AIRLEASE LTD, 10-K, 1997-03-31

AIRLEASE LTD
10-K, 1997-03-31
FINANCE LESSORS

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1996

Commission File No. 1-9259

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

California 94-3008908
(State of Organization) (I.R.S. Employer Identification No.)

555 California Street, Fourth Floor, San Francisco, CA 94104
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (415) 765-1814

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS: NAME OF EACH EXCHANGE
Depositary Units Representing ON WHICH REGISTERED:
Limited Partner Interests New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___

Aggregate market value of Depositary Units, held by nonaffiliates of
the registrant as of the close of business at March 27, 1997 was $36,886,675.00.
<PAGE> 2
TABLE OF CONTENTS
Page
PART I

ITEM 1. BUSINESS ......................................................... 3

ITEM 2. PROPERTIES ....................................................... 16

ITEM 3. LEGAL PROCEEDINGS ................................................ 16

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .............................................. 16

ITEM 6. SELECTED FINANCIAL DATA .......................................... 19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 25

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .............................. 25

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .............. 25

ITEM 11. EXECUTIVE COMPENSATION .......................................... 27

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .................................................. 27

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 29

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K ......................................... 30

SIGNATURES ............................................................... 34

INDEX TO EXHIBITS ........................................................ A-15

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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

PART I

ITEM 1. BUSINESS

GENERAL

Airlease Ltd., A California Limited Partnership (the "Partnership" or
"Airlease"), was formed in 1986. The general partner of the Partnership (the
"General Partner") is Airlease Management Services, Inc., a Delaware
corporation. Until October 31, 1996 the General Partner was a wholly owned
subsidiary of USL Capital Corporation ("USL Capital"), which in turn is an
indirect subsidiary of Ford Motor Company. On October 31, 1996, BA Leasing &
Capital Corporation, a California corporation ("BALCAP") purchased the stock of
the General Partner from USL Capital and now the General Partner is a wholly
owned subsidiary of BALCAP. See "The BALCAP/USL Capital Transaction" below.
BALCAP is a wholly owned indirect subsidiary of BankAmerica Corporation. A total
of 4,625,000 Depositary Units representing limited partnership interests
("Units") in the Partnership are outstanding, of which 3,600,000 are held by the
public and 1,025,000 are owned by BALCAP and its subsidiaries. The Partnership
invests in commercial aircraft and leases the aircraft to others, primarily
airlines, pursuant to full payout or operating leases.

PLAN TO RESTRICT TRANSFERABILITY OF UNITS AND CEASE REINVESTMENT

On March 13, 1997 the board of directors of the General Partner
approved a plan to restrict the transferability of Units, which will result in
delisting of the Units from trading on the New York Stock Exchange in December
1997, and to cease making new aircraft investments, leading to an earlier than
planned liquidation of the Partnership (the "Plan to Restrict Transferability of
Units and Cease Reinvestment"). The plan is subject to approval by the limited
partners of the Partnership (the "Limited Partners").

The plan is designed to maximize value to holders of Units
("Unitholders") while protecting them from adverse effects of federal income tax
law. As previously reported, the Partnership will be taxed as if it were a
corporation effective January 1, 1998, if the Units are freely tradable on that
date. This additional level of tax would substantially reduce distributions to
Unitholders. The plan is being proposed because of these changes in the tax law
and the Partnership's competitive position in the present market. See "Federal
Income Taxation" below and "Competitive Position of the Partnership" below.

Under the plan, transferability of the Units would be restricted in
December 1997 and the Units would be delisted from trading at that time.
Although the Units would not be

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freely tradable on the New York Stock Exchange or a similar secondary market
after December 1997, under provisions of the tax law, there are a number of
services which may be available to facilitate purchases and sales of Units. At
this time it is difficult to know if these services will operate with respect to
the Units, and IRS rules impose various limitations as to the aggregate number
of Units which may be sold in any year utilizing these services. The Partnership
will explore the alternatives available to facilitate purchases and sales of the
Units while protecting the Partnership from taxation as a corporation. If no
such services develop, Unitholders may be unable to sell their Units, but they
would receive distributions through the remaining term of the Partnership.

The plan also provides that the Partnership would not make any new
aircraft investments, would sell its aircraft as attractive opportunities become
available and would distribute net sales proceeds to Unitholders after each
sale. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION--Plan to Restrict Transferability of Units and Cease
Reinvestment."

THE BALCAP/USL CAPITAL TRANSACTION

In August 1996, USL Capital and BALCAP entered into an agreement
providing for the purchase by BALCAP and its affiliates of approximately $1.8
billion in assets from USL Capital, including substantially all of the aircraft
portfolio assets of USL Capital (the "BALCAP/USL Capital Transaction"). The
aircraft portfolio assets included all of the stock of the General Partner and
United States Airlease Holding, Inc. (which then owned 22.2% of the outstanding
Units), all Units owned by USL Capital and its subsidiaries, and the interests
in aircraft jointly owned by USL Capital and the Partnership (a 50% interest in
an aircraft (the "TWA Aircraft") on lease to TransWorld Airlines ("TWA") and a
50% interest in aircraft (the "Sun Jet Aircraft") on lease to Sun Jet
International, Inc. ("Sun Jet")). The purchase price for the limited
partnership interests was $15.70 per Unit and for the stock of the General
Partner was $726,260 (as adjusted to account for fees payable to the General
Partner under the Limited Partnership Agreement between September 1, 1996 and
October 31, 1996), and the funds for such purchase were provided by Bank of
America National Trust and Savings Association from its working capital.

Pursuant to the agreements between USL Capital and the Partnership
covering jointly owned aircraft, the Partnership had a right of first refusal to
purchase USL Capital's interest in the TWA Aircraft and the Sun Jet Aircraft on
the same terms as those offered by BALCAP. The General Partner reviewed these
terms and determined that it would not be in the best interest of the
Partnership to purchase the Sun Jet Aircraft. With respect to the TWA Aircraft,
the General Partner determined that the purchase price was below the appraised
value and that it would be in the Partnership's best interest to purchase the
TWA Aircraft so long as the Partnership could obtain financing. As a result,
USL Capital sold its interest in the Sun Jet Aircraft to BALCAP, and that
aircraft is now jointly owned by BALCAP and the Partnership, and in January
1997, the Partnership purchased USL Capital's interest in the TWA Aircraft,
and that aircraft is now wholly owned by the Partnership. The purchase of the
TWA Aircraft was made on the same terms offered by BALCAP, and the purchase
price was $5.7 million.

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As a result of the BALCAP/USL Capital Transaction, the General Partner
is a wholly owned subsidiary of BALCAP, BALCAP owns directly or through its
subsidiaries 22.2% of the Units and BALCAP and the Partnership jointly own the
Sun Jet Aircraft. USL Capital no longer has any affiliation with the
Partnership, and the General Partner believes that as a result of the BALCAP/USL
Capital Transaction, USL Capital is no longer in the aircraft leasing and
finance business.

PRINCIPAL INVESTMENT OBJECTIVES

The business of the Partnership is to acquire and own, either directly
or through joint ventures, aircraft and to lease such aircraft primarily to
airlines. The Partnership's principal investment objectives are to generate
income for quarterly cash distributions to Unitholders and to build and own a
diversified portfolio of leased aircraft. The Partnership's investment
objectives provide that until January 1, 2005, it intends to use a substantial
portion of the cash derived from the sale, refinancing or other disposition of
aircraft to purchase additional aircraft if attractive investment opportunities
are available. However, because of the impact of changes in tax law and the
Partnership's competitive position in the present market, the General Partner is
proposing the Plan to Restrict Transferability of Units and Cease Reinvestment.
See "Plan to Restrict Transferability of Units and Cease Reinvestment" above.

AIRCRAFT PORTFOLIO

The Partnership's aircraft portfolio consists of full and undivided
partial ownership interests in narrow-body (single-aisle) twin and tri-jet
commercial aircraft which were acquired as used aircraft. Although the
Partnership is permitted to do so, the Partnership does not own interests in
aircraft which were acquired as new aircraft; nor does the Partnership own any
wide-body aircraft, such as the Boeing 747 and McDonnell Douglas MD-11, or any
turboprop or prop-fan powered aircraft.

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The following table describes the Partnership's aircraft portfolio at
January 31, 1997:

<TABLE>
<CAPTION>
Number & Current Purchase
type; year of Ownership Acquired by lease price (in Type Noise
Lessee delivery Interest Partnership expiration millions) of lease compliance(1)
- ------ ---------- --------- ----------- ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
USAir 5 MD-82 100% 1986 2001(3) $91.0 Direct Stage III
1981 (2) finance

FedEx 1 727-200FH 100% 1987 2006 $18.5(4) Direct Stage III
1979 finance

TWA 1 MD-82 100%(5) 1988(5) 2002 $15.8(5) Direct Stage III
1984 finance

Sun Jet 1 DC-9-51 50% 1986 1997 $4.4(6) Operating Stage II
1975
</TABLE>

(1) See "Government Regulations--Aircraft Noise" below, for a description
of laws and regulations governing aircraft noise.

(2) The investment tax credits and the accelerated depreciation originally
available upon delivery of the aircraft on lease to USAirways, Inc.
(formerly USAir, Inc.) ("USAir") were sold in 1981 pursuant to a tax
benefit transfer lease, which terminated November, 1991. See Note 10
of Notes to Financial Statements.

(3) USAir has the right to renew the lease as to all aircraft in 1998 (at
the end of the initial twelve year term) for an additional three years
at the current quarterly rental. If USAir does not elect to renew, it
is required to make a termination payment and return the aircraft to
the Partnership. See Note 2 of Notes to Financial Statements.

(4) The purchase price includes $6.9 million of conversion costs for the
upgrade of the aircraft from a Stage II passenger aircraft to a Stage
III freighter.

(5) The Partnership originally acquired a 50% interest in this aircraft in
1988 for a purchase price of $10.1 million. On January 31, 1997 the
Partnership purchased the remaining 50% interest from USL Capital for a
purchase price of $5.7 million. See "The BALCAP/USL Capital
Transaction" above.

(6) The purchase price includes $0.7 million related to the overhaul of the
aircraft.

At January 31, 1997, the book value of aircraft by lessee as a percent
of total assets was as follows: USAir, 68.9%; FedEx, 12%; TWA, 13.3%; and Sun
Jet, 1.1%. Revenues by lessee as a percentage of total revenue for 1996 and
1995, respectively, were as follows: USAir, 57.1% and 64%; TWA, 5.3% and 6.9%;
FedEx, 4.1% and 4.6%; and Sun Jet, 2.6% and 2.7%

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Results of Operations" for a further discussion of the
Partnership's lessees.

The partnership's lessees have the following fair market value renewal
options: USAir has the right to renew its lease as to any of the aircraft for
up to three additional renewal terms of one year each at a fair market value
rental, provided that the number of aircraft to be returned at the end of any
renewal term may not be less than two; Fedex has the right to

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renew its lease for one six-month term at the current rent payable under the
lease, and thereafter for four successive one year terms at a fair market value
rental; and TWA has the right to renew its lease for one term of one, two, three
or four years at fair market value rentals.

COMPETITIVE POSITION OF THE PARTNERSHIP

As the Partnership has advised Unitholders over the course of the
Partnership's existence, significant changes in the aircraft and aircraft
leasing markets have occurred since the inception of the Partnership. In the
past ten years, the supply of commercial jet aircraft has increased
substantially, but the demand has not always kept pace with the supply primarily
because of changes in the airline industry. In the late 1980's and early 1990's
competition in the airline industry led to airline restructurings and
consolidations. Airlease itself experienced the effect of this competition as
four of its lessees (Eastern Airlines, Pan American Airlines, Continental
Airlines, Inc. ("Continental") and TWA) filed for bankruptcy during this
period. In the wake of these restructurings, airlines have been taking actions
to increase utilization of their fleets to reduce the need for additional
aircraft.

These conditions have led to periods in which the supply of aircraft
has exceeded the demand. Oversupply adversely impacts lessors like the
Partnership, because it increases the competition among lessors to place and
retain aircraft on lease and lease rates decline. Similarly, opportunities for
gain on sale of aircraft are reduced. Although demand for aircraft has been
increasing in the last two years as many airlines have returned to
profitability, and more recently lease rates appear to be improving, the
airline industry tends to be cyclical, indicating a potential return to less
favorable conditions.

The aircraft leasing industry has become increasingly competitive.
In making aircraft investments, leasing aircraft to lessees, and seeking
purchasers of aircraft, the Partnership competes with large leasing companies,
aircraft manufacturers, airlines and other operators, equipment managers,
financial institutions and other parties engaged in leasing, managing, marketing
or remarketing aircraft. Affiliates of the General Partner are engaged in many
of these businesses and may be deemed to be in competition with the Partnership.
There are many large leasing companies which have the financial strength to
borrow at very low rates and to obtain significant discounts when purchasing
large quantities of aircraft. The lower capital and acquisition costs enjoyed
by these large leasing companies permit them to offer airlines lower lease
rates than smaller leasing companies can offer. The Partnership does not have
the resources to purchase newer aircraft or to purchase aircraft at volume
discounts and has only a limited ability to use tax deferrals in its pricing.

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As previously reported to Unitholders, the Partnership's access to
capital is limited. Since all Cash Available from Operations, as defined in the
Limited Partnership Agreement, is distributed, there is no build up of equity
capital, and acquisitions must be funded from proceeds available when aircraft
are sold or from debt. Access to debt is limited because most of the
Partnership's aircraft are being used to secure existing borrowings. In general,
the Partnership's pricing is uncompetitive for new acquisitions because of its
limited sources and high cost of capital.

Because of these factors, finding new investment opportunities that
offer an appropriate balance of risk and reward has been very difficult. During
the past five years the Partnership has made only two aircraft investments, both
of which were possible because of special circumstances which the General
Partner believes are unlikely to occur in the future. In 1992, the Partnership
acquired an interest in an aircraft on lease to Finnair OY ("Finnair"). This
transaction was possible because it was funded from an existing bank line which
had been in place since 1988 and had a very low borrowing rate. The General
Partner believes that such favorable borrowing rates currently are not available
to the Partnership. In January 1997, the Partnership acquired the remaining 50%
interest in an aircraft on lease to TWA. This transaction was available only
because the Partnership already owned a 50% interest in this aircraft and had
originally negotiated the right to match a purchase offered by a third party.
See "The BALCAP/USL Capital Transaction" above.

In 1996, the Partnership sold interests in seven aircraft (a 50%
interest in an aircraft on lease to Finnair and a one-third interest in six
aircraft on lease to Continental) at a profit. See "Disposition of Aircraft"
below. However because of the factors described above, the Partnership was
unable to reinvest the proceeds in aircraft at an acceptable return, and the
General Partner determined that the best use of the net proceeds was to
distribute them to Unitholders.

Because of the changes in tax law (see "Federal Income Taxation" below)
and the competitive position of the Partnership described above, the General
Partner is proposing the Plan to Restrict Transferability of Units and Cease
Reinvestment.

EXISTING PARTICIPANTS IN LEASES

The Partnership owns a 100% interest in all aircraft in its portfolio
except the Sun Jet Aircraft which is owned 50% by the Partnership and 50% by
BALCAP. USL Capital originally participated equally with the Partnership in all
transactions except the aircraft on lease to USAir (the "USAir Aircraft"). In
April 1993 the Partnership leased two aircraft (held jointly with USL Capital),
which were previously off lease, to FedEx. In September 1993 the Partnership
exchanged its 50% interest in the two aircraft for a 100% interest in one
aircraft and pledged the aircraft and the lease as collateral to obtain funds to
upgrade the aircraft from a Stage II passenger aircraft to a Stage III
freighter. In January 1997, the Partnership purchased a 50% interest in the TWA
Aircraft formerly owned by USL Capital, and now owns a 100% interest in this
aircraft. See "The BALCAP/USL Capital Transaction" above.

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With respect to the Sun Jet Aircraft which is jointly owned by BALCAP
and the Partnership, BALCAP and the Partnership have agreed (i) to act in good
faith to reach agreement as to all actions which may be required with respect to
the lease and that any dispute between them will be settled by arbitration; (ii)
not to transfer any interest in the related aircraft or lease without the
consent of the other, except for a transfer to an affiliate and except for a
transfer described in clause (iii); and (iii) that each party has a right of
first refusal to purchase any such interest prior to the transfer to any third
party.

DESCRIPTION OF LEASES

All aircraft owned by the Partnership are leased to third parties
pursuant to either full-payout leases (direct finance) or operating leases.
Generally, operating leases are for a shorter term than full-payout leases and,
therefore, it will be necessary for the Partnership to remarket the aircraft in
order to recover its full investment. Full-payout leases are generally for a
longer term and hence provide more predictable revenue than do operating leases.

All of the Partnership's leases are net leases, which provide that the
lessee will bear the direct operating costs and the risk of physical loss of the
aircraft; pay sales, use or other similar taxes relating to the lease or use of
the aircraft; maintain the aircraft; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or omission
of the lessee or its agents; maintain casualty insurance in an amount equal to
the specific amount set forth in the lease (which may be less than the market
value of the aircraft); and maintain liability insurance naming the Partnership
as an additional insured with a minimum coverage which the General Partner deems
appropriate. In general, substantially all obligations connected with the
ownership and operation of the leased aircraft are assumed by the lessee and
minimal obligations are imposed upon the Partnership. Default by a lessee may
cause the Partnership to incur unanticipated expenses. See "Government
Regulation" below.

Certain provisions of the Partnership's leases may not be enforceable
upon a default by a lessee or in the event of a lessee's bankruptcy. The
enforceability of leases will be subject to limitations imposed by Federal,
California, or other applicable state law and equitable principles.

In order to encourage equipment financing to certain transportation
industries, Federal bankruptcy laws traditionally have afforded special
treatment to certain lenders or lessors who have provided such financing.
Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended
(the "Bankruptcy Code"), implements this policy by creating a category of
aircraft lenders and lessors whose rights to repossession are substantially
improved. If a transaction complies with Section 1110, the transaction is not
affected by the automatic stay provisions of the Bankruptcy Code (and thus, the
lender or lessor may repossess the equipment), unless within 60 days after
commencement of a bankruptcy proceeding the trustee agrees to perform all
obligations of the debtor under the agreement or lease and all defaults (except
those relating to insolvency or insolvency proceedings) are cured within such
60-day period.

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On October 22, 1994, President Clinton signed into law the Bankruptcy
Reform Act of 1994 (the "Reform Act"). The Reform Act made several changes to
Section 1110, such that it now protects all transactions involving qualifying
equipment, whether the transaction is a lease, conditional sale, purchase money
financing or customary refinancing. For equipment first placed in service on or
prior to the date of enactment, the requirement that the lender provide purchase
money financing continues to apply, but there is a "safe harbor" definition for
leases, so that Section 1110 benefits will be available to the lessor without
regard to whether or not the lease is ultimately determined to be a "true"
lease. This safe harbor is not the exclusive test so that other leases which do
not qualify under the safe harbor, but which are true leases, will continue to
be covered as leases by Section 1110. The Partnership may not be entitled to the
benefits of Section 1110 upon insolvency of a lessee airline under all of its
leases.

In the past, the Partnership has had interests in aircraft leased to
operators based outside the United States. It is possible that the Partnership's
aircraft could be leased or subleased to foreign airlines. Aircraft on lease to
such foreign operators are not registered in the United States and it is not
possible to file liens on such foreign aircraft with the Federal Aviation
Administration (the "FAA"). Further, in the event of a lessee default or
bankruptcy, repossession and claims would be subject to laws other than those of
the United States.

AIRCRAFT REMARKETING

On termination of a lease and return of the aircraft to the
Partnership, the Partnership must remarket the aircraft to realize its full
investment. See "Disposition of Aircraft" below, for a description of the
Partnership's remarketing at lease expiration of six aircraft on lease to
Continental. Under the Amended and Restated Agreement of Limited Partnership,
as amended, of the Partnership (the "Limited Partnership Agreement"), the
remarketing of aircraft may be through a lease or sale. The terms and
conditions of any such lease would be determined at the time of the
re-lease, and it is possible (although not anticipated at this time) that the
lease may not be a net lease. The General Partner will evaluate the risks
associated with leases which are not net leases prior to entering into any such
lease. The General Partner has not established any standards for lessees to
which it will lease aircraft and, as a result, there is no investment
restriction prohibiting the Partnership from doing business with any lessee,
including "start-up" airlines. However, the General Partner will analyze the
credit of a potential lessee and evaluate the aircraft's potential value prior
to entering into any lease.

DISPOSITION OF AIRCRAFT

The Partnership's original intent was to dispose of all its aircraft by
the year 2011, subject to prevailing market conditions and other factors.
However, because of the impact of changes in tax law and the Partnership's
competitive position in the present market, the General Partner is proposing the
Plan to Restrict Transferability of Units and Cease Reinvestment. See "Plan to
Restrict Transferability of Units and Cease Reinvestment" above.

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Under the Limited Partnership Agreement, aircraft may be sold at any
time whether or not the aircraft are subject to leases if, in the judgment of
the General Partner, it is in the best interest of the Partnership to do so.

In 1995, casualty proceeds were received on one 737-200 aircraft on
lease to Continental which was damaged in a ground accident and declared a total
loss. The proceeds received exceeded the net book value of the aircraft and
resulted in a net gain of $21,000. The proceeds were distributed to Unitholders
in the third quarter of 1995 in a special cash distribution of 10 cents per
Unit.

In March 1996, the Partnership sold its 50% interest in one MD-82
aircraft on lease to Finnair to a third party for approximately $6.9 million,
resulting in a net gain of approximately $556,000. The Partnership had acquired
its interest in this aircraft in April 1992, for approximately $8.5 million. A
portion of the sale proceeds were used to pay off the outstanding balance under
a non-recourse loan which was collateralized by this aircraft and the balance,
after retaining a reserve for liquidity purposes, was distributed to Unitholders
in the second quarter of 1996 in a special cash distribution of 80 cents per
Unit. See "Competitive Position of the Partnership" above.

The Partnership sold its one-third interest in six 737-200 aircraft on
lease to Continental at lease expiration on December 31, 1996, at a sale price
of approximately $3.1 million, resulting in a net gain of approximately $1.9
million. The proceeds were distributed to Unitholders in the first quarter of
1997 in a special cash distribution of 63 cents per Unit. See "Competitive
Position of the Partnership" above.

The lease for the Sun Jet Aircraft, which expires in December 1997,
contains a fixed price purchase option, and Sun Jet has advised the Partnership
that it wishes to exercise this option. However, Sun Jet has experienced
financial difficulties and no assurance can be given as to whether, when or at
what price this purchase will be consummated. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Results of
Operations." If the purchase is not consummated, the Partnership intends to
remarket the aircraft, which would include attempting to sell or to lease the
aircraft. At December 31, 1996, the book value of the Partnership's interest in
the Sun Jet Aircraft was $1.1 million.

The Partnership is permitted to sell aircraft to affiliates of the
General Partner at the fair market value of the aircraft at the time of sale as
established by an independent appraisal. The General Partner will receive a
Disposition or Remarketing Fee for any such sale.

JOINT VENTURES/GENERAL ARRANGEMENTS

Under the Limited Partnership Agreement, the Partnership may enter into
joint ventures with third parties to acquire or own aircraft. Generally, each
party to a joint venture is jointly responsible for all debts and obligations
incurred by the joint venture, and

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the joint venture will be treated as a single entity by third parties. The
Partnership may become liable to third parties for obligations of the joint
venture in excess of those contemplated by the terms of the joint venture
agreement. There can be no assurance that the Partnership will be able to obtain
control in any joint ventures, or that, even with such control the Partnership
will not be adversely affected by the decisions and actions of the co-venturers.
The General Partner attempts to ensure that all such agreements will be fair and
reasonable to the Partnership, although joint ventures with affiliates of the
General Partner may involve potential conflicts of interest. The Sun Jet
Aircraft is the only aircraft now owned by the Partnership pursuant to a joint
venture arrangement. See "Existing Participants in Leases," above.

If the Plan to Restrict Transferability of Units and Cease Reinvestment
is approved, the Partnership will not enter into any joint venture arrangements
to acquire additional aircraft.

BORROWING POLICIES

Under the Limited Partnership Agreement, the Partnership may borrow
funds or assume financing in an aggregate amount equal to less than 50% of the
higher of the cost or fair market value at the time of the borrowing of all
aircraft owned by the Partnership. The Partnership may exceed such 50% limit for
short-term borrowing so long as the General Partner uses its best efforts to
comply with such 50% limit within 120 days from the date such indebtedness is
incurred or if the borrowed funds are necessary to prevent foreclosure on any
Partnership asset. There is no limitation on the amount of such short-term
indebtedness. The General Partner is authorized to borrow for working capital
purposes and to make distributions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources"
and Note 5 of Notes to Financial Statements.

MANAGEMENT OF AIRCRAFT PORTFOLIO

Aircraft management services are provided by the General Partner and
its affiliates. The fees and expenses for these services are reviewed annually
and are subject to approval by the Audit Committee of the Partnership.

REGISTRATION OF AIRCRAFT; UNITED STATES PERSON

Under the Federal Aviation Act, as amended (the "FAA Act"), the
operation of an aircraft not registered with the Federal Aviation Administration
(the "FAA") in the United States is generally unlawful. Subject to certain
limited exceptions, an aircraft may not be registered under the FAA Act unless
it is owned by a "citizen of the United States" or a "resident alien" of the
United States. In order to attempt to ensure compliance with the citizenship
requirements of the FAA Act, the Limited Partnership Agreement requires that all
Unitholders (and all transferees of Units) be United States citizens or resident
aliens within the meaning of the FAA Act.

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GOVERNMENT REGULATION

GENERAL

The ownership and operation of aircraft in the United States are
strictly regulated by the FAA, which imposes certain minimum restrictions and
economic burdens upon the use, maintenance and ownership of aircraft. The FAA
Act and FAA regulations contain strict provisions governing various aspects of
aircraft ownership and operation, including aircraft inspection and
certification, maintenance, equipment requirements, general operating and flight
rules, noise levels, certification of personnel and record keeping in connection
with aircraft maintenance. FAA policy has given high priority to aviation
safety, and a primary objective of FAA regulations is that an aircraft be
maintained properly during its service life. FAA regulations establish standards
for repairs, periodic overhauls and alterations and require that the owner or
operator of an aircraft establish an airworthiness inspection program to be
carried out by certified mechanics qualified to perform aircraft repairs. Each
aircraft in operation is required to have a Standard Airworthiness Certificate
issued by the FAA.

MAINTENANCE

The Partnership, as the beneficial owner of aircraft, bears the
ultimate responsibility for compliance with certain federal regulations.
However, under all of the Partnership's aircraft leases, the lessee has the
primary obligation to ensure that at all times the use, operation, maintenance
and repair of the aircraft are in compliance with all applicable governmental
rules and regulations and that the Partnership/lessor is indemnified from loss
by the lessee for breach of any of these lessee responsibilities. Changes in
government regulations after the Partnership's acquisition of aircraft may
increase the cost to, and other burdens on, the Partnership of complying with
such regulations.

The General Partner monitors the physical condition of the
Partnership's aircraft and periodically inspects them to attempt to ensure that
the lessees comply with their maintenance and repair obligations under their
respective leases. Maintenance is further regulated by the FAA which also
monitors compliance. At lease termination, the lessees are required to return
the aircraft in airworthy condition. The Partnership may incur unanticipated
maintenance expenses if a lessee were to default under a lease and the
Partnership were to take possession of the leased aircraft without such
maintenance having been completed. If the lessee defaulting is in bankruptcy,
the General Partner will file a proof of claim for the required maintenance
expenses in the lessee's bankruptcy proceedings and attempt to negotiate payment
and reimbursement of a portion of these expenses. The bankruptcy of a lessee
could adversely impact the Partnership's ability to recover maintenance expense.

From time to time, aircraft manufacturers issue service bulletins and
the FAA issues airworthiness directives. These bulletins and directives provide
instructions to aircraft operators in the maintenance of aircraft and are
intended to prevent the occurrence of accidents arising from flaws discovered
during maintenance or as the result of aircraft incidents. Compliance with
airworthiness directives is mandatory.

13
<PAGE> 14
A formal program to control corrosion in all aircraft is included in
the FAA mandatory requirements for maintenance for each type of aircraft. These
FAA rules and proposed rules evidence the current approach to aircraft
maintenance developed by the manufacturers and supported by the FAA in
conjunction with an aircraft industry group. The Partnership may be required to
pay for these FAA requirements if a lessee defaults or if necessary to re-lease
or sell the aircraft.

Trade publications have reported that the FAA is considering issuing an
airworthiness directive to remedy potential unsafe conditions in 727 aircraft
which were converted from passenger to freight configuration. It has also been
reported that the FAA may issue weight restrictions on such aircraft as an
interim measure and may require extensive structural changes for the long term.
As of March 1, 1997, no such airworthiness directives had been issued. Any such
airworthiness directives would apply to the aircraft on lease to FedEx. Under
the lease covering this aircraft, FedEx would be required to take the steps
necessary to comply with airworthiness directives imposed during the lease term.
However, airworthiness directives may affect the residual value of the aircraft
or FedEx's decision to exercise fair market value renewal options under the
lease.

There are more than 11,500 jet aircraft in the fleets of the
principal airlines of the world. On average these aircraft are about 13
years old. Several hundred have been in service for 20 years or more and that
number is growing. See "Aircraft Portfolio" above, for a table showing the year
of delivery (manufacture) of Partnership aircraft and the date of termination of
the lease to which such aircraft is subject.

AIRCRAFT NOISE

The FAA, through regulations, has categorized certain aircraft types as
Stage I, Stage II and Stage III according to the noise level as measured at
three designated points. Stage I aircraft create the highest measured noise
levels. Aircraft which exceed Stage I noise maximums are no longer allowed to
operate from civil airports in the United States.

In general, the Aviation Safety and Capacity Act of 1990 bans the
operation of Stage II aircraft after December 31, 1999 for aircraft operated
within the continental United States. The Act also allows United States airports
to impose their own Stage II noise bans before the formal cut-off date, provided
that an analysis of the costs and benefits of the restriction is presented and
180 days are allowed for public comment. The Act affects about 2,500 Stage II
aircraft operated by United States airlines.

Alternatives for operators of Stage II aircraft include hushkitting,
re-engining and movement to jurisdictions without mandated noise compliance.
Hushkit options are expected to become more plentiful. However, even when
certified, there will still be considerable lag time before each program can be
brought to maximum production efficiency.

See "Aircraft Portfolio" above, for a description of the Partnership's
aircraft portfolio. At December 31, 1996, the net book value of Stage II
aircraft owned by the Partnership was $1.1 million or 1% of total assets and
consisted of its interest in the Sun Jet

14
<PAGE> 15
Aircraft. A noise kit that will bring this aircraft into compliance with Stage
III noise requirements is generally expected but has not yet been developed.

ACQUISITION OF ADDITIONAL AIRCRAFT

During the past five years the Partnership has made only two aircraft
investments. See "Competitive Position of the Partnership" above. If the Plan to
Restrict Transferability of Units and Cease Reinvestment is approved, the
Partnership will not acquire any more aircraft. See "Plan to Restrict
Transferability of Units and Cease Reinvestment" above.

If the Plan to Restrict Transferability of Units and Cease Reinvestment
is not approved, the Partnership could invest in additional aircraft. If the
Partnership were to acquire additional aircraft, it could do so in many
different forms, such as in sale/leaseback transactions, by purchasing interests
in existing leases from other lessors, by making loans secured by aircraft or by
acquiring or financing leasehold interests in aircraft. The Partnership is
permitted to acquire aircraft from affiliates of the General Partner subject to
limitations set forth in the Limited Partnership Agreement.

Prior to September 30, 1991, the General Partner and USL Capital were
required to offer the Partnership a 50% participation interest in certain
aircraft leasing investments made by Related Entities, as defined in the Limited
Partnership Agreement. After September 30, 1991 and while the General Partner
was an affiliate of USL Capital, the General Partner and USL Capital could, but
were not obligated to, offer investment opportunities to the Partnership. The
Partnership was required to accept suitable opportunities provided that the
General Partner and Related Entities made at least 20% (including their
investment through ownership of Units and the General Partner's interest) of the
total investment made by Related Entities and the Partnership in such
transactions. In the event that the Partnership elected not to make or to make
only a portion of an investment offered to it by an affiliate, the remaining
investment could be made by affiliates of the General Partner or third parties.

The General Partner believes that since it is no longer affiliated with
USL Capital, the limitation as to making investments with Related Entities
should no longer apply and that the Partnership should be able to invest in any
aircraft leasing transactions deemed suitable by the General Partner. In
determining whether an investment is suitable for the Partnership, the General
Partner will consider the following factors: the expected cash flow from the
investment and whether existing Unitholders' investment will be diluted; the
existing portfolio of the Partnership and the effect of the investment on the
diversification of the Partnership's assets; the amount of funds available to
finance the investment; the ability of the Partnership to obtain additional
funds through debt financing, by issuing Units, or otherwise; the cost of such
additional funds and the time needed to obtain such funds; the amount of time
available to remove contingencies prior to making the investment; projected
Federal income tax effect of the investment; projected residual value, if any;
any legal or regulatory restrictions; and other factors deemed relevant by the
General Partner.

The General Partner and its affiliates are not obligated to make any
investment opportunity available to the Partnership, and if any of them are
presented with a potential

15
<PAGE> 16
investment opportunity, it may be made by any of them without being offered to
the Partnership. In addition, in determining which entity should invest in a
particular transaction, it may be possible to structure the transaction in
various ways to make the acquisition more or less suitable for the Partnership
or for the General Partner or its affiliates.

FEDERAL INCOME TAXATION

As previously reported to Unitholders, changes in the federal income
tax laws which occurred in 1987 will cause the Partnership to be taxed as a
corporation beginning on January 1, 1998 if the Units continue to be traded on
an established securities market or readily tradeable on a secondary market (or
the substantial equivalent thereof). If the Partnership were taxed as a
corporation, no deductions arising from partnership operations would be
allowable to the Unitholders, income of the Partnership would be taxable at
corporate rates, distributions to Unitholders would be taxable as dividends to
the extent of the Partnership's current or accumulated earnings and profits and
the amount of a Unitholder's after-tax cash flow from the Partnership would be
substantially reduced. Certain corporate Unitholders, however, may be entitled
to a dividends received deduction on such dividend distributions. While such a
deduction would lessen the adverse impact of the Partnership's being subject to
taxation as a corporation, the General Partner believes that few Unitholders
other than BALCAP are corporations. See Note 9 of Notes to Financial Statements
as to the Partnership's tax liability if it were taxed as a corporation.

ITEM 2. PROPERTIES

The Partnership does not own any real property, and shares office space
in the offices of BALCAP and its affiliates.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

UNITS OUTSTANDING

The Units are traded on the New York Stock Exchange under the symbol
FLY. As of February 28, 1997, there were 1,493 holders of record of Units. If
the Plan to Restrict

16
<PAGE> 17
Transferability of Units and Cease Reinvestment is approved, transferability of
the Units will be restricted in December 1997 which would result in delisting
the Units from trading on the New York Stock Exchange at that time. See
"BUSINESS--Plan to Restrict Transferability of Units and Cease Reinvestment."

