AIRFUND INTERNATIONAL LIMITED PARTNERSHIP - 10-K Annual Report

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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, 2001
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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
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AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)

Massachusetts 04-3037350
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which
registered

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

3,040,000 Units Representing Limited Partnership Interest
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(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
-

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

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.

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

FORM 10- K

TABLE OF CONTENTS

Page

PART I

Item 1. Business 3

Item 2. Properties 6

Item 3. Legal Proceedings 6

Item 4. Submission of Matters to a Vote of Security Holders 9

PART II

Item 5. Market for the Partnership's Securities and Related Security Holder Matters 10

Item 6. Selected Financial Data 11

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12

Item 7A. Quantitative and Qualitative Disclosures about Market Risks 19

Item 8. Financial Statements and Supplementary Data 19

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40

PART III

Item 10. Directors and Executive Officers of the Partnership 41

Item 11. Executive Compensation 42

Item 12. Security Ownership of Certain Beneficial Owners and Management 43

Item 13. Certain Relationships and Related Transactions 44

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45

PART I

Item 1. Business.
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(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. 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 EFG. 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", or the "Partnership Agreement").

(b) Financial Information About Industry Segments

The Partnership is engaged in only one operating industry segment: financial
services. Historically, the Partnership has acquired used commercial aircraft
and leased the aircraft to creditworthy lessees on a full-payout or 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 rental payments are less than the acquisition cost of the leased
equipment. Industry segment data is not applicable.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 herein.

(c) Narrative Description of Business

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 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.

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 compensated for such services as provided for in the
Restated Agreement, as amended.
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.

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"). 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.

The Partnership's investment in commercial aircraft is, and will continue to be,
subject to various risks, including physical deterioration, technological
obsolescence, and credit quality 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. Another risk is that the credit quality of the lessee may deteriorate
after a lease is made. In addition, the leasing industry is very competitive.
The Partnership is subject to 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, many of which have greater resources, 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.
The terrorist attacks on September 11, 2001 and the commencement of hostilities
thereafter may adversely affect the Partnership's ability to re-lease or sell
equipment. 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. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors influence market demand and market values for passenger jet
aircraft.

Two of the Partnership's aircraft currently operate in international markets.
All rents due under the leases of these aircraft are denominated in U.S.
dollars. However, the operation of the aircraft in international markets
exposes the partnership to certain political, credit and economic risks.
Regulatory requirements of other countries governing aircraft registration,
maintenance, liability of lessors and other matters may apply. Political
instability, changes in national policy, competitive pressures, fuel shortages,
recessions and other political and economic events adversely affecting world or
regional trading markets or a particular foreign lessee could also create the
risk that a foreign lessee would be unable to perform its obligations to the
Partnership. The recognition in foreign courts of judgments obtained in United
States courts may be difficult or impossible to obtain and foreign procedural
rules may otherwise delay such recognition. It may be difficult for the
Partnership to obtain possession of aircraft used outside the United States in
the event or default by the lessee or to enforce its rights under the related
lease. Moreover, foreign jurisdictions may confiscate or expropriate aircraft
without paying adequate compensation.

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, 2001, 2000 and 1999 is incorporated
herein by reference to Note 2 to the financial statements included in Item 8
herein. Refer to Item 14(a)(3) for lease agreements filed with the Securities
and Exchange Commission.

In connection with a preliminary settlement agreement for a Class Action
Lawsuit, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $1,800,000 to a
newly formed real estate company, Echelon Residential Holdings LLC ("Echelon
Residential Holdings") to finance the acquisition of real estate assets by that
company. Echelon Residential Holdings, through a wholly owned subsidiary
("Echelon Residential LLC"), used the loan proceeds, along with the loan
proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company.
Echelon Residential Holding's interest in Echelon Residential LLC is pledged
pursuant to a pledge agreement to the partnerships as collateral for the loans.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership.

During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $157,500, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $292,140 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The total impairment of $449,640 is recorded as write-down of impaired loan and
interest receivable in the accompanying Statement of Operations for the year
ended December 31, 2001.

The write-down of the loan receivable from Echelon Residential Holdings and the
related accrued interest was precipitated principally by a slowing U.S. economy
and its effects on the real estate development industry. The economic outlook
for the properties that existed when the loan was funded has deteriorated and
inhibited the ability of Echelon Residential Holdings' management to secure
low-cost sources of development capital, including but not limited to
joint-venture or equity partners. In response to these developments and lower
risk tolerances in the credit markets, the management of Echelon Residential
Holdings decided in the second quarter of 2001 to concentrate its prospective
development activities within the southeastern United States and, therefore, to
dispose of development sites located elsewhere. In May 2001, Echelon
Residential Holdings closed its Texas-based development office; and since the
beginning of 2001, the company has sold five of nine properties (two in July
2001, one in October 2001, one in November 2001 and one in February 2002). As a
result of these developments, the General Partner does not believe that Echelon
Residential Holdings will realize the profit levels originally believed to be
achievable from either selling these properties as a group or developing all of
them as multi-family residential communities.

The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
general partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of the prohibition against
loans to affiliates in the Partnership Agreement and the court's statement in
its order permitting New Investments that all other provisions of the
Partnership Agreements governing the investment objectives and policies of the
Partnership shall remain in full force and effect. The court may require the
partnerships to restructure or divest the loan.

The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings. The Partnership does not intend to engage in investment activities in
a manner or to an extent that would require the Partnership to register as an
investment company under the 1940 Act. However, it is possible that the
Partnership unintentionally may have engaged, or may in the future, engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. The 1940 Act, among other things, prohibits an
unregistered investment company from offering securities for sale or engaging in
any business in interstate commerce and, consequently, leases and contracts
entered into by partnerships that are unregistered investment companies may be
voidable. The General Partner has consulted counsel and believes that the
Partnership is not an investment company. If the Partnership were determined to
be an unregistered investment company, its business would be adversely affected.
The General Partner has determined to take action to resolve the Partnership's
status under the 1940 Act by means that may include disposing or acquiring
certain assets that it might not otherwise dispose or acquire.

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

Not applicable.

Item 2. Properties.
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None.

Item 3. Legal Proceedings.
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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
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Southern District of Florida (the "Court") on behalf of a proposed class of
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investors in 28 equipment leasing programs sponsored by EFG, including the
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Partnership (collectively, the "Nominal Defendants"), against EFG and a number
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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 August 20, 1998, the court preliminarily approved a Stipulation of Settlement
setting forth terms pursuant to which a settlement of the Class Action Lawsuit
was intended to be achieved and which, among other things, was at the time
expected to reduce the burdens and expenses attendant to continuing litigation.
Subsequently an Amended Stipulation of Settlement was approved by the court.
The Amended Stipulation, among other things, divided the Class Action Lawsuit
into two separate sub-classes that could be settled individually. On May 26,
1999, the Court issued an Order and Final Judgment approving settlement of one
of the sub-classes. Settlement of the second sub-class, involving the
Partnership and 10 affiliated partnerships remained pending due, in part, to the
complexity of the proposed settlement pertaining to this class. On March 6,
2000, the court preliminarily approved a Second Amended Stipulation that
modified certain of the settlement terms applying to the settlement of the
Partnership sub-class contained in the Amended Stipulation. The settlement of
the Partnership sub-class was premised on the consolidation of the Partnerships'
net assets (the "Consolidation"), subject to certain conditions, into a single
successor company ("Newco"). The potential benefits and risks of the
Consolidation were to be presented in a Solicitation Statement that would be
mailed to all of the partners of the Exchange Partnerships as soon as the
associated regulatory review process was 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.

One of the principal objectives of the Consolidation was 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 provided, among other things, that commencing March 22,
1999, the Exchange Partnerships could 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 believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.

On March 8, 2000, the Exchange Partnerships collectively made a $32 million loan
as permitted by the Second Amended Stipulation approved by the Court. The
Partnership's portion of the aggregate loan is $1,800,000. The loan consists of
a term loan to Echelon Residential Holdings, a newly-formed real estate company
that is owned by several independent investors and, in his individual capacity,
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities. Echelon Residential Holdings, through a wholly owned
subsidiary (Echelon Residential LLC), used the loan proceeds, along with the
loan proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company. The
loan has a term of 30 months maturing on September 8, 2002 and bears interest at
the annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. Echelon Residential Holdings has pledged its membership interests in
Echelon Residential LLC to the Exchange Partnerships as collateral for the loan.

In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.

While the Court's August 20, 1998 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, 1999 Order permitted 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, 1998 Order which enjoined the General Partners of the
Partnerships from, among other things, recording any transfers not in accordance
with the Court's order remains effective.

On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the SEC has completed its review of the solicitation statement
and related materials submitted to the SEC in connection with the proposed
settlement, and (b) whether parties request the Court to schedule a hearing for
final approval of the proposed settlement or are withdrawing the proposed
settlement from judicial consideration and resuming the litigation of the
Plaintiffs' claims. The Court also directed the parties to use their best
efforts to assist the SEC so that its regulatory review may be completed on or
before May 15, 2001.

On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, AmericanIncome Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase, or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC
staff asserted that the notes evidencing the loans to Echelon Residential
Holdings are investment securities and the ownership of the notes by said
partnerships cause them to be investment companies and that, in the case of
American Income Partners V-A Limited Partnership and V-B Limited Partnership,
they may have become investment companies when they received the securities of
Semele Group Inc. ("Semele") as part of the compensation for the sale of a
vessel to Semele in 1997. The general partners have consulted with counsel who
specializes in the 1940 Act and, based on counsel's advice, do not believe that
the Designated Partnerships are investment companies.

The letter also stated that the Division is considering whether to commence
enforcement action with respect to this matter. Noting that the parties to the
Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.

