PEGASUS AIRCRAFT PARTNERS L P, 10-K405, 1999-03-31

PEGASUS AIRCRAFT PARTNERS L P
10-K405, 1999-03-31
EQUIPMENT RENTAL & LEASING, NEC

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K
---------

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

For the fiscal year ended December 31, 1998
------------------------------------------------------

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

For the transition period from _______________________ to ______________________

Commission file number 0-17712
---------------------------------------------------------

Pegasus Aircraft Partners, L.P.
-------------------------------
(Exact name of Registrant as specified in its charter)

Delaware 84-1099968
-------- ----------
(State of organization) (IRS employer
Identification No.)

Four Embarcadero Center, 35th Floor
San Francisco, California 94111
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (415) 434-3900
--------------

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

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

Limited Partnership Depositary Units
(Title of Class)

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

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

State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: Not applicable.

This document consists of 44 pages.
<PAGE>

Pegasus Aircraft Partners, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1998

Table of Contents

Page
----
Part I
- ------

Item 1 Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 8

Part II
- -------

Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 34

Part III
- --------

Item 10 Directors and Executive Officers of the Registrant 34
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owners and Management 35
Item 13 Certain Relationships and Related Transactions 36

Part IV
- -------

Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 38

2
<PAGE>

PART I

ITEM 1. BUSINESS

General

Pegasus Aircraft Partners, L.P. (the "Partnership" or the "Registrant")
is a limited partnership organized under the laws of the State of Delaware on
June 23, 1988. The general partners of the Partnership are Pegasus Aircraft
Management Corporation, the Managing General Partner, a California corporation
that is a wholly-owned subsidiary of Pegasus Capital Corporation, and Air
Transport Leasing, Inc., the Administrative General Partner, a Delaware
corporation that is a wholly-owned subsidiary of Paine Webber Group Inc.
(collectively, the "General Partners")

On October 18, 1988, the Partnership commenced an offering of limited
partnership depositary units ("Units"). The $80,000,000 maximum offering size
was reached during the first quarter of 1989. The Partnership incurred
$8,441,000 of commissions and other expenses in connection with the sale of
these Units.

Although the Partnership was organized on June 23, 1988, the
Partnership conducted no activities and recognized no revenues, profits or
losses prior to December 21, 1988 at which time the Partnership commenced
operations. During the period between December 23, 1988 and March 22, 1989, the
Partnership acquired its portfolio of used commercial aircraft, which are
principally subject to triple net operating leases with commercial air carriers.

The Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2012. The Partnership had the right, subject
to certain conditions, to reinvest the proceeds of sales of aircraft occurring
prior to March 22, 1997. The net proceeds of any future sales of aircraft (after
general working capital reserves) will be distributed to all partners.

Outlook for the Airline and Aircraft Leasing Industries

The US airline industry had a profitable year in 1998 that continued
the industry's profitability trend. A major expense item for operators of
aircraft is the cost of fuel and it was very low in 1998. The industry's results
have in the past been highly correlated to general economic activity, however,
the industry did experience weakened results in the fourth quarter, a period of
relatively strong economic activity.

As to the supply and demand for aircraft, the industry took on and
continues to take on a record number of new aircraft that will likely put
pressure on profitability and will lead to further retirements of older
aircraft, such as those owned by the Partnership. The number of used widebody
(two aisle) aircraft such as the Partnership's Boeing 747-100 that are available
for sale or lease has increased. The full implementation of Stage III noise
standards by year end 1999 will also likely lead to additional older Stage II
aircraft being retired.

Trans World Airlines, Inc. which accounted for 52% of the Partnership's
revenues in 1998 announced its tenth consecutive unprofitable year. While TWA is
replacing older aircraft with newer, more fuel efficient aircraft, its inability
to achieve sustained profitability is of concern.

The General Partners believe that installing hushkits to achieve Stage
III noise compliance and the conversion of one of its Boeing 727-200 aircraft to
a freighter will enhance the Partnership's portfolio. Passenger aircraft and
freighter aircraft leasing continues to be a highly competitive business and the
Partnership's lessees also continue to face significant challenges.

Recent Partnership Developments

Immediately below is a table which shows the December 1998 appraised
value of the Partnership's aircraft to be approximately $41.7 million, or 51% of
the portfolio's original acquisition cost (excluding acquisition fees) increased
by capital expenditures (and net of maintenance reserves collected from lessees
applied against aircraft maintenance checks and aircraft capital improvements)
since acquisition. Based in part on these appraised values, the Partnership's
net asset value at December 31, 1998 was equal to $7.36 per Unit. It should be
noted that these are only estimates of values at that date and not necessarily
representative of the values that will ultimately be realized when these
aircraft are disposed of, nor does this represent the values that may be
realized upon the disposition of a Unit.

3
<PAGE>

Aircraft Portfolio

The following table describes the Partnership's aircraft portfolio at
December 31, 1998:

<TABLE>
<CAPTION>
Current
December Lease
Acquisi- 1998 Expir- Original Noise Cumulative Cumulative
Current Aircraft Ownership tion Appraised ation Delivery Abatement Flight Flight
Lessee Type Interest Costs(1) Value(2) Date(3) Date Compliance Hours(4) Cycles(4)
- ------ ---- -------- -------- -------- ------- ---- ---------- -------- ---------
(in millions)

Boeing 727-200
(7) Advanced 100% $ 8.0 $ 4.7 (7) 1974 Stage II 69,003 45,423

Trans World
Airlines, Inc. Boeing 747-100 100 18.4 5.1 7/00 1970 Stage II(5) 83,478 16,436

Trans World McDonnell
Airlines, Inc. Douglas MD-82 100 21.3 14.4 10/04 1983 Stage III 49,105 25,240

USAirways McDonnell
Group, Inc. Douglas MD-81 50(6) 10.0 5.4 06/01 1982 Stage III 46,627 40,995

TNT Transport Boeing 727-200
International B.V. Non-Advanced 100 12.8 6.6 2/02 1969 Stage III(8) 65,595 51,986

Sky Trek
International
Airlines, Boeing 727-200
Inc. Non-Advanced 100 11.7 5.5 06/02 1969 Stage III(8) 63,696 50,446
----- -----
$82.2 $41.7
===== =====
</TABLE>

Notes:

(1) Acquisition costs do not include acquisition related fees of $2.0
million paid to the General Partners. The amounts shown include
additional investments, net of retirements, in the respective aircraft
which aggregated approximately $12.9 million, of which $1.5 million was
made in 1998, and $7.8 million was made in 1997 in respect of the two
Boeing 727-200 non-advanced aircraft, net of the application of $1.7
million of maintenance reserves collected.

(2) The December 1998 appraised values were determined by an independent
aircraft appraisal firm. Appraised values include the present value of
rents due under leases in place plus the present value of an estimated
residual value for the aircraft at the end of the lease. It should be
noted that appraisals are only estimates of value and should not be
relied on as measures of realizable value. A discount rate of 10% was
utilized and inflation was assumed to be 2.5% per annum. The appraised
value of the Boeing 727-200 Advanced aircraft was $9.0 million and
assumes a $4.3 million freighter conversion (as discussed in Note 5 of
the Financial Statements).

(3) Lease expiration dates do not include renewal options unless already
exercised.

(4) The number of cumulative flight cycles and cumulative flight hours
shown are as of December 31, 1998, with the exception of the McDonnell
Douglas MD-81 leased to US Airways Group, Inc., which is as of January
25, 1999.

(5) The Boeing 747-100 currently complies with Stage III requirements if it
is flown with certain operating restrictions.

(6) The remaining one-half beneficial interest is owned by Pegasus Aircraft
Partners II, L.P., an affiliated partnership.

(7) The aircraft was subject to a lease with Continental Airlines, Inc.
through August 18, 1998. Continental returned this aircraft in October
1998, and made rental payments through the return date. The Partnership
has committed to hushkit and convert this aircraft to a freighter, at a
budgeted cost of $4.3 million, for delivery to Kitty Hawk Aircargo,
Inc.

(8) Hushkit installed.

A description of the principal financial terms of the leases is
discussed further in Item 8.

4
<PAGE>
Significant Lessees

The Partnership leased its aircraft to five different airlines during
1998. Revenues from each of the airlines below accounted for greater than 10% of
the total rental revenues of the Partnership during 1998:

Percent of Total
Airline Rental Revenues
------- ----------------

TransWorld Airlines, Inc. 52%
USAirway Group, Inc. 15%
TNT Transport International B.V 14%
Sky Trek International Airlines, Inc. 11%

Safety Requirements and Aircraft Aging

In addition to registration, the FAA imposes strict requirements
governing aircraft inspection and certification, maintenance, equipment
requirements, general operating and flight rules (including limits on arrivals
and departures), noise levels, certification of personnel and record keeping in
connection with aircraft maintenance. 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. No aircraft of the Partnership may be
operated without a current airworthiness certificate.

