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

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

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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

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

Commission File No. 33-15551

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
----------------------------------------------------
(Exact name of registrant as specified in its charter)

California 94-3039169
------------------- --------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)

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

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

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

Securities registered pursuant to Section 12(g) of the Act:
Depository Units Representing Assignments of Limited Partnership Interests

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

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

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

Documents incorporated by reference: None

This document consists of 39 pages.

<PAGE>

PART I

Item 1. Business

Polaris Aircraft Income Fund IV, A California Limited Partnership (PAIF-IV or
the Partnership), was formed primarily to purchase and lease used commercial jet
aircraft in order to provide quarterly distributions of cash from operations, to
maximize the residual values of aircraft upon sale and to protect Partnership
capital through experienced management and diversification. PAIF-IV was
organized as a California limited partnership on June 27, 1984 and will
terminate no later than December 2020.

As more fully described in Item 7, the Partnership sold its remaining aircraft
during 1997 and collected all remaining notes receivable. Polaris Investment
Management Corporation, the general partner, is in the process of winding up the
Partnership's business. With the exception of reserves maintained for
anticipated expenses and costs of winding up, all proceeds were distributed
during 1997 and the first quarter of 1998.

Item 2. Properties

During 1997, Polaris Aircraft Income Fund IV (PAIF-IV) sold its 13 remaining
aircraft. Five McDonnell Douglas DC-9-30 leased to Continental, two Boeing
727-200 Advanced aircraft leased to ATA, two Boeing 737-200 Advanced aircraft
leased to IAG, two Boeing 737-200 Advanced aircraft leased to TBG Airways and
two Boeing 737-200 aircraft formerly leased to Viscount were sold to Triton
Aviation Services IV LLC in 1997. Fourteen Boeing 727-100 Freighter aircraft
were sold to Emery in 1993, five Boeing 727-200 aircraft were sold to
Continental in 1994, and two Boeing 727-100 aircraft, that were transferred to
the Partnership by ATA, were sold during 1994. One Boeing 727-100 Freighter,
formerly leased to Emery, was declared a casualty loss due to an accident in
1991.

Item 3. Legal Proceedings

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

Riskind, et al. v. Prudential Securities, Inc., et al. - This action was filed
in the District Court of the 165 Judicial District, Maverick County, Texas, on
behalf of over 3,000 individual investors who purchased units in "various
Polaris Aircraft Income Funds," including the Partnership. A second amended
original petition names the Partnership, Polaris Investment Management
Corporation, Prudential Securities, Inc. and others as defendants and alleges
that these defendants violated the Texas Securities Act and the Texas Deceptive

2
<PAGE>

Trade Practices Act and committed common law fraud, fraud in the inducement,
negligent misrepresentation, negligent breach of fiduciary duty and civil
conspiracy by misrepresenting and failing to disclose material facts in
connection with the sale of limited partnership units in the Partnership and the
other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an
award of compensatory damages in an unspecified amount plus interest, and double
and treble damages under the Texas Deceptive Trade Practices Act. Kidder,
Peabody & Co. was added as an additional defendant by virtue of an Intervenor's
Amended Plea in Intervention filed on or about April 7, 1995.

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

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

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

Mary C. Scott v. Prudential Securities Inc. et al. - This action was transferred
to the action entitled In re Prudential Securities Limited Partnerships
Litigation, which has been settled as discussed in Part III, Item 10 below.

Equity Resources, Inc., et al. v. Polaris Investment Management Corporation, et
al. - On or about April 18, 1997, an action entitled Equity Resources Group,
Inc., et al. v. Polaris Investment Management Corporation, et al. was filed in
the Superior Court for the County of Middlesex, Commonwealth of Massachusetts.
The complaint names each of Polaris Investment Management Corporation (PIMC),
the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund
III, Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund VI, as
defendants. The complaint alleges that PIMC, as general partner of each of the
partnerships, committed a breach of its fiduciary duties, violated applicable
partnership law statutory requirements and breached provisions of the
partnership agreements of each of the foregoing partnerships by failing to
solicit a vote of the limited partners in each of such partnerships in
connection with the Sale Transaction described in Item 7, under the caption
"Remarketing Update -- Sale of Aircraft to Triton" and in failing to disclose
material facts relating to such transaction. The plaintiffs sought to enjoin the
Sale Transaction, but the Superior Court denied their motion on May 6, 1997. The
plaintiffs appealed the Superior Court's denial of their motion to enjoin, but
ultimately, the Supreme Court of Massachusetts denied their appeal on May 29,
1997. On May 23, 1997, the defendants filed a motion to dismiss this action.
Subsequently, the plaintiffs voluntarily sought dismissal of their suit without
prejudice. On September 16, 1997, the court dismissed the plaintiffs' complaint
without prejudice.

3
<PAGE>

Ron Wallace v. Polaris Investment Management Corporation, et al. - On or about
June 18, 1997, a purported class action entitled Ron Wallace v. Polaris
Investment Management Corporation, et al. was filed on behalf of the unitholders
of Polaris Aircraft Income Funds II through VI in the Superior Court of the
State of California, County of San Francisco. The complaint names each of
Polaris Investment Management Corporation (PIMC), GE Capital Aviation Services,
Inc. (GECAS), Polaris Aircraft Leasing Corporation, Polaris Holding Company,
General Electric Capital Corporation, certain executives of PIMC and GECAS and
John E. Flynn, a former PIMC executive, as defendants. The complaint alleges
that defendants committed a breach of their fiduciary duties with respect to the
Sale Transaction involving the Partnership as described in Item 7, under the
caption "Remarketing Update -- Sale of Aircraft to Triton."

On September 2, 1997, an amended complaint was filed adding additional
plaintiffs. On September 16, 1997, the defendants filed a motion to stay
discovery and a demurrer seeking to dismiss the amended complaint. On November
5, 1997, the Superior Court granted the demurrer with leave to replead. On
December 18, 1997, the plaintiffs filed a second amended complaint asserting
their claims derivatively. On January 26, 1998, defendants filed a demurrer
seeking to dismiss the second amended complaint on the grounds that plaintiffs
had failed to satisfy the pre-litigation demand requirements under California
law for commencing a derivative action.

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

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

None.