On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the Court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.

Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has
yet to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referring the case to mediation and
referring discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel continued to negotiate toward a settlement and have reached agreement on
a Revised Stipulation of Settlement (the "Revised Settlement") that does not
involve a Consolidation. As part of the Revised Settlement, EFG has agreed to
buy the loans made by the Exchange Partnerships to Echelon Residential Holdings
for an aggregate of $32 million plus interest at 7.5% per annum, if they are not
repaid prior to or at their scheduled maturity date. The Revised Settlement also
provides for the liquidation of the Exchange Partnerships' assets, a cash
distribution and the dissolution of the Partnerships including the liquidation
and dissolution of this Partnership. The court held a hearing on March 1, 2002
to consider the Revised Settlement. After the hearing, the court issued an
order preliminarily approving the Revised Settlement and providing for the
mailing of notice to the Operating Partnership Sub-Class of a hearing on June 7,
2002 to determine whether the settlement on the terms and conditions set forth
in the Revised Settlement is fair, reasonable and adequate and should be finally
approved by the court and a final judgment entered in the matter.

There can be no assurance that the Revised Settlement of the sub-class involving
the Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement 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. Assuming the proposed settlement were effected according
to its terms, the Partnership's share of legal fees and expenses related to the
Class Action Lawsuit and the Consolidation was estimated to be approximately
$517,000, of which approximately $337,000 was expensed by the Partnership in
1998 and additional amounts of $89,000, $41,000, and $50,000 were expensed by
the Partnership in 2001, 2000, and 1999, respectively.

Item 4. Submission of Matters to a Vote of Security Holders.
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None.

PART II

Item 5. Market for the Partnership's Securities and Related Security Holder
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Matters.
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(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, 2001, there were 3,903 record holders of Units in the
Partnership.

(c) Dividend History and Restrictions

Historically, the amount of cash distributions when paid to the Partners had
been determined on a quarterly basis. Each quarter's distribution may have
varied in amount and was made 95% to the Limited Partners and 5% to the General
Partner. The Partnership did not declare distributions in any of the years
ended December 31, 2001, 2000 and 1999.

The Partnership is a Nominal Defendant in a Class Action Lawsuit. The General
Partner has continued to suspend the payment of quarterly cash distributions
pending final resolution of the Class Action Lawsuit. Accordingly, future cash
distributions are not expected to be paid until the Class Action Lawsuit is
settled or adjudicated.

In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.

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 aircraft upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells aircraft, because the remaining
aircraft portfolio 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.

In particular, the Partnership must contemplate the potential liquidity risks
associated with its investment in commercial jet 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
airworthiness 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.

At December 31, 2001, the Partnership's equipment portfolio included ownership
interests in three commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. In January 2002 this lease was amended, which
includes a revised lease expiration date of August 2002. The remaining two
aircraft in the Partnership's portfolio already are Stage 3 compliant. The
lease term associated with one of the McDonnell Douglas MD-82 aircraft expired
in 2001 and the aircraft is currently off lease. The third aircraft has a lease
term expiring in September 2004.

Recent changes in the economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of its commercial jet aircraft. Currently, two of the commercial
jet aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements. The General Partner is attempting to
remarket a McDonnell Douglas MD-82 aircraft, which was returned to the General
Partner upon its lease expiration in April 2001.

In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest a Boeing 737-2H4 aircraft. The sale of the aircraft was
recorded by the Partnership as a sales-type lease, with a lease term expiring in
January 2002. In the fourth quarter of 2001, Royal Aviation Inc. declared
bankruptcy and as a result, has defaulted on this conditional sales agreement.
The General Partner is negotiating for the return of the aircraft.

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.
- ------------------------------------

The following data should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included in Item 8 herein.

For each of the five years in the period ended December 31, 2001:

Summary of Operations 2001 2000 1999 1998 1997
- ----------------------------------- ------------ ------------ ------------ ----------- -----------

Operating and sales-type lease
revenue . . . . . . . . . . . . . . $ 1,859,844 $ 1,611,906 $ 3,362,568 $ 3,604,643 $ 3,858,270

Total income. . . . . . . . . . . . $ 2,054,524 $ 2,386,166 $ 3,523,800 $ 3,958,140 $ 3,988,822

Interest income . . . . . . . . . . $ 194,680 $ 328,661 $ 161,232 $ 165,479 $ 130,552

Net income (loss) . . . . . . . . . $(1,601,772) $ (854,371) $ (88,675) $ 431,323 $ 49,656

Per Unit:
Net income (loss). . . . . . . . . $ (0.50) $ (0.27) $ (0.03) $ 0.13 $ 0.02

Cash distributions declared. $ -- $ -- $ -- $ -- $ --

Financial Position
- -----------------------------------

Total assets. . . . . . . . . . . . $13,356,640 $14,678,631 $15,392,027 $17,906,024 $19,864,413

Total long-term obligations . . . . $ 3,438,473 $ 3,002,142 $ 3,250,113 $ 6,279,100 $ 8,864,307

Partners' capital . . . . . . . . . $ 8,530,803 $10,132,575 $10,986,946 $11,075,621 $10,644,298

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

Year ended December 31, 2001 compared to the year
ended December 31, 2000 and the year ended December 31, 2000
compared to the year ended December 31, 1999

Certain statements in this Form 10-K of 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 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, the remarketing of the Partnership's
equipment, and the performance of the Partnership's non-equipment assets.

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. Currently all of the aircraft in
the Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft, or sold. At December 31, 2001, the Partnership's equipment
portfolio included proportionate ownership interest in three aircraft. In
addition, in 2000 the Partnership entered into a conditional sales agreement
related to its interest in an aircraft. 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. Pursuant to the Restated Agreement, as amended, the Partnership is
scheduled to be dissolved by December 31, 2004.

The 1940 Act places restrictions on the capital structure and business
activities of companies registered thereunder. The Partnership has active
business operations in the financial services industry, including equipment
leasing and the loan to Echelon Residential Holdings LLC ("Echelon Residential
Holdings"). The Partnership does not intend to engage in investment activities
in a manner or to an extent that would require the Partnership to register as an
investment company under the 1940 Act. However, it is possible that the
Partnership unintentionally may have engaged, or may in the future, engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
SEC regarding whether or not the Partnership may be an inadvertent investment
company as a consequence of the above-referenced loan. The 1940 Act, among
other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business in interstate commerce and,
consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that the Partnership is not an investment
company. If the Partnership were determined to be an unregistered investment
company, its business would be adversely affected. The General Partner has
determined to take action to resolve the Partnership's status under the 1940 Act
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.

Critical Accounting Policies and Estimates
- ----------------------------------------------

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.

The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:

Revenue Recognition: Rents are payable to the Partnership monthly or quarterly
- ---------------------
and no significant amounts are calculated on factors other than the passage of
time. The majority of the Partnership's leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred. Lease payments for the sales-type lease are due monthly and the
related revenue is recognized by a method which produces a constant periodic
rate of return on the outstanding investment in the lease.

Asset lives and depreciation method: The Partnership's primary business involves
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. The Partnership's
depreciation policy is intended to allocate the cost of equipment over the
period during which it produces economic benefit. The principal period of
economic benefit is considered to correspond to each asset's primary lease term,
which generally represents the period of greatest revenue potential for each
asset. Accordingly, to the extent that an asset is held on primary lease term,
the Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of the primary lease expiration. To
the extent that an asset is held beyond its primary lease term, the Partnership
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life.

Allowance for doubtful accounts: The Partnership maintains allowances for
- -----------------------------------
doubtful accounts for estimated losses resulting from the inability of the
- -----
lessees to make the lease payments required under the contracted lease
- -----
agreements. These estimates are primarily based on the amount of time that has
- -----
elapsed since the related payments were due as well as specific knowledge
related to the ability of the lessees to make the required payments. If the
financial condition of the Partnership's lessees were to deteriorate, additional
allowances could be required that would increase expenses. Conversely, if the
financial condition of the lessees were to improve or if legal remedies to
collect past due amounts were successful, the allowance for doubtful accounts
could be reduced, thereby decreasing expenses.

Allowance for loan losses: The Partnership periodically evaluates the
- -----------------------------
collectibility of its loan's contractual principal and interest and the
- ----
existence of loan impairment indicators, including contemporaneous economic
- ----
conditions, situations which could affect the borrower's ability to repay its
- ----
obligation, the estimated value of the underlying collateral, and other relevant
- --
factors. Real estate values are discounted using a present value methodology
over the period between the financial reporting date and the estimated
disposition date of each property. A loan is considered to be impaired when,
based on current information and events, it is probable that the Partnership
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, which includes both principal and interest. A provision for
loan losses is charged to earnings based on the judgment of the General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.

Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. Adjustments to reduce the net
- -----
carrying value of equipment are recorded in those instances where estimated net
- --
realizable value is considered to be less than net carrying value and are
reflected separately on the accompanying Statement of Operations as write-down
of equipment. Inherent in the Partnership's estimate of net realizable values
are assumptions regarding estimated future cash flows. If these assumptions or
estimates change in the future, the Partnership could be required to record
impairment charges for these assets.

Contingencies and litigation: The Partnership is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business. In addition, the
Partnership is also involved in a class action lawsuit. The ultimate legal and
financial liability with respect to such matters cannot be estimated with
certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.

