Edgar Filing: AIRLEASE LTD

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

FORM 10-KSB

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

For the Fiscal Year Ended December 31, 2003

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: NONE

TITLE OF EACH CLASS: NAME OF EACH EXCHANGE
N/A ON WHICH REGISTERED:
N/A

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Depository Units Representing Limited Partnership Interests
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B 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-KSB or any
amendment to this Form 10-KSB.

Indicate by check mark whether the registrant is an accelerated filer
(as designated in Exchange Act Rule 12b-2). YES NO X
___ ___

Aggregate market value of Depositary Units, held by non-affiliates of
the registrant as of the close of business at February 19, 2004 was
$6,641,223.00.

The revenues for 2003 were $1,615,000.00

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......... 15

PART II

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

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 19

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 26

ITEM 8A. CONTROLS AND PROCEDURES..................................... 26

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 27

ITEM 10. EXECUTIVE COMPENSATION...................................... 29

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 30

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 31

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K................................................. 31

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................... 36

SIGNATURES................................................................... 37

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

PART I

ITEM 1. BUSINESS

GENERAL

Airlease Ltd., A California Limited Partnership (the "Partnership"),
has been engaged in the business of acquiring, either directly or through joint
ventures, commercial jet aircraft, and leasing such aircraft or parts thereof to
domestic and foreign airlines, freight carriers and charter companies. The
general partner of the Partnership (the "General Partner") is Airlease
Management Services, Inc. From 1999 to June 2002, the General Partner was a
wholly owned subsidiary of Banc of America Leasing and Capital, LLC, a Delaware
limited liability company ("BALCAP"), in turn a wholly owned subsidiary of Bank
of America National Assocation ("BANA"). In June 2002, BALCAP transferred its
stock of the General Partner to BANA and the General Partner became a wholly
owned subsidiary of BANA. BALCAP also holds 793,750 limited partnership units
and United States Airlease Holding, Inc. ("Holding"), also a wholly owned
subsidiary of BANA, holds 231,250 limited partnership units. An additional
3,600,000 units are publicly held.

DECISION TO SELL ASSETS AND DISSOLVE

The Partnership's principal investment objectives have been 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.

On March 17, 2004, the Board of Directors of the General Partner,
acting in response to a recommendation made by a special committee of
independent directors of its Board of Directors (the "Special Committee"),
directed the General Partner to cease making new aircraft investments, sell the
Partnership's remaining assets as attractive sale opportunities arise,
distribute sale proceeds (after repaying debt and establishing appropriate
reserves) to Unitholders after disposition, and dissolve the Partnership when
all assets are sold. The General Partner also has amended the Amended and
Restated Agreement of Limited Partnership of the Partnership, as amended (the
"Limited Partnership Agreement"), to give effect to this directive.

In 1997, the Unitholders of the Partnership authorized the General
Partner to take these actions. Since that time, the General Partner had deferred
taking such actions and continued to operate the Partnership while considering,
from time to time, alternative investments. However, the General Partner has not
made new investments in aircraft, primarily due to the weak aircraft leasing
market. For a variety of reasons, including the General Partner's belief that
significant improvement in this market is not forthcoming in the near term for
the Partnership's aircraft, the General Partner determined, on the basis of the
Special Committee's determination, that Unitholders likely will realize greater
value from a dissolution of the Partnership compared to continued operation of
the Partnership. Accordingly, the General Partner intends to exercise fully and
promptly the authority granted to it previously by the Unitholders to sell
assets, distribute net proceeds and dissolve the Partnership. To that end, the
General Partner has commenced actively seeking buyers for the Partnership's
aircraft.

Given current market conditions, the General Partner cannot predict
either the actual timing for completing sales of the Partnership's aircraft or
the prices and other terms of such sales.. The General Partner also cannot
predict when net proceeds will be distributed to Unitholders or the aggregate
amount of such net proceeds, both of which will depend upon a number of factors,
including market conditions, the timing and terms of such asset sales, the
amount of cash required to settle outstanding liabilities and contingencies, the
amount of necessary cash reserves, and the expenses associated with selling
assets and dissolving the Partnership.

In 1997, the Unitholders also authorized the General Partner to impose
restrictions on the transferability of outstanding units. The General Partner
has not taken this action, although it reserves the right to do so if it
concludes that implementing such restrictions would be in the best interests of
the Unitholders in light of current partnership tax law.

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 that 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.

At December 31, 2003, the Partnership's portfolio consisted of four
Stage-III commercial aircraft. Two were leased to CSI Aviation Services, Inc.
("CSI"), one aircraft was leased to FedEx Corporation ("FedEx"), and one
aircraft was held for sale. The following table further describes the
Partnership's aircraft portfolio at December 31, 2003:

_______________________________________________________________________________________________________________

Number & Current
type; year of Ownership Acquired by lease Lease Noise
Lessee Delivery Interest Partnership expiration Type compliance(1)
______ _____________ _________ ___________ __________ _____ _____________

CSI Aviation 2 MD-82 100% 1986 2004 Operating Stage III
1981

FedEx 1 727-200FH 100% 1987 2006 Direct finance Stage III
1979

Held for sale(2) 1 MD-81 100% 1986 N/A N/A Stage III
1981

(1) See "Government Regulation-Aircraft Noise" below, for a description of
laws and regulations governing aircraft noise.
(2) As described below, the aircraft held for sale at December 31, 2003 was sold on January 26, 2004.

_______________________________________________________________________________________________________________

At December 31, 2003, the book value of aircraft by lessee as a percent
of total assets was as follows: FedEx, 32.2%; CSI, 19.5%; and off-lease
aircraft, 10.4%. Revenues by lessee as a percentage of total revenue for 2003
and 2002, respectively, were as follows: CSI, 82.4% and 88.2%; and FedEx, 15.7%
and 9.9%.

CSI operates the two aircraft it leases under a contract for charter
services to the United States Marshals Service ("USMS"). In March 2003, the CSI
leases were extended on a month-to-month basis at a monthly rental rate of
$60,000 per aircraft. In September 2003, the CSI leases were amended to provide
for a reduced lease rate of $45,000 per aircraft, so long as CSI is leasing both
aircraft, and a lease rate of $60,000 per aircraft if CSI is leasing only one of
the two aircraft. CSI's contract with USMS was expected to terminate in January
2004. In January 2004, the leases on the two aircraft were extended to May 2004
to coincide with USMS's extension of its contract with CSI. The lease extension
provides for a monthly rental of $100,000 per month per aircraft. However, the
Partnership is required to contribute $150,000 per aircraft toward the

FAA required airframe maintenance referred to as a C-Check. In addition, the
Partnership is required to provide a $50,000 per month rent credit per aircraft
for the three-month period commencing February 10, 2004. As a result, the
expenses and rent credit will fully offset the rental income during this period.
The monthly rental on one of the aircraft will revert to $60,000 if CSI and the
Partnership agree on an additional extension past May 10, 2004.

During 2003, management prepared quarterly impairment evaluations on
the two MD-82 aircraft currently on lease to CSI. The evaluations indicated that
the aircraft were impaired as defined by SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"). An impairment charge
was recorded in June 2003 in the amount of $1,576,000 per aircraft. A second
impairment charge was recorded in December 2003 in the amount of $2,858,000 per
aircraft as a result of additional declines in estimated values and changes to
probability assumptions applied to projected cash flows from the aircraft. After
consideration of these impairment charges, each aircraft has a book value of
$1,125,000 at December 31, 2003.

The Partnership also leases a 727-200 FH aircraft to FedEx Corporation
("FedEx"). This lease is scheduled to terminate in April 2006. In 2003, the
residual value of the aircraft was reviewed. The review indicated that the
estimate of residual value had declined, and such decline was judged to be other
than temporary. As a result, a downward adjustment was made, reducing the
residual value from $2,000,000 to $700,000. This new valuation resulted in an
immediate charge to earnings in the amount of $1,168,000, and a reduction of
$132,000 in earnings over the remaining term of the lease. 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.

