AIRLEASE LTD - 10-K Annual Report

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

FORM 10-K

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

For the Fiscal Year Ended December 31, 2000

Commission File No. 1-9259

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

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

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

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

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

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

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

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

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

Aggregate market value of Depositary Units, held by non-affiliates of
the registrant as of the close of business at March 19, 2001 was $42,548,610.00.

TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS.......................................................... 3

ITEM 2. PROPERTIES........................................................ 14

ITEM 3. LEGAL PROCEEDINGS................................................. 14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 15

ITEM 6. SELECTED FINANCIAL DATA........................................... 18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 19

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK....................................................... 22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 23

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 23

ITEM 11. EXECUTIVE COMPENSATION............................................ 25

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 25

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 26

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. 27

SIGNATURES................................................................... 30

INDEX TO EXHIBITS...........................................................A-12

2

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

PART I
------

ITEM 1. BUSINESS

GENERAL

Airlease Ltd., A California Limited Partnership (the "Partnership" or
"Airlease"), was formed in 1986. The General Partner of the Partnership (the
"General Partner") is Airlease Management Services, Inc., a Delaware
corporation. Until October 31, 1996 the General Partner was a wholly owned
subsidiary of USL Capital Corporation ("USL Capital"), which in turn was an
indirect subsidiary of Ford Motor Company. On October 31, 1996, BA Leasing &
Capital Corporation ("BA Leasing & Capital"), a wholly owned indirect subsidiary
of BankAmerica Corporation, purchased the stock of the General Partner from USL
Capital and the General Partner became a wholly owned subsidiary of BA Leasing &
Capital. On September 29, 1999, BA Leasing & Capital merged into Banc of America
Leasing and Capital, LLC, a Delaware limited liability company ("BALCAP").
BALCAP is also a wholly owned indirect subsidiary of BankAmerica Corporation. A
total of 4,625,000 Depository Units representing limited partnership interests
("Units") in the Partnership are outstanding, of which 3,600,000 are held by the
public and 1,025,000 are owned by BALCAP and its subsidiaries.

The Partnership invests in commercial aircraft and leases the aircraft
to others, primarily airlines, pursuant to finance (full payout) or operating
leases.

PRINCIPAL INVESTMENT OBJECTIVES

The business of the Partnership is to acquire and own, either directly
or through joint ventures, aircraft and to lease such aircraft primarily to
airlines. The Partnership's principal investment objectives are to generate
income for quarterly cash distributions to Unitholders and to own a portfolio of
leased aircraft. The Partnership's original intent was that until January 1,
2005, it would use a substantial portion of the cash derived from the sale,
refinancing or other disposition of aircraft to purchase additional aircraft if
attractive investment opportunities were available.

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As previously reported, as part of a plan to mitigate the adverse
financial effects of changes in tax law, in 1997 Unitholders authorized the
General Partner to decide not to make new aircraft investments, to sell aircraft
when attractive opportunities arise, to distribute the proceeds and to liquidate
the Partnership when all assets are sold. The General Partner will consider
whether it is in the best interest of Unitholders to cease making new aircraft
investments as opportunities arise, in light of market conditions and the
Partnership's competitive position. Based on its investment experience and its
knowledge of the market, the General Partner believes that attractive investment
opportunities like those made by the Partnership in the past probably will not
be available. In the event that aircraft are sold and appropriate alternative
investments are not available, the Partnership will distribute sale proceeds to
Unitholders (after repaying debt and establishing appropriate reserves), and
this would result in a further reduction of the Partnership's portfolio.

In September 30, 2001, the leases with US Airways for five of the seven
aircraft in the Partnership's aircraft portfolio expire. Under the leases, US
Airways is required, by April 2001, to decide whether to renew the leases or to
return the aircraft. If US Airways elects to renew the leases, the leases will
continue but perhaps at a lower lease rate. Alternatively, if US Airways decides
to return the aircraft, the General Partner will market the aircraft to others
for either sale or a new lease.

If the five aircraft on lease to US Airways, which represent
approximately 73% of the Partnership's portfolio, are sold, the General Partner
would likely seek also to sell the remaining two aircraft in the Partnership's
portfolio. The Partnership intends to distribute the net proceeds from the sale
of any aircraft to Unitholders.

As the time of lease expirations nears, distributions to Unitholders
will depend more on the residual value of the aircraft in the Partnership's
portfolio than on the rental payment obligation from existing lessees (the
booked residual value per unit is $9.74.) Although the Partnership has
consistently sold aircraft at prices in excess of book value, aircraft values
depend on the supply and demand for aircraft, economic conditions, and other
factors. Consequently, the General Partner cannot precisely determine the net
proceeds availablefrom the sale of aircraft or whether such proceeds will be
above or below book value.

AIRCRAFT PORTFOLIO

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

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The following table describes the Partnership's aircraft portfolio at
December 31, 2000:

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

Number & Current Purchase
type; year of Ownership Acquired by lease price (in Type Noise
Lessee Delivery Interest Partnership expiration millions) of lease compliance(1)
- ------ ------------- --------- ----------- ---------- --------- -------- -------------

USAirways 5 MD-82 100% 1986 2001 $91.0 Direct Stage III
1981 (2) finance

FedEx 1 727-200FH 100% 1987 2006 $18.5(3) Direct Stage III
1979 finance

TWA 1 MD-82 100% 1988(4) 2002 $15.8(4) Direct Stage III
1984 finance

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

(2) The investment tax credits and the accelerated depreciation originally available upon delivery of the
aircraft on lease to US Airways, Inc. (formerly USAir, Inc.) ("US Airways") were sold in 1981 pursuant to
a tax benefit transfer lease, which terminated November, 1991. See Note 8 of Notes to Financial
Statements.

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

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

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

At December 31, 2000, the book value of aircraft by lessee as a percent
of total assets was as follows: US Airways, 72.6%; FedEx, 12.8%; and TWA, 14.3%.
Revenues by lessee as a percentage of total revenue for 2000 and 1999,
respectively, were as follows: US Airways, 76.8% and 77.1%; TWA, 17.4% and
17.2%; and FedEx, 5.9% and 5.7%.

TWA filed for Chapter 11 bankruptcy protection on January 10, 2001 and
failed to make its lease payments under its lease with the Partnership on
December 22, 2000, January 22, 2001 and February 22, 2001. On March 13, 2001,
TWA made its lease payments that were due on December 22, 2000 and January 22,
2001. TWA is expected to file with the U.S. Bankruptcy Court a stipulation,
agreement and order pursuant to which TWA agrees to cure the February 22, 2001
lease payment default within certain time limits. On March 12, 2001, the U.S.
Bankruptcy Court approved the sale of most assets of TWA to the parent
corporation of American Airlines, Inc. ("American Airlines"). Consummation of
the sale is subject to federal antitrust regulatory approval and other closing
conditions.