Results of Operations
- -----------------------

For year ended December 31, 2001, the Partnership recognized operating lease
revenue of $1,815,459 compared to $1,603,658 and $3,362,568 for the years ended
December 31, 2000 and 1999, respectively. The increase in operating lease
revenue from 2000 to 2001 resulted primarily from the September 2000 re-lease of
two aircraft partially offset by the effects of the expiration of the lease term
related to the Partnership's interest in a McDonnell Douglas MD-82 aircraft, as
discussed below. The decrease in lease revenue from 1999 to 2000 resulted
primarily from the expiration of lease terms related to the Partnership's
interest in three Boeing 737-2H4 aircraft and a McDonnell Douglas MD-82
aircraft, as discussed below. In the future, operating lease revenue is
expected to decline due to lease term expirations and aircraft sales. See
discussion below related to the Partnership's sales-type lease revenue for the
year ended December 31, 2001 and 2000.

The Partnership's aircraft interests represent a proportionate ownership
interests. The remaining interests are owned by an affiliated equipment leasing
program sponsored by EFG. The Partnership and each affiliate individually
report, in proportion to their respective ownership interests, their respective
shares of assets, liabilities, revenues, and expenses associated with the
aircraft.

The lease terms related to three Boeing 737-2H4 aircraft, in which the
Partnership held a proportionate interest, expired on December 31, 1999 and the
aircraft were stored pending their remarketing. In July 2000, one of the Boeing
737-2H4 aircraft was sold resulting in $846,496 of proceeds and a net gain, for
financial statement purposes, of $142,721 for the Partnership's proportional
interest in the aircraft. In September 2000, a second Boeing 737-2H4 aircraft
was re-leased with a lease term expiring in September 2003. In January 2002
this lease was amended, which includes a revised lease expiration date of August
2002. The Partnership recognized operating lease revenues of $373,327, $137,896
and $418,639, related to this aircraft during the years ended December 31, 2001,
2000 and 1999, respectively. The Partnership entered into a conditional sales
agreement to sell its interest in the remaining Boeing 737-2H4 aircraft as
described below.

The lease term associated with a McDonnell Douglas MD-82 aircraft, in which the
Partnership holds an ownership interest, expired in January 2000. The aircraft
was re-leased in September 2000 to Aerovias De Mexico, S.A. de C.V., with a
lease term expiring in September 2004. The Partnership recognized operating
lease revenues of $973,566, $401,908 and $709,086, related to this aircraft
during the years ended December 31, 2001, 2000 and 1999, respectively.

The General Partner is attempting to remarket the second McDonnell Douglas MD-82
aircraft, in which the Partnership holds an ownership interest. The lease term
associated with this aircraft expired in April 2001 and the aircraft is
currently off lease. The Partnership recognized operating lease revenue of
$468,565, $1,052,238 and $704,415, related to this aircraft during the years
ended December 31, 2001, 2000 and 1999, respectively.

Interest income for the year ended December 31, 2001 was $194,680 compared to
$328,661 and $161,232 for the years ended December 31, 2000 and 1999,
respectively. Interest income is generated principally from temporary
investments of rental receipts and equipment sale proceeds in short-term
instruments and interest earned on the loan receivable from Echelon Residential
Holdings. The amount of future interest income from the short-term instruments
is expected to fluctuate as a result of changing interest rates and the amount
of cash available for investment, among other factors.

Interest income included $71,548 and $220,592 for the years ended December 31,
2001 and 2000, respectively, earned on the loan receivable from Echelon
Residential Holdings. During the second quarter of 2001, the General Partner
determined that recoverability of the loan receivable had been impaired and at
June 30, 2001 recorded an impairment of $157,500, reflecting the General
Partner's current assessment of the amount of loss that is likely to be incurred
by the Partnership. In addition to the write-down recorded at June 30, 2001,
the Partnership reserved all accrued interest of $292,140 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The total impairment of $449,640 is recorded as write-down of impaired loan and
interest receivable in the year ended December 31, 2001.

In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft and recorded a net gain on
sale of equipment, for financial statement purposes, of $302,878. The title to
the aircraft was to transfer to Royal Aviation Inc., at the expiration of the
lease term. The sale of the aircraft was recorded by the Partnership as a
sales-type lease, with a lease term expiring in January 2002. During the year
ended December 31, 2000, the Partnership recorded a net gain on sale of
equipment, for financial statement purposes, of $302,878 for its proportional
interest in the aircraft. For the years ended December 31, 2001 and 2000, the
Partnership recognized sales-type lease revenue of $44,385 and $8,248,
respectively. In the fourth quarter of 2001, Royal Aviation Inc. declared
bankruptcy and as a result, has defaulted on this conditional sales agreement.
The General Partner is negotiating for the return of the aircraft. As of
December 31, 2001, no allowance on the investment in sales-type lease was deemed
necessary based on the comparison of estimated fair value of the Partnership's
interest in the aircraft and the Partnership's net investment in the sales-type
lease.

It cannot be determined whether future sales of aircraft will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of aircraft being sold and their marketability at
the time of sale.

The ultimate realization of residual value for aircraft is dependent upon many
factors, including EFG's ability to sell and re-lease the aircraft. Changing
market conditions, industry trends, technological advances, and many other
events can converge to enhance or detract from asset values at any given time.
EFG attempts to monitor these changes and 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 total economic value realized for each aircraft is comprised of all primary
lease term revenue 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.

Interest expense was $302,659, $344,016 and $399,589 during the years ended
December 31, 2001, 2000 and 1999, respectively. In the future, interest expense
will decline as the principal balance of notes payable is reduced through the
application of rent receipts to outstanding debt. See additional discussion
below regarding the refinancing of the debt in 2001.

Management fees were $129,842, $87,443 and $168,128 for the years ended December
31, 2001, 2000 and 1999, respectively. Management fees are based on 5% of gross
lease revenue generated by operating leases and 2% of gross lease revenue
generated by full payout leases.

Operating expenses were $799,844, $1,823,804 and $989,886 for the years ended
December 31, 2001, 2000 and 1999, respectively. Operating expenses in 2001
included approximately $95,000 of storage costs for an aircraft which was
returned to the General Partner in April 2001, upon its lease expiration. The
primary reason for the increase in operating expenses from 1999 to 2000 was
storage, remarketing and maintenance costs associated with the Partnership's
aircraft. In 2000 and 1999, the Partnership accrued approximately $492,000 and
$664,000, respectively, for the reconfiguration costs and completion of a
D-Check incurred to facilitate the remarketing of the McDonnell Douglas MD-82
aircraft released in September 2000. In 2000, the Partnership also accrued
approximately $664,000 for a required D-check for a second McDonnell Douglas
MD-82 aircraft. Operating expenses in 2001, 2000 and 1999 also included
approximately $89,000, $41,000 and $50,000, respectively, related to the Class
Action Lawsuit described. Other operating expenses consist principally of
professional service costs, such as audit and legal fees, as well as insurance,
printing, distribution and other remarketing expenses.

Depreciation expense was $865,311, $985,274 and $2,054,872 for the years ended
December 31, 2001, 2000 and 1999, respectively. During the year ended December
31, 2001, the Partnership also recorded a write-down of equipment, representing
an impairment to the carrying value of the Partnership's interest in a McDonnell
Douglas MD-82 aircraft returned in April 2001 and currently off lease. The
resulting charge of $1,109,000 was based on a comparison of estimated fair value
and carrying value of the Partnership's interest in the aircraft. The estimate
of the fair value was based on (i) information provided by a third-party
aircraft broker and (ii) EFG's assessment of prevailing market conditions for
similar aircraft. Aircraft condition, age, passenger capacity, distance
capability, fuel efficiency, and other factors influence market demand and
market values for passenger jet aircraft.

Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------

The events of September 11, 2001 and the slowing U.S. economy could have an
adverse effect on market values for the Partnership's assets and the
Partnership's ability to negotiate future lease agreements. Notwithstanding the
foregoing, it currently is not possible for the General Partner to determine the
long-term effects, if any, that these events may have on the economic
performance of the Partnership's equipment portfolio. The Partnership's
equipment portfolio consists entirely of commercial jet aircraft. The events of
September 11, 2001 adversely affected market demand for both new and used
commercial aircraft and weakened the financial position of most airlines. No
direct damage occurred to any of the Partnership's assets as a result of these
events and while it is currently not possible for the General Partner to
determine the ultimate long-term economic consequences of these events to the
Partnership, the General Partner expects that the resulting decline in air
travel will suppress market prices for used aircraft in the short term and could
inhibit the viability of the airline industry. In the event of a default by an
aircraft lessee, the Partnership could suffer material losses. At December 31,
2001, the Partnership has collected substantially all rents owed from aircraft
lessees. The General Partner is monitoring the situation and will continue to
evaluate potential implications to the Partnership's financial position and
future liquidity.

The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from aircraft rental transactions.
Accordingly, the Partnership's principal source of cash from operations is
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 a net cash
inflow of $1,702,151 for the year ended December 31, 2001 compared to a net cash
outflow of $533,195 in 2000 and net cash inflow of $2,669,158 for 1999.
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. The Partnership, however, may continue to incur
significant costs to facilitate the successful remarketing of its remaining
aircraft in the future. Ultimately, the Partnership will dispose of all
aircraft under lease. This will occur 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 renewal/re-lease term. The
amount of future cash from interest income is expected to fluctuate as a result
of changing interest rates and the level of cash available for investment, among
other factors. The loan to Echelon Residential Holdings and accrued interest
thereon is due in full at maturity on September 8, 2002 (see discussion below).

Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. For the year ended
December 31, 2000, the Partnership realized net cash proceeds of $846,496 from
the sale of its interest in one of the Boeing 737-2H4 aircraft. There were no
aircraft sales in 2001 or 1999. 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.

At December 31, 2001, the Partnership was due aggregate future minimum lease
payments of $2,819,919 from contractual operating lease agreements, a portion of
which will be used to amortize the principal balance of notes payable of
$3,438,473At the expiration of the individual lease terms underlying the
Partnership's future minimum lease payments, the Partnership will sell its
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.