On August 12, 2003, the Partnership entered into an agreement with
OLSF, LLC ("OLSF") to sell three off-lease MD-81 aircraft in intervals of 120
days, with the first aircraft being delivered on that date. The purchase price
per aircraft was $1,200,000. As a result of the contractual sales price of the
aircraft being lower than their book value, the aircraft were written-down in
the second quarter of 2003. The amount of the write-down per aircraft of
$1,500,000 was equal to the difference between the carrying book value of
$2,700,000 and the sale amount of $1,200,000. In September of 2003, the
agreement with OLSF was amended to accelerate the sale and delivery of the
second aircraft to September 26, 2003. A deposit of $200,000 previously paid to
the Partnership and included on the balance sheet as sale deposit as of December
31, 2003, was credited against the $1,200,000 purchase price of the third
aircraft, which was sold and delivered on January 26, 2004.

In June 2002, the Partnership commenced litigation against US Airways
seeking to recover damages for US Airways' failure to return three aircraft
leased to US Airways in the condition prescribed in the lease following its
expiration on October 1, 2001 and to pay rent due on the aircraft. US Airways
subsequently filed for bankruptcy, and the owner trustee for the Partnership
(the "Owner Trustee") filed a proof of claim in the bankruptcy case in the
amount of $13.0 million with respect to the aircraft. In September 2003, the
Owner Trustee and US Airways entered into a stipulation providing for the
allowance of an unsecured claim in the bankruptcy

case in the amount of $9.3 million. In its Disclosure Statement dated January
17, 2003, filed as part of its proposed plan of reorganization, US Airways
projected that it would pay between 1.2 percent and 1.8 percent on unsecured
claims. In December 2003, the Partnership received a partial distribution from
US Airways in the form of US Airways Class A Common stocks and Warrants
redeemable for Class A Preferred stocks. The Partnership received 6,975 shares
of Class A Common stocks, valued at $43,385 ($6.22 per share) and warrants for
4,278 shares of Class A Preferred stocks. No value was recorded on the Preferred
stocks since the per share strike price of $7.42 is higher than the closing
stock price of $6.22 at December 31, 2003.

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

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 available
to these large leasing companies and the large inventory of aircraft 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 the Partnership's
leased aircraft are generally 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 that offer
an appropriate balance of risk and reward has been difficult. During the past
ten years (and before 1997) the Partnership has made only two aircraft
investments, both of which were possible because of special circumstances.

In 1996, 1997, 2001, 2003 and January 2004, the Partnership sold its
interests in twelve aircraft:

o a 50% interest in an aircraft on lease to Finnair,
o a one-third interest in six aircraft on lease to Continental,
o a 50% interest in one aircraft leased to Sun Jet International,
Inc.,
o a 100% interest in an aircraft previously on lease to TWA and
American Airlines, and
o a 100% interest in three MD-81 off-lease aircraft, previously on
lease to US Airways.

See "Disposition of Aircraft" below for a further discussion of these
transactions. Because of the factors described above, the Partnership was unable
to reinvest the proceeds from these transactions 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.

DESCRIPTION OF LEASES

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.

The 727-200FH aircraft on lease to FedEx is leased pursuant to a
full-payout lease, and the two MD-82 aircraft on lease to CSI are leased
pursuant to operating leases. The two MD-82 aircraft on lease to CSI, were
previously leased to US Airways pursuant to full-payout 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 operating obligations are imposed upon the Partnership. Default by a
lessee may cause the Partnership to incur unanticipated expenses. See
"Government Regulation" below.

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

In order to encourage equipment financing to certain transportation
industries, Federal bankruptcy laws traditionally have afforded special
treatment to certain lenders or lessors who have provided such financing.
Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended
(the "Bankruptcy Code"), implements this policy by creating a category of
aircraft lenders and lessors whose rights to repossession are substantially
improved. If a transaction 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.

The Bankruptcy Reform Act of 1994 (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 (October 22, 1994), 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.

AIRCRAFT REMARKETING

On termination of a lease and return of the aircraft to the
Partnership, the Partnership previously remarketed the aircraft to realize its
full investment. Under the Limited Partnership Agreement, the remarketing of
aircraft may be through a lease or sale. The terms and conditions of any such
lease would be determined at the time of the re-lease, and it is possible
(although not anticipated at this time) that the lease may not be a net lease.
The General Partner would 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 analyzes the credit of a potential lessee and evaluate the
aircraft's potential value prior to entering into any lease.

From and after March 17, 2004, the General Partner will evaluate
leasing opportunities in light of its decision to sell the Partnership's assets
and dissolve.

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. From
and after March 17, 2004, the General Partner intends to sell aircraft as
attractive opportunities arise.

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.

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 receives a
Disposition or Remarketing Fee for all aircraft sold. No aircraft were sold to
affiliates in 2001, 2002 or 2003.

In March 1996, the Partnership sold its 50% interest in one MD-82 on
lease to Finnair to a third party for approximately $6,900,000, resulting in a
net gain of approximately $556,000. The Partnership had acquired its interest in
this aircraft in April 1992, for approximately $8,500,000. 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.

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 $3,100,000, resulting in a net gain of approximately
$1,900,000. The proceeds were distributed to Unitholders in the first quarter of
1997.

On September 29, 1997 the Partnership sold its 50% ownership interest
in a DC9-51 aircraft on lease to Sun Jet International, Inc. The sale price was
$1,200,000, 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 1997.

In December 2001, the Partnership sold its 100% interest in an MD-82
aircraft previously on lease to American Airlines, at a sale price of
approximately $9,000,000, resulting in a net gain of approximately $965,000. The
proceeds were distributed to Unitholders in the first quarter of 2002.

In August and September of 2003, and in January 2004, the Partnership
sold its 100% interest in three MD-81 aircraft to OLSF, LLC, at a sale price of
$1,200,000 per aircraft. As a result of the contractual sale price of the
aircraft being lower than their book value at the time of the sales agreement,
each of the three aircraft was written-down by $1,500,000 in the second quarter
of 2003. No gain was recorded in connection with these sales.

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.

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 7 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
9 of Notes to Financial Statements.

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

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

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.

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, 2003, all of the aircraft in the
Partnership's portfolio were Stage III aircraft.

ACQUISITION OF ADDITIONAL AIRCRAFT

From and after March 17, 2004, the General Partner will no longer make
investments in aircraft. See "Decision to Sell Assets and Dissolve" above.

Notwithstanding 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.

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

In June 2002, the Partnership commenced litigation against US Airways
seeking to recover damages for Airways' failure to return three aircraft leased
to US Airways in the condition prescribed in the lease following lease
expiration on October 1, 2001 and to pay rent due on such aircraft. US Airways
subsequently filed for bankruptcy, and the owner trustee for the Partnership
(the "Owner Trustee") filed a proof of claim in the bankruptcy case in the
amount of $13.0 million with respect to the aircraft. In September 2003, the
Owner Trustee and US Airways entered into a stipulation providing for the
allowance of an unsecured claim in the bankruptcy case in the amount of $9.3
million. In its Disclosure Statement dated January 17, 2003, filed as part of
its proposed plan of reorganization, US Airways projected that it would pay
between 1.2 percent and 1.8 percent on unsecured claims. In December 2003, the
Partnership received a partial distribution from US Airways in the form of
company Class A Common stocks and Warrants redeemable for Class A Preferred
stocks. The Partnership received 6,975 shares of Class A Common stocks, valued
at $43,385 ($6.22 per share) and warrants for 4,278 of Class A Preferred stocks.
No value was recorded on the Preferred stocks since the per share strike price
of $7.42 is higher than the closing stock price of $6.22 at December 31, 2003.

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

None.

PART II

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

UNITS OUTSTANDING

Since September 9, 2002, the Partnership's Units have been trading on
the OTC Bulletin Board ("OTCBB") under the symbol AIRL. Prior to that date, the
Units were traded on the New York Stock Exchange ("NYSE") under the symbol FLY.
The units were delisted from the NYSE because the Partnership ceased to meet the
NYSE's continued listing criteria. As of February 19, 2004, there were 722
Unitholders of record.

MARKET PRICE

The following chart sets forth the high and low closing prices on the
New York Stock Exchange or the high and low bid information as reported on the
over-the-counter market and the trading volume for each of the quarters in the
years ended December 31, 2003 and 2002. Over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.

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

March 31, 2003 510 $0.97 - $0.72
June 30, 2003 561 $1.85 - $0.65
September 30, 2003 571 $2.03 - $1.25
December 31, 2003 571 $2.03 - $1.55

March 31, 2002 378 $6.60 - $4.95
June 30, 2002 361 $5.99 - $3.03
September 30, 2002 438 $3.30 - $1.50
December 31, 2002 678 $1.25 - $0.61

DISTRIBUTIONS TO UNITHOLDERS

CASH DISTRIBUTIONS

Historically the Partnership has made 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.