<PAGE>

PART II

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

a) Polaris Aircraft Income Fund IV's (PAIF-IV or the Partnership) units
representing assignments of limited partnership interest (Units) are not
publicly traded. The Units are held by Polaris Depositary IV on behalf
of the Partnership's investors (Unit Holders). Currently there is no
market for PAIF-IV's Units and it is unlikely that any market will
develop.

b) Number of Security Holders:

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

Depository Units Representing Assignments 16,111
of Limited Partnership Interests:

General Partnership Interest: 1

c) Dividends:

The Partnership distributed cash to Unit Holders on a quarterly basis
beginning December 1987. Cash distributions to Unit Holders during 1997
and 1996 totaled $16,463,815 and $12,499,100, respectively. Cash
distributions per limited partnership unit were $32.93 and $25.00
during 1997 and 1996, respectively.

<PAGE>

Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 7,100,428 $ 12,216,480 $ 14,356,346 $ 7,912,192 $ 22,349,368

Net Income (Loss) 3,730,511 (18,445,792) 3,036,575 (8,058,577) 4,226,843

Net Income (Loss)
allocated to Limited
Partners 2,751,143 (19,511,119) 1,756,425 (9,352,755) 2,309,897

Net Income (Loss) per
Limited Partnership Unit 5.50 (39.03) 3.51 (18.71) 4.62

Cash Distributions per
Limited Partnership
Unit 32.93 25.00 25.00 27.50 82.50

Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit 32.93 25.00 25.00 27.50 77.88

Total Assets 34,023,841 55,142,487 87,174,844 94,791,340 115,637,336

Partners' Capital 33,506,890 48,069,506 80,403,187 91,254,501 114,589,756
</TABLE>
6
<PAGE>

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

During 1997, Polaris Aircraft Income Fund IV (the Partnership) sold its
remaining portfolio of 13 used commercial jet aircraft out of its original
portfolio of 33 aircraft. The 13 aircraft sold consisted of: five DC-9-30
aircraft leased to Continental Airlines, Inc. (Continental); two Boeing 727-200
Advanced aircraft leased to American Trans Air, Inc. (ATA); two Boeing 737-200
Advanced aircraft leased to Independent Aviation Group Limited (IAG); two Boeing
737-200 Advanced aircraft leased to TBG Airways Limited (TBG Airways); and two
Boeing 737-200 aircraft formerly leased to Viscount Air Services, Inc.
(Viscount) which filed for Chapter 11 bankruptcy protection in January 1996 as
discussed below. As discussed below under "Liquidity and Cash Distributions,"
Polaris Investment Management Corporation (PIMC, or the General Partner), is in
the process of winding up the Partnership's business.

Remarketing Update

Sale of Aircraft to Triton - On May 28, 1997, PIMC, on behalf of the
Partnership, executed definitive documentation for the purchase of the
Partnership's 13 remaining aircraft (the "Aircraft") and certain of its notes
receivables by Triton Aviation Services IV LLC, a special purpose company (the
"Purchaser" or "Triton"). The closings for the purchase of 11 of the 13 Aircraft
occurred from May 28, 1997 to June 30, 1997.The closings for 2 of the Aircraft
occurred on July 21, 1997. The Purchaser is managed by Triton Aviation Services,
Ltd. ("Triton Aviation" or the "Manager"), a privately held aircraft leasing
company which was formed in 1996 by Triton Investments, Ltd., a company which
has been in the marine cargo container leasing business for 17 years and is
diversifying its portfolio by leasing commercial aircraft. Each Aircraft was
sold subject to the existing leases if any. Although the aforementioned
transaction was structured as a sale, under Generally Accepted Accounting
Principles (GAAP), the transaction was originally recorded using the deposit
method of accounting as discussed under The Accounting Treatment of the
Transaction, until such time as sale accounting treatment was achieved.

The General Partner's Decision to Approve the Transaction - In determining
whether the transaction was in the best interests of the Partnership and its
unit holders, the General Partner evaluated, among other things, the risks and
significant expenses associated with continuing to own and remarket the Aircraft
(many of which were subject to leases that were nearing expiration). The General
Partner determined that such a strategy could require the Partnership to expend
a significant portion of its cash reserves for remarketing and that there was a
substantial risk that this strategy could result in the Partnership having to
reduce or even suspend future cash distributions to limited partners. The
General Partner concluded that the opportunity to sell the Aircraft at an
attractive price would be beneficial in the present market where demand for
Stage II aircraft is relatively strong rather than attempting to sell the
aircraft "one-by-one" over the coming years when the demand for such Aircraft
might be weaker. GE Capital Aviation Services, Inc. ("GECAS"), which provides
aircraft marketing and management services to the General Partner, sought to
obtain the best price and terms available for these Stage II aircraft given the
aircraft market and the conditions and types of planes owned by the Partnership.
Both the General Partner and GECAS approved the sale terms of the Aircraft as
being in the best interest of the Partnership and its unit holders because both
believe that this transaction will optimize the potential cash distributions to
be paid to limited partners. To ensure that no better offer could be obtained,
the terms of the transaction negotiated by GECAS included a "market-out"
provision that permitted the Partnership to elect to accept an offer for all
(but not less than all) of the assets to be sold by it to the Purchaser on terms
which it deemed more favorable, with the ability of the Purchaser to match the
offer or decline to match the offer and be entitled to be compensated in an
amount equal to 1 1/2% of the Purchaser's proposed purchase price. The
Partnership did not receive any other offers and, accordingly, the General
Partner believes that a valid market check has occurred confirming that
the terms of this transaction were the most beneficial that could have been
obtained.

7
<PAGE>

The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser was $29,748,000 which was allocated to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $3,351,410 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $26,396,590. The Partnership received $2,633,833 from the escrow
account on July 10, 1997 for the pro rata cash portion of the Purchase Price
allocated to the 11 aircraft that closed from May 28, 1997 to June 30, 1997. The
Partnership received the balance of the escrow funds of $717,577 from Triton on
July 31, 1997 for the pro rata cash portion of the Purchase Price allocated to
the 2 aircraft that closed on July 21, 1997. On December 30, 1997 the
Partnership received prepayment in full of the outstanding note receivable and
interest earned by the Partnership to that date.

Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser had the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases, if any, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits relating to such leases. Cash balances of $5,461,043 related to
maintenance reserves and security deposits were transferred to the Purchaser
after the Aircraft closing dates.

Neither PIMC nor GECAS received a sales commission in connection with the
transaction. In addition, PIMC was not paid a management fee with respect to the
collection of the Promissory Note or on any rents accruing from or after April
1, 1997. Neither PIMC nor GECAS or any of its affiliates holds any interest in
Triton Aviation or any of Triton Aviation's affiliates. John Flynn, the current
President of Triton Aviation, was a Polaris executive until May 1996 and has
over 15 years experience in the commercial aviation industry. At the time Mr.
Flynn was employed at PIMC, he had no affiliation with Triton Aviation or its
affiliates.

Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
certain aircraft assets to separate special purpose companies under common
management with the Purchaser (collectively, together with the Purchaser, the
"SPC's") on terms similar to those set forth above, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.

The Accounting Treatment of the Transaction - This transaction was initially
recorded using the deposit method of accounting which required the Partnership
to continue to report on its financial statements the Aircraft, other assets,
liabilities and any related debt even if they were assumed by Triton. Cash
received from Triton, including the initial down payment and subsequent
collection of principal and interest, was reported as a deposit on the contract.
In August and September 1997, the Partnership received prepayments of principal
from Triton of $1,891,402 and $5,000,000, respectively. As a result, sale
treatment was recorded on September 30, 1997.

In accordance with GAAP, the Partnership recognized rental income through the
closing date for the Aircraft which occurred from May 28, 1997 to July 21, 1997.
The Partnership recorded rental income from operating leases, interest and other
income totaling $94,889 and $1,603,571 during the three months ended September
30, 1997 and June 30, 1997, respectively, related to the Aircraft. However,
under the terms of the transaction, Triton was entitled to receive payment of
the rents, receivables and other income accruing from April 1, 1997 to the
closing dates for each of the Aircraft, which have been reflected as adjustments
to the sales proceeds received by the Partnership. Interest collected on the
Promissory Note prior to sale accounting treatment was recorded as part of
Triton's initial investment and has been subsequently recognized as additional
sales proceeds upon sale accounting treatment in accordance with GAAP.

8
<PAGE>

The Aircraft transferred pursuant to the definitive documentation executed on
May 28, 1997 had been classified as aircraft held for sale from that date. Under
GAAP, aircraft held for sale are carried at their fair market value less
estimated costs to sell. The adjustment to the sales proceeds described above
and revisions to estimated costs to sell the Aircraft required the Partnership
to record an adjustment to the net carrying value of the aircraft held for sale
of $1,328,482 during 1997. This adjustment to the net carrying value of the
aircraft held for sale was included in depreciation and amortization expense on
the statement of operations during 1997.

Partnership Operations

The Partnership reported net income of $3,730,511, or $5.50 per limited
partnership unit for the year ended December 31, 1997, compared to a net loss of
$18,445,792, or $39.03 per limited partnership unit in 1996 and net income of
$3,036,575, or $3.51 per limited partnership unit in 1995. The improved earnings
in 1997 was primarily due to a significant decrease in expenses, including
depreciation expense. The net loss in 1996 resulted primarily from adjustments
to depreciation expense and a decrease in rental revenue.

The Partnership reported decreases in rent from operating leases, management
fees and depreciation expense during 1997, as compared to the same period in
1996, due to the sale of the remaining Aircraft to Triton. As discussed in Note
4 to the financial statements, the Partnership did not recognize this
transaction as a sale until September 30, 1997, at which time it recognized a
gain on sale of $951,579.

Rental revenues, net of related management fees, decreased significantly during
1996, when compared to 1995. The leases of five McDonnell Douglas DC-9-30
aircraft with Continental were extended in July 1996 at a lease rate
approximately 51% of the original rate. Two Boeing 737-200 aircraft on lease
with Viscount were returned in September and October 1996.

The Partnership recognized as other revenue in 1997, maintenance reserves
aggregating $779,893 that were previously paid to the Partnership by a former
lessee for the aircraft that were sold to Triton in 1997.

Interest revenue increased during 1997 as a result of interest earned on the
Promissory Note from Triton previously discussed in the Remarketing Update
section. Interest revenue decreased in 1996, as compared to 1995. The lower 1996
interest was primarily the result of reduced interest recognized on the
Continental deferred rents as the note receivable balance was fully amortized.

If the projected net income for each aircraft (projected rental revenue, net of
management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, the Partnership
recognizes the deficiency currently as increased depreciation expense. The
Partnership recognized approximately $21.0 million and $1.2 million of these
deficiencies as increased depreciation expense in 1996 and 1995, respectively.
The deficiencies in 1995 were generally the result of declining estimates in
residual values of the aircraft. In 1996, the impairment loss was the result of
several significant factors. As a result of industry and market changes, a more
extensive review of the Partnership's aircraft was completed in the fourth
quarter of 1996 which resulted in revised assumptions of future cash flows
including reassessment of projected re-lease terms and potential future
maintenance costs. As discussed in Note 4, the Partnership accepted an offer to
purchase all of the Partnership's remaining aircraft subject to each aircraft's
existing lease. This offer constituted an event that required the Partnership to
review the aircraft carrying values pursuant to SFAS 121. In determining this
additional impairment loss, the Partnership estimated the fair value of the

9
<PAGE>

aircraft based on the purchase price reflected in the offer, less the estimated
costs and expenses of the proposed sale. The Partnership is deemed to have an
impairment loss to the extent that the carrying value exceeded the fair value.
Management believes the assumptions related to fair value of impaired assets
represented the best estimates based on reasonable and supportable assumptions
and projections.

The increased depreciation expense reduced the aircraft's carrying value and
reduced the amount of future depreciation expense that the Partnership would
recognize over the projected remaining economic life of the aircraft.

During 1996 and 1995, the Partnership recorded allowances for credit losses of
$589,029 and $710,809, respectively for outstanding receivables from Viscount.
The Stipulation and Agreement provides that, upon entry of a final
non-appealable court order approving it, the Partnership would waive its pre-
and post-petition claims against Viscount for all amounts due and unpaid. As a
result, the Partnership considers all receivables from Viscount to be
uncollectible and has written-off, during 1996, all notes, rents and interest
receivable balances from Viscount. Payments received by the Partnership from the
sale of the spare aircraft parts, if any, will be recorded as revenue when
received.

Liquidity and Cash Distributions

Liquidity - As previously discussed, the Partnership sold its remaining aircraft
during 1997. PIMC has determined that the Partnership maintain cash reserves as
a prudent measure to ensure that the Partnership has available sufficient funds
to satisfy anticipated contingencies and expenses in connection with winding up
its business. The Partnership's cash reserves will be monitored and may be
revised from time to time as further information becomes available in the
future.

Cash Distributions - Cash distributions paid to limited partners totaled
$16,463,815, $12,499,100 and $12,499,100, or $32.93, $25.00 and $25.00 per
limited partnership unit in 1997, 1996 and 1995, respectively. The Partnership
is now in the process of winding up its business. Consequently, the timing and
amount of future cash distributions, if any, are not yet known and will depend
upon whether the Partnership's reserves exceed its actual expenses and
contingencies in winding up and on the time required to complete the winding up
process. With the exception of reserves maintained for anticipated expenses and
costs of winding up, the Partnership distributed all of its available cash
during 1997 and the first quarter of 1998.