The FAA periodically reviews Service Bulletins which are issued by the
aircraft manufacturers. These bulletins focus on safety problems that have
developed during the aircraft's operation. The FAA may incorporate these Service
Bulletins in Airworthiness Directives ("ADs"), which are mandates requiring the
airline to perform specific maintenance within a specified period of time.

Aircraft aging is a significant issue in aircraft safety regulation. In
the past, certain aviation incidents and accidents raised concerns over the
structural integrity of older aircraft. In 1989, in its "Report to Congress on
the Status of the U.S. Stage II Commercial Aircraft Fleet", the FAA stated that
"no correlation has been established between the chronological age of an
aircraft and its structural airworthiness. A more accurate assessment of the
physical "age" of an aircraft is the total number of flight cycles and flight
hours flown." A flight cycle is defined as one takeoff and one landing. A flight
cycle is important because of the added stress on the airframe, landing gear and
other components from repeated takeoffs, landings and pressurizations. As
different types of aircraft have different missions, and carriers fly a variety
of routes, flight cycles can vary widely among aircraft of the same
chronological age. In general, narrow-body aircraft which are used for
short-haul service will have greater cycles per year than wide-body aircraft
used for longer routes. Other factors which contribute to the aging of an
aircraft are the number of hours actually flown, the predominant environment in
which an aircraft has flown, and its actual age in years.

The FAA has adopted certain ADs for Boeing and McDonnell Douglas
aircraft models, including Boeing 727s, 737s and 747s and McDonnell Douglas
DC-9s, MD-80s and DC-10s. These ADs make mandatory the periodic replacement or
modification of structural materials, fittings and skin at certain times in the
life of an aircraft, typically when the aircraft reaches a certain number of
flight cycles or age threshold. Previously, these aircraft were subject only to
periodic inspection, and the replacement and modification of materials and parts
was done where deemed necessary. Similar ADs for Lockheed and Airbus
manufactured aircraft are expected to be proposed and adopted by the FAA. In
addition, it is widely expected that foreign civil aviation authorities,
especially in Europe and Japan, will adopt similar measures to protect the
structural integrity of older aircraft.

These aging aircraft ADs will initially impact only a limited number of
older aircraft, but additional aircraft will be covered as they accumulate
time-and-service and reach the thresholds for the required modifications.
Significantly, in the case of each aircraft type, a significant majority of
replacements or modifications are mandated when a plane reaches a certain number
of flight cycles and relatively few required replacements are triggered when a
plane reaches a certain chronological age or number of flight hours.

5
<PAGE>
The following table summarizes the age, flight cycle, and flight hour
thresholds for each major aircraft type under the ADs. In general, these
thresholds are based on the "economic design goal" of an aircraft, which is
typically considered to be the period of service after which an increase in
maintenance costs is expected to take place in order to assure continued
operational safety. In addition, the table provides an estimate by the FAA of
the costs of complying with all of the mandated replacements and modifications
of the ADs. It is important to note that since most of the proposed work under
the ADs is based on flight cycle thresholds, those lower-cycle aircraft which
reach the aircraft age or flight hour thresholds should incur significantly
lower AD compliance cost than the total amounts estimated below.

Aircraft Flight Flight Estimated
Aircraft Age Cycle Hour AD
Type Threshold Threshold Threshold Costs
- -------- --------- --------- --------- ---------
(Years)

Boeing 727 20 60,000 N/A $1,100,000
Boeing 737 20 75,000 N/A 934,000
Boeing 747 20* 20,000* N/A 3,400,000
McDonnell Douglas DC-9 20 100,000 75,000 79,000
McDonnell Douglas MD-80 20 75,000 75,000 4,000
McDonnell Douglas DC-10 None 42,000 60,000 187,000

* Substantially cycle limited

Flight cycle and flight hour information with respect to the
Partnership's aircraft are included in the aircraft portfolio table included
earlier in item 1.

The Partnership's leases generally require the lessees to bear the
costs of compliance with ADs which require action during the lease terms. The
Partnership's three Boeing 727-200 aircraft have had the major calendar
modifications performed as required.

The FAA has recently issued an AD relating to certain Boeing 727
freighter conversions that requires strengthening of certain floor beams and the
installation of restraint systems in the cargo area. The General Partners
estimate the cost of compliance will not exceed $100,000 per aircraft. For
discussion of the cost of compliance see TNT Transport International B.V., and
Kitty Hawk Aircargo, Inc. in Footnote 5 to the Financial Statements.

Overall, the General Partners believe that the increased maintenance
costs mandated for older aircraft may have some impact on re-lease and resale
values for these aircraft, but mitigating this, compliance with the ADs should
also serve to prolong the revenue lives of the affected aircraft.

Aircraft Noise Regulations

On November 5, 1990, Congress enacted into law the Airport Noise and
Capacity Act of 1990 (the "Act"). On September 24, 1991, the FAA issued the
final rules of implementation for the Act. The Act provides that Stage II
aircraft will be phased out from operation within United States airspace by
December 31, 1999.

Implementing regulations proposed by the FAA would require each United
States operator to increase its Stage III airplane fleet to 50 percent by
December 31, 1996; to 75 percent by December 31, 1998 and to 100 percent by
December 31, 1999.

However, the Act further provides, that if by July 1, 1999, at least
85% of an air carrier's fleet complies with Stage III noise levels, the carrier
may apply for a waiver of the operational ban for the remaining aircraft in the
operator's fleet until December 31, 2003. The application for such a waiver must
be submitted to the Secretary of the Department of Transportation no later than
January 1, 1999 and must include a plan with firm orders for making all aircraft
operated by the air carrier comply with Stage III noise levels by December 31,
2003.

6
<PAGE>
Stage III hushkitting and re-engineering for the Boeing 727-200
aircraft have been approved by the FAA. The Partnership's Boeing 747 will comply
with Stage III noise levels if it is flown with certain operating restrictions.
Alternatively, the engines can be upgraded with existing technology to provide
for compliance with Stage III requirements.

Two of the Partnership's three 727-200 aircraft have been hushkitted
and the Partnership has committed to hushkitting the third Stage II Boeing
727-200 aircraft.

The European Commission has promulgated rules relating to aircraft
noise that would ban aircraft that are modified ("hushkitted") to achieve Stage
III noise compliance from European airspace after the year 2002. Such aircraft
cannot be added to European fleets after April of 1999. It is unclear in what
manner and if such rules will achieve full implementation.

Competition

The aircraft leasing industry is highly competitive. The Partnership
competes with aircraft manufacturers, distributors, airlines and other
operators, equipment managers, leasing companies, financial institutions and
other parties engaged in leasing, managing or remarketing aircraft, many of
which have significantly greater financial resources and greater experience than
the Partnership. Such competitors may lease aircraft at lower rates than the
Partnership and provide benefits, such as direct maintenance, crews, support
services and trade-in privileges, which the Partnership does not intend to
provide. Competitors may include certain affiliates of the General Partners.

Employees

The Partnership has no employees. The officers, directors and employees
of the General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant", and Item 13 of this Report, "Certain
Relationships and Related Transactions", which are incorporated herein by
reference.

ITEM 2. PROPERTIES

The Partnership does not own or lease any physical properties other
than the aircraft and engine which are discussed in Item 1 of this Report,
"Business", which is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS

The Partnership has filed a claim in the Bankruptcy Court for unpaid
rents and other damages related to the rejection by Kiwi International Airlines,
Inc. ("Kiwi") of its leases for two Boeing 727-200 aircraft. Given the sale of
Kiwi's operating assets as approved by the Court, it is remote that the
Partnership will obtain any recovery. Based on a petition by creditors, the case
has been converted to a Chapter 7 liquidation and a Trustee has been appointed
by the court.

On March 10, 1999, the Trustee appointed in Kiwi's bankruptcy
proceedings made a demand for the return of payments approximating $1,276,000 to
an affiliate of the Managing General Partner, the Partnership and an affiliated
Partnership (see discussion herein under "Kiwi International Airlines, Inc. -
Bankruptcy") on the basis that these payments were made by Kiwi in the ninety
days prior to Kiwi's filing of its voluntary bankruptcy petition and were
therefore preferential. The payments relate to seven aircraft, only two of which
are owned by the Partnership. Management has notified the Trustee of the
existence of a Stipulation and Consent Order, dated April 22, 1997, which
provides for waiver and relinquishment by Kiwi of any potential preference
claims it might have against the Partnership.

The General Partners, on the advice of counsel, believe that the claim
will be withdrawn.

The parties in the Mallia lawsuit (as set forth in the Partnership's
September 30, 1998 quarterly report on Form 10-Q incorporated by reference
herein) have settled. Although Paine Webber could seek indemnification from the
Partnership, the General Partners believe this possibility is remote.

7
<PAGE>

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

No matters were submitted to a vote of the Limited Partners of the
Partnership, through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended December 31, 1998.

8
<PAGE>

PART II

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

The Units represent the economic rights attributable to limited
partnership interests in the Partnership. There is no organized trading market
for the purchase and sale of the Units and certain measures have been adopted
and implemented to assure that no such organized trading market will develop.

As of March 1, 1999, the number of Limited Partners of record was
approximately 4,685.

