AIRFUND INTERNATIONAL LIMITED PARTNERSHIP, 10-K, 1999-03-31

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
10-K, 1999-03-31
EQUIPMENT RENTAL & LEASING, NEC

Previous: SHEARSON LEHMAN BROTHERS UNIT TRUSTS HIGH YIELD MUN SER 8, 24F-2NT, 1999-03-31

Next: AG BAG INTERNATIONAL LTD, 10-K405, 1999-03-31

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-18368
------------------------

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

MASSACHUSETTS 04-3037350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
88 BROAD STREET, SIXTH FLOOR, BOSTON, MA 02110
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (617) 854-5800

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

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

NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
---------------------------------------- ---------------------------------

Securities registered pursuant to Section 12(g) of the Act:

3,040,000 UNITS REPRESENTING LIMITED PARTNERSHIP INTEREST

(Title of class)

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 / /

State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1998 (Part I and II)

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

FORM 10-K

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I

Item 1. Business...................................................................................... 3

Item 2. Properties.................................................................................... 5

Item 3. Legal Proceedings............................................................................. 5

Item 4. Submission of Matters to a Vote of Security Holders........................................... 5

PART II

Item 5. Market for the Partnership's Securities and Related Security Holder Matters................... 6

Item 6. Selected Financial Data....................................................................... 7

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8

Item 8. Financial Statements and Supplementary Data................................................... 8

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 8

PART III

Item 10. Directors and Executive Officers of the Partnership........................................... 9

Item 11. Executive Compensation........................................................................ 11

Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 11

Item 13. Certain Relationships and Related Transactions................................................ 12

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 14-15
</TABLE>

2
<PAGE>
PART I

ITEM 1. BUSINESS.

(a) General Development of Business

AIRFUND International Limited Partnership (the "Partnership") was organized
as a limited partnership under the Massachusetts Uniform Limited Partnership Act
(the "Uniform Act") on January 31, 1989 for the purpose of acquiring and leasing
to third parties a specified portfolio of used commercial aircraft. Partners'
capital initially consisted of contributions of $1,000 from the General Partner
(AFG Aircraft Management Corporation, a Massachusetts corporation) and $100 from
the Initial Limited Partner (AFG Assignor Corporation, a Massachusetts
corporation). On July 26, 1989, the Partnership issued 3,040,000 units
representing assignments of limited partnership interests (the "Units") to 4,147
investors. Unitholders and Limited Partners (other than the Initial Limited
Partner) are collectively referred to as Recognized Owners. The General Partner
is Equis Financial Group Limited Partnership (formerly known as American Finance
Group), a Massachusetts limited partnership ("EFG"). The capital contribution of
the General Partner, in consideration of its general partner interest, was
$1,000. The General Partner is not required to make any other capital
contributions except as may be required under the Uniform Act and Section 6.1(b)
of the Amended and Restated Agreement and Certificate of Limited Partnership
(the "Restated Agreement, as amended").

(b) Financial Information About Industry Segments

The Partnership is engaged in only one industry segment: the business of
acquiring used commercial aircraft and leasing the aircraft to creditworthy
lessees on an operating lease basis. Full-payout leases are those in which
aggregate undiscounted noncancellable rents equal or exceed the acquisition cost
of the leased equipment. Operating leases are those in which the aggregate
undiscounted noncancellable rents are less than the acquisition cost of the
leased equipment. Industry segment data is not applicable.

The Partnership was organized to acquire a specified portfolio of used
commercial jet aircraft subject to various full-payout and operating leases and
to lease the aircraft to third parties as income-producing investments. More
specifically, the Partnership's primary investment objectives were to acquire
and lease aircraft, that would:

1. Generate quarterly cash distributions;

2. Preserve and protect Partnership capital; and

3. Maintain substantial residual value for ultimate sale of the aircraft.

The Partnership has the additional objective of providing certain federal
income tax benefits.

The Closing date of the Offering of Units of the Partnership was July 26,
1989. The initial purchase of the aircraft and the associated lease commitments
occurred on July 27, 1989. The acquisition of the Partnership's aircraft and its
associated leases is described in Note 3 to the financial statements included in
Item 14, herein. The Restated Agreement as amended, provides that the
Partnership will terminate no later than December 31, 2004. However, the
Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization and
its future business operations. See Note 7 to the accompanying financial
statements.

The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing, re-leasing,
financing, and refinancing of aircraft, and (iii) arrange the resale of
aircraft. The Manager is

3
<PAGE>
compensated for such services as provided for in the Restated Agreement, as
amended, described in Item 13, herein and in Note 4 to the financial statements,
included in Item 14, herein.

The Partnership's investment in commercial aircraft is, and will continue to
be, subject to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing aircraft is the possibility that aggregate lease revenues and aircraft
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all operating expenses. In addition, the
leasing industry is very competitive. The Partnership will encounter
considerable competition when the aircraft are re-leased or sold at the
expiration of current lease terms. The Partnership must compete with lease
programs offered directly by manufacturers and other equipment leasing
companies, including lease programs organized and managed similarly to the
Partnership, and including other EFG-sponsored partnerships and trusts, which
may seek to re-lease or sell aircraft within their own portfolios to the same
customers as the Partnership. Many competitors have greater financial resources
and more experience than the Partnership, the General Partner and the Manager.
In addition, default by a lessee under a lease may cause aircraft to be returned
to the Partnership at a time when the General Partner or the Manager is unable
to arrange for the re-lease or sale of such aircraft. This could result in the
loss of a material portion of anticipated revenues.

In recent years, market values for certain models of used commercial jet
aircraft have deteriorated. Consistent price competition and other pressures
within the airline industry have inhibited sustained profitability for many
carriers. Most major airlines have had to re-evaluate their aircraft fleets and
operating strategies. Aircraft condition, age, passenger capacity, distance
capability, fuel efficiency, and other factors influence market demand and
market values for passenger jet aircraft.

Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG's ability to sell
and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.

The General Partner will determine when each aircraft should be sold and the
terms of such sale based upon numerous factors with a view toward achieving the
investment objectives of the Partnership. The General Partner is authorized to
sell the aircraft prior to the expiration of the initial lease terms and intends
to monitor and evaluate the market for resale of the aircraft to determine
whether an aircraft should remain in the Partnership's portfolio or be sold. As
an alternative to sale, the Partnership may enter re-lease agreements when
considered advantageous by the General Partner and the Manager.

Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is
incorporated herein by reference to Note 2 to the financial statements in the
1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.

EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.

4
<PAGE>
sole Director. Equis Corporation also owns a controlling 1% general partner
interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE
LP"). Mr. Engle established Equis Corporation and GDE LP in December 1994 for
the sole purpose of acquiring the business of AFG.

In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.

(d) Financial Information About Foreign and Domestic Operations and Export
Sales

Not applicable.

ITEM 2. PROPERTIES.

Incorporated herein by reference to Note 3 to the financial statements in
the 1998 Annual Report.

ITEM 3. LEGAL PROCEEDINGS.

Incorporated herein by reference to Note 7 to the financial statements in
the 1998 Annual Report.

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

None.

5
<PAGE>
PART II

ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER
MATTERS.

(a) Market Information

There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.

(b) Approximate Number of Security Holders

At December 31, 1998, there were 3,874 record holders of Units in the
Partnership.

Pursuant to Article VI of the Restated Agreement, as amended, the amount of
cash distribution to be declared and paid to the Partners is determined on a
quarterly basis. Each quarter's distribution may vary in amount and is made 95%
to the Recognized Owners and 5% to the General Partner.

There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft. The management
and remarketing of aircraft can involve, among other things, significant costs
and lengthy remarketing initiatives.

Although the Partnership's lessees are required to maintain the aircraft
during the period of lease contract, repair, maintenance, and/or refurbishment
costs at lease expiration can be substantial. For example, an aircraft that is
returned to the Partnership meeting minimum air worthiness standards, such as
flight hours or engine cycles, nonetheless may require heavy maintenance in
order to bring its engines, airframe and other hardware up to standards that
will permit its prospective use in commercial air transportation. Individually,
these repairs can cost in excess of $1 million and, collectively, they could
require the disbursement of several million dollars, depending upon the extent
of refurbishment. In addition, the Partnership's equipment portfolio includes an
interest in three Stage 2 aircraft having scheduled lease expiration dates of
December 31, 1999. These aircraft are prohibited from operating in the United
States after December 31, 1999 unless they are retro-fitted with hush-kits to
meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. The cost to hush-kit an aircraft, such as the Partnership's
Boeing 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the remarketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized from
refurbishing the aircraft and re-leasing them to another user. Collectively, the
aggregation of the Partnership's potential liquidity needs related to aircraft
and other working capital requirements could be significant. Accordingly, the
General Partner has maintained significant cash reserves within the Partnership
in order to minimize the risk of a liquidity shortage.

Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 7 to the accompanying financial statements. A preliminary
settlement agreement will allow the Partnership to invest in new equipment or
other activities, subject to certain limitations, effective March 22, 1999. To
the extent that the Partnership continues to own aircraft investments that could
require capital reserves, the General Partner does not anticipate that the
Partnership will invest in new assets, regardless of its authority to do so.
Until the Class Action Lawsuit is adjudicated, the General Partner does not
expect to declare any distributions to the Partners. In addition, the proposed
settlement, if effected, will materially change the

6
<PAGE>
future organizational structure and business interests of the Partnership, as
well as its cash distribution policies. See Note 7 to the accompanying financial
statements.

Cash distributions consist of Distributable Cash from Operations and
Distributable Cash from Sales or Refinancing.

"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.

"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i)(a) for a period of two years from Final Closing,
Cash From Sales or Refinancings, which the General Partner reinvests in
additional aircraft, and (b) amounts realized from any loss or destruction of
any aircraft which the General Partner reinvests in replacement aircraft, and
(ii) any accrued and unpaid Equipment Management Fees and, after Payout, any
accrued and unpaid Subordinated Remarketing Fees.

"Cash From Sales or Refinancings" means cash received by the Partnership
from Sale or Refinancing transactions, as (i) reduced by (a) all debts and
liabilities of the Partnership required to be paid as a result of Sale or
Refinancing transactions, whether or not then due and payable (including any
liabilities on aircraft which are not assumed by the buyer and any remarketing
fees required to be paid to persons not affiliated with the General Partner, but
not including any Subordinated Remarketing Fees required to be accrued) and (b)
any reserves for working capital and contingent liabilities funded from such
cash to the extent deemed reasonable by the General Partner and (ii) increased
by any portion of such reserves deemed by the General Partner not to be required
for Partnership operations. In the event the Partnership accepts a note in
connection with any Sale or Refinancing transaction, all payments subsequently
received in cash by the Partnership with respect to such note shall be included
in Cash From Sales or Refinancings, regardless of the treatment of such payments
by the Partnership for tax or accounting purposes. If the Partnership receives
purchase money obligations in payment for aircraft sold, which are secured by
liens on such aircraft, the amount of such obligations shall not be included in
Cash From Sales or Refinancings until the obligations are fully satisfied.

"Payout" is defined as the first time when the aggregate amount of all
distributions to the Recognized Owners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Recognized Owners' original capital contributions plus a cumulative annual
return of 10% (compounded quarterly and calculated beginning with the last day
of the month of the Partnership's Closing Date) on their aggregate unreturned
capital contributions. For purposes of this definition, capital contributions
shall be deemed to have been returned only to the extent that distributions of
cash to the Recognized Owners exceed the amount required to satisfy the
cumulative annual return of 10% (compounded quarterly) on the Recognized Owners'
aggregate unreturned capital contributions, such calculation to be based on the
aggregate unreturned capital contributions outstanding on the first day of each
fiscal quarter.

ITEM 6. SELECTED FINANCIAL DATA.

Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 1998 Annual Report.

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

Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1998 Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Incorporated herein by reference to the financial statements and
supplementary data included in the 1998 Annual Report.

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

None.

8
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP.

(a-b) Identification of Directors and Executive Officers

The Partnership has no Directors or Officers. As indicated in Item 1 of this
report, AFG Aircraft Management Corporation is the sole General Partner of the
Partnership. Under the Restated Agreement, as amended, the General Partner is
solely responsible for the operation of the Partnership's properties. The
Recognized Owners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 1999 are as follows:

DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (SEE ITEM 13)

<TABLE>
<CAPTION>
NAME TITLE AGE TERM
- ------------------------------------ --------------------------------------------- --- ---------------------
<S> <C> <C> <C>

Geoffrey A. MacDonald Chairman and a member of the Executive Until a successor is
Committee of EFG and President and a Director duly elected and
of the qualified
General Partner 50

Gary D. Engle President and Chief Executive Officer and
member of the Executive Committee of EFG and
a Director of the General Partner 50

Gary M. Romano Executive Vice President and Chief Operating
Officer of EFG and Clerk of the General
Partner 39

James A. Coyne Executive Vice President of EFG 38

Michael J. Butterfield Senior Vice President, Finance and Treasurer
of EFG and Treasurer of the General Partner 39

Sandra L. Simonsen Senior Vice President, Information Systems of
EFG 48

Gail D. Ofgant Senior Vice President, Lease Operations of
EFG 33
</TABLE>

None.

(d) Family Relationship

No family relationship exists among any of the foregoing Partners, Directors
or Executive Officers.

(e) Business Experience

Mr. MacDonald, age 50, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the General Partner.
Mr. MacDonald was also a co-founder, Director, and Senior Vice President of
EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of
American Finance Group Securities Corp. and a limited partner in Atlantic
Acquisition

9
<PAGE>
Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC").
Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive
and management positions in the leasing and pharmaceutical industries. Mr.
MacDonald holds a M.B.A. from Boston College and a B.A. degree from the
University of Massachusetts (Amherst).

Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole
shareholder and Director of its general partner, Equis Corporation and a member
of the Executive Committee of EFG and President of AFG Realty Corporation. Mr.
Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG
and its subsidiaries in December 1994. Mr. Engle is Vice President and a
Director of certain of EFG's subsidiaries and affiliates, a limited partner in
AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is
also Chairman, Chief Executive Officer, and a member of the Board of Directors
of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal
and co-founder of Cobb Partners Development, Inc., a real estate and mortgage
banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and
Chief Financial Officer of Arvida Disney Company, a large-scale community
development company owned by Walt Disney Company. Prior to 1980, Mr. Engle
served in various management consulting and institutional brokerage capacities.
Mr. Engle has a MBA from Harvard University and a BS degree from the University
of Massachusetts (Amherst).

Mr. Romano, age 39, became Executive Vice President and Chief Operating
Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or
Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in
November 1989, became Vice President and Controller in April 1993 and Chief
Financial Officer in April 1995. Mr. Romano assumed his current position in
April 1996. Mr. Romano is also Vice President and Chief Financial Officer of
Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a
privately held real estate development and mortgage origination company that he
joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney
(now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is
a Certified Public Accountant and holds a B.S. degree from Boston College.

Mr. Coyne, age 38, is Executive Vice President, Capital Markets of EFG and
President, Chief Operating Officer and a member of the Board of Directors of
Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG
in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice
President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993
through November 1994, he was employed by the Raymond Company, a private
investment firm, where he was responsible for financing corporate and real
estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a
real estate investment company and an equipment leasing company. Prior to 1985,
he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He
has a BS in Business Administration from John Carroll University, a Masters
Degree in Accounting from Case Western Reserve University and is a Certified
Public Accountant.

Mr. Butterfield, age 39, is Senior Vice President, Finance and Treasurer of
EFG and certain of its affiliates and is Treasurer of the General Partner and
Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance
and Treasurer of EFG and certain of its affiliates in April 1996 and was
promoted to Senior Vice President, Finance and Treasurer of EFG and certain of
its affiliates in July 1998. Prior to joining EFG, Mr. Butterfield was an Audit
Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was
employed in public accounting and industry positions in New Zealand and London
(UK) prior to coming to the United States in 1987. Mr. Butterfield attained his
Associate Chartered Accountant (A.C.A.) professional qualification in New
Zealand and has completed his CPA requirements in the United States. He holds a
Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand.

Ms. Simonsen, age 48, joined EFG in February 1990 and was promoted to Senior
Vice President, Information Systems of EFG in April 1996. Prior to joining EFG,
Ms. Simonsen was Vice President, Information Systems with Investors Mortgage
Insurance Company, which she joined in 1973.

10
<PAGE>
Ms. Simonsen provided systems consulting for a subsidiary of American
International Group and authored a software program published by IBM. Ms.
Simonsen holds a BA degree from Wilson College.

Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and
certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to
Manager Lease Operations in April 1994, and became Vice President of Lease
Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice
President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by
Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance
from Providence College.