Distributions declared during 2003 and 2002 were as follows:

Record Date Payment Date Per Unit
___________ ____________ ________

March 31, 2003 May 15, 2003 5 cents
June 30, 2003 August 15, 2003 5 cents
September 30, 2003 November 14, 2003 5 cents
September 30, 2003 (Special) November 14, 2003 26 cents
December 30, 2003 February 13, 2004 5 cents
December 30, 2003 (Special) February 13, 2004 26 cents

March 29, 2002 May 15, 2002 11 cents
June 28, 2002 August 15, 2002 11 cents
October 4, 2002 November 15, 2002 5 cents
December 31, 2002 February 14, 2003 5 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

On March 17, 2004, the Board of Directors of the General Partner
directed the General Partner to cease making new aircraft investments, sell the
Partnership's remaining assets as attractive sale opportunities arise,
distribute sale proceeds (after repaying debt and establishing appropriate
reserves) to Unitholders after disposition, and dissolve the Partnership when
all assets are sold. The General Partner also has amended the Amended and
Restated Agreement of Limited Partnership of the Partnership, as amended (the
"Limited Partnership Agreement") to give effect to this directive. See "BUSINESS
- Decision to Sell Assets and Dissolve." Among other things, the Limited
Partnership Agreement has been amended to require that, after March 17, 2004,
all Cash Available From Sale or Refinancing (as defined therein) would be
distributed to the Unitholders.

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 to Unitholders. Also, any Cash Available from
Sale or Refinancing received after January 1, 2005 would not be reinvested but
was to be distributed to the Unitholders.

For information as to the sales giving rise to distributions from Cash
Available from Sales or Refinancing, see "BUSINESS--Disposition of Aircraft."

TAX ALLOCATIONS

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

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Partnership has included in this annual report certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning the Partnership's business, operations
and financial condition. The words or phrases "can be", "may affect", "may
depend", "expect", "believe", "anticipate", "intend", "will", "estimate",
"project" and similar words and phrases are intended to identify such
forward-looking statements. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and the Partnership cautions
you that any forward-looking information provided by or on behalf of the
Partnership is not a guarantee of future performance. Actual results could
differ materially from those anticipated in such forward-looking statements due
to a number of factors, some of which are beyond the Partnership's control, in
addition to those discussed in the Partnership's public filings and press
releases, including (i) changes in the aircraft or aircraft leasing market, (ii)
economic downturn in the airline industry, (iii) default by lessees under leases
causing the Partnership to incur uncontemplated expenses or not to receive
rental income as and when expected, (iv) the impact of the events of September
11, 2001, and war, acts of terrorism, or other military involvement by the U.S.
or others in Iraq or other regions, on the aircraft or aircraft leasing market
and on the airline industry, (v) changes in interest rates and (vi) legislative
or regulatory changes that adversely affect the value of aircraft. All such
forward-looking statements are current only as of the date on which such
statements were made. The Partnership does not undertake any obligation to
publicly update any forward-looking statement to reflect events or circumstances
after the date on which any such statement is made or to reflect the occurrence
of unanticipated events.

CRITICAL ACCOUNTING POLICIES

On March 17, 2004, the Board of Directors of the General Partner
directed the General Partner to cease making new aircraft investments, sell the
Partnership's remaining assets as attractive sale opportunities arise,
distribute sale proceeds (after repaying debt and establishing appropriate
reserves) to Unitholders after disposition, and dissolve the Partnership when
all assets are sold. The leased assets in the portfolio of the Partnership as
reflected in the consolidated financial statements accompanying this report are
shown at the estimated fair value. See " -- Long Lived Assets" and "Impairment"
below. The Partnership will classify all lease assets as held for sale for the
quarter ending March 31, 2004.

In response to the SEC's financial release FR-60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies," the Partnership has
identified the most critical accounting principles upon which its financial
reporting depends. It determined the critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. The Partnership identified its most critical accounting policies to
be those related to lease revenue recognition, depreciation policies, and
valuation of aircraft. These

accounting policies are stated in the notes to the financial statements and in
relevant sections in this discussion and analysis. All three accounting policies
directly affect the Partnership's earnings and involve estimations regarding
residual and salvage values and current aircraft market values. These
estimations involve judgments and assumptions on the part of management
regarding current and future aircraft market conditions and lease rates.
Aircraft valuations are typically derived from publications published by
independent aircraft appraisers and adjusted for aircraft conditions as to
whether the aircraft need additional maintenance work or refurbishing. These
estimations bear the risk of change due among other things to uncertainties
about the future of the economy, the health of the airline industry and to
changes in the aircraft or aircraft leasing market.

Long Lived Assets - The Partnership accounts for its long-lived assets,
including Operating Leases, aircraft held for lease and aircraft held for sale,
in accordance with Statement of Financial Accounting Standards ("SFAS") No 144
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS".

The statement's provisions supersede SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which addressed
asset impairment, and certain provisions of APB Opinion 30 related to reporting
the effects of the disposal of a business segment and requires expected future
operating losses from discontinued operations to be recorded in the period in
which the losses are incurred rather than the measurement date.

SFAS 144 addresses how and when to measure impairment on long-lived assets that
an entity plans to dispose of either through sale, abandonment, exchange, or
distribution to owners. SFAS 144 retains the requirements of SFAS 121 whereby an
impairment loss is recognized in an amount equal to the difference between the
carrying value and the fair value if the carrying value of an asset is not
recoverable based on undiscounted future cash flows. In accordance with SFAS
144, the Partnership tests its long-lived assets for recoverability at least
annually and whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable.

Operating Leases - Leases that do not meet the criteria for finance leases are
accounted for as operating leases. The Partnership's undivided interests in
aircraft subject to operating leases are recorded at carrying value of the
aircraft at lease inception. Aircraft are depreciated over the related lease
terms, generally five to nine years on a straight-line basis to an estimated
salvage value, or over their estimated useful lives for aircraft held for lease,
on a straight-line basis to an estimated salvage value.

IMPAIRMENT

On August 12, 2003, the Partnership signed a sales agreement with OLSF,
LLC ("OLSF") to sell three off-lease aircraft in intervals of 120 days, with the
first aircraft being delivered on August 12, 2003. The purchase price per
aircraft was $1,200,000. As a result of the contractual sale price of the
aircraft being lower than their book value, the aircraft were written-down in

the second quarter of 2003. The $1,500,000 write-down per aircraft was equal to
the difference between the carrying book value of $2,700,000 and the sale price
of $1,200,000.

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. In 2003, the residual value of the 727-200FH aircraft on
lease to FedEx was reviewed. The review indicated that the estimate of residual
value had declined, and such decline was judged to be other than temporary. As a
result, the booked residual was reduced from $2,000,000 to $700,000. This new
valuation resulted in an immediate charge to earnings in the amount of
$1,168,000, which is included on the statement of operations as impairment
charge on aircraft, and a reduction of $132,000 in earnings over the remaining
term of the lease.

During 2003, management prepared quarterly impairment evaluations on
the two aircraft currently on lease to CSI. The evaluations indicated that the
carrying value of the aircraft was not recoverable based on the undiscounted
future cash flows to be generated by the aircraft. An impairment charge was
recorded in June 2003 in the amount of $1,576,000 per aircraft. A second
impairment charge was recorded in December 2003 in the amount of $2,858,000 per
aircraft as a result of additional declines in estimated values and changes to
probability assumptions applied to projected cash flows from the aircraft. The
book value per aircraft after the impairment charges is $1,125,000.

LIQUIDITY AND CAPITAL RESOURCES

Aircraft sales will further reduce the Partnership's portfolio, which
in turn will prospectively reduce net cash flows from operations. Also, given
current market conditions, the General Partner cannot predict either the actual
timing for completing sales of the Partnership's aircraft or the prices and
other terms of such sales. The General Partner also cannot predict when net
proceeds will be distributed to Unitholders or the aggregate amount of such net
proceeds, both of which will depend upon a number of factors, including market
conditions, the timing and terms of such asset sales, the amount of cash
required to settle outstanding liabilities and contingencies, the amount of
necessary cash reserves, and the expenses associated with selling assets and
dissolving the Partnership.

The Partnership presently has one long-term debt facility. At December
31, 2003, the

7.4% non-recourse note collateralized by one aircraft leased to FedEx had an
outstanding balance of $2.0 million. The facility matures in April 2006.

