIS AIRCRAFT INCOME FUND II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 48,114 $ (1,709,007) $ (1,596,956)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 11,114,846 16,556,938 28,368,967
Net loss on sale of equipment 513,395 - -
Changes in operating assets and liabilities:

Decrease (increase) in rent and other receivables 339,579 482,421 (246,049)
Decrease in aircraft inventory - 463,500 -
Decrease (increase) in other assets 6,420 3,824 (28,210)
Increase (decrease) in payable to
affiliates (1,141,850) 900,698 44,692
Increase (decrease) in accounts payable and accrued
liabilities 694,921 (253,132) 82,924
Increase in lessee security deposits 3,244 102,481 83,839
Increase (decrease) in maintenance
reserves (215,383) 533,715 427,395
Increase (decrease) in deferred income (1,808,383) 699,955 1,496,585

Net cash provided by operating activities 9,554,903 17,781,393 28,633,187

INVESTING ACTIVITIES:
Improvements to aircraft - - (427,401)
Net proceeds from sale of aircraft equipment 2,585,000 - -
Principal payments on note receivable 727,692 - -
Net proceeds from sale of aircraft inventory 1,169,483 32,460 -
Inventory disassembly costs (327,750) (135,750) -
Hushkit deposits - 270,000 -
Lease acquisition fees - (1,073) (45,592)

Net cash provided by (used in) investing activities 4,154,425 165,637 (472,993)

FINANCING ACTIVITIES:
Principal payments on note payable - - (1,250,000)
Cash distributions to partners (11,111,044) (13,888,806) (19,444,328)

Net cash used in financing activities (11,111,044) (13,888,806) (20,694,328)

CHANGES IN CASH AND SHORT-TERM INVESTMENTS 2,598,284 4,058,224 7,465,866

CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 19,846,799 15,788,575 8,322,709

CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 22,445,083 $ 19,846,799 $ 15,788,575
</TABLE>
[FN]
The accompanying notes are an integral part of these statements.
24 <PAGE>

<PAGE>

POLARIS AIRCRAFT INCOME FUND II
(A California Limited Partnership)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1993

1. Accounting Principles and Policies

Accounting Method Polaris Aircraft Income Fund II (PAIF-II or the
Partnership), a California Limited Partnership, maintains its accounting
records, prepares financial statements and files its tax returns on the
accrual basis of accounting.

Aircraft and Depreciation The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed
using the straight-line method over the estimated economic life of the
aircraft which was originally estimated to be 30 years from the date of
manufacture. Depreciation in the year of acquisition is calculated based
upon the number of days that the aircraft are in service.

The Partnership periodically reviews the estimated realizability of the
residual values at the end of each aircraft's economic life. For any
downward adjustment in estimated residual, or change in the estimated
remaining economic life, the depreciation expense over the remaining life of
the aircraft is increased. If the expected net income generated from the
lease (rental revenue, net of management fees, less adjusted depreciation and
an allocation of estimated administrative expense) results in a net loss,
that loss will be recognized currently. Off-lease aircraft are carried at
the lower of depreciated cost or estimated net realizable value. A further
adjustment is made for those aircraft, if any, that require substantial
maintenance work.

Capitalized Costs Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft
are capitalized and amortized using the straight-line method over the
appropriate period. These costs are also subject to the periodic evaluation
discussed above.

Aircraft Inventory Aircraft held in inventory for sale are reflected at the
lower of depreciated cost or estimated net realizable value. Proceeds from
sales are applied against inventory until book value is fully recovered.

Operating Leases The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases.

Other Assets Lease acquisition costs are capitalized as other assets and
amortized using the straight-line method over the term of the lease.

25
<PAGE>

<PAGE>

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

Net Income (Loss) Per Limited Partnership Unit Net income (loss) per
limited partnership unit is based on the limited partners' share of net
income or loss and the number of units outstanding for the years ended
December 31, 1993, 1992 and 1991.

Short-Term Investments The Partnership classifies all liquid investments
with original maturities of three months or less as short-term investments.