MARKET PRICE

The following chart sets forth the high and low closing prices on the
New York Stock Exchange and the trading volume for each of the quarters in the
years ended December 31, 1995 and 1996.

<TABLE>
<CAPTION>
Trading Volume
Quarter Ended (in thousands) Unit Prices (high-low)
- ------------- -------------- ----------------------
<S> <C> <C>
March 31, 1995 236 $15 - $13 3/8

June 30, 1995 338 $16 - $14

September 30, 1995 284 $18 - $15 1/8

December 31, 1995 213 $17 7/8 - $16 1/4

March 31, 1996 257 $18 7/8 - $17

June 30, 1996 557 $18 1/4 - $15

September 30, 1996 461 $16 3/4 - $13 1/4

December 31, 1996 298 $16 3/8 - $14 5/8
</TABLE>

DISTRIBUTIONS TO UNITHOLDERS

CASH DISTRIBUTIONS

The Partnership makes quarterly cash distributions to Unitholders which
are based on Cash Available from Operations (as defined in the Limited
Partnership Agreement) and are partially tax sheltered. Information on the tax
status of such payments, which is necessary in the preparation of individual tax
returns, is prepared and mailed to Unitholders as quickly as practical after the
close of each year. If the Plan to Restrict Transferability of Units and Cease
Reinvestment is approved it may affect distributions to Unitholders. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Plan to Restrict Transferability of Units and Cease Reinvestment."

Distributions declared during 1995, 1996 and the first quarter of 1997
were as follows:

17
<PAGE> 18
<TABLE>
<CAPTION>
Record Date Payment Date Per Unit
- ----------- ------------ --------
<S> <C> <C>
March 31, 1995 May 14, 1995 47 cents
June 30, 1995 August 13, 1995 50 cents
September 29, 1995 November 15, 1995 60 cents(1)
December 29, 1995 February 15, 1996 50 cents

March 29, 1996 May 15, 1996 50 cents
May 20, 1996 May 31, 1996 80 cents(2)
June 28, 1996 August 15, 1996 45 cents
September 30, 1996 November 15, 1996 45 cents
December 31, 1996 February 14, 1997 45 cents

January 15, 1997 January 31, 1997 63 cents(3)
March 31, 1997 May 15, 1997 45 cents
</TABLE>

(1) Includes a special cash distribution of 10 cents per Unit from casualty
proceeds from an aircraft on lease to Continental. See "BUSINESS--Disposition of
Aircraft" and "Distributions to Unitholders--Cash Available from Sale or
Refinancing," below.

(2) Special cash distribution from sale proceeds from the sale of an aircraft on
lease to Finnair. See "BUSINESS--Disposition of Aircraft" and "Distributions to
Unitholders--Cash Available from Sale or Refinancing," below.

(3) Special cash distribution from sales proceeds from the sale of six aircraft
on lease to Continental. See "BUSINESS--Disposition of Aircraft" and
"Distributions to Unitholders--Cash Available from Sale or Refinancing," below.

CASH AVAILABLE FROM OPERATIONS

The Partnership distributes all Cash Available from Operations (as
defined in the Limited Partnership Agreement). The Partnership is authorized to
make distributions from any source, including reserves and borrowed funds.
Distributions of Cash Available from Operations are allocated 99% to Unitholders
and 1% to the General Partner. The Partnership makes distributions of Cash
Available from Operations generally on the fifteenth day of each February, May,
August and November to Unitholders of record on the last business day of the
calendar quarter preceding payment.

CASH AVAILABLE FROM SALE OR REFINANCING

The Partnership's original intent was that Cash Available From Sale or
Refinancing (as defined in the Limited Partnership Agreement) received prior to
January 1, 2005 would be retained for use in the Partnership's business,
provided that if the General Partner did not believe that attractive investment
opportunities exist for the Partnership, the Partnership could distribute Cash
Available from Sale or Refinancing. Any Cash Available from Sale or

18
<PAGE> 19
Refinancing received after January 1, 2005 was not to be reinvested but was to
be distributed. If the Plan to Restrict Transferability of Units and Cease
Reinvestment is approved, Cash Available from Sale or Refinancing will not be
reinvested and will be distributed. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS--Plan to Restrict
Transferability of Units and Cease Reinvestment." For information as to the
sales and casualty events giving rise to distributions from Cash Available from
Sale or Refinancing, see "BUSINESS--Disposition of Aircraft."

TAX ALLOCATIONS

Allocations for tax purposes of income, gain, loss deduction, credit
and tax preference are made on a monthly basis to Unitholders who owned Units on
the first day of each month. Thus, for example, if an aircraft were sold at a
gain, that gain would be allocated to Unitholders who owned Units on the first
day of the month in which the sale occurred. If proceeds from this sale were
distributed to Unitholders, such proceeds would be distributed to Unitholders
who owned Units on the record date for such distribution, which, because of
notice requirements, likely would not occur in the same month as the sale. In
addition, a Unitholder who transfers his or her Units after the commencement of
a quarter but prior to the record date for that quarter will be allocated a
share of tax items for the first two months of that quarter without any
corresponding distribution of Cash Available from Operations for, among other
things, payment of any resulting tax.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data and other data
concerning the Partnership for each of the last five years:

19
<PAGE> 20
<TABLE>
<CAPTION>
For years ended December 31,

(In thousands except per-unit amounts) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS

Lease and other income $ 10,747 $ 12,492 $ 12,538 $ 12,852 $ 12,375

Gain on disposition of aircraft 2,501 21 -- -- --
-------- -------- -------- -------- --------

Total Revenues 13,248 12,513 12,538 12,852 12,375
-------- -------- -------- -------- --------
Interest Expense 1,830 2,366 2,660 2,557 2,529

Depreciation expense 1,500 2,129 2,146 2,426 2,921

Other expenses 1,266 1,196 1,401 1,786 1,259
-------- -------- -------- -------- --------
Total Expenses 4,596 5,691 6,207 6,769 6,709
-------- -------- -------- -------- --------
Net income $ 8,652 $ 6,822 $ 6,331 $ 6,083 $ 5,666
-------- -------- -------- -------- --------

Net income per unit(1) 1.85 $ 1.46 $ 1.36 $ 1.30 $ 1.21

Cash distributions declared per unit(2) $ 3.28 $ 2.07 $ 1.85 $ 1.69 $ 1.66

FINANCIAL POSITION

Total Assets $ 85,130 $103,021 $107,542 $113,967 $112,337

Long-term obligations $ 14,071 $ 27,483 $ 29,525 $ 27,940 $ 30,861

Total partners' equity $ 65,042 $ 71,712 $ 74,562 $ 76,874 $ 78,685

Limited Partners' equity per unit(1) 13.92 15.35 15.96 16.46 16.84

Cumulative return of capital per unit(1) 22.3% 18.6% 17.2% 16.0% 15.1%
</TABLE>

(1) After allocation of the 1% General Partner's interest.

(2) Includes special cash distributions of 10 cents per unit in 1995 and of
$1.43 per unit in 1996, of which 63 cents was paid in January 1997.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, long-term borrowings of $14.1 million represented
11.3% of the cost of the aircraft presently owned by the Partnership and 16.6%
of total assets. This debt is outstanding under three long-term, non-recourse
debt facilities collateralized by certain aircraft, two of which are at fixed
rates and one which is at a floating rate. The Partnership has entered into an
interest rate swap agreement which limits its risk on the floating rate debt. At
December 31, 1996 and 1995, $14.1 million and $27.5 million, respectively, were
outstanding under these

20
<PAGE> 21
three facilities. At December 31, 1996, approximately $5.6 million remained
available. See Note 5 of Notes to Financial Statements.

On January 31, 1997, the Partnership entered into a fourth long-term
non-recourse note agreement in the amount of $9 million. Approximately $5.6
million of this loan was utilized to purchase an additional 50% interest in the
TWA Aircraft. See "BUSINESS--The BALCAP/USL Capital Transaction." At the time of
the acquisition, the Partnership already owned a 50% interest in this aircraft,
and the loan is collateralized by this aircraft. The Partnership intends to use
the balance of this loan for working capital.

Total scheduled debt service in 1997 (including debt service under the
loan agreement entered into in January 1997) is $7.5 million and will be paid
from revenues, primarily from the rental payments received under its aircraft
leases. Existing borrowings secured by aircraft on lease to USAir provide for
full repayment of the debt by 1998 rather than through the end of the expected
lease term in 2001. See Notes 2 and 5 of Notes to Financial Statements. As this
debt is repaid and the related line of credit expires, by 1998 the Partnership
will need to and believes that it would be able to obtain bank or other
financing to replace all or a portion of these expiring facilities.

Net cash provided by operating activities was $7.3 million for 1994,
$9.3 million for 1995, and $7.3 million for 1996. Total debt service as a
percentage of net cash provided by operating activities was 95.8%, 59.3%, and
107% for 1994, 1995 and 1996, respectively. In 1993 the Partnership incurred
costs to convert an off-lease Boeing 727 to a cargo configuration and leased it
to FedEx under a finance lease. This caused debt service to increase in 1994 due
to the payment of these conversion costs, and net cash from operating activities
to decrease because, as a finance lease, the FedEx lease generates cash from
investing activities rather than operating activities. In 1996 debt service
increased by $2.9 million from the prior year due to the timing of debt service
payments. Under the loan documents, if December 31 is not a business day (as was
the case in 1995), the loan payment is due in January, causing debt service to
be lower in 1995 and higher in 1996. Net cash provided by operating activities
decreased almost $2 million primarily because of reduced rentals resulting from
the sale of one aircraft in March 1996.

Note receivable of $236,000 represents advances made by the
Partnership to Continental to finance certain aircraft modifications. The
agreement for this financing was entered into as part of a 1991 stipulation in
Continental's bankruptcy. Continental has advised the Partnership that because
the lease has terminated these amounts are no longer due and the Partnership is
reviewing Continental's claim.

Cash distributions paid by the Partnership were $8.6 million ($1.84 per
Unit) in 1994, $9.5 million ($2.04 per Unit) in 1995, and $12.6 million ($2.70
per Unit) in 1996. Distributions paid in 1995 include a special cash
distribution of 10 cents per Unit made from the proceeds received from the
casualty of one aircraft. Distributions paid in 1996 include a special cash
distribution of 80 cents per Unit made from a portion of the sale proceeds
received from the sale of a 50% interest in the aircraft on lease to Finnair.
The increase in cash distributions per Unit in 1995 and 1996 are due primarily
to the special cash distributions described above. On

21
<PAGE> 22
January 31, 1997 the Partnership made an additional special cash distribution of
63 cents per Unit from the proceeds received from the December 31, 1996 sale of
its interest in six 737-200 aircraft. See "Plan to Restrict Transferability of
Units and Cease Reinvestment" below and "BUSINESS--Disposition of Aircraft".

Partnership net income was $6.3 million in 1994, $6.8 million in 1995,
and $8.7 million in 1996. Pursuant to the Limited Partnership Agreement, the
Partnership distributed all Cash Available from Operations and also made special
cash distributions, as described above. Since such distributions were in excess
of earnings, Partnership equity declined from $71.7 million at December 31, 1995
to $65.0 million at December 31, 1996, and Limited Partner equity per Unit
declined from $15.70 to $13.92. From a Limited Partner perspective, the portion
of the distribution in excess of net income constitutes a return of capital.
Total cash distributions declared since inception of the Partnership have
exceeded total net income reflecting a return of capital of $4.92 per Unit, or
22% of the initial capital invested by Limited Partners.

RESULTS OF OPERATIONS

In 1994, revenues were earned from seven aircraft subject to finance
leases (USAir, TWA, and FedEx) and nine aircraft subject to operating leases
(Continental, Finnair, and Sun Jet). TWA contributed 5.2% of 1994 total revenues
and there were two months (November and December) of non-accrual of TWA revenue.
At year-end 1994, there were no off-lease aircraft and none of the Partnership's
lessees was in bankruptcy.

In 1995, revenues were earned from seven aircraft subject to finance
leases (USAir, TWA, and FedEx). Finance lease income declined from 1994 as the
balances due declined. TWA was on non-accrual status early in 1995, but remitted
all past-due amounts by the third quarter. TWA was in bankruptcy for a portion
of 1995, and the TWA lease contributed 7% of total 1995 revenues. Revenues were
earned from nine aircraft subject to operating leases (Continental, Finnair, and
Sun Jet) from January through May, and eight aircraft for the balance of the
year, reflecting the casualty loss of one aircraft leased to Continental. At
year-end 1995, there were no off-lease aircraft, all of the Partnership's
lessees were current under their lease agreements, and none was in bankruptcy.

In 1996, revenues were earned from seven aircraft subject to finance
leases (USAir, TWA, and FedEx). Finance lease income declined from 1995 as the
balances due declined. Revenues were earned from eight aircraft subject to
operating leases (Continental, Finnair, and Sun Jet) from January through March,
and seven aircraft for the remainder of the year, reflecting the March sale of
the aircraft leased to Finnair. The decline in operating lease rentals is due
primarily to the sale of this aircraft. On December 31, 1996, the operating
lease with Continental covering six aircraft expired, and the aircraft were sold
on that date. The sales of the Partnership's interests in aircraft on lease to
Finnair and Continental produced gains of $556,000 and $1.9 million,
respectively. See Note 3 of Notes to Financial Statements. At year-end 1996,
there were no off-lease aircraft, all of the Partnership's lessees were current
under their lease agreements and none was in bankruptcy.

22
<PAGE> 23
USAir, the Partnership's major lessee (76% of total year-end assets),
reported profits of $263 million on revenues of $8.1 billion for 1996, compared
with profits of $119 million on revenues of $7.5 billion for 1995.

FedEx (13.3% of total year-end assets) reported profits of $308
million on revenues of $10.3 billion for its fiscal year ending May 31, 1996,
compared with profits of $298 million on revenues of $9.4 billion for its
prior fiscal year.

TWA (8.3% of total year-end assets) reported a net loss of $285 million
on revenues of $3.6 billion for 1996, compared with a net loss of $228 million
on revenues of $3.3 billion for 1995.

Sun Jet (1.3% of total year-end assets) while current in its rental
obligations throughout 1996, was delinquent in its February 1997 rental payment,
but this delinquency has been cured.

For information regarding the percentage of total Partnership assets
and revenues represented by aircraft owned and leased by the Partnership, see
"BUSINESS--Aircraft Portfolio".

The Partnership believes that its revenues and income have not been
materially affected by inflation and changing prices because its principal items
of revenue (rental payments) and expenses (interest) are at fixed long-term
rates.

Interest expense in 1996 reflects an average interest rate of 8.7%
based on average total outstanding debt of $21 million, compared to 1995's
average interest rate of 8.3% based on average total outstanding debt of $28.5
million.

Depreciation expense relates to aircraft subject to operating leases
and those held for sale or lease. In 1996 depreciation expense decreased because
of the March 1996 sale of the aircraft on lease to Finnair.

In 1994, general and administrative expenses were $388,000, which
included $197,000 in non-recurring expenses, primarily related to the early
return and repair of the aircraft now on lease to Sun Jet. In 1994, the
Partnership incurred total expenses of $798,000 (of which $668,000 were
capitalized), to prepare its DC-9-51 aircraft for re-lease to Sun Jet. In 1996,
general and administrative expenses increased by $117,000 to $272,000 primarily
because of legal expenses relating to the January 1997 acquisition of an
interest in an aircraft on lease to TWA and the 1998 change in tax status.

In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which is effective for fiscal years beginning after December 15, 1995.
The Partnership adopted the standard January 1, 1996, and the impact on the
financial statements was not material.

In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. It is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods and prior-periods presented. The Partnership does
not expect that adoption of SFAS No. 128 will have a material effect on its
financial position, results of operations or net income per Unit.

23
<PAGE> 24
PLAN TO RESTRICT TRANSFERABILITY OF UNITS AND CEASE REINVESTMENT

As previously reported to Unitholders, Airlease will be taxed as if it
were a corporation effective January 1, 1998, if its Units are freely tradable
on that date. This additional level of tax would substantially reduce
distributions to Unitholders. See Note 9 of Notes to Financial Statements. To
address the adverse change in tax law, the plan provides that transferability of
the Units would be restricted in December 1997 and the Units would be delisted
from trading at that time. Although the Units would not be freely tradable on
the New York Stock Exchange or a similar secondary market after December 1997,
under provisions of the tax law, there are a number of services which may be
available to facilitate purchases and sales of Units. At this time it is
difficult to know if these services will operate with respect to the Units, and
IRS rules impose various limitations as to the aggregate number of Units which
may be sold in any year utilizing these services. If no such services develop
Unitholders may be unable to sell their Units, but they would receive
distributions through the remaining term of the Partnership.

The plan also provides that Airlease would not make any new aircraft
investments, would sell its aircraft as attractive opportunities become
available and would distribute net sales proceeds to Unitholders after each
sale. Airlease cannot predict when sales will be made, or provide any assurance
as to the prices at which sales will be made. If the existing aircraft were sold
at the end of their lease terms, 86% of the assets would be sold within five
years and the remainder by 2006. This assumes that all lessees comply with their
lease obligations and available lease renewal options are not exercised.
Aircraft sales will result in a liquidation of the portfolio over time, and
increasingly cash flow and distributions will depend more upon sales proceeds
and less upon receipt of regular rental payments, and thus be less predictable.

As previously disclosed, the Partnership's sources of capital are
limited. Since all cash available from operations is distributed, there is no
build up of equity capital and acquisitions must be funded from proceeds when
aircraft are sold or from debt. Access to debt is limited because most of the
aircraft are being used to secure existing borrowings. Because of these and
other factors, Airlease cannot compete on the basis of price with many of its
competitors which are much larger and have lower capital costs. As a result,
finding investment opportunities that offer an appropriate balance of risk and
reward has been very difficult. In the past five years, the Partnership has made
only two aircraft investments, both of which were possible because of special
circumstances which the General Partner believes are unlikely to occur in the
future. As described above, during 1996 Airlease sold interests in seven
aircraft at a profit, but the Partnership was unable to reinvest the proceeds in
aircraft at an acceptable return, and the General Partner determined that the
best use of the proceeds was to distribute them to Unitholders. Since these
sales proceeds were not reinvested in aircraft, the size of the portfolio has
been reduced.

24
<PAGE> 25
These and other factors were considered by the Board of Directors of
the General Partner as affecting the competitive position of Airlease, and these
factors as well as the change in tax law were considered by the board in its
decision to propose the plan. See "BUSINESS--Competitive Position of the
Partnership" and "--Federal Income Taxation."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and Notes to Financial Statements described in
Item 14(a) are set forth in Appendix A and are filed as part of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

GENERAL

The Partnership has no directors or executive officers. Under the
Limited Partnership Agreement, the General Partner has full power and authority
in the management and control of the business of the Partnership, subject to
certain provisions requiring the consent of the Limited Partners.

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information about the directors and
executive officers of the General Partner.

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
---- --------------- --- ---------------------------
<S> <C> <C> <C>
David B. Gebler Chairman of the 47 Mr. Gebler is Senior Vice President of Bank of America National
Board, President, Trust and Savings Association ("Bank of America") and of
Chief Executive BALCAP. He has been with BALCAP since September 1996.
Officer and a Director From 1991 to September 1996 he was Senior Vice President of
the Transportation and Industrial Financing business unit of
USL Capital. Mr. Gebler has been President of the General Partner
since 1989 and a Director since 1990. Mr. Gebler holds a bachelors
degree in mathematics from Clarkson University and graduate degrees
in Engineering and Management from the University of Michigan.
</TABLE>

25
<PAGE> 26
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
---- --------------- --- ---------------------------
<S> <C> <C> <C>
Richard V. Harris Director 48 Mr. Harris is Executive Vice President of Bank of America and
Chairman and President of BALCAP. He was elected President
and CEO in 1982, adding the title of Chairman in 1988. He has
been a Director of the General Partner since October 1996.
Other assignments at Bank of America have included
responsibilities for Project Finance and Asset-Backed Finance
along with Leasing. Prior to assuming his present
responsibilities, Mr. Harris held both transactional and marketing
management positions at BankAmerica Leasing. Mr. Harris
holds a B.S.E.E. degree in Electrical Engineering from Brigham
Young University and a Master of Business Administration
degree also from BYU.

William A. Hasler Director 55 Mr. Hasler has been the dean of the Haas School of Business at
the University of California at Berkeley since August 1991 and a
Director of the General Partner since 1995. From 1984 to 1991,
he was vice chairman and director of KPMG Peat Marwick and
was responsible for its worldwide consulting business. He is a
member of the board of governors of The Pacific Stock Exchange
and of the board of directors of The Gap, TCSI, Tenera, Walker
Industries, and Aphton Corporation. He serves on a presidential
advisory board on critical technologies. He is a 1963 graduate of
Pomona College and earned his MBA from Harvard in 1967.

Leonard Marks, Jr. Director 75 Mr. Marks retired as Executive Vice President of Castle &
Cooke, Inc. in 1985. Prior to that time, he was also president of
the real estate and diversified activities group of that company.
Mr. Marks has been a Director of the General Partner since
1986. For many years, Mr. Marks was an assistant professor of
Finance at the Harvard Business School and a professor of
Finance at the Stanford Business School. He was Assistant
Secretary of the United States Air Force from 1964 to 1968.
Mr. Marks is a director of Alexion Pharmaceutical Inc. and
Northern Trust Bank of Arizona, N.A. Mr. Marks holds a Ph.D
in Business Administration from Harvard University.

Richard P. Powers Director 56 Mr. Powers has been Vice President, Finance and Administration
and Chief Financial Officer of CardioGenesis Corporation, a
medical device company, since 1996. From 1981 to 1994,
he was with Syntex Corporation, a pharmaceutical company,
serving as Senior Vice President and Chief Financial Officer of
that company from 1986 to 1994. From 1994 to 1996 he served
as consultant to various companies, including advising and
assisting in the sale of Syntex Corporation to Roche Corporation
in 1994. Mr. Powers holds a Bachelor of Science degree in
Accounting from Canisius College and a Masters in Business
Administration from the University of Rochester.

K. Thomas Rose Director 52 Mr. Rose has been Executive Vice President and Chief Operating
Officer of BALCAP since 1992, responsible for all
non-marketing areas of BALCAP. He also is the chief credit
officer for the subsidiaries of BankAmerica Corporation which
comprise the leasing group. He has been a Director of the
General Partner since October 1996. Prior to his present
responsibilities, Mr. Rose was with Security Pacific Leasing
Corporation as Executive Vice President - Lease Services since
1973. Mr. Rose holds a B.A. from California State University,
Fullerton and a Juris Doctorate degree from Golden Gate
University, School of Law.
</TABLE>

26
<PAGE> 27
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
---- --------------- --- ---------------------------
<S> <C> <C> <C>
Richard C. Walter Chief Financial Officer 51 Mr. Walter has been Senior Vice President and Controller of
and a Director BALCAP since 1992. He has been a director of the General
Partner since October 1996. Prior to assuming his present
responsibilities at BALCAP, Mr. Walter was with Security Pacific
Leasing as Accounting Manager since 1973. He holds a Bachelor of
Science degree in Business Administration and Accounting from
Montana State University.
</TABLE>

ITEM 11. EXECUTIVE COMPENSATION

The Partnership does not pay or employ directly any directors or
officers. Each of the officers of the General Partner is also an officer or
employee of BALCAP and is not separately compensated by the General Partner or
the Partnership for services on behalf of the Partnership. Thus, there were no
deliberations of the General Partner's Board of Directors with respect to
compensation of any officer or employee.

The Partnership reimburses the General Partner for fees paid to
Directors of the General Partner who are not otherwise affiliated with the
General Partner or its affiliates. In 1996, such unaffiliated directors were
paid an annual fee of $14,500 and $500 for each meeting attended.

The Partnership has not established any plans pursuant to which cash or
non-cash compensation has been paid or distributed during the last fiscal year
or its proposed to be paid or distributed in the future. The Partnership has not
issued or established any options or rights relating to the acquisition of its
securities or any plans therefor.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS

As of February 28, 1997, the following persons were known to the
Partnership to be beneficial owners of more than five percent of the
Partnership's equity securities:

<TABLE>
<CAPTION>
Name and Address Amount and Nature of
Title of Class of Beneficial Owner Beneficial Ownership Percent of Class
- -------------- ------------------- -------------------- ----------------
<S> <C> <C> <C>
Depositary United States Airlease 231,250(1) 5%
Units Holding, Inc.
555 California Street
San Francisco, CA 94104(2)

Depositary BALCAP 793,750(3) 17.2%
Units 555 California Street
San Francisco, CA 94104(2)
</TABLE>

27
<PAGE> 28
- ----------
(1) United States Airlease Holding, Inc. ("Holding") reported that it had
sole voting and dispositive power over these Units.

(2) BALCAP owns all of the outstanding stock of Holding. Therefore, BALCAP
may be deemed also to be the indirect beneficial owner of the Units
owned by Holding. In addition, BALCAP owns all the outstanding stock of
the General Partner. Therefore, BALCAP may be deemed to be the indirect
beneficial owner of the General Partner's 1% general partner interest.
BALCAP is a wholly owned indirect subsidiary of BankAmerica
Corporation. Therefore, BankAmerica Corporation and each BankAmerica
Corporation subsidiary which is the direct or indirect parent of BALCAP
is also indirectly the beneficial owner of all Units and of the General
Partner's 1% general partner interest owned or deemed owned by BALCAP.

(3) BALCAP reported that it had sole voting and dispositive power over
these Units.

UNIT OWNERSHIP BY MANAGEMENT

Set forth below is information regarding interests in the Partnership
owned by each director of and all directors and executive officers, as a group,
of the General Partner. Unless otherwise noted, each person has sole voting and
investment power over all units owned.

<TABLE>
<CAPTION>
Name of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
-------------- ---------------- -------------------- ----------------
<S> <C> <C> <C>
Depositary David B. Gebler 700(1) (2)
Units

Leonard Marks, Jr. 500 (2)

All directors and executive 1,200(3) (2)
officers as a group
</TABLE>
- ----------
(1) Includes 200 Units held by Mr. Gebler as custodian for a minor child as
to which Mr. Gebler has shared voting and dispositive power and as to
which beneficial ownership is disclaimed.

(2) Represents less than 1%.

(3) Includes the 200 Units described in note 1.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Until September 18, 1996, United States Airlease Holding, Inc. (which
was then a wholly owned subsidiary of USL Capital), owned 22.2% of the
outstanding Units. On that date, Holding sold 17% of the outstanding Units to
BALCAP. The filing under Section 16 of the Securities Exchange Act reporting
such sale was due on October 10, 1996 and inadvertently was not filed until
October 21, 1996.

28
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For a discussion of certain fees, expenses and reimbursements payable
and paid to the General Partner and its affiliates by the Partnership, see Note
8 of Notes to Financial Statements. From time to time, the Partnership borrowed
funds from USL Capital, including advances for expense payments. All such
borrowings were unsecured and bore interest at a floating rate not exceeding the
prime rate. There were no such borrowings outstanding during 1996.

For information regarding the purchase by the Partnership of an
interest in the TWA Aircraft from USL Capital, see "BUSINESS--The BALCAP/USL
Capital Transaction." For a discussion of certain terms of the Partnership
Agreement regarding the Partnership's participation in aircraft leasing
investments made by USL Capital and its Related Entities, see
"BUSINESS--Acquisition of Additional Aircraft." For a discussion of aircraft
held jointly between the Partnership and BALCAP or formerly held jointly between
the Partnership and USL Capital, see "BUSINESS--Aircraft Portfolio" and
"--Existing Participants in Leases."

29
<PAGE> 30
PART IV

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

(a) 1. The following financial statements of the Partnership are
included in this report as Appendix A:

<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Responsibility for Financial Statements................................... A-1

Independent Auditors' Report........................................................... A-2

Financial Statements:

Statements of Income for the Years Ended December 31, 1996,
1995 and 1994 ................................................................ A-3

Balance Sheets, as of December 31, 1996 and 1995.............................. A-4

Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994........................................................... A-5

Statements of Changes in Partners' Equity for the Years Ended
December 31, 1996, 1995 and 1994.............................................. A-6

Notes to Financial Statements ......................................................... A-6
</TABLE>

Financial statement schedules other than those listed above are omitted
because the required information is included in the financial
statements or the notes thereto or because of the absence of conditions
under which they are required.

(b) The Partnership did not file any reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1996.

30
<PAGE> 31
(c) Exhibits required by Item 601 of Regulation S-K:

Exhibit No. Description
----------- -----------
3.1(1) Amended and Restated Agreement of Limited Partnership of
Partnership.

3.2(1) Form of Certificate for Limited Partnership Units of
Partnership.

3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon
Shareholder Services (formerly Manufacturers Hanover Trust
Company), the General Partner and Limited Partners and Assignees
holding Depositary Receipts.

3.4(1) Form of Depositary Receipt for Units of Limited Partners'
Interest in the Partnership

3.5(2) Amendments to Amended and Restated Partnership Agreement.

4.1(1) Form of Application for Transfer of Depositary Unit.

4.2(2) Loan and Security Agreement dated as of March 20, 1987 between
Meridian Trust Company, as Trustee, as Borrower and The World
Wing Company Limited, as Lender.

4.3(2) 8.75% Secured Non-recourse Note of Meridian Trust Company dated
March 31, 1987 in favor of The World Wing Company Limited.

4.4(2) Instructions and Consent Agreement dated as of March 31,
1987 between the Registrant and The World Wing Company
Limited.

10.1(1) Trust Agreement, together with Trust Agreement Supplement No.
1-5, dated as of July 10, 1986, between the Registrant, Meridian
Trust Company and the General Partner.

10.3(1) Lease Agreement, together with Lease Supplement Nos. 1-5, dated
as of July 10, 1986, between Meridian Trust Company, not in its
individual capacity but solely as Trustee, and Pacific Southwest
Airlines.

10.40(2) Trust Agreement dated as of August 15, 1988, between Taurus
Trust Company, Inc. (formerly Trust Company for USL, Inc.), as
Trustee, United States Airlease, Inc., and the Registrant, with
respect to aircraft N913TW.

- ----------
(1) Incorporated by reference to the Partnership's Registration
Statement on Form S-1 (File No. 33-7985), as amended.

(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1995.

31
<PAGE> 32
Exhibit No. Description
----------- -----------
10.41 Stipulation and order dated July 1991 among Continental
Airlines, Inc., Continental Airlines Holdings, Inc., New York
Airlines, Inc., United States Leasing International, Inc.,
Airlease, Ltd., PS Group, Inc., and Taurus Trust Company, Inc.
(formerly Trust Company for USL, Inc.) concerning seven Boeing
737-200 aircraft and certain engines and related equipment.

10.44(3) Aircraft Lease Agreement dated as of April 15, 1993 between
Taurus Trust Company, Inc. (formerly Trust Company for USL,
Inc.) as Owner Trustee, Lessor, and Federal Express Corporation,
Lessee with respect to one (1) Boeing 727-2D4 Aircraft, U.S.
Registration No. 362PA (manufacture serial no. 21850).

10.45(2) Trust Agreement dated as of July 27, 1993 among Airlease Ltd., A
California Limited Partnership, as Owner Participant, and Taurus
Trust Company, Inc. (formerly Trust Company for USL, Inc.) as
Trustee, with respect to one (1) Boeing 727-204 Aircraft with
FAA Registration No. N362PA leased to Federal Express
Corporation.

10.48(4) Aircraft Lease Agreement dated as of December 1, 1994 and Lease
Supplement dated December 13, 1994 between Taurus Trust Company,
Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee,
Lessor and Sun Jet International, Inc., Lessee; Instruction
Letter dated as of December 12, 1994 between Taurus Trust
Company, Inc. (formerly Trust Company for USL, Inc.) as Owner
Trustee, USL Capital Corporation and Airlease Ltd. as Owner
Participants; and Appointment Letter of Leasing Agent dated as
of December 12, 1994 between USL Capital Corporation and Taurus
Trust Company, Inc. (formerly Trust Company for USL, Inc.), as
Owner Trustee, with respect to one (1) McDonnell Douglas DC-9-51
Aircraft, Aircraft Registration No. N920PJ (manufacture serial
#47677).

10.49 Assignment and Assumption Agreement dated as of January 31, 1997
between USL Capital Corporation and the Registrant.

- ----------
(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1995.

(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1993.

(4) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1994.

32
<PAGE> 33
Exhibit No. Description
----------- -----------
10.50 Lease, together with Lease Supplement No. 1, dated as of March
15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World
Airlines, Inc., as Lessee, with respect to one (1) McDonnell
Douglas DC-9-82 Aircraft, as amended by Amendment Agreement
dated as of December 15, 1986.

33
<PAGE> 34
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 28, 1997.

AIRLEASE LTD., A CALIFORNIA LIMITED
PARTNERSHIP
(Registrant)

By: Airlease Management Services, Inc.,
General Partner

By: /s/ David B. Gebler
-------------------------------------
David B. Gebler
Chairman, Chief Executive Officer and
President

34
<PAGE> 35
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 in
the capacities and on the dates indicated.

For Airlease Management
Services, Inc. ("AMSI"), General Partner

/s/ David B. Gebler March 28, 1997
- -----------------------------
David B. Gebler
Chairman, Chief Executive Officer, President
and Director of AMSI

/s/ Richard C. Walter March 28, 1997
- -----------------------------
Richard C. Walter
Chief Financial Officer and Director of AMSI (Principal
Financial Officer and Accounting Officer)

/s/ Richard V. Harris March 28, 1997
- -----------------------------
Richard V. Harris
Director of AMSI

/s/ K. Thomas Rose March 28, 1997
- -----------------------------
K. Thomas Rose
Director of AMSI

The foregoing constitute a majority of the members of the Board of Directors of
Airlease Management Services, Inc. (the General Partner).

35
<PAGE> 36
APPENDIX A

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Airlease Management Services, Inc. ("AMSI"), the general partner of the
partnership was a wholly owned subsidiary of USL Capital until October 31, 1996,
when BA Leasing & Capital Corporation ("BALCAP") purchased 100% of the stock of
AMSI. AMSI is responsible for the preparation of the partnership's financial
statements and the other financial information in this report. This
responsibility includes maintaining the integrity and objectivity of the
financial records and the presentation of the partnership's financial statements
in accordance with generally accepted accounting principles.

The general partner maintains an internal control structure designed to provide,
among other things, reasonable assurance that partnership records include the
transactions of its operations in all material respects and to provide
protection against significant misuse or loss of partnership assets. The
internal control structure is supported by careful selection and training of
financial management personnel, by written procedures that communicate the
details of the control structure to the partnership's activities, and by
BALCAP's staff of operating control specialists who conduct reviews of adherence
to the partnership's procedures and policies.

The partnership's financial statements have been audited by Coopers & Lybrand
L.L.P., independent auditors for the years ended December 31, 1996, and December
31, 1995. Their audits were conducted in accordance with generally accepted
auditing standards which included consideration of the general partner's
internal control structure. The Independent Auditors' Report appears on page
A-2.

The board of directors of the general partner, acting through its Audit
Committee composed solely of directors who are not employees of the general
partner, is responsible for overseeing the general partner's fulfillment of its
responsibilities in the preparation of the partnership's financial statements
and the financial control of its operations. The independent auditors have full
and free access to the Audit Committee and meet with it to discuss their audit
work, the partnership's internal controls, and financial reporting matters.