Long-term borrowings at December 31, 2003 represented 2.93% of the
original cost of the aircraft presently owned by the Partnership, including
capital expenditures for upgrades.

Total scheduled debt service in 2004 is $0.9 million. Debt service is
expected to be paid from the rental payments received under the FedEx lease.

Net cash provided by operating activities was $1.1 million for 2003,
$1.6 million for 2002, and $2.7 million for 2001. The 2003 decrease in net cash
provided by operating activities was primarily due to having three aircraft
off-lease for most of the year. The decrease in net cash provided by operating
activities during 2002 as compared to 2001 was primarily due to reduced revenue
as a result of the termination on October 1, 2001 of the US Airways leases on
five MD-81 aircraft.

Total debt service on the fixed loan as a percentage of net cash
provided by operating activities was 123%, 57%, and 80% for 2001, 2002 and 2003,
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 of total debt service on the fixed loan as a percentage of net cash
provided by operating activities become 27%, 35%, and 41%, for 2001, 2002 and
2003, respectively.

Regular cash distributions paid by the Partnership were $7.1 million
($1.51 per unit) in 2001, $1.8 million ($0.38 per unit) in 2002, and $0.9
million ($0.20 per unit) in 2003. There were no special cash distributions paid
in 2001. A special cash distribution of $7.0 million ($1.50 per unit) was
declared in December 2001, and was paid in the first quarter of 2002. Also, a
special cash distribution of $1.2 million was paid in November 2003.

Pursuant to the Limited Partnership Agreement, the Partnership
distributes all Cash Available from Operations net of expenses and reserves.
Since such distributions were in excess of earnings, and because of the
Partnership's net loss in 2003, Partnership equity declined from $25.8 million
at December 31, 2002 to $6.1 million at December 31, 2003, and limited partner
equity per Unit declined from $5.51 to $1.30. Included in the equity decline are
the non-cash aircraft impairment charges of $14.5 million, or $3.11 per Unit,
recorded in 2003.

At December 31, 2003, the Partnership had cash on hand in the amount of
$4.3 million, of which $1.4 million is payable to Unitholders on February 14,
2004 as cash distributions. In the event that the Partnership's cash on hand is
significantly reduced as a result of unanticipated expenses, including
unanticipated maintenance and refurbishing expenses with respect to the two
aircraft leased by CSI following their lease expirations, cash distributions to
Unitholders may be reduced or eliminated.

RESULTS OF OPERATIONS

2003 VS. 2002
_____________
Net loss in 2003 was $16,302,000 compared with a net loss of
$13,035,000 in 2002. The decline in earnings results from an increase in
expenses, primarily due to higher impairment charges in 2003, and from reduced
operating lease rental revenues.

In 2003 and 2002, revenues were earned from only three of the six
aircraft in the Partnership's portfolio during those years. The remaining three
aircraft were off-lease, two of which were sold in 2003 and the third of which
was sold in January 2004. Two of the leased aircraft were leased to CSI and the
other was leased to FedEx.

Revenues in 2003 were $1,615,000 compared with $3,027,000 in 2002. The
revenue reductions were primarily due to lower operating lease rentals
associated with the two aircraft leased to CSI, as the leases were extended at
lower monthly rental rates to reflect the changing aircraft market conditions,
and to the scheduled decline in finance lease income in 2003 associated with the
aircraft leased to Fed Ex.

Expenses in 2003 were $17,917,000, an increase of $1,855,000 from
$16,062,000 for the comparable 2002 period. The increase in expenses was
primarily due to higher aircraft impairment charges in 2003, as $14,533,000 in
impairment charges was recorded in 2003 versus $11,086,000 recorded in 2002. The
increase in impairment charges in 2003 was partially offset by lower interest
expense in 2003 as a result of the reduction in the Partnership's debt balances,
by lower depreciation expenses as a result of reduced depreciable aircraft
values primarily due to the aircraft write-downs in 2002 and 2003, and by lower
management fees and taxes due to a smaller asset base and lower revenues. In
addition, $43,000 in credit to bad debt expense was recorded in December 2003,
as a result of the receipt of stock from US Airways. The stock was issued by US
Airways to the Partnership as a partial payment on the settlement reached with
the airline in 2003. See "Aircraft Portfolio."

2002 VS. 2001
_____________
Net loss in 2002 was $13,035,000, compared with a net income of
$1,623,000 in 2001. The decline in earnings results from an increase in
expenses, primarily due to aircraft impairment charges and an increase in
depreciation expense, and from reduced revenues.

In 2002, revenues were earned from only three of the six aircraft in
the Partnership's portfolio. The remaining three aircraft were off-lease
throughout the year. Two of the leased aircraft were leased to CSI and the other
was leased to FedEx.

Revenues in 2002 were $3,027,000 compared with $6,067,000 in 2001. The
revenue reductions were primarily due to the expiration of the lease with US
Airways for five aircraft in the fourth quarter of 2001, three of which remained
off-lease as of December 31, 2002; the sale of one aircraft in December 2001;
and the scheduled decline in finance lease income in 2002 associated with the
aircraft leased to FedEx.

Expenses in 2002 were $16,062,000, an increase of $11,618,000 from
$4,444,000 for the comparable 2001 period. The increase in expenses was
primarily due to the aircraft impairment charges in the third quarter of 2002 of
$11,086,000, as the three off-lease aircraft were deemed impaired under SFAS
144, and depreciation expense of $3,206,000 in 2002 compared to depreciation
expense of $1,268,000 for the comparable 2001 period. A note receivable from US
Airways recorded on the Partnership's books in 2001 for $34,000 (net of discount
and deferred income) was written off as a loss. The note was written off as a
result of US Airways' bankruptcy filing, in August 2002, and the uncertainty of
collection. Interest expense was lower in 2002 as a result of the reduction in
the Partnership's debt balances. Management fees and taxes were lower due to a
smaller asset base and lower revenues.

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

2001 VS. 2000
_____________
In 2001, revenues were earned from seven aircraft subject to finance
and operating leases and from the gain on sale of one aircraft. The lease
revenue reduction in 2001 as compared with 2000 was primarily due to the
scheduled decline in finance lease income as the balances due from the lessees
declined, the expiration of the lease with US Airways for five aircraft, three
of which remained off lease, and the restructure of the TWA lease.

In 2001, five MD-82 aircraft leased to US Airways generated $3,363,000
in finance lease income prior to their return upon lease expiration. Two of the
five aircraft were leased to CSI Aviation Services, Inc. ("CSI") in November
2001 under operating leases, which generated $296,000 in operating lease income
(before depreciation expense). The remaining three aircraft were being held for
lease as of December 31, 2001.

The finance lease of one MD-82 aircraft with TWA was assumed by
American Airlines in April of 2001, and was reclassified as an operating lease.
In 2001, the finance lease generated $293,000 in finance lease income, and the
operating lease generated $750,000 in operating lease rental income (before
depreciation expense). In December of 2001, the aircraft was sold, generating a
gain on sale before remarketing fee of $965,000.

The lease of one 727-200FH aircraft to FedEx generated $346,000 in
finance lease income.

Interest expense decreased in 2001 by $359,000 as compared with 2000,
as a result of declining debt balances.

Depreciation expense of $1,268,000 in 2001 related to aircraft subject
to operating leases and to aircraft available for lease. No depreciation expense
was recorded in 2000 as the Partnership's portfolio did not include any aircraft
subject to operating lease or held for lease.

Management fees and tax on gross income increased in 2001 as compared
with the prior year as a result of the sale of the MD-82 aircraft.

The increase in general and administrative expenses was primarily due
to aircraft maintenance and refurbishing expenses incurred in the preparation of
two MD-82 aircraft for delivery to CSI.

The lease with US Airways for five MD-82 aircraft was scheduled to
terminate on October 1, 2001. However, US Airways failed to satisfy the aircraft
return conditions relating to aircraft maintenance as specified in the lease
agreement. Under the lease, US Airways was obligated to pay rent for each
aircraft on a prorated basis until the required maintenance has been completed
and the aircraft has been returned. The lease required the maintenance to be
completed within 60 days of the expiration of the lease term.