The Partnership declared the following distributions to its Limited
Partners out of cash flow received from operations during 1998 and 1997:

Amount of
Distribution
Period Per Unit Record Date Payment Date
------ ------------ ----------- ------------

1st Quarter 1998 $.40 March 31, 1998 April 25, 1998
2nd Quarter 1998 .40 June 30, 1998 July 23, 1998
3rd Quarter 1998 .40 September 30, 1998 October 28, 1998
4th Quarter 1998 .40 December 31, 1998 January 27, 1999
1st Quarter 1997 .40 March 31, 1997 April 25, 1997
2nd Quarter 1997 .40 June 30, 1997 July 25, 1997
3rd Quarter 1997 .40 September 30, 1997 October 24, 1997
4th Quarter 1997 .40 December 31, 1997 January 23, 1998

Total distributions to all partners for 1998 and 1997 were declared as
follows (in thousands):

1998 1997
---- ----

Limited Partners $6,400 $6,400
General Partners 65 64
------ ------
$6,465 $6,464
====== ======

Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, approximately 84%,
89%, and 89%, of the cash distributions declared for the years ended December
31, 1998, 1997 and 1996, respectively, constituted a return of capital. Also,
based on the amount of net income reported by the Partnership for accounting
purposes, approximately 73% of the cash distributions paid to the partners from
inception of the Partnership through December 31, 1998 constituted a return of
capital. However, the total actual return of capital over the Partnership's life
can only be determined at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.

9
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Partnership was derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the Partnership's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Report.

As of December 31,
or Year Ended December 31,
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per unit amounts)

Rental Revenue $ 8,360 $ 7,533 $ 6,604 $ 6,076(3) $ 8,527
Net Income 1,050 716(2) 711 880 426
Net Income per Limited
Partnership Unit 0.26 0.18 0.18 0.22 0.11
Distributions per Limited
Partnership Unit(1) 1.60 1.60 1.60 1.85 1.80
Total Assets 27,792 30,512 31,158 36,611 42,619
Notes Payable 10,000 7,271 1,218 1,625 2,000
Partners' Equity 14,260 19,675 25,423 31,176 37,770

(1) Distribution amounts are reflected on the accrual basis. The amount of
each distribution will be determined on a quarterly basis after an
evaluation of the Partnership's operating results and its current and
expected financial position.

(2) Includes gain on sale of spare aircraft engine of $177.

(3) Such amount excludes lease settlement proceeds accounted for under the
cost recovery method.

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

The following discussion should be read in conjunction with the
"Selected Financial Data" and the Consolidated Financial Statements of the
Partnership and the Notes thereto. This report may contain, in addition to
historical information, forward-looking statements that include risks and other
uncertainties. The Partnership's actual results may differ materially from those
anticipated in these forward-looking statements. Factors that might cause such a
difference include those discussed below, as well as general economic and
business conditions, competition and other factors discussed elsewhere in this
report. The Partnership undertakes no obligation to release publicly any
revisions to the Forward-Looking Statements, if any, to reflect events or
circumstances after the date hereof or to reflect the occurrence of anticipated
or unanticipated events.

Liquidity and Capital Resources

The Partnership owns and manages a diversified portfolio of leased
commercial aircraft and makes quarterly distributions to the partners of net
cash flow generated by operations. In certain situations, the Partnership may
retain cash flow from operations to finance authorized capital expenditures.

Cash distributions declared by the Partnership were approximately $6.5
million in each of 1998, 1997 and 1996 ($1.60 per unit). Net cash provided by
operating activities was $6.3 million in 1998, $6.3 million in 1997 and $5.2
million in 1996. In the aggregate, for this three year period net cash provided
by operating activities totaled $17.8 million and cash distributions declared by
the Partnership totaled $19.4 million.

Partnership equity declined by approximately $5.4 million from December
31, 1997 to December 31, 1998 as a result of the declaration of cash
distributions to the partners in excess of the Partnership's net income. This
resulted from the fact that, unlike net income, cash flow generated by
operations, which is the source of the cash utilized to make the distributions,
is not reduced by non-cash depreciation expense and provisions for decline in
market value of the Partnership's aircraft.

10
<PAGE>
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners in short-term, highly liquid
investments or a fund that invests in such instruments. At December 31, 1998,
the Partnership's unrestricted cash and cash equivalents of $2,129,000 was
primarily held in an interest bearing money market account. This amount was
$773,000 more than the Partnership's unrestricted cash and cash equivalents at
December 31, 1997 of $1,356,000. This increase in unrestricted cash was
primarily attributable to the amount by which cash generated by operating
activities, collection of advances to lessees, proceeds from notes payable, and
the unapplied maintenance reserves, exceeded cash distribution to partners and
capitalized aircraft improvements, during the year ended December 31, 1998.

At December 31, 1998, the Partnership's liquidity was improved due
principally to the consummation, in January 1998, of an agreement with the
lender to increase the commitment under the loan facility from $7.5 million to
$10 million. The Partnership provided, as additional collateral, the Boeing
727-200 aircraft formerly leased to Continental Airlines, Inc. ("Continental")
and the Boeing 727-200 aircraft leased to Sky Trek International Airlines, Inc.
("Sky Trek"). The proceeds were used to fund the cargo conversion of the
aircraft delivered to TNT Transport International B.V. ("TNT").

In February 1999, the Partnership consummated an agreement to increase
the committed amount of the loan facility from $10 million to $14.5 million and
increase the interest rate from 1.25 % to 1.5% over prime. (See Footnote 11,
"Subsequent Event"). The Partnership has pledged all of its aircraft as
collateral, for this loan facility. The Partnership will utilize the additional
borrowings to fund the hushkit and cargo conversion of the Boeing 727-200
advanced aircraft formerly leased to Continental, which was returned in October
1998, for delivery to Kitty Hawk Aircargo, Inc. ("Kitty Hawk"), discussed below.
This loan is due in April, 2000. If the Partnership is unable to renegotiate or
refinance the loan it will be forced to reduce or suspend distributions.

Rent and other receivables, net, increased by $54,000 from $422,000 at
December 31, 1997 to $476,000 at December 31, 1998. This increase is primarily
due to rents due from Sky Trek, partially offset by the continued repayments of
advances and deferrals by TWA. During 1997, the Partnership provided an
allowance for uncollectible accounts of $20,000 with respect to rent due from
Nations Air Express, Inc. ("Nations"). (See Item 8 Financial Statements, Note 5
"Aircraft Under Operating Leases").

TWA was current on its lease payments in 1998 and made final repayment
of the funds advanced by the Partnership however, TWA reported its tenth
consecutive annual loss in 1998. Although TWA had a cash position of $314
million at September 30, 1998, given TWA's historical financial difficulties,
the ongoing losses increase the possibility of default or deferral of lease
payments by TWA, which accounted for 52% of the Partnership's lease revenue in
1998.

At December 31, 1998 Sky Trek was 4.5 months in arrears to the
Partnership, totaling $428,000 and $229,000, with respect to rent and
maintenance reserve obligations, respectively. As a result of Sky Trek's
arrearages, the Partnership placed Sky Trek on non-accrual status beginning
October 1, 1998. Also, as of December 31, 1998, a write-down of $100,000 was
taken to reduce the carrying value of the aircraft leased to Sky Trek to
estimated realizable amounts.

Sky Trek continues to struggle with liquidity and continues to search
for a capital infusion. In December 1998, at the request of the General
Partners, Sky Trek began paying its lease and maintenance reserve obligations on
a weekly basis. Prior arrearages will need to be addressed in an overall
recapitalization plan of Sky Trek. If Sky Trek is unsuccessful in raising
additional capital, the Partnership will likely need to repossess the aircraft
and search for a new lessee. There can be no assurance as to the timeliness or
success of such a remarketing effort.

Deferred rental income and deposits increased $56,000 from $982,000 at
December 31, 1997 to $1,038,000 at December 31, 1998 due to a deposit received
from Kitty Hawk, as discussed below.

With the exception of the Boeing 727-200 advanced aircraft formerly
leased to Continental, which was returned in October 1998 after the expiration
of the extended lease, all of the Partnership's assets are subject to leases
with remaining terms of at least 19 months. During 1998, the Partnership
invested $2.0 million in capitalized aircraft improvements and maintenance
checks, of which $57,000 was funded by the application of maintenance reserves
collected from Sky Trek.

In 1998, the Partnership entered into an agreement with Kitty Hawk for
the lease of the Boeing 727-200 Advanced aircraft formerly leased to
Continental. The lease requires the Partnership to hushkit and convert the
aircraft to a freighter at an estimated cost of $4.3 million. The lease
agreement provides for 84 months rent at $117,800 per month. Kitty Hawk provided

11
<PAGE>

a security deposit totaling $56,000 during 1998, and increased the deposit to
$236,000 in February, 1999. In February 1999, the borrowing amount under the
loan facility was increased from $10 million to $14.5 million.