/s/ David B. Gebler
- -----------------------------
David B. Gebler
Chairman, Chief Executive Officer and President
Airlease Management Services, Inc.

/s/ Richard C. Walter
- -----------------------------
Richard C. Walter
Chief Financial Officer
Airlease Management Services, Inc.

A-1
<PAGE> 37
INDEPENDENT AUDITORS' REPORT

To the Partners of Airlease Ltd.,
A California Limited Partnership:

We have audited the accompanying balance sheet of Airlease Ltd., A California
Limited Partnership as of December 31, 1996 and 1995, and the related statements
of income, changes in partners' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the partnership as of December
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.

/s/ Coopers & Lybrand L.L.P.
- -----------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
January 27, 1997
except for Note 9 for which
the date is March 13, 1997

A-2
<PAGE> 38
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER-UNIT AMOUNTS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES

Finance lease income $ 8,800 $ 9,455 $ 9,635

Operating lease rentals 1,798 2,883 2,743

Gain on disposition of equipment, net 2,501 21 --

Other income 149 154 160

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

Total Revenues 13,248 12,513 12,538
------- ------- -------

EXPENSES

Interest 1,830 2,366 2,660

Depreciation-operating leases 1,500 2,129 2,146

Management fee-general partner 740 784 800

Investor reporting 254 258 213

General and administrative 272 154 388
------- ------- -------

Total expenses 4,596 5,691 6,207
------- ------- -------

NET INCOME $ 8,652 $ 6,822 $ 6,331
------- ------- -------

NET INCOME ALLOCATED TO:
------- ------- -------
General Partner 87 68 63
------- ------- -------

Limited Partners 8,565 6,754 6,268
------- ------- -------

NET INCOME PER LIMITED PARTNERSHIP UNIT 1.85 1.46 1.36
------- ------- -------
</TABLE>

See notes to financial statements

A-3
<PAGE> 39
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF DECEMBER 31,

(IN THOUSANDS EXCEPT UNIT DATA) NOTES 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS

Cash $ 580 $ 0

Finance leases-net 1 & 2 83,056 91,564

Operating leases-net 1 & 3 1,090 10,259

Notes receivable 4 & 7 236 933

Prepaid expenses and other assets 168 265
-------- --------
Total Assets $ 85,130 $103,021
-------- --------

LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:

Distribution payable to partners $ 5,045 $ 2,336

Accounts payable and accrued liabilities 972 1,490

Long-term notes payable 5 14,071 27,483
-------- --------
Total liabilities 20,088 31,309
-------- --------
COMMITMENTS AND CONTINGENCIES 6

PARTNERS' EQUITY:

Limited partners (4,625,000 units outstanding) 64,391 70,995

General partner 651 717
-------- --------
Total partners' equity 65,042 71,712
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 85,130 $103,021
-------- --------
</TABLE>

See notes to financial statements

A-4
<PAGE> 40
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,

(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net Income $ 8,652 $ 6,822 $ 6,331

Adjustments to reconcile net income to net cash
provided by operating activities:

Depreciation 1,500 2,129 2,146

Increase (decrease) in accounts payable and accrued (518) 231 (1,092)
liabilities

Decrease (increase) in prepaid expenses and other assets 97 54 (157)

Decrease (increase) in accounts receivable 111 111 103

Gain on disposition of equipment, net (2,501) (21) 0
-------- -------- --------

Net cash provided by operating activities 7,341 9,326 7,331
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES

Aircraft equipment purchase and refurbishment (net of 0 (66) (4,401)
accrued refurbishment costs of $66 in 1995, and
$250 in 1994)

Proceeds from disposition of equipment 10,060 440 0

Decrease (increase) in notes receivable 697 (260) (434)

Rental receipts in excess of earned finance lease income 8,508 2,133 4,513
-------- -------- --------
Net cash provided (used) by investing activities 19,265 2,247 (322)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES

Revolving credit borrowing (repayment)-net (7,381) 545 5,946

Proceeds from issuance of long-term debt 0 575 0

Repayment of long-term debt (6,031) (3,162) (4,361)

Distributions paid to partners (12,614) (9,531) (8,596)
-------- -------- --------
Net cash used by financing activities (26,026) (11,573) (7,011)
-------- -------- --------
Increase (decrease) in cash 580 0 (2)

Cash at beginning of year 0 0 2
-------- -------- --------
Cash at end of year $ 580 $ 0 $ 0
-------- -------- --------

Additional information: Cash paid for interest $ 2,097 $ 2,052 $ 2,483
-------- -------- --------
</TABLE>

NON-CASH INVESTING AND FINANCING ACTIVITIES
During the second quarter of 1994, accrued conversion costs were adjusted by
$920,000

See notes to financial statements

A-5
<PAGE> 41
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994

GENERAL LIMITED TOTAL
(IN THOUSANDS EXCEPT PER-UNIT AMOUNTS) PARTNER PARTNERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 769 $ 76,105 $ 76,874

Net Income - 1994 63 6,268 6,331

Distributions to partners declared ($1.85 (86) (8,557) (8,643)
per limited partnership unit)
- --------------------------------------------------------------------------------

Balance, December 31, 1994 746 73,816 74,562

Net Income - 1995 68 6,754 6,822

Distributions to partners declared ($2.07 (97) (9,575) (9,672)
per limited partnership unit)
- --------------------------------------------------------------------------------

Balance, December 31, 1995 717 70,995 71,712

Net Income - 1996 87 8,565 8,652

Distributions to partners declared ($3.28 (153) (15,169) (15,322)
per limited partnership unit)
- --------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 1996 $ 651 $ 64,391 $ 65,042
- --------------------------------------------------------------------------------
</TABLE>

See notes to financial statements

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION - Airlease Ltd., A California Limited Partnership (the
"partnership") engages in the business of acquiring, either directly or through
joint ventures, commercial jet aircraft, spare or separate engines and related
rotable parts ("aircraft") and leasing such aircraft to domestic and foreign
airlines and freight carriers. The general partner is Airlease Management
Services, Inc. ("AMSI") which was a wholly-owned subsidiary of USL Capital
Corporation ("USL Capital") until October 31, 1996 on which date BA Leasing and
Capital Corporation ("BALCAP") purchased all of the stock of AMSI and of United
States Airlease Holding ("Holding"), which holds 5% of the outstanding units
from USL Capital. BALCAP owns

A-6
<PAGE> 42
directly or through its subsidiaries 22.2% of the units. An additional 3,600,000
units are publicly held.

BASIS OF PRESENTATION - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

FINANCE LEASES - Lease agreements, under which the partnership recovers
substantially all its investment from the minimum lease payments are accounted
for as finance leases. At lease commencement, the partnership records the lease
receivable, estimated residual value of the leased aircraft, and unearned lease
income. The original unearned income is equal to the receivable plus the
residual value less the cost of the aircraft (including the acquisition fee paid
to an affiliate of the general partner). The remaining unearned income is
recognized as revenue over the lease terms so as to approximate a level rate of
return on the investment.

OPERATING LEASES - Leases that do not meet the criteria for finance leases are
accounted for as operating leases. The partnership's undivided interests in
aircraft subject to operating leases are recorded at cost which includes
acquisition fees paid to an affiliate of the general partner. Aircraft are
depreciated over the related lease terms, generally five to nine years on a
straight-line basis to an estimated residual value, or over their useful lives
for aircraft held for lease or sale, on a straight-line basis to an estimated
salvage value.

NET INCOME PER LIMITED PARTNERSHIP UNIT is computed by dividing the net income
allocated to the Limited Partners by the weighted average units outstanding
(4,625,000).

CONCENTRATION OF CREDIT RISK - At December 31, 1996, all eight aircraft owned by
the partnership (either directly or through joint ventures) were leased to
commercial airlines and a major freight carrier.

2. FINANCE LEASES

The partnership owns five aircraft which are leased to USAirways. The lessee is
required to pay a substantial additional amount if it does not renew the lease
for three years at the end of the initial 12-year term (1998); accordingly, the
lease is accounted for as a 15-year lease. In 1996, 1995, and 1994, leases with
USAirways resulted in finance lease revenues of $7,559,000, $8,007,000, and
$8,409,000, respectively.

A sixth aircraft subject to a finance lease expiring in 2002 was held jointly
with USL Capital and leased to Trans World Airlines. On January 31, 1997, the
partnership purchased USL Capital's 50% interest in this aircraft for $5.7
million and now holds a 100% interest in the aircraft.

A seventh wholly-owned aircraft is leased to FedEx under a 13-year finance lease
which expires in 2006.

A-7
<PAGE> 43
The finance leases at December 31, 1996 and 1995 are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Receivable in installments $ 74,875 $ 92,183
Residual valuation 41,950 41,950
Unearned lease income (33,769) (42,569)
-------- --------
NET INVESTMENT $ 83,056 $ 91,564
======== ========
</TABLE>

Residual valuation, which is reviewed annually, represents the estimated amount
to be received from the disposition of aircraft after lease termination. If
necessary, residual adjustments are made which result in an immediate charge to
earnings and/or a reduction in earnings over the remaining term of the lease.

Finance lease receivables at December 31, 1996 are due in installments of
$14,348,000 annually through 2000, and $11,389,000 in 2001, and $6,094,000
thereafter.

3. OPERATING LEASES

The partnership, jointly with USL Capital and PS Group, Inc., owned an undivided
1/3 interest in six aircraft, subject to an operating lease with Continental
Airlines, Inc. ("Continental") which were sold on December 31, 1996 and resulted
in a net gain of $1.9 million. A seventh aircraft damaged and declared a
casualty loss in July 1995 resulted in a net gain of $21,000. Operating lease
revenues to the partnership from this lease were $1,260,000 in 1996, $1,347,500
in 1995, and $1,470,000 in 1994.

In April 1992, the partnership, jointly with USL Capital, purchased an
individual 50% interest in one aircraft for $8,526,000, and placed it on lease
to Finnair OY for a seven-year term. In March 1996, the partnership sold its 50%
interest in this aircraft, resulting in a net gain of $556,000. Finnair
generated partnership operating lease revenues of $199,000 and $1,197,000 in
1996 and 1995, respectively.

In December 1994, the partnership leased one aircraft which was previously off
lease to Sun Jet International, Inc. under a three-year operating lease which
expires in 1997. The aircraft was previously held with USL Capital. On October
31, 1996, USL Capital sold its 50% interest in the aircraft to BALCAP. Operating
lease revenues to the partnership from this lease were $339,000 in 1996 and
1995 and $14,000 in 1994.

The operating leases at December 31, 1996 and 1995 are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Leased aircraft (at cost) $ 4,501 $ 27,492
Accumulated depreciation (3,411) (17,344)
Rentals receivable 0 111
-------- --------
NET INVESTMENT $ 1,090 $ 10,259
======== ========
</TABLE>

Future minimum rentals on operating leases at December 31, 1996, are due in
installments of $290,000 in 1997.

A-8
<PAGE> 44
During 1995, the partnership incurred capital expenditures of $66,000 for repair
work on the DC-9-51 aircraft.

4. NOTES RECEIVABLE

At December 31, 1996 and 1995, the partnership had outstanding notes receivable
of $236,000 and $933,000, respectively, from Continental for certain aircraft
modifications pursuant to the restructuring of the lease agreement on the
aircraft in 1991.

The weighted average interest rate at December 31, 1996 and 1995 was 11.28% and
11.11%, respectively, and the principal is due in subsequent years as follows:
1997, $65,000; 1998, $73,000; 1999, $81,000, and $14,000 thereafter.

5. LONG-TERM NOTES PAYABLE

At December 31, 1996 and 1995, the partnership had outstanding borrowings of
$8,026,000 and $13,059,000, respectively, under an 8.75% note payable through
September 30, 1998. The note is collateralized by three of the aircraft leased
to USAirways under a finance lease with no other recourse to the partnership.

The partnership has a non-recourse revolving variable interest loan facility
which is collateralized by one of the aircraft leased to USAirways. The
partnership may borrow up to $5,634,000 which amount declines through 1998. At
December 31, 1996 and 1995, $0 and $7,381,000 were outstanding, respectively.
The partnership has entered into an interest rate swap agreement which
effectively fixes the interest rate at 7.36% on substantially all the borrowing
through November 1998. See Note 6.

In April 1993, the partnership entered into a non-recourse revolving declining
loan agreement collateralized by the 50% interest in the aircraft leased to
Finnair OY. The aircraft was sold in March 1996 and a portion of the sales
proceeds were used to repay the outstanding debt under this agreement.

In November 1993, the partnership entered into a non-recourse fixed interest
rate loan facility collateralized by its 100% interest in the aircraft leased to
FedEx. At December 31, 1996 and 1995, $6,045,000 and $6,467,000, respectively,
were outstanding under a 7.4% note payable through 2006.

Based upon amounts outstanding at December 31, 1996, the minimum future
principal payments on all outstanding long-term notes payable are due as follows
(in thousands):

A-9
<PAGE> 45
<TABLE>
<S> <C>
1997 $ 4,893
1998 4,080
1999 529
2000 568
2001 612
Thereafter 3,389
-------
TOTAL $14,071
=======
</TABLE>

6. DERIVATIVE FINANCIAL INSTRUMENTS

Interest rate swap agreements involve the exchange of interest obligations on
fixed and floating interest rate debt without the exchange of the underlying
principal amounts. The agreements generally mature at the time the related debt
matures. The differential paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense over the life of the agreements.
Notional amounts are used to express the volume of interest rate swap
agreements. The notional amounts do not represent cash flows and are not subject
to risk of loss. In the unlikely event that a counterparty fails to meet the
terms of an interest rate swap agreement, the partnership's exposure is the
termination value of the contracts. At December 31, 1996,the partnership had one
interest rate swap agreement outstanding, which was in a payable position, with
a notional principal amount of $5,462,000 and a termination value of $89,000.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents carrying amounts and fair values of the
partnership's financial instruments at December 31, 1996. The fair value of a
financial instrument is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.

<TABLE>
<CAPTION>
1996

(IN THOUSANDS) CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Notes receivable (Note 4) $ 236 $ 244

Long-term debt (Note 5) $ 14,071 $ 14,115

Derivatives relating to debt (Note 6)

Interest rate swaps-net pay position n/a $ (89)
</TABLE>

The carrying amounts presented in the table are included in the balance sheet
under the indicated captions.

The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:

A-10
<PAGE> 46
NOTES RECEIVABLE are estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.

LONG-TERM DEBT is estimated by discounting the future cash flows using
rates that are assumed would be charged to the partnership for debt
with similar terms and remaining maturities.

DERIVATIVES are estimated as the amount that the partnership would
receive or pay to terminate the agreements at the reporting date,
taking into account current market interest rates and corresponding
borrowing spreads.

8. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES

In accordance with the Agreement of Limited Partnership, the general partner and
its affiliates receive expense reimbursement, fees and other compensation for
services provided to the partnership.

Amounts earned by the general partner and affiliates for the years ended
December 31, 1996, 1995, and 1994, were as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Management fees $ 673 $ 718 $ 735
Disposition fees 501 23 0
Remarketing fees 67 66 65
Reimbursement of other costs 79 79 79
Reimbursement of interest costs 6 15 39
------ ------ ------
TOTAL $1,326 $ 901 $ 918
====== ====== ======
</TABLE>

Disposition fees have been netted against the reported gain on sale amounts.
See Note 3.

The general partner was allocated its 1% share of the partnership net income and
cash distributions. Holding and BALCAP, each a limited partner and an affiliate
of the general partner, were also allocated their share of income and cash
distributions.

9. FEDERAL INCOME TAX STATUS

The partnership is considered a publicly traded partnership ("PTP") under the
Revenue Act of 1987 and therefore will be subject to Federal income tax on any
taxable income at regular corporate rates beginning in 1998. At that time the
partners would no longer be entitled to take into account their distributive
shares of deductions, income or credits, and would be subject to tax on their
share of dividends to the extent distributed (1) out of current or accumulated
earnings and profits or (2) as a return of capital in excess of their tax basis.

The partnership has seven aircraft on finance leases which expire after 1997.
The partnership's use of different accounting methods for income tax and
financial statement purposes which may

A-11
<PAGE> 47
cause the partnership's taxable income to exceed financial statement income for
years subsequent to 1997 up to $70 million, would result in partnership tax
liabilities at the partnership level of up to a maximum of $28 million based
upon current tax rates. On March 13, 1997, the general partner's board of
directors approved a plan to restrict transferability of units which will result
in the delisting of the partnership from the New York Stock Exchange in December
1997. The plan is subject to unitholder approval. On the basis of this tax
planning strategy, no deferred taxes were recorded in the financial statements
at December 31, 1996. It is possible that unitholders may not approve this plan
in which case deferred taxes may need to be recorded in 1997 in an amount that
could be material to the financial statements.

10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING

The aircraft on lease to USAirways were purchased by the partnership subject
to a tax benefit transfer lease ("TBT") which provided for the transfer of
Federal income tax ownership of the aircraft to a tax lessor until 1991. The
transfer was accomplished by the sale, for tax purposes only, of the aircraft
to the tax lessor for cash and a note and a leaseback of the aircraft for
rental payments which equalled the payments on the note. The rental payments
under the TBT lease resulted in tax deductions for the partnership and the
interest was included by the partnership in taxable income. In 1991, the TBT
lease agreement terminated and the tax attributes transferred under the TBT
lease reverted to the partnership.

The difference between the method of accounting for income tax reporting and the
method of accounting used in the accompanying financial statements are as
follows (in thousands except per unit amounts):

A-12
<PAGE> 48
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income per financial statements: $ 8,652 $ 6,822 $ 6,331
Increases (decreases) resulting from
Gain on disposition of equipment, net 777 109 0
Lease rents less earned finance lease income 5,627 5,207 4,530
Depreciation and amortization (6,242) (7,949) (6,577)
-------- -------- --------
Income per income tax method 8,814 4,189 4,284
Allocable to general partner (88) (42) (43)
-------- -------- --------

TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $ 8,726 $ 4,147 $ 4,241

Taxable income per limited partnership unit after giving
effect to taxable income allocable to general partner
(amount based on a unit owned from October 10, 1986) $ 1.89 $ 0.90 $ 0.92
Partners' equity per financial statements $ 65,042 $ 71,712 $ 74,562
Increases (decreases) resulting from
Gain on disposition of equipment, net 777 109 0
Lease rents less earned finance lease income 33,900 28,273 23,066
Deferred underwriting discounts and commissions
and organization costs 5,351 5,351 5,351
Accumulated depreciation and amortization (51,222) (45,089) (37,140)
TBT interest income less TBT rental expense (54,030) (54,030) (54,030)
-------- -------- --------

PARTNERS' EQUITY PER INCOME TAX METHOD $ (182) $ 6,326 $ 11,809
</TABLE>

A-13
<PAGE> 49
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995 (in thousands, except per unit amounts):

<TABLE>
<CAPTION>
1996 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Total Revenues $3,431 $2,717 $2,598 $4,502
Net Income $2,171 $1,588 $1,532 $3,361
Net Income Per Limited Partnership $0.46 $0.34 $0.33 $0.72
Unit
Unit Trading Data:
Unit Prices (high-low) on NYSE $18 7/8-$17 $18 1/4-$15 $16 3/4-$13 1/4 $16 3/8-$14 5/8
Unit Trading Volumes on NYSE 257 557 461 298

<CAPTION>
1995 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Total Revenues $3,103 $3,221 $3,179 $3,010
Net Income $1,656 $1,793 $1,725 $1,648
Net Income Per Limited Partnership $0.35 $0.38 $0.37 $0.36
Unit
Unit Trading Data:
Unit Prices (high-low) on NYSE $15-$13 3/8 $16-$14 $18-$15 1/8 $17 7/8-$16 1/4
Unit Trading Volumes on NYSE 236 338 284 213
</TABLE>

A-14
<PAGE> 50
INDEX TO EXHIBITS

Exhibit No. Description
----------- -----------
10.41 Stipulation and order dated July 1991 among Continental
Airlines, Inc., Continental Airlines Holdings, Inc., New York
Airlines, Inc., United States Leasing International, Inc.,
Airlease, Ltd., PS Group, Inc., and Taurus Trust Company, Inc.
(formerly Trust Company for USL, Inc.) concerning seven Boeing
737-200 aircraft and certain engines and related equipment.

10.49 Assignment and Assumption Agreement dated as of January 31, 1997
between USL Capital Corporation and the Registrant.

10.50 Lease, together with Lease Supplement No. 1, dated as of
March 15, 1984 between DC-9T-III, Inc., as Lessor, and Trans
World Airlines, Inc., as Lessee, with respect to one (1)
McDonnell Douglas DC-9-82 Aircraft, as amended by Amendment
Agreement dated as of December 15, 1986.

27. Financial Data Schedule.

A-15

<PAGE> 1

EXHIBIT 10.41

UNITED STATES BANKRUPTCY COURT

DISTRICT OF DELAWARE

___________________________________X
IN RE:
CASE NOS. 90-932
through 90-984
CONTINENTAL AIRLINES, INC.,
et al.,
JOINTLY ADMINISTERED
DEBTORS. UNDER CASE NO. 90-932
___________________________________X

STIPULATION AND ORDER
AMONG CONTINENTAL AIRLINES, INC.,
CONTINENTAL AIRLINES HOLDINGS, INC.,
NEW YORK AIRLINES, INC.
UNITED STATES LEASING INTERNATIONAL, INC.,
AIRLEASE, LTD., PS GROUP, INC.,
AND TRUST COMPANY FOR USL, INC.
CONCERNING SEVEN BOEING 737-200 AIRCRAFT
AND CERTAIN ENGINES AND RELATED EQUIPMENT.

IT IS HEREBY STIPULATED AND AGREED by and between Continental
Airlines, Inc., debtor and debtor in possession ("Continental"), Continental
Airlines Holdings, Inc., debtor and debtor in possession ("Holdings"), New York
Airlines, Inc., debtor and debtor in possession ("NYA" and, together with
Continental and Holdings, the "Debtors"), United States Leasing International,
Inc., formerly United States Airlease, Inc. ("US Airlease"), Airlease, Ltd.
("Airlease"), PS Group, Inc. ("PS") (PS, together with US Airlease and
Airlease, the "Beneficiaries"), and Trust Company for USL, Inc., as owner
trustee for Beneficiaries ("Lessor" and together with the Beneficiaries, the
"Lessor Parties"), subject to Bankruptcy Court approval, as follows:

1
<PAGE> 2

1. On December 3, 1990 (the "Petition Date"), the
Debtors and certain of their affiliates filed petitions for relief under
Chapter 11, Title 11 United States Code (the "Bankruptcy Code"). Pursuant to
Section 1107 and 1108 of the Bankruptcy Code, the Debtors have retained
possession of their property and are authorized as debtors in possession to
continue the operation and management of their respective businesses.

2. NYA and Lessor Parties (as an assignee of GATX
Leasing Corporation), have entered into seven Lease Agreements (each a "Lease"
and collectively the "Leases") covering, among other property, seven Boeing
737-200 jet-powered aircraft and 14 engines (each such aircraft and the
associated engines being referred to herein as an "Aircraft"), described as
follows:
<TABLE>
<CAPTION>
Engine
Aircraft United States Manufacturer's
Serial Nos. Registry Nos. Serial Nos.
----------- ------------- --------------
<S> <C> <C>
20073 N737OF P674344B
(to become N11244) P674380B

20074 N7371F P674487B
(to become N14245) P674329B

20072 N7372F P674266B
(to become N73243) P674262B

20361 N10251 P674361B
(formerly N7373F) P674341B

20362 N17252 P674374B
(formerly N7374F) P674335B

20070 N14241 P674250B
(formerly N7378F) P674299B

20071 N10242 P674314B
(formerly N7379F) P674384B
</TABLE>

In connection with the Leases, Holdings executed and delivered seven Guarantees
(each a "Guarantee" and, collectively, the

2
<PAGE> 3
"Guarantees") pursuant to which Holdings guaranteed the obligations of NYA
under the Leases.

3. On January 16, 1991, Debtors filed a Motion with
Respect to Section 1110 of the Bankruptcy Code (the "1110 Motion") in which
Debtors designated the Leases to be Section 1110 transactions and, therefore,
entitled to the benefits of Section 1110. As authorized pursuant to the Order,
dated January 30, 1991, of the Bankruptcy Court under Section 1110 of the
Bankruptcy Code regarding the Motion of Continental Airlines, Inc., et al., and
the Transactions listed on Exhibit 2 thereof (the "1110 Order"), NYA has cured
all defaults under the Leases (or has agreed to do so, as provided in paragraph
28 below) and has continued to perform its obligations under the Leases in
accordance with the terms thereof.

4. Notwithstanding NYA's continued performance under the
Leases, Debtors have asserted that the Basic Rent (as defined in the Leases) is
substantially above fair market rental values for the Aircraft. Debtors have
asserted to the Lessor Parties that Debtors' continued use and operation of the
Aircraft is subject to reaching an agreement to revise certain financial terms
contained in the Leases.

5. Debtors and the Lessor Parties have subsequently
negotiated concerning the status and treatment of the Leases and have reached
the agreements set forth herein. These various agreements, including NYA's
agreement to assign its rights and obligations under the Leases to Continental
and Continental's agreement to assume and perform such obligations all as
described

3
<PAGE> 4
below, are part of a unified settlement among the Lessor Parties and Debtors
concerning treatment of the Leases under Sections 1110, 361, 362, 363 and 365
of the Bankruptcy Code as set forth in greater detail below.

6. Debtors and the Lessor Parties agree that each of the
Leases is hereby modified to the extent applicable as set forth below in this
Stipulation.

7. Effective as of July 1, 1991 and continuing
throughout the remainder of the term of each Lease (including any extension
described herein but excluding any further renewal term as described in Section
21.02 of each Lease), the monthly Basic Rent owed pursuant to each of the
Leases payable on the first business day of the month shall be $52,500 (the
"Revised Rental Rates"), subject to rent deferral described below. In the
event a Debtor pays in excess of the Revised Rental Rate with respect to any
Basic Rent due on or after July 1, 1991 and prior to the date this Stipulation
is approved by the Bankruptcy Court, such excess shall be refunded to such
Debtor three business days following the date of such approval.
Notwithstanding the foregoing provisions of this paragraph 7, any periodic
rentals paid under any sublease of an Aircraft which are in excess of the
Revised Rental Rates, but less than $115,000 per month, shall be paid to Lessor
upon receipt. In addition, to the extent used in calculating liquidated
damages for any purpose under or in connection with any of the Leases or this
Stipulation, the stipulated loss values thereunder shall be deemed to be and
each hereby is revised downward by an amount equal to the difference,

4
<PAGE> 5
as of the time of determination, on a present value basis using a discount rate
equal to the Stipulated Rate (as defined in paragraph 9 below), between the
remaining Basic Rent which would have been payable based on the original basic
rent rate and the remaining Basic Rent actually payable based on the Revised
Rental Rates (the "Revised SLV"); provided that the foregoing shall not affect
the stipulated loss values in connection with, but solely in connection with,
an Event of Loss (as defined in the Leases) or required insurance under such
Leases. The Revised SLV during the term of the Lease extensions provided for
herein shall initially be equal to the Revised SLV in effect as of the date
originally scheduled in each Lease for the last Basic Rent payment and shall
decline by 1% of Lessor's Cost (as set forth in each Lease) per month until the
stipulated loss value under such Lease is equal to 20% of such Lessor's Cost
and thereupon shall remain at 20% of lessor's costs for the remainder of the
term of the Lease extension.

8. With respect to the Basic Rent due under the Leases,
Continental shall be entitled to defer such Basic Rent as follows:

a. 100% of the August 1, 1991, payment;

b. 50% of the September 1, 1991, payment; and

c. 100% of each of the payments due October 1,
1991, through and including March 1, 1992.

Any rentals deferred as provided in this paragraph 8 are
referred to as the "Deferred Amount." Any Deferred Amount shall bear interest
at the Stipulated Rate (defined below) and

5
<PAGE> 6
shall be paid, together with such interest, as set forth below in paragraph 10.

9. Interest shall accrue on the outstanding principal
amount of the Deferred Amount until paid in full at the rate of 12% per annum,
calculated on the basis of 360-day year consisting of twelve 30-day months (the
"Stipulated Rate"). In all other cases in which interest is provided for
herein, such interest shall accrue on the relevant unpaid principal amount
until paid in full at a per annum rate equal to the 5-year Treasury Rate (as
published in the most recent Federal Reserve H. 15 report or, if such report
shall be discontinued, as published in any equivalent official report of the
United States government, in either case as of the date Lessor funds the
relevant amount) plus 368 basis points, calculated on the basis of a 365-day
year and actual days elapsed (the "Stated Interest Rate"). Notwithstanding the
foregoing, if, between the period from the Petition Date through December 31,
1991, Debtors enter into settlement agreements with other lessors pertaining to
more than 25% of Debtors' current aircraft of comparable model, series, engine
type, age and other specifications to the Aircraft which provide (i) in
connection with the rent deferrals, for rates of interest higher than the
Stipulated Rate, then the Stipulated Rate shall be adjusted as of the date such
other agreements are approved by the Bankruptcy Court to the arithmetic average
of such higher rates or (ii) in connection with modification financing (as
described in paragraphs 12 et seq. below), for interest rates determined by a
spread over long term Treasury Rates with a spread greater than

6
<PAGE> 7
the spread used in calculating the Stated Interest Rate, then the spread used
to calculate the Stated Interest Rate shall be adjusted as of the date such
other agreements are approved by the Bankruptcy Court to the arithmetic average
of such higher spreads.

10. The unpaid Deferred Amounts and related accrued
interest as of April 1, 1992 (the "Deferral Repayment Start Date") are for each
Lease referred to herein collectively as the "Total Deferred Amount" for such
Lease. The obligation of Continental to repay the Total Deferred Amount for
each Lease shall be evidenced by separate promissory notes (each, a "Note") in
the form of Exhibit A hereto. Notes relating to the Leases shall provide that
Continental shall repay the applicable Total Deferred Amount and the interest
accrued on the unamortized portion thereof at tho Stipulated Rate in twelve
equal monthly installments of principal and interest commencing on April 1,
1992 and thereafter on the first Business Day (as defined in the applicable
Lease) of each of the next eleven months. Each such Note shall be deemed
evidence of the obligations referred to in this paragraph as further detailed
in Exhibit A, but such obligations shall exist whether or not Continental shall
execute and deliver a Note as required hereby, and such obligation shall be
deemed to have an allowed administrative expense claim, with the priority
provided by Sections 503(b)(1)(A) and 507(a)(1) of the Bankruptcy Code, for any
amounts under such Note (or in respect of such obligations, as the case may
be), not paid when due by Continental; provided, however, that if Continental
grants

7
<PAGE> 8
a higher priority to any other aircraft lessor in respect of basic rent
(treating as rent for the purposes of this proviso any obligation originally so
denominated without regard to the outcome of any issue as to whether the
underlying agreement is a true lease or a secured loan (the "Characterization
Issue") in respect of the particular transaction), the obligations of
Continental hereunder with respect to Deferred Amounts shall be automatically
accorded the benefit of such higher priority. Such claims shall be payable
currently so long as Continental is then generally paying when due
administrative expense claims which have the same or a lower priority (except
that amounts payable only as a result of an acceleration shall be payable
currently only if such claims other than wages, salaries or commissions for
services rendered within the meaning of Section 503(b)(1)(A) of the Bankruptcy
Code are generally being paid when due) and, notwithstanding any other
provision hereof, Lessors shall have all rights to demand payment of such
claims pursuant to Section 503(a) of the Bankruptcy Code or otherwise. A
"Default" under any Note shall constitute an "Event of Default" under the
related Lease and in respect of any FAA Modification Advance (as defined below)
or New Image Modification Advance (as defined below) with respect to such
Aircraft; and an "Event of Default" under any Lease shall constitute a
"Default" under the related Note and in respect of any such FAA or New Image
Modification Advances and the Lessor shall be entitled to exercise its rights
and remedies under the Leases, the Note, and hereunder including, without
limitation, the remedy set forth in paragraph 25 below.

8
<PAGE> 9
11. Continental's (i) payment of the Total Deferred
Amount and interest thereon as described above, (ii) payment of the basic and
supplemental rent under a Lease with respect to any period and performance of
its other obligations under such Lease and the related Operative Documents or
Operative Agreements (as defined in such Lease) in accordance with the
respective terms thereof (as modified hereby) with respect to such period and
(iii) performance of any additional obligation hereunder with respect to such
Lease with respect to such period (the obligations described in clauses (i),
(ii) and (iii) referred to herein, collectively, as the "Modified Lease
Obligations") shall constitute full satisfaction of any payment or performance
obligation with respect to that period for such Lease under Sections 365, 362,
363 and 1110 of the Bankruptcy Code that Continental may have for such period
for the applicable aircraft or equipment under such Lease and Continental shall
not have, and accordingly, the Lessor Parties expressly waive any right to, any
further payment or performance obligations under or in connection with such
Lease and the related Operative Documents or Operative Agreements for such
period. Nothing herein shall relieve or be deemed to relieve Continental of
any obligations to comply with provisions of the Leases not expressly modified
by this Stipulation (including without limitation provisions relating to
maintenance, return, insurance, notice and inspection) or otherwise to comply
with provisions of the Leases or related Operative Agreements or Operative
Documents pertaining to payments other than basic rent (including without
limitation,

9
<PAGE> 10
payments in respect of indemnities, interest on overdue payments, events of
default, events of loss and any termination, purchase or renewal options).

12. Upon notification from Continental to Lessor as
described below, the Lessor shall finance the capital expenditures (up to the
amounts set forth on Exhibit 8 hereto) constituting, if the applicable work is
performed by Debtor, the cost of materials and Debtor's "fully burdened labor
cost" or, if such work is done by a third party, the actual invoiced cost
thereof, for any improvement or modification to any aircraft subject to the
applicable Lease that is required to be made pursuant to any rule, regulation
or directive of the Federal Aviation Administration relating to modifications
for aging aircraft ("Aging Aircraft Modifications") and TCAS and Windshear
Detection Modifications ("Avionics Modifications" and together, with Aging
Aircraft Modifications, collectively the "FAA "Modifications"), up to $396,642
in the aggregate for each Aircraft. The parties stipulate for the purpose of
this Stipulation and Order that Continental's current "fully burdened labor
cost" on the date hereof is $27.53 per man-hour. Any future "fully burdened
labor cost" for purposes of determining a Lessor's obligations hereunder with
respect to FAA Modifications and New Image Modifications (as hereinafter
defined) shall be calculated using the same methodology as used to calculate
the current "fully burdened labor cost" and shall in any event be no more than
the then prevailing average rate quoted by reputable third party providers used
by Continental for the performance of

10
<PAGE> 11
comparable work. Exhibit B annexed hereto describes the nature of the FAA
Modifications.