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.

Reclassification Certain 1992 balances have been reclassified to conform to
the 1993 presentation.

2. Organization and the Partnership

The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December
2010. Upon organization, both the general partner and the initial limited
partner contributed $500. The Partnership recognized no profits or losses
during the periods ended December 31, 1985 and 1984. The offering of limited
partnership units terminated on December 31, 1986, at which time the
Partnership had sold 499,997 units of $500, representing $249,998,500. All
partners were admitted to the Partnership on or before December 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. GE
Capital Corporation (GE Capital), an affiliate of General Electric Company,
owns 100% of PHC's outstanding common stock. Allocations to affiliates are
described in Note 11.

3. Aircraft

The Partnership owns a portfolio of 24 used commercial jet aircraft, which
were purchased and leased as discussed below. All aircraft acquired from an
affiliate were purchased within one year of the affiliate's acquisition at
the affiliate's original price paid. The aircraft leases are net leases,
requiring the lessees to pay all operating expenses associated with the
aircraft during the lease term including Airworthiness Directives (ADs) which
have been or may be issued by the Federal Aviation Administration (FAA) and
require compliance during the lease term. The leases generally state a
minimum acceptable return condition for which the lessee is liable under the
terms of the lease agreement. Certain leases also provide that if the

26
<PAGE>

<PAGE>

aircraft are returned at a level above the minimum acceptable level, the
Partnership must reimburse the lessee for the related excess, subject to
certain limitations. The related liability to these lessees, if any, is
currently inestimable and therefore is not reflected in the financial
statements.

One Boeing 737-200 This aircraft was acquired for $6,766,166 in 1986 and
leased to various lessees until 1989, when Braniff, Inc. (Braniff) defaulted
on its lease. The aircraft remained off lease until March 1991. The
aircraft was then leased to SABA Airlines, S.A. (SABA) at approximately 70%
of the prior rate until February 1992, when the aircraft was repossessed by
the Partnership after SABA defaulted under its lease. In November 1992, the
aircraft was re-leased for five years to Viscount Air Services, Inc.
(Viscount) at approximately 56% of the prior lease rate. Viscount, a charter
carrier based in Arizona, has the option to purchase the aircraft for the
then fair market value at the end of the lease term. An engine for the
aircraft has been leased from an affiliate (Note 11) following the return of
an inoperable engine from SABA as discussed in Note 4.

Seven Boeing 727-200 These aircraft were acquired for $38,986,145 during
1986 and leased to Pan American World Airways, Inc. (Pan Am) until 1991, when
the lease was terminated due to Pan Am's bankruptcy filing, as discussed in
Note 5. The Partnership has transferred six of these aircraft to aircraft
inventory and has disassembled them for sale of the component parts (Note 6).
One hushkit set from the aircraft was sold in January 1993 and two additional
hushkit sets from the aircraft were sold in September 1993 (Note 4).

The remaining aircraft was leased to Delta Airlines, Inc. (Delta) in
September 1991. Delta returned the aircraft at the end of September 1993,
following several month-by-month lease extensions since the original lease
termination date in April 1993. The aircraft is currently being remarketed
for sale or re-lease.

One Boeing 737-200 Combi This aircraft was acquired for $7,582,572 in 1986
and leased to Presidential Airways, Inc. (Presidential), until Presidential's
default in 1989. The aircraft remained off lease until June 1990, when it
was leased to Air Zaire, Inc. (Air Zaire). The lease required that Air Zaire
maintain the aircraft in accordance with FAA requirements. However, Air Zaire
was unable to obtain FAA approval for its proposed maintenance program, thus
prompting the early termination of the lease in 1991. Air Zaire provided a
$610,000 letter of credit, the proceeds of which the Partnership applied to
outstanding rent, reserves and interest due in 1991. Air Zaire paid
additional amounts in 1993 and 1992 as a result of legal action commenced by
the Partnership (Note 10).