Viscount Restructuring Agreement and Default

On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the federal Bankruptcy Code in the United States Bankruptcy Court for the
District of Arizona. On April 12, 1996, GE Capital Aviation Services, Inc.
(GECAS), as agent for the Partnership, First Security Bank, National Association
(formerly known as First Security Bank of Utah, National Association) (FSB), the
owner/trustee under the Partnership's leases with Viscount, certain guarantors
of Viscount's indebtedness and others executed that certain Compromise of Claims
and Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation). Among other things, the Compromise and Stipulation, which was
subsequently approved by the Bankruptcy Court, provided that if Viscount failed
to meet its monetary obligations, the Partnership would be entitled to immediate
possession of the aircraft for which Viscount failed to perform, and Viscount
would deliver to GECAS all records related thereto, without further order of the
Bankruptcy Court.

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

10
<PAGE>

The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB would release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996. As a result of the Stipulation and Agreement, all
disputes between the Partnership and Viscount have been resolved and there is no
further pending litigation with Viscount. Viscount has ceased operations and is
currently considered to be administratively insolvent, meaning that it does not
have sufficient funds to fully pay costs and expenses incurred after the
commencement of the bankruptcy case, which costs and expenses have priority over
general unsecured claims.

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

During 1996 and 1995, the Partnership recorded allowances for credit losses of
$589,029 and $710,809, respectively for outstanding receivables from Viscount.
The Stipulation and Agreement provides that, upon entry of a final
non-appealable court order approving it, the Partnership would waive its pre-
and post-petition claims against Viscount for all amounts due and unpaid. As a
result, the Partnership considers all receivables from Viscount to be
uncollectible and had written-off, during 1996, all notes, rents and interest
receivable balances from Viscount. Payments received by the Partnership from the
sale of the spare aircraft parts (as discussed above), if any, will be recorded
as revenue when received.

The Partnership sold the returned aircraft as part of the Triton transaction
described above, under the caption "Remarketing Update - Sale of Aircraft to
Triton."

As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the
Partnership has incurred legal costs of approximately $16,000 and $265,000,
which are reflected in operating expense in the Partnership's 1997 and 1996
statement of operations, respectively.
11

<PAGE>

Item 8. Financial Statements and Supplementary Data

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996

TOGETHER WITH

AUDITORS' REPORT

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Polaris Aircraft Income Fund IV,
A California Limited Partnership:

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

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

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

ARTHUR ANDERSEN LLP

San Francisco, California,
January 23, 1998

<PAGE>

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership

BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

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

CASH AND CASH EQUIVALENTS $ 34,023,841 $ 23,989,285

RENT AND OTHER RECEIVABLES -- 943,708

NOTES RECEIVABLE, net of allowance for credit
losses of $167,722 in 1996 -- --

AIRCRAFT, net of accumulated depreciation of
$88,490,049 in 1996 -- 30,187,395

OTHER ASSETS, net of accumulated amortization of
$2,188,151 in 1996 -- 22,099
------------ ------------

$ 34,023,841 $ 55,142,487
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):

PAYABLE TO AFFILIATES $ 190,967 $ 216,319

ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 325,984 322,513

LESSEE SECURITY DEPOSITS -- 1,124,529

MAINTENANCE RESERVES -- 5,409,620
------------ ------------

Total Liabilities 516,951 7,072,981
------------ ------------

PARTNERS' CAPITAL (DEFICIT):
General Partner (4,825,310) (3,975,366)
Limited Partners, 499,964 units
issued and outstanding 38,332,200 52,044,872
------------ ------------

Total Partners' Capital 33,506,890 48,069,506
------------ ------------

$ 34,023,841 $ 55,142,487
============ ============

The accompanying notes are an integral part of these statements.

<PAGE>

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership

STATEMENTS OF OPERATIONS

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

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

REVENUES:
Rent from operating leases $ 3,813,721 $ 10,796,685 $ 12,383,100
Interest 1,527,740 1,388,557 1,973,246
Gain on sale of aircraft 951,579 -- --
Other 807,388 31,238 --
------------ ------------ ------------

Total Revenues 7,100,428 12,216,480 14,356,346
------------ ------------ ------------

EXPENSES:
Depreciation and amortization 2,685,475 28,985,919 9,639,278
Management fees to general partner 106,632 524,835 583,865
Provision for credit losses -- 589,029 710,809
Operating 200,783 275,042 49,465
Administration and other 377,027 287,447 336,354
------------ ------------ ------------

Total Expenses 3,369,917 30,662,272 11,319,771
------------ ------------ ------------

NET INCOME (LOSS) $ 3,730,511 $(18,445,792) $ 3,036,575
============ ============ ============

NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 979,368 $ 1,065,327 $ 1,280,150
============ ============ ============

NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 2,751,143 $(19,511,119) $ 1,756,425
============ ============ ============

NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 5.50 $ (39.03) $ 3.51
============ ============ ============

The accompanying notes are an integral part of these statements.

<PAGE>

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

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

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

Balance, December 31, 1994 $ (3,543,265) $ 94,797,766 $ 91,254,501

Net income 1,280,150 1,756,425 3,036,575

Cash distributions to partners (1,388,789) (12,499,100) (13,887,889)
------------ ------------ ------------

Balance, December 31, 1995 (3,651,904) 84,055,091 80,403,187

Net income (loss) 1,065,327 (19,511,119) (18,445,792)

Cash distributions to partners (1,388,789) (12,499,100) (13,887,889)
------------ ------------ ------------

Balance, December 31, 1996 (3,975,366) 52,044,872 48,069,506

Net income 979,368 2,751,143 3,730,511

Cash distributions to partners (1,829,312) (16,463,815) (18,293,127)
------------ ------------ ------------

Balance, December 31, 1997 $ (4,825,310) $ 38,332,200 $ 33,506,890
============ ============ ============

The accompanying notes are an integral part of these statements.