13. Promptly upon completion of any FAA Modification of
an aircraft subject to a Lease, Continental shall so notify the Lessor in
writing, which notice shall describe the FAA Modification and set forth the
calculation of the amount to be paid by Lessor. In addition, Continental shall
provide such additional support information as the Lessor may reasonably
request to verify the performance of the work at issue and the actual cost
thereof. Within five business days following the later receipt of such notice
or receipt of such reasonably requested support information, the Lessor shall
pay by wire transfer to such account as Continental may designate the lesser of
(i) the amount set forth in such notice and (ii) the maximum amount Lessor is
obligated to finance for such FAA Modification as set forth on Exhibit B (an
"FAA Modification Advance"). The Lessor shall have the right to inspect the
Aircraft on which such FAA Modification was performed in accordance with the
inspection provisions of the applicable Lease to verify the performance of the
applicable FAA Modification, provided that any failure to conduct such
inspection shall not affect the Lessor's obligation to fund such FAA
Modification Advance.

14. Any FAA Modification Advance relating to an Aging
Aircraft Modification shall bear interest at the Stated Interest Rate.
Continental shall make equal monthly payments of principal and interest in
respect of each such FAA Modification Advance commencing on the first business
day of the month immediately

11
<PAGE> 12
succeeding the date of funding, such FAA Modification in an amount calculated
to amortize such FAA Modification Advance over five years, it being agreed that
Continental shall have no obligation to make such payments beyond the
expiration of the applicable Lease, regardless of whether such applicable FAA
Modification Advance shall have been fully amortized.

15. If any Aging Aircraft Modification which would give
rise to an FAA Modification Advance is to be performed or installed on or after
December 31, 1993, Lessor shall have the option to decline payment of such FAA
Modification Advance. If Lessor so declines to fund such Aging Aircraft
Modification Advance, Continental shall have the option to terminate the
applicable Lease upon ten days prior written notice to Lessor and return the
applicable Aircraft pursuant to the return conditions of such Lease (except
that a financial adjustment shall be made in lieu of any hour or cycle minimum
requirements). In connection with such early termination by Continental,
Continental shall pay, upon return of the applicable Aircraft to the Lessor,
the outstanding principal amount of all FAA Modification Advances, Nev Image
Modification Advances and Total Deferred Amount, to the extent Continental
would otherwise have been required to pay such principal balance during the
remaining term of the Lease of such Aircraft in accordance with the terms
hereof.

16. Any FAA Modification Advance relating to an Avionics
Modification paid by Lessor shall bear interest at the Stated Interest Rate
and, at the option of Lessor, to be selected

12
<PAGE> 13
at the time such FAA Modification Advance relating to Avionics Modifications is
paid, such FAA Modification Advance

a. shall be repaid by Continental in equal
monthly installments of principal and
interest calculated to amortize
such Modification Advance from the date of
payment thereof over the remaining term of
the applicable Lease; or

b. shall be amortized at the applicable Stated
Interest Rate over 84 months and Continental
shall make monthly payments of equal
principal and interest calculated to provide
that such FAA Modification Advance would be
fully amortized over 84 months, it being
agreed that Continental shall have no
obligation to make such payments beyond the
expiration of the applicable Lease,
regardless of whether the FAA Modification
Advance shall have been fully amortized.

Payments with respect to such FAA Modification Advances, shall be payable on
the first business day of each month, commencing with the month immediately
succeeding the date of funding such FAA Modification Advance. In the event
Lessor elects the repayment option set forth in clause (a) above, at the
expiration or termination of the term of the applicable Lease, except in
connection with a termination as a result of an Event of Default under such
Lease, including as a result of Default under the

13
<PAGE> 14
related Note or this Stipulation, Continental may remove and retain the
relevant Avionics Modifications, provided that such removal shall not cause
physical damage to the applicable Aircraft. If Lessor elects option (b) above,
Continental agrees, to the extent not already provided pursuant to the
applicable Lease, to execute such documentation as the Lessor may reasonably
request in order to vest title to such modification in the Lessor.

Continental shall repay Lessor for each FAA Modification
Advance financed by Lessor in accordance with the foregoing paragraphs.
Continental's obligation to make such repayments shall be independent of the
related Lease and shall survive the termination thereof prior to the repayment
in full of the applicable FAA Modification Advance and accrued interest thereon
(including without limitation a termination in connection with a winding up of
the business or a Fundamental Business Restructuring as each is defined below).
If Continental shall fail to make any scheduled installment in respect of the
repayment of an FAA Modification Advance within the cure periods provided in
paragraph 25 below, such failure shall constitute an Event of Default under the
applicable Lease, and the Applicable Note and the full amount of such FAA
Modification Advance that would otherwise have been repaid by Continental shall
be accelerated (unless acceleration is waived by Lessor and such waiver may be
made and shall be effective without further order of the Bankruptcy Court) and
shall accrue interest at a rate per

14
<PAGE> 15
annum equal to the applicable Stated Interest Rate plus 2% from the original due
date of such installment until paid in full.

17. Upon notification from Continental to the Lessor as
provided below, the Lessor shall finance the capital expenditures constituting,
if the applicable work is performed by Continental, the cost of materials and
Continental's "fully burdened labor cost" or, if such work is done by a third
party, the actual invoiced cost thereof, for any New Image Interior or Exterior
Modification (a "New Image Modification") of the sort described in Exhibit B
hereto up to $449,323 in the aggregate for each Aircraft.

18. (a) Promptly upon completion of any New Image
Modification of an Aircraft subject to a Lease to be financed by the Lessor,
Continental shall so notify the Lessor in writing, which notice shall describe
the New Image Modification and set forth the amount to be financed by the
Lessor. In addition, Continental shall provide such additional support
information as the Lessor may reasonably request to verify that the work at
issue has been performed and the actual cost thereof. The Lessor shall have the
right to inspect the Aircraft on which such New Image Modification was performed
in accordance with the inspection provisions of the applicable Lease to verify
the performance of the applicable New Image Modification, provided that any
failure to conduct such inspection shall not affect the Lessor's obligation to
fund such New Image Modification Advance. Within five business days following
tho later of receipt of such notice or receipt of such reasonably requested
support

15
<PAGE> 16
information, the Lessor shall pay by wire transfer to such account as
Continental may designate the lesser of (i) the amount set forth in such notice
and (ii) the maximum amount the Lessor is obligated to finance for such New
Image Modification (a "New Image Modification Advance"). The outstanding New
Image Modification Advances so financed shall accrue interest at the Stated
Interest Rate calculated as of the date such New Image Modification Advance is
financed by the Lessor.

(b) Continental shall repay each New Image
Modification Advance, together with interest thereon, monthly on the first
Business Day (as defined in the Lease) of each month, commencing with the month
immediately succeeding the month in which such amount is paid by the Lessor, in
equal payments of principal and interest calculated to amortize such New Image
Modification Advance over a period of time equal to the then remaining term (as
defined in the applicable Lease) of the applicable Lease as extended hereby.
Continental's obligation to make such repayments shall be independent of the
related Lease and shall survive the termination thereof prior to the repayment
in full of the applicable New Image Modification Advance and accrued interest
thereon (including without limitation a termination in connection with a
Fundamental Business Restructuring as defined below). If Continental shall
fail to make any scheduled installment in respect of the repayment of a New
Image Modification Advance within the cure periods provided in paragraph 25
below, such failure shall constitute an Event of Default under the applicable
Lease and related Note, and the full

16
<PAGE> 17
amount thereof shall be accelerated (unless acceleration is waived by Lessor
and such waiver may be made and shall be effective without further order of the
Bankruptcy Court) and shall accrue interest at the stated interest rate plus
two percent per annum from the original due date of such installment until paid
in full.

19. (a) The Lessor shall be deemed to have an allowed
administrative expense claim, with the priority provided by Section 364(c)(1)
of the Bankruptcy Code, for any amounts of principal and interest (including
overdue interest) not paid when due, subject to any applicable cure period, by
Continental in respect of an FAA Modification Advance or New Image Modification
Advance. Such claims shall be payable currently so long as Continental is then
generally paying when due administrative expense claims which have the same or
a lower priority (except that amounts payable only as a result of an
acceleration shall be payable currently only if such claims other than wages,
salaries or commissions for services rendered within the meaning of Section
503(b)(1)(A) of the Bankruptcy Code are generally being paid when due) and,
notwithstanding any other provision hereof, Lessor shall have all rights to
demand payment of such claims pursuant to Section 503(a) of the Bankruptcy Code
or otherwise, and the rights set forth in the last sentence of paragraph 25
below. Notwithstanding the first sentence of this paragraph 19(a), (i) the
Lessor hereby acknowledges and agrees that such claims in respect of any FAA
Modification Advance or New Image Modification Advance shall be, and are hereby
deemed,

17
<PAGE> 18
junior and subordinate in right of payment to any and all credit obtained debt
or other obligations incurred, whether previously, concurrently or hereafter
incurred by Continental, including, without limitation, debtor-in-possession
financing heretofore extended by The Chase Manhattan Bank, N.A. and American
Airlines, Inc. by authority granted by the Bankruptcy Court, with a priority
senior to the priority established by Section 507(a)(1) and 503(b)(1)(A),
including, without limitation, credit obtained or debt or other obligations
incurred or guaranteed by Continental pursuant to, and having a priority
established by, Sections 364(c) or (d) or Section 507(b) of the Bankruptcy
Code, but excluding any such credit or debt provided by other lessors (treating
as a lessor for purposes of this proviso any party originally so denominated
without regard to the outcome of the Characterization Issue in respect of the
particular transaction) of aircraft in Continental's fleet as of the date
hereof in respect of modifications, improvements or additions to such aircraft
("Other Lessor Financing Amounts"), and (ii) Continental's obligations
hereunder with respect to FAA Modification Advances and New Image Modification
Advances under each Lease to Lessor shall rank (x) pari passu among each other;
and (y) pari passu or senior to Continental's obligations now or hereafter
incurred with respect to any Other Lessor Financing Amounts. The Lessor agrees
that it shall not raise any objection in the Bankruptcy Court to the incurrence
of any indebtedness or other obligation by Continental with a priority senior
to the priority provided herein with respect to FAA Modification

18
<PAGE> 19
Advances and New Image Modification Advances based on the effect of such
incurrence of indebtedness or other obligations on continental's obligation to
the Lessor with respect to FAA Modification Advances or New Image Modification
Advances; provided, however that nothing herein shall preclude the Lessor from
raising any such objection on grounds other than the priority of the Lessor's
claim for repayment of FAA Modification Advances or New Image Modification
Advances.

(b) A failure of Continental to repay any FAA
Modification Advances or New Image Modification Advances within the applicable
cure periods shall constitute an Event of Default under the applicable
underlying Lease.

(c) The Lessor shall not be obligated to fund an
FAA Modification Advance or New Image Modification Advance with respect to a
Lease while an Event of Default exists thereunder.

(d) The provisions in this Stipulation relating
to Modification Advances shall supercede Section 9.05 of the applicable Lease.

20. Approval of this Stipulation by the Bankruptcy Court
shall constitute authorization for the applicable Debtor (i) to incur the
indebtedness involved with the Deferred Amounts, the FAA Modification Advances
and the New Image Modification Advances with respect to the equipment covered
by each of the Leases; and (ii) to assume the Leases on the terms and
conditions stated herein. Notwithstanding clause (i) above, the Debtors
acknowledge that such authorization to incur the indebtedness involved with any
New Image Modification Advance may be subject

19
<PAGE> 20
to such additional terms and conditions as the Bankruptcy Court may require
upon motion by Continental in connection with approval of the "New Image"
modification program or otherwise; provided, however that the foregoing shall
not affect the Lessor's obligation to fund or Lessor's rights with respect to,
New Image Modification Advances and the Lessor may rely without further inquiry
on a notice from Continental under paragraph 17 as conclusive evidence of
Continental's authority to incur the indebtedness constituting the New Image
Modification Advance thereby requested. The assumption referred to in clause
(ii) of the first sentence of this paragraph shall occur automatically upon
approval of this Stipulation by the Bankruptcy Court. The assumption of a
Lease shall be deemed to constitute an assumption by NYA of the Operative
Agreements or Operative Documents. Simultaneously with such assumption of a
Lease all of NYA's rights, title, interest and obligations under such Lease and
hereunder with respect to such Lease shall, without further actions, consent or
approval, be assigned to and assumed by Continental. Effective immediately
upon such assignment and assumption, (a) the term of such Lease shall be
extended to expire on December 31, 1996 (subject to the further options
described in Section 21 of the Leases), (b) NYA shall be released from all of
its obligations under such Lease, and (c) the Guarantee relating to such Lease
shall be terminated and Holdings shall be released from all its obligations
thereunder. After such assignment and assumption, Continental shall not reject
the Leases pursuant to Section 365(a) of the Bankruptcy Code or

20
<PAGE> 21
otherwise except in connection with a winding up of the business of Continental
or a Fundamental Business Restructuring (as each is defined in paragraph 22) as
described in paragraph 21 and 23. The Lessor acknowledges and agrees that the
terms and conditions stated herein constitute compliance with the provisions of
Section 365(b)(1) in connection with the assumption of the Leases. Effective
upon the assignment to and assumption by Continental described above with
respect to a Lease, all references herein to NYA shall be deemed to mean
Continental with respect to such Lease. Each Lessor Party hereby consents to
the assumption of the Lease at the times and on the terms set forth in this
Stipulation and agrees that no further payments need be made in connection with
such assumption under the terms of Section 365 of the Bankruptcy Code other
than those explicitly set forth in this Stipulation.

21. Subject to paragraph 22 hereof, effective upon
assumption of a Lease pursuant to paragraph 20, the Lessor shall be deemed to
have an allowed administrative expense claim, with the priority provided by
Sections 503(b)(1)(A) and 507(a)(1) of the Bankruptcy Code, for any amounts not
paid when due by Continental under such Lease, the related Note or hereunder
with respect to such Lease including any amounts payable as a result of a
breach thereunder or hereunder (collectively, "Lease Claims"). Any Lease Claim
for amounts of basic rent and supplemental rent accrued and due and payable by
Continental under a Lease or related Operative Agreements or Operative
Documents during the period ending on the date on which all of

21
<PAGE> 22
the equipment subject to such Lease is made available for repossession by the
Lessor upon at least 3 business days' prior written notice from Continental of
such availability, at a location in the continental United States to be
specified in such notice (an "Availability Date"), shall be payable currently
so long as Continental is then generally paying when due administrative expense
claims which have the same or a lower priority dispute (except that amounts
payable only as a result of an acceleration shall be payable currently only if
such administrative expense claims other than wages, salaries or commissions
for services rendered within the meaning of Section 503(b)(1)(A) of the
Bankruptcy Code are generally being paid when due) and, notwithstanding any
other provision hereof, Lessor shall have all rights under Section 503(a) of
the Bankruptcy Code to demand payment of such claims and any other claims
hereby granted a priority under Section 507(a)(1) or 364(c) of the Bankruptcy
Code.

22. (a) Notwithstanding paragraph 21 and except as to
claims expressly granted a higher priority herein, in the case of any breach
attributable to the failure of Continental to perform an obligation under a
Lease arising from or in connection with a winding up of the business of
Continental (as hereinafter defined) or a Fundamental Business Restructuring
(as hereinafter defined), any claim arising therefrom (a "Liquidation Claim",
it being understood that Liquidation Claims shall not include any claims
excluded pursuant to subparagraph (b) of this paragraph 22), shall be
determined, and shall be allowed under

22
<PAGE> 23
Section 502(a), (b) or (c) of the Bankruptcy Code or disallowed under Sections
502(d) or (e) of the Bankruptcy Code, as if such claim had arisen before the
date of the filing of the petition by Continental, including, without
limitation: (x) any claim for damages with respect to basic rent payments not
yet accrued as of the Availability Date, including any liquidated damages in
lieu thereof contemplated by the applicable Lease, and (y) any claim for
damages attributable to the failure of the equipment to satisfy return
conditions specified in the Lease (other than any such failure which does not
constitute a Liquidation Claim or is excluded from the foregoing limitation on
priority as provided elsewhere herein) or the failure of the applicable Debtor
to provide notice of return as specified in the Lease; provided, however, that
the limitation on administrative expense priority described above shall not
apply with respect to:
(i) any Lease Claim described in subparagraph
(b) below as being expressly not included as a Liquidation
Claim,

(ii) any Liquidation Claim arising under a Lease
in connection with a Fundamental Business Restructuring unless
all Similar Aircraft (as defined below) other than Assumed
Aircraft (as defined below), if any, have been permanently
taken out of service by Continental and the applicable
Fundamental Business Restructuring is or becomes a Permanent
Downsizing (as hereinafter defined),

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<PAGE> 24
(iii) any Lease Claim for an amount payable as a
result of the failure of any airframe or engine to have the
specified minimum hours or cycles remaining until the next
scheduled heavy maintenance visit or shop overhaul, or

(iv) any direct, but not consequential claim for
a breach of the undertakings contained in subparagraph (c) of
this Paragraph 22,

all of which claims enumerated in (i) through (iv) above having the priority
provided by Sections 503(b)(1)(A) and 507(a)(1) of the Bankruptcy Code (or such
higher priority specifically granted pursuant to this Stipulation) and shall be
payable currently so long as Continental is then generally paying when due like
administrative expense claims and, notwithstanding any other provision hereof,
Lessor shall have all rights to demand payment of such claims pursuant to
Section 503(a) of the Bankruptcy Code or otherwise. The parties hereto
expressly waive any right to treatment of any Liquidation Claim with a priority
superior to that provided herein and agree that in the event an allowed
Liquidation Claim is granted such a superior priority, the assumption of the
Lease related to such Liquidation Claim shall be deemed void ab initio;
provided, however, that the foregoing shall not affect the priority of (i) the
indebtedness involved with the Deferred Amounts, the FAA Modification Advances
and the New Image Modification Advances; and (ii) claims excluded from the
definition of Liquidation Claim set forth in subparagraph (b) below.

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<PAGE> 25
(b) It is expressly agreed that Liquidation
Claims shall not include (i) any Lease Claim for amounts of basic rent and
supplemental rent accrued and due and payable by Continental under a Lease or
related Operative Agreements or Operative Documents arising during the period
ending on the Availability Date for equipment subject to such Lease and (ii)
any Lease Claims directly resulting from Continental's breach of its covenants
contained in a Lease with respect to the operation, use, maintenance and
possession of equipment subject to such Lease during the period ending on the
Availability Date for such equipment including, without limitation, any breach
by Continental of any covenant with respect to (x) compliance with
Airworthiness Directives required to be performed during the period ending on
the Availability Date or (y) maintenance of such equipment in accordance with
an FAA-approved maintenance program during the period ending on the
Availability Date (including performance of inspections, part replacement and
overhauls required under such program) regardless of whether any such breach is
discovered before or after the Availability Date.

(c) With respect to the return of equipment
subject to a Lease in connection with a winding up of the business of
Continental or a Fundamental Business Restructuring, Continental agrees (i) to
return at no charge to the Lessor within thirty days following the return of
such equipment (or such longer period as may be provided in such Lease), all
records, logs and manuals required under such Lease to be returned with such
aircraft and (ii) except with respect to any

25
<PAGE> 26
engine subject to a Lease which at the time of return is unserviceable or
disassembled for maintenance purposes (which engine shall be made available in
its then-current condition), to return such aircraft with the engines subject
to such Lease (or substitute engines permitted under the terms of such Lease)
installed on such aircraft.

23. For the purpose of this Stipulation and Order: (i)
the "winding up of the business of Continental" shall mean any act by
Continental or one of its affiliates, a trustee or examiner which constitutes
(1) the publicly announced cessation of all or substantially all scheduled
flight operations by Continental and its affiliates as debtors or as debtors in
possession (a "Cessation") followed ultimately by an actual Cessation, or (2) a
Cessation, and which in either case is without the intention to resume such
operations; (ii) "Fundamental Business Restructuring" shall mean, with respect
to the breach or rejection of a Lease giving rise to a Liquidation Claim, a
reduction, prior to adoption of or in implementation of a downsizing set forth
in a non-liquidating plan of reorganization, in the scheduled flight operations
of Continental and its affiliates, as measured by weekly available seat miles
("ASM's") determined using a consistently applied and generally recognized
methodology, of 35% from the week commencing on December 2, 1990, and ending on
December 8, 1990, and at least 10% within ninety (90) days before or after the
date of such breach or rejection; provided, however, that it Continental or one
of its affiliates transfers flight operations to a third

26
<PAGE> 27
party but retains effective control, through any agreement, contractual or
otherwise, to select the equipment to be used by such third party in such
operations, the ASM's of such flight operations shall be included in the
operations of Continental and its affiliates for purposes of this definition;
(iii) "Similar Aircraft" shall mean with respect to an aircraft as to which a
Liquidation Claim is asserted; all aircraft, if any: (a) which were in
Continental's or NYA's fleet on the Petition Date and at any time from the date
hereof to the date of the Fundamental Business Restructuring; (b) which are of
the same make, model, series and engine type as such aircraft as to which a
Liquidation Claim is asserted; and (c) which were manufactured within five
years of the date of manufacture of such aircraft as to which a Liquidation
Claim is asserted; (iv) "Assumed Aircraft" shall mean any Similar Aircraft
subject to a lease (treating as a lease any agreement originally denominated as
such without regard to the outcome of the Characterization Issue in respect of
the particular transaction) which, as of the date of a Fundamental Business
Restructuring, shall have been assumed by the applicable Debtor under Section
365 of the Bankruptcy Code pursuant to this Stipulation or to any other
agreement between a Debtor and the lessor thereunder which provide, among other
things, for a deferral of periodic payments and financing of modifications to
such Similar Aircraft; and (v) a Fundamental Business Restructuring resulting
in tho breach or rejection of a Lease shall be deemed a "Permanent Downsizing"
if (A) as of the end of any of the twelve full calendar months immediately
following such

27
<PAGE> 28
breach or rejection, the average monthly ASM's of Continental and its
affiliates for the preceding 12 calendar months is at least 35% less than the
average monthly ASM's of Continental and its affiliates in 1990 and (B) as of
the end of any one of the three calendar months immediately following such
breach or rejection, the monthly ASM's of Continental and its affiliates is at
least 20% less than the average monthly ASM's of Continental and its affiliates
for the 12 calendar months ended on the third full calendar month prior to such
rejection.

24. Effective upon assumption of a Lease pursuant to
paragraph 20 hereof, the applicable Debtor may reject a Lease pursuant to
Section 365(a) of the Bankruptcy Code in connection with a Fundamental Business
Restructuring only if all Similar Aircraft which are not Assumed Aircraft have
been disposed of by Continental and the leases with respect to all leased
Similar Aircraft which are not Assumed Aircraft shall have been rejected and
the affected equipment shall have been taken out of service and made available
to the applicable lessor for repossession. If the leases or Leases with
respect to one or more Assumed Aircraft of any category of leased Similar
Aircraft are to be rejected in connection with a Fundamental Business
Restructuring, the determination and allowance of Liquidation Claims with
respect to the affected Leases described in paragraph 21B shall apply only if
all such leases or Leases are rejected or the particular leases or Leases to be
rejected are selected at random from all such Assumed Aircraft in such
category. In addition, in connection with any such rejection Continental shall
pay to the

28
<PAGE> 29
applicable Lessor on or before the Availability Date, any accrued and unpaid
amounts due in current rent under the applicable Lease, excluding supplemental
rent, Deferred Amounts, FAA Modification Advances and New Image Modification
Advances and without giving effect to any acceleration thereof attributable to
such rejection.

25. The applicable Debtor shall perform its obligations
under the Leases (as amended pursuant hereto), other than obligations of the
sort described Section 365(b)(2) of the Bankruptcy Code. No Lessor Party shall
have a right to bring an action to seek return of any of the aircraft or
related equipment covered by a Lease unless Continental shall (i) breach its
obligation to pay any amount due under such Lease, as modified hereby, any
related Note or hereunder with respect to such Lease and such breach shall
remain uncured beyond any applicable cure period provided in the applicable
document, it being agreed that the payment obligations of Continental hereunder
shall be entitled to cure periods provided for basic rent payments under the
applicable Leases, except that the payment obligations under paragraph 28
hereof shall be entitled to cure periods provided for supplemental rent
payments under the applicable Leases (but interest on overdue amounts shall be
payable to the extent provided in such Lease and Lessor Parties' or any Note
holder's claim therefor shall be an allowed administrative expense claim) or
(ii) breach any other material provision of the applicable Lease (other than
provisions of the sort described in Section 365(b)(2) of the Bankruptcy Code)
and such breach shall

29
<PAGE> 30
remain uncured beyond any applicable cure period provided in the Lease. Upon
approval of this stipulation by the Bankruptcy Court, the automatic stay of
Section 362 of the Bankruptcy Code is modified to the extent necessary to
permit the Lessor Parties to exercise their rights hereunder, under the Notes
and under the Lease (as modified hereby) and, accordingly, any such right to
repossess a aircraft subject to a Lease in compliance with the terms thereof
following an Event of Default thereunder shall not be affected by such
automatic stay.

26. Notwithstanding Section 1129(a)(9)(A) or any other
provision of the Bankruptcy Code, in connection with the confirmation of a
plan, the Debtors shall not be obligated to pay cash for claims hereunder
granted a priority under Section 507(a)(1) or 364(c) to the extent such claims
are not then due and payable in accordance with the terms hereof (including
period of repayment and acceleration provisions), and the Lessor Parties
consent to the treatment in any plan of reorganization of the Debtors proposed
by any entity to payment of amounts in respect of Total Deferred Amounts, FAA
Modification Advances and New Image Modification Advances in accordance with
the terms hereof (including period of repayment and acceleration provisions).

27. To implement the foregoing, Continental and the
Lessor Parties shall take, among others, the following actions upon approval of
this Stipulation by the Bankruptcy Court and expiration of the period allowed
to appeal such approval (and provided no such appeal or a stay of the order of
such approval is pending): (i) the Lessor Parties shall promptly withdraw

30
<PAGE> 31
their participation in all pending motions in respect of the Leases including
all motions seeking relief under Sections 362, 363, 365 and/or 1110 of the
Bankruptcy Code and shall refrain from filing any motion under the Bankruptcy
Code for any relief whatsoever related to any Lease, the Operative Agreements
or the Operative Documents for so long as Continental complies with such Lease
(as amended hereby), the Operative Documents and Operative Agreements, this
Stipulation and the Note relating to such Lease, provided that if an appeal has
been filed, the Lessor Parties shall continue any such pending motion until
such appeal is resolved so long as the Bankruptcy Court's approval hereof has
been stayed; (ii) the Lessor Parties shall withdraw any appeal, or shall
withdraw from participation in any appeal, of the Bankruptcy Court's January
30, 1991 ruling concerning the non-application of Section 1110 to Leases that
do not cause the acquisition of new equipment (except that the Lessor Parties
may participate in any response to any petition for certiorari or brief filed
by Continental in the United States Supreme Court in connection with the
reversal of such ruling); (iii) the Lessors shall not bring a motion seeking
1110 status for any Lease or shall dismiss any such motion already brought;
(iv) Continental shall withdraw any pleadings seeking to recharacterize any
Lease as other than a "true lease" provided that if an appeal has been filed
Continental agrees to continue any such recharacterization motion until such
appeal is resolved so long as the Bankruptcy Court's approval hereof have not
been stayed; and (v) Continental shall promptly request and diligently pursue
obtaining an order

31
<PAGE> 32
of the Bankruptcy Court approving this Stipulation and, in that connection,
shall give proper notice of and conduct a hearing under Section 364(b) and (c)
of the Bankruptcy Code and Bankruptcy Rules 4001(c) and 9019 (with a request
under clause (2) of Bankruptcy Rule 4001(c)(2) to hold such hearing or a
preliminary hearing on July 19, 1991, and to seek authority to obtain credit
necessary to avoid immediate and irreparable harm to the estate) with respect
hereto, request that such hearing be expedited and held on July 19, 1991 and in
good faith oppose any objections hereto raised by the Official Committee of
Unsecured Creditors of Continental Airlines, Inc., et al. (the "Committee") or
any other party. Continental agrees to treat the Leases as "true leases,"
including, without limitation, in any plan of reorganization or liquidation
filed by it under its pending bankruptcy proceedings and to oppose in good
faith any contrary characterization, in any such plan filed by another party to
such bankruptcy proceedings or otherwise.

28. Within a reasonable period of time following the
presentation to the appropriate Debtors and the Committee of an invoice
adequately detailing the fees requested, and notwithstanding the provisions of
paragraph 11 above, Continental shall pay reasonable out-of-pocket legal fees
and expenses incurred by the Lessor Parties on or after the Petition Date in
connection with the Chapter 11 proceedings with respect to the leases and the
negotiation, execution and approval of this Stipulation. If the parties cannot
agree as to the reasonable amount of such fees, costs and expenses requested
within 60 days

32
<PAGE> 33
of receipt of the complete invoice, or if the Committee objects to the
reasonableness of such fees and files a timely written objection within 60 days
of receipt of the complete invoice, then the matter shall be submitted promptly
to the Bankruptcy Court for resolution, and Continental shall pay the amount
ordered by final order of the Court.

29. During the pendency of the Debtors' proceedings under
the United States Bankruptcy Code, no Aircraft shall be re-registered in a
jurisdiction other than the United States of America, unless the prior written
consent of Lessor shall have first been obtained, and thereafter, only as
permitted by the applicable leases.

30. If on or before the earlier of December 31, 1992 or
the date of confirmation of a plan of reorganization of Continental,
Continental, with the approval of the Bankruptcy Court, enters into an
agreement (other than an agreement embodied in a non-liquidating plan of
reorganization) with any lessor (i) with respect to aircraft and engines of
comparable model, series, engine type and age as the aircraft which are the
subject of the Leases; (ii) with respect to one or more pre-petition leases
covering such comparable equipment; and (iii) which provides overall benefits
materially more favorable to the lessor(s) under such lease(s) than the overall
benefits set forth herein, then the agreement contained herein with respect to
such aircraft shall be modified in a mutually acceptable manner to provide the
Lessors with treatment which, when viewed in its entirety (including all
benefits and burdens), is not materially less

33
<PAGE> 34
favorable to the Lessors than such agreement with such other lessor(s);
provided, however, however, that in all events, regardless, inter alia, of the
operation of this paragraph, force of law or otherwise, the Lessors' rights and
priority in connection with a Liquidation Claim shall be as set forth in
paragraph 16B, unless the Committee consents to the transaction forming the
basis for Lessors' claim for better treatment pursuant to this paragraph;
provided, further, however, that if an agreement or stipulation between
Continental and any other pre-petition lessor of aircraft equipment includes a
different definition of "Fundamental Business Restructuring" or "Permanent
Downsizing" (including terms intended to describe comparable situations), each
Lessor shall have the choice to adopt such different definitions in lieu of the
applicable definitions set forth herein.

31. The parties hereto may execute documentation
reasonably satisfactory to them and to the Committee to amend the applicable
Leases to conform with the forms of this Stipulation but the execution of such
documentation shall not be a precondition to the parties' respective
obligations hereunder.

32. The Beneficiaries agree, jointly and severally, to
provide funds to Lessor at such times and in such amounts as to enable Lessor
to pay the Modification Advances as specified in this Stipulation and Order.
In this regard, the Beneficiaries acknowledge that the Beneficiaries are the
Lessor's only source of funds to pay such Modification Advances. In the event
Lessor fails to pay any Modification Advance as required hereunder, NYA

34
<PAGE> 35
shall be entitled to offset payments of Basic Rent to the extent of such
Modification Advance.

33. This Stipulation shall not be of any force or effect
until approved by order of the Bankruptcy Court. Until so approved by the
Bankruptcy Court, (i) references in this Stipulation to "Lease", "Lessors",
"rentals" or words or phrases of similar import are for convenience only and
shall not constitute an admission by Continental that any alleged lease
agreement in fact constitutes a true lease or is otherwise entitled to the
protection of Sections 365 or 1110 of the Bankruptcy Code or any other
Bankruptcy Code Section, (ii) the Revised Rental Rates shall not constitute an
admission by any party that such rates constitute Fair Market Lease Rates under
the Leases and (iii) this Stipulation and any document related hereto shall not
be cited to any court for such purpose. Without limiting the generality of the
foregoing, no statement, undertaking or characterization herein shall be deemed
an admission by any party of any fact or legal conclusion for any purpose and
shall not be cited to any court by any party against any other party as
evidencing a waiver or an admission against interest or for any similar
purpose.

34. Following approval of this Stipulation by the
Bankruptcy Court, this Stipulation shall be binding upon and enforceable
against the parties hereto, their successors and assigns and in the case of
Continental, any and all of the affiliated debtors of Continental (including
any substantively consolidated entity of which Continental may be a part), and
any

35
<PAGE> 36
trustee appointed in Continental's Chapter 11 proceedings and any trustee
appointed in the event such proceedings are converted to Chapter 7 proceedings.

35. This Stipulation and Order may be executed in one or
more counterparts, including facsimile transmittals, each of which shall be
deemed an original and all of which, when taken together, shall constitute one
and the same document and any of the parties hereto may execute this
Stipulation and Order by signing any such counterpart. The Beneficiaries
hereby authorize, by their execution of this Stipulation, the Lessor to execute
this Stipulation and this Stipulation and Order maybe be filed with the
Bankruptcy Court using facsimile transmitted executions.

STIPULATED AND AGREED:

Dated: July 3, 1991 /s/ Laura Davis Jones
-------------------------------------
Attorney for Continental Airlines,
Inc., Debtor and Debtor in Possession

Dated: July 3, 1991 /s/ Laura Davis Jones
-------------------------------------
Attorney for Continental Airlines
Holdings, Inc., Debtor and Debtor
in Possession

Dated: July 3, 1991 /s/ Laura Davis Jones
-------------------------------------
Attorney for New York Airlines,
Inc., Debtor and Debtor in Possession

Dated: July 3, 1991 /s/ [signature]
-------------------------------------
Attorney for United States
Airlease, Inc.

36
<PAGE> 37

Dated: July 3, 1991 /s/ [signature]
---------------------------------
Attorney for Airlease Ltd.

Dated: July 3, 1991 /s/ [signature]
---------------------------------
Attorney for PS Group, Inc.

Dated: July 3, 1991 /s/ [signature]
---------------------------------
Attorney for Trust Company for
USL, Inc., as trustee

37
<PAGE> 38
The Official Committee of Unsecured Creditors hereby confirms that it has no
objection to the foregoing Stipulation or to the holding of a hearing with
respect thereto as soon as the parties may be heard.

Dated: July 3, 1991 /s/ [signature]
--------------------------------------
Attorneys for the Official
Committee of Unsecured Creditors

SO ORDERED:

Dated: July 3, 1991
--------------------------------------
United States Bankruptcy Judge

38
<PAGE> 39
EXHIBIT A

THIS NOTE HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MUST BE HELD
INDEFINITELY UNLESS SO REGISTERED OR TRANSFERRED
IN A TRANSACTION EXEMPT FROM REGISTRATION

[City, State] $*/
_____________________, Original Principal Amount

PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, CONTINENTAL AIRLINES,
INC., a Delaware corporation [and debtor-in-possession] ("Borrower"), hereby
promises to pay to [NAME OF APPLICABLE LESSOR], a [insert applicable
jurisdiction] corporation ("Holder"), or its assigns, in lawful money of the
United States of America, the principal sum of [INSERT APPLICABLE "TOTAL
DEFERRED AMOUNT" DUE UNDER PARAGRAPH 10 OF THE STIPULATION
($_______________.__)] (the "Principal"), together with interest at the rate of
twelve percent (12%) per annum calculated on the basis of a 360 day year
consisting of twelve 30-day months (the "Interest Rate"), which interest shall
accrue on the outstanding Principal from and including April 1, 1992 to but
excluding the date on which the Principal and all accrued interest are paid in
full. The Principal of, and accrued interest on, this Note shall be payable in
accordance with the provisions of Section 2 hereof. The entire unpaid
Principal of this Note, together with accrued and unpaid interest thereon, it
any, shall be finally due and payable on the Maturity Date (as hereinafter
defined). All amounts of Principal and, to the extent permitted by applicable
law, interest which are not paid when due in accordance with the provisions of
Section 2 hereof shall bear interest from the date such Principal and interest
payment was due until paid at the Default Rate (hereinafter defined)
(calculated on the basis of a 360 day year consisting of twelve 30-day months).