In August 1992, the Partnership leased the aircraft to Northwest Territorial
Airways, Ltd. (NWT) through February 1993 at approximately 45% of the prior
rental rate. The lease was then extended through December 1993 at 80% of the
previous rental rate and again through March 1994 at the same rental rate.
An engine for the aircraft has been leased from an affiliate (Note 11). The
Partnership is currently remarketing this aircraft for sale or re-lease.

27
<PAGE>

<PAGE>

17 McDonnell Douglas DC-9-30 and One McDonnell Douglas DC-9-40 These
aircraft were acquired for $122,222,040 during 1986 and leased to Ozark Air
Lines, Inc. (Ozark). In 1987, Trans World Airlines, Inc. (TWA) merged with
Ozark and assumed the leases. The leases were modified and extended prior to
TWA's bankruptcy filing discussed in Note 7.

Three Boeing 727-200 Advanced These aircraft were acquired for $36,364,929
during 1987 and leased to Alaska Airlines, Inc. (Alaska) until September
1992. Upon return of the aircraft, an additional amount of $509,000 was
received for deferred maintenance and applied in 1993 as an offset of
maintenance expenses incurred on the aircraft. The aircraft were re-leased
to Continental Micronesia, Inc. (Continental Micronesia) at approximately 55%
of the prior lease rate from April and May 1993 until April 1998. The lease
stipulates that the Partnership will reimburse costs for cockpit
modifications up to $600,000 per aircraft, C-check labor costs up to $300,000
per aircraft and the actual cost of C-check parts for two of the aircraft.
In addition, the Partnership will provide financing up to $815,000 for new
image modifications to be repaid with interest over the lease term for each
aircraft. Reimbursements and financing for modifications were made by the
Partnership in January 1994 and are partially included in 1993 operating
results as discussed in Note 13.

The following is a schedule by year of future minimum rental income under the
existing leases:
Year Amount
1994 $14,239,000
1995 14,074,000
1996 14,074,000
1997 14,041,000
1998 and
thereafter 3,660,000

Total $60,088,000

Future minimum rental payments may be offset or reduced by future costs as
described above and in Note 7.

During 1992 and 1991, the Partnership made downward adjustments to its
estimates of aircraft value for certain of its on-lease aircraft. To ensure
that the carrying value of each asset equals its estimated residual value at
the end of its expected holding period, where appropriate the Partnership has
increased depreciation expense as described in Note 1. The Partnership also
made downward adjustments to the carrying values of certain of its off-lease
aircraft and aircraft inventory where depreciated cost exceeded the estimated
net realizable value. During 1993, 1992 and 1991, the Partnership recognized
downward adjustments totalling $300,000, $5.8 million and $13.7 million,
respectively, for certain of its aircraft and aircraft inventory in the case
of the 1993 adjustment. These adjustments are included in depreciation
expense in the statements of operations.

28
<PAGE>

<PAGE>

4. Sale of Equipment

The Partnership sold one used engine to International Aircraft Support, L.P.
in July 1993 for $85,000, which resulted in a $375,012 loss. The engine,
along with its airframe, was repossessed from the former lessee, SABA in
February 1992. At the time of its default, SABA had not maintained the
aircraft as required under the lease agreement, rendering the engine
inoperable. The Partnership determined the costs to repair the engine were
excessive in comparison to amounts recoverable from sale or lease. As a
result, the engine was sold for its component parts.

29
<PAGE>

<PAGE>

5. Pan Am Lease Modification and Termination

In July 1990, the Partnership and Pan Am signed an amendment to their
original lease agreement which (i) extended the scheduled lease termination
dates; (ii) obligated the Partnership to pay for hushkit modification of the
seven aircraft; (iii) required Pan Am to pay supplemental rent to the
Partnership after each hushkit was installed; and (iv) required the
Partnership to share in the cost of compliance with certain aging aircraft
ADs, up to a cost of $500,000 per aircraft. The Partnership paid $415,444 in
1991 to reimburse Pan Am for work done under such ADs and reported that
amount as aircraft improvements on the accompanying balance sheets. Four of
the seven hushkit modifications were installed in 1990 for a total cost of
$7,082,576, financed by the proceeds of a loan from a related party (Note 9)
and cash reserves. The remaining three hushkits were not installed due to
market conditions and Pan Am's bankruptcy filing and later sold as discussed
in Note 4.