<PAGE>

<TABLE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership

STATEMENTS OF CASH FLOWS

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

<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,730,511 $(18,445,792) $ 3,036,575
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,685,475 28,985,919 9,639,278
Gain on sale of aircraft (951,579) -- --
Provision for credit losses -- 589,029 710,809
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables 3,219 250,559 (282,417)
Increase (decrease) in payable to affiliates 26,369 70,411 (28,952)
Increase (decrease) in accounts payable
and accrued liabilities (177,128) 214,939 74,579
Increase (decrease) in lessee security deposits (1,124,529) 71 52,391
Increase (decrease) in maintenance reserves (5,409,620) 398,403 2,864,300
Increase (decrease) in deferred income -- (382,500) 272,500
------------ ------------ ------------

Net cash provided by operating activities (1,217,282) 11,681,039 16,339,063
------------ ------------ ------------

INVESTING ACTIVITIES:
Proceeds from sale of aircraft 4,940,755 -- --
Principal payments on notes receivable 26,396,590 2,740,104 2,851,982
Payments to Purchaser related to sale of aircraft (1,792,380) -- --
------------ ------------ ------------

Net cash provided by investing activities 29,544,965 2,740,104 2,851,982
------------ ------------ ------------

FINANCING ACTIVITIES:
Cash distributions to partners (18,293,127) (13,887,889) (13,887,889)
------------ ------------ ------------

Net cash used in financing activities (18,293,127) (13,887,889) (13,887,889)
------------ ------------ ------------

CHANGES IN CASH AND CASH
EQUIVALENTS 10,034,556 533,254 5,303,156
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 23,989,285 23,456,031 18,152,875
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 34,023,841 $ 23,989,285 $ 23,456,031
============ ============ ============

The accompanying notes are an integral part of these statements.
</TABLE>
17

<PAGE>

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. Accounting Principles and Policies

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

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

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

The Partnership periodically reviewed the estimated realizability of the
residual values at the projected end of each aircraft's economic life based on
estimated residual values obtained from independent parties which provided
current and future estimated aircraft values by aircraft type. For any downward
adjustment in estimated residual value or decrease in the projected remaining
economic life, the depreciation expense over the projected remaining economic
life of the aircraft was increased.

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

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

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

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

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

<PAGE>

Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft.

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

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

Receivables - The Partnership had recorded an allowance for credit losses for
certain impaired notes and rents receivable as a result of uncertainties
regarding their collection as discussed in Notes 5 and 6. The Partnership
recognizes revenue on impaired notes only as payments are received.

1997 1996
---- ----
Allowance for credit losses,
beginning of year $ (167,722) $(2,177,265)
Provision for credit losses -- (589,029)
Write-downs -- 1,299,838
Collections 167,722 1,298,734
----------- -----------
Allowance for credit losses,
end of year $ -- $ (167,722)
=========== ===========

2. Organization and the Partnership

The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2020.
Upon organization, both the general partner and the depositary contributed $500.
The offering of depositary units (Units), representing assignments of limited
partnership interest, terminated on September 15, 1988, at which time the
Partnership had sold 500,000 units of $500, representing $250,000,000. All unit
holders were admitted to the Partnership on or before September 15, 1988. During
November 1988, 36 units were returned to the Partnership by an investor who did
not meet the Investor Suitability Standards described in the Prospectus.

Polaris Investment Management Corporation (PIMC), the sole general partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Note 7.

3. Aircraft

During 1997, the Partnership sold all of its remaining aircraft from its
original portfolio of 33 used commercial jet aircraft which were acquired and
leased or sold as discussed below. Two aircraft were transferred from a lessee
as discussed below. The aircraft leases were net operating leases, requiring the
lessees to pay all operating expenses associated with the aircraft during the
lease term. While the leases required the lessees to comply with Airworthiness
Directives (ADs) which have been or may be issued by the Federal Aviation
Administration and require compliance during the lease term, in certain of the
leases the Partnership has agreed to share in the cost of compliance with ADs.
In addition to basic rent, certain lessees were required to pay supplemental

19
<PAGE>

amounts based on flight hours or cycles into a maintenance reserve account, to
be used for heavy maintenance of the engines or airframe. The leases generally
stated a minimum acceptable return condition for which the lessee is liable
under the terms of the lease agreement. In the event of a lessee default, these
return conditions are not likely to be met.

As discussed in Note 1, the Partnership periodically reviewed the estimated
realizability of the residual values at the projected end of each aircraft's
economic life based on estimated residual values obtained from independent
parties which provide current and future estimated aircraft values by aircraft
type. As a result, the Partnership made downward adjustments to the estimated
residual value of certain of its aircraft as of December 31, 1995.

The Partnership recognized impairment losses on aircraft to be held and used by
the Partnership aggregating approximately $21.0 million and $1.2 million, or
$41.95 and $2.41 per limited Partnership unit, as increased depreciation expense
in 1996 and 1995, respectively. The impairment losses in 1995 were generally the
result of declining estimates in residual values of the aircraft. In 1996, the
impairment loss was the result of several significant factors. As a result of
industry and market changes, a more extensive review of the Partnership's
aircraft was completed in the fourth quarter of 1996 which resulted in revised
assumptions of future cash flows including reassessment of projected re-lease
terms and potential future maintenance costs. As discussed in Note 4, the
Partnership accepted an offer to purchase all of the Partnership's remaining
aircraft subject to each aircraft's existing lease. This offer constitutes an
event that required the Partnership to review the aircraft carrying value
pursuant to SFAS 121. In determining this additional impairment loss, the
Partnership estimated the fair value of the aircraft based on the purchase price
reflected in the offer, less the estimated costs and expenses of the proposed
sale. The Partnership is deemed to have an impairment loss to the extent that
the carrying value exceeded the fair value. Management believes the assumptions
related to fair value of impaired assets represents the best estimates based on
reasonable and supportable assumptions and projections.

4. Sale of Aircraft to Triton

On May 28, 1997, PIMC, on behalf of the Partnership, executed definitive
documentation for the purchase of the Partnership's 13 remaining aircraft (the
"Aircraft") and certain of its notes receivables by Triton Aviation Services IV
LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for
the purchase of 11 of the 13 Aircraft occurred from May 28, 1997 to June 30,
1997. The closings for 2 of the Aircraft occurred on July 21, 1997. The
Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the
"Manager"), a privately held aircraft leasing company which was formed in 1996
by Triton Investments, Ltd., a company which has been in the marine cargo
container leasing business for 17 years and is diversifying its portfolio by
leasing commercial aircraft. Each Aircraft was sold subject to the existing
leases, if any. Although the aforementioned transaction was structured as a
sale, under Generally Accepted Accounting Principles (GAAP), the transaction had
been recorded using the deposit method of accounting as discussed under The
Accounting Treatment of the Transaction.