Section 1. Certain Definitions. As used herein, the
following terms have the following meanings:

1.1 "Default" means the occurrence of one or mare o the
following events:

__________________________________

*/ Interest applicable "Total Deferred Amount" due under Paragraph 10 of the
Stipulation.

1
<PAGE> 40
(a) The failure of Borrower to pay any amounts of
Principal or interest thereon due on this Note within ten (10)
Business Days (as defined in the Lease) of when the same become due
and payable in accordance with the terms hereof; or

(b) The failure of Borrower to perform, observe,
and comply with any covenant, agreement, or condition (other than the
covenant to pay amounts of Principal or interest thereon due under
this Note) contained in this Note including, without limitation, those
covenants and agreements set forth in Section 4 hereof, and the
continuation of such a failure for a period of forty-five (45) days
following written notice to Borrower from the Holder of the
continuation of such failure; or

(c) The occurrence of an "Event of Default" as such term
is defined in the Lease, subject to the provisions therein concerning
notice and/or opportunity to cure such Event of Default, or a default
under the Stipulation (after giving effect to the grace periods
provided for in paragraph 22 thereof) insofar as it relates to the
Lease or the equipment subject thereto.

1.2 "Default Rate" means the rate per annum equal to the
lesser of (a) fourteen percent (14%), or (b) the highest rate then permitted by
law for any period during which the Principal shall be overdue; provided,
however, that if no such highest rate exists, then the rate specified in clause
(a) preceding shall apply.

1.3 "Lease" means [insert applicable Lease definition.]

1.4 "Maturity Date" means February 1, 1993.

1.5 "Stipulation" mean [insert name of Stipulation].

Section 2. Payments of Principal and Interest.

(a) Payment of Principal and the interest accrued at the
Interest Rate on the unamortized portion of the Principal shall be made in
twelve (12) equal monthly installments of Principal and interest commencing on
March 1, 1992 and thereafter on the first Business Day (as defined in the
Lease) of each of the next eleven (11) months.

(b) Notwithstanding the foregoing, at the Maturity Date,
the entire unpaid balance of Principal and all accrued and unpaid interest
shall be finally due and payable.

Section 3. Prepayments. Borrower shall be entitled to
prepay the unpaid Principal, at any time and from time to time, in whole or in
part, without premium or penalty, but only

2
<PAGE> 41
if all accrued and unpaid interest on this Note is paid to the date of such
prepayment.

Section 4. Events of Default and Remedies. The entire
unpaid Principal, and all accrued interest, if any, on this Note shall
immediately become due and payable at the option of the Holder hereof upon the
occurrence of a Default. In the event a Default shall have occurred, the
holder of this Note may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, or by other appropriate proceedings,
whether for the specific performance of any covenant or agreement contained in
this Note, or in aid of the exercise of any power or right granted by this Note
or to enforce any other legal or equitable right of the holder of this Note,
including any rights accorded Holder under the Stipulation.

Section 5. No Partnership or Agency Intended; Indemnity.

(a) Nothing contained herein is intended, or
shall in any way be construed, so as to create any form of partnership
or agency relationship between Borrower and Holder. The parties
hereby expressly disclaim any intention of any kind to create any such
partnership or agency relationship between themselves hereby.
Accordingly, in no event shall Holder be liable for any of the debts,
obligations, or liabilities of Borrower as a result of the execution
of this Note.

(b) Holder shall have the benefit of the same
indemnities as Lessor under the Lease but subject to the same
conditions and exceptions.

Section 6. Cumulative Rights. No delay on the part of
the holder of this Note in the exercise of any power or right under this Note
shall operate as a waiver thereof, nor shall a single or partial exercise of
any such power or right. The remedies provided to Holder herein are cumulative
of any other rights and remedies available at law or in equity and enforcement
by the holder of this Note shall not constitute any election by it of remedies
so as to preclude the exercise of any other remedy available to it.

Section 7. Waiver. Borrower and each and other party,
if any, ever liable for the payment of any sue of money payable or this Note,
jointly and severally waive demand, presentment, protest, notice of nonpayment,
dishonor and notice of dishonor, notice of intention to accelerate, notice of
protest, notice of acceleration and any and all lack of diligence or any delay
in collection or the filing of suit hereon which may occur, and agree that
their liability on this Note shall not be affected by any renewal or extension
in the time of payment hereof or by any indulgences, and hereby consent to any
and all

3
<PAGE> 42
renewals, extensions or indulgences, regardless of the number of such renewals,
extensions or indulgences.

Section 8. Attorneys' Fees and Costs. If a Default
shall occur and thereafter this Note is placed in the hands of an attorney for
collection, or if this Note is collected in whole or in part through legal
proceedings of any nature, then and in any such case, Borrower promises to pay
all reasonable costs of collection, including but not limited to reasonable
attorneys' fees incurred by the holder hereof on account of such collection,
whether or not suit is filed.

Section 9. Notices. Any notice or other communication
permitted or required to be given hereunder by one party to the other shall be
given in accordance with the Lease. If the Holder is not a party to the Lease,
the Holder agrees to provide Borrower all notice information reasonably
requested by Borrower.

SECTION 10. GOVERNING LAW. THE LAWS OF THE STATE OF NEW
YORK SHALL GOVERN THE CONSTRUCTION, VALIDITY, ENFORCEMENT, AND INTERPRETATION
OF THIS NOTE.

Section 11. Headings; Construction. The headings of the
sections of this Note are inserted for convenience only and shall not be deemed
to constitute a part hereof, words used herein of any gender shall be construed
to include any other gender where appropriate, and words used herein which are
either singular or plural shall be construed to include the other where
appropriate.

Section 12. Successors and Assigns. All of the
covenants, stipulations, promises, and agreements in this Note contained by or
on behalf of Borrower shall bind its successors and assigns, whether so
expressed or not; provided, however, that Borrower may not, without the prior
consent of Holder, assign any rights, duties, or obligations under this Note
except in connection with an assignment of Borrower's rights, obligations and
duties under the Lease to the extent permitted thereunder and under the
Stipulation. All rights, duties and privileges of Holder under this Note shall
insure to the benefit of any successors and assigns, whether in whole or in
part, of Holder.

SECTION 13. Payments. Unless otherwise directed in
writing by Holder, Borrower shall make all payments or prepayments on this Note
in accordance with the provisions of Section _ of the Lease. All payments
received in respect of this Note shall be applied first, to discharge any
amounts owing under Section 8 hereof; second, to discharge any obligations
owing under Section 5(b) hereof; third, to the payment of accrued and unpaid
interest; fourth, to the payment of any Principal due and owing; and fifth, to
the prepayment of Principal in the inverse order of maturity in accordance with
Section 3 hereof.

4
<PAGE> 43
IN WITNESS WHEREOF, the undersigned has executed this Note on
the day and year first above written.

CONTINENTAL AIRLINES, INC.
[Debtor-in-Possession]

By:
------------------------
Name:
Title:

[Promissory Note]

5
<PAGE> 44
EXHIBIT B

MODIFICATIONS

Modifications applicable to each aircraft can summarized in the
following categories:

Aging Any act associated with Continental's FAA mandated Aging

Aircraft Program which support continuing structural
airworthiness of aircraft as they age beyond their original
design goal by specifying a minimum acceptable level of
structural maintenance. This program will include implementation
of airworthiness directives, service bulletins, and corrosion
control methods.

Avionics Addition of systems and/or improvements to the aircraft not
affiliated with the Aging Aircraft program, which would include
TCAS (Traffic-alert Collision Avoidance System), Windshear
detection systems, ACARS (Aircraft Communication, Addressing and
Reporting System), Teleflex Cargo Landing System, Fire
Containment Systems (specifically insulation of cargo holds).

New Image/ Transformation of aircraft interiors and exteriors to
Identity Continental's New Image/Identity Program. Exterior Modifications
consist of painting the aircraft. Interior Modifications include
1) carpeting of floors, 2) repainting (or replacement of
decorative material) of sidewalls, doors, bins, seat shrouds,
toilet shrouds and surfaces (walls, bulkheads, dividers,
ceilings) of cabin, galleys and lavatories, 3) leather or cloth
exteriors and cushions for seats, 4) replacement of interior
lights and aisle path lighting, 5) placards (signage), 6)
interior upgrades (hot galleys, closets, required seat
replacements and overhead bins), and 7) other miscellaneous
improvements (seat track covers, window shades, and curtains).

<PAGE> 1

EXHIBIT 10.49

ASSIGNMENT AND ASSUMPTION AGREEMENT

This ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of January
31, 1997 by and between USL CAPITAL CORPORATION, a Delaware corporation ("USL
Capital"), and AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP ("Airlease").

W I T N E S E T H

WHEREAS, USL Capital, Airlease and Taurus Trust Company, Inc.
(formerly Trust Company for USL, Inc.) are party to that certain Trust
Agreement dated as of August 15, 1988 (the "Trust Agreement") as more
particularly described on Annex 1 attached hereto;

WHEREAS, pursuant to that certain Asset Purchase Agreement
dated as of January 31, 1997 by and between USL Capital and Airlease (the
"Agreement"), USL Capital desires to transfer to Airlease, and Airlease desires
to acquire from USL Capital, that certain trust certificate (the "Certificate")
evidencing a 50% interest in the trust estate under the Trust Agreement and USL
Capital's interest in the Trust Agreement and all agreements ancillary to the
Trust Agreement (the "Related Agreements");

WHEREAS, Article XIV of the Trust Agreement provides that USL
Capital may sell or otherwise transfer its interest in the Trust Agreement and
the Related Agreements, provided that the requirements of said Article XIV have
been complied with; and

WHEREAS, in order to effect such transfer, Article XIV of the
Trust Agreement requires an agreement to the following effects.

NOW THEREFORE, in consideration of the transfer contemplated
hereby and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, USL Capital and Airlease do hereby agree as
follows:

1. USL Capital assigns and transfers to Airlease, and
Airlease accepts the assignment and transfer of (the "Assignment"), all of USL
Capital's right, title and interest in, to and under the Certificate, the Trust
Agreement the Related Agreements and the Books and Records (as such term is
defined in the Agreement) relating to the Transaction (as such term is defined
in the Agreement), and Airlease assumes and undertakes to perform any and all
of USL Capital's liabilities or obligations of any kind or nature, whether
absolute contingent, accrued, known or unknown, due or to become due, or
recourse or nonrecourse (the "Liabilities") arising thereunder (except to the
extent that any such Liability shall have accrued, or shall arise from facts or
circumstances occurring, on or before the date hereof). USL Capital represents
that its right, title and interest in, to and under the Certificate, Trust
Agreement and

1
<PAGE> 2
Related Agreements are free and clear of all liens, encumbrances or any
interests of any third party (excepting any liens permitted under the Lease (as
such term is defined in the Trust Agreement)).

2. Airlease shall henceforth be deemed to be a party to the
Trust Agreement and the Related Agreements to which USL Capital is a party and
agrees to be bound by their terms.

3. Airlease hereby represents and warrants that the
Assignment will not cause an Owner Participant Event of Default (as defined in
the Trust Agreement).

4. This Assignment and Assumption Agreement shall be governed
by and construed in accordance with the laws of the State of California.

[Remainder of page intentionally left blank]

2
<PAGE> 3
IN WITNESS WHEREOF, USL Capital and Airlease have caused this
Assignment and Assumption Agreement to be executed as of the date first above
written.

USL CAPITAL CORPORATION,
a Delaware corporation

By: /s/ F. Bruce Kulp

Name: F. Bruce Kulp

Title: Chairman and Chief Executive Officer

AIRLEASE LTD., A CALIFORNIA LIMITED
PARTNERSHIP

By: AIRLEASE MANAGEMENT SERVICES, INC.,
its General Partner

By: /s/ David B. Gebler

Name: David B. Gebler

Title: Chairman

S-1
<PAGE> 4
Annex 1
to Assignment and Assumption Agreement

Description of Trust Agreement

Trust Agreement dated as of August 15, 1988 between Taurus
Trust Company (formerly known as Trust Company for USL, Inc.), as trustee, and
Airlease Ltd., a California Limited Partnership, and USL Capital Corporation,
as beneficiaries.

<PAGE> 1

EXHIBIT 10.50

LEASE

Dated as of

March 15, 1984

Between

DC-9T-III, Inc., as Lessor

and

TRANS WORLD AIRLINES, INC., as Lessee

_____________________________

One McDonnell Douglas DC-9-82 Aircraft
<PAGE> 2
TABLE OF CONTENTS TO LEASE AGREEMENT

<TABLE>
<S> <C>
Section 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 2. Acceptance Under Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Section 3. Term and Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Term for Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Basic Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Supplemental Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Payment to Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Late Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Section 4. Lessor's Representations and Warranties; Certain Agreements of Lessee . . . . . . . . . . . . . . . . . . . 9
Lessor's Representations and Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Certain Agreements of Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Certain Covenants of Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 5. Return of Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Condition Prior to Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Maintenance Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Return Delivery Flight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Replacement Engine upon Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Failure to Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Section 6. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Section 7. Registration, Maintenance and Operation; Possession; Insignia . . . . . . . . . . . . . . . . . . . . . . . 14
Registration, Maintenance and Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Insignia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Section 8. Replacement and Pooling of Parts; Alterations, Modifications and Additions . . . . . . . . . . . . . . . . 19
Replacement of Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Pooling of Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Alterations, Modifications and Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Section 9. Voluntary Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Termination During Initial Lease Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Termination for Obsolescence or Surplusage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Section 10. Loss; Destruction; Requisition; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Event of Loss with Respect to the Aircraft or the Airframe During Initial Lease Period . . . . . . . . . . . . 24
Event of Loss with Respect to the Aircraft or the Airframe During Base Lease Period or
any Renewal Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

</TABLE>

i
<PAGE> 3

<TABLE>
<S> <C>
Event of Loss with Respect to an Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Conveyance of Replacement Airframe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Application of Payments from Governmental Authorities for Requisition of Title . . . . . . . . . . . . . . . . 29
Requisition for Use by the Government of the Airframe and the Engines Installed Thereon . . . . . . . . . . . 29
Requisition for Use by the Government of an Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Application of Payments During Existence of Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . 30

Section 11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Airlines Public Liability and Property Damage Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Insurance Against Loss or Damage to Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Proceeds of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Reports, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Insurance for Own Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Section 12. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Section 13. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Section 14. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Failure to Pay Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Failure to Carry Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Public Liability Insurance not in Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Failure to Perform Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Incorrect Representation or Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Entry of a Decree in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Commencement of a Voluntary Case in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Undischarged Final Judgment in Excess of $1,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Acceleration of Indebtedness Exceeding $5,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Failure to Remain Air Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Voluntary Suspension of Airline Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Section 15. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Return of Airframe and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Sale of Airframe or Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Section 16. Federal Bankruptcy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Section 17. Further Assurances; Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Section 18. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Section 19. No Setoff; Counterclaim; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Section 20. Purchase Option and Renewal Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Purchase Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Renewal Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Determination of Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>

ii
<PAGE> 4

<TABLE>
<S> <C>
Section 21. Not Applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Section 22. Lessor's Right to Perform for Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Section 23. Maintenance of Certain Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Section 24. Investment of Security Funds; Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

EXHIBIT A - Form of Lease Supplement

EXHIBIT B - Stipulated Loss Schedule

EXHIBIT C - Termination Schedule

EXHIBIT D - List of Permitted Air Carriers
</TABLE>

iii
<PAGE> 5
LEASE AGREEMENT

THIS LEASE AGREEMENT dated as of March 15, 1984, between
DC-9T-III, Inc , a Delaware corporation, with a place of business at United
Technologies Building, Hartford, Connecticut and its successors and assigns
("Lessor"), and TRANS WORLD AIRLINES, INC., a Delaware corporation with its
principal place of business at 605 Third Avenue, New York, New York 10158
("Lessee" or "TWA").

WITNESSETH:

Section 1. Definitions

Unless the context otherwise requires, the following terms
shall have the following meanings for all purposes of this Lease Agreement and
shall be equally applicable to both the singular and the plural forms of the
terms herein defined:

"Act" means the Federal Aviation Act of 1958, as
amended from time to time.

"Agreement to Manufacture and Lease" means the
Agreement to Manufacture and Lease dated October 29, 1982
between Lessee and Manufacturer.

"Aircraft" means the Airframe delivered and leased
hereunder (or any Replacement airframe substituted for such
Airframe hereunder) together with the two Engines described
under a Lease Supplement covering such Airframe (or any Engine
substituted for any of such Engines hereunder), whether or not
any of such initial or substituted Engines may from time to
time be installed on such Airframe or may be installed on any
other airframe. The term "Aircraft" shall also include any
Replacement Aircraft.

"Airframe" means (i) the McDonnell Douglas DC-9-82
aircraft (except Engines or engines from time to time
installed thereon) leased hereunder by Lessor to Lessee under
a Lease Supplement; and (ii) any and all Parts so long as the
same shall be incorporated or installed in or attached to such
aircraft, or so long as title thereto shell remain vested in
Lessor in accordance with the terms of Section 8, after
removal from such aircraft. The term "Airframe" shall also
include any Replacement Airframe substituted as contemplated
by Section 10(b). Except as otherwise set forth herein, at
such time as a Replacement Airframe shall be so substituted,
such replaced Airframe shall cease to be the Airframe
hereunder.
<PAGE> 6
"Base Lease Period" means a period from the day after
the end of the Initial Lease Period for the Aircraft to but
not including the eighteenth anniversary of the Delivery Date
of the Aircraft.

"Base Loss Cost" for the Aircraft means $23,840,000
and for any Engine means 2,000,000.

"Basic Rent" for the Aircraft means the rent payable
for the Aircraft to pursuant to Section 3(b) and, during any
Renewal Period, Renewal Rent.

"Business Day" means any day other than a Saturday,
Sunday or holiday scheduled by law for any commercial banking
institution in New York, New York.

"Delivery Date" for the Aircraft means the date,
which shall be a Business Day other than a day on which the
FAA is authorized or required by law to remain closed, on
which the Aircraft is delivered to and accepted by, Lessor,
and the Aircraft is leased by Lessor to Lessee hereunder,
which shall be the date of the Lease Supplement covering the
Aircraft.

"Engine" means (i) each of the two Pratt & Whitney
Aircraft Model JT8D-217A engines listed by manufacturer's
serial numbers in a Lease Supplement and originally installed
on the Airframe covered by such Lease Supplement whether or
not from time to time thereafter installed on such Airframe or
installed on any other airframe or on any other aircraft; and
(ii) any Replacement Engine which may from time to time be
substituted as contemplated by Sections 5, 7(b), 10(b) or
10(c) for an Engine leased hereunder; together in each case
with any and all Parts incorporated or installed in or
attached thereto or any and all Parts removed therefrom so
long as title thereto shall remain vested in Lessor in
accordance with the terms of Section 8 after removal from such
Engine. Except as otherwise set forth herein, at such time as
a Replacement Engine shall be so substituted, such replaced
Engine shall cease to be an Engine hereunder. The term
"Engines" means, as of any date of determination, all Engines
then leased hereunder. Each Engine has or at the time it
becomes a Replacement Engine hereunder will have at least 750
rated take-off horsepower or the equivalent of such
horsepower.

"Event of Default" has the meaning specified in
Section 14.

"Event of Loss" with respect to any property means
any of the following events with respect to such property: (i)
loss of such property or the use thereof

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<PAGE> 7
due to theft, disappearance, destruction, damage beyond
repair or rendition of such property permanently unfit for
normal use for any reason whatsoever; (ii) any damage to
such property which results in the receipt of insurance
proceeds with respect to such property on the basis of a
total loss; (iii) the condemnation, confiscation or seizure
of, or requisition of title to or use of, such property,
other than a requisition for use by the United States
Government or any instrumentality or agency thereof (unless
and until such property shall have been modified or adapted
in such manner as would render reconversion of such
property for use in normal commercial passenger service
impractical or uneconomical); (iv) as a result of any
rule, regulation, order or other action by the FAA, the
Civil Aeronautics Board or other governmental body having
jurisdiction, the use of such property in the normal course
of interstate air transportation of persons shall have been
prohibited for a period of six consecutive months, unless
Lessee, prior to the expiration of such six (6) month
period, shall have undertaken and shall be diligently
carrying forward all steps which are necessary or desirable
to permit the normal use of such property by Lessee or, in
any event, if such use shall have been prohibited for a
period of 12 consecutive months; (v) with respect to an
Aircraft or Engine, the operation or location of such
Aircraftor Engine, while under requisition for use by the
United States Government or any instrumentality or agency
thereof, in any area excluded from coverage by any
insurance policy in effect with respect to such Aircraft or
Engine required by the terms of Section 11 hereof, if
Lessee shall be unable to obtain indemnity in lieu thereof
from the United States of America; or(vi) with respect to
the Aircraft or any Engine, the opinion required pursuant
to Section 4(q) of the Participation Agreement shall not be
to the effect contemplated by such Section and Lessee shall
fail to take such action as shall enable a new opinion to
the effect so contemplated to be delivered within thirty
(30) days after the date of such first opinion. An Event of
Loss with respect to the Aircraft shall be deemed to have
occurred if an Event of Loss occurs with respect to the
Airframe.

"FAA" means the Federal Aviation Administration or
a successor agency.

"Incentive Rate" means a fluctuating rate equal to
the prime rate quoted from time to time by The Chase
Manhattan Bank, National Association, plus 1-1/2%.

"Independent Appraisal" means an appraisal
mutually agreed to by two nationally recognized

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<PAGE> 8
independent aircraft appraisers, one of which shall be chosen
by Lessor and one by Lessee, or, if such appraisers cannot
agree on the amount of such appraisal, an appraisal arrived at
by a third nationally recognized independent aircraft appraiser
chosen by the mutual consent of such two appraisers, and paid
for by Lessee, provided that, if either party shall fail to
appoint an appraiser within 15 days after a written request to
do so by the other party, or if such two appraisers cannot
agree on the amount of such appraisal and fail to appoint a
third appraiser within thirty (30) days after the date of the
appointment of the second of such appraisers, then either party
may apply to any court having jurisdiction to make such
appointment. An "Independent Appraisal" of the fair market
value or fair market rental value of the Aircraft shall mean an
appraisal which assumes that the Aircraft is unencumbered by
this Lease or any renewal or purchase option hereunder and
which assumes that the Aircraft has been maintained in all
respects in accordance with the terms of this Lease (whether or
not it is in fact in such condition) and which is net of
selling and transportation charges, and which would be obtained
in an arms-length transaction between an informed and willing
lessor or seller, as the case may be, and an informed and
willing lessee or purchaser, as the case may be, both under no
compulsion to lease or sell and purchase, as the case may be.

"Initial Lease Period" means a period of five years
from the Delivery Date for the Aircraft to but excluding the
fifth anniversary of such Delivery Date.

"Lease Agreement", "this Lease Agreement", "this
Lease", "this Agreement", "herein", "hereunder", "hereby" or
other like words mean this Lease Agreement as originally
executed or as modified, amended or supplemented pursuant to
the applicable provisions hereof, including, without
limitation, supplementation hereof by one or more Lease
Supplements entered into pursuant to the applicable provisions
hereof.

"Lease Supplement" means a Lease Supplement,
substantially in the form of Exhibit A hereto, entered into
between Lessor and Lessee for the purpose of leasing an
Aircraft, Airframe or an Engine under and pursuant to the
terms of this Lease Agreement, including, without limitation,
any amendment thereto entered into subsequent to the Delivery
Date of such Aircraft.

"Lessor's Warranty" means, as to any property, a
warranty by Lessor that: (i) Lessor has received, or will
receive, whatever title to such property was

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<PAGE> 9
conveyed, or will be conveyed, to Lessor by the Manufacturer or
by any other predecessor in interest to such property, as the
case may be; and (ii) such property is free of Liens of any
Person claiming by, through, or under Lessor which either (a)
result from action taken by Lessor, other than with respect to
its ownership of the Aircraft, or (b) result from action taken
by Lessor other than action (1) permitted by this Lease or the
Participation Agreement, (2) participated in or consented to by
Lessee, or (3) taken by reason of the occurrence of an Event of
Default hereunder.

"Lien" means any mortgage, pledge, lien, charge,
encumbrance, lease, exercise of rights, security interest or
claim of any nature whatsoever.

"Manufacturer" means McDonnell Douglas Corporation,
a Maryland corporation, and its successors and assigns.

"Material Adverse Change in Financial Condition"
means the existence of an event of default, as such term may
be defined in any then effective agreement, with respect to
any material financial covenant in such agreement binding on
Lessee, which has not been cured within the applicable cure
period.

"Participation Agreement" means that certain
Participation Agreement dated as of the date hereof between
Lessee and Lessor whereby, among other things, the Lessor
agrees, subject to conditions specified therein, to purchase
the Aircraft to be leased hereunder as therein provided.

"Parts" means any and all appliances, parts,
instruments, appurtenances, accessories, furnishings and other
equipment of whatever nature (other than complete Engines or
engines), which may from time to time be incorporated or
installed in or attached to the Airframe or any Engine.

"Permitted Air Carrier" has the meaning set forth in
Section 7(b).

"Person" means any individual, corporation,
partnership, trust, unincorporated organization or government,
or any agency or political subdivision thereof.

"Pratt & Whitney Aircraft" means Pratt & Whitney
Aircraft Group of United Technologies Corporation, a Delaware
Corporation, and its successors and assigns.

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<PAGE> 10
"Renewal Period" means for the Aircraft, a period of
one, two, three or four years commencing the day after the end
of the Base Lease Period aa determined pursuant to Section
20(b) hereof.

"Renewal Rent" means, the rent payable for the
Aircraft pursuant to Section 20(b) hereof.

"Rent" means Basic Rent, Renewal Rent and
Supplemental Rent.

"Replacement Aircraft" means the Aircraft of which a
Replacement Airframe is part.

"Replacement Airframe" means each McDonnell Douglas
DC-9-82 aircraft (except Engines or engines from time to time
installed thereon), the cockpit configuration of which is
substantially the same as the Airframe which is being
replaced, and which shall have been substituted as
contemplated by Section 10(d) hereof, together with all Parts
relating to such aircraft.

"Replacement Engine" means each Pratt & Whitney
Aircraft Model JT8D-217A engine (or engine of the same or, if
Pratt & Whitney Aircraft no longer manufacturers such engines,
another manufacturer of the same or an improved model), that
has a value and utility at least equal to such Pratt & Whitney
Aircraft engine and which may be installed on the Airframe
without materially impairing the value or utility of the
Aircraft, and is certified for use on a McDonnell Douglas
DC-9-80 aircraft, which shall have been leased hereunder as
contemplated by Sections 5(e), 7(b), 10(b) or 10(c) hereof,
together with all Parts relating to such engine.

"Stipulated Loss Schedule" shall mean, in the case of
the Aircraft and each Engine, the Stipulated Loss Schedule
included as Exhibit B to this Lease, to which reference is
made in determining the Stipulated Loss Value for the Aircraft
or such Engine.

"Stipulated Loss Value" for the Aircraft or any
Engine, as of any date of computation, shall mean an amount
equal to Base Loss Cost for the Aircraft or such Engine
multiplied by either (a) if the date of computation falls on a
date on which a Basic Rent payment for the Aircraft becomes
due, or, in the case of an Engine, on the date on which a
Basic Rent payment becomes due for the Aircraft of which such
Engine was a part, the percentage specified in the Stipulated
Loss Schedule opposite the month corresponding to the Basic
Rent payment date for the Aircraft or such Engine, or

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<PAGE> 11
(b) if the date of computation falls on a day other than one on
which a Basic Rent payment for the Aircraft becomes due, or, in
the case of an Engine, on a date other than one on which a
Basic Rent payment becomes due for the Aircraft of which such
Engine was a part, the percentage derived by linear
interpolation (by reference to the actual number of days)
between the percentages specified in the Stipulated Loss
Schedule for the Aircraft or such Engine opposite the month of
the Basic Rent payment immediately preceding and the month of
the Basic Rent payment immediately following the date of
computation, less the amount of Basic Rent multiplied by a
fraction, the denominator of which shall be 30 and the
numerator of which shall be 30 minus the number of days from
and including the date of computation to but excluding the
Basic Rent payment date next succeeding the termination.

"Supplemental Rent" means all amounts, liabilities
and obligations (other than Basic Rent) which Lessee assumes
or agrees to pay hereunder or under the Participation
Agreement to Lessor or others, including, without limitation,
payments of Stipulated Loss Value, any interest payable with
respect to payments pursuant to Section 3(e) hereunder and the
amount of any loss of principal realized as the result of any
investments made pursuant to Section 24 hereunder.

"Term" means the period for which Lessee leases the
Aircraft pursuant to this Lease Agreement.

"Termination Value" means for the Aircraft, as of any
date of computation, an amount equal to Base Loss Cost for the
Aircraft multiplied by either (a) if the date of computation
falls on a date on which a Basic Rent payment for the Aircraft
becomes due, the percentage specified in Exhibit C hereto
opposite the month corresponding to the Basic Rent payment
date for the Aircraft, or (b) if the date of computation falls
on a day other than one or which a Basic Rent payment for the
Aircraft becomes due, the percentage derived by linear
interpolation (by reference to the actual number of days)
between the percentages specified in Exhibit C opposite the
month of the Basic Rent payment immediately preceding and the
month of the Basic Rent payment immediately following the date
of computation less the amount of Basic Rent multiplied by a
fraction, the denominator of which shall be 30 and the
numerator of which shall be 30 minus the number of days from
and including the date of computation to but excluding the
Basic Rent payment date next succeeding the termination date.

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<PAGE> 12
Section 2. Acceptance Under Lease

Lessor hereby agrees (subject to satisfaction or waiver of the
conditions set forth in Section 4 of the Participation Agreement) to purchase
and accept delivery of the Aircraft from Manufacturer and simultaneously to
lease to Lessee hereunder, and Lessee hereby agrees to lease from Lessor
hereunder, the Aircraft as evidenced by the execution by Lessor and Lessee of a
Lease Supplement leasing the Aircraft hereunder. Lessor shall authorize one or
more employees of Lessee, designated by Lessee, as the authorized
representative or representatives of Lessor to accept delivery of the Aircraft.
Lessee hereby agrees that such acceptance of delivery by such authorized
representative or representatives on behalf of Lessor shall, without further
act, irrevocably constitute acceptance by Lessee of the Aircraft for all
purposes of this Agreement.

Section 3. Term and Rent

(a) Term for Aircraft. The Term for the Aircraft shall
consist of the following period: (i) the Initial Lease Period; (ii) upon
written notice given by Lessee to Lessor on or before October 17, 1987 Lessee
may elect to renew the lease for the Base Lease Period; and (iii) upon written
notice given at least eight (8) months prior to the end of the Base Lease
Period for the Aircraft, Lessee may elect to renew the Lease for a Renewal
Period as specified herein.

(b) Basic Rent. For the Aircraft, Lessee agrees to pay
Basic Rent in installments monthly in advance at the rate specified in Section
4 of the Lease Supplement relating to the Aircraft commencing on the Delivery
Date thereof, and on the date in each succeeding calendar month corresponding
to such Delivery Date or, if any month has no such corresponding date, on the
last day of such month.

(c) Supplemental Rent. Lessee also agrees to pay to
Lessor or to whomsoever shall be entitled thereto, any and all Supplemental
Rent promptly as the same shall become due and owing, and in the event of any
failure on the part of Lessee to pay any Supplemental Rent, Lessor shall have
all rights, powers and remedies provided for herein or by law or equity or
otherwise in the case of nonpayment of Basic Rent. Supplemental Rent shall
include, without limitation, all amounts payable by Lessee under Section 3(e)
hereof and under Sections 8 and 11 of the Participation Agreement when and as
the same shall become due.

(d) Payment to Lessor. All Rent shall be paid by Lessee
to Lessor to its General Account No. 38137504 at Citibank, N.A., 399 Park
Avenue, New York, New York, or as Lessor may otherwise direct, in immediately
available funds in U.S. Dollars by 11 A.M. New York time on the date that such
payment is due if

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<PAGE> 13
such day is a Business Day or, if such day is not a Business Day, the next
preceding Business Day.

(e) Late Payments. As to any (i) amount due under this
Lease or the Participation Agreement which is not paid when due as herein
provided; or (ii) advance made by Lessor of any amount required to be paid by
Lessee as herein provided and not so paid by Lessor, Lessee shall pay on demand
to Lessor aa Supplemental Rent, interest thereon from either the due date
thereof or the date demanded by Lessor, as the case may be (as to amounts
referred to in clause (i)) or the date advanced by Lessor (as to amounts
referred to in clause (ii)), as the case may be, to the date paid at the
Incentive Rate.

Section 4. Lessor's Representations and Warranties; Certain
Agreements of Lessee

(a) Lessor's Representations and Warranty. Lessor hereby
makes Lessor's Warranty and represents and warrants that it is a "citizen of
the United States" as defined in Section 101(16) of the Act. EXCEPT FOR THE
FOREGOING WARRANTIES AND THE REPRESENTATIONS AND WARRANTIES OF LESSOR SET FORTH
IN SECTION 12 OF THE PARTICIPATION AGREEMENT, LESSOR NEITHER MAKES NOR SHALL BE
DEEMED TO HAVE MADE OR TO MAKE ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES OF
ANY KIND, AND LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES ANY WARRANTIES,
REPRESENTATIONS OR GUARANTEES, LIABILITIES AND OBLIGATIONS OF ANY KIND, EITHER
EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE AIRCRAFT, THE
AIRFRAME, OR ANY ENGINE, PART OR OTHER THING DELIVERED, LEASED, SOLD OR
TRANSFERRED HEREUNDER (AND WHETHER OR NOT ARISING OUT OF THE DELIVERY, USE,
OPERATION, LEASE, SUBLEASE, TRANSFER, POSSESSION, STORAGE, MODIFICATION,
ALTERATION, MAINTENANCE, REPAIR OR OTHER DISPOSITION THEREOF), INCLUDING, BUT
NOT LIMITED TO (i) THE AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION OF OR
THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, OR TITLE TO, OR ANY DEFECT IN
THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART OR OTHER THING DELIVERED,
LEASED, SOLD OR TRANSFERRED HEREUNDER; (ii) ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, AGAINST
INFRINGEMENT OR THE LIKE, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF
DEALING OR USAGE OF TRADE; (iii) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR
REMEDY IN TORT WITH RESPECT TO THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART
OR OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER, WHETHER OR NOT
IN STRICT OR ABSOLUTE LIABILITY OR ARISING FROM THE NEGLIGENCE OF LESSOR,
ACTUAL OR IMPUTED; OR (iv) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY
FOR LOSS OF, OR DAMAGE TO, THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART OR
OTHER THING, FOR ANY LOSS OF USE, REVENUE OR PROFIT, OR OTHER DIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES. Nothing in this Section 4(a) shall be
deemed to modify or otherwise affect the respective rights and obligations of
the Lessee and of the Manufacturer (as manufacturer) under the Agreement to
Manufacture and Lease.