On February 27, 2001, the Partnership and American Airlines entered
into an assumption and lease agreement (the "Assumption and Lease Agreement")
pursuant to which American Airlines, subject to consummation of the sale to
American Airlines of the TWA assets and other conditions, has agreed to assume
or cause one of its subsidiaries to assume the TWA lease. If assumed by American
Airlines, the lease would be amended to reduce the monthly rent from the

5

present rent of $200,000 to a rent of $90,000 through January 1, 2002 and
$100,000 thereafter, and to extend the lease expiration date from 2002 to 2009.
In addition, the Partnership would have the right to exercise a put option
requiring American Airlines to purchase the leased aircraft, on any date between
October 1, 2001 and March 31, 2002, at a price of $9 million if purchased in
2001 or $8.9 million if purchased thereafter.

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

The Partnership's lessees have the following fair market value renewal
options: US Airways has the right to renew its lease as to any of the aircraft
for up to three additional renewal terms of one year each at a fair market value
rental, provided that the number of aircraft to be returned at the end of any
renewal term may not be less than two; Fedex has the right to renew its lease
for one six-month term at the current rent payable under the lease, and
thereafter for four successive one year terms at a fair market value rental; and
TWA has the right to renew its lease for one term of one, two, three or four
years at fair market value rentals.

COMPETITIVE POSITION OF THE PARTNERSHIP

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

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

Because of these factors, finding new aircraft investments like those
made by the Partnership in the past and that offer an appropriate balance of
risk and reward has been difficult. During the past seven years the Partnership
has made only two aircraft investments, both of

6

which were possible because of special circumstances.

In 1996 and 1997, the Partnership sold interests in eight aircraft (a
50% interest in an aircraft on lease to Finnair, a one-third interest in six
aircraft on lease to Continental, and a 50% interest in one aircraft leased to
Sun Jet International, Inc.) at a profit. See "Disposition of Aircraft" below.
However, because of the factors described above, the Partnership was unable to
reinvest the proceeds in aircraft at an acceptable return, and the General
Partner determined that the best use of the net proceeds was to distribute them
to Unitholders. These sales and distributions have reduced the size of the
Partnership's portfolio.

PARTICIPANTS IN LEASES

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

DESCRIPTION OF LEASES

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

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

Certain provisions of the Partnership's leases may not be enforceable
upon a default by a

7

lessee or in the event of a lessee's bankruptcy. The enforceability of leases
will be subject to limitations imposed by Federal, California, or other
applicable state law and equitable principles.

In order to encourage equipment financing to certain transportation
industries, Federal bankruptcy laws traditionally have afforded special
treatment to certain lenders or lessors who have provided such financing.
Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended
(the "Bankruptcy Code"), implements this policy by creating a category of
aircraft lenders and lessors whose rights to repossession are substantially
improved. If a transaction is eligible under Section 1110, the right of the
lender or lessor to take possession of the equipment upon default is not
affected by the automatic stay provisions of the Bankruptcy Code, unless within
60 days after commencement of a bankruptcy proceeding the trustee agrees to
perform all obligations of the debtor under the agreement or lease and all
defaults (except those relating to insolvency or insolvency proceedings) are
cured within such 60-day period or 30 days after the default. One court has
recently held that Section 1110 does not apply after the 60-day period, and thus
the automatic stay may apply after such 60-day period.

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

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

8

AIRCRAFT REMARKETING

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

DISPOSITION OF AIRCRAFT

The Partnership's original intent was to dispose of all its aircraft by
the year 2011, subject to prevailing market conditions and other factors.
However, in 1997 unitholders authorized the General Partner not to make new
investments, to sell aircraft when attractive opportunities arise, to distribute
the proceeds and to liquidate the Partnership when all assets are sold. See
"Principal Investment Objectives" above.

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

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

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

On September 29, 1997 the Partnership sold its one-half ownership
interest in a DC9-51 aircraft on lease to Sun Jet International, Inc. The sale
price was $1.2 million, resulting in a gain of $393,000 even though the lessee
had filed for bankruptcy in June 1997, and had ceased making the rent payments.
The proceeds were distributed to Unitholders in the fourth quarter of

9

1997. See "Competitive Position of the Partnership" above. See "Principal
Investment Objectives" above for a discussion of the General Partner's present
expectations regarding the disposition of the aircraft in the Partnership's
portfolio.

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

JOINT VENTURES/GENERAL ARRANGEMENTS

Under the Limited Partnership Agreement, the Partnership may enter into
joint ventures with third parties to acquire or own aircraft. No such joint
ventures presently exist. Generally, each party to a joint venture is jointly
responsible for all debts and obligations incurred by the joint venture, and the
joint venture will be treated as a single entity by third parties. If party to a
joint venture, the Partnership may become liable to third parties for
obligations of the joint venture in excess of those contemplated by the terms of
the joint venture agreement. There can be no assurance that the Partnership will
be able to obtain control in any joint ventures, or that, even with such control
the Partnership will not be adversely affected by the decisions and actions of
the co-venturers. The General Partner attempts to ensure that all such
agreements will be fair and reasonable to the Partnership, although joint
ventures with affiliates of the General Partner may involve potential conflicts
of interest.

BORROWING POLICIES

Under the Limited Partnership Agreement, the Partnership may borrow
funds or assume financing in an aggregate amount equal to less than 50% of the
higher of the cost or fair market value at the time of the borrowing of all
aircraft owned by the Partnership. The Partnership may exceed such 50% limit for
short-term borrowing so long as the General Partner uses its best efforts to
comply with such 50% limit within 120 days from the date such indebtedness is
incurred or if the borrowed funds are necessary to prevent foreclosure on any
Partnership asset. There is no limitation on the amount of such short-term
indebtedness. The General Partner is authorized to borrow for working capital
purposes and to make distributions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources"
and Note 4 of Notes to Financial Statements.

MANAGEMENT OF AIRCRAFT PORTFOLIO

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

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REGISTRATION OF AIRCRAFT; UNITED STATES PERSON

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

GOVERNMENT REGULATION

GENERAL

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

MAINTENANCE

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

The General Partner monitors the physical condition of the
Partnership's aircraft and periodically inspects them to attempt to ensure that
the lessees comply with their maintenance and repair obligations under their
respective leases. Maintenance is further regulated by the FAA which also
monitors compliance. At lease termination, the lessees are required to return
the aircraft in airworthy condition. The Partnership may incur unanticipated
maintenance expenses

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if a lessee were to default under a lease and the Partnership were to take
possession of the leased aircraft without such maintenance having been
completed. If the lessee defaulting is in bankruptcy, the General Partner will
file a proof of claim for the required maintenance expenses in the lessee's
bankruptcy proceedings and attempt to negotiate payment and reimbursement of a
portion of these expenses. The bankruptcy of a lessee could adversely impact the
Partnership's ability to recover maintenance expense.