In November 2001 the Partnership entered into an agreement with US
Airways with respect to the two MD-82 aircraft now leased to CSI, providing for
US Airways to pay hold-over rent and to pay for certain agreed-upon maintenance
work. US Airways made a cash payment covering a portion of the rent and
maintenance costs and delivered an unsecured note for the remaining amount. The
note was written off as a result of US Airways' bankruptcy filing, in August
2002, and the uncertainty of collection, resulting in a charge to bad debt
expense of $34,000. See Note 5 of the Notes to Financial Statements.

OUTLOOK

As a result of the March 17, 2004 Board of Directors action, the
Partnership will classify lease assets as held for sale for the quarter ended
March 31, 2004.

The market conditions for aircraft leasing continue to be weak, as the
supply of aircraft exceeds demand. The leases on the two aircraft on lease to
CSI are scheduled to terminate in May 2004. In light of the decision of the
General Partner to sell the Partnership's assets and dissolve the partnership,
Management is not able to predict if or when the aircraft may be leased again
after their return from CSI. If the leases with CSI are not extended,
management's best estimate at the present time is that the Partnership would be
able to recover net book value through a combination of lease rentals and sales
proceeds; however, if the Partnership's assumptions regarding renewal lease
rates and terms are not realized, the Partnership could record additional
impairment charges with respect to these aircraft.

ITEM 7. 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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 8A. CONTROLS AND PROCEDURES

(a) The Chief Executive Officer and the Chief Financial Officer of the
General Partner of the Partnership, after evaluating the effectiveness of the
Partnership's disclosure controls and procedures as of the end of the period
covered by this annual report, have concluded that the Partnership's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Partnership in this annual report is accumulated and
communicated to the Partnership's management to allow timely decisions regarding
required disclosure.

(b) No significant change was made in the Partnership's control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Partnership's internal control over financial reporting.

PART III

ITEM 9. 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 29, 2004. As used
below, "BALCAP" refers both to BALCAP and to BA Leasing and Capital prior to its
BALCAP in September 1999.

POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
__________________ _________________ ___ ___________________________

David B. Gebler Chairman of the 54 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.

William A. Hasler Director 62 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., Schwab Funds, Mission
West, Ditech Communications, Stratex Network, and
Aphton Corporation. He is a graduate of Pomona
College and earned his MBA from Harvard .

Leonard Marks, Jr. Director 82 Mr. Marks retired as Executive Vice President of
Castle & Cooke, Inc., in 1985. Prior to that time, he
was also President of the real estate and diversified
activities group of that company. Mr. Marks has been
a Director of the General Partner since 2001, and
previously was a Director to the General Partner from
1986 to 1997. For many years, Mr. Marks was an
assistant professor of Finance at the Harvard Business
School and a professor of Finance at the Stanford
Business School. He was Assistant Secretary of the
United States Air Force from 1964 to 1968. Mr. Marks
holds a Ph.D in Business Administration from Harvard
University.

POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
__________________ _________________ ___ ___________________________

Richard P. Powers Director 63 Mr. Powers is a Vice President and Chief Financial
Officer of Corgentech. From 1996 to 2000 he was an
Executive Vice President of Finance and Administration
of Eclipse Surgical Technologies, Inc., a medical
device company. He has been 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 58 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 51 Mr. Keyes has been Senior Vice President and Senior
Officer and a Finance Manager of BALCAP since December 2000. Prior
Director 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 parent of the General Partner) as
Vice President and Corporate Controller. While at USL
Capital, Mr. Keyes served as Chief Financial Officer
and as a Director of the General Partner. 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.

AUDIT COMMITTEE FINANCIAL EXPERTS

The General Partner's Board of Directors has determined that each of
William A. Hasler, Richard P. Powers and Leonard Marks, Jr. is an audit
committee financial expert as defined by Item 401(e) of Regulation S-B of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the
Exchange Act.

CODE OF ETHICS

The General Partner has adopted a code of ethics applicable to all
employees, including the General Partner's President, Chief Executive Officer
and Chief Financial Officer. The code of ethics is filed as an exhibit to this
Form 10-KSB.

ITEM 10. 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 2003, such unaffiliated directors were
paid an annual fee of $14,500 plus $500 for each board or committee 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 therefore.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS

As of February 29, 2004, 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) (2) 5%
555 California Street
San Francisco, CA 94104

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

____________________

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

(2) Bank of America National Association ("BANA") owns all of the
outstanding stock of Holding and the membership interests of BALCAP.
Therefore, BANA may be deemed also to be the indirect beneficial owner
of the Units owned by Holding and by BALCAP. In addition, BANA owns all
the outstanding stock of the General Partner. Therefore, BANA may be
deemed to be the indirect beneficial owner of the General Partner's 1%
General Partner interest. BANA 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 BANA may also be deemed to be the indirect beneficial owner
of all Units and of the General Partner's 1% General Partner interest
deemed owned by BANA.

(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)
Depositary Units Leonard Marks Jr. 750 (2)
All directors and executive 10,150 (2)
officers as a group

____________________

(1) Includes 200 Units held by Mr. Gebler as custodian for a 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 12. 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
9 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, 2003 Airlease owed
BALCAP $238,000 for such borrowings.

ITEM 13. 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 Operations for the Years Ended December 31, 2003,
2002 and 2001 ................................................................ A-3

Balance Sheets, as of December 31, 2003 and 2002.............................. A-4

Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001........................................................... A-5

Statements of Changes in Partners' Equity for the Years Ended
December 31, 2003, 2002 and 2001.............................................. 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) On October 2, 2003, the Partnership filed a report on Form 8-K
dated September 26, 2003, disclosing under Item 2 the
completion of the sale by the Partnership of two MD-81
aircraft and related assets to OLSF, L.L.C. and the expected
future sale of a third off-lease MD-81 aircraft and related
assets to OLSF, L.L.C. On December 19, 2003, the Partnership
filed a report on Form 8-K dated December 19, 2003, disclosing
under Item 9 the formation by the Board of Directors of the
General Partner of a special committee of independent
directors to review management's recommendation that the
Partnership adopt a plan for the immediate sale of all
remaining aircraft followed by a dissolution of the
Partnership.

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.

3.6 Second Amendment to Amended and Restated Partnership
Agreement.

3.7 Third Amendment to Amended and Restated Partnership Agreement.

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

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, 2001.

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

10.52(4) Assignment, Assumption and Amendment Agreement dated April 9,
2001 among Trans World Airlines, Inc., American Airlines,
Inc., the registrant and First Security Bank, National
Association, as Owner Trustee.

10.53(2) Certificate of Redelivery and Agreement dated as of November
26, 2001, 2001 between First Union National Bank, not in its
individual capacity but solely as Owner Trustee, and US
Airways, Inc., with respect to one MD-82 Aircraft, U.S.
Registration No. 806USAirframe.

10.54(2) Certificate of Redelivery and Agreement dated as of November
26, 2001, 2001 between First Union National Bank, not in its
individual capacity but solely as Owner Trustee, and US
Airways, Inc., with respect to one MD-82 Aircraft, U.S.
Registration No. 807USAirframe.

10.55(2) Aircraft Lease Agreement dated as of November 21, 2001,
between First Union National Bank (formerly Meridian Trust
Company), not in its individual capacity but solely as Owner
Trustee, and CSI Aviation Services, Inc., Lessee with respect
to one (1) MD-82 Aircraft, U.S. Registration No. N806US
(manufacture serial no. 48038).

10.56(2) Aircraft Lease Agreement dated as of November 21, 2001,
between First Union National Bank (formerly Meridian Trust
Company), not in its individual capacity but solely as Owner
Trustee, and CSI Aviation Services, Inc., Lessee with respect
to one (1) MD-82 Aircraft, U.S. Registration No. N807US
(manufacture serial no. 48039).

10.57(5) Lease Supplement Number Three dated April 9, 2003, among
Wachovia Bank, National Association, as successor to First
Union National Bank, not in its individual capacity but solely
as Trustee, the Partnership and CSI Aviation Services, Inc.

10.58(6) Lease Supplement Number Four dated September 10, 2003,
among Wachovia Bank, National Association, as successor to
First Union National Bank, not in its individual capacity but
solely as Trustee, the Partnership and CSI Aviation Services,
Inc.

10.59(7) Aircraft Sales Agreement, dated as of August 12, 2003, among
Wachovia Bank, National Association as trustee, Airlease Ltd.,
a California limited partnership, and OLSF, L.L.C., a Delaware
limited liability company.