In connection with a preliminary settlement agreement for a Class Action
Lawsuit, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $1,800,000 to a
newly formed real estate company, Echelon Residential Holdings to finance the
acquisition of real estate assets by that company. Echelon Residential
Holdings, through a wholly owned subsidiary (Echelon Residential LLC), used the
loan proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an unrelated Florida-based
real estate company. Echelon Residential Holding's interest in Echelon
Residential LLC is pledged pursuant to a pledge agreement to the partnerships as
collateral for the loans. The loan has a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final six months. Interest accrues and compounds monthly and is
payable at maturity.

The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.

The write-down of the loan receivable from Echelon Residential Holdings and the
related accrued interest discussed above was precipitated principally by a
slowing U.S. economy and its effects on the real estate development industry.
The economic outlook for the properties that existed when the loan was funded
has deteriorated and inhibited the ability of Echelon Residential Holdings'
management to secure low-cost sources of development capital, including but not
limited to joint-venture or equity partners. In response to these developments
and lower risk tolerances in the credit markets, the management of Echelon
Residential Holdings decided in the second quarter of 2001 to concentrate its
prospective development activities within the southeastern United States and,
therefore, to dispose of development sites located elsewhere. In May 2001,
Echelon Residential Holdings closed its Texas-based development office; and
since the beginning of 2001, the company has sold five of nine properties (two
in July 2001, one in October 2001, one in November 2001 and one in February
2002). As a result of these developments, the General Partner does not believe
that Echelon Residential Holdings will realize the profit levels originally
believed to be achievable from either selling these properties as a group or
developing all of them as multi-family residential communities.

The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
General Partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of the prohibition against
loans to affiliates in the Partnership Agreement and the court's statement in
its order permitting New Investments that all other provisions of the
Partnership Agreements governing the investment objectives and policies of the
Partnership shall remain in full force and effect. The court may require the
partnerships to restructure or divest the loan.

The Partnership obtained long-term financing in connection with certain
aircraft. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities in the
Partnership's Statement of Cash Flows. The corresponding note agreements are
recourse only to the specific aircraft financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
generally coincides with the lease term). As rental payments are collected, a
portion or all of the rental payment is used to repay associated indebtedness.
In the future, the amount of cash used to repay debt obligations will decline as
the principal balance of notes payable is reduced through the collection and
application of rents.

In February 2001, the Partnership's and certain affiliated investment programs
collectively, (the "Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft. In addition to refinancing the
Programs' total existing indebtedness and accrued interest of $4,758,845, the
Programs received additional debt proceeds of $3,400,177. The Partnership's
aggregate share of the refinanced and new indebtedness was $4,011,791 including
$2,339,924 used to repay the existing indebtedness on the refinanced aircraft.
The Partnership used a portion of its share of the additional proceeds of
$1,671,867 to repay the outstanding balance of the indebtedness and accrued
interest related to a second aircraft of $433,178 and certain aircraft
reconfiguration costs that the Partnership had accrued at December 31, 2000.
The new indebtedness bears a fixed interest rate of 7.65%, principal is
amortized monthly and the Partnership has a balloon payment obligation at the
expiration of the lease term of $1,337,875 in September 2004. During the year
ended December 31, 2000, the Partnership refinanced the indebtedness associated
with the same aircraft and, in addition to refinancing the existing
indebtedness, received additional debt proceeds of $666,217.

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 aircraft upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells aircraft, because the remaining
aircraft portfolio 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 airworthiness 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.

At December 31, 2001, the Partnership's equipment portfolio included ownership
interests in three commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. In January 2002 this lease was amended, which
includes a revised lease expiration date of August 2002. The remaining two
aircraft in the Partnership's portfolio already are Stage 3 compliant. The
lease term associated with one of the McDonnell Douglas MD-82 aircraft expired
in 2001 and the aircraft is currently off lease. The third aircraft has a lease
term expiring in September 2004.

Recent changes in the economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of its commercial jet aircraft. Currently, two of the commercial
jet aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements except one McDonnell Douglas MD-82
aircraft, which was returned to the General Partner upon its lease expiration in
April 2001. The General Partner is attempting to remarket this aircraft.

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 comparison to financial
reporting purposes. 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 consisting of the cumulative
difference between income or loss for tax purposes and financial statement
income or loss. 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, 2001. 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 Restated Agreement,
as amended, 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, 2001, the General Partner had a positive tax capital account
balance.

In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.

The Partnership is a Nominal Defendant in a Class Action Lawsuit. In addition,
the General Partner will continue to suspend the payment of quarterly cash
distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is settled or adjudicated.

Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
- -----------------------------------------------------------------------------

The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.

The Partnership has one note payable outstanding at December 31, 2001, which
bears a fixed interest rate of 7.65%. The fair market value of fixed interest
rate debt may be adversely impacted due to a decrease in interest rates. The
effect of interest rate fluctuations on the Partnership during the year ended
December 31, 2001 was not material.

The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002, currently earns interest at a fixed annual rate of 14% and will earn a
fixed annual rate of 18% for the last 6 months of the loan, with interest due at
maturity. Investments earning a fixed rate of interest may have their fair
market value adversely impacted due to a rise in interest rates. The effect of
interest rate fluctuations on the Partnership in 2001 was not material.
However, during the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $157,500, reflecting the General Partner's then
assessment of the amount of loss likely to be incurred by the Partnership. In
addition to the write-down recorded at June 30, 2001, the Partnership reserved
all accrued interest of $292,140 recorded on the loan receivable from inception
through March 31, 2001 and ceased accruing interest on its loan receivable from
Echelon Residential Holdings, effective April 1, 2001.

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

Financial Statements:

Report of Independent Certified Public Accountants . 20

Statement of Financial Position
at December 31, 2001 and 2000. . . . . . . . . . . . 21

Statement of Operations
for the years ended December 31, 2001, 2000 and 1999 22

Statement of Changes in Partners' Capital
for the years ended December 31, 2001, 2000 and 1999 23

Statement of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 24

Notes to the Financial Statements. . . . . . . . . . 25

ADDITIONAL FINANCIAL INFORMATION:

Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed. . . . . . . . 38

Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings. . . . . . . . 39

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 . . . . . . . . . . . . . . . . 40

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Partners of AIRFUND International Limited Partnership:

We have audited the accompanying balance sheets of AIRFUND International Limited
Partnership as of December 31, 2001 and 2000, 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, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

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 at Item 8 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.

/S/ ERNST & YOUNG LLP

Tampa, Florida
March 26, 2002

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000

2001 2000
ASSETS

Cash and cash equivalents $ 3,584,719 $ 1,446,237
Rents receivable, net of allowance of $145,424
at December 31, 2001 201,157 305,592
Accounts receivable - other - 162,261
Accounts receivable - affiliate 1,561 110,767
Prepaid expenses 4,827 -
Interest receivable - loan, net of allowance of $292,140
at December 31, 2001 - 220,592
Loan receivable, net of allowance of $157,500
at December 31, 2001 1,642,500 1,800,000
Net investment in sales-type lease 58,785 795,780
Equipment at cost, net of accumulated depreciation
of $8,017,971 and $6,043,660 at December 31, 2001
and 2000, respectively 7,863,091 9,837,402
------------ ------------

Total assets $13,356,640 $14,678,631
============ ============

LIABILITIES AND PARTNERS' CAPITAL

Notes payable $ 3,438,473 $ 3,002,142
Accrued interest 21,407 23,705
Accrued liabilities 1,324,983 1,402,949
Accrued liabilities - affiliate 40,974 27,070
Deferred rental income - 90,190
------------ ------------
Total liabilities 4,825,837 4,546,056
------------ ------------

Partners' capital (deficit):
General Partner (1,272,456) (1,192,367)
Limited Partnership Interests
(3,040,000 Units; initial purchase price of $25 each) 9,803,259 11,324,942
------------ ------------
Total partners' capital 8,530,803 10,132,575
------------ ------------

Total liabilities and partners' capital $13,356,640 $14,678,631
============ ============

The accompanying notes are an integral part of these financial statements

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999
-----------

INCOME

Operating lease revenue $ 1,815,459 $1,603,658 $3,362,568
Sales-type lease revenue 44,385 8,248 -
Interest income 123,132 108,069 161,232
Interest income - loan 71,548 220,592 -
Gain on sale of equipment - 445,599 -
------------ ----------- -----------
Total income 2,054,524 2,386,166 3,523,800
------------ ----------- -----------

EXPENSES

Depreciation 865,311 985,274 2,054,872
Write-down of equipment 1,109,000 - -
Interest expense 302,659 344,016 399,589
Equipment management fees - affiliate 129,842 87,443 168,128
Operating expenses - affiliate 799,844 1,823,804 989,886
Write-down of impaired loan and interest receivable 449,640 - -
------------ ----------- -----------
Total expenses 3,656,296 3,240,537 3,612,475
------------ ----------- -----------

Net loss $(1,601,772) $ (854,371) $ (88,675)
============ =========== ===========

Net loss per limited partnership unit $ (0.50) $ (0.27) $ (0.03)
============ =========== ===========
Cash distributions declared
per limited partnership unit $ -- $ -- $ --
============ =========== ===========

The accompanying notes are an integral part of these financial statements

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

General
Partner Limited Partners
Amount Units Amount Total
------------ ---------------- ------------ ------------

Balance at December 31, 1998 $(1,145,215) 3,040,000 $12,220,836 $11,075,621

Net loss - 1999 (4,434) - (84,241) (88,675)
------------ ---------------- ------------ ------------

Balance at December 31, 1999 (1,149,649) 3,040,000 12,136,595 10,986,946

Net loss - 2000 (42,718) - (811,653) (854,371)
------------ ---------------- ------------ ------------