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<PAGE> 14
(b) Certain Agreements of Lessee. Lessee agrees with
Lessor that it shall perform the agreements, covenants and indemnities of
Lessee set forth in Sections 7, 8, 10, 11 and 14 of the Participation Agreement
as fully and to the same extent and with the same force and effect as if set
forth in full in this Section 4(b).

(c) Certain Covenants of Lessor. (i) Lessor covenants
with Lessee that, so long as no Event of Default or event, which with
the passage of time or the giving of notice, or both, would become an
Event of Default, shall have occurred, Lessee's right to use and
possession of the Aircraft shall not be interrupted by voluntary acts
or omissions of Lessor, or by persons claiming through Lessor
resulting from actions taken by Lessor, in each case other than as
permitted by this Lease or the Participation Agreement or participated
in or consented to by Lessee and not arising from Lessor's ownership
of the Aircraft, it being understood and agreed that, Lessee shall not
thereby be relieved of any obligation, covenant or agreement of Lessee
set forth herein or in the Participation Agreement (including, without
limitation, those of Section 6 hereof and of Section 10 of the
Participation Agreement.

(ii) throughout the Term, Lessor shall (A) not knowingly
create any Lien on the Aircraft (x) which results from or constitutes
a claim against Lessor not relating to or arising directly or
indirectly as a result of its interest in the Aircraft, the Airframe
or any Engine or of the transactions contemplated by this Lease, or
the Participation Agreement or (y) covered by Lessor's Warranty, (B)
as soon as reasonably practical after it becomes aware of any such
Lien (whether such Lien arose with or without the knowledge of Lessor)
on the Aircraft, discharge or remove the same unless, where such Lien
does not affect Lessee's quiet possession and enjoyment of the
Aircraft, Lessor is contesting such Lien in good faith by appropriate
proceedings as long as such proceedings will not adversely affect the
continued quiet possession and enjoyment of the Aircraft by Lessee and
will not result in the sale, forfeiture or loss of the Airframe or any
Engine or interest therein during its continuance, and (C) pay when
due all taxes of Lessor the non-payment of which will result in a Lien
against the Aircraft (unless, where such Lien does not affect Lessee's
quiet possession and enjoyment of the Aircraft, the liability to pay
and/or the amount of such taxes are being disputed or contested by
Lessor in good faith by appropriate proceedings so long aa such
proceedings will not adversely affect the continued quiet possession
and enjoyment of the Aircraft by Lessee and.will not result in the
sale, forfeiture or loss of the Airframe or any Engine or interest
therein during its continuance), other than taxes for which Lessor is
entitled to indemnification under this Lease or the Participation
Agreement.

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<PAGE> 15
Section 5. Return of Aircraft

Following the termination of this Lease in any circumstances
other than as a result of an Event of Loss, within four days after such
termination, or as otherwise agreed, Lessee shall, at its own expense,
redeliver the Aircraft to Lessor at Manufacturer's facility in Long Beach,
California. All costs associated with the return flight shall be for the
account of Lessee.

(a) Condition Prior to Return. Immediately prior to
return of the Aircraft to Lessor, the Aircraft shall have a currently valid
Standard FAA Certificate of Airworthiness. The Aircraft condition shall allow
for normal wear and tear. The Aircraft shall be clean by normal airline
operating standards and shall have installed thereon all Engines, equipment,
accessories or Parts as when delivered to Lessee or replacements therefor and
additions and improvements thereto, as provided in Sections 7 and 8 herein, and
shall be in the same interior configuration as when delivered to Lessee or as
otherwise mutually agreed. All Lessee exterior markings shall have been
painted over in matching exterior colors.

(b) Maintenance Status. The maintenance status of the
Aircraft so returned shall be as follows:

(i) all FAA Airworthiness Directives applicable
to the Aircraft requiring compliance on or before the return date
shall have been complied with;

(ii) at time of return, the Aircraft shall be in
its "as is" maintenance cycle condition within Lessee's then current
FAA approved maintenance program; and

(iii) if requested by Lessor, Lessee shall perform or

cause to be performed a single visit "C" check within thirty (30) days
prior to the return of the Aircraft and such additional overhaul,
repair or maintenance work which Lessor in its Judgment deems necessary
to bring the Aircraft up to a condition not greater than half-time.
Lessor will pay Lessee an amount equal to the cost of such single visit
"C" check and such additional overhaul, repair or maintenance work.

Lessee shall not exchange Engines or time/cycle controlled
components on the Aircraft about to be returned to Lessor for engines or
time/cycle controlled components on other aircraft or in Lessee's possession
which will remain in Lessee's possession after such return in order to reduce
or avoid future maintenance requirements.

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<PAGE> 16
inspection including engine runs at Lessee's main base of operations. Such
inspections shall be conducted during normal working hours, unless otherwise
agreed by both parties. Any equipment noted during such inspections not
complying with normal airline standards for continued usage in passenger
service shall be corrected by Lessee. All costs associated therewith shall be
to the account of Lessee.

(d) Return Delivery Flight. During the return delivery
flights, a pilot of Manufacturer, in conjunction with Lessee's flight crew,
will accomplish a flight functional to demonstrate the airworthiness of the
Aircraft and proper functioning of all systems and components. Any discrepancy
or malfunction detected of an airworthiness or operational nature by normal
airline standards shall be corrected. All costs associated therewith shall be
to the account of Lessee.

(e) Replacement Engine upon Return. In the event that
any engine not owned by Lessor shall be installed on the Airframe returned in
accordance with this Section 5(a) hereof, such engine shall comply with the
definition of a Replacement Engine, suitable for installation and use on the
Airframe and fully compatible with other Engines. At the time of such
replacement such engine shall have performance and durability characteristics
and a value, condition and utility at least equal to the Engine it replaced
hereunder, assuming such Engine was maintained in accordance with the
requirements of this Lease, including this Section 5, which are applicable to
Engines. Upon return of the Aircraft of which the Airframe is a part, Lessee
shall duly convey to Lessor good and marketable title to any such replacement
engines, free and clear of all Liens whatsoever; and, upon such conveyance,
Lessee, at its own expense, will (i) furnish Lessor with a full warranty bill of
sale, in form and substance satisfactory to Lessor, with respect to such
replacement engines; (ii) furnish Lessor with such evidence of Lessee's title to
such replacement engines, including an opinion of Lessee's counsel, and of the
condition of such replacement engines may be duly and properly vested in Lessor
to the same extent as the Engine replaced thereby. Upon full compliance by
Lessee with its obligations hereunder, at Lessee's expense, Lessor will transfer
to Lessor, without recourse or warrant, (except for Lessor's Warranty and
subject to the disclaimer set forth in Section 4(a) hereof), all Lessor's right,
title and interest in and to an Engine constituting part of the Aircraft but not
installed on the Airframe at the time of the return of the Airframe.

(f) Failure to Return. If Lessee shall, for any reason
whatsoever, fail to return the Aircraft or any Engine at the time specified
herein, the obligations of Lessee as provided in this Lease shall continue in
effect with respect to the Aircraft or such Engine until the Aircraft or such
Engine is returned to Lessor, provided that this Section 5(f) shall not be
construed as (A) permitting Lessee to fail to meet its obligation

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<PAGE> 17
to return the Aircraft and Engines in accordance with the requirements of this
Lease or (B) relieving Lessee of any legal responsibility for direct or
consequential damages suffered by Lessor by reason of such failure.

(g) Documentation. Documentation for the Aircraft upon
return shall be as follows:

(i) all documentation shall be made available by
Lessee for review by Lessor seven (7) days prior to the return
of the Aircraft. Applicable Maintenance, Repair, Wiring
Diagram, Weight and Balance, Flight Crew Operating, FAA
approved Flight Manuals, and other documentation as listed in
the Agreement to Manufacture and Lease, will be provided with
the Aircraft at time of return; and

(ii) upon acceptance of the Aircraft by Lessor,
Lessor agrees to execute a receipt for such Aircraft in a
mutually acceptable form.

(iii) upon the return of the Airframe either at the
end of the Term or pursuant to Section 9 hereof, each fuel
tank and oil tank shall contain the same quantity of fuel and
oil as was contained in the fuel and oil tanks when the
original Airframe was delivered to Lessee on the Delivery Date
of the Aircraft, or, in the case of differences in any such
quantities, an appropriate adjustment will be made by payment
at the then current market price of fuel or oil, as the case
may be.

If Lessor requests the single visit "C" check and additional
work as may be required as noted in paragraph (b)(iii) above, Lessor and Lessee
agree that the Term will be extended by the amount of time required by Lessee
to accomplish such "C" check and additional work and Lessor agrees to waive the
payment of Basic Rent for such extension period. All other terms and
conditions of the Lease Agreement shall remain in full force and effect during
such extension.

(h) Insurance. In connection with inspections of the
Aircraft and the return delivery flights, Lessor shall be named as additional
insured under Lessee's Third Party and Passenger Liability insurance and Lessee
shall maintain the following insurance in the minimum amounts noted (and
otherwise as provided in Section 11 hereof):

(i) Hull Insurance (in the amount of Stipulated
Loss Value at the last day of the Term before such return).

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<PAGE> 18
(ii) Third Party and Passenger Liability coverage
(in the amount of Lessee's current coverage but not less than
U.S. $100,000,000).

The hull insurance coverage set forth above shall contain a
waiver of subrogation by Lessee's insurance carrier of any rights it may have
against Lessor.

Prior to the inspections and return delivery flight set forth
herein, Lessee shall supply evidence satisfactory to Lessor of the insurance
coverage set forth above.

Section 6. Liens

Lessee will not directly or indirectly create, incur, assume
or suffer to exist any Lien on or with respect to the Airframe or any Engine,
title thereto or any interest therein or in this Lease or any interest of
Lessor in any Rent except (i) the respective rights of Lessor and Lessee as
herein provided; (ii) the rights of others under agreements or arrangements to
the extent expressly permitted by the terms of Sections 7(b) and 8(b); (iii)
Liens covered by Lessor's Warranty; (iv) Liens for taxes either not yet due or
being contested in good faith (and for the payment of which adequate reserves
have been provided) by appropriate proceedings so long as such proceedings, in
Lessor's opinion, do not involve any unreasonable danger of the sale,
forfeiture or loss of the Airframe or any Engine or interest therein; (v)
materialmen's, mechanics', workmen's, repairmen's, employees' or other like
liens arising in the ordinary course of business for amounts the payment of
which is either not yet delinquent or is being contested in good faith (and for
the payment of which adequate reserves have been provided) by appropriate
proceedings so long as such proceedings do not involve any danger of the sale,
forfeiture or lose of the Airframe or any Engine or interest therein; and (vi)
Liens on Lessee's interest as Lessee under this Lease, arising out of judgments
or awards against Lessee (for the payment of which adequate reserves have been
provided with respect to which at the time an appeal or proceeding for review
is being prosecuted in good faith and with respect to which there shall have
been secured a stay of execution pending such appeal or proceeding after
review. Lessee will promptly, at its own expense, take such action as may be
necessary duly to discharge any such Lien not excepted above if the same shall
arise at any time.

Section 7. Registration, Maintenance and Operation;
Possession; Insignia

(a) Registration, Maintenance and Operation. Lessee, at
its own cost and expense, shall: (i) forthwith upon the delivery thereof
hereunder, cause the Aircraft to be duly registered, and at all times
thereafter to remain duly

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<PAGE> 19
registered, in the name of Lessor with the FAA pursuant to the Act; (ii)
maintain, service, repair, overhaul, alter, modify, add to and test the
Aircraft, the Airframe, and each Engine, and each other engine installed from
time to time on the Airframe in accordance with its FAA approved maintenance
program for McDonnell Douglas Model DC-9 Series 80 aircraft and Pratt & Whitney
Aircraft Model JT8D-217A engines and comply with all service, inspection,
maintenance, repair and overhaul regulations, directives and instructions which
are made mandatory by the FAA upon United States operators of McDonnell Douglas
Model DC-9 Series 80 aircraft and Pratt & Whitney Aircraft Model JT8D-217A
engines so as to keep the Aircraft and Engines in as good operating condition
as when delivered to Lessee hereunder, ordinary wear and tear excepted, and in
such condition as may be necessary to enable the Standard Airworthiness
Certification of the Aircraft to be maintained in good standing at all times
under the Act; (iii) maintain all records, logs and other materials required by
the FAA or any other governmental authority or agency having jurisdiction to be
maintained in respect of the Aircraft, Airframe and each Engine; and (iv)
promptly furnish to Lessor such information as may be required to enable Lessor
to file any reports required to be filed by Lessor with any governmental
authority because of Lessor's ownership of the Aircraft. Lessee shall pay for
and provide all electric power, oil, fuel and lubricant consumed by and
required for the operation of the Aircraft and any Engines, and all repairs,
parts and supplies necessary therefor. Lessee agrees that the Aircraft and
Engines will not be maintained, used or operated in violation of any law or any
rule, regulation or order of any government or governmental authority having
jurisdiction (domestic or foreign), or in violation of any airworthiness
certificate, license or registration relating to the Aircraft or such Engine
issued by any such authority. In the event that any such law, rule, regulation
or order requires alteration of the Aircraft or any Engine, Lessee will conform
thereto or obtain conformance therewith at no expense to Lessor and will
maintain the Aircraft in proper operating condition under such laws, rules,
regulations and orders; provided, however, that Lessee may, in good faith
(after having delivered to Lessor a certificate signed by a responsible officer
of Lessee stating the facts with respect thereto), contest the validity or
application of any such law, rule, regulation or order in any reasonable manner
which does not, in Lessor's opinion, materially adversely affect Lessor.
Lessee also agrees not to operate, use or locate the Airframe or any Engine, or
suffer the Airframe or any Engine to be operated, used or located, (i) in any
area excluded from coverage by any insurance required by the terms of Section
11, except in the case of a requisition by the United States of America where
Lessee obtains an indemnity (which need not be evidenced by written agreement)
in lieu of such insurance from the United States of America against the risks
and in the amounts required by Section 11 covering such areas; or (ii) in any
recognized or, in Lessee's reasonable judgment, threatened area of hostilities
unless fully covered to Lessor's satisfaction by war risk and

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<PAGE> 20
allied perils insurance, or unless the Airframe or such Engine is operated or
used under contract with the Government of the United States under which
contract the Government assumes liability for any damage, loss, destruction or
failure to return possession of the Airframe or such Engine at the end of the
term of such contract or for injury to persons or damage to property of others;
provided, however, that the Airframe or an Engine located in an area at the
time it becomes a recognized or threatened area of hostilities may be flown
from and through such area of hostilities to an area outside such area of
hostilities.

(b) Possession. Lessee will not, without the prior
written consent of Lessor, sublease or otherwise in any manner deliver,
transfer or relinquish possession of the Aircraft, Airframe or any Engine or
install any Engine, or permit any Engine to be installed, on any airframe other
than the Airframe; provided that, so long as no Event of Default (or event
which would constitute an Event of Default but for the lapse of time or the
giving of notice or both) shall have occurred and be continuing, and so long as
Lessee shall comply with the provisions of Section 11 hereof, Lessee may,
without the prior written consent of Lessor:

(i) subject any Engine to normal interchange or pooling
agreements or arrangements customary in the airline industry and
entered into by Lessee in the ordinary course of its business with
other United States certificated air carriers or with any "foreign air
carrier" (as such term is defined in the Act) as to which there is in
force a permit issued pursuant to Section 402 of said Act (any such
United States certificated air carrier and any such foreign air
carrier being hereinafter called a "Permitted Air Carrier"); provided
that no transfer of the registration of such Engine shall be effected
in connection therewith and so long as the terms of this Lease shall
be observed and provided further that (A) no such agreement or
arrangement contemplates or requires the transfer of title to such
Engine, and (B) if Lessor's title to any such Engine shall be divested
under any such agreement or arrangement, such divestiture shall be
deemed to be an Event of Loss with respect to such Engine and Lessee
shall comply with Section 10(c) in respect thereof;

(ii) deliver possession of the Aircraft, Airframe or any
Engine to the manufacturer thereof for testing or other similar
purposes or to any organization for service, repair, maintenance or
overhaul work on the Aircraft, Airframe or such Engine or any part
thereof or for alterations or modifications in or additions to the
Aircraft, Airframe or such Engine to the extent required or permitted
by the terms of Sections 7(a) or 8(c);

(iii) enter into a "wet" sublease with respect to the Aircraft
in the ordinary course of Lessee's business

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<PAGE> 21
pursuant to which Lessee retains exclusive control of the Aircraft,
provides all maintenance and conducts all operations of such Aircraft;

(iv) transfer possession of the Aircraft, Airframe or any
Engine to the United States of America or any instrumentality or
agency thereof in accordance with the Civil Reserve Air Fleet Program
administered pursuant to Executive Order No. 10999, as amended, or any
similar or substitute programs;

(v) install an Engine on an airframe owned by Lessee free
and clear of all Liens, except (A) those of the type permitted under
clauses (iv), (v) and (vi) of Section 6, and those which apply only to
the engines (other than Engines), appliances, parts, instruments,
appurtenances, accessories, furnishings and other equipment (other
than Parts) installed on such airframe (but not to the airframe as an
entirety), (B) Liens (including the Lien of the Indenture of Mortgage
dated as of January 1, 1977, from Lessee to The Bank of New York as
Trustee) which insofar as they relate to such Engine are subordinate
to the rights of the Lessor hereunder, and (C) the rights of other
Permitted Air Carriers under normal interchange agreements which are
customary in the airline industry and do not contemplate, permit or
require the transfer of title to the airframe or engines installed
thereon;

(vi) install an Engine on an airframe leased to Lessee or
purchased by Lessee subject to a conditional sale or other security
agreement; provided that such airframe is free and clear of all Liens
except the rights of the parties to the lease or conditional sale or
other security agreement covering such airframe which insofar as they
relate to such Engine are subordinate to the rights of the Lessor
hereunder and except Liens of the type permitted by clauses (A) and
(B) of subparagraph (v) of this paragraph (b);

(vii) install an Engine on an airframe owned by Lessee,
leased to Lessee or purchased by Lessee subject to a conditional sale
or other security agreement under circumstances where neither
subparagraph (v) nor subparagraph (vi) of this paragraph (b) is
applicable; provided, however, that prior to such installation, the
Lessee shall convey or cause to be conveyed to the Lessor, as
replacement for the Engine to be so installed, title to a Replacement
Engine in the same manner as is provided in Section 10(c) for Engines
suffering an Event of Loss, and the Lessee shall take all other action
which would be required of it under said Section 10(c) if an Event of
Loss had occurred with respect to such Engine, the Lessor not
intending hereby to waive any right or interest it may have to or in
such Engine under applicable law until compliance by the Lessee with
Section 10(c);

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<PAGE> 22
(viii) during the Base Lease Period but not during the Initial
Lease Period, transfer possession of the Aircraft or the Airframe or
an Engine to the United States of America or any instrumentality or
agency thereof pursuant to a sublease a copy of which shall be
furnished to Lessor; provided that the term of such sublease
(including, without limitation, any option of the sublessee to renew
or extend) shall not continue beyond the end of the Base Lease Period;

(ix) during the Base Lease Period but not during the
Initial Lease Period, sublease the Aircraft, or an Engine or the
Airframe (together, in the case of the Airframe, with engines then
installed on the Airframe) to any United States certificated air
carrier or, if there has been no Material Adverse Change in Financial
Condition, to any foreign air carrier listed in Exhibit D hereto,
which sublessee shall not be the subject of a petition in bankruptcy
filed under the Federal Bankruptcy laws or other insolvency laws now
or hereafter in effect, for a term including, without limitation, any
extension thereof, in the case of a United States certificated air
carrier, not to exceed in the aggregate one-half of the remaining Base
Lease Period or five years, whichever is greater, and, in the case of
a foreign carrier, not to exceed in the aggregate five years; provided
that no such sublease shall extend beyond the end of the Base Lease
Period and Lessee may not sublease during any Renewal Period;
provided, however, that no transfer of the registration of the
Airframe or any Engine or engine shall be effected in connection
therewith, and provided further, that the rights of any transferee who
receives possession by reason of a transfer permitted by this
paragraph (b) (other than the transfer of an Engine which is deemed an
Event of Loss) shall be, and any sublease permitted by this Section
shall be made expressly subject and subordinate to all the terms of
this Lease, including without limitation, the covenants contained in
Section 7(a) hereof and Lessor's rights to repossession pursuant to
Section 15 and to avoid such sublease upon such repossession, and
Lessee shall remain primarily liable hereunder for the performance of
all of the terms of this Lease to the same extent as if such sublease
or transfer had not occurred, and that any such sublease shall include
appropriate provisions for the registration, maintenance, insurance
and return of the Aircraft and each Engine subleased thereby. No
interchange agreement, transfer, sublease or other relinquishment of
possession permitted hereunder shall affect the United States
registration of the Aircraft. In connection with any sublease, all
necessary action shall be taken which is required to continue the
perfection of Lessor's title and interest to the Aircraft, Airframe
and Engines and Lessor's rights under this Lease, such sublease and
all other necessary documents shall be duly filed, registered or
recorded in such public offices as may be required fully to preserve
the title of, and the

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<PAGE> 23
priority of the interest of, Lessor in the Aircraft, Airframe and
Engines and provided, further, that any such instrument of transfer or
sublease shall contain a provision comparable to that set forth in
Section 16. Lessee shall deliver to Lessor promptly after execution
thereof a duly executed copy of any sublease permitted hereunder. No
interchange agreement, sublease or other relinquishment of possession
of the Airframe or any Engine shall in any way discharge or diminish
any of Lessee's obligations to Lessor hereunder or under the
Participation Agreement. In the event Lessor shall have received from
the lessor or secured party of any airframe leased to Lessee or
purchased by Lessee subject to a conditional sale or other security
agreement referred to in Section 7(b)(vi) a written agreement in which
such lessor or secured party expressly agrees that neither it nor its
successors and assigns will acquire or claim any right, title or
interest in any Engine by reason of such Engine's being installed on
such airframe at any time while such Engine is subject to this Lease or
is owned by Lessor, and the lease or conditional sale or other security
agreement covering such airframe also covers an engine or engines owned
by the lessor under such lease or subject to a security interest in
favor of the secured party under such conditional sale or other
security agreement, Lessor hereby agrees for the benefit of such lessor
or secured party that Lessor will not acquire or claim, as against such
lessor or secured party, any right, title or interest in any such
engine as the result of such engine being installed on the Airframe at
any time while such engine is subject to such lease or conditional sale
or other security agreement and owned by such lessor or subject to a
security interest in favor of such secured party.

(c) Insignia. Lessee agrees to affix and maintain in the
cockpit of the Airframe adjacent to the airworthiness certificate therein and
on each Engine a metal nameplate bearing the inscription "Owned by and leased
from DC-9T-III, Inc., AS LESSOR."

Section 8. Replacement and Pooling of Parts, Alterations,
Modifications and Additions

(a) Replacement of Parts. Lessee, at its own cost and
expense, will promptly replace all Parts, which may from time to time be
incorporated or installed in or attached to the Airframe or any Engine and
which may from time to time become worn out, lost, stolen, destroyed, seized,
confiscated, damaged beyond repair or

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<PAGE> 24
permanently rendered unfit for use for any reason whatsoever, except as
otherwise provided in Section 8(c). In addition, Lessee may, at its own cost
and expense, remove in the ordinary course of maintenance, service, repair,
overhaul or testing, any Parts, whether or not worn out, lost, stolen,
destroyed, seized, confiscated, damaged beyond repair or permanently rendered
unfit for use; provided that Lessee, except as otherwise provided in Section
8(c), will, at its own cost and expense, replace such Parts as promptly as
possible. All replacement Parts shall be free and clear of all Liens (except
for pooling arrangements to the extent permitted by Section 8(b)) and shall be
in as good operating condition as, and shall have performance and durability
characteristics and a value and utility at least equal to, the Parts replaced
assuming such replaced Parts were in the condition and repair required to be
maintained by the terms hereof. All Parts at any time removed from the
Airframe or any Engine shall remain the property of Lessor, no matter where
located, until such time as such Parts shall be replaced by Parts which have
been incorporated or installed in or attached to the Airframe or such Engine
and which meet the requirements for replacement Parts specified above.
Immediately upon any replacement Parts becoming incorporated or installed in or
attached to the Airframe or any Engine as above provided, without further act,
(i) title to the replaced Part shall thereupon vest in Lessee, free and clear
of all rights of Lessor, and shall no longer be deemed a Part hereunder; (ii)
title to such replacement Part shall thereupon vest in Lessor (subject only to
a pooling arrangement to the extent permitted by Section 8(b)); and (iii) such
replacement Part shall become subject to this Lease and be deemed part of the
Airframe or such Engine for all purposes hereof to the same extent as the Parts
originally incorporated or installed in or attached to the Airframe or such
Engine.

(b) Pooling of Parts. Any Part removed from the Airframe
or any Engine as provided in Section 8(a) may be subjected by Lessee to a
normal pooling arrangement customary in the airline industry entered into in
the ordinary course of Lessee's business with Permitted Air Carriers; provided
that the part replacing such removed Part shall be incorporated or installed in
or attached to the Airframe or such Engine in accordance with Section 8(a) as
promptly as possible after the removal of such removed Part. In addition, any
replacement part when incorporated or installed in or attached to the Airframe
or an Engine in accordance with Section 8(a) may be owned by a Permitted Air
Carrier subject to such a normal pooling arrangement, provided that Lessee, at
its expense, as promptly thereafter as possible, either (i) causes title to
such replacement part to vest in Lessor in accordance with Section 8(a) by
Lessee acquiring title thereto for the benefit of, and transferring such title
to, Lessor free and clear of all Liens; or (ii) replaces such replacement Part
by incorporating or installing in or attaching to the Airframe or such Engine a
further replacement Part owned by Lessee free and clear of all Liens and by
causing title to such further replacement Part to vest in Lessor in accordance
with Section 8(a).

(c) Alterations, Modifications and Additions. Lessee, at
its own expense, will make such alterations and modifications in and additions
to the Airframe or Engines as may be required

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from time to time to meet the standards of the FAA or other governmental
authority having jurisdiction. In addition, Lessee, at its own expense, may
from time to time make such alterations and modifications in and additions to
the Airframe or any Engine as Lessee may deem desirable in the proper conduct
of its business, including, without limitation, removal of Parts which Lessee
deems obsolete or no longer suitable or appropriate for use in the Airframe, or
such Engine, provided that no such alteration, modification or addition shall
(i) diminish the value or utility of the Airframe or such Engine, or impair the
condition or airworthiness thereof, below the value, utility, condition and
airworthiness thereof immediately prior to such alteration, modification or
addition assuming the Airframe or such Engine was then of the value or utility
and in the condition and airworthiness required to be maintained by the terms
of this Lease Agreement; (ii) materially adversely affect the capability of the
Aircraft to be used in commercial, scheduled passenger service in the United
States; (iii) materially adversely affect aerodynamic characteristics,
performance, weight or ground or flight operation characteristics of the
Aircraft; (iv) materially adversely affect the cost of performing Airframe or
Engine maintenance; (v) adversely affect the service life of the Aircraft or
such Engine, the interchangeability of spare parts and ground support equipment
for the Airframe or such Engine or the commonality of (A) the Aircraft with
other McDonnell Douglas DC-9 Series 80 aircraft; or (B) such Engine with other
Pratt & Whitney Aircraft JT89-217A engines; or (vi) materially change the basic
configuration thereof. Title to all Parts incorporated or installed in or
attached or added to the Airframe or such Engine as the result of such
alteration, modification or addition shall, without further act, vest in
Lessor. Notwithstanding the foregoing sentence of this Section 8(c), so long
as no Event of Default (or event which would constitute an Event of Default but
for the lapse of time or the giving of notice or both) shall have occurred and
be continuing, Lessee may, at any time during the Term remove any Part;
provided that (x) such Part is in addition to, and not in replacement of or
substitution for, any Part originally incorporated or installed in or attached
to the Airframe or such Engine at the time of delivery thereof hereunder or any
Part in replacement of, or substitution for any such Part; (y) such Part is not
required to be incorporated or installed in or attached or added to the
Airframe or such Engine pursuant to the terms of this Section 8, and (z) such
Part can be removed from the Airframe or such Engine without diminishing or
impairing the value, utility, condition or airworthiness required to be
maintained by the terms of this Lease Agreement which the Airframe or such
Engine would have had at such time had such alteration, modification or
addition not occurred. Upon the removal by Lessee of any Part as above
provided, title thereto shall, without further act, vest in Lessee and such
Part shall no longer be deemed part of the Airframe or Engine from which it was
removed. Any Part not removed by Lessee as above provided prior to the return
of the respective Airframe or Engine to Lessor hereunder shall remain the
property of Lessor.

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<PAGE> 26
Section 9. Voluntary Termination

(a) Termination During Initial Lease Period. During the
Initial Lease Period, Lessee shall be entitled to terminate the Lease with
respect to the Aircraft effective on a date when a payment of Basic Rent is
due, if, on or before April 17, 1987, the Manufacturer has officially announced
that it will no longer manufacture DC-9 aircraft or derivatives thereof, in
which case Lessee will have a period of three (3) months following such
announcement to decide whether or not to terminate the Lease, provided that the
Lessee must give Lessor at least nine (9) months prior written notice of
termination. If Lessee does not elect to terminate within said three (3)
months, the Lease shall continue for the remainder of the Initial Lease Period,
it being understood that Lessee retains the right not to renew the Lease for
the Base Lease Period in accordance with Section 3(a) herein.

(b) Termination for Obsolescence or Surplusage.

(i) Right of Termination. So long as no Event of
Default (or event which would constitute an Event of Default but for
the lapse of time or the giving of notice or both) shall have occurred
and be continuing, Lessee shall have the right at its option at any
time after the seventh anniversary of the Delivery Date of the
Aircraft, on at least six (6) months' prior written notice to Lessor
specifying a proposed date of termination, to terminate this Lease
with respect to the Aircraft if, in the good faith opinion of the
Board of Directors of Lessee the Aircraft shall have become obsolete
or shall be surplus to Lessee's requirements, such termination to be
effective on the date of sale, if any, referred to in Section 9(b)(ii)
hereof, provided that, prior to or concurrently with such termination,
Lessee shall have provided to Lessor a copy of the resolutions of the
Board of Directors of Lessee, certified by the Secretary or an
Assistant Secretary of Lessee, by which such Board determined, in good
faith, that the Aircraft shall have become obsolete or surplus to
Lessee's requirements. Lessor shall notify Lessee of its intention to
sell or retain the Aircraft no later than sixty (60) days prior to the
proposed termination date;

(ii) Election by Lessor to Sell. If Lessor elects
to sell the Aircraft, Lessee, as agent for Lessor, shall, from the
date of such election until the proposed date of termination
specified, use its best efforts to obtain bids for the cash purchase
of the Aircraft and Lessor may, after consulting with and giving
notice to Lessee, seek to obtain such bids. In the event Lessee
receives any bid, Lessee shall, promptly, and in any event at least
ten (10) Business Days prior to the proposed date of sale, certify to
Lessor in writing the amount and terms of such bid, the proposed date
of such sale and the name and address of the party (who

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<PAGE> 27
shall not be Lessee or any person, firm or corporation affiliated with
Lessee) submitting such bids. In the event Lessee receives any bid,
Lessor shall, at least five (5) Business Days prior to the proposed
date of sale, certify to Lessor in writing the amount and terms of such
bid, the proposed date of such sale and the name and address of the
party or submitting such bid. On the date specified in such notice of
termination or such earlier date as shall be consented to in writing by
Lessor (1) Lessee shall deliver the Airframe and Engines or engines to
the bidder, if any, which shall have submitted the highest bid prior to
such date, in the same manner as if delivery were made to Lessor
pursuant to Section 5 hereof and in full compliance with the terms
thereof, and shall duly transfer to Lessor title to any such engines
not owned by Lessor, all in accordance with the terms of Section 5
hereof; and (2) Lessor shall, without recourse or warranty (except for
Lessor's Warranty and subject to the disclaimer set forth in Section
4(a) hereof), simultaneously therewith sell the Airframe and Engines or
engines to such bidder for cash paid in the manner and in funds of the
type specified in Section 3(d) hereof. The total selling price
realized at such sale shall be paid to and retained by Lessor and, in
addition, on the date of such sale, and as a condition precedent to
such sale and the delivery of the Aircraft and Engines or engines to
such bidder, Lessee shall pay to Lessor, in the manner and in funds of
the type specified in Section 3(d) hereof, the excess, if any, of (A)
the Termination Value for the Aircraft computed as of the date of sale
over (B) the sale price of the Airframe and Engines or engines sold by
Lessor after deducting the expenses incurred by Lessor in connection
with such sale. Upon such payment, Lessor will transfer to Lessee,
without recourse or warranty (except for Lessor's Warranty and subject
to the disclaimer set forth in Section 4(a) hereof), all of Lessor's
right, title and interest in and to any Engines constituting part of
the Aircraft, but which were not then installed on the Airframe and
sold therewith. If no sale shall have occurred on or as of the date
specified in such notice of termination, either because no bids have
been received or because Lessee, at its option, shall have elected that
no bid be accepted, this Lease shall continue in full force and effect
as to the Aircraft. In the event of any such sale and receipt by
Lessor of such sale price as provided herein, and upon compliance by
Lessee with the provisions of this Section 9(b)(ii), the obligation of
Lessee to pay Basic Rent hereunder for the Aircraft shall cease for any
period commencing on or after the Basic Rent payment date occurring on
or after the date as of which Termination Value is computed and the
Term for the Aircraft shall end effective as of the date of such sale.
Lessor shall be under no duty to solicit bids, to inquire into the
efforts of Lessee to obtain bids or otherwise take any action in
connection with any such sale other than to transfer to the purchaser
named

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<PAGE> 28
in the highest bid as referred to above (or to such purchaser and to
Lessee, as the case may be), without recourse or warranty (except for
Lessor's Warranty and subject to the disclaimer set forth in Section
4(a) hereof), all of Lessor's right, title and interest in and to the
Airframe and Engines, against receipt of the payments provided for
herein; and

(iii) Retention of Aircraft by Lessor. In the
event that Lessor elects to retain the Aircraft as provided in Section
9(b)(i) hereof, Lessee, on the proposed termination date, shall
deliver the Aircraft as provided in Section 5, Lessor shall repay to
Lessee that amount of prepaid Basic Rent representing the amount of
Basic Rent prepaid multiplied by a fraction, the denominator of which
shall be 30 and the numerator of which shall be 30 minus the number of
days from and including the date of return to but excluding the Basic
Rent payment date next succeeding the termination date, and no further
payment of Basic Rent or any payment of Termination Value will be owed
to Lessor by Lessee and this Lease shall terminate.

Section 10. Loss; Destruction; Requisition; etc.