Results of Operations

Substantially all of the Partnership's revenue was generated from the
leasing of the Partnership's aircraft to commercial air carriers under triple
net operating leases. The balance of the Partnership's revenue consisted of
interest income earned with respect to certain advances made to lessees, as well
as sales of miscellaneous aircraft parts. No advances remained outstanding at
December 31, 1998.

Under the terms of the triple net leases, substantially all of the
expenses related to the operation and maintenance of the aircraft during 1998,
were paid for by the lessees or in the case of Sky Trek and TNT, funded to a
certain extent through hourly maintenance reserves paid by them. The direct
lease expenses incurred by the Partnership represent the costs of providing
insurance coverage for the Partnership's aircraft in excess of the amounts
required to be carried by the lessees, trustee fees related to the ownership of
the aircraft and the cost of the letter of credit required under the terms of
the TBT lease on the McDonnell Douglas MD-81 leased to US Airways Group, Inc.
("USAir"). In 1998, the Partnership incurred maintenance costs with respect to
aircraft leased to TNT and Sky Trek, as well as costs (including legal)
associated with the Kiwi International Airlines, Inc. ("Kiwi") bankruptcy.

Additionally, the Partnership records depreciation expense pertaining
to the aircraft while on lease and incurs certain general and administrative
expenses in connection with operations of the Partnership. General and
administrative expenses consist primarily of investor reporting expenses,
transfer agent and audit fees and the cost of accounting services.

1998 as compared to 1997

The Partnership's net income was $1,050,000 for the year ended December
31, 1998 ("1998 Period") as compared to $716,000 for the year ended December 31,
1997 ("1997 Period"). The increase in net income was mainly due to an increase
in rental income (as a result of the aircraft leased to TNT and the Sky Trek
aircraft being on lease for a full year) and decreases in aircraft maintenance
and write-downs, partially offset by increases in depreciation, management and
release fees and interest expense.

Rental revenue increased by $827,000 or 11% in the 1998 Period as
compared to the 1997 Period. The increase is attributable primarily to the
increased rate on the TNT lease (versus the prior Nations Air Express, Inc.
lease) and the fact that the Sky Trek aircraft was off-lease for a portion of
the 1997 Period. This was partially offset by the fact that the Boeing 727-200
aircraft, formerly leased to Continental, was off-lease for the majority of the
last quarter of the 1998 Period.

During the 1998 Period, the Partnership recognized an $18,000 gain on
the sale of spare parts inventory which had a net book value of $-0-. During the
1997 Period, the Partnership sold a spare engine for proceeds of $275,000 which
had a depreciated cost of $98,000, resulting in a $177,000 gain.

Interest and other income for the 1998 Period decreased by $35,000 or
32% as compared to the 1997 Period. This decrease was primarily attributable to
the continued repayment of the advance by TWA pursuant to the repayment
schedule, thus reducing the balance on which interest income was earned. This
was partially offset by the sale of miscellaneous aircraft parts.

Depreciation and amortization increased by $401,000 or 8% for the 1998
Period as compared to the 1997 Period. The increase was mainly attributable to
the increased depreciation associated with the aircraft on lease to Sky Trek,
partially offset by a decrease in depreciation associated with the Boeing
727-200 aircraft formerly leased to Continental.

During the 1998 Period, the Partnership provided write-downs totaling
$204,000, for the value of the interior which was removed from the Boeing
727-200 aircraft leased to TNT and the carrying value of the Boeing 727-200 on
lease to SkyTrek, compared to a $350,000 write-down in the 1997 Period.

Management and re-lease fees for the 1998 Period increased by $67,000
or 11%, in comparison to the 1997 Period. The increase was consistent with the
increase in rental income, which provides the basis on which management and
re-lease fees are calculated.

12
<PAGE>
Interest expense increased by $334,000 or 56% in the 1998 Period as
compared to the 1997 Period, due principally to the increase in borrowings
outstanding from approximately $7.3 million at December 31, 1997 to $10 million
at December 31, 1998. Such borrowings were used for capital improvements to the
two Boeing 727-200 non advanced aircraft remarketed in 1997 and 1998.

Direct lease expenses decreased by $48,000 or 39% in the 1998 Period as
compared to the 1997 Period. The decrease in the 1998 Period as compared to the
1997 Period, was due to certain costs associated with the aircraft formerly
leased to Kiwi and a provision for bad debts associated with the aircraft
formerly leased to Nations, that were incurred in 1997.

The Partnership incurred maintenance expense of $307,000 in the 1997
Period with respect to the Boeing 727-200 aircraft delivered to Nations and Sky
Trek. There was no corresponding expense in 1998.

1997 as compared to 1996

The Partnership's net income was $716,000 for the year ended December
31, 1997 ("1997 Period") as compared to $711,000 for the year ended December 31,
1996 ("1996 Period"). An increase in rental income (a full year of rent for the
747 aircraft leased to TWA was the primary reason) and the gain on sale of the
engine and the decrease in aircraft maintenance and other expenses was offset by
the increases in depreciation, provision for decline in market value of
aircraft, management and release fees and interest expense.

Rental revenue increased by $929,000 or 14% in the 1997 Period as
compared to the 1996 Period. The increase is attributable primarily to the fact
that the 747 aircraft was off-lease for a portion of the 1996 Period as well as
the increase in lease rates attributable to the ex-Kiwi aircraft (the lease rate
increases were due primarily to the enhancements to the aircraft made by the
Partnership, primarily the hushkitting of the aircraft). This was partially
offset by the fact that the ex-Kiwi aircraft were off-lease for the last quarter
of the 1996 Period.

During 1997 Period, the Partnership sold a spare engine for proceeds of
$275,000 which had a depreciated cost of $98,000, resulting in a $177,000 gain.
There was no such item during the 1996 Period.

Interest income for the 1997 Period decreased by $111,000 or 50% as
compared to the 1996 Period. This decrease was primarily attributable to the
continued repayment of advances and deferrals pursuant to various repayment
schedules reducing the balances on which interest income is earned.

Depreciation and amortization increased by $812,000 or 20% for the 1997
Period as compared to the 1996 Period. The increase was attributable to the
depreciation associated with the 747 aircraft which was placed in service in
July 1996 and which was off-lease for a substantial portion of the 1996 Period,
as well as the depreciation on capital improvements to aircraft made in 1997.

During the 1997 Period the Partnership provided allowances for decline
in market value of aircraft aggregating $350,000 to reflect the impairment to
certain aircraft. An allowance of $150,000 was provided in the 1996 Period.

Management and re-lease fees for the 1997 Period increased by $156,000
or 34%, in comparison to the 1996 Period. The increase was due primarily to an
increase in rental income, which provide, the basis on which management and
re-lease fees are calculated.

Interest expense increased by $459,000 in the 1997 Period as compared
to the 1996 Period, due principally to the increase in borrowings outstanding
from approximately $1.2 million at December 31, 1996 to approximately $7.3
million at December 31, 1997. Such borrowings were used for capital improvements
to the two Boeing 727-200 non advanced aircraft remarketed in 1997.

Direct lease expenses decreased by $4,000 or 3% in the 1997 Period as
compared to the 1996 Period. The decrease in the 1997 Period as compared to the
1996 Period was due to a decrease in insurance expense, partially offset by
certain costs associated with the aircraft formerly leased to Kiwi, that were
incurred in 1997.

Aircraft maintenance expense of $669,000 was incurred in the 1996
period, which reflected the work completed with respect to a maintenance check
performed on the Boeing 747-100 aircraft prior to the delivery to TWA in July
1997. The Partnership incurred maintenance expense of $307,000 in the 1997

13
<PAGE>

Period with respect to the Boeing 727-200 aircraft delivered to Nations and Sky
Trek.

Inflation and Changing Prices

Inflation has had no material impact on the operations or financial
condition of the Partnership during 1998. However, market and worldwide economic
conditions and changes in federal and foreign aircraft regulations have in the
past, and may in the future, impact the airline industry and thus lease rates
and aircraft values. Additionally, inflation and changing prices, may affect
future leasing rates and the eventual selling prices of the aircraft.

New Accounting Pronouncements

In March 1998, the Partnership adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. The adoption of this pronouncement
did not impact the reporting of the Partnership's results of operations.

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Partnership). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The adoption of this
pronouncement is not expected to impact the Partnership's earnings or statement
of financial position.

Impact of the Year 2000 Issue

The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. This
could result in a failure of the information technology systems (IT systems) and
other equipment containing imbedded technology (non-IT systems) in the Year
2000, causing disruption of operation of the Partnership, its lessees or
vendors.

The Partnership does not own its own software, but is reliant upon
software owned by the General Partners or third party vendors. The General
Partners and third party vendors are either currently Year 2000 compliant or
have instituted plans to be so.

The plan for addressing third party critical dependencies includes:
identification of third party critical dependencies including lessees, vendors
and financial institutions; circulation to all applicable third parties of a
written request for their plans and progress in addressing the Year 2000 issue;
evaluation of responses; and development of contingency plans to address risks
of non-compliance by third parties. The Partnership has completed the
identification of critical dependencies and the circulation for requests for
Year 2000 compliance status.