Balance at December 31, 2000 (1,192,367) 3,040,000 11,324,942 10,132,575

Net loss - 2001 (80,089) - (1,521,683) (1,601,772)
------------ ---------------- ------------ ------------

Balance at December 31, 2001 $(1,272,456) 3,040,000 $ 9,803,259 $ 8,530,803
============ ================ ============ ============

The accompanying notes are an integral part of these financial statements

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(1,601,772) $ (854,371) $ (88,675)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 865,311 985,274 2,054,872
Bad debt expense 145,424 - -
Write-down of equipment 1,109,000 - -
Sales-type lease revenue (44,385) (8,248) -
Gain on sale of equipment - (445,599) -
Write-down of impaired loan and interest receivable 449,640 - -
Changes in assets and liabilities:
Rents receivable (40,989) (305,592) 104,184
Accounts receivable - other 162,261 (162,261) -
Accounts receivable - affiliate 109,206 (105,879) (4,888)
Prepaid expenses (4,827) - -
Interest receivable - loan (71,548) (220,592) -
Collections on net investment in sales-type lease 781,380 195,127 -
Accrued interest (2,298) (20,504) (39,014)
Accrued liabilities (77,966) 480,880 633,569
Accrued liabilities - affiliate 13,904 8,468 (2,096)
Deferred rental income (90,190) (79,898) 11,206
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,702,151 (533,195) 2,669,158
------------ ------------ ------------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales - 846,496 -
Loan receivable - (1,800,000) -
------------ ------------ ------------
Net cash used in investing activities - (953,504) -
------------ ------------ ------------

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 1,671,867 666,217 -
Principal payments - notes payable (1,235,536) (914,188) (3,028,987)
Distributions paid - - -
------------ ------------ ------------
Net cash provided by (used in) financing activities 436,331 (247,971) (3,028,987)
------------ ------------ ------------

Net increase (decrease) in cash and cash equivalents 2,138,482 (1,734,670) (359,829)
Cash and cash equivalents at beginning of year 1,446,237 3,180,907 3,540,736
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,584,719 $ 1,446,237 $ 3,180,907
============ ============ ============

SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 304,957 $ 364,520 $ 438,603
============ ============ ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Equipment sold on sales-type lease $ - $ 982,659 $ -
============ ============ ============

See Note 7 to the financial statements regarding the refinancing of the
Partnership's notes payable in February 2001.

The accompanying notes are an integral part of these financial statements

29AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2001

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. Unitholders 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 EFG. 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").

Significant operations commenced on July 27, 1989 when the Partnership made its
initial equipment purchase. Pursuant to the Restated Agreement, as amended,
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Recognized Owners and 5% to the
General Partner.

Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees based upon
acquisitions of equipment and revenues from leases.

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 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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------

Cash and Cash Equivalents
- ----------------------------

The Partnership classifies as cash and cash equivalent amounts on deposits in
banks and liquid investment instruments purchased with an original maturity of
three months or less.

Revenue Recognition
- --------------------

Effective January 1, 2000, the Partnership adopted the provisions of Securities
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the
recognition, presentation and disclosure of revenue in financial statements.
The adoption of SAB No. 101 had no impact on the Partnership's financial
statements.

Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The majority
of the leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. Future minimum rents from
operating leases of $2,819,919 are due as follows:

For the year ending December 31, 2002 1,197,309
2003 973,566
2004 649,044
----------

. Total $2,819,919
==========

In January 2002, the Programs executed a lease amendment with the existing
lessee, Air Slovakia BWJ Ltd. ("Air Slovakia") to restructure the lease of a
Boeing 737 aircraft, which had been scheduled to expire in September 2003. In
accordance with the lease amendment, the lease term was revised and the lease
will terminate in August 2002.

Lease payments for the sales-type lease are due monthly and the related revenue
is recognized by a method which produces a constant periodic rate of return on
the outstanding investment in the lease. Unearned income is recognized as
sales-type lease revenue over the lease term using the interest method.

Revenue from major individual lessees which accounted for 10% or more of lease
revenue during the years ended December 31, 2001, 2000 and 1999 is as follows:

2001 2000 1999
-------- ---------- ----------

Aerovias De Mexico S.A. de C.V $973,566 $ 305,592 $ --
Finnair OY . . . . . . . . . . $468,565 $1,148,554 $2,101,991
Air Slovakia . . . . . . . . . $373,327 $ -- $ --
Southwest Airlines, Inc. . . . $ -- $ -- $1,260,577

Use of Estimates
- ------------------

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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, 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 the 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.

The ultimate realization of residual value for any aircraft is dependent upon
many factors, including EFG's ability to sell and re-lease equipment. Changing
market conditions, industry trends, technological advances, and many other
events can converge to enhance or detract from asset values at any given time.

Remarketing and Maintenance Expenses
- ---------------------------------------

The Partnership expenses storage and remarketing costs associated with aircraft
and other equipment under lease as incurred.

Generally, the costs of scheduled inspections and repairs and routine
maintenance for aircraft and other equipment under lease are the responsibility
of the lessee. For aircraft under lease, scheduled airframe inspections and
repairs, such as "D checks", are generally the responsibility of the lessee. In
certain situations, the Partnership may be responsible for reimbursing the
lessee for a portion of such costs paid by the lessee prior to the redelivery
date (i.e., the expiration of the lease term) or may be entitled to receive
additional payments from the lessee based on the terms and conditions set forth
in the lease arrangement which considers, among other things, the amount of time
remaining until the next scheduled maintenance event. The Partnership records
the amount payable or receivable, with a corresponding charge or credit to
operations.

Allowance for Loan Losses
- ----------------------------

In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), the
Partnership periodically evaluates the collectibility of its loan's contractual
principal and interest and the existence of loan impairment indicators,
including contemporaneous economic conditions, situations which could affect the
borrower's ability to repay its obligation, the estimated value of the
underlying collateral, and other relevant factors. Real estate values are
discounted using a present value methodology over the period between the
financial reporting date and the estimated disposition date of each property. A
loan is considered to be impaired when, based on current information and events,
it is probable that the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement, which includes both
principal and interest. A provision for loan losses is charged to earnings
based on the judgment of the Partnership's management of the amount necessary to
maintain the allowance for loan losses at a level adequate to absorb probable
losses.

Net Investment in Sales-Type Lease
- --------------------------------------
For leases that qualify as sales-type leases, the Partnership recognizes profit
or loss at lease inception to the extent the fair value of the property leased
differs from the carrying value. For balance sheet purposes, the aggregate
lease payments receivable are recorded on the balance sheet net of unearned
income as net investment in sales-type lease. Unearned income is recognized as
sales-type lease revenue over the lease term on the interest method.
Impairment of Long-Lived Assets
- ----------------------------------
The carrying values of long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value may not be
recoverable. If this review results in an impairment, as determined based on
the estimated undiscounted cash flow, the carrying value of the related
long-lived asset is adjusted to fair value.
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.

Contingencies
- -------------

It is the Partnership's policy to recognize a liability for goods and services
during the period when the goods or services are received. To the extent that
the Partnership has a contingent liability, meaning generally a liability the
payment of which is subject to the outcome of a future event, the Partnership
recognizes a liability in accordance with Statement of Financial Accounting
Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5
requires the recognition of contingent liabilities when the amount of liability
can be reasonably estimated and the liability is probable.

The Partnership is a Nominal Defendant in a Class Action Lawsuit. The
Defendant's and Plaintiff's Counsel have negotiated a Revised Settlement. As
part of the Revised Settlement, EFG has agreed to buy the loans made by the
Partnership and 10 affiliated partnerships (the ''Exchange Partnerships'') to
Echelon Residential Holdings for an aggregate of $32 million plus interest at
7.5% per annum, if they are not repaid prior to or at their scheduled maturity
date. The Revised Settlement also provides for the liquidation of the Exchange
Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. The
court held a hearing on March 1, 2002 to consider the Revised Settlement. After
the hearing, the court issued an order preliminarily approving the Revised
Settlement and providing for the mailing of notice to the Operating Partnership
Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on
the terms and conditions set forth in the Revised Settlement is fair, reasonable
and adequate and should be finally approved by the court and a final judgment
entered in the matter. The Partnership's estimated exposure for costs
anticipated to be incurred in pursuing the settlement proposal is approximately
$517,000 consisting principally of legal fees and other professional service
costs. These costs are expected to be incurred regardless of whether the
proposed settlement ultimately is effected. The Partnership expensed
approximately $337,000 of these costs in 1998 following the Court's approval of
the initial settlement plan. The cost estimate is subject to change and is
monitored by the General Partner based upon the progress of the litigation and
other pertinent information. As a result, the Partnership expensed additional
amounts of approximately $89,000, $41,000 and $50,000 for such costs during
2001, 2000 and 1999, respectively. See Note 9 additional discussion.

The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings. The Partnership does not intend to engage in investment activities in
a manner or to an extent that would require the Partnership to register as an
investment company under the 1940 Act. However, it is possible that the
Partnership unintentionally may have engaged, or may in the future, engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. The 1940 Act, among other things, prohibits an
unregistered investment company from offering securities for sale or engaging in
any business in interstate commerce and, consequently, leases and contracts
entered into by partnerships that are unregistered investment companies may be
voidable. The General Partner has consulted counsel and believes that the
Partnership is not an investment company. If the Partnership were determined to
be an unregistered investment company, its business would be adversely affected.
The General Partner has determined to take action to resolve the Partnership's
status under the 1940 Act by means that may include disposing or acquiring
certain assets that it might not otherwise dispose or acquire.

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 8 concerning
allocation of income or loss for income tax purposes.