Pan Am commenced reorganization proceedings under Chapter 11 of the federal
Bankruptcy Code in January 1991. Subsequently, the Partnership and Pan Am
agreed to renegotiated lease rates of approximately 75% of the original rates
and Pan Am paid rent through mid-September 1991. Pan Am's reorganization
under Chapter 11 was ultimately unsuccessful, and Pan Am ceased operations in
December 1991. Delta had leased one of the Partnership's aircraft until
September 1993 as discussed in Note 3 and the remaining six aircraft have
been disassembled for sale of their component parts (Note 6).

6. Disassembly of aircraft

In an attempt to maximize the economic return from the remaining six aircraft
formerly leased to Pan Am, the Partnership entered into an agreement with
Soundair, Inc. (Soundair) on October 31, 1992, for the disassembly and sale
of certain of the Partnership's aircraft. It is anticipated that the
disassembly and sales process will take at least three years. The
Partnership has borne the cost of disassembly and will receive the proceeds
from the sale of such parts net of overhaul expenses, if necessary, and
commissions paid to Soundair. Disassembly of the six aircraft has been
completed. Through December 31, 1993, the Partnership paid approximately
$571,000 for aircraft disassembly costs, of which $463,500 was reflected in
the book value of aircraft inventory in 1992. The Partnership has received
net proceeds from the sale of aircraft inventory of $1,201,943 through
December 31, 1993.

These aircraft have been recorded as aircraft inventory in the amount of $3.0
million in the balance sheet as of December 31, 1992 as described in Note 3.
During 1993, the Partnership recorded downward adjustments of $300,000, which
are included in depreciation expense in the statement of operations, to
reflect the current estimate of net realizable aircraft inventory value.

30
<PAGE>

<PAGE>

7. TWA Lease Modification

In January 1992, TWA commenced reorganization proceedings under Chapter 11 of
the federal Bankruptcy Code. TWA made all payments due under the leases.

In accordance with the cost sharing arrangement described above, in 1993, TWA
submitted to the Partnership invoices for expenses paid to date by TWA to
meet the ADs. These expenses, which are included in operating expense in the
statement of operations, were offset against rental payments totalling $2.7
million that were due the Partnership in 1993. TWA may offset rental
payments up to an additional amount of $6.3 million, subject to limitations
over the lease term.

8. Refund of Hushkit Deposits

31
<PAGE>

<PAGE>

certain conditions related to the purchase of the remaining three hushkits
were not satisfied, the Partnership requested return of its deposit of
$270,000 plus interest as provided in the purchase documents. Federal
Express refused the Partnership's request, pending resolution with the
Partnership of certain allegedly disputed contractual issues. On April 16,
1992, the general partner, on behalf of the Partnership, commenced legal
action to require Federal Express to refund the remaining balance of the
deposit, with interest, plus legal fees and other damages, and Federal
Express filed a cross-complaint against the Partnership alleging breach of
contract. A settlement was reached and repayment of the deposit, with
interest, was received by the Partnership in November 1992.

9. Note Payable to Affiliate

In December 1990, the Partnership signed a promissory note payable to PALC in
the amount of $1,250,000, with interest at an annual rate of 9.5%. The
proceeds of the note were used to pay a portion of the cost of the hushkits
discussed in Note 5. The Partnership repaid the note together with interest
of $42,945 in April 1991. The note was repaid with a portion of the lump-sum
payment from TWA as described in Note 7.