The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser was $29,748,000 which was allocated to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $3,351,410 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $26,396,590. The Partnership received $2,633,833 from the escrow
account on July 10, 1997 for the pro rata cash portion of the Purchase Price
allocated to the 11 aircraft that closed from May 28, 1997 to June 30, 1997. The
Partnership received the balance of the escrow funds of $717,577 from Triton on
July 31, 1997 for the pro rata cash portion of the Purchase Price allocated to
the 2 aircraft that closed on July 21, 1997. On December 30, 1997, the
Partnership received prepayment in full of the outstanding note receivable and
interest earned by the Partnership to that date.

20
<PAGE>

The Aircraft transferred pursuant to the definitive documentation executed on
May 28, 1997 had been classified as aircraft held for sale from that date. Under
GAAP, aircraft held for sale are carried at their fair market value less
estimated costs to sell. The adjustment to the sales proceeds described above
and revisions to estimated costs to sell the Aircraft required the Partnership
to record an adjustment to the net carrying value of the aircraft held for sale
of $1,328,482 during the three months ended June 30, 1997. This adjustment to
the net carrying value of the aircraft held for sale was included in
depreciation and amortization expense on the statement of operations.

21
<PAGE>

5. Viscount Restructuring Agreement and Default

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

The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB shall release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court approved the Stipulation and Agreement on October 23, 1996.
As a result of the Stipulation and Agreement, all disputes between the
Partnership and Viscount have been resolved and there is no further pending
litigation with Viscount. Viscount has ceased operations and is currently
considered to be administratively insolvent, meaning that it does not have
sufficient funds to fully pay costs and expenses incurred after the commencement
of the bankruptcy case, which costs and expenses have priority over general
unsecured claims.

During 1996 and 1995, the Partnership recorded allowances for credit losses of
$589,029 and $710,809, respectively for outstanding receivables from Viscount.
The Stipulation and Agreement provides that, upon entry of a final
non-appealable court order approving it, the Partnership would waive its pre-
and post-petition claims against Viscount for all amounts due and unpaid. As a
result, the Partnership considers all receivables from Viscount to be
uncollectible and has written-off, during 1996, all notes, rents and interest
receivable balances from Viscount. Payments received by the Partnership from the
sale of the spare aircraft parts (as discussed above), if any, will be recorded
as revenue when received.

The Partnership sold the returned aircraft as part of the Triton transaction
described in Item 7, under the caption "Remarketing Update - Sale of Aircraft to
Triton."

22
<PAGE>

As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the
Partnership incurred legal costs of approximately $16,000 and $265,000, which
are reflected in operating expense in the Partnership's 1997 and 1996 statement
of operations, respectively.

6. Continental Lease Modification

The aircraft leases with Continental were modified after Continental filed for
Chapter 11 bankruptcy protection in December 1990. The modified agreement
stipulated that the Partnership pay certain aircraft maintenance, modification
and refurbishment costs, not to exceed approximately $4.9 million, a portion of
which will be recovered with interest through payments from Continental over the
extended lease terms. The Partnership's share of such costs may be capitalized
and depreciated over the remaining lease terms, subject to the capitalized cost
policy as described in Note 1.

The agreement with Continental included an extended deferral of the dates when
Continental would remit its rental payments for the period from December 3, 1990
through September 30, 1991 and for a period of three months, beginning in
November 1992, aggregating $8,385,000 (the Deferred Amount). The Partnership
recorded a note receivable and an allowance for credit losses equal to the total
of the deferred rents and prior accrued interest, the net of which is reflected
in the accompanying balance sheets. The note receivable and corresponding
allowance for credit losses were reduced by the principal portion of payments
received. In addition, the Partnership recognized rental revenue and interest
revenue in the period the deferred rental payments were received.

The allowances for credit losses on the principal and interest portions due were
$167,722 as of December 31, 1996. The unrecognized Deferred Amounts as of
December 31, 1996 were $166,689. In accordance with the aforementioned
agreement, Continental began making supplemental payments for the Deferred
Amount plus interest on July 1, 1992. During 1996 and 1995, the Partnership
received supplemental payments of $1,365,423 and $2,050,566, of which $1,267,713
and $1,675,095 was recognized as rental revenue in 1996 and 1995, respectively.

7. Related Parties

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

a. An aircraft management fee equal to 5% of gross rental revenues
with respect to operating leases or 2% of gross rental revenues
with respect to full payout leases of the Partnership, payable
upon receipt of the rent, subordinated to receipt by unit holders
of distributions equaling an 8% cumulative, non-compounded return
on capital contributions, as defined in the Partnership Agreement.
In 1997, 1996 and 1995, the Partnership paid management fees to
PIMC of $109,584, $544,886 and $603,965, respectively. Management
fees payable to PIMC at December 31, 1997 and 1996 were $0 and
$54,673, respectively.

b. Reimbursement of certain out-of-pocket expenses incurred in
connection with the management of the Partnership and its assets.
In 1997, 1996, and 1995, the Partnership reimbursed PIMC for
services rendered or payments made on behalf of the Partnership of
$796,675, $447,837 and $319,695, respectively. Reimbursements
totaling $190,967 and $161,646 were payable to PIMC at December
31, 1997 and 1996, respectively.

c. A 10% interest to PIMC in all cash distributions from operations
and sales proceeds, gross income in an amount equal to 9.09% of
distributed cash available from operations and 1% of net income or
loss and taxable income or loss, as such terms are defined in the
Partnership Agreement. After the Partnership has sold or disposed
of aircraft representing 50% of the total aircraft cost, gains

23
<PAGE>

from the sale or other disposition of aircraft are generally
allocated first to the General Partner until such time that the
General Partner's capital account is equal to the amount to be
distributed to the General Partner from the proceeds of such sale
or disposition.

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

e. In the event that, immediately prior to the dissolution and
termination of the Partnership, the General Partner shall have a
deficit balance in its tax basis capital account, then the General
Partner shall contribute in cash to the capital of the Partnership
an amount which is equal to such deficit (see Note 8).

8. Partners' Capital

The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the Limited Partners
(see Note 7). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 10, varies from
income or loss calculated for tax purposes.

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

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

At December 31, 1997, the tax basis capital accounts of the General Partner and
the Limited Partners were $3,247,580 and $30,259,311, respectively.