Net Income (Loss) Per Unit
- ------------------------------

Net income (loss) per unit is based on 3,040,000 Units outstanding during each
of the three years in the period ended December 31, 2001 and computed after
allocation of the General Partner's 5% share of net income (loss) per unit.

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 separate tax returns.

New Accounting Pronouncements
- -------------------------------

Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Partnership believes the adoption of SFAS No.
141 has not had a material impact on its financial statements.

Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Partnership to complete a
transitional goodwill impairment test six months from the date of adoption. The
Partnership believes the adoption of SFAS No. 142 will not have a material
impact on its financial statements.

Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in
October 2001 and replaces Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Bulletin Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business", for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Partnership believes that the
adoption of SFAS No. 144 will not have a material impact on its financial
statements.

NOTE 3 - EQUIPMENT
- ---------------------

The following is a summary of equipment owned by the Partnership at December 31,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 2001 under contracted lease terms. A
remaining lease term equal to zero reflects equipment held for sale or re-lease.

. Remaining
. Lease Term Equipment
Equipment Type (Months) at Cost Location
- ---------------------------------------------- ----------- ------------ ---------

One McDonnell Douglas MD-82 0 $ 6,881,219 Off Lease
One McDonnell Douglas MD-82
(Aerovias de Mexico, S.A. de C.V.) 32 6,881,219 Foreign
One Boeing 737-2H4 (Air Slovakia) 8 2,118,624 Foreign
------------
Total equipment cost. . . . . . . . . . . . - 15,881,062
Accumulated depreciation . - (8,017,971)
------------
Equipment, net of accumulated depreciation - $ 7,863,091
============

The cost of each of the Partnership's aircraft represents 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.

Certain of the Partnership's aircraft and the related lease payment streams were
used to secure the Partnership's term loans with third-party lenders. The
preceding summary includes leveraged equipment having an aggregate original cost
of approximately $6,881,000 and a net book value of approximately $4,206,000 at
December 31, 2001.

The Partnership entered into a three-year lease agreement with Air Slovakia for
its proportionate interest in a Boeing 737-2H4 aircraft, effective September
2000. In accordance with the lease amendment described above, the lease term
was revised and the lease will terminate in August 2002. The Partnership
entered into a four-year re-lease agreement with Aerovias de Mexico, S.A. de
C.V. for its proportionate interest in a McDonnell Douglas MD-82 aircraft,
effective September 2000. Under the terms of this agreement, the Partnership
are to receive rents of approximately $3,873,000 over the term of the lease.

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. The summary above includes
aircraft held for re-lease or sale with an original cost of approximately
$6,881,000 and a net book value of $3,097,000 at December 31, 2001, which
represents the McDonnell Douglas MD-82 aircraft returned in April 2001. The
General Partner is actively seeking the sale or re-lease of this aircraft.

The Partnership accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the assets may not be recoverable from undiscounted
future cash flows. During the year ended December 31, 2001, the Partnership
recorded a write-down of equipment, representing an impairment to the carrying
value of the Partnership's interest in the McDonnell Douglas MD-82 aircraft
which is off-lease as discussed above. The resulting charge of $1,109,000 was
based on a comparison of estimated fair value and carrying value of the
Partnership's interest in the aircraft.

NOTE 4 - LOAN RECEIVABLE
- ----------------------------

On March 8, 2000, the Exchange Partnerships collectively loaned $32 million to
Echelon Residential Holdings, a newly formed real estate company. Echelon
Residential Holdings is owned by several investors, including James A. Coyne,
Executive Vice President of the general partner of EFG. In addition, certain
affiliates of the General Partner made loans to Echelon Residential Holdings in
their individual capacities.
In the Class Action Lawsuit, there is a risk that the court may object to the
General Partner's action in structuring the loan in this way since the EFG
officer may be deemed an affiliate and the loans in violation of the prohibition
against loans to affiliates in the Partnership Agreement and the court's
statement in its order permitting New Investments that all other provisions of
the Partnership Agreements governing the investment objectives and policies of
the Partnership shall remain in full force and effect. The court may require
the partnerships to restructure or divest the loan.
The Partnership's original loan was $1,800,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, an unrelated Florida-based real estate company. The loan has a term
of 30 months, maturing on September 8, 2002, and an annual interest rate of 14%
for the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral. Echelon Residential
Holdings has no material business interests other than those connected with the
real estate properties owned by Echelon Residential LLC.
The summarized financial information for Echelon Residential Holdings as of
December 31, 2001 and 2000, and for the year ended December 31, 2001 and the
period March 8, 2000 (commencement of operations) through December 31, 2000 is
as follows:

2001 2000
------------- ------------

Total assets .. . . . . . . . . . . . $ 85,380,902 $68,580,891
Total liabilities . . . . . . . . . . $ 94,352,739 $70,183,162
Minority interest . . . . . . . . . . $ 1,570,223 $ 2,257,367
Total deficit .. . . . . . . . . . . $(10,542,060) $(3,859,638)

Total revenues .. . . . . . . . . . . $ 14,564,771 $ 5,230,212
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture. . . . . . . . . . . . $ 23,137,076 $11,936,238
Net loss .. . . . . . . . . . . . . . $ (8,572,305) $(6,706,026)

During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $157,500, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $292,140 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The total impairment of $449,640 is recorded as write-down of impaired loan and
interest receivable in the year ended December 31, 2001.
The write-down of the loan receivable from Echelon Residential Holdings and the
related accrued interest was precipitated principally by a slowing U.S. economy
and its effects on the real estate development industry. The economic outlook
for the properties that existed when the loan was funded has deteriorated and
inhibited the ability of Echelon Residential Holdings' management to secure
low-cost sources of development capital, including but not limited to
joint-venture or equity partners. In response to these developments and lower
risk tolerances in the credit markets, the management of Echelon Residential
Holdings decided in the second quarter of 2001 to concentrate its prospective
development activities within the southeastern United States and, therefore, to
dispose of development sites located elsewhere. In May 2001, Echelon
Residential Holdings closed its Texas-based development office; and since the
beginning of 2001, the company has sold five of nine properties (two in July
2001, one in October 2001, one in November 2001 and one in February 2002). As a
result of these developments, the General Partner does not believe that Echelon
Residential Holdings will realize the profit levels originally believed to be
achievable from either selling these properties as a group or developing all of
them as multi-family residential communities.

NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------

The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft was to transfer to
Royal Aviation Inc., at the expiration of the lease term. The sale of the
aircraft was recorded by the Partnership as a sales-type lease, with a lease
term expiring in January 2002. For the year ended December 31, 2000, the
Partnership recorded a net gain on sale of equipment, for financial statement
purposes, of $302,878 for the Partnership's proportional interest in the
aircraft. The net book value of equipment sold on sales-type lease totaled
$982,659, which was a non-cash transaction. In addition, the Partnership has
recognized sales-type lease revenue from this lease of $44,385 and $8,248,
respectively, during the years ended December 31, 2001 and 2000. At December
31, 2001, the components of the net investment in the sales-type lease are as
follows:

Total minimum lease payments to be received $64,322
Less: Unearned income . . . . . . . . . . . . 5,537
-------
Net investment in sales-type lease $58,785
=======

Unearned income is being amortized to revenue over the lease term, expiring in
January 2002.

In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a
result, has defaulted on this conditional sales agreement. The General Partner
is negotiating for the return of the aircraft. As of December 31, 2001, no
allowance on the investment in sales-type lease was deemed necessary based on
the comparison of estimated fair value of the Partnership's interest in the
aircraft and the Partnership's net investment in the sales-type lease.

NOTE 6 - RELATED PARTY TRANSACTIONS
- ----------------------------------------

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 each of the three years in the period ended
December 31, 2001, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:

2001 2000 1999
-------- ---------- ----------

Equipment management fees . . . $129,842 $ 87,443 $ 168,128
Administrative charges. . . . . 41,518 67,207 70,081
Reimbursable operating expenses
due to third parties. . . . 758,326 1,756,597 919,805
-------- ---------- ----------

Total. . . . . . . . . . . . . $929,686 $1,911,247 $1,158,014
======== ========== ==========

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
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 aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 2,
"Equipment on Lease."

All rents and the proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 2001, the Partnership was owed $1,561 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2002.

An affiliate of the General Partner owns Units in the Partnership as follows:

Number of Percent of Total
Affiliate Units Owned Outstanding Units

Old North Capital Limited Partnership 205,040 6.74%
- ------------------------------------- ----------- ------------------

Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele Group
Inc. ("Semele"). Gary D. Engle is Chairman and Chief Financial Officer of
Semele and President, Chief Executive Officer, sole shareholder and Director of
EFG's general partner.

NOTE 7 - NOTES PAYABLE
- --------------------------

The Partnership has one note payable outstanding at December 31, 2001 in the
amount of $3,438,473. This installment note is non-recourse and is
collateralized by Partnership's interest in an aircraft leased to Aerovias de
Mexico, S. A. de C.V. and assignment of the related lease payments. This
indebtedness bears a fixed interest rate of 7.65%, principal is amortized
monthly and the Partnership has a balloon payment obligation at the expiration
of the lease term of $1,337,875 in September 2004.

In February 2001, the Partnership and certain affiliated investment programs
(collectively "the Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de
C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $4,011,791 including $2,339,924 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $1,671,867 to repay the outstanding balance
of the indebtedness and accrued interest related to a second aircraft of
$433,178 and certain aircraft reconfiguration costs that the Partnership had
accrued at December 31, 2000.

Management believes that the carrying amount of the note payable approximates
fair value at December 31, 2001 based on its experience and understanding of the
market for instruments with similar terms.