10.60(7) First Amendment to Aircraft Sales Agreement, dated as of
September 26, 2003, among Wachovia Bank, National Association
as trustee, Airlease Ltd., a California limited partnership,
and OLSF, L.L.C., a Delaware limited liability company.

___________________

(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2001.

(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2000.

(4) Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.

(5) Incorporated by reference to the Partnership's Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2003.

(6) Incorporated by reference to the Partnership's Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 2003.

(7) Incorporated by reference to the Partnership's Form 8-K dated September
26, 2003 filed on October 2, 2003.

14.1 Code of Ethics.

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

99.1 Press Release dated March 18, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the fees for professional audit services
rendered by Ernst & Young LLP for the audit of the Partnership's annual
financial statements for the years ended December 31, 2003 and 2002 and review
of financial statements included in the Partnership's Form 10-Q or Form 10-QSB
for the quarters included in those years, and fees for other services rendered
by Ernst & Young LLP during those years. The table also sets forth the fees for
services rendered by priceWaterhouseCoopers during those years.

2003 2002
________ ________

Audit Fees - Ernst & Young LLP $ 42,323 $ 42,000
Audit Related Fees ---- ----
Tax Fees (1)
Tax Fees - Ernst & Young LLP 24,298 19,900
Tax Fees - PriceWaterhouseCoopers 189,234 166,981
________ ________
Total $255,855 $228,881
======== ========

(1) Tax Fees rendered by Ernst & Young LLP consists of fees billed for
professional services associated with preparing the Partnership's tax returns.

(2) Tax Fees rendered by PriceWaterhouseCoopers consist of fees billed for
professional services associated with preparing the Form K-1 tax returns of the
general partner and unitholders.

All engagements for services to the Partnership by Ernst & Young LLP,
PriceWatterhouseCoopers or other independent accountants are subject to prior
approval by the General Partner's Audit Committee.

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 18, 2004.

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

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 18, 2004
____________________________________________
David B. Gebler
Chairman, Chief Executive Officer, President
and Director of AMSI

/s/ ROBERT A. KEYES March 18, 2004
____________________________________________
Robert A. Keyes
Chief Financial Officer and Director of AMSI

/s/ K. THOMAS ROSE March 18, 2004
____________________________________________
K. Thomas Rose
Director of AMSI

/s/ WILLIAM A. HASLER March 18, 2004
____________________________________________
William A. Hasler
Director of AMSI

/s/ LEONARD MARKS, JR. March 18, 2004
____________________________________________
Leonard Marks, Jr.
Director of AMSI

/s/ RICHARD P. POWERS March 18, 2004
____________________________________________
Richard P. Powers
Director of AMSI

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

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 conformity 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 (a
wholly owned subsidiary of Bank of America National Association, which also 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 LLP,
independent auditors for the years ended December 31, 2003 and 2002. Their
audits were conducted in accordance with auditing standards generally accepted
in the United States. The Independent Auditors' Report appears on page A-2.

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

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

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

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying balance sheets of Airlease Ltd. (the
"Partnership") as of December 31, 2003 and 2002, and the related statements of
operations, changes in partners'equity, and cash flows for each of the three
years in the period ended December 31, 2003. 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,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP
_________________________

San Francisco, California
February 4, 2004
Except for Note 1, as to which the date is
March 17, 2004

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

For the years ended
December 31,
(In thousands, except per unit amounts) 2003 2002 2001
________________________________________________________________________________________________________________________

REVENUES

Finance lease income $ 253 $ 300 $ 4,002
Operating lease rentals 1,330 2,670 1,046
Gain on sale of aircraft - - 965
Other income 32 57 54

___________________________________________
Total revenues 1,615 3,027 6,067
___________________________________________

EXPENSES

Interest 190 231 550
Depreciation - aircraft 2,037 3,206 1,268
Management fees and disposition and remarketing fees -
General Partner 345 355 984
Investor reporting 353 425 365
General and administrative 149 269 167
Taxes on gross income 211 142 884
Aircraft maintenance 142 314 226
Impairment charge on aircraft 14,533 11,086 -
Bad debt recovery (43) - -
Bad debt expense - 34 -

___________________________________________
Total expenses 17,917 16,062 4,444
___________________________________________
NET INCOME/(LOSS) $ (16,302) $ (13,035) $ 1,623
___________________________________________

NET INCOME/(LOSS) ALLOCATED TO:

GENERAL PARTNER $ (163) $ (130) $ 16
___________________________________________
Limited partners $ (16,139) $ (12,905) $ 1,607
___________________________________________
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (3.49) $ (2.79) $ 0.35
___________________________________________

See notes to financial statements

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

BALANCE SHEETS

As of December 31,
(In thousands except units outstanding) 2003 2002
___________________________________________________________________________________________________________________

ASSETS

Cash and cash equivalents $ 4,288 $ 2,569
Investments - available for sale 43 -
Finance leases - net 3,718 5,939
Operating leases - net 2,250 12,753
Aircraft held for lease - net - 8,500
Aircraft held for sale - net 1,200 -
Prepaid expenses and other assets 33 50
_____________________________
Total assets $ 11,532 29,811
_____________________________

LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:

Distribution payable to partners $ 1,448 $ 234
Accounts payable to General Partner and Affiliates 238 170
Accounts payable and accrued liabilities 112 175
Aircraft sale security deposit 200 -
Maintenance reserves 1,425 748
Current portion of long-term note payable 764 709
Long-term note payable 1,256 2,020
_____________________________
Total liabilities 5,443 4,056
_____________________________

PARTNERS' EQUITY:

Limited partners (4,625,000 units outstanding) 6,029 25,498
General partner (46,717 units outstanding) 60 257
_____________________________
Total partners' equity 6,089 25,755
_____________________________

TOTAL LIABILITIES AND PARTNERS' EQUITY $ 11,532 $ 29,811
=============================

See notes to financial statements

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

For the years ended December 31,
(In thousands) 2003 2002 2001
_____________________________________________________________________________________________________________________

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (16,302) $(13,035) $ 1,623
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation - aircraft 2,037 3,206 1,268
Increase in deferred income - - 509
Bad debt expense - 34 -
Bad debt recovery (43) - -
Gain on sale of aircraft - - (965)
Increase (decrease) in accounts payable and accrued liabilities 5 (256) 134
Increase in aircraft sale security deposit 200 - -
Increase in maintenance reserves 677 748 -
Decrease in prepaid expenses and other assets 17 10 94
Impairment charge on aircraft 14,533 11,086 -
Increase (decrease) in taxes payable - (224) 84
_______________________________________
Net cash provided by operating activities 1,124 1,569 2,747
_______________________________________

CASH FLOWS FROM INVESTING ACTIVITIES
Rental receipts in excess of earned finance and operating lease income
1,053 1,010 9,869
Proceeds from sale of equipment 2,400 - 9,000
Increase in notes receivable - - (544)
_______________________________________

Net cash provided by investing activities 3,453 1,010 18,325
_______________________________________

CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit repayment-net - - (1,765)
Repayment of long-term notes payable (709) (660) (2,838)
Distributions paid to partners (2,149) (8,782) (7,054)
_______________________________________

Net cash and cash equivalent used by financing activities (2,858) (9,442) (11,657)
_______________________________________

Increase (decrease) in cash and cash equivalents 1,719 (6,863) 9,415
Cash at beginning of year 2,569 9,432 17
_______________________________________

Cash and cash equivalents at end of year $ 4,288 $ 2,569 $ 9,432
_______________________________________
Additional information:
Cash paid for interest $ 193 $ 244 $ 510
_______________________________________

See notes to financial statements

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

For the years ended December 31, 2003, 2002, and 2001
General Limited
(In thousands except per unit amounts) Partner Partners Total
___________________________________________________________________________________________________________________

Balance, December 31, 2000 511 50,624 51,135
Net Income - 2001 16 1,607 1,623
Distributions to partners declared
($2.67 per limited partnership unit) (125) (12,348) (12,474)

_____________________________________
Balance, December 31, 2001 402 39,883 40,285
Net Loss - 2002 (130) (12,905) (13,035)
Distributions to partners declared
($0.32 per limited partnership unit) (15) (1,480) (1,495)

_____________________________________
Balance, December 31, 2002 257 25,498 25,755
Net Loss - 2003 (163) (16,139) (16,302)
Distributions to partners declared
($0.72 per limited partnership unit) (34) (3,330) (3,364)
_____________________________________
BALANCE, DECEMBER 31, 2003 $ 60 $6,029 $6,089
_____________________________________

See notes to financial statements

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

1. BACKGROUND AND ORGANIZATION

Airlease Ltd., A California Limited Partnership (the "Partnership"), engages in
the business of acquiring, either directly or through joint ventures, commercial
jet aircraft, and leasing such aircraft or parts thereof to domestic and foreign
airlines and freight carriers. The general partner of the Partnership (the
"General Partner") is Airlease Management Services, Inc. From 1999 to June 2002,
the General Partner was a wholly owned subsidiary of Banc of America Leasing and
Capital, LLC, a Delaware limited liability company ("BALCAP"), in turn a wholly
owned subsidiary of Bank of America National Assocation ("BANA"). In June 2002,
BALCAP transferred its stock of the General Partner to BANA and the General
Partner became a wholly owned subsidiary of BANA. BALCAP also holds 793,750
limited partnership units and United States Airlease Holding, Inc. ("Holding"),
also a wholly owned subsidiary of BANA, holds 231,250 limited partnership units.
An additional 3,600,000 units are publicly held.