The costs associated with addressing the Year 2000 issue, including
developing and implementing the above stated plan will be nominal and will be
expensed as incurred.

While the Partnership expects to have no interruption of operations as
a result of internal IT and non-IT systems, uncertainties remain about the
affect of third party critical dependencies who are not Year 2000 compliant.

The Partnership is not aware of any significant Year 2000 systems
issues with respect to the airworthiness of aircraft, however, should such an
issue result in Airworthiness Directives or other manufacturer recommended
maintenance, the implementation and the majority of the cost of such
implementation would be the responsibility of the aircraft lessee. Any resulting
costs to the Partnership cannot be estimated at this time.

Non-compliance on the part of a lessee could result in lost revenue for
the lessee and an inability to make lease payments to the Partnership.
Non-compliance by the lessee's financial institution could also affect the
ability to process lease payments. The Partnership has attempted to mitigate

14
<PAGE>

such risks by inquiring of each lessee about its Year 2000 plans, including
whether they have addressed the issue with their financial institution.

The Partnership's lessees face the potential risk of non-compliance by
the air traffic control systems throughout the world. A disruption in the
operations of some or all of the air traffic control systems may cause
disruption to the operations of the Partnership's lessees, which may adversely
affect their ability to generate revenue.

A possible scenario would be that lessees are unable to operate and
generate revenues and as a result be unable to make lease payments. The
Partnership is unable to estimate the likelihood or the magnitude of the
resulting lost revenue at this time. Should this occur, the Partnership would
attempt to repossess aircraft from non-compliant lessees and place the aircraft
with compliant lessees. No assurances can be given that the Partnership would be
able to re-lease such aircraft at favorable terms or at all. If a significant
number of aircraft could not be re-leased at favorable terms or at all, or their
re-lease is delayed, the Partnership's business, financial condition and results
of operations would be adversely affected.

15
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

List of Financial Statements Page
----

Report of Independent Accountants .......................................... 17

Balance Sheets -- December 31, 1998 and 1997................................ 18

Statements of Income for the years ended
December 31, 1998, 1997 and 1996....................................... 19

Statements of Partners' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... 20

Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................................... 21

Notes to Financial Statements............................................... 23

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
thereto; (2) schedules are not required under the related instruction or; (3)
the schedules are inapplicable.

16
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Limited Partners of
Pegasus Aircraft Partners, L.P.

In our opinion, the accompanying balance sheets and the related
statements of income and partners' equity and of cash flows present fairly, in
all material respects, the financial position of Pegasus Aircraft Partners, L.P.
(the "Partnership") as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
New York, New York
March 17, 1999

17
<PAGE>

PEGASUS AIRCRAFT PARTNERS, L.P.

BALANCE SHEETS

DECEMBER 31, 1998 AND 1997

ASSETS

1998 1997
---- ----
(in thousands, except
unit data)

Cash and cash equivalents (Note 4) $ 2,129 $ 1,356
Rent and other receivables, net (Note 5) 476 422
Aircraft, net (Note 5) 25,161 28,708
Prepaid expenses and other assets 26 26
-------- --------
Total Assets $ 27,792 $ 30,512
======== ========

LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
Notes payable (Notes 7 and 11) $ 10,000 $ 7,271
Accounts payable and accrued expenses 97 302
Payable to affiliates (Note 6) 431 458
Distributions payable to partners 1,616 1,632
Maintenance reserves collected 350 192
Deferred rental income and deposits 1,038 982
-------- --------
Total Liabilities $ 13,532 $ 10,837
======== ========

COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 9)

PARTNERS' EQUITY:
General Partners (653) (599)
Limited Partners (4,000,005 units outstanding in
1998 and 1997) 14,913 20,274
-------- --------
Total Partners' Equity 14,260 19,675
-------- --------

Total Liabilities and Partners' Equity $ 27,792 $ 30,512
======== ========

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

18
<PAGE>

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF INCOME

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

1998 1997 1996
---- ---- ----
(in thousands, except unit data
and per unit amounts)

REVENUE:
Rentals from operating leases $ 8,360 $ 7,533 $ 6,604
Interest and other 76 111 222
Gain on sale of engine and equipment 18 177 --
---------- ---------- ----------
8,454 7,821 6,826
---------- ---------- ----------

EXPENSES:
Depreciation and amortization 5,273 4,872 4,060
Interest expense 929 595 136
Management and re-lease fees (Note 6) 682 615 459
Write-downs (Note 5) 204 350 150
Provision for bad debts (Note 5) -- 20 240
General and administrative (Note 6) 241 223 234
Direct lease 75 123 127
Aircraft maintenance and other -- 307 709
---------- ---------- ----------
7,404 7,105 6,115
---------- ---------- ----------
NET INCOME $ 1,050 $ 716 $ 711
========== ========== ==========

NET INCOME ALLOCATED:
To the General Partners 11 7 7
To the Limited Partners 1,039 709 704
---------- ---------- ----------
$ 1,050 $ 716 $ 711
========== ========== ==========

NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.26 $ 0.18 $ 0.18
========== ========== ==========

WEIGHTED AVERAGE NUMBER
OF LIMITED PARTNERSHIP
UNITS OUTSTANDING 4,000,005 4,000,005 4,000,005
========== ========== ==========

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

19
<PAGE>

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF PARTNERS' EQUITY

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

General Limited
Partners Partners Total
-------- -------- -----
(in thousands)

Balance, December 31, 1995 $ (485) $ 31,661 $ 31,176

Net income 7 704 711

Distribution to partners declared (64) (6,400) (6,464)
-------- -------- --------

Balance, December 31, 1996 (542) 25,965 25,423

Net income 7 709 716

Distribution to partners declared (64) (6,400) (6,464)
-------- -------- --------

Balance, December 31, 1997 (599) 20,274 19,675

Net income 11 1,039 1,050

Distribution to partners declared (65) (6,400) (6,465)
-------- -------- --------

Balance, December 31, 1998 $ (653) $ 14,913 $ 14,260
======== ======== ========

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

20
<PAGE>

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF CASH FLOWS

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

1998 1997 1996
---- ---- ----
(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,050 $ 716 $ 711
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,273 4,872 4,060
Provision for bad debts -- 20 240
Write-downs 204 350 150
Gain on sale of engine and equipment (18) (177) --
Change in assets and liabilities:
Rent and other receivables (182) 22 332
Prepaid expenses and other -- 109 (88)
Accounts payable and accrued expenses (205) 229 (25)
Payable to affiliates (27) (26) (144)
Maintenance reserves collected 158 192 (100)
Deferred rental income and deposits 56 (34) 98
Accrued interest payable -- (9) (6)
------- ------- -------
Net cash provided by operating activities 6,309 6,264 5,228
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine and equipment 18 275 --
Capitalized aircraft improvements, net (1,930) (7,813) (611)
Repayment of advances by lessees 128 196 302
------- ------- -------
Net cash used in investing activities (1,784) (7,342) (309)
------- ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Security deposits -- 340 360
Proceeds from notes payable 2,729 7,271 --
Repayment of notes payable -- (1,218) (407)
Cash distributions paid to partners (6,481) (6,480) (6,432)
------- ------- -------
Net cash used in financing activities (3,752) (87) (6,479)
------- ------- -------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 773 (1,165) (1,560)

CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,356 2,521 4,081
------- ------- -------

CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,129 $ 1,356 $ 2,521
======= ======= =======

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

21
<PAGE>

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF CASH FLOWS (CONTINUED)

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

1998 1997 1996
---- ---- ----
(in thousands)

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest Paid $ 915 $ 604 $ 142
Restricted maintenance reserves collected
net of maintenance drawdowns $ -- $ -- $ 492
Transfers from restricted cash utilized
to restore aircraft including 1997
collections -- 1,742 --

NONCASH TRANSACTIONS:
Distributions to partners declared but
unpaid $ 1,616 $ 1,632 $ 1,648

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

22
<PAGE>

PEGASUS AIRCRAFT PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. Significant Accounting Policies

Basis of Presentation. Pegasus Aircraft Partners, L.P. (the
"Partnership"), a Delaware limited partnership, maintains its accounting records
and prepares financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant assumptions and estimates relate to useful life and
recoverability of the aircraft and tax and other indemnity provisions described
below. Actual results could differ from such estimates.

Cash and Cash Equivalents. The Partnership invests funds not
immediately required for operations or distributions in short term, highly
liquid investments until such time as the funds are required to meet its
obligations. The short term, highly liquid investments are recorded at cost
which approximates fair market value. For purposes of the balance sheets and the
statements of cash flows, the Partnership considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.