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

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

In January 1999 the FAA issued an airworthiness directive setting
payload weight limitations on the Boeing 727 aircraft which were converted from
passenger to freight configuration. The directive requires extensive structural
modifications to strengthen the aircraft's floor, if the aircraft is to continue
to operate under the existing payload limits. If these modifications are not
performed, the directive sets substantially reduced payload limits. This
airworthiness directive applies to the aircraft on lease to FedEx. Under the
lease covering this aircraft, FedEx is required to take the steps necessary to
comply with airworthiness directives imposed during the lease term. However,
airworthiness directives may affect the residual value of the aircraft or
FedEx's decision to exercise fair market value renewal options under the lease.

AIRCRAFT NOISE

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

See "Aircraft Portfolio" above, for a description of the Partnership's
aircraft portfolio. At December 31, 2000, all of the aircraft in the
Partnership's portfolio were Stage III aircraft.

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ACQUISITION OF ADDITIONAL AIRCRAFT

In 1997 Unitholders authorized the General Partner to decide not to
make new aircraft investments, to sell aircraft when attractive opportunities
arise, to distribute the proceeds and to liquidate the Partnership when all
assets are sold. See "Principal Investment Objectives" above.

Not withstanding the above, if the Partnership were to acquire
additional aircraft, it could do so in many different forms, such as in
sale/leaseback transactions, by purchasing interests in existing leases from
other lessors, by making loans secured by aircraft or by acquiring or financing
leasehold interests in aircraft. The Partnership is permitted to acquire
aircraft from affiliates of the General Partner subject to limitations set forth
in the Limited Partnership Agreement.

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

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

The General Partner and its affiliates are not obligated to make any
investment opportunity available to the Partnership, and if any of them are
presented with a potential investment opportunity, it may be made by any of them
without being offered to the Partnership. In addition, in determining which
entity should invest in a particular transaction, it may be

13

possible to structure the transaction in various ways to make the acquisition
more or less suitable for the Partnership or for the General Partner or its
affiliates.

FEDERAL INCOME TAXATION

The Partnership is considered a publicly traded partnership ("PTP")
under the Revenue Act of 1987 with a special tax status, whereby it has not been
subject to federal income taxation. This special tax status was scheduled to
expire at the beginning of 1998. However, during 1997 federal and California tax
laws were amended to provide that PTPs may elect to continue to be publicly
traded and retain their Partnership tax status if they pay a federal tax of 3.5%
and a California state tax of 1% on their applicable annual gross income
beginning in January 1998. The Partnership made an election to pay this tax
beginning in 1998.

EMPLOYEES

The Partnership has no employees. See "DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT - General" below. Employees of the General Partner provide
services on behalf of the Partnership.

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

14

PART II
-------

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

UNITS OUTSTANDING

The Units are traded on the New York Stock Exchange under the symbol
FLY. As of February 2, 2001, there were 941 unitholders of record.

MARKET PRICE

The following chart sets forth the high and low closing prices on the
New York Stock Exchange and the trading volume for each of the quarters in the
years ended December 31, 2000 and 1999.

Trading Volume
Quarter Ended (in thousands) Unit Prices (high-low)
------------- -------------- ----------------------

March 31, 2000 227 $12 - $10 5/8

June 30, 2000 239 $12 1/4 - $10 9/16

September 30, 2000 230 $13 1/8 - $11 9/16

December 31, 2000 291 $12 1/2 - $11 9/16

March 31, 1999 309 $12 3/4 - $12 3/16

June 30, 1999 293 $12 3/8 - $10 13/16

September 30, 1999 250 $12 5/16 - $11 1/2

December 31, 1999 246 $11 14/16 - $10 15/16

DISTRIBUTIONS TO UNITHOLDERS

CASH DISTRIBUTIONS

The Partnership makes quarterly cash distributions to Unitholders which
are based on Cash Available from Operations (as defined in the Limited
Partnership Agreement) and are partially tax sheltered. From time to time the
Partnership also has made cash distributions from Cash Available from Sale or
Refinancing (as defined in the Limited Partnership Agreement.) Information on
the tax status of such payments, which is necessary in the preparation of
individual tax returns, is prepared and mailed to Unitholders as quickly as
practical after the close of each year. The size of the Partnership's portfolio
and future aircraft sales will affect distributions.

15

Distributions declared during 2000 and 1999 were as follows:

Record Date Payment Date Per Unit
----------- ------------ --------

March 31, 2000 May 15, 2000 45 cents
June 30, 2000 August 15, 2000 45 cents
September 29, 2000 November 15, 2000 45 cents
December 29, 2000 February 15, 2001 45 cents

March 31, 1999 May 14, 1999 41 cents
June 30, 1999 August 13, 1999 41 cents
September 30, 1999 November 15, 1999 41 cents
December 31, 1999 February 15, 2000 41 cents

CASH AVAILABLE FROM OPERATIONS

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

CASH AVAILABLE FROM SALE OR REFINANCING

The Partnership's original intent was that Cash Available From Sale or
Refinancing (as defined in the Limited Partnership Agreement) received prior to
January 1, 2005 would be retained for use in the Partnership's business,
provided that if the General Partner did not believe that attractive investment
opportunities exist for the Partnership, the Partnership could distribute Cash
Available from Sale or Refinancing. Any Cash Available from Sale or Refinancing
received after January 1, 2005 was not to be reinvested but was to be
distributed. However, in 1997, Unitholders authorized the General Partner to
decide not to make new aircraft investments, to sell aircraft when attractive
opportunities arise, to distribute the proceeds and to liquidate the Partnership
when all assets are sold. See "BUSINESS--Principal Investment Objectives." For
information as to the sales giving rise to distributions from Cash Available
from Sales or Refinancing, see "BUSINESS--Disposition of Aircraft."

16

TAX ALLOCATIONS

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

17

ITEM 6. SELECTED FINANCIAL DATA

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

For years ended December 31,

(In thousands except per-unit amounts) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------

OPERATING RESULTS

Lease and other income $ 6,736 $ 7,614 $ 8,400 $ 9,210 $10,747

Gain on disposition of aircraft -- -- -- 393 2,501
-------------------------------------------------------

Total revenues 6,736 7,614 8,400 9,603 13,248
-------------------------------------------------------

Interest expense 909 1,270 1,704 2,028 1,830

Depreciation expense -- -- -- 273 1,500

Other expenses 1,082 1,088 1,123 1,820 1,266

Tax on gross income 548 548 699 0 0
-------------------------------------------------------

Total expenses 2,539 2,906 3,526 4,121 4,596
-------------------------------------------------------

Net income $ 4,197 $ 4,708 $ 4,874 $ 5,482 $ 8,652
-------------------------------------------------------

Net income per unit(1) $ 0.90 $ 1.01 $ 1.04 $ 1.17 $ 1.85

Cash distributions declared per unit(2) $ 1.80 $ 1.64 $ 1.64 $ 2.02 $ 3.28

FINANCIAL POSITION

Total assets $61,836 $67,787 $75,813 $82,859 $85,130

Long-term obligations $ 7,992 $10,092 $14,505 $19,115 $14,071

Total partners' equity $51,135 $55,347 $58,301 $61,089 $65,042

Limited partners' equity per unit $ 10.95 $ 11.85 $ 12.48 $ 13.08 $ 13.92

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

(2) Includes special cash distributions of $1.43 per unit in 1996, of which $.63 was paid in
January 1997, and $.22 per unit in 1997.