9. Income Taxes

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

<PAGE>

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

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

1997: Assets $34,023,841 $34,023,841 $ --
Liabilities 516,951 516,951 --

1996: Assets $55,142,487 $41,913,204 $13,229,283
Liabilities 7,072,981 1,635,910 5,437,071

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

The following is a reconciliation between net income (loss) per limited
partnership unit reflected in the financial statements and the information
provided to limited partners for federal income tax purposes:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------

1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Book net income (loss) per limited partnership unit $ 5.50 $ (39.03) $ 3.51
Adjustments for tax purposes represent differences
between book and tax revenue and expenses:
Rental and maintenance reserve revenue recognition 0.54 3.23 3.98
Management fee expense 0.02 0.14 0.11
Depreciation 0.63 47.24 (1.02)
Gain or loss on sale of aircraft (0.32) -- --
Capitalized costs 2.74 1.83 0.02
Interest Income 3.13 -- --
Other revenue and expense items (2.95) (5.15) (0.24)
----- ------ -----

Taxable net income per limited partnership unit $ 9.29 $ 8.26 $ 6.36
===== ====== =====
</TABLE>

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

For book purposes, rental revenue was generally recorded as it is earned. For
tax purposes, certain temporary differences existed in the recognition of
revenue. For tax purposes, management fee expense was accrued in the same year
as the tax basis rental revenue. Increases in the Partnership's book maintenance
reserve liability were recognized as rental revenue for tax purposes.
Disbursements from the Partnership's book maintenance reserves were capitalized
or expensed for tax purposes, as appropriate.

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

25
<PAGE>

For book purposes, the interest collected on the Promissory Note prior to sale
accounting treatment was recorded as additional sales proceeds. For tax
purposes, all interest collected on the Promissory Note was recognized as
interest income.

11. Subsequent Events

The Partnership made a cash distribution of $7,499,310 or $15.00 per limited
partnership unit, to limited partners, and $833,257 to the General Partner on
January 15, 1998.

The Partnership made a special cash distribution of $21,308,039 or $42.62 per
limited partnership unit, to limited partners, and $2,367,560 to the General
Partner on February 23, 1998, as a result of the prepayment of the Promissory
Note from Triton, as discussed in Note 4.

<PAGE>

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

None.

<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

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

The officers and directors of PIMC are:

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

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

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

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

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

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

Mr. Liu, 40, assumed the position of Vice President of PIMC effective May 1,
1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the
position of Executive Vice President - Marketing and Structured Finance of
GECAS, having previously held the position of Executive Vice President - Capital

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<PAGE>

Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management
positions in corporate Business Development and in Syndications and Leasing for
TIFC. Mr. Liu previously held the position of managing director of Kidder,
Peabody & Co., Incorporated.

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

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

Certain Legal Proceedings:

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

On or around February 17, 1993, a civil action entitled Einhorn, et al. v.
Polaris Public Income Funds, et al. was filed in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against, among others, Polaris
Investment Management Corporation and Polaris Depositary Company. The
Partnership is not named as a defendant in this action. Plaintiffs seek class
action certification on behalf of a class of investors in Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund
VI who purchased their interests while residing in Florida. Plaintiffs allege
the violation of Section 517.301, Florida Statutes, in connection with the
offering and sale of units in such Polaris Aircraft Income Funds. Among other
things, plaintiffs assert that the defendants sold interests in such Polaris
Aircraft Income Funds while "omitting and failing to disclose the material facts
questioning the economic efficacy of" such Polaris Aircraft Income Funds.
Plaintiffs seek rescission or damages, in addition to interest, costs, and
attorneys' fees. On April 5, 1993, defendants filed a motion to stay this action
pending the final determination of a prior filed action in the Supreme Court for
the State of New York entitled Weisl v. Polaris Holding Company. On that date,
defendants also filed a motion to dismiss the complaint on the grounds of
failure to attach necessary documents, failure to plead fraud with particularity
and failure to plead reasonable reliance. On April 13, 1993, the court denied
the defendants' motion to stay. On May 7, 1993, the court stayed the action

29
<PAGE>

pending an appeal of the denial of the motion to stay. Defendants subsequently
filed with the Third District Court of Appeal a petition for writ of certiorari
to review the lower court's order denying the motion to stay. On October 19,
1993, the Court of Appeal granted the writ of certiorari, quashed the order, and
remanded the action with instruction to grant the stay.

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

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

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

On or about January 12, 1995, a class action complaint entitled Cohen, et al. v.
Kidder Peabody & Company, Inc. (Kidder Peabody), et al. was filed in the Circuit
Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida,
and on March 31, 1995 the case was removed to the United States District Court
for the Southern District of Florida. An amended class action complaint (the
"amended complaint"), which re-named this action Bashein, et al. v. Kidder,
Peabody & Company Inc., et al. was filed on June 13, 1995. The amended complaint
names Kidder Peabody & Company, Inc., General Electric Capital Corporation,
General Electric Financial Services, Inc., and General Electric Company as
defendants. The Partnership is not named as a defendant in this action. The
action purports to be on behalf of "approximately 20,000 persons throughout the
United States" who purchased units in Polaris Aircraft Income Funds III through
VI. The amended complaint sets forth various causes of action purportedly
arising in connection with the public offerings of Polaris Aircraft Income Fund
III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, and
Polaris Aircraft Income Fund VI. Specifically, plaintiffs assert claims for
violation of Sections 12(2) and 15 of the Securities Act of 1933, fraud,
negligent misrepresentation, breach of fiduciary duty, breach of third party
beneficiary contract, violation of NASD Rules of Fair Practice, breach of
implied covenant, and breach of contract. Plaintiffs seek compensatory damages,
interest, punitive damages, costs and attorneys' fees, as well as any other

30
<PAGE>

relief the court deems just and proper. Plaintiffs filed a motion for leave to
file a second amended complaint, which was granted on October 3, 1995. On March
18, 1996, plaintiffs moved for class certification. On the eve of class
discovery, April 26, 1996, plaintiffs moved for a voluntary dismissal of Counts
I and II (claims brought pursuant to the Securities Act of 1933) of the Second
Amended Complaint and simultaneously filed a motion to remand this action to
state court for lack of federal jurisdiction. Plaintiffs' motion for voluntary
dismissal of the federal securities law claims and motion for remand were
granted on July 10, 1996. On December 18, 1997, the Court ordered that
plaintiffs show good cause why the action should not be dismissed without
prejudice for lack of prosecution. On January 14, 1998, a hearing was held with
respect to the order to show cause, and the Court determined that the action
should be dismissed without prejudice for lack of prosecution.

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

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

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

In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about

31
<PAGE>

December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. The Partnership is not named as a
defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary
duty, in tort, contract and quasi-contract, violation of sections of the
Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection
with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs
seek compensatory damages, attorneys' fees, interest, costs and general relief.