10. Claims Related to Lessee Defaults

Braniff Bankruptcy Claim In July 1992, the Bankruptcy Court approved a
stipulation embodying a settlement among PIMC, on behalf of the Partnership,
the Braniff Creditor committees and Braniff in which it was agreed that First
Security Bank of Utah, National Association, acting as trustee for the
Partnership, would be allowed an administrative claim in the bankruptcy
proceeding of approximately $230,769. In 1992, the Partnership received full
payment of the claim, subject, however, to the requirement that 25% of total
proceeds be held by PIMC in a separate, interest-bearing account pending
notification by Braniff that all of the allowed administrative claims have
been satisfied. The Partnership recognized 75% of the total claim as other
income in the accompanying 1992 statement of operations. As of the end of
1993, the Partnership had not been advised that the 25% portion of the
administrative claim payment could be released or that any disposition of the
Partnership's general claim in bankruptcy was being considered.

32
<PAGE>

<PAGE>

11. 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 or 2% of gross rental revenues with respect
to full payout leases of the Partnership, payable upon receipt of the
rent.

b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets.
In 1993, 1992 and 1991, $407,582, $275,312 and $331,093, respectively,
were reimbursed by the Partnership for administrative expenses.

Administrative reimbursements totalling $46,910 and $39,008 were payable
at December 31, 1993 and 1992, respectively. The general partner also
paid operating costs to vendors resulting from lessee defaults.
Reimbursements for such costs totalling $2,608,523, $2,040,505 and
$827,669 were paid by the Partnership in 1993, 1992 and 1991,
respectively. Operating reimbursements of $5,364 and $1,153,606 were
payable at December 31, 1993 and 1992, respectively.

c. A 10% interest 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.

d. A subordinated sales commission 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 shall 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.

e. An engine was leased from Polaris Aircraft Income Fund I for eight
months in 1993 for use on the aircraft leased to Viscount. The rental
payment of $98,000 was offset against rent from operating leases in the
statement of operations.

f. An engine was leased from PHC for three and one half months in 1993 for
use on the aircraft leased to NWT. The rental payment of $42,000 was
offset against rent from operating leases in the statement of
operations.

12. 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

33
<PAGE>

<PAGE>

income tax returns. Accordingly, no provision for such taxes has been made
in the accompanying financial statements.

In 1993, the Partnership adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). One of the requirements
of SFAS 109 is for a public enterprise that is not subject to income taxes,
because its income is taxed directly to its owners, to disclose the net
difference between the tax basis and the reported amounts of the enterprise's
assets and liabilities.

The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1993 are as follows:

Reported Amounts Tax Basis Net Difference

Assets $129,706,547 120,984,013 $8,722,534

Liabilities 4,310,268 255,838 4,054,430

13. Subsequent Event

In accordance with the Continental Micronesia cost sharing agreement as
discussed in Note 3, in January 1994, the Partnership reimbursed Continental
Micronesia $1.8 million for cockpit modifications, which is included in
aircraft at cost in the 1993 balance sheet, and $742,325 for C-check labor
and parts, which is included in operating expense in the 1993 statement of
operations. In addition, the Partnership financed $2,177,533 for new image
modifications, to be repaid with interest over the lease terms of the
aircraft, beginning in February 1994.

34
<PAGE>

<PAGE>

<TABLE>
SCHEDULE V PROPERTY, PLANT, AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991

<CAPTION>
Balance at Beginning Additions Balance at
Classification of Period at Cost Retirements End of Period
<S> <C> <C> <C> <C> <C> <C>
1993 Aircraft $187,169,150 1,800,000 7,009,863 $ 181,959,287

1992 Aircraft $220,278,443 - 33,109,293 $ 187,169,150

1991 Aircraft $220,246,155 32,288 - $ 220,278,443
</TABLE>
<TABLE>

SCHEDULE VI ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<CAPTION>
Balance at Beginning Additions Charged to Balance at
Classification of Period Expense Retirements End of Period
<S> <C> <C> <C> <C> <C> <C>

1993 Aircraft $68,378,317 10,814,846 2,161,468 $77,031,695

1992 Aircraft $82,001,401 16,486,209 30,109,293 $68,378,317

1991 Aircraft $53,990,500 28,010,901 - $82,001,401

</TABLE>

35 <PAGE>

<PAGE>

PART III

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

None.