(f) Involvement in Certain Legal Proceedings

None.

(g) Promoters and Control Persons

See Item 10 (a-b) above.

ITEM 11. EXECUTIVE COMPENSATION.

(a) Cash Compensation

Currently, the Partnership has no employees. However, under the terms of the
Restated Agreement, as amended, the Partnership is obligated to pay all costs of
personnel employed full or part-time by the Partnership, including officers or
employees of the General Partner or its Affiliates. There is no plan at the
present time to make any partners or employees of the General Partner or its
Affiliates employees of the Partnership. The Partnership has not paid and does
not propose to pay any options, warrants or rights to the officers or employees
of the General Partner or its Affiliates.

(b) Compensation Pursuant to Plans

None.

Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to section 10.4(c) of the Restated Agreement, as amended, the
Partnership incurs a monthly charge for personnel costs of the Manager for
persons engaged in providing administrative services to the Partnership. A
description of the remuneration paid by the Partnership to the General Partner
and its Affiliates for such services is included in Item 13, herein and in Note
4 to the financial statements included in Item 14, herein.

(d) Compensation of Directors

None.

(e) Termination of Employment and Change of Control Arrangement

There exists no remuneration plan or arrangement with the General Partner or
its Affiliates which results or may result from their resignation, retirement or
any other termination.

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

By virtue of its organization as a limited partnership, the Partnership has
outstanding no securities possessing traditional voting rights. However, as
provided for in Section 11.2(a) of the Restated Agreement, as amended (subject
to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners has
voting rights with respect to:

1. Amendment of the Restated Agreement;

2. Termination of the Partnership;

11
<PAGE>
3. Removal of the General Partner; and

4. Approval or disapproval of the sale of all, or substantially all, of the
assets of the Partnership (except in the orderly liquidation of the
Partnership upon its termination and dissolution).

As of March 1, 1999, the following person or group owns beneficially more
than 5% of the Partnership's 3,040,000 outstanding Units:

<TABLE>
<CAPTION>
NAME AND AMOUNT PERCENT
TITLE ADDRESS OF OF BENEFICIAL OF
OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------- --------------------------------------------- --------------- -----------
<C> <C> <S> <C>

Units Representing Old North Capital Limited Partnership
Limited Partnership 88 Broad Street
Interests Boston, MA 02110 205,040 Units 6.74%
</TABLE>

Messrs. Engle, MacDonald and Coyne have ownership interests in ONC. The
general Partner of ONC is controlled by Gary D. Engle.

The ownership and organization of EFG is described in Item 1 of this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.

(a) Transactions with Management and Others

All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1998, 1997 and 1996, which were accrued or paid by the Partnership to EFG or its
Affiliates, are as follows:

Equipment management fees.................................................. $ 180,232 $ 192,913 $ 217,311

Administrative charges..................................................... 53,004 49,788 28,376

Reimbursable operating expenses due to third parties....................... 476,803 304,188 1,069,846
---------- ---------- ------------

Total................................................................ $ 710,039 $ 546,889 $ 1,315,533
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 1.6% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Partnership. Both acquisition and management fees are
subject to certain limitations defined in the Management Agreement.

Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG at actual cost.

All rents and proceeds from the sale of aircraft are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest bearing account
prior to remittance to the Partnership.

12
<PAGE>
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 2
to the financial statements included in Item 14, herein.

In 1990, EFG assigned its equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority-owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.

Certain affiliates of the General Partner own Units in the Partnership as
follows:

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- ------------------------------------------------------------- ------------ -------------------

<S> <C> <C>
Old North Capital Limited Partnership........................ 205,040 6.74%
</TABLE>

Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.

(b) Certain Business Relationships

None.

(d) Transactions with Promoters

See Item 13(a) above.

13
<PAGE>
PART IV

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

<TABLE>
<S> <C> <C> <C>
(a) Documents filed as part of this report:

(1) Financial Statements:

Report of Independent Auditors................................................. *

Statement of Financial Position at December 31, 1998 and 1997.................. *

Statement of Operations for the years ended December 31, 1998, 1997 and 1996... *

Statement of Changes in Partners' Capital for the years ended December 31,
1998, 1997 and 1996............................................................ *

Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... *

Notes to the Financial Statements.............................................. *

(2) Financial Statement Schedules:

None required.

(3) Exhibits:

Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601
of Regulation S-K, are not applicable.
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>

4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the
Prospectus, which is included in Registration Statement on Form S-1 (No. 33-25334).

13 The 1998 Annual Report to security holders, a copy of which is furnished for the information of the
Securities and Exchange Commission. Such Report, except for those portions thereof which are
incorporated herein by reference, is not deemed "filed" with the Commission.

23 Consent of Independent Auditors.

99 (a) Lease agreement with Northwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the period July 26, 1989 (commencement of operations) to December 31, 1989 as Exhibit 28 (b)
and is incorporated herein by reference.

99 (b) Lease agreement with Cathay Pacific Airways Limited was filed in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992 as Exhibit 28 (d) and is incorporated herein by
reference.

99 (c) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 as Exhibit 99 (d) and is incorporated herein by reference.

99 (d) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 as Exhibit 99 (d) and is incorporated herein by reference.
</TABLE>

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

* Incorporated herein by reference to the appropriate portion of the 1998
Annual Report to security holders for the year ended December 31, 1998 (see
Part II).

14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>
99 (e) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 as Exhibit 99 (d) and is incorporated herein by reference.

99 (f) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996 as Exhibit 99 (e) and is incorporated herein by reference.

99 (g) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996 as Exhibit 99 (f) and is incorporated herein by reference.

99 (h) Lease agreement with Aer Lease Limited was filed in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 as Exhibit 99 (i) and is incorporated herein by reference.
</TABLE>

(b) Reports on Form 8-K

None.

15
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.

<TABLE>
<S> <C> <C>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

By: AFG Aircraft Management Corporation,
-----------------------------------------
a Massachusetts corporation and the
General Partner of the Registrant.
</TABLE>

<TABLE>
<S> <C> <C> <C>
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE
---------------------------------------- ----------------------------------------
Geoffrey A. MacDonald Gary D. Engle
CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND
COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF
DIRECTOR OF THE GENERAL PARTNER EFG AND A DIRECTOR OF THE GENERAL PARTNER
(PRINCIPAL EXECUTIVE OFFICER)

Date: March 31, 1999 Date: March 31, 1999

By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD
---------------------------------------- ----------------------------------------
Gary M. Romano Michael J. Butterfield
EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND
OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE
GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING
OFFICER) OFFICER)

Date: March 31, 1999 Date: March 31, 1999
</TABLE>

<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

ANNUAL REPORT TO THE PARTNERS, DECEMBER 31, 1998
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SELECTED FINANCIAL DATA................................................................................... 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 3-8

FINANCIAL STATEMENTS:

Report of Independent Auditors............................................................................ 9

Statement of Financial Position at December 31, 1998 and 1997............................................. 10

Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 11

Statement of Changes in Partners Capital for the years ended December 31, 1998, 1997 and 1996............. 12

Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 13

Notes to the Financial Statements......................................................................... 14-22

ADDITIONAL FINANCIAL INFORMATION:

Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 23

Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 24

Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 10.4 of the
Amended and Restated Agreement and Certificate of Limited Partnership................................... 25
</TABLE>

1
<PAGE>
SELECTED FINANCIAL DATA

The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.

For each of the five years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
SUMMARY OF
OPERATIONS 1998 1997 1996 1995 1994
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease revenue........................ $ 3,604,643 $ 3,858,270 $ 4,346,218 $ 4,588,609 $ 5,166,392
Net income (loss).................... $ 431,323 $ 49,656 $ 4,360,899 $ (2,283,720) $ (1,463,495)
Per Unit:
Net income (loss).................. $ 0.13 $ 0.02 $ 1.36 $ (0.71) $ (0.46)
Cash distributions declared........ $ -- $ -- $ 1.56 $ 1.00 $ 1.25

FINANCIAL POSITION
- -------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets......................... $ 17,906,024 $ 19,864,413 $ 23,700,585 $ 16,888,606 $ 17,961,111
Total long-term obligations.......... $ 6,279,100 $ 8,864,307 $ 11,321,769 $ 4,742,968 $ --
Partners' capital.................... $ 11,075,621 $ 10,644,298 $ 10,594,642 $ 11,233,743 $ 16,717,463
</TABLE>

2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

Certain statements in this annual report of AIRFUND International Limited
Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, the collection of all rents due under the Partnership's
lease agreements and remarketing of the Partnership's equipment.