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

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

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

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

On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint

32
<PAGE>

names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiffs allege claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Funds
III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief.

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

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

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

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

A complaint entitled Mary Grant Tarrer, et al. v. Kidder Peabody & Co. (Kidder
Peabody), et al., which was filed in the Superior Court of the State of
California, County of Sacramento, on or about October 16, 1996, by individual
plaintiffs who purchased limited partnership units in Polaris Aircraft Income
Funds III-VI and other limited partnerships sold by Kidder Peabody. The
complaint names Kidder, Peabody & Co. Incorporated, KP Realty Advisors, Inc.,
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and Does 1-100 as defendants. The
Partnership is not named as a defendant in this action. The complaint alleges

33
<PAGE>

violations of state common law, including fraud, negligent misrepresentation,
breach of fiduciary duty, and violations of the rules of the National
Association of Securities Dealers. The complaint seeks to recover compensatory
damages and punitive damages in an unspecified amount, interest, and rescission
with respect to Polaris Aircraft Income Funds III-VI and all other limited
partnerships alleged to have been sold by Kidder Peabody to the plaintiffs.

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

A complaint entitled Wayne W. Kuntz, et al. v. Polaris Holding Company, et al.,
which was filed in the Superior Court of the State of California, County of
Sacramento, on or about November 13, 1996, by individual plaintiffs who
purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The
complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation,
Polaris Investment Management Corporation, Polaris Securities Corporation,
Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric
Company, General Electric Financial Services, Inc., General Electric Capital
Corporation, General Electric Credit Corporation and Does 1-100 as defendants.
The Partnership is not named as a defendant in this action. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and rescission with respect to Polaris Aircraft Income Funds I-VI.

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

A complaint entitled Enita Elphick, et al. v. Kidder Peabody & Co.,et al., which
was filed in the Superior Court of the State of California, County of
Sacramento, on or about January 16, 1997, by individual plaintiffs who purchased

34
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limited partnership units in Polaris Aircraft Income Funds III-VI and other
limited partnerships sold by Kidder Peabody. The complaint names Kidder, Peabody
& Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company, Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc., General Electric Company, General Electric Financial Services, Inc.,
General Electric Capital Corporation, General Electric Credit Corporation and
Does 1-100 as defendants. The Partnership is not named as a defendant in this
action. The complaint alleges violations of state common law, including fraud,
negligent misrepresentation, breach of fiduciary duty, and violations of the
rules of the National Association of Securities Dealers. The complaint seeks to
recover compensatory damages and punitive damages in an unspecified amount,
interest, and rescission with respect to Polaris Aircraft Income Funds III-VI
and all other limited partnerships alleged to have been sold by Kidder Peabody
to the plaintiffs.

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

Three complaints which were filed on or about March 21, 1997, in the Superior
Court of the State of California, County of Sacramento naming as defendants
Kidder, Peabody & Company, Incorporated, Polaris Holding Company, Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services,
Inc., General Electric Company, General Electric Capital Services, General
Electric Capital Corporation, GE Capital Aviation Services and Does 1-100. The
first complaint, entitled Michael J. Ouellette, et al. v. Kidder Peabody & Co.,
et al., was filed by over 50 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I-VI. The
second complaint, entitled Thelma A. Rolph, et al. v. Polaris Holding Company,
et al., was filed by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I-VI. The
third complaint, entitled Carl L. Self, et al. v. Polaris Holding Company, et
al., was filed by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in any of these actions. Each complaint
alleges violations of state common law, including fraud, negligent
misrepresentation and breach of fiduciary duty, and violations of the rules of
the National Association of Securities Dealers, Inc. Each complaint seeks to
recover compensatory damages and punitive damages in an unspecified amount,
interest and rescission with respect to Polaris Aircraft Income Funds I-VI and
all other limited partnerships alleged to have been sold by Kidder Peabody to
the plaintiffs.

A summons and First Amended Complaint entitled Sara J. Bishop, et al. v. Kidder
Peabody & Co., et al., which was filed in the Superior Court of the State of
California, County of Sacramento, on or about April 9, 1996, by over one hundred
individual plaintiffs who purchased limited partnership units in Polaris
Aircraft Income Funds III, IV, V and VI and other limited partnerships sold by
Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP

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Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Financial Services, Inc., General
Electric Capital Corporation, General Electric Credit Corporation and Does 1-100
as defendants. The Partnership is not named as a defendant in this action. The
complaint alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and rescission with respect to Polaris Aircraft Income Funds III-VI and all
other limited partnerships alleged to have been sold by Kidder Peabody to the
plaintiffs.

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

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

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

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

Item 11. Executive Compensation

PAIF-IV has no directors or officers. PAIF-IV is managed by PIMC, the General
Partner. In connection with management services provided, management and
advisory fees of $109,584 were paid to PIMC in 1997 in addition to a 10%
interest in all cash distributions as described in Note 7 to the financial
statements (Item 8).

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

36
<PAGE>

<TABLE>
b) The General Partner of PAIF-IV owns the equity securities of PAIF-IV as
set forth in the following table:
<CAPTION>

Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
-------- ---------------- -------------------- --------
<S> <C> <C> <C>
General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
cash available from operations, and a
1% interest in net income or loss

</TABLE>

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

Item 13. Certain Relationships and Related Transactions

None.

<PAGE>

PART IV

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

1. Financial Statements.

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

Report of Independent Public Accountants 13
Balance Sheets 14
Statements of Operations 15
Statements of Changes in Partners' Capital (Deficit) 16
Statements of Cash Flows 17
Notes to Financial Statements 18

2. Reports on Form 8-K.

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

A current report on Form 8-K was filed on January 5, 1998 to report the
prepayment in full of the Promissory Note due from Triton Aviation
Services IV LLC on December 30, 1997.

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

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

4. Financial Statement Schedules.

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

<PAGE>

SIGNATURES

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

POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner

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

Pursuant to the requirements of the Securities Exchange Act of 134, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date

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

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

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

<ARTICLE>5

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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 34023841
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 34023841
<CURRENT-LIABILITIES> 0
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<COMMON> 0
0
0
<OTHER-SE> 33506890
<TOTAL-LIABILITY-AND-EQUITY> 34023841
<SALES> 0
<TOTAL-REVENUES> 7100428
<CGS> 0
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<OTHER-EXPENSES> 3369917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3730511
<INCOME-TAX> 0
<INCOME-CONTINUING> 3730511
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<NET-INCOME> 3730511
<EPS-PRIMARY> 5.50
<EPS-DILUTED> 0

</TABLE>