18

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

FORWARD-LOOKING STATEMENTS

The information set forth below and elsewhere in this Annual Report on
Form 10-K contains certain forward-looking statements, which reflect the current
view of the Partnership with respect to future events and financial performance.
The words "expect", "intend", "believe", "anticipate", "likely" and "will" and
similar expressions generally identify forward-looking statements. These
statements are subject to certain risks and uncertainties, which could cause
actual results and events to differ materially from those anticipated in the
forward-looking statements.

Factors that could cause the Partnership's actual results to differ
from current expectations include, among others, changes in the aircraft or
aircraft leasing market, economic downturn in the airline industry, default by
lessees under leases causing the Partnership to incur uncontemplated expenses or
not to receive rental income as and when expected, the Partnership's inability
to re-lease or sell, at favorable terms, any aircraft returned at lease
expiration or any delays in re-leasing or selling such aircraft, changes in
interest rates, consolidation in the airline industry and legislative or
regulatory changes that adversely affect the value of aircraft.

LIQUIDITY AND CAPITAL RESOURCES

The Partnership presently has three long-term debt facilities. At
December 31, 2000, the following amounts were outstanding: $4.0 million on a
7.4% non-recourse note collateralized by one aircraft leased to FedEx; $2.2
million on a 9.35% non-recourse note collateralized by one aircraft on lease to
Trans World Airlines; and $1.8 million on a long-term variable rate revolving
loan facility guaranteed by the Partnership and collateralized by two aircraft
on lease to US Airways. At December 31, 2000 and 1999, $8.0 million and $10.1
million, respectively, was outstanding under the Partnership's loan facilities.
At December 31, 2000 approximately $3.3 million remained available under the
revolving loan facility.

Long-term borrowings at December 31, 2000 represented 6.6% of the
original cost of the aircraft presently owned by the Partnership, including
capital expenditures for upgrades. The terms of the Partnership Agreement permit
debt to be at a level not exceeding 50% of such cost.

Total scheduled debt service (principal and interest) on the fixed
loans in 2001 is $2.7 million, and the principal payment on the floating loan in
2001 is projected to be $1.8 million (if no purchase or sale of aircraft or any
unforeseen business events occur). Debt service will be paid primarily from the
rental payments received under aircraft leases.

Net cash provided by operating activities was $5.3 million for 1998,
$4.1 million for 1999, and $4.5 million for 2000. Aside from the cash flow
activity associated with taxes payable, the net cash flow provided by operating
activities showed moderate decreases over the

19

three-year period. The decrease was due to reduced rentals as a result of a
smaller portfolio.

Total debt service on the fixed loans as a percentage of net cash
provided by operating activities was 166%, 78%, and 67% for 1998, 1999 and 2000,
respectively. However, cash flow from operating activities does not fully
reflect cash receipts from lease payments. When the excess of rental receipts
above finance lease income is added to cash flow from operating activities, the
ratios become 71%, 26%, and 29%, respectively. The lower 1999 ratio as compared
with 1998 reflects a greater rate of debt repayment in 1998, while the cash
received from lease rentals remained about the same for each of 1998 and 1999.
The 2000 ratio is comparable to the ratio of 1999 as the debt service and the
cash flow from operating activities for both years were also comparable.

Cash distributions paid by the Partnership were $7.8 million ($1.68 per
unit) in 1998, $7.7 million ($1.64 per unit) in 1999, and $8.2 million ($1.76
per unit) in 2000. There were no special cash distributions paid in 1998, 1999
or 2000.

Partnership net income was $4.9 million in 1998, $4.7 million in 1999,
and $4.2 million in 2000. The decline in net income from 1998 to 1999 and from
1999 to 2000 is primarily due to a smaller asset base, as the balances due from
the lessees declined. Pursuant to the Limited Partnership Agreement, the
Partnership distributed all Cash Available from Operations net of expenses and
reserves, as described above. Since such distributions were in excess of
earnings, Partnership equity declined from $55.3 million at December 31, 1999 to
$51.1 million at December 31, 2000, and limited partner equity per unit declined
from $11.85 to $10.95. From a limited partner perspective, the portion of the
distribution in excess of net income constitutes a return of capital. Total cash
distributions declared since inception of the Partnership have exceeded total
net income by $7.84 per unit.

RESULTS OF OPERATIONS

2000 vs. 1999
- -------------

The revenue reduction in 2000 as compared with 1999 is primarily due to
the scheduled decline in finance lease income as the balances due from the
lessees declined.

US Airways, the Partnership's major lessee (73% of total 2000 year-end
assets) reported a net loss of $269 million on revenues of $9.3 billion for
2000, compared with profits of $197 million on revenues of $8.6 billion for
1999.

FedEx (13% of total 2000 year-end assets) reported profits of $688
million on revenues of $18.3 billion for 2000 (fiscal year ended May 31, 2000),
compared with profits of $631 million on revenues of $16.8 billion for 1999.

TWA (14% of total 2000 year-end assets) reported a net loss of $115
million on revenues of $2.7 billion for the first nine months of 2000, compared
with a net loss of $81 million on revenues of $2.5 billion for the comparable
1999 period. TWA filed for Chapter 11 bankruptcy

20

protection on January 10, 2001 and failed to make its lease payments under its
lease with the Partnership on December 22, 2000, January 22, 2001 and February
22, 2001. As a result of the lease payment defaults, the Partnership has been
making debt-service payments under its long-term debt secured by the TWA
aircraft from other sources of cash. On March 13, 2001, TWA made its lease
payments that were due on December 22, 2000 and January 22, 2001. TWA is
expected to file with the U.S. Bankruptcy Court a stipulation, agreement and
order pursuant to which TWA agrees to cure the February 22, 2001 lease payment
default within certain time limits. On March 12, 2001, the U.S. Bankruptcy Court
approved the sale of most assets of TWA to American Airlines' parent
corporation. Consummation of the sale is subject to federal antitrust regulatory
approval and other closing conditions. American Airlines has entered into an
agreement with the Partnership, which becomes effective only upon consummation
of the sale to American Airlines of the TWA assets, pursuant to which American
Airlines would assume the TWA lease subject to a reduced lease rate and an
extended lease term. The reduction in cash receipts and the bankruptcy of TWA
have led to a reduction in cash distributions to Unitholders, beginning with the
cash distribution for the first quarter of 2001.