At December 31, 2003 and 2002, the Partnership's portfolio consisted of four and
six Stage-III commercial aircraft, respectively. At December 31, 2003, two
aircraft were leased to CSI Aviation Services, Inc. ("CSI"), one aircraft was
leased to Federal Express Corporation

("FedEx"), and one was held for sale. At December 31, 2003 and 2002, the book
value of aircraft by lessee as a percent of assets was as follows: FedEx, 32.2%
and 19.9%; CSI, 19.5% and 42.8%; and off-lease aircraft, 10.4% and 28.5%.
Revenues by lessee as a percentage of total revenue for 2003, 2002 and 2001,
respectively, were as follows: CSI, 82.4%, 88.2% and 4.9%; and FedEx, 15.7%,
9.9% and 5.7%.

On March 17, 2004, the Board of Directors of the General Partner, acting in
response to a recommendation made by a special committee of independent
directors of its Board of Directors (the "Special Committee"), directed the
General Partner to cease making new aircraft investments, sell the Partnership's
remaining assets as attractive sale opportunities arise, distribute sale
proceeds (after repaying debt and establishing appropriate reserves) to
Unitholders after disposition, and dissolve the Partnership when all assets are
sold. The General Partner also has amended the Amended and Restated Agreement of
Limited Partnership of the Partnership, as amended (the "Limited Partnership
Agreement") to give effect to this directive.

As a result of the foregoing, the Partnership will classify its lease assets as
held for sale for the quarter ended March 31, 2004.

In 1997, the Unitholders of the Partnership authorized the General Partner to
take these actions. Since that time, the General Partner had deferred taking
such actions and continued to operate the Partnership while considering, from
time to time, alternative investments. However, the General Partner has not made
new investments in aircraft, primarily due to the weak aircraft leasing market.
For a variety of reasons, including the General Partner's belief that
significant improvement in this market is not forthcoming in the near term for
the Partnership's aircraft, the General Partner determined, on the basis of the
Special Committee's determination, that Unitholders likely will realize greater
value from a dissolution of the Partnership compared to continued operation of
the Partnership. Accordingly, the General Partner intends to exercise fully and
promptly the authority granted to it previously by the Unitholders to sell
assets, distribute net proceeds and dissolve the Partnership. To that end, the
General Partner has commenced actively seeking buyers for the Partnership's
aircraft.

Given current market conditions, the General Partner cannot predict either the
actual timing for completing sales of the Partnership's aircraft or the prices
and other terms of such sales. The General Partner also cannot predict when net
proceeds will be distributed to Unitholders or the aggregate amount of such net
proceeds, both of which will depend upon a number of factors, including market
conditions, the timing and terms of such asset sales, the amount of cash
required to settle outstanding liabilities and contingencies, the amount of
necessary cash reserves, and the expenses associated with selling assets and
dissolving the Partnership.

2. SIGNIFICANT ACCOUNTING POLICIES

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 and
expenses during the reporting period. Actual results could differ from those
estimates. Certain prior year amounts have been reclassified to conform to the
current year presentation.

CASH EQUIVALENTS - The Partnership considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.

INVESTMENT SECURITIES - Investment securities available for sale include 6,975
shares of US Airways Class A common stock received in December 2003 in partial
settlement of a claim against US Airways for past due lease payments and damages
resulting from US Airways' failure to return three aircraft in the condition
prescribed in the lease agreement. These shares are reported at market value,
with unrealized gains and losses, net of taxes, reported as a component of
cumulative other comprehensive income in partners' equity. Unrealized gains and
losses other-than-temporary impairments related to investment securities are
determined using specific identification. Investment securities are regularly
reviewed for impairment based on criteria that include the extent to which cost
exceeds market value, the duration of the market decline and the financial
health of and specific prospects of the issuer of the investment security. At
December 31, 2003, there were no realized or unrealized gains or losses on these
investment securities.

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.

OPERATING LEASES - Leases that do not meet the criteria for finance leases are
accounted for as operating leases. The Partnership's undivided interests in
aircraft subject to operating leases are recorded at carrying value of the
aircraft at lease inception. Aircraft are depreciated over the related lease
terms, generally five to nine years on a straight-line basis to an estimated
salvage value, or over their estimated useful lives for aircraft held for lease,
on a straight-line basis to an estimated salvage value.

MAINTENANCE RESERVES - On certain operating leases the Partnership requires the
lessees to pay aircraft maintenance reserves. The reserves will be applied
toward the aircraft's future maintenance requirements. Reserves are collected
for engines, airframe, and other aircraft components. The amount of the reserves
is based on flight hours.

NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT is computed by dividing the net
income/(loss) allocated to the Limited Partners by the weighted average units
outstanding (4,625,000 for each of the past three years).

LONG LIVED ASSETS - The Partnership accounts for its long-lived assets,
including Operating Leases, aircraft held for lease and aircraft held for sale,
in accordance with Statement of Financial Accounting Standards ("SFAS") No 144
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS".

In accordance with SFAS 144, the Partnership classifies an aircraft as held for
sale in the period in which a) management, having the authority to approve the
action, commits to a plan to sell the asset, b) the asset is available for
immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets, c) an active program to locate a buyer and
other actions required to complete the plan to sell the asset have been
initiated at a price that is reasonable in relations to the assets current fair
value, and d) the sale of the asset within one year is considered to be probable
and it is unlikely that significant changes to the plan will be made or that the
plan will be withdrawn.

3. FINANCE LEASES

At December 31, 2003, and 2002, the Partnership owned one aircraft that was
subject to a finance lease. The aircraft is leased to FedEx Corporation (FedEx)
under a 13-year finance lease that expires in 2006. 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.

In 2003, 2002, and 2001 this lease with FedEx resulted in finance lease income
of $253,000, $300,000, and $346,000, respectively.

The components of this finance lease at December 31, 2003 and 2002, are
summarized as follows (in thousands):

2003 2002
______ ______

Lease Receivable in installments $3,276 $4,582
Residual valuation 700 2,000
Unearned lease income (258) (643)
______ ______
Net Investment $3,718 $5,939
====== ======

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. In
2003, the residual value was reviewed. The review indicated that the estimate of
residual value had declined, and such decline was judged to be other than
temporary. As a result the booked residual was reduced from $2,000,000 to
$700,000. This new valuation resulted in an immediate charge to earnings in the
amount of $1,168,000, which is included on the statement of operations as
impairment charge on aircraft, and a reduction of $132,000 in earnings over the
remaining term of the lease.

Finance lease receivables at December 31, 2003 are due in installments of
$1,310,000 in 2004 and 2005, and $656,000 in 2006.

4. OPERATING LEASES

At December 31, 2003 and 2002, the Partnership had two aircraft that were
subject to operating lease treatment. The two MD-82 aircraft were leased to CSI
Aviation Services, Inc. (CSI) and generated $1,330,000 and $2,670,000 in
operating lease rental income in 2003 and 2002, respectively. During 2001, the
Partnership had three aircraft that were subject to operating lease treatment.
As mentioned above, two aircraft were leased to CSI and generated $296,000 in
operating lease rental income in 2001. The third aircraft was leased to American
Airlines and generated $750,000 in operating lease rental income during 2001.
The aircraft was sold in December 2001.