YEAR 2000 ISSUE

The Year 2000 Issue generally refers to the capacity of computer programming
logic to correctly identify the calendar year. Many companies utilize computer
programs or hardware with date sensitive software or embedded chips that could
interpret dates ending in "00" as the year 1900 rather than the year 2000. In
certain cases, such errors could result in system failures or miscalculations
that disrupt the operations of the affected businesses. The Partnership uses
information systems provided by EFG and has no information systems of its own.
EFG has adopted a plan to address the Year 2000 Issue that consists of four
phases: assessment, remediation, testing, and implementation and has elected to
utilize principally internal resources to perform all phases. EFG completed
substantially all of its Year 2000 project by December 31, 1998 at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining
items are expected to be minor and be completed by March 31, 1999. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.

EFG's primary information software was coded by IBM at the point of original
design to use a four-digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.

Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues could result
in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.

EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with

3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

respect to its computer systems or result in a system failure or disruption of
its or the Partnership's business operations. However, EFG has no means of
ensuring that all customers, vendors and third-party servicers will conform
ultimately to Year 2000 standards. The effect of this risk to the Partnership is
not determinable.

OVERVIEW

As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. Upon its inception in 1989, the Partnership
purchased three used commercial jet aircraft and a proportionate interest in a
fourth aircraft, which were leased by major carriers, engaged in passenger
transportation. Initially, each aircraft generated rental revenues pursuant to
primary-term lease agreements. In 1991, one of the Partnership's original
aircraft was sold to a third party and a portion of the sale proceeds was
reinvested in a proportionate interest in another aircraft. Subsequently, all of
the aircraft in the Partnership's original portfolio have been re-leased,
renewed, exchanged for other aircraft or sold (see below). At December 31, 1998,
the Partnership owned a proportionate interest in five aircraft. All of the
Partnership's aircraft are currently on lease. Upon expiration of the lease
agreements, each aircraft will be re-leased or sold depending on prevailing
market conditions and the assessment of such conditions by EFG to obtain the
most advantageous economic benefit. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. See Note 7 to the accompanying financial statements. Pursuant to the
Restated Agreement, as amended, the Partnership is scheduled to be dissolved by
December 31, 2004.

RESULTS OF OPERATIONS

For year ended December 31, 1998, the Partnership recognized lease revenue
of $3,604,643 compared to $3,858,270 and $4,346,218 for the years ended December
31, 1997 and 1996, respectively. The decrease in lease revenue from 1997 to 1998
reflects the sale, at the expiration of the aircraft's lease term on April 1998,
of the Partnership's interest in a Lockheed L-1011-50 aircraft to the lessee,
Air Lease Limited (see discussion below). The Partnership recognized aggregate
lease revenue related to the Lockheed L-1011-50 aircraft of $236,004, $489,609
and $462,676 in 1998, 1997 and 1996, respectively. The decrease in lease revenue
from 1996 to 1997 resulted from the expiration of the leases related to the
Lockheed L-1011-50 aircraft during 1996 and the sale of two Boeing 727-251
Advanced aircraft also in 1996. These decreases in 1997 were partially offset by
the re-lease of the Lockheed L-1011-50 aircraft effective April 1997 and the
Partnership's aircraft exchange (discussed below), which was concluded in the
first quarter of 1996. As a result of the aircraft exchange, the Partnership
replaced its ownership interest in a Boeing 747-SP aircraft (the "United
Aircraft") having aggregate quarterly lease revenues of $495,360, with interests
in five other aircraft; three Boeing 737 aircraft leased by Southwest Airlines,
Inc. (the "Southwest Aircraft"), and two McDonnell Douglas MD-82 aircraft leased
by Finnair OY (the "Finnair Aircraft") having aggregate quarterly lease revenues
of $842,160. Due to the conclusion of this transaction late in the first quarter
of 1996, 1997 was the first year the Partnership recognized a full year's
revenue related to its interests in all five of these replacement aircraft.

On April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its interest in a Lockheed L-1011-50 aircraft to Aer Lease
Limited ("Aer Lease"). The Partnership realized net proceeds of $846,300 from
the sale of this aircraft. The Partnership's interest in the aircraft had a net
book value of $658,282 at the time of sale, resulting in the recognition of a
net gain on sale, for financial statement purposes, of $188,018 during the year
ending December 31, 1998.

4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Previously, the former lessee, Cathay Pacific Airways, Ltd returned the
Lockheed L-1011-50 aircraft to the Partnership on June 30, 1996, at the
expiration of the last of several lease extensions. Upon return of the aircraft,
the aircraft underwent heavy maintenance which cost the Partnership
approximately $570,000, the majority of which was expensed during 1996. The
Partnership subsequently entered into a new 1-year lease agreement with Aer
Lease at a base rent to the Partnership of $60,450 per month, beginning April
27, 1997. The demand for Lockheed L-1011 aircraft was weak, limited principally
to air cargo carriers and operators of passenger charters. Several major
airlines reduced their commitment to the Lockheed L-1011 aircraft. Such
circumstances inhibited the remarketing of the Partnership's Lockheed L-1011-50
aircraft and required the Partnership to refurbish the aircraft to meet the
needs of Aer Lease.

During July 1996, the Partnership sold a Boeing 727-251 Advanced jet
aircraft with an original cost and net book value of $9,520,359 and $426,560,
respectively, to the existing lessee Northwest Airlines, Inc. ("Northwest"). In
connection with this sale, the Partnership realized sale proceeds of $3,210,000
which resulted in a net gain, for financial statement purposes, of $2,783,440.
The Partnership also realized lease termination rents of $180,000 relating to
this sale as the aircraft was sold prior to the expiration of the related lease
term. During November 1996, the Partnership sold a second Boeing 727-251
Advanced jet aircraft with an original cost and net book value of $9,520,359 and
$261,697, respectively, to the existing lessee. In connection with this sale,
the Partnership realized sale proceeds of $3,454,313 which resulted in a net
gain, for financial statement purposes, of $3,192,616. In 1996, the Partnership
recognized aggregate lease revenue of $1,200,000 related to these two aircraft,
prior to their respective sales.

The Partnership holds a proportionate ownership interest in the Southwest
and Finnair Aircraft, discussed above. The remaining interests are owned by
other affiliated partnerships sponsored by EFG. All partnerships individually
report, in proportion to their respective ownership interests, their respective
shares of assets, liabilities, revenues and expenses associated with the
aircraft (see Note 3 to the financial statements).

Interest income for the year ended December 31, 1998 was $165,479 compared
to $130,552 and $261,557 for the years ended December 31, 1997 and 1996,
respectively. Interest income is typically generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments.
Interest income in 1996 included $130,268 earned on cash held in a
special-purpose escrow account in connection with the like-kind exchange
transactions and also reflected a temporary increase in the Partnership's cash
available for investment resulting from the receipt of sale proceeds associated
with the Northwest aircraft.

Depreciation expense was $2,152,360, $2,501,988 and $3,065,516 for the years
ended December 31, 1998, 1997 and 1996, respectively. The Partnership also
recorded a write-down of aircraft carrying values, representing impairments,
during the year ended December 31, 1996. The resulting charge, $967,200 ($0.30
per limited partnership unit) was based on a comparison of estimated net
realizable values and corresponding carrying values for the Partnership's
aircraft.

Net realizable values were estimated based on (i) third-party appraisals of
the Partnership's aircraft and (ii) EFG's assessment of prevailing market
conditions for similar aircraft. In recent years, market values for certain
models of used commercial jet aircraft have deteriorated. Consistent price
competition and other pressures within the airline industry have inhibited
sustained profitability for many carriers. Most major airlines have had to
re-evaluate their aircraft fleets and operating strategies. Aircraft condition,
age, passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft. The
write-down in 1996 resulted from the deterioration in the market value of the
Partnership's interest in the Lockheed L-1011-50 aircraft.

5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The total economic value realized upon final disposition of each aircraft is
comprised of all primary lease term revenues generated from that aircraft,
together with its residual value. The latter consists of cash proceeds realized
upon the aircraft's sale in addition to all other cash receipts obtained from
renting the aircraft on a re-lease, renewal or month-to-month basis.
Consequently, the amount of gain or loss reported in the financial statements is
not necessarily indicative of the total residual value the Partnership achieved
from leasing the aircraft.