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

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

Expenses in 2000 were $2.5 million or $367,000 lower than the 1999
expenses of $2.9 million. The decline in expenses is primarily due to lower
interest expense in 2000 as a result of the Partnership's reduced debt balances.
Debt balances declined from $10.1 million at December 31, 1999 to $8.0 million
at December 31, 2000.

1999 vs. 1998
- -------------

The revenue reduction in 1999 as compared with 1998 is primarily due to
the scheduled decline in finance lease income as the balances due from the
lessees declined. At year-end 1999, all of the Partnership's lessees were
current under their lease agreements and none was in bankruptcy.

OUTLOOK

In September 30, 2001, the leases with US Airways for five of the seven
aircraft in the Partnership's aircraft portfolio expire. Under the leases, US
Airways is required, by April 2001, to decide whether to renew the leases or to
return the aircraft. If US Airways elects to renew the leases, the leases will
continue but perhaps at a lower lease rate. Alternatively, if US Airways decides
to return the aircraft, the General Partner will market the aircraft to others
for either sale or a new lease.

21

If the five aircraft on lease to US Airways, which represent
approximately 73% of the Partnership's portfolio, are sold, the General Partner
would likely seek also to sell the remaining two aircraft in the Partnership's
portfolio. The Partnership intends to distribute the net proceeds from the sale
of any aircraft to Unitholders.

As the time of lease expirations nears, distributions to Unitholders
will depend more on the residual value of the aircraft in the Partnership's
portfolio than on the rental payment obligation from existing lessees (the
booked residual value per unit is $9.74.) Although the Partnership has
consistently sold aircraft at prices in excess of book value, aircraft values
depend on the supply and demand for aircraft, economic conditions, and other
factors. Consequently, the General Partner cannot precisely determine the net
proceeds available from the sale of aircraft or whether such proceeds will be
above or below book value.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Partnership's assets consist of aircraft subject to leases,
accounted for as finance leases, and thus consist of a future stream of fixed
rental payments and a residual interest in the aircraft. See Note 2 to Financial
Statements for information as to finance lease receivables. At December 31,
2000, the Partnership had long-term fixed-rate notes payable of $6,227,000 and a
revolving variable rate loan facility with $1,765,000 outstanding and
approximately $3,275,000 of credit available. See Note 4 to Financial Statements
for information as to minimum future principal payments due and the interest
rates applicable to the notes and revolving credit facility. Since the rental
payments under its leases are fixed, but a portion of its liabilities are based
on a variable interest rate, the assets and liabilities of the Partnership are
not perfectly hedged and the Partnership bears some risk of interest rate
fluctuations. Since a portion of its debt under the revolving credit facility is
for variable working capital needs, the General Partner believes that the risk
of interest fluctuations is appropriate under the circumstances.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

GENERAL

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

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information about the directors and
executive officers of the General Partner as of February 28, 2001. As used
below, "BALCAP" refers both to BALCAP and to BA Leasing & Capital prior to its
merger into BALCAP in September 1999.

POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
- --------------------- --------------------- --- ------------------------------------------

David B. Gebler Chairman of the 51 Mr. Gebler is a Managing Director of Bank of America
Board, President, National Association ("Bank of America") and of
Chief Executive BALCAP. He has been with BALCAP since September
Officer and a 1996. From 1993 to September 1996 he was Senior Vice
Director President of the Transportation and Industrial
Financing business unit of USL Capital. Mr. Gebler has
been President of the General Partner since 1989 and a
Director since 1990, and has been Chairman and CEO
since September 1996. Mr. Gebler holds a bachelor degree
in mathematics from Clarkson University and graduate
degrees in Engineering and Management from the University
of Michigan.

Richard V. Harris Director 52 Mr. Harris is Managing Director and Head of Global
Leasing of Bank of America, and Chairman and President
of BALCAP. He was elected President and CEO in 1982,
adding the title of Chairman in 1988. He has been a
Director of the General Partner since October 1996.
Other assignments at Bank of America have included
responsibilities for Project Finance and Asset-Backed
Finance along with Leasing. Prior to assuming his
present responsibilities, Mr. Harris held both
transactional and marketing management positions at
BankAmerica Leasing. Mr. Harris holds a B.S.E.E.
degree in Electrical Engineering from Brigham Young

23

POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
- --------------------- --------------------- --- ------------------------------------------

University and a Master of Business Administration
degree also from BYU.

William A. Hasler Director 59 Mr. Hasler has been the Co-Chief Executive Officer of
Aphton Corporation , a biopharmaceutical company,
since July 1998 and a Director of the General Partner
since 1995. From August 1991 to June 1998 he was the
Dean of the Haas School of Business at the University
of California at Berkeley. From 1984 to 1991, he was
vice chairman and director of KPMG Peat Marwick and
was responsible for its worldwide consulting
business. He is a member of the board of governors of
The Pacific Stock Exchange and of the board of
directors of Selectron Corp., TCSI, Tenera, Walker
Interactive, and Aphton Corporation. He serves on a
presidential advisory board on critical technologies.
He is a graduate of Pomona College and earned his MBA
from Harvard.

Richard P. Powers Director 60 Mr. Powers is a Financial Consultant and Private
Investor. From 1996 to 2000 he was an Executive Vice
President of Finance and Administration of Eclipse
Surgical Technologies, Inc., a medical device company
and a Director of the General Partner since 1996.
From 1981 to 1994, he was with Syntex Corporation, a
pharmaceutical company, serving as Senior Vice
President and Chief Financial Officer of that company
from 1986 to 1994. From 1994 to 1996 he served as
consultant to various companies, including advising
and assisting in the sale of Syntex Corporation to
Roche Corporation in 1994. Mr. Powers holds a
Bachelor of Science degree in Accounting from Canisius
College and a Masters in Business Administration from
the University of Rochester.

K. Thomas Rose Director 55 Mr. Rose has been Managing Director, Credit of BALCAP
since 1992. He has been a Director of the General
Partner since October 1996. Prior to his present
responsibilities, Mr. Rose was with Security Pacific
Leasing Corporation as Executive Vice President -
Lease Services since 1973. Mr. Rose holds a B.A. from
California State University, Fullerton and a Juris
Doctorate degree from Golden Gate University, School
of Law.

Robert A. Keyes Chief Financial 48 Mr. Keyes has been Senior Vice President and Senior
Officer and a Finance Manager of BALCAP since December 2000. He has
Director been Chief Financial Officer and a Director of the
General Partner since March 2001. Prior to assuming his
present responsibilities at BALCAP, Mr. Keyes was with
Citicorp Bankers Leasing as Vice President and Head of
Operations from 1997 to 2000. From 1990 to 1997 Mr. Keyes
was with USL Capital Corporation (former General Partner
of the Partnership) as Vice President and Corporate
Controller. While at USL Capital, Mr. Keyes served as
Chief Financial Officer and as a Director of the
Partnership. From 1980 to 1990 Mr. Keyes held various
Finance positions with Wells Fargo Leasing Corporation,
including Senior Vice President and Chief Financial
Officer. Mr. Keyes holds a Bachelor of Science degree
in Economics from Bates College and a Masters in Business
Administration and Accounting from Rutgers University.