The annual maturities of the note payable are as follows:

For the year ending December 31, 2002 $ 742,090
2003 794,776
2004 1,901,607
----------

. Total $3,438,473
==========

NOTE 8 - 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, 2001, the General Partner had a positive tax capital account
balance.

The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2001, 2000 and 1999:

2001 2000 1999
------------ ---------- ---------

Net loss . . . . . . . . . . . . . . . . . . $(1,601,772) $(854,371) $(88,675)
Write-down of loan receivable. . . . . . . 157,500 -- --
Bad debt expense . . . . . . . . . . 145,424 -- --
Financial statement depreciation in excess
of (less than) of tax depreciation 624,764 (188,282) 795,190
Deferred rental income . . . . . . . . . . (90,190) (79,898) 11,206
Other. . . . . . . . . . . . . . . . . . . 63,690 708,972 68,000
------------ ---------- ---------
Net income (loss) for federal income
Tax reporting purposes. . . . . . . . . . . $ (700,584) $(413,579) $785,721
============ ========== =========

The principal component of "Other" consists of the difference between the tax
and financial statement gain or loss on aircraft 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, 2001 and 2000:

2001 2000
------------ ------------

Partners' capital. . . . . . . . . . . . . . . . . . . . . . $ 8,530,803 $10,132,575
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) . . . . . . . . . . . (4,534,028) (5,435,216)
------------ ------------
Partners' capital for federal income tax reporting purposes. $11,971,775 $12,672,359
============ ============

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

NOTE 9 - 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 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 August 20, 1998, the court preliminarily approved a Stipulation of Settlement
setting forth terms pursuant to which a settlement of the Class Action Lawsuit
was intended to be achieved and which, among other things, was at the time
expected to reduce the burdens and expenses attendant to continuing litigation.
Subsequently an Amended Stipulation of Settlement was approved by the court.
The Amended Stipulation, among other things, divided the Class Action Lawsuit
into two separate sub-classes that could be settled individually. On May 26,
1999, the Court issued an Order and Final Judgment approving settlement of one
of the sub-classes. Settlement of the second sub-class, involving the
Partnership and 10 affiliated partnerships remained pending due, in part, to the
complexity of the proposed settlement pertaining to this class. The settlement
of the Partnership sub-class was premised on the consolidation of the
Partnerships' net assets (the "Consolidation"), subject to certain conditions,
into a single successor company. The potential benefits and risks of the
Consolidation were to be presented in a Solicitation Statement that would be
mailed to all of the partners of the Exchange Partnerships as soon as the
associated Securities and Exchange Commission review process was completed.

On May 15, 2001, Defendants' Counsel reported to the court that, notwithstanding
the parties' best efforts, the review of the solicitation statement by the staff
of the SEC in connection with the proposed settlement of the Class Action
Lawsuit had not been completed. Nonetheless, the Defendants stated their belief
that the parties should continue to pursue the court's final approval of the
proposed settlement.

Plaintiffs' Counsel also reported that the SEC review has not been concluded and
that they had notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intended to seek court approval to immediately resume active
prosecution of the claims of the Plaintiffs. Subsequently, the court issued an
order setting a trial date of March 4, 2002, referring the case to mediation and
referring discovery to a magistrate judge.

The Defendant's and Plaintiff's Counsel continued to negotiate toward a
settlement and have reached agreement on a Revised Stipulation of Settlement
(the "Revised Settlement") that does not involve a Consolidation. As part of the
Revised Settlement, EFG has agreed to buy the loans made by the Exchange
Partnerships to Echelon Residential Holdings for an aggregate of $32 million
plus interest at 7.5% per annum, if they are not repaid prior to or at their
scheduled maturity date. The Revised Settlement also provides for the
liquidation of the Exchange Partnerships' assets, a cash distribution and the
dissolution of the Partnerships including the liquidation and dissolution of
this Partnership. The court held a hearing on March 1, 2002 to consider the
Revised Settlement. After the hearing, the court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Operating Partnership Sub-Class of a hearing on June 7, 2002 to determine
whether the settlement on the terms and conditions set forth in the Revised
Settlement is fair, reasonable and adequate and should be finally approved by
the court and a final judgment entered in the matter. The Partnership's share
of legal fees and expenses related to the Class Action Lawsuit and the
Consolidation was estimated to be approximately $517,000, of which approximately
$337,000 was expensed by the Partnership in 1998 and additional amounts of
$89,000, $41,000, and $50,000 were expensed by the Partnership in 2001, 2000,
and 1999, respectively.

NOTE 10 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------

The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:

Three Months Ended

March 31, June 30, September 30, December 31, Total
----------- ------------ --------------- -------------- ------------

2001
-----------

Total operating and sales-type lease revenue. $ 613,758 $ 438,386 $ 456,504 $ 351,196 $ 1,859,844
Net income (loss) . . . . . . . . . . . . . . 250,352 (1,462,102) 27,134 (417,156) (1,601,772)
Net income (loss) per
limited partnership unit. . . . . . . . . . 0.08 (0.46) 0.01 (0.13) (0.50)

2000
-----------

Total operating and sales-type lease revenue. $ 362,298 $ 260,137 $ 352,390 $ 637,081 $ 1,611,906
Net income (loss) . . . . . . . . . . . . . . (165,982) (38,153) (718,775) 68,539 (854,371)
Net income (loss) per limited
partnership unit . (0.05) (0.01) (0.23) 0.02 (0.27)

The Partnership's net loss in the three months ended June 30, 2001, is primarily
the result of a write-down of the impaired loan and interest receivable from
Echelon Residential Holdings and a write-down of equipment of $449,640 and
$957,000, respectively.

The Partnership's net loss in the three months ended September 30, 2000 is
primarily the result of recording an accrual of $664,000 for a required D-check
for an aircraft.

50

ADDITIONAL FINANCIAL INFORMATION

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

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

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

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 the cash excess (deficiency) associated with the
aircraft dispositions which occurred in the year ended December 31, 2000. There
were no aircraft disposals during the years ended December 31, 2001 and 1999.

2000
----------

Rents earned prior to disposal of
equipment, net of interest charges $1,580,999

Sale proceeds realized upon
disposition of equipment 846,496
----------

Total cash generated from rents
and equipment sale proceeds 2,427,495

Original acquisition cost of equipment disposed 2,118,625
----------

Excess of total cash generated to cost
of equipment disposed $ 308,870
==========

AIRFUND INTERNATIONAL LIMITED PARTNERSHIP

STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS

FOR THE YEAR ENDED DECEMBER 31, 2001

. Sales and
Operations Refinancings Total
------------ ------------- ------------

Net income (loss) $(1,601,772) $ - $(1,601,772)

Add:
Depreciation 865,311 - 865,311
Collections on investment in sales-type lease 781,380 - 781,380
Bad debt expense 145,424 - 145,424
Write-down of equipment 1,109,000 - 1,109,000
Management fees 129,842 - 129,842
Write-down of impaired loan and interest receivable 449,640 - 449,640
Less:
Sales-type lease revenue (44,385) - (44,385)
Principal reduction of notes payable (1,235,536) - (1,235,536)
------------ ------------- ------------
Cash from operations, sales and refinancings 598,904 - 598,904

Less:
Management fees (129,842) - (129,842)
------------ ------------- ------------

Distributable cash from operations,
sales and refinancings 469,062 - 469,062

Other sources and uses of cash:
Cash and cash equivalents at beginning of year 489,128 957,109 1,446,237
Net change in receivables and accruals (2,447) - (2,447)
Net proceeds from notes payable refinancing - 1,671,867 1,671,867
------------ ------------- ------------

Cash and cash equivalents at end of year $ 955,743 $ 2,628,976 $ 3,584,719
============ ============= ============

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

FOR THE YEAR ENDED DECEMBER 31, 2001

For the year ended December 31, 2001, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:

Operating expenses $ 863,906

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

None.

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, 2002 are as follows:

DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (See Item 13)
- -------------------------------------------------------------------------------

Name Title Age Term
- ---------------------- -------------------------------------------- --- ---------

Geoffrey A. MacDonald Chairman of the general . Until a
. partner of EFG and a Director . successor
. of the General Partner 53 is duly
. . . elected
Gary D. Engle President and Chief Executive . and
. Officer of the general partner of EFG . qualified
. and President and a Director .
. of the General Partner 53

Michael J. Butterfield Executive Vice President and Chief
. Operating Officer of the general partner
. of EFG and Treasurer of the General Partner 42

Gail D. Ofgant Senior Vice President, Lease Operations
. of the general partner of EFG and
. Senior Vice President of the General Partner 36

(c) Identification of Certain Significant Persons
- -----------------------------------------------------------

None.
- -----

(d) Family Relationship
- ------------------------------

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

(e) Business Experience
- -------------------------

Mr. MacDonald, age 53, has been a Director of the General Partner since 1998 and
served as its President from 1988 through August 2001. Mr. McDonald is also
Chairman of the Board of the general partner of EFG. Mr. McDonald was a
co-founder of EFG's predecessor, American Finance Group, which was established
in 1980. Mr. MacDonald is a member of the Board of Managers of Echelon
Development Holdings LLC. Prior to co-founding American Finance Group, Mr.
MacDonald held various positions in the equipment leasing industry and the
ethical pharmaceutical industry with Eli Lilly & Company. Mr. MacDonald holds
an M.B.A. from Boston College and a B.A. degree from the University of
Massachusetts (Amherst).