During 1998, 1997 and 1996, the Partnership incurred interest expense of
$664,418, $890,289 and $874,683 respectively. Interest expense resulted from
financing obtained from third-party lenders in connection with the Southwest
Aircraft and the Finnair Aircraft, described above. The financing of the
Southwest and Finnair Aircraft occurred in December 1995 and March 1996,
respectively. Interest expense in future years is expected to decline as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt.

Management fees were 5% of lease revenue in 1998, 1997, and 1996 and will
not change as a percentage of lease revenue in future periods.

Operating expenses were $529,807, $353,976 and $1,098,222 for the years
ended December 31, 1998, 1997 and 1996, respectively. During the year ended
December 31, 1998, the Partnership incurred or accrued $336,500 for certain
legal and administrative expenses related to the Class Action Lawsuit described
in Note 7 to the accompanying financial statements. In 1996, operating expenses
included heavy maintenance costs incurred and accrued in connection with the
Partnership's interest in the Lockhead L-1011-50 aircraft and legal expenses and
broker fees incurred in connection with the like-kind exchange transactions (see
discussion below). Other operating expenses consist principally of
administrative charges, professional service costs, such as audit and other
legal fees, as well as insurance, printing, distribution and other remarketing
expenses.

LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS

The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities generally
derive from aircraft rental transactions. Accordingly, the Partnership's
principal source of cash from operations is generally provided by the collection
of periodic rents. These cash inflows are used to satisfy debt service
obligations associated with leveraged leases, and to pay management fees and
operating costs. Operating activities generated net cash inflows of $2,608,602,
$2,001,652 and $3,806,235 in 1998, 1997 and 1996, respectively. The sales of the
Partnership's interest in the Lockheed L-1011-50 and the two Boeing 727-251
Advanced aircraft have caused an overall decline in the Partnership's lease
revenue and corresponding sources of operating cash from 1996 to 1998. This
decline has been partially offset by an increase in rents generated in
connection with the Southwest Aircraft and the Finnair Aircraft subsequent to
1996. Overall, expenses associated with rental activities, such as management
fees, and net cash flow from operating activities will decline as the
Partnership remarkets its aircraft. Ultimately, the Partnership will dispose of
all aircraft under lease. This will occur principally through sale transactions
whereby each aircraft will be sold to the existing lessee or to a third party.
Generally, this will occur upon expiration of each aircraft's primary or
renewal/re-lease term.

6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During year ended December 31, 1998, the
Partnership realized $846,300 in proceeds from the sale of its interest in the
Lockheed L-1011-50 aircraft. In 1996, the Partnership realized $6,664,313 in
proceeds from the sale of the two Boeing 727-251 Advanced aircraft. There were
no aircraft sales in 1997. Future inflows of cash from aircraft disposals will
vary in timing and amount and will be influenced by many factors including, but
not limited to, the frequency and timing of lease expirations, the aircraft's
condition and age, and future market conditions. In 1996, the Partnership
completed the replacement of the United Aircraft with a 49.17% ownership
interest in the Finnair Aircraft at a total cost to the Partnership of
$13,762,438. To acquire the ownership interest in the Finnair Aircraft, the
Partnership paid $4,601,325 in cash and obtained financing of $9,161,113 from a
third-party lender. The Partnership utilized $4,360,599 (classified as
Contractual Right Equipment at December 31,1995) which had been deposited into a
special purpose escrow account through a third party exchange agent pending the
completion of the aircraft exchange. The balance of $240,726 was expended from
the Partnership's cash reserves. The remaining ownership interest of 50.83% in
the Finnair Aircraft is held by affiliated equipment leasing programs sponsored
by EFG. The like-kind exchange, involving the United, Southwest and Finnair
Aircraft, was undertaken, in part, to mitigate the Partnership's economic risk
resulting from the United Aircraft being returned to the Partnership upon its
lease expiration in April 1996 and remaining off-lease for an extended period.
The exchange enabled the Partnership to replace a specialized aircraft with
other aircraft, which are used more widely in the industry, and also to
significantly extend its rental stream with two creditworthy lessees. There were
no aircraft acquisitions in 1998 and 1997.

At December 31, 1998, the Partnership was due aggregate future minimum lease
payments of $4,782,888 from contractual lease agreements (see Note 2 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $6,279,100 (see Note 5 to the financial statements).
At the expiration of the individual primary lease terms underlying the
Partnership's future minimum lease payments, the Partnership will sell the
aircraft or enter re-lease or renewal agreements when considered advantageous by
the General Partner and EFG. Such future remarketing activities will result in
the realization of additional cash inflows in the form of sale proceeds or rents
from renewals and re-leases, the timing and extent of which cannot be predicted
with certainty. This is because the timing and extent of remarketing events
often is dependent upon the needs and interests of the existing lessees. Some
lessees may choose to renew their lease contracts, while others may elect to
return the aircraft. In the latter instances, the aircraft could be re-leased to
another lessee or sold to a third party. Accordingly, as the terms of the
currently existing contractual lease agreements expire, the cash flows of the
Partnership will become less predictable. In addition, the Partnership will need
cash outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses.

As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership also has balloon payment
obligations at the expiration of the primary lease term related to the Finnair
Aircraft of $4,671,150. All of the Partnership's indebtedness matures in the
year ended December 31, 1999.

7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. Liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base consists of fewer revenue-producing assets that are available to
cover prospective cash disbursements. Insufficient liquidity could inhibit the
Partnership's ability to sustain its operations or maximize the realization of
proceeds from remarketing its remaining aircraft. The management and remarketing
of aircraft can involve, among other things, significant costs and lengthy
remarketing initiatives.

Although the Partnership's lessees are required to maintain the aircraft
during the period of lease contract, repair, maintenance, and/or refurbishment
costs at lease expiration can be substantial. For example, an aircraft that is
returned to the Partnership meeting minimum air worthiness standards, such as
flight hours or engine cycles, nonetheless may require heavy maintenance in
order to bring its engines, airframe and other hardware up to standards that
will permit its prospective use in commercial air transportation. Individually,
these repairs can cost in excess of $1 million and, collectively; they could
require the disbursement of several million dollars, depending upon the extent
of refurbishment. In addition, the Partnership's equipment portfolio includes an
interest in three Stage 2 aircraft having scheduled lease expiration dates of
December 31, 1999. These aircraft are prohibited from operating in the United
States after December 31, 1999 unless they are retro-fitted with hush-kits to
meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. The cost to hush-kit an aircraft, such as the Partnership's
Boeing 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the re-marketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized from
refurbishing the aircraft and re-leasing them to another user. Collectively, the
aggregation of the Partnership's potential liquidity needs related to aircraft
and other working capital requirements could be significant. Accordingly, the
General Partner has maintained significant cash reserves within the Partnership
in order to minimize the risk of a liquidity shortage.

Cash distributions to the General Partner and Recognized Owners are declared
and generally paid within fifteen days following the end of each calendar
quarter. The payment of such distributions is presented as a component of
financing activities. Cash distributions paid to the Recognized Owners consist
of both a return of and a return on capital. To the extent that cash
distributions consist of Cash From Sales or Refinancings, substantially all of
such cash distributions should be viewed as a return of capital. Cash
distributions do not represent and are not indicative of yield on investment.
Actual yield on investment cannot be determined with any certainty until
conclusion of the Partnership and will be dependent upon the collection of all
future contracted rents, the generation of renewal and/or re-lease rents, and
the residual value realized for each aircraft at its disposal date. No
distributions were declared in either 1997 or 1998.

The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in

8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

comparison to financial reporting purposes (generally referred to as permanent
or timing differences; see Note 6 to the financial statements). For instance,
selling commissions and organization and offering costs pertaining to
syndication of the Partnership's limited partnership units are not deductible
for federal income tax purposes, but are recorded as a reduction of partners'
capital for financial reporting purposes. Therefore, such differences are
permanent differences between capital accounts for financial reporting and
federal income tax purposes. Other differences between the bases of capital
accounts for federal income tax and financial reporting purposes occur due to
timing differences. Such items consist of the cumulative difference between
income or loss for tax purposes and financial statement income or loss and the
difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, if any. The principal component of the cumulative
difference between financial statement income or loss and tax income or loss
results from different depreciation policies for book and tax purposes.