During 2003, management prepared quarterly impairment evaluations on the two CSI
MD-82 aircraft. The evaluations indicated that the carrying value of the
aircraft was not recoverable based on the undiscounted future cash flows to be
generated by the aircraft. An impairment charge was recorded in June 2003 in the
amount of $1,576,000 per aircraft. A second impairment charge was recorded in
December 2003 in the amount of $2,858,000 per aircraft as a result of additional
declines in values and to changes to probability assumptions applied to
projected cash flows from the aircraft. The book value per aircraft after the
impairment charges is $1,125,000.

The operating leases at December 31, 2003 and 2002 are summarized as follows (in
thousands):

2003 2002 2001
_______ _______ _______
Leased aircraft (at cost) $14,560 $14,560 $14,560
Impairment charges (8,866) 0 0
Accumulated depreciation (3,444) (1,807) (342)
_______ _______ _______
Net Investment $ 2,250 $12,753 $14,218
======= ======= =======

5. NOTE RECEIVABLE

In November 2001, the Partnership accepted a note receivable of $606,231 from US
Airways in exchange for past due rent obligations owed to the Partnership on two
of the five leased aircraft. The note receivable accrues interest at a rate of
7% per annum and provides for

twelve equal monthly payments beginning in January 2003. The note was recorded
at fair market value determined by discounting the future cash flows. Rental
income associated with this note was deferred and was to be recognized as the
note was repaid. The entire note was written off, as a result of US Airways'
bankruptcy filing, in August 2002 and the uncertainty of collection, resulting
in a charge to bad debt expense of $34,000.

6. AIRCRAFT HELD FOR LEASE OR SALE

In October 2001, US Airways, Inc. returned five aircraft that had been on lease
under a finance lease to the Partnership. During 2001, two of these aircraft
were re-leased to CSI under two operating lease agreements as previously
described, and are included in the Operating Leases-net in the accompanying
balance sheets as of December 31, 2003 and 2002. The other three aircraft sold
in 2003 and January 2004 as described below.

On August 12, 2003, the Partnership signed a sales agreement with OLSF, LLC
("OLSF") to sell the three remaining aircraft in intervals of 120 days, with the
first aircraft being delivered on August 12, 2003. The purchase price per
aircraft is $1,200,000. As a result of the contractual sale price of the
aircraft being lower than its book value, the aircraft were written-down in the
second quarter of 2003. The $1,500,000 write-down per aircraft was equal to the
difference between the carrying book value of $2,700,000 and the sale amount of
$1,200,000.

In September of 2003, the sales agreement was amended to accelerate the sale and
delivery of the second aircraft to September 26, 2003. A deposit of $200,000
previously paid to the Partnership and included in the balance sheet as of
December 31, 2003, was credited against the $1,200,000 purchase price of the
third aircraft, which was sold and delivered on January 26, 2004.

7. LONG-TERM NOTE PAYABLE

As of December 31, 2003 and 2002, the Partnership had one long-term note
payable, a 7.4% non-recourse loan facility collateralized by the aircraft leased
to FedEx, due in semi-annual installments of principal and interest of $451,000
through April 2006. At December 31, 2003 and 2002, $2,020,000 and $2,729,000,
were outstanding, respectively.

Based upon amounts outstanding at December 31, 2003, the minimum future
principal payments on the outstanding fixed-rate long-term note payable are due
as follows (in thousands):

2004 $ 764
2005 822
2006 434
______
Total Long Term Debt $2,020
======

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents carrying amounts and fair values of the
Partnership's financial instruments at December 31, 2003 and 2002. 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.

2003 2003 2002 2002
(In thousands) Carrying Amount Fair Value Carrying Amount Amount Fair Value
_______________ __________ _______________ __________

Long-term notes
(Note 7) $2,020 $2,079 $2,729 $2,762

The carrying amounts presented in the table are included in the balance sheets
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.

9. 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, 2003, 2002, and 2001, were as follows (in thousands):

2003 2002 2001
____ ____ ____

Management fees $173 $303 $ 481
Disposition and remarketing fees 172 52 503
Reimbursement of other costs 79 79 79
Reimbursement of interest costs 2 2 10
____ ____ ______
TOTAL $426 $436 $1,073
==== ==== ======

The General Partner was allocated its 1% share of the Partnership net
income/(loss) and cash distributions. Holding and BALCAP, each a limited partner
and an affiliate of the General Partner, were also allocated their share of
income/(loss) and cash distributions. As of December 31, 2003 and 2002, the
Partnership had accounts payable to the General Partner or its affiliates of
approximately $238,000 and $170,000 respectively.

10. 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. Instead, net income or net loss are
apportioned among Unitholders in

accordance with their respective partnership interest and the number of months
they held that interest.

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.

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 on a tax
basis.

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 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.

11. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING AND THE NET DIFFERENCE
BETWEEN THE PARTNERSHIP'S ASSETS AND LIABILITIES (UNAUDITED)

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):

2003 2002 2001
_________ _________ _______

Net income (loss) per financial statements: $ (16,302) $ (13,035) $ 1,623
Increases/(decreases) resulting from:
3.5% Gross Income Tax - non deductible 141 124 721
Gain on sale of equipment 2,400 0 6,487
Lease rents earned less finance lease income 2,387 404 7,114
Bad debt charge-off - 34 -
Impairment charge on aircraft 14,533 11,086 -
Operating lease finance book depreciation 2,037 3,206 1,268
Depreciation and amortization (7) (11) (627)
_____________________________________
Income per income tax method 5,189 1,808 16,586
Allocable to General Partner (52) (18) (166)
_____________________________________
TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $ 5,137 $ 1,790 $16,420

Taxable income per limited partnership unit after
giving effect to taxable income allocable to General
Partner (amount based on a unit owned from
October 10, 1986) $ 1.11 $ 0.39 $ 3.55

ASSETS' TAX AND FINANCE BOOKS DIFFERENCES (IN THOUSANDS):

FINANCE TAX
YEAR BOOKS BOOKS DIFFERENCE
____ ________ ________ __________

2003 $ 11,532 $ 11,255 $ 277
2002 29,811 8,184 21,627

The difference between the booked assets on the finance and tax books in 2002 is
primarily due to the faster aircraft depreciation method on the tax books versus
the finance books. The difference narrowed in 2003 as a result of the aircraft
impairment charges.

LIABILITIES' TAX AND FINANCE BOOKS DIFFERENCES (IN THOUSANDS):

FINANCE TAX
YEAR BOOKS BOOKS DIFFERENCE
____ ________ ________ __________

2003 $ 5,443 $ 5,443 -
2002 4,056 4,056 -

12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended December 31, 2003 and 2002 (in thousands, except per unit amounts):

2003 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
____ ________ _______ ________ _______

Total Revenues $ 476 $ 433 $ 399 $ 307
Impairment Charge on Aircraft - $ (7,651) - $ (6,882)
Net Income/(Loss) $ (458) $ (8,186) $ (371) $ (7,287)
Net Income/(Loss) Per Limited $(0.10) $ (1.75) $(0.08) $ (1.56)
Partnership Unit
Unit Trading Data:
Unit Prices (high-low) $0.97-$0.72 $1.85-$0.65 $2.03-$1.25 $2.03-$1.55
Unit Trading Volumes OTCBB 510 561 571 571

2002 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
____ ________ _______ ________ _______

Total Revenues $ 859 $ 833 $ 833 $ 502
Impairment Charge on Aircraft - - $(11,086) -
Net Income/(Loss) $ (422) $ (337) $(11,567) $ (709)
Net Income/(Loss) Per Limited $(0.09) $(0.07) $ (2.48) $ (0.15)
Partnership Unit
Unit Trading Data:
Unit Prices (high-low) on NYSE/OTCBB $6.60-$4.95 $5.99-$3.03 $3.30-$1.50 $1.25-$0.61
Unit Trading Volumes on NYSE/OTCBB 378 361 438 678

INDEX TO EXHIBITS

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.

3.6 Second Amendment to Amended and Restated Partnership
Agreement.

3.7 Third Amendment to Amended and Restated Partnership Agreement.

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

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.

____________________

(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, 2001.

____________________

(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2001.

(4) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2000.

(4) Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.

(5) Incorporated by reference to the Partnership's Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2003.

(6) Incorporated by reference to the Partnership's Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 2003.

(7) Incorporated by reference to the Partnership's Form 8-K dated September
26, 2003 filed on October 2, 2003.

14.1 Code of Ethics.

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

99.1 Press Release dated March 18, 2004.