(a) Event of Loss with Respect to the Aircraft or the
Airframe During Initial Lease Period. Upon the occurrence of an Event of Loss
with respect to the Aircraft or the Airframe during the Initial Lease Period,
Lessee shall, within sixty (60) days of such occurrence, pay to Lessor (i) all
installments of Basic Rent due with respect to the Aircraft to that date; (ii)
the Stipulated Loss Value in respect of the Aircraft; and (iii) interest at the
Incentive Rate on any amounts of overdue Rent outstanding. Upon the payment of
the Stipulated Loss Value in respect of the Aircraft, Lessee's obligation to
pay future installments of Basic Rent in respect of the Aircraft shall cease.
Lessor will transfer to Lessee, without recourse or warranty (except for
Lessor's Warranty and subject to the disclaimer set forth in Section 4(a)
hereof), all Lessor's right, title and interest, if any, in and to the Airframe
and Engines (if any) with respect to which such Event of Loss occurred, as well
as all Lessor's right, title and interest in and to any Engines constituting
part of the Aircraft with respect to which such Event of Loss occurred but not
installed thereon when such Event of Loss occurred.

(b) Event of Loss with Respect to the Aircraft or the
Airframe During Base Lease Period or any Renewal Period. Upon the occurrence
of an Event of Loss with respect to the Aircraft or Airframe during the Base
Lease Period or any Renewal Period, Lessee shall forthwith (and, in any event,
within fifteen (15) days after such occurrence) give Lessor written notice of
such Event of Loss and of its election, subject to the terms hereof, to perform
one of the following two options (it being agreed that

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<PAGE> 29
if Lessee shall not have given Lessor notice of such election within twenty
(20) calendar days after such occurrence, Lessee shall be deemed to have
elected to perform the option set forth in the following clause (ii)), provided
that Lessee shall not have the right to select the option set forth in clause
(i) if an Event of Default, or an event which would constitute an Event of
Default upon the lapse of time or the giving of notice or both, shall have
occurred and is continuing or, if Lessee shall have suffered a Material Adverse
Change in Financial Condition:

(i) within one year after the date of occurrence
of such Event of Loss, during which time Lessee's obligation
to pay Basic Rent shall continue, Lessee shall convey or cause
to be conveyed to Lessor, to be leased by Lessee hereunder in
replacement of the Airframe, title to a Replacement Airframe
(together with the same number of Replacement Engines as the
Engines, if any, installed on the Airframe at the time such
Event of Loss occurred), such Replacement Airframe and
Replacement Engines to be free and clear of all Liens other
than Liens permitted by Section 6, to have a value, utility
and useful life at least equal to, and to be in as good
operating condition as, the Airframe and the Engines, if any,
so replaced (assuming the Airframe and such Engines were in
the condition and repair required by the terms of this
Agreement), provided that if Lessee shall not perform its
obligation to effect such replacement under this clause (i)
promptly upon receipt of any insurance proceeds paid in
accordance with Section 11 hereof, but in any event no later
than ninety (90) days after the date of the occurrence of such
Event of Loss, Lessee shall deposit with Lessor the amount
that would be required by the terms of clause (ii) below to be
paid with respect to the Aircraft, such amount to be held by
the Lessor until paid over to the Lessee or applied to reduce
the Lessor's investment, and such amount may be invested by
the Lessor as provided in Section 24; provided further that
(A) if the replacement occurs pursuant to Section 10(d)
hereof, during the one (1) year period, Lessor shall pay to
Lessee the amount held at such time (giving effect to any
increase or decrease thereof on account of actions taken
pursuant to Section 24, hereof) which was deposited with
Lessor by Lessee pursuant to this clause (i) and Lessor will
execute and deliver any documents requested by Lessee to
terminate Lessor's interest, if any in such amount, or (B) if
no replacement occurs by the end of the one (1) year period,
the Event of Loss with respect to the Airframe shall be deemed
to have occurred on the last day of such one (1) year period
and Lessee shall comply with the provisions of clause (ii) of
this Section 10(b) except that the amount to be paid to Lessor
by Lessee as the Stipulated Loss Value of the Aircraft shall
be

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<PAGE> 30
paid on the date on which the Event of Loss is deemed to have
occurred and shall be reduced by the amount then held by Lessor
(giving effect to any increase or decrease in such amount on
account of actions taken pursuant to Section 24 hereof) which
was deposited with Lessor by Lessee pursuant to this clause
(i), and Lessor shall retain such amount, or if such amount
held by Lessor exceeds the Stipulated Loss Value of the
Aircraft to be paid to Lessor by Lessee, Lessor shall, upon
compliance by Lessee with the provisions of clause (ii) of this
Section 10(b), pay over to Lessee the amount of such excess,
and the Lease shall terminate. At such time Lessor will execute
and deliver to Lessee any documents requested by Lessee to
terminate the interest, if any, granted by Lessee to Lessor in
such amount; and

(ii) (1) On or before ninety (90) days after the date
of Event of Loss, Lessee shall pay to Lessor, in immediately
available funds the Stipulated Loss Value of the Aircraft,
whereupon the obligation of Lessee to pay Basic Rent hereunder
with respect to the Aircraft for any period commencing on or
after the Basic Rent payment date occurring on or after the
date as of which such Stipulated Loss Value is computed shall
terminate, provided that Lessee shall remain liable for all
payments of Basic Rent for the Aircraft due on or before the
date of such payment of Stipulated Loss Value, (2) the Term
for the Aircraft shall end, and (3) Lessor will transfer to
Lessee, without recourse or warranty (except for Lessor's
Warranty and subject to the disclaimer set forth in Section
4(a) hereof), all Lessor's right, title and interest, if any,
in and to the Airframe and Engines (if any) with respect to
which such Event of Loss occurred, as well as all Lessor's
right, title and interest in and to any Engines constituting
part of the Aircraft with respect to which such Event of Loss
occurred but not installed thereon when such Event of Loss
occurred.

(c) Event of Loss with Respect to an Engine. Upon the
occurrence of an Event of Loss with respect to an Engine only, under
circumstances in which there has been no Event of Loss to the Airframe Lessee
shall give Lessor prompt written notice thereof and shall, within thirty (30)
days after the occurrence of such Event of Loss, convey or cause to be conveyed
to Lessor, as replacement for the Engine with respect to which such Event of
Loss occurred, title to a Replacement Engine free and clear of all Liens not
excepted in Section 6 and having performance and durability characteristics and
a value and utility at least equal to, and being in as good operating condition
as, the Engine with respect to which such Event of Loss occurred assuming such
Engine was of the value or utility and in the condition and repair required by
the terms hereof immediately prior to the occurrence

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<PAGE> 31
of such Event of Loss. Prior to or at the time of any such conveyance, Lessee,
at its own expense, will promptly (i) furnish Lessor with a bill of sale, in
form and substance satisfactory to Lessor, with respect to such Replacement
Engine; (ii) cause a supplement hereto, in form and substance satisfactory to
Lessor, subjecting such Replacement Engine to this Lease, to be duly executed
by Lessee, and recorded pursuant to the Act, as amended; (iii) furnish Lessor
with such evidence of title to such Replacement Engine and of compliance with
the insurance provisions of Section 11 hereof with respect to such Replacement
Engine as Lessor may reasonably request; (iv) furnish Lessor with an opinion of
Lessee's counsel to the effect that title to such Replacement Engine has been
duly conveyed to Lessor free and clear of all Liens (except those permitted
under Section 6 of this Lease) and is duly leased hereunder; (v) furnish to
Lessor a certificate signed by a duly authorized financial officer or executive
of Lessee certifying that the Lessee's representations and warranties contained
in the Participation Agreement are true and accurate on and as of said date as
though made on and as of said date and that upon consummation of such
replacement, no Event of Default (or other event which after lapse of time or
notice or both would become an Event of Default) will exist hereunder; (vi)
furnish to Lessor such documents and evidence with respect to Lessee, as Lessor
or its counsel may reasonably request in order to establish the Lessor's title
to such Engine, free and clear of all liens, except those permitted hereby, the
consummation of the transactions contemplated by this Section 10(c), the taking
of all corporate proceedings in connection therewith and compliance with the
conditione set forth in this Section 10(c), in each case in form and substance
satisfactory to such party; and (vii) furnish to Lessor evidence that all
amounts payable by Lessee on or prior to said date pursuant to the provisions
of this Lease shall have been paid in full. Upon full compliance by Lessee
with the terms of this paragraph (c), Lessor will transfer to Lessee all of the
right, title and interest in the Engine with respect to which the Event of Loss
occurred and which was originally conveyed to Lessor without recourse or
warranty (except for Lessor's Warranty and subject to the disclaimer set forth
in Section 4(a) hereof). For all purposes hereof, each such Replacement Engine
shall be deemed part of the property leased hereunder, shall be deemed an
"Engine" as defined herein and shall be deemed part of the same Aircraft as was
the Engine replaced thereby. No Event of Loss covered by this Section 10(c)
shall result in any reduction in Basic Rent.

(d) Conveyance of Replacement Airframe. Prior to or at
the time of any conveyance of a Replacement Airframe pursuant to subsection (b)
above, Lessee, at its own expense, will furnish Lessor with the following
documents which shall have been duly authorized, executed and delivered by the
respective parties as parties thereto and shall be in full force and effect on
said date: (i) a full warranty bill of sale, in the form and substance
satisfactory to Lessor, and an AC Form 8050-2 Bill of Sale (or such other form
of bill of sale as may be approved by the FAA on

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<PAGE> 32
said date), executed by the owner thereof, in favor of Lessor, with respect to
such Replacement Airframe and Engines, if any, and in the case of the latter,
recorded pursuant to the Act; (ii) a supplement hereto, in form and substance
satisfactory to Lessor, covering such Replacement Airframe and Engines, if any,
duly executed by Lessee and recorded pursuant to the Act; (iii) such evidence
of compliance with the insurance provisions of Section 11 with respect to such
Replacement airframe and Engines, if any, as Lessor may reasonably request,
including an independent insurance broker's report with Certificates of
Insurance; (iv) an opinion of Lessee's counsel (and such other evidence of
title as Lessor may reasonably request) to the effect that, upon such
conveyance, Lessor is entitled to the benefits of 11 U.S.C. Section 1110 with
respect to the Replacement Airframe and Engines, if any, and Lessor will
acquire good and marketable title to such Replacement Airframe and Engines, if
any, free and clear of all Liens other than the rights of Lessee hereunder and
such Liens as are permitted by this Lease, and that such Replacement Airframe
and Engines, if any, will be leased hereunder to the same extent as the
Airframe and Engines, if any, replaced thereby; (v) a certificate signed by a
duly authorized financial officer or executive of Lessee certifying that the
representations and warranties made by Lessee contained in the Participation
Agreement are true and accurate on and as of said date as though made on and as
of said date and that, upon consummation of such replacement, no Event of
Default (or other event which after lapse of time or notice or both would
become an Event of Default) will exist hereunder; (vi) such documents and
evidence with respect to Lessee, as Lessor, or its counsel may reasonably
request in order to establish the consummation of the transactions contemplated
by this Section 10(d), the taking of all corporate proceedings in connection
therewith and compliance with the conditions set forth in this Section 10(d),
in each case in form and substance satisfactory to Lessor, including evidence
that the Replacement Aircraft has been duly certificated by the FAA as to type
and airworthiness in accordance with the terms of this Lease and application
for registration of the Replacement Aircraft in the name of Lessor has been
duly made with the FAA and Lessee has temporary or permanent authority to
operate the Replacement Aircraft; and (vii) evidence that all amounts payable
by Lessee on or prior to said date pursuant to the provisions of this Lease
shall have been paid in full. Upon full compliance by Lessee with the terms of
this paragraph (d), Lessor will transfer to Lessee, without recourse or
warranty (except for Lessor's Warranty and is subject to the disclaimer set
forth in Section 4(a) hereof) all of Lessor's right, title and interest, if
any, in and to the Aircraft with respect to which such Event of Loss occurred.
No Event of Loss with respect to the Aircraft under the circumstances
contemplated by the terms of this paragraph (d) shall result in any reduction
in Basic Rent.

For all purposes of this Lease, each such Replacement Aircraft
(together with any Engines constituting part of the Aircraft being replaced
which were not installed on such Aircraft

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<PAGE> 33
when the Event of Loss occurred) shall be deemed part of the property leased
hereunder, and shall be deemed the "Aircraft" as defined herein.

(e) Application of Payments from Governmental Authorities
for Requisition of Title. Any payments (other than insurance proceeds the
application of which is provided for in Section 11) received at any time by
Lessor or by Lessee from any governmental authority or other person with
respect to an Event of Loss resulting from the condemnation, confiscation,
theft or seizure of, or requisition of title to or use of the Airframe or any
Engine, other than a requisition for use by the United States Government or any
instrumentality or agency thereof (for purposes of this Section 10 called the
"Government") not constituting an Event of Loss, will be applied as follows:

(i) if such payments are received with respect to
the Airframe or the Airframe and the Engines or engines installed on
the Airframe that has been or is being replaced by Lessee as
contemplated by Sections 10(b) and 10(d), such payments shall be paid
over to, or retained by, Lessor and upon completion of such
replacement be paid over to, or retained by Lessee; and

(ii) if such payments are received with respect to
the Airframe or the Airframe and the Engines or engines installed on
the Airframe that has not been and will not be replaced as
contemplated by Sections 10(b) and 10(d), so much of such payments
remaining after reimbursement of Lessor for costs and expenses as
shall not exceed the Stipulated Loss Value require to be paid by
Lessee pursuant to Section 10(b), shall be paid to or retained by
Lessor and applied in reduction of Lessee's obligation to pay such
Stipulated Loss Value, if not already paid by Lessee, or, if already
paid by Lessee, shall be paid to or retained by Lessee and applied to
reimburse Lessee for its payment of such Stipulated Loss Value, and
the balance, if any, of such payment remaining thereafter shall be
retained by the Lessee; and

(iii) if such payments are received with respect to
an Engine under circumstances contemplated by Section 10(c), so much
of such payments remaining after reimbursement of Lessor for costs and
expenses shall be paid over to, or retained by, Lessee provided that
Lessee shall have fully performed the terms of Section 10(c) with
respect to the Event of Loss for which such payments are made.

(f) Requisition for Use by the Government of the Airframe
and the Engines Installed Thereon. In the event of the requisition for use by
the Government of the Airframe and the Engines or engines installed on the
Airframe during the Term, Lessee shall promptly notify Lessor of such
requisition and all of Lessee's obligations under this Lease Agreement with
respect

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<PAGE> 34
to the Aircraft shall continue to the same extent as if such requisition had
not occurred provided that, if the Airframe and such Engines or engines are not
returned by the Government prior to the end of the Term, Lessee shall be
obligated to return the Airframe and such Engines or engines to Lessor pursuant
to, and in all other respects to comply with the provisions of, Section 5
promptly upon their return by the Government. All payments received by Lessor
or Lessee from the Government for the use of the Airframe and such Engines or
engines during the Term shall be paid over to, or retained by, Lessee; and all
payments received by Lessor or Lessee from the Government for the use of the
Airframe and such Engines or engines after the Term shall be paid over to, or
retained by, Lessor.

(g) Requisition for Use by the Government of an Engine.
In the event of the requisition for use by the Government of any Engine, Lessee
will replace such Engine hereunder by complying with the terms of Section 10(c)
to the same extent as if an Event of Lose had occurred with respect to such
Engine, and any payments received by Lessor or Lessee from the Government with
respect to such requisition shall be paid over to, or retained by, Lessee,
provided that Lessee shall have fully performed the terms of Section 10(c) with
respect to the Engine requisitioned for use for which such payments are made.

(h) Application of Payments During Existence of Event of
Default. Any amount referred to in clause (i), (ii) or (iii) of Section 10(e),
Section 10(f) or Section 10(g) which is payable to Lessee shall not be paid to
Lessee, or if it has been previously paid directly to Lessee, shall not be
retained by Lessee, if at the time of such payment an Event of Default, or any
event which after lapse of time or the giving of notice or both would
constitute an Event of Default, shall have occurred and be continuing, but
shall be paid to and held by Lessor as security for the obligations of Lessee
under this Lease, and at such time as the following shall be true and Lessor
shall receive a certificate of an officer of Lessee stating that there is not
continuing any such Event of Default or event which after lapse of time or the
giving of notice or both would become an Event of Default, all such amounts
paid during such Event of Default in excess of Basic Rent shall be paid to
Lessee.

Section 11. Insurance

(a) Airlines Public Liability and Property Damage
Insurance. Lessee will carry at its own expense airlines public liability
insurance (which shall include contractual liability insurance) including
passenger legal liability and property damage insurance with respect to the
operation of the Aircraft (i) in amounts which are not lest than the public
liability and property damage insurance applicable to similar aircraft and
engines which comprise Lessee's fleet on which Lessee carries insurance; (ii)
of the type usually carried by corporations

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<PAGE> 35
engaged in the same or a similar business, similarly situated with Lessee, and
owning or operating similar aircraft and engines; and (iii) which is maintained
in effect with insurers of recognized responsibility.

Furthermore, any policies of insurance carried in accordance
with this Section 11(a), and any policies taken out in substitution or
replacement for any of such policies (A) shall be amended to name Lessor (in
the case of any manufacturers of the Aircraft or Engines, not in their
capacities as such), its assigns and officers, directors, shareholders, agents,
employees and servants as additional insured(s) (Additional Insureds), (B)
shall provide that in respect of the interests of Lessor in such policies the
insurance shall not be invalidated by any action or inaction of Lessee and
shall insure Lessor regardless of any breach or violation of any warranty,
declaration or condition contained in such policies by Lessee, and (C) shall
provide that if such insurance is cancelled for any reason, or any substantial
change is made in the coverage which affects the interests of Lessor or if such
insurance is allowed to lapse for nonpayment of premium, Lessee will cause to
be sent to Lessor immediate notification of such cancellation, change or lapse
which cancellation, change or lapse shall not be effective as to the Lessor for
thirty (30) days, except seven (7) days or such shorter period as from time to
time may be customarily obtainable in the industry, in the case of war risk or
allied perils coverage, after receipt by the Lessor of written notice from such
insurers of such cancellation change or lapse.

Each liability insurance policy (1) shall be primary without
right of contribution from any other insurance which is carried by any
Additional Insureds with respect to its interest as such in each Aircraft, (2)
shall expressly provide that all of the provisions thereof, except the limits
of liability, shall operate in the same manner as if there were a separate
policy covering each Additional Insureds, and (3) shall contain other
provisions as required by (f) hereof.

(b) Insurance Against Loss or Damage to Aircraft. Subject
to the rights of Lessee to establish and maintain self-insurance with respect
to loss or damage to the Aircraft as hereinafter provided, Lessee shall
maintain in effect with insurers of recognized responsibility, at its own
expense, all-risk aircraft hull insurance covering the Aircraft and ground
property insurance with respect to any Engines or Parts while removed from the
Aircraft. Lessee shall also maintain war risk and allied perils hull insurance
if the Aircraft is operated on routes where the custom in the industry or
Lessee's practice is to carry war risk and allied perils hull insurance. Such
war risk and allied perils hull insurance will be of the type and in
substantially the amount usually carried by airlines similarly situated with
Lessee; provided that such all-risk and war risk and allied perils insurance
(including the permitted self-insurance) shall at all times while the Aircraft
is subject

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<PAGE> 36
to this Lease be for an amount not less than the Stipulated Loss Value for the
Aircraft (as from time to time determined). Provision in the aircraft hull
insurance for deductible amounts per occurrence shall be permitted in addition
to self insurance; provided that such deductible amount shall not exceed the
greater of: (i) the deductible amounts carried by United States airlines
operating similar aircraft, or (ii) the greater of $600,000 or two (2%) percent
of the insured value of the Aircraft (except that in the case of damage to
Engines caused by ingestion, such deductible amounts may not be in excess of
four (4%) percent of the insured value).

Lessee may self-insure the risks required to be insured
against pursuant to this Section 11 to a reasonable level. The self-insurance
with respect to all of the aircraft in the Lessee's fleet may not exceed for
any twelve-month-policy year, the lesser of (i) $12,000,000 (or the largest
replacement value of any single aircraft on which Lessee carries insurance, if
such value is greater than $12,000,000), or (ii) one and one-half (1-1/2%)
percent of the average aggregate insurable value of Lessee's fleet for the
preceding year.

Any policies carried in accordance with this Section 11(b)
covering the Aircraft and any policies taken out in substitution or replacement
for any such policies shall (A) be amended to name Lessor as loss payee as its
interests may appear as Owner and Lessor, (B) provide that in respect of the
interest of Lessor, the insurance shall not be invalidated by any action or
inaction of Lessee and shall insure Lessor's interest, regardless of any breach
or violation by Lessee of any warranties, declarations or conditions contained
in such policies, (C) provide for a waiver of subrogation in respect of Lessor,
(D) provide that if such insurance is cancelled for any reason whatsoever, or
any substantial change is made in the coverage which affects the interest of
the Lessor, or if such insurance is allowed to lapse for nonpayment of premium,
such cancellation, change or lapse shall not be effective as to the Lessor for
30 days (seven days, or such shorter period as may from time to time be
customarily obtainable in the industry, in the case of any war risk and allied
perils coverage) after receipt by the Lessor of written notice from such
insurers of such cancellation, change or lapse, and (E) be primary and without
right of contribution from other insurance which may be available to the
Lessor.

In the case of a lease or contract with the United States of
America or any agency or instrumentality thereof in respect of the Aircraft, a
valid agreement by the United States of America or such agency or
instrumentality to indemnify Lessee against the same risks which Lessee is
required hereunder to insure against in an amount at least equal to the
Stipulated Loss Value of the Aircraft from time to time shall be considered
adequate insurance with respect to the Aircraft while subject to

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such lease or contract, to the extent of the risks and in the amounts that are
the subject of any such agreement to indemnify.

(c) Proceeds of Insurance. As between Lessor and Lessee
it is agreed that all insurance payments received under policies required to be
maintained by Lessee hereunder, exclusive of any payments received in excess of
the Stipulated Loss Value for the Aircraft, as the result of the occurrence of
an Event of Loss with respect to the Airframe or any Engine will be applied as
follows:

(i) if such payments are received with respect to
the Airframe or Airframe and Engines or engines installed on
the Airframe that has been or is being replaced by Lessee,
such payments shall be paid over to, or retained by, Lessor,
and upon completion of such replacement be paid over to, or
retained by Lessee; and

(ii) if such payments are received with respect to
the Airframe or Airframe and Engines or engines installed on
the Airframe that has not been and will not be replaced, so
much of such payments remaining after reimbursement of Lessor
for costs and expenses shall be applied in reduction of
Lessee's obligations pursuant to Section 10(b)(ii) hereof, if
not already paid by Lessee, or, if payment for such
obligations has been already made by Lessee, shall be applied
to reimburse Lessee for such payment, and the balance, if any,
will be paid over to, or retained by, Lessee; and

(iii) if such payments are received with respect to
an Engine replaced pursuant to Section 10(c) hereof, so much
of such payments remaining after reimbursement of Lessor for
costs and expenses shall be paid over to, or retained by,
Lessee, provided that Lessee shall have fully performed the
terms of Section 10(c) with respect to such Engine;

provided, however, if at the time of such payment an Event of Default or an
event which but for the giving of notice or lapse of time would constitute an
Event of Default shall have occurred and be continuing, such insurance payments
shall be paid to the Lessor and either (i) held by the Lessor as security for
the obligations of the Lessee under this Agreement, or (ii) applied by the
Lessor on behalf of the Lessee for repairs or for replacement property in
accordance with the terms of Sections 7 and 10 hereof. At such time as there
shall not be continuing any such Event of Default or event which with the lapse
of time or giving of notice or both would become an Event of Default, the
Lessor will pay to the Lessee any such amount then held by the Lessor.

As between Lessor and Lessee the insurance payments with
respect to any property damage not constituting an Event of

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Loss with respect to the Airframe or an Engine shall be retained by the Lessee,
provided that Lessee repairs or causes to be repaired such damage in accordance
with the provisions hereof.

(d) Reports, etc. In the case of the Aircraft, (i) on or
before the Delivery Date thereof, and upon each renewal or change of insurance,
Lessee will furnish to Lessor certificates of the insurer or insurers (or their
authorized representatives) stating the amounts and types of insurance in force
as to the Aircraft, and (ii) on or before the Delivery Date thereof and
annually on the anniversary date hereof, Lessee will furnish to Lessor a report
signed by a fire of independent aircraft insurance brokers, appointed by Lessee
and not objected to by Lessor, stating the opinion of such firm to the effect
that Lessee's insurance coverage complies with the insurance requirements of
this Section, provided, that all information contained therein shall be held
confidential by Lessor and shall not be furnished to anyone other than as
necessary to any affiliate of Lessor, who shall also hold such information
confidential and shall not furnish or disclose such information to anyone,
except, in each case as may be required by an order of any court or
administrative agency or by any statute, rule, regulation or final order of any
governmental authority. In the event that Lessee shall fail to maintain
insurance as herein provided, Lessor may at its option, provide such insurance
and, in such event, Lessee shall, upon demand, reimburse Lessor, for the cost
thereof.

(e) Insurance for Own Account. Nothing in this Section
shall limit or prohibit the Lessor or the Lessee from obtaining insurance for
its own account; and any proceeds payable thereunder shall be payable as
provided in the insurance policy relating thereto, provided that no such
insurance may be obtained which would limit or otherwise adversely affect the
coverage of any insurance required to be obtained or maintained pursuant to
this Section.

(f) General Requirements. Any policies carried in
accordance with this Section 11 and any policies taken out in substitution or
replacement for any such policies shall (A) be primary and without right of
contribution from other insurance which may be available to Lessor or any
Additional Insured and shall expressly provide that all the provisions thereof,
except limits of liability, shall operate in the same manner as if there were a
separate policy covering each insured, (B) waive any right of the insurers to
any setoff, recoupment, counterclaim or any other deduction, whether by
attachment or otherwise, in respect of any liability of the Lessee or the
Additional Insureds, (C) provide that the Additional Insureds shall not be
liable for any insurance premium of the Lessee arising out of or resulting from
this Agreement and (D) specifically refer to this Section 11. The Lessee will
cause such insurers to advise the Lessor in writing promptly of any default in
the payment of any premium and of any other act or omission on the part of the
Lessee of which they

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have knowledge and which might invalidate on render unenforceable, in whole or
in part, any insurance on the Aircraft.

Section 12. Inspection

At all reasonable times Lessor or its authorized
representatives may inspect the Aircraft and the books and records of Lessee
relative thereto. Lessor shall have no duty to make any such inspection and
shall not incur any liability or obligation by reason of not making any such
inspection.

Section 13. Assignment

Except as otherwise provided in Section 7(b) or in the case of
any requisition by the United States of America referred to in Section 10(f),
Lessee will not, without prior written consent of Lessor, assign any of its
rights hereunder. The terms and provisions of this Lease shall be binding upon
and inure to the benefit of Lessor and Lessee and their respective successors
and assigns.

Section 14. Events of Default

The following events shall constitute Events of Default
(whether any such event shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with any Judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) and each such Event of Default shall be
deemed to exist and continue so long as, but only so long as, it shall not have
been remedied:

(a) Failure to Pay Rent. Lessee shall fail to make any
payment of Rent within ten (10) days after the same shall have become due; or

(b) Failure to Carry Insurance. Lessee shall fail to
carry and maintain insurance on or with respect to the Aircraft in accordance
with the provisions of Section 11 provided that, in the case of insurance with
respect to which cancellation, change, or lapse for nonpayment of premium shall
not be effective as to Lessor for thirty (30) days (seven (7) days, or such
shorter period as may from time to time be customarily obtainable in the
industry, in the case of any war risk and allied perils coverage) after receipt
of notice by Lessor of such cancellation, change, or lapse, no such failure to
carry and maintain insurance shall constitute an Event of Default hereunder
until the earlier of (i) the date such failure shall have continued unremedied
for a period of fifteen (15) days (three (3) days or 24 hours less than any
shorter notice period in the case of any war risk and allied perils coverage)
after receipt by Lessor of the notice of

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cancellation, change, or lapse referred to in Section 11(a)(C) or 11(b)(D)
hereof or (ii) such insurance not being in effect as to either of Lessee or
Lessor; or

(c) Public Liability Insurance not in Effect. Lessee
shall operate any Aircraft at a time when public liability insurance required
by Section 11(a) shall not be in effect; or

(d) Failure to Perform Covenants. Lessee shall (i) fail
to comply with its obligations under clause (i) of Section 7(a) hereof; or (ii)
fail to perform or observe any other covenant, condition or agreement to be
performed or observed by it hereunder or under the Participation Agreement, and
such failure shall continue unremedied for a period of thirty (30) days after
written notice thereof to Lessee; or

(e) Incorrect Representation or Warranty. Any
representation or warranty made by Lessee herein or in the Participation
Agreement or in any document or certificate furnished by Lessee in connection
herewith or pursuant hereto shall at any time prove to have been incorrect in
any material respect at the time made or deemed to have been made; or

(f) Entry of a Decree in Bankruptcy. The entry of a
decree or order for relief by a court having Jurisdiction in the premises in
respect of Lessee in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of Lessee or for any substantial part of its property, or
ordering the winding-up or liquidation of its affairs and the continuance of
any such decree or order undismissed, unstayed or unvacated for a period of
ninety (90) days after the date of entry thereof; or

(g) Commencement of a Voluntary Case in Bankruptcy. The
commencement by Lessee of a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or the consent by
it to the entry of an order for relief in an involuntary case under any such
law or to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator (or other similar official) of
Lessee or of any substantial part of its property, or the making by it of any
general assignment for the benefit of creditors, or the failure of Lessee
generally to pay its debts as such debts become due (within the meaning of 11
U.S.C. Section 303(h)), or the taking of corporate action by Lessee in
furtherance of any of the foregoing; or

(h) Undischarged Final Judgment in Excess of $1,000,000.
Final judgment for the payment of money in excess of $1,000,000 shall be
rendered against Lessee and the same shall remain undischarged for a period of
sixty (60) days during which execution of such judgment shall not be
effectively stayed; or

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(i) Acceleration of Indebtedness Exceeding $5,000,000.
The Lessee shall fail to pay an indebtedness of the Lessee for borrowed money
or the deferred purchase price of property or the rental of any personal
property (excluding the Lessee's obligations hereunder), or any interest or
premium thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such payment and the maturity of such indebtedness, deferred
purchase price or rental shall have been accelerated by the holder or holders
thereof or such payment shall not be made at final maturity and the aggregate
amount over the term of this Lease, whether or not later repaid or pardoned, of
all such indebtedness, deferred purchase price or rental which shall have been
so accelerated or which shall not have been made at final maturity shall equal
or exceed $5,000,000; or

(j) Failure to Remain Air Carrier. The Lessee shall fail
to remain an "air carrier" as that term is used in 11 U.S.C. Section 1110; or

(k) Voluntary Suspension of Airline Operations. The
Lessee shall voluntarily suspend all or substantially all of its commercial
airline operations (except a suspension resulting from a labor action) or the
franchises, concessions, permits, rights or privileges require for the conduct
of the business and operations of the Lessee shall be revoked, cancelled or
otherwise terminated or the free and continued use and exercise thereof
curtailed or prevented, and as a result thereof the preponderant business
activity of the Lessee shall cease to be that of a commercial airline.

Promptly after Lessee has knowledge thereof, Lessee shall give
Lessor notice of any event that has occurred and is continuing which
constitutes an Event of Default or would constitute an Event of Default but for
the lapse of time or the giving of notice or both.

Section 15. Remedies

Upon the occurrence of any Event of Default and at any time
thereafter so long as the same shall be continuing, Lessor may, at its option,
declare this Lease to be in default; and at any time thereafter, so long as
Lessee shall not have remedied all outstanding Events of Default, Lessor may do
one or more of the following with respect to all or any part of the Airframe or
any and all Engines as Lessor in its sole discretion shall elect, to the extent
permitted by, and subject to compliance with any mandatory requirements of,
applicable law then in effect:

(a) Return of Airframe and Engines. Cause Lessee, upon
the written demand of Lessor and at Lessee's expense, to return

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promptly, and Lessee shall return promptly, all or such part of the Airframe or
any Engine as Lessor may so demand to Lessor or its order in the manner and
condition required by, and otherwise in accordance with all the provisions of,
Section 5 as if the Airframe or Engine were being returned at the end of the
Term, or Lessor, at its option, may enter upon the premises where all or any
part of the Airframe or any Engine is located and take immediate possession of
and remove the same (together with any engine which is not an Engine but which
is installed on the Airframe), subject to all of the rights of the owner,
lessor, lienor or secured party of such engine; provided that the Airframe with
an engine (which is not an Engine) installed thereon may be flown only to a
location within the continental United States, and such engine shall be held
for the account of any such owner, lessor, lienor or secured party or, if owned
by Lessee, may, at the option of Lessor, be exchanged with Lessee for an Engine
in accordance with the provisions of Section 5(e), by summary proceedings or
otherwise, all without liability accruing to Lessor for or by reason of such
entry or taking of possession, whether for the restoration of damage to
property caused by such taking or otherwise and Lessee expressly waives any
right it may have under applicable law to a hearing prior to repossession of
the Aircraft, Airframe or any Engine;

(b) Sale of Airframe or Engines. With or without taking
possession thereof, sell all or any part of the Airframe or any Engine at
public or private sale at such times and places and to such Person or Persons,
with or without advertisement, for cash or upon credit, as Lessor may
determine, or otherwise dispose of, hold, use, operate, lease to others or keep
idle all or any part of such Airframe or Engine as Lessor in its sole
discretion, may determine, all free and clear of any rights of Lessee except as
hereinafter set forth in this Section 15 and without any duty to account to
Lessee with respect to such action or inaction or for any proceeds with respect
thereto;

(c) Liquidated Damages. Whether or not Lessor shall have
exercised, or shall thereafter at any time exercise, any of its rights under
paragraph (a) or paragraph (b) above with respect to all or any part of the
Airframe or any Engine, Lessor, by written notice to Lessee specifying a
payment date (which shall also be the date on which Stipulated Loss Value is
determined under (i) or (ii) below) which shall be a date not earlier than ten
(10) days from the date of such notice, may demand Lessee to pay to Lessor, and
Lessee shall pay Lessor, on the payment date specified In such notice, as
liquidated damages for lose of a bargain and not as a penalty (in lieu of Basic
Rent for the Aircraft due on or after the date specified for payment in such
notice), in addition to all Basic Rent due up to such date, the following:

(i) in the event that the Aircraft, Airframe or
such Engine has been sold, Stipulated Loss Value less the net proceeds
of such sale; or

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(ii) in the event the Aircraft, Airframe or such
Engine is being re-leased by Lessor to another lessee, for the whole,
or any portion of the remaining Initial and Base Lease Term,
Stipulated Loss Value less the present value of such rentals under
such lease through the end of the Base Lease Term, and in the event
that there are subsequent re-lease agreements entered into prior to
the end of the Base Lease Term, such subsequent re-lease rentals
through the end of the Base Lease Term shall be paid to Lessee as
received by Lessor. If Lessor sells the Aircraft either before or
after any re-lease period or periods, but before the end of the Base
Lease Period, Lessee shall receive the net sales proceeds of such
sale;

provided, however, that any payments to Lessee or reductions from payments of
Stipulated Loss Value due from Lessee shall not be made until Lessor shall have
been paid in full Stipulated Loss Value and, provided further, however, that
the total of the present value, as of the date of determination of Stipulated
Loss Value, of all credits and payments to Lessee pursuant to (i) and (ii)
above, shall not exceed Stipulated Loss Value. The present value of any
re-lease rentals or sales proceeds shall be determined using a discount rate
equal to the sum of two (2%) percent plus a rate equal to the average of the
latest two weeks of the Ten Year Treasury Constant Maturity Rate as contained
in the most recent Federal Reserve Statistical Release H.15 published by the
Board of Governors of the Federal Reserve System (or any successor publication
thereto) prior to the Delivery Date for the Aircraft.