For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 1998. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Amended and Restated
Agreement and Certificate of Limited Partnership, requires that upon the
dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance which may
exist in the General Partner's tax capital account. At December 31, 1998, the
General Partner had a positive tax capital account balance.

The future liquidity of the Partnership will be influenced by, among other
factors, prospective market conditions, aircraft refurbishment requirements
(discussed above), the ability of EFG to manage and remarket the aircraft, and
many other events and circumstances, that could enhance or detract from
individual aircraft yields and the collective performance of the Partnership's
aircraft portfolio. However, the outcome of the Class Action Lawsuit described
in Note 7 to the accompanying financial statements will be the principal factor
in determining the future of the Partnership's operations.

9
<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Partners of AIRFUND International Limited Partnership:

We have audited the accompanying statements of financial position of AIRFUND
International Limited Partnership, as of December 31, 1998 and 1997, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our 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
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIRFUND International
Limited Partnership at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

ERNST & YOUNG LLP

Boston, Massachusetts
March 10, 1999

10
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF FINANCIAL POSITION

DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS

Cash and cash equivalents.......................................................... $ 3,540,736 $ 2,671,041
Rents receivable................................................................... 104,184 --
Accounts receivable--affiliate..................................................... -- 121,626
Equipment at cost, net of accumulated depreciation of $5,857,207 and $10,923,789 at
December 31, 1998 and 1997, respectively......................................... 14,261,104 17,071,746
------------- -------------
Total assets................................................................... $ 17,906,024 $ 19,864,413
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL

Notes payable...................................................................... $ 6,279,100 $ 8,864,307
Accrued interest................................................................... 83,223 98,052
Accrued liabilities................................................................ 288,500 8,250
Accrued liabilities--affiliate..................................................... 20,698 36,219
Deferred rental income............................................................. 158,882 213,287
------------- -------------
Total liabilities.............................................................. 6,830,403 9,220,115
------------- -------------
Partners' capital (deficit):
General Partner.................................................................. (1,145,215) (1,166,781)
Limited Partnership Interests (3,040,000 Units; initial purchase price of $25
each).......................................................................... 12,220,836 11,811,079
------------- -------------
Total partners' capital........................................................ 11,075,621 10,644,298
------------- -------------
Total liabilities and partners' capital........................................ $ 17,906,024 $ 19,864,413
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of
these financial statements.

11
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF OPERATIONS

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

<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Income:
Lease revenue....................................................... $ 3,604,643 $ 3,858,270 $ 4,346,218
Interest income..................................................... 165,479 130,552 261,557
Gain on sale of equipment........................................... 188,018 -- 5,976,056
------------ ------------ -------------
Total income...................................................... 3,958,140 3,988,822 10,583,831
------------ ------------ -------------
Expenses:
Depreciation........................................................ 2,152,360 2,501,988 3,065,516
Write-down of equipment............................................. -- -- 967,200
Interest expense.................................................... 664,418 890,289 874,683
Equipment management fees--affiliate................................ 180,232 192,913 217,311
Operating expenses--affiliate....................................... 529,807 353,976 1,098,222
------------ ------------ -------------
Total expenses.................................................... 3,526,817 3,939,166 6,222,932
------------ ------------ -------------
Net income............................................................ $ 431,323 $ 49,656 $ 4,360,899
------------ ------------ -------------
------------ ------------ -------------
Net income per limited partnership unit............................... $ 0.13 $ 0.02 $ 1.36
------------ ------------ -------------
------------ ------------ -------------
Cash distributions declared per limited partnership unit.............. $ -- $ -- $ 1.56
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

The accompanying notes are an integral part of
these financial statements.

12
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL

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

<TABLE>
<CAPTION>
GENERAL RECOGNIZED OWNERS
PARTNER -------------------------
AMOUNT UNITS AMOUNT TOTAL
------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........................... $ (1,137,309) 3,040,000 $ 12,371,052 $ 11,233,743
Net income--1996..................................... 218,045 -- 4,142,854 4,360,899
Cash distributions declared.......................... (250,000) -- (4,750,000) (5,000,000)
------------- ---------- ------------- -------------
Balance at December 31, 1996........................... (1,169,264) 3,040,000 11,763,906 10,594,642
Net income--1997..................................... 2,483 -- 47,173 49,656
------------- ---------- ------------- -------------
Balance at December 31, 1997........................... (1,166,781) 3,040,000 11,811,079 10,644,298
Net income--1998..................................... 21,566 -- 409,757 431,323
------------- ---------- ------------- -------------
Balance at December 31, 1998........................... $ (1,145,215) 3,040,000 $ 12,220,836 $ 11,075,621
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of
these financial statements.

13
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS

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

<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income........................................................... $ 431,323 $ 49,656 $ 4,360,899
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation................................................... 2,152,360 2,501,988 3,065,516
Write-down of equipment........................................ -- -- 967,200
Gain on sale of equipment...................................... (188,018) -- (5,976,056)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable................................................. (104,184) -- 562,594
Accounts receivable--affiliate................................... 121,626 (121,626) 353,803
Increase (decrease) in:
Accrued interest................................................. (14,829) (20,888) 55,372
Accrued liabilities.............................................. 280,250 (434,150) 401,873
Accrued liabilities--affiliate................................... (15,521) (27,711) (7,731)
Deferred rental income........................................... (54,405) 54,383 22,765
------------- ------------- -------------
Net cash from operating activities............................. 2,608,602 2,001,652 3,806,235
------------- ------------- -------------
Cash flows from (used in) investing activities:
Purchase of equipment.............................................. -- -- (240,726)
Proceeds from equipment sales...................................... 846,300 -- 6,664,313
------------- ------------- -------------
Net cash from investing activities............................. 846,300 -- 6,423,587
------------- ------------- -------------
Cash flows used in financing activities:
Principal payments--notes payable.................................. (2,585,207) (2,457,462) (2,582,312)
Distributions paid................................................. -- (1,000,000) (4,600,000)
------------- ------------- -------------
Net cash used in financing activities.......................... (2,585,207) (3,457,462) (7,182,312)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................. 869,695 (1,455,810) 3,047,510
Cash and cash equivalents at beginning of year....................... 2,671,041 4,126,851 1,079,341
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 3,540,736 $ 2,671,041 $ 4,126,851
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................. $ 679,247 $ 911,177 $ 819,311
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

Supplemental disclosure of non-cash investing and financing activities:

See Note 3 to the Financial Statements.

The accompanying notes are an integral part of
these financial statements.

14
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1-- ORGANIZATION AND PARTNERSHIP MATTERS

AIRFUND International Limited Partnership (the "Partnership") was organized
as a limited partnership under the Massachusetts Uniform Limited Partnership Act
(the "Uniform Act") on January 31, 1989 for the purpose of acquiring and leasing
to third parties a specified portfolio of used commercial aircraft. Partners'
capital initially consisted of contributions of $1,000 from the General Partner
(AFG Aircraft Management Corporation, a Massachusetts corporation) and $100 from
the Initial Limited Partner (AFG Assignor Corporation, a Massachusetts
corporation). On July 26, 1989, the Partnership issued 3,040,000 units
representing assignments of limited partnership interests (the "Units") to 4,147
investors. Unit holders and Limited Partners (other than the Initial Limited
Partner) are collectively referred to as Recognized Owners. The General Partner
is an affiliate of Equis Financial Group Limited Partnership (formerly known as
American Finance Group) a Massachusetts limited partnership ("EFG"). The common
stock of the General Partner is owned by AF/AIP Programs Limited Partnership, of
which EFG and a wholly-owned affiliate are the 99% limited partners and AFG
Programs, Inc., a Massachusetts corporation which is wholly-owned by Geoffrey A.
MacDonald, is the 1% general partner. The capital contribution of the General
Partner, in consideration of its general partner interests, was $1,000. The
General Partner is not required to make any other capital contributions except
as may be required under the Uniform Act and Section 6.1(b) of the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended").

EFG is a Massachusetts partnership formerly known as American Finance Group
("AFG"). AFG was established in 1988 as a Massachusetts general partnership and
succeeded American Finance Group, Inc., a Massachusetts corporation organized in
1980. EFG and its subsidiaries (collectively, the "Company") are engaged in
various aspects of the equipment leasing business, including EFG's role as
Equipment Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.

The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.

In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group", and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.

In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.