Aircraft and Depreciation. The aircraft are recorded at cost, which
includes acquisition costs and the acquisition fee and the financial management
advisory fee paid upon acquisition to the General Partners. Depreciation is
computed using the straight-line method over an estimated economic life of
twelve years (five years for the aircraft engine sold in 1997) to a salvage
value (generally 10%). Major improvements to aircraft are capitalized when
incurred and are depreciated, generally, over the remaining useful life of the
improvement. The Partnership evaluates the carrying value of the aircraft based
upon changes in market and other physical and economic conditions and will
record write-downs to recognize a loss in the value of the aircraft when
management believes that, based on expected future cash flows, the
recoverability of the Partnership's investment has been impaired. Proceeds
received in lease settlements or terminations are accounted for under the cost
recovery method when and to the extent that, based upon third party appraisals
and market conditions, there has been a diminution to the carrying value of the
aircraft.

Tax Benefit Transfer Lease. The McDonnell Douglas MD-81 aircraft under
lease to USAirways Group, Inc. ("USAir") was purchased subject to a tax benefit
transfer lease which provided for the transfer of the investment tax credits and
depreciation deductions with respect to the aircraft to a tax lessor. The
transfer was accomplished by the sale, for income tax purposes only, of the
aircraft to the tax lessor for cash and a note and a leaseback of the aircraft
for rental payments which match the payments on the note. Under the terms of the
tax benefit transfer lease, the Partnership's required rental payments are
contingent upon and may, by agreement, be offset by the tax lessor's required
note payments. Accordingly, no asset or liability for the tax benefit transfer
lease has been recorded.

Maintenance Reserve Funds. The Partnership has two leases where the
lessee is required to make monthly payments to maintenance reserve funds
administered by the Partnership. The Partnership may be obligated to reimburse
the lessee for specified maintenance costs out of the reserve funds, upon
submission of appropriate evidence documenting the maintenance costs incurred by
the lessee. Excess costs over the reserve are the lessees' responsibility.

Operating Leases. The aircraft leases which are structured principally
as triple net leases are accounted for as operating leases. Lease revenues are
recognized ratably over the terms of the related leases.

Deferred Rental Income. Deferred rental income represents rental
payments received in advance which have not been earned.

Lease settlement payments received in connection with the termination
or modification of a lease of an aircraft, the carrying value of which has not
been impaired, have been recognized ratably over the remaining original lease in
the case of a lease termination and over the modified lease term in connection
with a lease modification.

23
<PAGE>

Income Taxes. No provision for income taxes has been made in the
financial statements since such taxes are the responsibility of the individual
partners rather than the Partnership.

Net Income Per Limited Partnership Unit. The net income per limited
partnership unit is computed by dividing the net income allocated to the Limited
Partners by the weighted average number of Units outstanding for the period.

New Accounting Pronouncements

2. Organization of the Partnership

The Partnership was formed on June 23, 1988 for the purpose of
acquiring, leasing, and ultimately selling used commercial aircraft principally
to US airlines. The Managing General Partner of the Partnership is Pegasus
Aircraft Management Corporation, a wholly-owned subsidiary of Pegasus Capital
Corporation, and the Administrative General Partner is Air Transport Leasing,
Inc., a wholly-owned subsidiary of Paine Webber Group Inc. (collectively, the
"General Partners")

The Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2012. The Partnership had the right, subject
to certain conditions to reinvest the proceeds from sales of aircraft occurring
prior to March 22, 1997. The net proceeds of any future sales of aircraft (after
general working capital reserves) will be distributed to all partners.

Upon formation of the Partnership, the General Partners each
contributed $500 to the capital of the Partnership, and the initial Limited
Partner contributed $100 for five limited partnership depositary units
("Units"). An additional 4,000,000 Units were then sold at a price of $20.00 per
Unit, with the Partnership receiving gross offering proceeds of $80,000,000.

Title to the aircraft owned by the Partnership is held by
non-affiliated trustees of trusts of which the Partnership is the beneficiary or
one of two beneficiaries. The purpose of this method of holding title is to
satisfy certain registration requirements of the Federal Aviation
Administration.

3. Partnership Allocations

The Partnership Agreement provides that cash flow from operations be
distributed on a quarterly basis at the General Partners' discretion, 99% to the
Limited Partners and 1% to the General Partners. Cash flow is defined in the
Partnership Agreement as including cash receipts from operations and interest
income earned, less expenses incurred and paid in connection with the ownership
and lease of the aircraft. Depreciation and amortization expenses are not
deducted from cash receipts in determining cash flow. Distributable proceeds
from sales of aircraft upon liquidation of the Partnership will be distributed
in accordance with the partners' capital accounts after all allocations of
income and losses.

Income and losses generally will be allocated 99% to the Limited
Partners and 1% to the General Partners. Upon the sale of aircraft, gain
generally will be allocated, first, to the General Partners in an amount equal
to the difference between their capital contributions and 1.01% of the aggregate
capital contributions of the Limited Partners, and then, 99% to the Limited
Partners, and 1% to the General Partners.

24
<PAGE>
4. Cash Equivalents

At December 31, 1998, all cash was held in an interest bearing money
market account. At December 31, 1997, the Partnership held short-term commercial
paper issued by Ford Motor Credit Company (with various maturities) with par
values aggregating $350,000, which were acquired at costs aggregating $348,000.

5. Aircraft Under Operating Leases

Net Investment in Aircraft

The Partnership's net carrying value of aircraft as of December 31,
1998 and 1997 consisted of the following (in thousands):

1998 1997
---- ----

Aircraft on operating leases, at cost $ 75,902 $ 71,120
Less: Accumulated depreciation (43,979) (40,609)
Write-downs (4,799) (3,368)
Net lease settlement proceeds accounted for as cost
recovery (3,673) (3,673)
Reserve for maintenance cost (178) (178)
-------- --------
$ 23,273 $ 23,292
-------- --------

Aircraft held for lease, at cost $ 8,251 $ 11,555
Less: Accumulated depreciation (5,529) (3,839)
Write-downs (834) (2,300)
-------- --------
1,888 5,416
-------- --------
Aircraft, net $ 25,161 $ 28,708
======== ========

Rents and Other Receivables

Rents and other receivables, net, were composed of the following at
December 31, 1998 and 1997 (in thousands):

1998 1997
---- ----

Rents receivable $ 476 $ 552
Advances to lessees -- 128
Accrued interest receivable and other -- 2
-------- --------
476 682
Less: Allowance for bad debts -- (260)
-------- --------
Rents and other receivables, net $ 476 $ 422
======== ========

Financial Terms of Leases

Continental Airline Leases. During December 1988, the Partnership
acquired a Boeing 727-200 advanced aircraft for a total purchase price of
$8,025,000 which was subject to a lease with Continental Airlines, Inc.
("Continental"), providing for rentals of $75,000 per month through June 30,
1998, the scheduled expiration date. The Partnership and Continental agreed to a
short extension of the lease to August 18, 1998 at the same rate of $75,000 per
month. Continental returned this aircraft in October 1998 and made rental
payments through the return date.

In 1998, the Partnership entered into an agreement with Kitty Hawk
Aircargo, Inc. ("Kitty Hawk") for the lease of the Boeing 727-200 Advanced
aircraft formerly leased to Continental. Kitty Hawk is a Dallas, Texas based
operator of more than 100 freighter aircraft. The lease requires the Partnership
to hushkit and convert the aircraft to a freighter at an estimated cost of $4.3
million. The lease agreement provides for 84 months rent at $117,800 per month.
Kitty Hawk has provided a security deposit of $56,000 during 1998, and was

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<PAGE>
required to increase the deposit to $236,000 in February 1999. The cost of
complying with the recently issued AD relating to freighter conversions is
included in the estimated conversion cost.

Trans World Airlines Leases. During February 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$21,017,000 which as of December 31, 1998 was subject to a lease with Trans
World Airlines, Inc. ("TWA") providing for rentals of $185,000 per month for a
term scheduled to expire in September 2004.

Pursuant to a lease amendment in 1993, the Partnership reimbursed TWA
for $225,000 of capital improvements and advanced $750,000 to TWA to finance
certain major maintenance procedures. TWA fully repaid the $750,000 to the
Partnership through September 1, 1998, in equal monthly installments, with
interest at a fixed rate of 9.68%.

In mid-October 1994 because of operating and financial problems, TWA
announced that it would seek a global restructuring of its capital by offering
common stock for its debt securities preferred stock obligation and lease
deferrals negotiated with aircraft lessors such as the Partnership ("Exchange
Offer"). TWA and the Partnership agreed to a deferral of 50% of the original
rent scheduled for November 1994 and 75% of the original schedule from December
1994 to April 1995. Additionally, TWA and the Partnership reached an agreement
to extend the lease of the MD-82 aircraft by six years beyond the then scheduled
expiration date to October 1, 2004 at the current lease rate of $185,000 per
month. All rents deferred during the November 1994 to April 1995 period were
repaid with interest at 12% from the date of the deferral over an 18 month
period, which commenced May 1, 1995. On June 30, 1995, TWA filed a prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On August 23,
1995, the reorganization plan, which included the foregoing lease modifications,
was confirmed by the Bankruptcy Court, and TWA emerged from bankruptcy.