24

ITEM 11. EXECUTIVE COMPENSATION

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

The Partnership reimburses the General Partner for fees paid to
Directors of the General Partner who are not otherwise affiliated with the
General Partner or its affiliates. In 2000, such unaffiliated directors were
paid an annual fee of $14,500 plus $500 for each meeting attended.

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS

As of February 28, 2001, the following persons were known to the
Partnership to be beneficial owners of more than five percent of the
Partnership's equity securities:

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

Depositary Units United States Airlease Holding, Inc. 231,250(1) 5%
555 California Street
San Francisco, CA 94104(1)

Depositary Units BALCAP 793,750(3) 17.2%
555 California Street
San Francisco, CA 94104(3)
- --------------------

(1) United States Airlease Holding, Inc. ("Holding") reported that it had sole voting and dispositive power
over these Units.

(2) BALCAP owns all of the outstanding stock of Holding. Therefore, BALCAP may be deemed also to be the
indirect beneficial owner of the Units owned by Holding. In addition, BALCAP owns all the outstanding
stock of the General Partner. Therefore, BALCAP may be deemed to be the indirect beneficial owner of the

25

General Partner's 1% General Partner interest. BALCAP is a wholly owned indirect subsidiary
of BankAmerica Corporation. Therefore, BankAmerica Corporation and each BankAmerica Corporation
subsidiary which is the direct or indirect parent of BALCAP may also be deemed to be the indirect
beneficial owner of all Units and of the General Partner's 1% General Partner interest owned or
deemed owned by BALCAP.

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

UNIT OWNERSHIP BY MANAGEMENT

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

Name of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
-------------- ---------------- -------------------- ----------------

Depositary Units David B. Gebler 700(1) (2)

Depositary Units William A. Hasler 8,700 (2)

All directors and executive 9,400 (2)
officers as a group
- --------------------

(1) Includes 200 Units held by Mr. Gebler as custodian for a minor child as
to which Mr. Gebler has shared voting and dispositive power and as to
which beneficial ownership is disclaimed.

(2) Represents less than 1%.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For a discussion of certain fees, expenses and reimbursements payable
and paid to the General Partner and its affiliates by the Partnership, see Note
6 of Notes to Financial Statements. From time to time, the Partnership has
borrowed funds from BALCAP or BA Leasing & Capital, including advances for
expense payments. All such borrowings were unsecured and bore interest at a
floating rate not exceeding the prime rate. At December 31, 2000 Airlease owed
BALCAP $211,542 for such borrowings.

For a discussion of certain terms of the Limited Partnership Agreement
regarding the Partnership's participation in aircraft leasing investments made
by USL Capital and its Related Entities, see "BUSINESS-Acquisition of Additional
Aircraft." For a discussion of aircraft formerly held jointly between the
Partnership and USL Capital, see "BUSINESS- Participants in Leases."

26

PART IV
-------

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

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

Management's Responsibility for Financial Statements A-1

Report of Independent Auditors ..................... A-2

Financial Statements:

Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998 .............. A-3

Balance Sheets, as of December 31, 2000 and 1999 A-4

Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.............. A-5

Statements of Changes in Partners' Equity for
the Years Ended December 31, 2000, 1999 and 1998 A-6

Notes to Financial Statements ...................... A-6

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

(b) The Partnership did not file any reports on Form 8-K during
the last quarter of the fiscal year ended December 31, 2000.

27

(c) Exhibits required by Item 601 of Regulation S-K:

Exhibit No. Description
- ----------- -----------

3.1(1) Amended and Restated Agreement of Limited Partnership of
Partnership.

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

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

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

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

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

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

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

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

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

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

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

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

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

28

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

10.49(3) Assignment and Assumption Agreement dated as of January 31,
1997 between USL Capital Corporation and the Registrant.

10.50(3) Lease, together with Lease Supplement No. 1, dated as of March
15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World
Airlines, Inc., as Lessee, with respect to one (1) McDonnell
Douglas DC-9-82 Aircraft, as amended by Amendment Agreement
dated as of December 15, 1986.

10.51(4) Loan agreement secured by two aircraft leased to US Airways
dated as of December 22, 1997, amended and restated as
of December 15, 1998,6 between Meridian Trust Company, as
Trustee, as Borrower and Credit Lyonnais/PK AIRFINANCE, as
Lender.

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

(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1996.

(4) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1998.

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 26, 2001.

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
(Registrant)

By: Airlease Management Services, Inc.,
General Partner

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

30

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

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

/s/ DAVID B. GEBLER March 26, 2001
- -------------------------------------------------------------
David B. Gebler
Chairman, Chief Executive Officer, President
and Director of AMSI

/s/ ROBERT A. KEYES March 26, 2001
- -------------------------------------------------------------
Robert A. Keyes
Chief Financial Officer and Director of AMSI

/s/ RICHARD V. HARRIS March 26, 2001
- -------------------------------------------------------------
Richard V. Harris
Director of AMSI

/s/ K. THOMAS ROSE March 26, 2001
- -------------------------------------------------------------
K. Thomas Rose
Director of AMSI

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

31

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Airlease Management Services, Inc. ("AMSI"), the General Partner of the
Partnership is responsible for the preparation of the Partnership's financial
statements and the other financial information in this report. This
responsibility includes maintaining the integrity and objectivity of the
financial records and the presentation of the Partnership's financial statements
in accordance with accounting principles generally accepted in the United
States.

The General Partner maintains an internal control structure designed to provide,
among other things, reasonable assurance that Partnership records include the
transactions of its operations in all material respects and to provide
protection against significant misuse or loss of Partnership assets. The
internal control structure is supported by careful selection and training of
financial management personnel, by written procedures that communicate the
details of the control structure to the Partnership's activities, and by staff
of operating control specialists of Banc of America Leasing and Capital, LLC.,
which owns 100% of the stock of AMSI, who conduct reviews of adherence to the
Partnership's procedures and policies.

The Partnership's financial statements have been audited by Ernst & Young
L.L.P., independent auditors for the years ended December 31, 2000, 1999 and
1998. Their audits were conducted in accordance with auditing standards
generally accepted in the United States, which included consideration of the
General Partner's internal control structure. The Report of Independent Auditors
appears on page A-2.

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

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

/s/ ROBERT A. KEYES
- -------------------------------------------------------------
Robert A. Keyes
Chief Financial Officer
Airlease Management Services, Inc.

A-1

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying balance sheets of Airlease Ltd. as of December
31, 2000 and 1999 and the related statements of income, changes in
Partners'equity, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with 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 Airlease Ltd. at December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.