Significant operations commenced July 27, 1989 when the Partnership made its
initial equipment purchase. Pursuant to the Restated Agreement, as amended,
Distributable Cash From Operations and

15
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

Distributable Cash From Sales or Refinancings will be allocated 95% to the
Recognized Owners and 5% to the General Partner for the life of the Partnership.

Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).

NOTE 2-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STATEMENT OF CASH FLOWS

The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in reverse repurchase agreements with overnight maturities.
Under the terms of the agreements, title to the underlying securities passes to
the Partnership. The securities underlying the agreements are book entry
securities. At December 31, 1998, the Partnership had $3,431,400 invested in
federal agency discount notes and in reverse repurchase agreements secured by
U.S. Treasury Bills or interests in U.S. Government securities.

REVENUE RECOGNITION

Rents are payable to the Partnership monthly and quarterly and no
significant amounts are calculated on factors other than the passage of time.
All leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$4,782,888 are due as follows:

<TABLE>
<S> <C> <C>
For the year ending December 31, 1999............................... $ 3,363,406
2000............................... 1,156,422
2001............................... 263,060
-----------
Total $ 4,782,888
-----------
-----------
</TABLE>

In December 1998, the Partnership and the other affiliated leasing programs
owning interests in two McDonnell Douglas MD-82 aircraft entered into lease
extension agreements with Finnair OY. The lease extensions, effective upon the
expiration of the existing primary lease terms on April 28, 1999, extended the
leases for nine months and two years, respectively. In aggregate, these lease
extensions will provide additional lease revenue of approximately $2,899,000 to
the Partnership.

16
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Finnair OY.............................................................. $ 2,118,431 $ 2,118,453 $ 1,433,334
(Two MD-82)
Southwest Airlines, Inc................................................. $ 1,250,208 $ 1,250,208 $ 1,250,208
(Three Boeing 737-2H4)
Aer Lease Limited....................................................... $ -- $ 489,609 $ --
(One Lockheed L-1011-50)
Northwest Airlines, Inc................................................. $ -- $ -- $ 1,200,000
(Two Boeing 727-251 ADV)
Cathay Pacific Airways Limited.......................................... $ -- $ -- $ 462,676
(One Lockheed L-1011-50)
</TABLE>

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

EQUIPMENT ON LEASE

All aircraft were acquired from EFG or one of its Affiliates. Equipment Cost
means the actual cost paid by the Partnership to acquire the aircraft, including
acquisition fees. Equipment Cost reflect the actual price paid for the aircraft
by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate
while carrying the aircraft less, for the Lockhead L-1011-50 aircraft, the
amount of all interim rents received by EFG or the Affiliate prior to selling
the aircraft.

DEPRECIATION

The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of each aircraft to determine whether it exceeds
estimated net realizable value. Adjustments to reduce the net carrying value of
aircraft are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.

The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends,

17
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

technological advances, and many other events can converge to enhance or detract
from asset values at any given time.

ACCRUED LIABILITIES--AFFILIATE

Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities--Affiliate (see Note 4).

ALLOCATION OF PROFITS AND LOSSES

For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.

NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT

Net income (loss) and cash distributions per Unit are based on 3,040,000
Units outstanding during each of the three years in the period ended December
31, 1998 and computed after allocation of the General Partner's 5% share of net
income (loss) and cash distributions.

PROVISION FOR INCOME TAXES

No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.

NOTE 3-- EQUIPMENT

The following is a summary of equipment owned by the Partnership at December
31, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1998 under contracted lease terms. In the
opinion of EFG, the acquisition cost of the equipment did not exceed its fair
market value.

<TABLE>
<CAPTION>
REMAINING
LEASE
TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST LOCATION
- ----------------------------------------------- -------------------------------------- ------------- ---------
<S> <C> <C> <C>
Two McDonnell-Douglas MD-82 (Finnair) 13-28 $ 13,762,438 Foreign
Three Boeing 737-2H4 (Southwest) 12 6,355,873 TX
-------------
Total equipment cost 20,118,311
Accumulated depreciation (5,857,207)
-------------
Equipment, net of accumulated depreciation $ 14,261,104
-------------
-------------
</TABLE>

18
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

The cost of the three Boeing 737-2H4 aircraft and the two McDonnell-Douglas
MD-82 aircraft represent proportionate ownership interests. The remaining
interests are owned by other affiliated partnerships sponsored by EFG. All
Partnerships individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the aircraft.

In 1996, the Partnership completed the replacement of the United Aircraft
with a 49.17% ownership interest in two MD-82 aircraft leased to Finnair OY (the
"Finnair Aircraft") at a total cost to the Partnership of $13,762,438. To
acquire the ownership interest in the Finnair Aircraft, the Partnership paid
$4,601,325 in cash and obtained financing of $9,161,113 from a third-party
lender. The Partnership's utilized $4,360,599 (classified as Contractual Right
for Equipment at December 31, 1995) which had been deposited into a
special-purpose escrow account through a third party exchange agent pending the
completion of the aircraft exchange. The balance of $240,726 was expended from
the Partnership's cash reserves. The remaining ownership interests of 50.83% in
the Finnair Aircraft are held by affiliated equipment leasing programs sponsored
by EFG.

All of the remaining aircraft and related lease payment streams were used to
secure term loans with third-party lenders. Such leveraged aircraft had an
original cost of approximately $20,118,000 and a net book value of approximately
$14,261,000 at December 31, 1998 (see Note 5).

Generally, the costs associated with maintaining, insuring and operating the
Partnership's aircraft are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Partnership. However,
the Partnership has purchased supplemental insurance coverage to reduce the
economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."

As aircraft are sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the aircraft at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the aircraft is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the aircraft upon the
expiration of the primary lease terms.

During 1996, the Partnership recorded a write-down of aircraft carrying
values, representing impairments related to the Partnership's interest in the
Lockheed L-1011-50 aircraft, which was sold in April 1998. The resulting charge
of $967,200 ($0.30 per limited partnership unit) was based on a comparison of
estimated net realizable values and corresponding carrying values for the
Partnership's aircraft.

NOTE 4-- RELATED PARTY TRANSACTIONS

19
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

the three years in the period ended December 31, 1998, which were paid or
accrued by the Partnership to EFG or its Affiliates, are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Equipment management fees.................................................. $ 180,232 $ 192,913 $ 217,311
Administrative charges..................................................... 53,004 49,788 28,376
Reimbursable operating expenses due to third parties....................... 476,803 304,188 1,069,846
---------- ---------- ------------
Total................................................................ $ 710,039 $ 546,889 $ 1,315,533
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

All equipment was purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2,
Equipment on Lease.

All rents and proceeds from the sale of aircraft are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership.

Certain affiliates of the General Partner own Units in the Partnership as
follows:

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- --------------------------------------------------------------------------------- ------------ -------------------
<S> <C> <C>
Old North Capital Limited Partnership............................................ 205,040 6.74%
</TABLE>

NOTE 5-- NOTES PAYABLE

Notes payable at December 31, 1998 consisted of installment notes payable to
banks of $6,279,100. All of the installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.89% and are collateralized by the
equipment and assignment of the related lease payments. All of the notes were
originated in connection with the Southwest Aircraft and the Finnair Aircraft.
The installment notes related to the Southwest Aircraft will be fully amortized
by noncancellable rents. The Partnership has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$4,671,150. The carrying amount of notes payable approximates fair value at
December 31, 1998.

All of the Partnership's installment notes payable mature during the year
ending December 31, 1999.

20
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

NOTE 6-- INCOME TAXES

The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.

For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). The
allocation of net income or loss for financial statement purposes differs from
the net income or loss allocation requirements for income tax and Dissolution
Event purposes, as delineated in the Restated Agreement, as amended. For income
tax purposes, the Partnership allocates net income or net loss in accordance
with the provisions of such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner will be
required to contribute to the Partnership an amount equal to any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 1998, the General Partner had a positive tax capital account
balance.

The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net income................................................................ $ 431,323 $ 49,656 $ 4,360,899
Tax depreciation in excess of financial statement depreciation.......... (487,526) (551,768) (1,654,141)
Write-down of equipment................................................. -- -- 967,200
Deferred rental income.................................................. (54,405) 54,383 22,765
Other................................................................... (760,951) (424,651) (1,333,616)
----------- ----------- ------------
Net income (loss) for federal income tax reporting purposes............... $ (871,559) $ (872,380) $ 2,363,107
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

The principal component of "Other" consists of the difference between the
tax gain or loss on aircraft disposals and the financial statement gain on
disposals. It also includes reversal of certain maintenance reserves.