In July 1996, the Partnership delivered its Boeing 747-100 aircraft,
acquired in 1988 for $17,847,000 and formerly leased to Continental, to TWA
under a lease with a term of approximately four years. The lease provides for a
monthly rent of $180,000. The Partnership incurred costs of approximately
$1,280,000 in connection with the redelivery, integration and maintenance of the
Boeing 747-100 aircraft, of which $669,000 represented maintenance expense and
$611,000 were capitalized expenditures. The Partnership received a security
deposit of $360,000 from TWA with respect to the lease. TWA has entered into a
fleet restructuring program that has resulted in grounding a substantial portion
of its Boeing 747 aircraft, including the Boeing 747 leased from the
Partnership. TWA has continued to make lease payments with respect to the
aircraft.

US Airways Group, Inc. ("USAir") Lease. During March 1989, the
Partnership acquired one half of the beneficial interest in a trust ("Trust")
that is the owner/lessor of a McDonnell Douglas MD-81 ("USAir Aircraft") for a
purchase price of $9,999,000. The remaining one-half interest in the Trust is
owned by Pegasus Aircraft Partners II, L.P., an affiliated partnership.

Rental payments are payable quarterly, in arrears, at a rate of
$304,000 (for the Partnership's one-half interest in the aircraft). During 1997,
USAir exercised its renewal option for a three year extension (to June, 2001) at
the original lease rate. USAir also has three additional one-year renewal
options at fair market rental rates. USAir may elect to purchase the aircraft at
its fair market value at the end of any renewal term.

The McDonnell Douglas MD-81 aircraft was purchased subject to a tax
benefit transfer lease ("TBT lease") which provided for the transfer of the
investment tax credits and depreciation deductions with respect to the aircraft
to a tax lessor. Under the TBT lease, the Trust, as the owner of the aircraft
and the tax lessee under the TBT lease, has agreed to indemnify the tax lessor
if certain anticipated tax benefits are lost by the tax lessor as a result of,
among other things, acts or omissions by the Trust, breach of covenants by the
Trust under the TBT lease, loss or damage to the aircraft or use of the aircraft
outside the United States. The TBT lease requires that a letter of credit be
posted to collateralize this obligation. The Partnership shares in the annual
cost of the letter of credit and is obligated for one-half of any calls on the
letter of credit.

The letter of credit has a current face amount of approximately $1.2
million. Through June 1996 the letter of credit agreement obligated the
Partnership to deposit $35,000 per quarter (beginning on June 1, 1992 and
originally scheduled to terminate on June 1, 1997) into a restricted account at
the bank ("Lender") which issued the current letter of credit. In July 1995, the

26
<PAGE>
Partnership restructured its borrowing arrangement with the Lender, under which
the Lender released its security interest on the cash collateral account and
eliminated the requirement for future deposits to such account.

Under the operating lease, the lessee, USAir, has assumed all
liabilities, indemnities and obligations of the Trust to the tax lessor under
the TBT lease and has agreed to indemnify the Trust for any liability, indemnity
or obligation to the tax lessor under the TBT lease except for liability
resulting from breaches by the Trust of covenants under the operating lease.
USAir has not posted a letter of credit to collateralize this obligation. As a
result of the foregoing, if the tax lessor draws on the letter of credit as a
result of an action by the lessee, the Partnership and Pegasus Aircraft Partners
II, L.P., through the Trust will be responsible for the loss to the tax lessor
until and if they can obtain indemnification from the lessee.

The tax lessor is entitled to call on the letter of credit whether its
loss of tax benefits is caused by Pegasus Aircraft Partners II, L.P. or the
Partnership, and Pegasus Aircraft Partners II, L.P. and the Partnership have
agreed to indemnify each other for any loss occasioned by the acts of the other.
There have been no calls on the Trust's letter of credit as of December 31,
1998.

Kiwi International Air Lines, Inc. - Bankruptcy. The Partnership owns
two Boeing 727-200 non-advanced aircraft, originally acquired on December 1988
for $6,308,000 per aircraft. In February 1994 and April 1994, the Partnership
entered into leases with Kiwi International Airlines, Inc. ("Kiwi"), each
originally for a term of approximately five years with rents payable monthly in
advance at $55,000 per aircraft. The leases were modified in 1996 and extended
to December 31, 1999. The leases also required Kiwi to pay maintenance reserves
for airframe and engines, of $250 per flight hour, which could be drawn upon by
Kiwi for specific maintenance procedures. The aircraft were delivered in April
and July 1994. In connection with the first Kiwi lease, the Partnership also
acquired an additional aircraft engine, at a cost of $195,000, which was used as
a spare by Kiwi on a utilization basis at $105 per flight hour of use. The
Partnership invested an additional $3,108,000 for maintenance, aging aircraft
modifications and other Kiwi requested modifications prior to delivery, $580,000
of which was funded by prior return condition settlement payments. The leases
allowed Kiwi to request that the aircraft be hushkitted by the Partnership.

During 1996 in part, because of the grounding of certain aircraft by
the FAA as the result of pilot handbook deficiencies and the market reaction to
the Valujet crash, Kiwi did not meet its financial goals. Kiwi requested and was
granted by the Partnership a deferral of its August 1996 rental and July 1996
maintenance payments. Kiwi was also unable to make its September rental and
August maintenance payments and was placed in default by the Partnership.

On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy
Code") and did not make any subsequent payments. The Kiwi leases accounted for
approximately 19% of the Partnership's rental revenue in 1996. At December 31,
1996 the Partnership held maintenance deposits aggregating approximately
$1,627,000, which were not sufficient to complete work required on the aircraft
and the related engines to meet lease return conditions and make the aircraft
leasable. On October 15, 1996, Kiwi ceased scheduled flight operations. The
Bankruptcy Court approved Kiwi's motion to reject both leases as of November 15,
1996. In 1996, The Partnership provided an allowance for bad debts in the amount
of $240,000 relating to amounts due from Kiwi as of the bankruptcy date and did
not record any revenue beyond that date. The Partnership recovered the aircraft
and the spare engine in 1996.

The Partnership filed a claim in Kiwi's bankruptcy case for all unpaid
items in connection with the leases as well as rejection damages. The
Partnership also filed an adversarial complaint seeking the Bankruptcy Court's
authority to utilize the maintenance reserves held ($1.6 million). In April
1997, the Partnership won a summary judgment in Bankruptcy Court permitting the
use of the collected maintenance reserves. The maintenance reserves were
reclassified from restricted cash to cash and cash equivalents and the
maintenance reserve payable was applied against expenditures made to make the
aircraft leasable. The spare engine was sold during the quarter ended March 31,
1997 for proceeds of $275,000. The Partnership was also involved in litigation
with the company who acted as Kiwi's engine manager regarding each party's
compliance with a settlement agreement entered into to facilitate the recovery
of the aircraft. The parties achieved a negotiated settlement in May 1997 by the
payment by the Partnership of amounts due and the receipt by the Partnership of
services provided.

In July 1997, the Bankruptcy Court approved a proposal to purchase the
operating assets of Kiwi submitted by a group which includes certain of the
parties that had provided debtor-in-possession financing. Based upon the
approved purchase price, it is likely that the Partnership will have little or
no recovery of its bankruptcy claims. Based on a petition by creditors, the case
has been converted to a Chapter 7 liquidation and a Trustee has been appointed
by the court.

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<PAGE>
Nations Air Express, Inc. On December 31, 1996, the Partnership
delivered a Boeing 727-200 aircraft, formerly leased to Kiwi, to Nations Air
Express Inc. ("Nations") subject to a lease for a term of approximately 36
months at a lease rate of $65,000 per month. Nations was also required to make
maintenance reserve payments of approximately $347 per flight hour (to be
reduced thereafter and used only for specific maintenance) and was obligated to
complete the next phase "C" check without reimbursement from maintenance
reserves.

At the time of its delivery to Nations, because of Kiwi's noncompliance
with lease return condition provisions and the need to deliver the aircraft
quickly, the Partnership delivered the aircraft with one engine which belonged
to Pegasus Aircraft Partners II, L.P., an affiliated partnership, and two
engines which belonged to affiliates of the Managing General Partner. The
Partnership paid those entities for their share of the rents (in the aggregate
of $45,000 per month plus related reserves) while using such engines. The
Partnership purchased five rebuilt engines in January 1997 from an unaffiliated
third party, three of which were installed on the aircraft in March and April
1997. Additionally, the Partnership hushkitted the aircraft at a cost of
approximately $1.9 million and simultaneously extended the lease to April 2002
and increased the monthly lease rate from $65,000 to $105,000 effective April
1997. During 1997, Nations incurred operating problems and struggled with
adequate liquidity and capitalization requirements. Nations fell in arrears with
respect to rent and maintenance reserves due and in July 1997 began making
weekly payments of rent and maintenance reserves instead of monthly payments. In
late July 1997, Nations stopped making weekly payments and stopped flying the
aircraft shortly thereafter. Nations was unable to fund a "C" check then due and
after Nations was unable to raise any additional financing, the Partnership
recovered the aircraft in September 1997. At December 31, 1997, the Partnership
had unfunded maintenance reserves due from Nations totaling $400,000 (which were
not accrued due to the uncertainty of collectability) and had provided an
allowance for bad debts of $20,000 with respect to rents earned prior to the
recovery of the aircraft. In addition, the Partnership provided a write-down of
$200,000 with respect to the aircraft at December 31, 1997. (See also TNT
Transport International B.V., below).