Item 10. Directors and Executive Officers of the Registrant

PAIF-II has no directors or officers. PIMC is the General Partner of the
Partnership and as such manages and controls the business of the Partnership.
The directors and officers of PIMC are:

Name Position

Herbert D. Depp Chairman of the Board; President;
Director

Howard L. Feinsand Senior Vice President; Director

John E. Flynn Senior Vice President Aircraft
Marketing

Richard J. Adams Senior Vice President Aircraft
Sales and Leasing

James T. Caleshu Senior Vice President and General
Counsel; Secretary

Bobbe V. Sabella Vice President and Chief Financial
Officer

Robert M.J. Ward Vice President International

James R. Weiland Vice President Technical

James W. Linnan Vice President Financial
Management

Robert W. Dillon Vice President Aviation Legal and
Insurance Affairs; Assistant
Secretary

Mr. Depp, 49, assumed the position of the President effective April 1991,
previously having served as Executive Vice President of PIMC and PALC since
July 1989, Vice President Aircraft Marketing since June 1986, Vice
President Commercial Aircraft since August 1984, and Director of Marketing
Aircraft since November 1980. Mr. Depp assumed the position of Chairman

36 <PAGE>

<PAGE>

effective April 1991. He has been a director of PIMC and of PHC since May
1990 and a director of PALC since April 1991.

Mr. Feinsand, 46, joined PIMC and PALC as Vice President and General Counsel;
Assistant Secretary in April 1989. Effective July 1989, Mr. Feinsand assumed
the positions of Senior Vice President which he continues to hold, and
previously served as General Counsel and Secretary from July 1989 to August
1992. Mr. Feinsand also serves as a director of PIMC. Mr. Feinsand, an
attorney, was a partner in the New York law firm of Golenbock and Barell from
1987 through 1989. In his previous capacities, Mr. Feinsand served as
counsel to PIMC and PALC. Mr. Feinsand also serves as a director on the
board of Duke Realty Investments, Inc.

Mr. Flynn, 53, was elected Senior Vice President Aircraft Marketing
effective April 1991, having previously served as Vice President North
America of PIMC and PALC since July 1989. Mr. Flynn joined PALC in March
1989 as Vice President Cargo. For the two years prior to the time he
joined PALC, Mr. Flynn was a Transportation Consultant.

Mr. Adams, 60, serves as Senior Vice President Aircraft Sales and Leasing
of PIMC and PALC effective August 1992; having previously served as Vice
President Aircraft Sales & Leasing, Vice President North America, and
Vice President Corporate Aircraft since he joined PALC in August 1986.

Mr. Weiland, 50, joined PIMC and PALC in September 1990 as Vice President
Technical. Prior to joining PIMC and PALC, Mr. Weiland had been President
and Chief Executive Officer of RAMCO, a company organized to build and
operate an aircraft maintenance facility, since 1986.

Mr. Caleshu, 54, joined PIMC and PALC in August 1992 as Senior Vice President
and General Counsel. Prior to joining PIMC and PALC, Mr. Caleshu, an
attorney, was a partner in the San Francisco firm of Pettit and Martin from
1966 to 1992.

Ms. Sabella, 37, was elected Vice President and Chief Financial Officer
effective October 1993, having previously served as Vice President - Finance
since April 1992, Vice President and Controller since January 1990 and
Corporate Controller of PIMC and PALC since September 1986.

Mr. Ward, 50, has served as Vice President International of PIMC and PALC
since October 1987, with responsibility for Asia, Central America, Pacific
and Latin America.

Mr. Linnan, 52, was elected Vice President Financial Management effective
April 1991, having previously served as Vice President Investor Marketing
of PIMC and PALC since July 1986.

Mr. Dillon, 52, was elected Vice President Aviation Legal and Insurance
Affairs effective April 1989. Previously, he has served as General Counsel
of PIMC and PALC since January 1986.

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

37
<PAGE>

<PAGE>

Based solely on its review of the copies of such forms received or written
representations from certain reporting persons that no Forms 3, 4, or 5 were
required for those persons, the Partnership believes that, during 1993 all
filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were met.