/s/ ERNST & Young L.L.P.
- -------------------------------------------
Ernst & Young L.L.P. .........
San Francisco, California
January 30, 2001, except for note 10, as to which the date is March 13, 2001

A-2

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF INCOME

For the years ended
December 31,
(In thousands except per unit amount) 2000 1999 1998
- -------------------------------------------------------------------------------------------

REVENUES

Finance lease income $6,736 $7,614 $8,400
------------------------------------
Total revenues 6,736 7,614 8,400
------------------------------------

EXPENSES

Interest 909 1,270 1,704
Management fee - general partner 603 629 651
Investor reporting 316 339 298
General and administrative 163 120 174
Tax on gross income 548 548 699
------------------------------------
Total expenses 2,539 2,906 3,526
------------------------------------
NET INCOME $4,197 $4,708 $4,874
------------------------------------

NET INCOME ALLOCATED TO:

General partner $ 42 $ 47 $ 49
------------------------------------
Limited partners 4,155 4,661 4,825
------------------------------------
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.90 $ 1.01 $ 1.04
------------------------------------

See notes to financial statements

A-3

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

BALANCE SHEETS

As of December 31,
(IN THOUSANDS) 2000 1999
- --------------------------------------------------------------------------------

ASSETS

Cash $ 17 $ 2
Finance leases - net 61,657 67,509
Prepaid expenses and other assets 162 276
-------------------------
Total assets $61,836 $67,787
-------------------------

LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:

Distribution payable to partners $ 2,102 $ 1,915
Accounts payable and accrued liabilities 468 429
Taxes payable 139 4
Long-term notes payable 7,992 10,092
-------------------------
Total liabilities 10,701 12,440
=========================

COMMITMENTS AND CONTINGENCIES

PARTNERS' EQUITY:

Limited partners (4,625,000 units outstanding) 50,624 54,794

General partner 511 553

Total partners' equity 51,135 55,347

TOTAL LIABILITIES AND PARTNERS' EQUITY $61,836 $67,787
=========================

See notes to financial statements

A-4

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

For the years ended December 31,
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,197 $ 4,708 $ 4,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in assets and liabilities:
Increase/(decrease) in accounts payable and accrued liabilities 39 36 (160)
Decrease/(increase) in prepaid expenses and other assets 114 85 (93)
Increase/(decrease) in taxes payable 135 (695) 699
-------------------------------------
Net cash provided by operating activities 4,485 4,134 5,320
-------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES

Rental receipts in excess of earned finance lease income 5,852 7,934 7,147
-------------------------------------
Net cash provided by investing activities 5,852 7,934 7,147
-------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowing (repayment)-net (18) (2,474) 2,509
Repayment of long-term notes payable (2,082) (1,939) (7,119)
Distributions paid to partners (8,222) (7,662) (7,849)
-------------------------------------

Net cash used in financing activities (10,322) (12,075) (12,459)
-------------------------------------

Increase/(decrease) in cash 15 (7) 8
Cash at beginning of year 2 9 1
-------------------------------------

Cash at end of year $ 17 $ 2 $ 9
-------------------------------------
Additional information:
Cash paid for interest $ 858 $ 1,187 $ 1,775
-------------------------------------

See notes to financial statements

A-5

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

For the years ended December 31, 2000, 1999 and 1998
General Limited
(In thousands except per unit amounts) Partner Partners Total
- ---------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997 611 60,478 61,089
Net Income - 1998 49 4,825 4,874
Distributions to partners declared
($1.64 per limited partnership unit) (77) (7,585) (7,662)

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

Balance, December 31, 1998 583 57,718 58,301
Net Income - 1999 47 4,661 4,708
Distributions to partners declared
($1.64 per limited partnership unit) (77) (7,585) (7,662)

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

Balance, December 31, 1999 553 54,794 55,347
Net Income - 2000 42 4,155 4,197
Distributions to partners declared
($1.80 per limited partnership unit) (84) (8,325) (8,409)

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

BALANCE, DECEMBER 31, 2000 $511 $50,624 $51,135

=====================================================================================================================

See notes to financial statements

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION - Airlease Ltd., A California Limited Partnership (the
"partnership") engages in the business of acquiring, either directly or through
joint ventures, commercial jet aircraft, spare or separate engines and related
rotable parts ("aircraft") and leasing such aircraft to domestic and foreign
airlines and freight carriers. The general partner is Airlease Management
Services, Inc., a wholly owned subsidiary of Banc of America Leasing and
Capital, LLC. ("BALCAP"). BALCAP also holds 793,750 limited partnership units
and United States Airlease Holding, Inc. ("Holding"), a wholly owned subsidiary
of BALCAP, holds 231,250 limited partnership units. An additional 3,600,000
units are publicly held.

BASIS OF PRESENTATION - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues

A-6

and expenses during the reporting period. Actual results could differ from those
estimates.

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

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

2. FINANCE LEASES

As of December 31, 2000, the partnership owned seven aircraft, which are all
leased under finance leases. Five of the aircraft are leased to US Airways, Inc.
and the lease is due to expire September 2001. In 2000, 1999, and 1998, leases
with US Airways, Inc. resulted in finance lease revenues of $5,175,000,
$5,873,000, and $6,498,000, respectively.

The sixth aircraft, wholly owned by the partnership since January 31, 1997 when
it purchased USL Capital's 50% interest in this aircraft for $5.7 million, is
leased to Trans World Airlines (TWA) under a finance lease. In 2000, 1999, and
1998 this lease with TWA, resulted in finance lease income of $1,172,000,
$1,310,000, and $1,432,000, respectively. TWA filed for chapter 11 bankruptcy
protection on January 10, 2001. See note 10.

The seventh aircraft is leased to Federal Express Corporation (FedEx) under a
13-year finance lease which expires in 2006. In 2000, 1999, and 1998 this lease
with FedEx resulted in finance lease income of $389,000, $431,000, and $470,000,
respectively.

The finance leases at December 31, 2000 and 1999, are summarized as follows (in
thousands):

2000 1999
---- ----

Receivable in installments $22,044 $34,633
Residual valuation 45,500 45,500
Unearned lease income (5,887) (12,624)
------- -------
NET INVESTMENT $61,657 $67,509
======= =======

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

Finance lease receivables at December 31, 2000 are due in installments of
$15,748,000 in 2001, $1,710,000 in 2002, $1,310,000 in 2003, $1,310,000 in 2004,
and $1,966,000 thereafter.

3. OPERATING LEASES

At December 31, 2000, the partnership did not own any aircraft subject to an
operating lease. The last aircraft that was subject to an operating lease was
sold in September 1997.

A-7

4. LONG-TERM NOTES PAYABLE

As of December 31, 2000 and 1999 long-term notes payable included the following:

A 7.4% non-recourse loan facility collateralized by the aircraft
leased to FedEx, due in semi-annual installments of $451,000
through April 2006. At December 31, 2000 and 1999, $4,001,000 and
$4,569,000, were outstanding, respectively.