(d) Other Remedies. Lessor may terminate this Lease
Agreement as to the Airframe or any and all Engines or may exercise any other
right or remedy which may be available to it under applicable law or proceed by
appropriate court action to enforce the terms hereof or to recover damages for
the breach hereof. In addition, Lessee shall be liable, except as otherwise
provided above, for any and all unpaid Rent due hereunder before, after or
during the exercise of any of the foregoing remedies and for all legal fees and
other costs and expenses incurred by reason of the occurrence of any Event of
Default or the exercise of Lessor's remedies with respect thereto, including
all costs and expenses incurred in connection with the return of the Airframe
or any Engine in accordance with the terms of Section 5 or in placing the
Airframe or such Engine in the condition and airworthiness. required by such
Section. At any sale of the Airframe or an Engine or part thereof pursuant to
this Section 15, Lessor may bid for and purchase such property. Except as
otherwise expressly provided above, no remedy referred to in this Section 15 is
intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available to Lessor at law or in
equity, and the exercise or beginning of exercise of any one or more of such
remedies shall not preclude the simultaneous or later exercise by Lessor of any
or all of such other remedies. No express or implied waiver by

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Lessor of any Event of Default shall in any way be, or be construed to be, a
waiver of any future or subsequent Event of Default. To the extent permitted by
applicable law, Lessee hereby waives any rights now or hereafter conferred by
statute or otherwise which may require Lessor to sell, lease or otherwise use
the Airframe or any Engine or part thereof in mitigation of Lessor's damages as
set forth in this Section or which may otherwise limit or modify any of
Lessor's rights or remedies under this Section 15.

Section 16. Federal Bankruptcy Act.

Pursuant to the provisions of 11 U.S.C. Section 1110, or any
analogous section of the Federal bankruptcy laws, as amended from time to time,
it is hereby expressly agreed and provided that, notwithstanding any other
provisions of the Federal bankruptcy laws, as amended from time to time, the
title of Lessor to the Aircraft, Airframe and each Engine and any right of
Lessor to take possession of the Aircraft, Airframe and each Engine in
compliance with the provisions of this Lease shall not be affected by the
provisions of the Federal bankruptcy laws, as amended from time to time.

Section 17. Further Assurances; Financial Information

Forthwith upon the execution and delivery of each Lease
Supplement, Lessee will cause such Lease Supplement (and, in the case of the
initial Lease Supplement, this Lease as well) to be duly filed and recorded in
accordance with the Act. In addition, Lessee will promptly and duly execute and
deliver to Lessor such further documents and assurances and take such further
action as Lessor may from time to time reasonably request in order to more
effectively carry out the intent and purpose of this Lease and to establish and
protect the rights and remedies created or intended to be created in favor of
Lessor hereunder, including, without limitation, if requested by Lessor, at the
expense of Lessee, the execution and delivery of supplements or amendments
hereto, in recordable form, subjecting to this Lease any Replacement Airframe
or Replacement Engine and the recording or filing of counterparts hereof, in
accordance with the laws of such Jurisdictions as Lessor may from time to time
deem advisable, provided that this sentence is not intended to impose upon
Lessee any additional liabilities not otherwise contemplated by this Lease.
Lessee also agrees to furnish Lessor (i) within sixty (60) days after the end
of each of the first three quarterly fiscal periods in each fiscal year of
Lessee, a consolidated balance sheet of Lessee and its consolidated
subsidiaries prepared by it as of the close of such period, together with the
related consolidated statements of income and of surplus and statements of
changes in financial position for such period; (ii) within 120 days after the
close of each fiscal year of Lessee, a consolidated balance sheet of Lessee and
its consolidated subsidiaries as of the close of such fiscal year, together
with

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the related consolidated statements of income and of surplus and statements of
changes in financial position for such fiscal year, as certified by independent
public accountants, including their certificate and accompanying comments;
(iii) within 120 days after the close of each fiscal year of Lessee, a
certificate of Lessee, signed by a duly authorized financial officer of Lessee
to the effect that the signer has reviewed the relevant terms of this Lease and
has made, or caused to be made under his supervision, a review of the
transactions and condition of Lessee during the accounting period covered by
the financial statements referred to in clause (ii) above, and that such review
has not disclosed the existence during such accounting period, nor does the
signer have knowledge of the existence as at the date of such certificate, of
any condition or event which constitutes an Event of Default or which, after
notice or lapse of time or both, would constitute an Event of Default, or, if
any such condition or event existed or exists, specifying the nature and period
of existence thereof and what action Lessee has taken or is taking or proposes
to take with respect thereto, together with a certificate of Lessee as to the
condition of the Aircraft; and (iv) from time to time such other information as
Lessee sends to its lenders (except periodic reports that may be sent more
frequently than quarterly).

Section 18. Notices

All notices required under the terms and provisions hereof
shall be in writing by telex, teletype, telecommunication or other customary
means of business communication; if by writing, any such notice shall become
effective when received, addressed (i) if to Lessee, at 605 Third Avenue, New
York, New York 10158, Attention: Vice President and Treasurer, or at such other
address as Lessee shall from time to time designate in writing to Lessor; and
(ii) if to Lessor, c/o UT Credit Corporation, United Technologies Building,
Hartford, Connecticut, 06101, Attention: Treasurer, or at such other address as
Lessor shall from time to time designate in writing to Lessee.

Section 19. No Setoff; Counterclaim; etc.

Lessee's obligation to pay all Rent payable hereunder shall be
absolute and unconditional and shall not be affected by any circumstance,
including, without limitation, (i) any setoff, counterclaim, recoupment,
defense or other right which Lessee may have against Lessor, the Manufacturer,
Pratt & Whitney Aircraft or anyone else for any reason whatsoever (including
any thereof based upon or relating to Lessor's representations or warranties in
Section 4 hereof or elsewhere); (ii) any defect in the title, airworthiness,
condition, design, operation, or fitness for use of, or any damage to or loss
or destruction of, the Aircraft, or any interruption or cessation in the use or
possession thereof by Lessee for any reason whatsoever; (iii) any insolvency,

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bankruptcy, reorganization or similar proceedings by or against Lessee; or (iv)
any other circumstance, happening or event whatsoever, whether or not similar
to any of the foregoing. If for any reason whatsoever this Lease shall be
terminated in whole or in part by operation of law or otherwise, except as
specifically provided herein, Lessee nonetheless agrees to pay to Lessor an
amount equal to each Basic Rent payment at the time such payment would have
become due and payable in accordance with the terms hereof had this Lease not
been terminated in whole or in part. Lessee hereby waives, to the extent
permitted by applicable law, any and all rights which it may now have or which
at any time hereafter may be conferred upon it, by statute or otherwise, to
terminate, cancel, quit or surrender this Lease except in accordance with the
express terms hereof. Each payment of Rent made by Lessee shall be final as to
Lessor and Lessee. Lessee will not seek to recover all or any part of any such
payment of Rent from Lessor for any reason whatsoever.

Section 20. Purchase Option and Renewal Option

(a) Purchase Option. In the case of the Aircraft, upon
not less than eight (8) months' prior written notice from Lessee to Lessor,
Lessee may, on the last Business Day of the Base Lease Period if no Event of
Default (or other event or condition which after lapse of time or notice or
both would become an Event of Default) hereunder shall have occurred and be
continuing on such day and the last payment of Rent required to be paid
hereunder on or before such day shall have been made, elect to purchase the
Aircraft at a purchase price equal to the fair market value for the Aircraft
determined by mutual consent of Lessor and Lessee or, if they shall be unable
to agree, by Independent Appraisal. Such election to purchase shall be
revocable by Lessee (by written notice from Lessee to Lessor) until a date
which shall be no later than six (6) months before the end of the Base Lease
Period at which time such election to purchase shall become irrevocable. Upon
receipt of the purchase price (in the type of funds and in the manner specified
in Section 3(d) hereof) for the Aircraft, Lessor will transfer to Lessee,
without recourse or warranty (except for Lessor's Warranty and subject to the
disclaimer set forth in Section 4(a) hereof), all of Lessor's right, title and
interest in and to the Aircraft.

(b) Renewal Option. Lessee shall have the right, subject
to the provisions set forth herein, to elect to extend this Lease in respect of
the Aircraft for one period of one, two, three, or four years, such period
commencing on the date immediately following the final day of the Base Lease
Period (such period being hereinafter referred to as the "Renewal Period").
Such election to renew shall be exercised upon written notice (such notice to
specify whether the term of such Renewal Period shall be one, two, three, or
four years) from Lessee to Lessor given not less than eight (8) months prior to
the final day of the Base Lease Period which election to renew shall be
revocable (by written notice from Lessee to Lessor) until a date

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which shall be six (6) months before the end of the Base Lease Period, at which
time such election to renew shall become irrevocable and, if, on the last day
of the Base Lease Period, no Event of Default shall have occurred and be
continuing and no payment ia due and owing under the Participation Agreement,
then this Lease shall be extended for the Renewal Period specified in Lessee's
notice, on the same conditione provided for herein, at a rental rate equal to
the fair market rental value for such Aircraft determined by mutual consent of
Lessor and Lessee or, if they shall be unable to agree, as determined by an
Independent Appraisal.

(c) Determination of Fair Value. If Lessee elects either
to purchase the Aircraft or to renew this Lease with respect to the Aircraft
pursuant to this Section 20 and the parties do not determine a fair market
purchase price or fair market rental value, as the case may be, with respect to
the Aircraft by mutual consent by the date which is three months prior to the
expiration of the Base Lease Term then such purchase price or rental value
shall be determined by an Independent Appraisal and each party shall have 15
days from such date to appoint an appraiser, instructing such appraiser that
such Independent Appraisal must be completed not less than 15 days prior to the
end of the Base Lease Term.

Section 21. Not Applicable.

Section 22. Lessor's Right to Perform for Lessee

If Lessee fails to make any payment of Rent required to be
made by it hereunder or fails to perform or comply with any of its agreements
contained herein, Lessor may itself make such payment or perform or comply with
such agreement, and the amount of such payment and the amount of the reasonable
expenses of Lessor incurred in connection with such payment or the performance
of or compliance with such agreement, as the case may be, together with
interest thereon at the Incentive Rate, shall be deemed Supplemental Rent,
payable by Lessee upon demand provided, however, that no such payment,
performance or compliance by Lessor shall (i) be deemed to have satisfied the
obligation of Lessee to make such payment or to perform or comply with such
agreement, as the case may be, unless and until Lessee shall have paid all such
Supplemental Rent as may be payable pursuant to this Section 22 by reason of
such failure; or (ii) be deemed waiver of Lessor's rights and remedies against
Lessee hereunder.

Section 23. Maintenance of Certain Engines

Notwithstanding anything to the contrary contained herein, an
aircraft engine which is not an Engine, but which is installed on the Airframe,
shall be maintained in accordance with Sections 7(a) and 8 hereof.

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Section 24. Investment of Security Funds; Miscellaneous

Any monies required to be paid to or retained by Lessor which
are not required to be paid to Lessee pursuant to Section 1O(e) or 11(c) hereof
solely because an Event of Default hereunder (or other event which after notice
or lapse of time or both would constitute such an Event of Default) shall have
occurred, or which are required to be paid to Lessee pursuant to Section 1O(e)
or 11(c) hereof after completion of a replacement to be made pursuant to
Section 1O(b) hereof shall, until paid to Lessee as provided in Section 10 or
11 hereof or applied as provided herein, be invested by Lessor from time to
time as directed in writing by Lessee and at the expense of Lessee (i) in
obligations of the United States Government maturing within ninety (90) days,
(ii) in repurchase agreements fully collateralized by such obligations, (iii)
in certificates of deposit maturing within ninety (90) days issued by
commercial banks organized under the laws of the United States or of any
political subdivision thereof and having commercial paper rated P1 by Moody's
Investors Service, Inc. or A1 by Standard & Poor's Corp. (provided, however,
that the aggregate amount at any one time so invested in certificates of
deposit issued by any one bank shall not be in excess of the lesser of
$10,000,000 or 5% of such bank's capital and surplus) or (iv) in commercial
paper rated P1 by Moody's Investors Service, Inc., or A1 by Standard & Poor's
Corp. at the time of purchase thereof. There shall be promptly remitted to
Lessee any gain (including interest received) realized as the result of any
such investment (net of any fees, commissions and other expenses, if any,
incurred in connection with such investment) unless an Event of Default (or
other event which after lapse of time or notice or both would become an Event
of Default shall have occurred and be continuing and Lessee will promptly pay
to Lessor, on demand, the amount of any loss of principal realized as the
result of any such investment together with and fees, commissions and other
expenses, if any, incurred in connection with such investment).

Any provision of this Lease which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law Lessee hereby waives any provision of law which renders any
provision hereof prohibited or unenforceable in any respect. No term or
provision of this Lease may be changed, waived, discharged or terminated
orally, but only by an instrument in writing signed by the party against which
the enforcement of the change, waiver, discharge or termination is sought. This
Lease shall constitute an agreement of lease, and nothing herein shall be
construed as conveying to Lessee any right, title or interest in the Aircraft
except as lessee only. The section and paragraph headings in this Lease and the
table of

-44-
<PAGE> 49
contents are for convenience of reference only and shall not modify, define,
expand or limit any of the terms or provisions hereto and all references herein
to numbered sections, unless otherwise indicated, are to sections of this
Lease. This Lease has been delivered in the State of New York and shall in all
respects be governed by, and construed in accordance with, the laws of the
State of New York, including all matters of construction, validity and
performance.

IN WITNESS WHEREOF, Lessor and Lessee have each caused this
Agreement to be duly executed as of the day and year first above written.

LESSOR

DC-9T-III, INC.

By: /s/ Scott W. Cleveland
---------------------------------
Title: Vice President

LESSEE

TRANS WORLD AIRLINES, INC.

By: /s/ [signature]
---------------------------------
Title: Vice President and Treasurer

-45-
<PAGE> 50
EXHIBIT A

LEASE SUPPLEMENT NO. 1

LEASE SUPPLEMENT NO. 1 dated ____________, 1984 between
DC-9T-III, Inc., a Delaware Corporation ("Lessor"), and Trans World Airlines,
Inc., a Delaware corporation ("Lessee").

Lessor and Lessee have heretofore entered into that certain
Lease Agreement dated as of March 15, 1984 (herein called the "Lease Agreement"
and the defined terms therein being hereinafter used with the same meaning).
The Lease Agreement provides for execution and delivery from time to time of
Lease Supplements each substantially in the form hereof for the purpose of
leasing each Aircraft under the Lease Agreement as and when delivered by Lessor
to Lessee in accordance with the terms thereof.

The Lease Agreement relates to the aircraft and engines
described below, and a counterpart of the Lease Agreement is attached hereto
and made a part hereof and this Lease Supplement, together with such
attachment, is being filed for recordation on the date hereof with the Federal
Aviation Administration as one document.

NOW, THEREFORE, in consideration of the premise. and other
good and sufficient consideration, Lessor and Lessee hereby agree as follows:

1. Lessor hereby delivers and leases to Lessee under the
Lease Agreement and Lessee hereby accepts and leases from Lessor under the
Lease Agreement, the following described McDonnell Douglas Model DC-9-82
Aircraft ("Delivered Aircraft") which Delivered Aircraft as of the date hereof
consists of the following components:

(i) airframe U.S. Identification Number ___________;
manufacturer's serial No. ______________;

(ii) two (2) Pratt & Whitney Aircraft Model JT8D-217A engines
bearing, respectively; manufacturer's serial Nos. ____________ and ____________
(each of which engines has 750 or more rated takeoff horsepower or the
equivalent of such horsepower).

2. The Delivery Date of the Delivered Aircraft is the date of
this Lease Supplement as set forth in the opening paragraph hereof.

3. The Initial Lease Period for the Delivered Aircraft shall
commence on the Delivery Date and shall end on ____________, 1989.
<PAGE> 51
-2-

4. Lessee hereby agrees to pay Lessor Basic Rent for the
Delivered Aircraft during the Initial Lease Period in 60 payments, monthly in
advance, of $ ________ each and thereafter, the Base Lease Period, in 156
payments, monthly in advance, of $ ____________ each.

5. Lessee hereby confirms to Lessor that the Delivered
Aircraft and each delivered Engine have been duly marked in accordance with the
terms of Section 7(c) of the Lease Agreement and that Lessee has accepted the
Delivered Aircraft for all purposes hereof and of the Lease Agreement, as being
airworthy, in accordance with specifications, in good working order and repair
and without defect or inherent vice in title, condition, design, operation or
fitness for use, whether or not discoverable by Lessee as of the date hereof,
and free and clear of all Liens except such Liens as are covered by Lessor's
Warranty.

6. All of the terms and provisions of the Lease Agreement are
hereby incorporated by reference in the Lease Supplement to the same extent as
if fully set forth herein.

IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
Supplement to be duly executed as of the day and year first above written and
to be delivered in the State of New York.

LESSOR

DC-9T-III, INC.

By: ______________________________
Title:

LESSEE

TRANS WORLD AIRLINES, INC.

By: ______________________________
Title: Vice President and Treasurer
<PAGE> 52
EXHIBIT B

<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
1 101.5

2 102.1

3 102.7

4 103.2

5 103.7

6 104.2

7 104.8

8 105.2

9 105.7

10 106.2

11 106.6

12 107.1

13 107.5

14 104.5

15 104.8

16 105.1

17 105.5

18 105.8

19 106.1

20 106.4

21 106.7

22 107.0

23 107.3

24 107.6

25 107.9

26 106.2

27 106.5

28 106.8

29 107.0

30 107.3

31 107.6

32 107.9

33 108.2

34 108.4

35 108.7
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
36 109.0

37 109.2

38 107.5

39 107.7

40 108.0

41 108.3

42 108.5

43 108.8

44 109.0

45 109.2

46 109.5

47 109.7

48 109.9

49 110.2

50 108.4

51 108.6

52 108.9

53 109.1

54 109.3

55 109.5

56 109.8

57 110.0

58 110.4

59 110.7

60 111.0

61 111.8

62 109.4

63 109.5

64 109.4

65 109.2

66 109.1

67 109.0

68 108.8

69 108.6

70 108.4

71 108.1

72 107.8
</TABLE>

2
<PAGE> 54
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
73 107.5

74 107.2

75 106.9

76 106.6

77 106.2

78 105.9

79 105.5

80 105.1

81 104.7

82 104.3

83 103.9

84 103.5

85 103.1

86 102.6

87 102.2

88 101.8

89 101.4

90 100.9

91 100.5

92 100.0

93 99.6

94 99.2

95 98.7

96 98.3

97 97.8

98 97.4

99 96.9

100 96.5

101 96.0

102 95.5

103 95.1

104 94.6

105 94.1

106 93.7

107 93.2

108 92.7

109 92.2
</TABLE>

3
<PAGE> 55
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
110 91.7

111 91.3

112 90.8

113 90.3

114 89.8

115 89.3

116 88.8

117 88.3

118 87.8

119 87.3

120 86.7

121 86.2

122 85.7

123 85.2

124 84.7

125 84.1

126 83.6

127 83.1

128 82.5

129 82.0

130 81.4

131 80.9

132 80.3

133 79.8

134 79.2

135 78.7

136 78.1

137 77.6

138 77.0

139 76.4

140 75.8

141 75.3

142 74.7

143 74.1

144 73.5

145 72.9

146 72.3
</TABLE>

4
<PAGE> 56
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
147 71.7

148 71.1

149 70.5

150 69.9

151 69.3

152 68.7

153 68.1

154 67.4

155 66.8

156 66.2

157 65.6

158 64.9

159 64.3

160 63.6

161 63.0

162 62.3

163 61.7

164 61.0

165 60.4

166 59.7

167 59.0

168 58.4

169 57.7

170 57.0

171 56.3

172 55.6

173 54.9

174 54.2

175 53.5

176 52.8

177 52.1

178 51.4

179 50.7

180 50.0

181 49.3

182 48.5

183 47.8
</TABLE>

5
<PAGE> 57
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
184 47.1

185 46.3

186 45.6

187 44.8

188 44.1

189 43.3

190 42.6

191 41.8

192 41.0

193 40.2

194 39.5

195 38.7

196 37.9

197 37.1

198 36.3

199 35.5

200 34.7

201 33.9

202 33.1

203 32.3

204 31.4

205 30.6

206 29.8

207 28.9

208 28.1

209 27.3

210 26.4

211 25.5

212 24.7

213 23.8

214 23.0

215 22.1

216 21.2

End of Term
and Thereafter: 20.0
</TABLE>

6
<PAGE> 58
EXHIBIT C

<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
1 101.5

2 102.0

3 102.6

4 103.1

5 103.5

6 104.0

7 104.4

8 104.8

9 105.3

10 105.7

11 106.0

12 106.4

13 106.8

14 103.9

15 104.2

16 104.4

17 104.7

18 105.0

19 105.3

20 105.5

21 105.8

22 106.0

23 106.2

24 106.5

25 106.7

26 105.0

27 105.2

28 105.4

29 105.6

30 105.9

31 106.1

32 106.3

33 106.5

34 106.7

35 106.9
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
36 107.1

37 107.3

38 105.5

39 105.7

40 105.9

41 106.1

42 106.2

43 106.4

44 106.6

45 106.8

46 106.9

47 107.1

48 107.2

49 107.4

50 105.5

51 105.7

52 105.8

53 106.0

54 106.1

55 106.2

56 106.4

57 106.6

58 106.8

59 107.0

60 107.3

61 107.1

62 104.6

63 104.5

64 104.4

65 104.3

66 104.1

67 104.0

68 103.9

69 103.7

70 103.6

71 103.4

72 103.3
</TABLE>

2
<PAGE> 60
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
73 103.1

74 102.9

75 102.7

76 102.5

77 102.3

78 102.1

79 101.9

80 101.7

81 101.5

82 101.2

83 100.9

84 100.7

85 100.4

86 100.1

87 99.9

88 99.6

89 99.3

90 99.0

91 98.7

92 98.4

93 98.0

94 97.7

95 97.3

96 97.0

97 96.6

98 96.2

99 95.9

100 95.5

101 95.1

102 94.7

103 94.3

104 93.8

105 93.4

106 93.0

107 92.5

108 92.1

109 91.6
</TABLE>

3
<PAGE> 61
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
110 91.1

111 90.6

112 90.1

113 89.6

114 89.1

115 88.6

116 88.1

117 87.6

118 87.0

119 86.5

120 85.9

121 85.4

122 84.8

123 84.3

124 83.7

125 83.1

126 82.5

127 82.0

128 81.4

129 80.8

130 80.2

131 79.6

132 79.0

133 78.4

134 77.8

135 77.1

136 76.5

137 75.9

138 75.3

139 74.7

140 74.0

141 73.4

142 72.8

143 72.1

144 71.5

145 70.9

146 70.2
</TABLE>

4
<PAGE> 62
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
147 69.6

148 68.9

149 68.3

150 67.6

151 66.9

152 66.3

153 65.6

154 64.9

155 64.3

156 63.6

157 62.9

158 62.2

159 61.5

160 60.8

161 60.1

162 59.4

163 58.7

164 58.0

165 57.3

166 56.6

167 55.9

168 55.2

169 54.5

170 53.7

171 53.0

172 52.3

173 51.5

174 50.8

175 50.0

176 49.3

177 48.6

178 47.8

179 47.0

180 46.3

181 45.5

182 44.8

183 44.0
</TABLE>

5
<PAGE> 63
<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ---------
<S> <C>
184 43.2

185 42.4

186 41.6

187 40.8

188 40.1

189 39.3

190 38.5

191 37.7

192 36.8

193 36.0

194 35.2

195 34.4

196 33.5

197 32.8

198 31.9

199 31.1

200 30.2

201 29.4

202 28.6

203 27.7

204 26.8

205 26.0

206 25.1

207 24.3

208 23.4

209 22.5

210 21.6

211 20.7

212 19.8

213 18.9

214 18.1

215 17.2

216 16.3

End of Term
and Thereafter: 15.0
</TABLE>

6
<PAGE> 64
EXHIBIT D

Foreign Air Carriers Constituting
Permitted Sublessees Under
Section 7(b)(ix) of the Lease

_________________________________

Aeromexico
Air Canada
Air France

Air New Zealand
Alitalia
Austrian Airlines

British Airways
British Caledonian Airways
CP Air

Finnair
Iberia
Japan Air Lines

KLM-Royal Dutch Airlines
Kuwait Airways
Lufthansa German Airlines

Qantas Airways
Sabena-Belgian Airlines
SAS-Scandinavian Airlines

Singapore Airlines
Swissair
Varig-Brazil
Viasa-Venezuela

Any successor to any such
foreign air carrier
<PAGE> 65
LEASE SUPPLEMENT NO. 1

LEASE SUPPLEMENT NO. 1 dated March 22, 1984 between DC-9T-III,
Inc., a Delaware Corporation ("Lessor"), and Trans World Airlines, Inc., a
Delaware corporation ("Lessee").

NOW, THEREFORE, in consideration of the premise. and other
good and sufficient consideration, Lessor and Lessee hereby agree as follows:

(i) airframe U.S. Identification Number N913TW; manufacturer's
serial No. 49184;

(ii) two (2) Pratt & Whitney Aircraft Model JT8D-217A engines
bearing, respectively; manufacturer's serial Nos. P709733D, and P709734D (each
of which engines has 750 or more rated takeoff horsepower or the equivalent of
such horsepower).

2. The Delivery Date of the Delivered Aircraft is the date of
this Lease Supplement as set forth in the opening paragraph hereof.

3. The Initial Lease Period for the Delivered Aircraft shall
commence on the Delivery Date and shall end on March 21, 1989.

4. Lessee hereby agrees to pay Lessor Basic Rent for the
Delivered Aircraft during the Initial Lease Period in 60 payments,
monthly in advance, of $210,000 each and thereafter,
<PAGE> 66
-2-

the Base Lease Period, in 156 payments, monthly in advance, of $225,000 each.

6. All of the terms and provisions of the Lease Agreement are
hereby incorporated by reference in the Lease Supplement to the same extent as
if fully set forth herein.

IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
Supplement to be duly executed as of the day and year first above written and
to be delivered in the State of New York.

LESSOR

DC-9T-III, INC.

By: /s/ Scott W. Cleveland
-------------------------------
Title: Vice President

LESSEE

TRANS WORLD AIRLINES, INC.

By: /s/ [signature]
-------------------------------
Title: Vice President and Treasurer
<PAGE> 67

DC-9T-III

AMENDMENT AGREEMENT

This AMENDMENT AGREEMENT dated as of December 15, 1986 between TRANS
WORLD AIRLINES, INC., a Delaware corporation (the "Lessee") and DC-9T-III,
INC., a Delaware Corporation (the "Lessor") WITNESSETH:

WHEREAS, the Lessor and Lessee are parties to a Participation
Agreement and a Lease Agreement, each dated as of March 15, 1984;

WHEREAS, pursuant to the Lease, Lessor leased the Aircraft to Lessee
(the capitalized terms used herein without definition having the respective
meanings ascribed to them in the Lease);

WHEREAS, the Lease, to which was attached Lease Supplement No. 1 dated
March 22, 1984, was recorded with the FAA on April 26, 1984 as Conveyance No.
S47200.

WHEREAS, the parties acknowledge, for purposes of reference, that the
Aircraft consists of (i) one McDonnell Douglas Model DC-9-82 airframe, bearing
U.S. Identification Number N913TW and manufacturer's serial No. 49184; and (ii)
two Pratt & Whitney Model JT8D-217A engines bearing, respectively,
manufacturer's serial Nos. P709733D and P709734D; and

WHEREAS, the parties desire to amend the Lease, Lease Supplement and
Participation Agreement as provided herein.

NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
parties hereby consent and agree as follows:
<PAGE> 68

1. Section 1 of the Lease is amended by deleting the definition
of "Initial Lease Period" and inserting in lieu thereof the following:

"'Initial Lease Period' means the period commencing on the
Delivery Date for the Aircraft and ending on December 21,
1986."

2. Section 3(a) of the Lease is amended to read as follows:

"(a) Term for Aircraft. The Term for the Aircraft shall
consist of (i) the Initial Lease Period; (ii) the Base Lease
Period; and (iii) upon written notice given at least six (6)
months prior to the end of the Base Lease Period, any Renewal
Period elected by the Lessee pursuant to Section 20(b)
hereof."

3. The Stipulated Loss Value and Termination value Schedules
attached to the Lease are deleted in their entirety and replaced with the
Stipulated Loss Value and Termination Value Schedules attached hereto as
Exhibits A and B, respectively.

4. Section 3 of Lease Supplement No. 1 is amended to read as
follows:

"The Initial Lease Period for the Aircraft shall commence on
the Delivery Date and end on December 21, 1986. The Base
Lease Period shall commence on December 22, 1986."

5. Section 4 of Lease Supplement No. 1 is amended to read as
follows:

"Lessee hereby agrees to pay Lessor Basic Rent for the
Aircraft during the Initial Lease Period in 33 payments,
monthly in advance, of $210,000 each, and during the Base
Lease Period in 183 payments, monthly in advance, of $200,000
each. The first Basic Rent payment for the Base Lease Period
will be due December 22, 1986 and the last such payment will
be due February 22, 2002."

-2-

<PAGE> 69

6. Section 13 of the Participation Agreement is amended by
deleting "$225,000" in clause (ii) and inserting in lieu thereof "$200,000".

7. Each party represents and warrants to the other party that:

(i) It is a corporation duly organized, validly existing
and in good standing under the laws of the state of
its incorporation and has all requisite corporate
power and authority to enter into and perform its
obligations under this Amendment Agreement.

(ii) This Amendment Agreement has been duly authorized,
executed and delivered by it and constitutes its
legal, valid and binding obligation enforceable
against it in accordance with its terms.

(iii) Neither the execution, delivery or performance by it
of this Amendment Agreement nor the consummation of
any of the transactions by it contemplated hereby
contravenes any Federal or state law, regulation,
order or judgment applicable to it, or any provision
of its charter or by-laws or will result in a breach
of, or constitute a default under, or contravene any
provisions of, any material indenture, mortgage,
credit agreement, or other similar agreement to which
it is a party or by which it is bound.

-3-

<PAGE> 70

8. On the date of execution of this Amendment Agreement, counsel
to each party agrees to provide to the other party an opinion of its counsel
substantially to the effect set forth in the preceding Section 7.

9. Except as amended hereby, the Lease and the Participation
Agreement are in all respects ratified and confirmed and the terms thereof
shall remain in full force and effect.

10. This Amendment Agreement may be executed by the parties hereto
in separate counterparts, all of which when so executed and delivered shall be
an original for all purposes but all such counterparts shall together
constitute one and the same instrument.

11. This Amendment Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of New York, including
all matters of construction, validity and performance.

-4-

<PAGE> 71

IN WITNESS WHEREOF, the parties hereto have caused this
Amendment Agreement to be executed as of the date hereinabove first set forth.

LESSOR LESSEE
DC-9T-III, INC. TRANS WORLD AIRLINES, INC.

By /s/ R.P. Webb By /s/ Robert J. Mitchell
------------------------------------ ---------------------------------

Name R.P. Webb Name Robert J. Mitchell
---------------------------------- -------------------------------

Title President Title Treasurer
--------------------------------- ------------------------------

-5-

<PAGE> 72

Lessor: DC-9T-III, Inc. EXHIBIT A
Lessee: TWA to Amendment Agreement
Aircraft: N913TW dated as of December 15, 1986

<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ----------
<S> <C>
1 100.483133
2 100.942457
3 101.502794
4 101.785635
5 102.282305
6 102.774523
7 103.196116
8 103.654750
9 104.108126
10 104.536001
11 104.946788
12 105.352426
13 102.400618
14 102.785383
15 103.180497
16 103.573328
17 103.970729
18 104.362895
19 104.754706
20 105.157476
21 105.555038
22 105.951641
23 105.535490
24 105.785296
25 102.720403
26 102.958925
27 103.206610
28 103.379554
29 103.619979
30 103.853844
31 104.086102
32 104.327976
33 104.563392
34 104.796642
35 104.472566
36 104.616783
37 101.448266
38 101.574874
39 101.709837
40 101.589542
41 101.715167
42 101.833833
43 101.950244
44 102.075246
45 102.193277
46 102.308370
</TABLE>

<PAGE> 73

Lessor: DC-9T-III, Inc. EXHIBIT A
Lessee: TWA to Amendment Agreement
Aircraft: N913TW dated as of December 15, 1986

<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ----------
<S> <C>
47 101.995759
48 101.969908
49 98.630489
50 98.584155
51 98.545074
52 98.076959
53 98.025965
54 97.967292
55 97.905004
56 97.849962
57 97.786639
58 97.718944
59 97.389321
60 97.176944
61 93.648727
62 93.412035
63 93.178092
64 92.355873
65 92.125474
66 91.885349
67 91.639420
68 91.396702
69 91.144242
70 90.886704
71 91.185494
72 90.928384
73 90.663962
74 90.402045
75 90.143291
76 89.308075
77 89.052282
78 88.786466
79 88.514675
80 88.245970
81 87.967321
82 87.683375
83 87.944274
84 87.660194
85 87.368467
86 87.078951
87 86.792457
88 85.941118
89 85.656958
90 85.362479
91 85.061823
92 84.764108
93 84.456230
94 84.142807
</TABLE>

<PAGE> 74

Lessor: DC-9T-III, Inc. EXHIBIT A
Lessee: TWA to Amendment Agreement
Aircraft: N913TW dated as of December 15, 1986

<TABLE>
<CAPTION>
BEGINNING PERCENT OF
OF BASE
MONTH NO. LOSS COST
--------- ----------
<S> <C>
95 84.362756
96 84.048585
97 83.726392
98 83.406034
99 83.088378
100 82.217765
101 81.902838
102 81.577303
103 81.245321
104 80.915956
105 80.576162
106 80.230592
107 80.401481
108 80.054699
109 79.699559
110 79.346130
111 78.995056
112 78.108552
113 77.760520
114 77.401515
115 77.035785
116 76.672322
117 76.298188
118 75.918038
119 76.032275
120 75.650375
121 75.259719
122 74.870596
123 74.483485
124 73.583589
125 73.199723
126 72.804571
127 72.402342
128 72.002055
129 71.590802
130 71.173288
131 71.222898
132 70.803052
133 70.374002
134 69.946287
135 69.520209
136 68.609239
137 68.186575
138 67.752253
139 67.310594
140 66.870457
141 66.419054
142 65.961103
</TABLE>

<PAGE> 75