As reported in the Partnership's 1990 Form 10-K, on June 8, 1990, a purported
class action entitled Harner, et al, v Prudential Bache Securities, (to which
the Partnership was not a party) was filed by certain purchasers of units in
a 1983 and 1984 public offering in several corporate aircraft public
partnerships. PALC and PIMC were named as two of the defendants in this
action. On September 24, 1991, the court entered an order in favor of PALC
and PIMC granting their motion for summary judgement and dismissing the
plaintiffs' complaint with prejudice. On March 13, 1992, Plaintiff filed a
notice of appeal to the United States Court of Appeals for the Sixth Circuit.

On August 21, 1992, the court of Appeals ordered consolidation of the
Appellants' causes for the purposes of briefing and submission. This appeal
was fully briefed and oral argument was held. Parties are waiting for the
Court to issue a decision.

On October 27, 1992, a Class Action Complaint entitled Edwin Weisl, Jr. et
al, Plaintiffs, v the General Partner of the Partnership, its affiliates and
others, Defendants, Index No. 29239/92 was filed in the Supreme Court of the
State of New York for the County of New York. The Complaint sets forth
various causes of action which include allegations against certain or all of
the defendants (i) for alleged fraud in connection with certain public
offerings, including that of the Partnership, on the basis of alleged
misrepresentation and alleged omissions contained in the written offering
materials and all presentations allegedly made to investors; (ii) for alleged
negligent misrepresentation in connection with such offerings; (iii) for
alleged breach of fiduciary duties; (iv) for alleged breach of third party
beneficiary contracts; (v) for alleged violations of the NASD Rules of Fair
Practice by certain registered broker dealers; and (vi) for alleged breach of
implied covenants in the customer agreements by certain registered brokers.
The Complaint seeks an award of compensatory and other damages and remedies.

On January 19, 1993, Plaintiff's filed a motion for class certification. On
March 1, 1993, Defendants filed motions to dismiss Complaint on numerous
grounds, including failure to state a cause of action and statute of
limitations. The court has not ruled on the motion for class certification
or the motions to dismiss the complaint. The Partnership is not named as a
defendant in this action.

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,
PIMC and Polaris Depositary Company. Plaintiffs seek class action
certification on behalf of a class of investors in the Polaris Aircraft
Income Funds IV, V and 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 the Partnerships.
Among other things, Plaintiffs assert that the Defendants sold interests in
the Partnerships while "omitting and failing to disclose the material facts

38
<PAGE>

<PAGE>

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

On or around May 14, 1993, a purported class action entitled Michael Moross,
et al, v Polaris Holding Company, et al, was filed in the United States
District Court for the District of Arizona. This purported class action was
filed on behalf of investors in the Polaris Aircraft Income Funds I - VI by
nine investors in the Polaris Aircraft Income Funds. The Compliant alleges
that defendants violated Arizona state securities statues and committed
negligent misrepresentation and breach of fiduciary duty by misrepresenting
and failing to disclose material facts in connection with the sale of limited
partnership units in the above-named funds. An Amended Compliant was filed
on September 17, 1993, but has not been served upon defendants. On or around
October 4, 1993, defendants filed a notice of removal to the United States
District Court for the district of Arizona. Defendants also filed a motion
to stay the action pending the final determination of a prior filed action in
the Supreme Court for the State of New York entitled Weisl v. Polaris Holding
Company ("Weisl") and to defendants' time to respond to the Complaint until
20 days after disposition of the motion to action pending resolution of the
motions for class certification and motions to dismiss pending in Weisl. On
January 20, 1994, the court stayed the action and required defendants to file
status reports every sixty days setting forth the status of the motions in
Weisl.