Mr. Engle, age 53, is Director and President of the General Partner. Mr. Engle
is the sole shareholder, Director, President and Chief Executive Officer of
Equis Corporation, the general partner of EFG. Mr. Engle is also Chairman and
Chief Executive Officer of Semele Group Inc. ("Semele") and a member of the
Board of Managers of Echelon Development Holdings LLC. Mr. Engle controls the
general partners of Atlantic Acquisition Limited Partnership ("AALP") and Old
North Capital Limited Partnership ("ONC"). Mr. Engle joined EFG in 1990 and
acquired control of EFG and its subsidiaries in December 1994. Mr. Engle
co-founded Cobb Partners Development, Inc., a real estate and mortgage banking
company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr.
Engle was Senior Vice President and Chief Financial Officer of Arvida Disney
Company, a large-scale community development organization owned by Walt Disney
Company. Prior to 1980, Mr. Engle served in various management consulting and
institutional brokerage capacities. Mr. Engle has an M.B.A. degree from Harvard
University and a B.S. degree from the University of Massachusetts (Amherst).

Mr. Butterfield, age 42, has served as Treasurer of the General Partner since
1996. Joining EFG in June 1992, Mr. Butterfield is currently Executive Vice
President, Chief Operating Officer, Treasurer and Clerk of the general partner
of EFG. Mr. Butterfield is also Chief Financial Officer and Treasurer of Semele
and Vice President, Finance and Clerk of Equis/Echelon Management Corporation,
the manager of Echelon Residential LLC. Prior to joining EFG, Mr. Butterfield
was an audit manager with Ernst & Young LLP, which he joined in 1987. Mr.
Butterfield was also 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 C.P.A. requirements in the
United States. Mr. Butterfield holds a Bachelor of Commerce degree from the
University of Otago, Dunedin, New Zealand.

Ms. Ofgant, age 36, has served as Senior Vice President of the General Partner
since 1997. Ms. Ofgant joined EFG in July 1989 and held various positions in
the organization before becoming Senior Vice President of the general partner of
EFG in 1998. Ms. Ofgant is Senior Vice President and Assistant Clerk of
Equis/Echelon Management Corporation, the manager of Echelon Residential LLC.
From 1987 to 1989, Ms. Ofgant was employed by Security Pacific National Trust
Company. Ms. Ofgant holds a B.S. degree from Providence College.

(f) Involvement in Certain Legal Proceedings

None.

(g) Promoters and Control Persons

Not applicable.

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.

(c) Other Compensation

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 6 to the financial
statements included in Item 8, herein.

(d) Stock Options and Stock Appreciation Rights.

Not applicable.

(e) Long-Term Incentive Plan Awards Table.

Not applicable.

(f) Defined Benefit or Actuarial Plan Disclosure.

Not applicable.

(g) Compensation of Directors

None.

(h) 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 no
outstanding 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;

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 15, 2002, the following person or group owns beneficially more than
5% of the Partnership's 3,040,000 outstanding Units:

. Name and Amount Percent
. Title Address of of Beneficial of
of Class Beneficial Owner Ownership Class
- --------------------- ------------------------------------- ------------- --------

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

Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele. Gary D.
Engle is Chairman and Chief Financial Officer of Semele and President, Chief
Executive Officer, sole shareholder and Director of EFG's general partner.

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, 2001, 2000 and
1999, which were accrued or paid by the Partnership to EFG or its Affiliates,
are as follows:

2001 2000 1999
-------- ---------- ----------

Equipment management fees. . . . . . . . . . . $129,842 $ 87,443 $ 168,128
Administrative charges . . . . . . . . . . . . 41,518 67,207 70,081
Reimbursable operating expenses
due to third parties. . . . . . . . . . . . . 758,326 1,756,597 919,805
-------- ---------- ----------

Total $929,686 $1,911,247 $1,158,014
======== ========== ==========

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 or to
a lender. EFG temporarily deposits collected funds in a separate interest
bearing account prior to remittance to the Partnership. At December 31, 2001,
the Partnership was owed $1,561 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 2002.

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 8, 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.

An affiliate of the General Partner owns Units in the Partnership as follows:

Number of Percent of Total
Affiliate Units Owned Outstanding Units

Old North Capital Limited Partnership 205,040 6.74%
- ------------------------------------- ----------- ------------------

Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele. Gary D.
Engle is Chairman and Chief Financial Officer of Semele and President, Chief
Executive Officer, sole shareholder and Director of EFG's general partner. See
Items 10 and 13 of this report.

The discussions of the loan to Echelon Residential Holdings in Items 1(b) and
1(c) above are incorporated herein by reference.

(b) Certain Business Relationships

None.

(c) Indebtedness of Management to the Partnership

None.

(d) Transactions with Promoters

Not applicable.

PART IV

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

(a) Documents filed as part of this report:

(1) All Financial Statements:

The financial statements are filed as part of this report under Item 8
"Financial Statements and Supplementary Data".

(2) Financial Statement Schedules:

Schedule II - Valuation and Qualifying Accounts:

Allowance for rents receivable
- ---------------------------------
Balance at December 31, 2000 $ -
Additions to allowance 145,424
--------
Balance at December 31, 2001 $145,424
========

Allowance for interest receivable
- ---------------------------------
Balance at December 31, 2000 $ -
Additions to allowance 292,140
--------
Balance at December 31, 2001 $292,140
========

Allowance for loan receivable
- ---------------------------------
Balance at December 31, 2000 $ -
Additions to allowance 157,500
--------
Balance at December 31, 2001 $157,500
========

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.

(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.

A list of exhibits filed or incorporated by reference is as follows:

Exhibit
Number
----------

2.1 Plaintiffs' and Defendants' Joint Motion to Modify Order
Preliminarily Approving Settlement, Conditionally Certifying Settlement Class
and Providing for Notice of, and Hearing on, the Proposed Settlement was filed
in the Registrant's Annual Report on Form 10-K/A for the year ended December 31,
1998 as Exhibit 2.1 and is incorporated herein by reference.

2.2 Plaintiffs' and Defendants' Joint Memorandum in Support
of Joint Motion to Modify Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report
on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.2 and is
incorporated herein by reference.

2.3 Order Preliminarily Approving Settlement, Conditionally
Certifying Settlement Class and Providing for Notice of, and Hearing on, the
Proposed Settlement (August 20, 1998) was filed in the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.3 and is
incorporated herein by reference.

2.4 Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement (March 22, 1999) was filed in the
Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998
as Exhibit 2.4 and is incorporated herein by reference.

2.5 Plaintiffs' and Defendants' Joint Memorandum in Support of
Joint Motion to Further Modify Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999 as Exhibit 2.5 and is
incorporated herein by reference.

2.6 Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement (March 5, 2000) was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 2.6 and is incorporated herein by reference.

2.7 Proposed Order Granting Joint Motion to Continue Final
Approval Settlement Hearing (March 13, 2001) was filed in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 2.7
and is incorporated herein by reference.

2.8 Order Setting Trial Date and Discovery Deadlines,
Referring Case to Mediation and Referring Discovery to United States Magistrate
Judge (June 4, 2001) was filed in the Registrant's Annual Report on Form 10-K/A,
Amendment No. 2, for the year ended December 31, 2000 as Exhibit 2.8 and is
incorporated herein by reference.

2.9 Plaintiffs' and Defendants' Joint Motion for Preliminary Approval
of Revised Stipulation of Settlement and request for hearing is filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as
Exhibit 2.9 and is included herein.

2.10 Plaintiffs' and Defendants' Joint Memorandum in Support of Joint
Motion for Preliminary Approval of Revised Stipulation of Settlement is filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001
as Exhibit 2.10 and is included herein.

2.11 Order Preliminarily Approving Settlement, Conditionally Certifying
Settlement Class and Providing for Notice of, and Hearing on, the Proposed
Settlement (March 1, 2002) is filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001 as Exhibit 2.11 and is included
herein.

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

10.1 Promissory Note in the principal amount of $1,800,000
dated March 8, 2000 between the Registrant, as lender, and Echelon Residential
Holdings LLC, as borrower, was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999 as Exhibit 10.1 and is incorporated
herein by reference.

10.2 Pledge Agreement dated March 8, 2000 between Echelon
Residential Holdings LLC (Pledgor) and American Income Partners V-A Limited
Partnership, as Agent for itself and the Registrant, was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 10.2 and is incorporated herein by reference.

99(a) 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(b) 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(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 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(e) 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(f) Lease agreement with Aerovias De Mexico, S.A. de C.V. was
filed in the Registrant's Annual Report on Form 10-K for the year ended December
31, 2000 and is incorporated herein by reference.

99(g) Aircraft Conditional Sale agreement with Royal Aviation Inc.
was filed in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 and is incorporated herein by reference.

99(h) Lease agreement with Air Slovakia BWJ, Ltd was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and
is incorporated herein by reference.

99 (i) Lease agreement with Air Slovakia BWJ, Ltd. is filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as
Exhibit 99 (i) and is included herein.

(b) Reports on Form 8-K

None.

(c) Other Exhibits

None.

(d) Financial Statement Schedules:

Consolidated Financial Statements for Echelon Residential Holdings LLC as of
December 31, 2001 and 2000 and for the year ended December 31, 2001 and for the
period March 8, 2000 (Date of Inception) through December 31, 2000 and
Independent Auditors' Report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.

AIRFUND International Limited Partnership

By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.

By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
- ----------------------------------------------------- --------------------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman of the general partner of EFG President and Chief Executive Officer
and a Director of the General Partner of the general partner of EFG,
. and President and a Director of
. the General Partner
. (Principal Executive Officer)

Date: March 29, 2002 Date: March 29, 2002
- ----------------------------------------------------- --------------------------------------

By: /s/ Michael J. Butterfield
- -----------------------------------------------------
Michael J. Butterfield
Executive Vice President and Chief Operating Officer
of the general partner of EFG and Treasurer
of the General Partner
(Principal Financial and Accounting Officer)

Date: March 29, 2002
- -----------------------------------------------------