A 9.35% non-recourse loan facility collateralized by the aircraft
leased to TWA, due in monthly installments of $150,000 through
March 2002. At December 31, 2000 and 1999, $2,226,000 and
$3,740,000, were outstanding, respectively. During 1998, the
partnership renegotiated the terms of the 9.35% loan facility. As
part of the re-negotiation, the partnership was able to prepay
$2.0 million in principal and reduce the interest rate 50 basis
points from 9.85% to 9.35%.

A $7.5 million three-year revolving loan facility
obtained in February 1998. The facility was initially
collateralized by one aircraft on lease to US Airways, Inc., was
guaranteed by the partnership, and bore an interest rate of
three-month Libor plus 225 basis points. In December 1998, this
loan facility was expanded by $5.0 million and the variable
interest rate was lowered to 212.50 basis points over the
three-month Libor when another aircraft leased to US Airways was
added as additional collateral. At December 31, 2000 $1,765,000
was outstanding and approximately $3,275,000 was available under
this facility. At December 31, 1999, $1,783,000 was outstanding.

Based upon amounts outstanding at December 31, 2000, the minimum future
principal payments on all outstanding fixed-rate long-term notes payable are due
as follows (in thousands):

2001 $2,419
2002 1,078
2003 710
2004 763
Thereafter 1,257
-------
Total Fixed Term Debt 6,227

Revolving Line of Credit
Outstanding at 12/31/2000 1,765
-------
TOTAL LONG TERM DEBT $7,992
=======

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents carrying amounts and fair values of the
partnership's financial

A-8

instruments at December 31, 2000 and 1999. The fair value of a financial
instrument is defined as the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a forced or
liquidation sale.

2000 2000 1999 1999
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------

Long-term notes payable
(Note 4) $7,992 $7,983 $10,092 $9,956

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

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

6. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES

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

Amounts earned by the general partner and affiliates for the years ended
December 31, 2000, 1999, and 1998, were as follows (in thousands):

2000 1999 1998
---- ---- ----

Management fees $551 $577 $599
Disposition and remarketing fees 52 52 52
Reimbursement of other costs 79 79 79
Reimbursement of interest costs 8 7 7
---- ---- ----
TOTAL $690 $715 $737
==== ==== ====

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

7. FEDERAL INCOME TAX STATUS

The Partnership is considered a publicly traded partnership ("PTP") under the
Revenue Act of 1987. Under that Act, the partnership was not subject to federal
income tax as a partnership until 1998. Effective January 1, 1998, PTP's were
required to choose to retain PTP status and be subjected to federal income tax
as a corporation or to delist their units thereby removing themselves from the
scope of the PTP rules. Faced with these alternatives, the Partnership initially
recommended that its units be delisted.

A-9

In August and October 1997, respectively, federal and California tax laws were
amended to provide PTP's a third alternative. Under these amended laws, PTP's
are allowed to continue to be publicly traded during 1998 and subsequent years
without becoming subject to corporate income tax if they elect to pay a 3.5%
federal tax and a 1% California tax on their applicable gross income.

The board of directors of the General Partner unanimously concluded, after
authorization from the unitholders and consideration of a number of factors,
including the 1997 tax law changes and the benefits of liquidity, that is was in
the best interests of the unitholders for the partnership to remain publicly
traded at that time. Accordingly, in January 1998 the partnership made an
election to pay the annual gross income tax at the partnership level.

8. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING (UNAUDITED)

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

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

2000 1999 1998
---- ---- ----

Net income per financial statements: $4,197 $4,708 $4,874
Increases (decreases) resulting from:
3.5% Gross Income Tax - non deductible 544 544 544
Lease rents earned less finance lease income 8,810 7,934 7,147
Depreciation and amortization (1,840) (2,605) (6,071)
--------------------------------------
Income per income tax method 11,711 10,581 6,494
Allocable to general partner (117) (106) (65)
--------------------------------------

TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $ 11,594 $10,475 $ 6,429

Taxable income per limited partnership unit after
giving effect to taxable income allocable to general
partner (amount based on a unit owned from October 10, 1986) $ 2.51 $ 2.26 $ 1.39

Partner's equity per financial statements $ 51,135 $ 55,347 $ 58,301
Cumulative increases resulting from:
Lease rents less earned finance lease income 64,211 55,401 47,467
Deferred underwriting discounts and commissions,
and organization costs 5,361 5,361 5,361

Accumulated depreciation and amortization (66,125) (64,285) (61,681)
TBT interest income less TBT rental expense (54,030) (54,030) (54,030)
--------------------------------------

PARTNERS' EQUITY PER INCOME TAX METHOD $ 552 $ (2,206) $(4,580)

A-10

9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999 (in thousands, except per unit amounts):

2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------

Total Revenues $1,771 $1,712 $1,657 $1,596
Net Income $1,097 $1,066 $1,035 $1,002
Net Income Per Limited Partnership Unit $ 0.23 $ 0.23 $ 0.22 $ 0.21
Unit Trading Data:
Unit Prices (high-low) on NYSE $12-$10 5/8 $12 1/4-$10 9/16 13 1/8-$11 9/16 $12 1/2 -$11 9/16
Unit Trading Volumes on NYSE 227 239 230 291

1999 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------

Total Revenues $1,982 $1,928 $1,879 $1,825
Net Income $1,192 $1,157 $1,132 $1,227
Net Income Per Limited Partnership Unit $ 0.26 $ 0.25 $0.24 $ 0.26
Unit Trading Data:
Unit Prices (high-low) on NYSE $12 3/4-$12 3/16 $12 3/8-$10 13/16 12 5/16-$11 1/2 $11 14/16 -$10 15/16
Unit Trading Volumes on NYSE 309 293 250 246

10. SUBSEQUENT EVENT

On March 12, 2001, the U.S. Bankruptcy Court approved the sale of most assets of
Trans World Airlines to American Airlines' parent corporation. Consummation of
the sale is subject to federal antitrust regulatory approval and other closing
conditions. American Airlines has entered into an agreement with the
Partnership, which becomes effective only upon consummation of the sale to
American Airlines of the Trans World Airlines assets, pursuant to which American
Airlines would assume Trans World Airlines' lease with the Partnership subject
to a reduced lease rate and an extended lease term.

Additionally, on March 13, 2001, Trans World Airlines made its lease payments
that were due on December 22, 2000 and January 22, 2001. Also, the Partnership
expects Trans World Airlines to file with the U.S. Bankruptcy Court a
stipulation agreement and order pursuant to which Trans World Airlines agrees to
cure the February 22, 2001 lease payment within certain time limits.

A-11

INDEX TO EXHIBITS

Exhibit No. Description
- ----------- -----------

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

A-12