On September 21, 1993, a purported derivative action entitled Novak, et al,
v. Polaris Holding Company, et al, was filed in the Supreme Court of the
State of New York, County of New York. This action was brought on behalf of
Polaris Aircraft Income Funds I - III (the "Partnerships"). The Complaint
names as defendants Polaris Holding Company, its affiliates and others.
Polaris Aircraft Income Funds I - III are named as nominal defendants. The
Complaint alleges, among other things, that defendants mismanaged the
Partnerships, engaged in self-dealing transactions that were detrimental to
the Partnerships and failed to make required disclosure in connection with
the sale of the Partnership units. The Complaint alleges claims of breach of
fiduciary duty and constructive fraud and seeks, among other things an award
of compensatory and punitive damages in an unspecified amount, re-judgment
interest, and attorneys' fees and costs. On January 13, 1994, certain of the
defendants, including Polaris Holding Company, filed motions to dismiss the

39
<PAGE>

<PAGE>

Complaint on the grounds of, among others, failure to state a cause of action
and failure to plead the alleged wrong in detail.

On or around March 13, 1991, a purported class action entitled Kahn v Polaris
Holding Company, et al, was filed in the Supreme Court of the State of New
York, County of New York. This purported class action on behalf of investors
in Polaris Aircraft Income Fund V ("PAIF V") was filed by one investor in the
above named fund. The Complaint names as defendants the Company, Polaris
Holding Company, its affiliates and others. The Complaint charges defendants
with common law fraud, negligent misrepresentation and breach of fiduciary
duty in connection with certain misrepresentations and omissions allegedly
made in connection with the sale of interest in PAIF V. Plaintiffs seek
compensatory and consequential damages in an unspecified amount, plus
interest, disgorgement and restitution of all earnings, profits and other
benefits received by defendants as a result of their alleged practices, and
attorneys' fees and costs.

Defendants' time to move, answer or otherwise plead with respect to the
Complaint has been extended by stipulation up to and including 30 days after
the Court rules on the pending motions to dismiss, or the motions are
otherwise resolved, in Weisl v Polaris Holding Company, et al. The
Partnership is not named as a defendant in this action.

Item 11. Management Remuneration and Transactions

PAIF-II has no directors or officers. PAIF-II is managed by PIMC, the
General Partner. In connection with management services provided, management
and advisory fees of $681,241 were paid to PIMC in 1993.

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

b) The General Partner of PAIF-II owns the equity securities of PAIF-II
as set forth in the following table:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
<S> <C> <C> <C> <C>
General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management Corporation distributions, gross income in an amount equal to
Interest 9.09% of distributed cash available from
operations, and a 1% interest in net income or
loss
</TABLE>
c) There are no arrangements known to PAIF-II, including any pledge by
any person of securities of PAIF-II, the operation of which may at a
subsequent date result in a change in control of PAIF-II.

40 <PAGE>

<PAGE>

Item 13. Certain Relationships and Related Transactions

None.

41
<PAGE>

<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 20
Balance Sheets 21
Statements of Operations 22
Statements of Changes in Partners' Capital (Deficit) 23
Statements of Cash Flows 24

Notes to Financial Statements 25

2. Financial Statement Schedules.

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

Schedule V Property, Plant and Equipment 35
Schedule VI Accumulated Depreciation, Depletion; and
Amortization of Property, Plant, and
Equipment 35

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

3. Exhibits required to be filed by Item 601 of Regulation S-K and Reports
on Form 8-K.

a) Reports on Form 8-K:

None.

b) Exhibits required to be filed by Item 601 of Regulation S-K:

None.

42
<PAGE>

<PAGE>

<TABLE>
SIGNATURES
<S> <C>

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 II
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner

March 28, 1994 By: /S/Herbert D. Depp
Date Herbert D. Depp, 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/Herbert D. Depp Chairman of the Board and President of Polaris March 28, 1994
(Herbert D. Depp) Investment Management Corporation, General Partner
of the Registrant

/S/Howard L. Feinsand Senior Vice President, Secretary and Director of March 28, 1994
(Howard L. Feinsand) Polaris Investment Management Corporation, General
Partner of the Registrant

/S/Bobbe V. Sabella Vice President and Chief Financial Officer of March 28, 1994
(Bobbe V. Sabella) Polaris Investment Management Corporation, General
Partner of the Registrant

</TABLE>
43
<PAGE>