The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Partners' capital.................................................................. $ 11,075,621 $ 10,644,298
Add back selling commissions and organization and offering costs................. 7,975,000 7,975,000
Cumulative difference between federal income tax and financial statement income
(loss)......................................................................... (6,750,404) (5,447,522)
------------- -------------
Partners' capital for federal income tax reporting purposes........................ $ 12,300,217 $ 13,171,776
------------- -------------
------------- -------------
</TABLE>

The cumulative difference between federal income tax and financial statement
income (loss) represents a timing difference.

NOTE 7-- LEGAL PROCEEDINGS

In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28

21
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

equipment leasing programs sponsored by EFG, including the Partnership
(collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the General Partner, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".

The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.

On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
Prior to issuing a final order, the Court will hold a fairness hearing that will
be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff class
members in the Class Action Lawsuit will receive a Notice of Settlement and
other information pertinent to the settlement of their claims that will be
mailed to them in advance of the fairness hearing. Since first executing the
Stipulation of Settlement, the Court has scheduled two fairness hearings, the
first on December 11, 1998 and the second on March 19, 1999, each of which was
postponed because of delays in finalizing certain information materials that are
subject to regulatory review prior to being distributed to investors.

On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership and 10 affiliated partnerships (collectively referred to as the
"Exchange Partnerships"), is expected to remain pending for a longer period due,
in part, to the complexity of the proposed settlement pertaining to this class.

Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco"). Under
the proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved. In addition, EFG would contribute
certain management contracts, operations personnel, and business opportunities
to Newco and cancel its current management contracts with all of the

22
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

Exchange Partnerships. Newco would operate as a finance company specializing in
the acquisition, financing and servicing of equipment leases for its own account
and for the account of others on a contract basis. Newco also would use its best
efforts to list its shares on the Nasdaq National Market or another national
exchange or market as soon after the Consolidation as Newco deems that market
conditions and its business operations are suitable for listing its shares and
Newco has satisfied all necessary regulatory and listing requirements. The
potential benefits and risks of the Consolidation will be presented in a
Solicitation Statement that will be mailed to all of the partners of the
Exchange Partnerships as soon as the associated regulatory review process is
completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.

One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provides, among other things, that commencing March 22,
1999, the Exchange Partnerships may collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believe to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations, including that the Exchange Partnerships retain
sufficient cash balances to pay their respective shares of the cash distribution
referenced above in connection with the proposed Consolidation.

In the absence of the Court's authorization to enter into such activities,
the Partnership's Restated Agreement, as amended, would not permit new
investment activities without the approval of limited partners owning a majority
of the Partnership's outstanding Units. Accordingly, to the extent that the
Partnership invests in new equipment, the Manager (being EFG) will (i) defer,
until the earlier of the effective date of the Consolidation or December 31,
1999, any acquisition fees resulting therefrom and (ii) limit its management
fees on all such assets to 2% of rental income. In the event that the
Consolidation is consummated, all such acquisition and management fees will be
paid to Newco. To the extent that the Partnership invests in other business
activities not consisting of equipment acquisitions, the Manager will forego any
acquisition fees and management fees related to such investments. In the event
that the Partnership has acquired new investments, but the Partnership does not
participate in the Consolidation, Newco will acquire such new investments for an
amount equal to the Partnership's net equity investment plus an annualized
return thereon of 7.5%. Finally, in the event that the Partnership has acquired
new investments and the Consolidation is not effected, the General Partner will
use its best efforts to divest all such new investments in an orderly and timely
fashion and the Manager will cancel or return to the Partnership any acquisition
or management fees resulting from such new investments.

The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting final settlements, including providing
the partners of the Exchange Partnerships with the opportunity to object to the
participation of their partnership in the Consolidation. Assuming the proposed
settlement is effected according to present terms, the Partnership's share of
legal fees and expenses related to the Class Action Lawsuit is estimated to be
approximately $81,400, all of which was accrued and expensed by the Partnership
in 1998. In addition, the Partnership's share of fees and expenses related to
the proposed Consolidation is estimated to be approximately $255,100, all of
which was accrued and expensed by the Partnership in 1998.

23
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

NOTES TO THE FINANCIAL STATEMENTS

(CONTINUED)

While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permits the partners to transfer Units to family members or as a
result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.

There can be no assurance that settlement of either sub-class of the Class
Action Lawsuit will receive final Court approval and be effected. There also can
be no assurance that all or any of the Exchange Partnerships will participate in
the Consolidation because if limited partners owning more than one-third of the
outstanding Units of a partnership object to the Consolidation, then that
partnership will be excluded from the Consolidation. The General Partner and its
affiliates, in consultation with counsel, concur that there is a reasonable
basis to believe that final settlements of each sub-class will be achieved.
However, in the absence of final settlements approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.

24
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED

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

The Partnership classifies all rents from leasing aircraft as lease revenue.
Upon expiration of the primary lease terms, aircraft may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the aircraft,
in addition to any month-to-month revenue, represent the total residual value
realized for each aircraft. Therefore, the financial statement gain or loss,
which reflects the difference between the net book value of the aircraft at the
time of sale or disposition and the proceeds realized upon sale or disposition
may not reflect the aggregate residual proceeds realized by the Partnership for
such aircraft.

The following is a summary of cash excess (deficiency) associated with the
aircraft dispositions, which occurred in the years ended December 31, 1998 and
1996. There were no aircraft disposals during the year ended December 31, 1997.

<TABLE>
<CAPTION>
1998 1996
------------ -------------
<S> <C> <C>
Rents earned prior to disposal of aircraft........................................... $ 6,064,972 $ 17,831,499
Sale proceeds realized upon disposition of aircraft.................................. 846,300 6,664,313
------------ -------------
Total cash generated from rents and aircraft sale proceeds........................... 6,911,272 24,495,812
Original acquisition cost of aircraft disposed....................................... 7,877,224 19,040,719
------------ -------------
Excess (deficiency) of total cash generated to cost of aircraft disposed............. $ (965,952) $ 5,455,093
------------ -------------
------------ -------------
</TABLE>

25
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
SALES AND
OPERATIONS REFINANCINGS TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Net income............................................................ $ 243,305 $ 188,018 $ 431,323
Add:
Depreciation........................................................ 2,152,360 -- 2,152,360
Management fees..................................................... 180,232 -- 180,232
Book value of disposed equipment.................................... -- 658,282 658,282
Less:
Principal repayment of notes payable................................ (2,585,207) -- (2,585,207)
------------- ------------ -------------
Cash from operations, sales and refinancings........................ (9,310) 846,300 836,990
Less:
Management fees..................................................... (180,232) -- (180,232)
------------- ------------ -------------
Distributable cash from operations, sales and refinancings.......... (189,542) 846,300 656,758
Other sources and uses of cash:
Cash at beginning of year........................................... 1,606,728 1,064,313 2,671,041
Net change in receivable and accruals............................... 212,937 -- 212,937
------------- ------------ -------------
Cash at end of year................................................... $ 1,630,123 $ 1,910,613 $ 3,540,736
------------- ------------ -------------
------------- ------------ -------------
</TABLE>

26
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP

DECEMBER 31, 1998

For the year ended December 31, 1998, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:

<TABLE>
<S> <C>
Operating expenses................................................ $ 262,053
</TABLE>

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form
10-K) of AIRFUND International Limited Partnership, of our report dated March
10, 1999 included in the 1998 Annual Report to the Partners of AIRFUND
International Limited Partnership.

ERNST & YOUNG LLP

Boston, Massachusetts
March 10, 1999

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,540,736
<SECURITIES> 0
<RECEIVABLES> 104,184
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,644,920
<PP&E> 20,118,311
<DEPRECIATION> 5,857,207
<TOTAL-ASSETS> 17,906,024
<CURRENT-LIABILITIES> 551,303
<BONDS> 6,279,100
0
0
<COMMON> 0
<OTHER-SE> 11,075,621
<TOTAL-LIABILITY-AND-EQUITY> 17,906,024
<SALES> 0
<TOTAL-REVENUES> 3,958,140
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,862,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 664,418
<INCOME-PRETAX> 431,323
<INCOME-TAX> 0
<INCOME-CONTINUING> 431,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 431,323
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>