Sky Trek International Airlines, Inc. In 1997, the Partnership entered
into an agreement to lease the second former Kiwi 727 aircraft to a start up
airline, Sky Trek International Airlines Inc. ("Sky Trek"). The aircraft was
delivered in late June 1997. The Sky Trek lease provides for rent of $95,000 per
month for a term of approximately 60 months. Sky Trek provided a security
deposit of $190,000 and is obligated to fund maintenance reserves, in the
aggregate, at a rate of $325 per flight hour. The Partnership completed a "C"
check (including replacing time-controlled parts) at a cost of approximately
$1,500,000 (before the application of maintenance reserves to restore the
aircraft of $888,000) and has purchased a hushkit at a cost of $1,900,000. Two
of the five engines purchased in January 1997 (see Nations discussion) were
installed on the aircraft and the Partnership purchased an additional engine, at
a cost of $625,000 for the aircraft prior to delivery to Sky Trek. The
Partnership provided a write-down of $150,000 with respect to the aircraft at
December 31, 1997.

TNT Transport International B.V. Lease. In November 1997, the
Partnership entered into an agreement to lease the aircraft formerly leased to
Nations to a European freight carrier, TNT Transport International B.V. ("TNT")
for a term of four years. The lease provides for monthly rentals of $123,500
(subject to a subsequent rent reduction of approximately 10% after two years if
TNT exercises an option, during the lease term, to extend the lease for an
additional two years beyond the original expiration date) and airframe and
landing gear reserves aggregating $85 per flight hour. TNT has contracted with a
third party service provider for the maintenance of the engines. TNT has
provided a $150,000 security deposit. TNT also has the right to extend the lease
for an additional two years at the end of the initial lease term (if the above
option is not exercised) at $95,000 per month.

The Partnership invested approximately $3.2 million for a "C" check and
cargo conversion of the aircraft (before the application of maintenance reserves
to restore the aircraft of $854,000). The work was performed and the aircraft
parts provided by companies affiliated with the Managing General Partner or its

28
<PAGE>

President and Director. The Partnership increased its borrowing facility from
$7,500,000 to $10,000,000 to finance this work. The aircraft was delivered to
TNT in March 1998.

In the third quarter of 1998, due to the conversion of this aircraft to
a freighter, the Partnership wrote-off the remaining net book value of the
interior, determined through a third party appraisal, which resulted in an
impairment expense of $104,000.

TNT is responsible for the first $50,000 of cost in complying with the
newly issued freighter conversion AD. Costs in excess of this amount are
initially paid for by TNT. At the end of the lease, TNT will be reimbursed by
the Partnership for a portion of the AD compliance cost based on a formula set
forth in the Partnership agreement, not to exceed $250,000. The reimbursed cost
will be capitalized and amortized over 10 years on a straight line basis. The
amortization will begin at the time of conversion.

General. The aircraft leases are principally triple net leases. As
such, during the terms of leases, the lessees are required to pay substantially
all expenses associated with the aircraft and in the case of Sky Trek and TNT
(and in the past, Nations and Kiwi), also fund certain maintenance expenses
through hourly maintenance reserves paid monthly.

Significant Lessees

The Partnership leased its aircraft to five different airlines during
1998. Revenues from airlines which accounted for greater than 10% of the
Partnership's total rental revenues during 1998, 1997 and 1996 are as follows:

Percentage of Rental Revenues
-----------------------------
Airlines 1998 1997 1996
- -------- ---- ---- ----

Trans World Airlines, Inc. 52% 58% 49%
US Airways Group, Inc. 15 16 18
Continental Airlines, Inc. (1) 12 14
Kiwi International Air Lines Inc. (1) (1) 19
TNT Transport International B.V 14 (1) (1)
Sky Trek International Airlines, Inc. 11 (1) (1)

(1) Represents less than 10%.

The percentages for 1996 include revenues generated by aircraft leased
to Kiwi for which an allowance for bad debts was provided.

Revenues include rentals from aircraft leased to foreign airlines or
carriers of $1,143,000 in 1998.

Future Minimum Rental Income

The following is a schedule by year of future minimum rental income
under the leases as of December 31, 1998 (in thousands):

1999 $ 8,216
2000 7,208
2001 5,356
2002 2,929
2003 2,220
Thereafter 1,891
-------
Total $27,820
=======

The Partnership operates in one industry, the leasing of used aircraft
to commercial passenger and freight airlines.

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<PAGE>

Future minimum rents include a total of $3,987, related to lessees on
non-accrual status.

6. Transactions With Affiliates

Management Fees. The General Partners earn a quarterly subordinated
base management fee in an amount generally equal to 1.5% of gross aircraft
rentals, net of re-lease fees. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
During the years ended December 31, 1998, 1997 and 1996, the General Partners
earned base management fees of $124,000, $110,000 and $93,000, respectively.

Incentive Management Fee. The General Partners also earn a quarterly
subordinated incentive management fee in an amount equal to 4.5% of quarterly
cash flow and sales proceeds (net of resale fees), of which 2.5% is payable to
the Managing General Partner and 2.0% is payable to the Administrative General
Partner. During the years ended December 31, 1998, 1997 and 1996, the General
Partners earned incentive management fees of $308,000, $284,000 and $221,000,
respectively.

Re-lease Fee. The General Partners earn a quarterly subordinated fee
for re-leasing aircraft or renewing a lease in an amount equal to 3.5% of the
gross rentals from such re-lease or renewal for each quarter for which such
payment is received. Of this amount, 2.5% is payable to the Managing General
Partner and 1.0% is payable to the Administrative General Partner. During the
years ended December 31, 1998, 1997 and 1996, the General Partners earned
$250,000, $221,000 and $145,000, respectively of re-lease fees.

Beginning January 1, 1996, as part of the 1996 and 1997 class action
settlement, the Administrative General Partner remits to an affiliate, all
management fees as well as all 1997 and future fees and distributions received
by the Administrative General Partner, for deposit into an escrow account for
the benefit of the class action members.

Accountable Expenses. The General Partners are entitled to
reimbursement of certain expenses, paid on behalf of the Partnership which are
incurred in connection with the administration and management of the
Partnership. The Administrative General Partner billed $12,500 in 1998 and
$50,000 in 1997 and 1996, respectively, for administrative services. The decline
in accountable expenses is due to the subcontracting of certain accounting
services, and their cost is included in general and administrative expenses.

Other. During 1998, 1997 and 1996, the Partnership purchased parts in
connection with certain capital projects for costs totaling $1,067,616,
$1,360,000 and $161,000, respectively, from a Company in which the President and
Director of the Managing General Partner had an interest.

In connection with certain capital projects, during 1998, 1997 and
1996, the Partnership paid $638,775, $1,634,000 and $56,000, respectively, to a
licensed maintenance provider that is affiliated with the Managing General
Partner.

7. Notes Payable

In July 1995, the Partnership and the Lender completed an extension of
their existing commitment. Under the new agreement, the aggregate commitment
remained at $4,000,000, the Partnership's ability to borrow under the facility
was extended until May 1, 1997 and the floating interest rate charged under the
facility was reduced to the Lender's prime rate plus .5%. The Lender released
the Boeing 747-100 aircraft as collateral under the loan and received as
substitute collateral a perfected security interest in the Partnership's MD-82
aircraft leased to TWA. At December 31, 1996, the outstanding loan balance was
$1,218,000.

In February 1997, the Partnership purchased five aircraft engines from
an unaffiliated third party for $2,150,000 plus six engine cores from the former
Kiwi aircraft which required overhaul, utilizing its then existing borrowing
facility. The Lender charged the Partnership 1.50% over prime with respect to
this borrowing and increased the rate on the other borrowings to 1.50% over
prime.

In April 1997, the Partnership obtained a new borrowing facility with a
different lender. Under the terms of the new agreement, the Partnership was able
to borrow up to $7,500,000 at an interest rate of 1% over the lender's prime
rate of interest. The lender's commitment is for a term of 36 months, at which
time all principal will be due. The loan is collateralized by the Partnership's
interest in the MD-82 aircraft leased to TWA. During the loan term, the
Partnership is required to pay interest on a monthly basis and maintain a
minimum outstanding balance of $2,000,000. The Partnership used approximately
$3.3 million of proceeds from this facility to retire the amounts previously

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<PAGE>

outstanding and used an additional $3.9 million to finance hushkits for the two
former Kiwi aircraft, one of which was leased to Nations Air Express Inc., prior
to its recovery by the Partnership in September 1997, and the other of which is
leased to Sky Trek International Airlines, Inc. In late 1997, the Partnership
committed to lease the former Nations aircraft to TNT Express Inc., a European
cargo carrier and committed to perform the cargo conversion.

In January 1998, the lender increased the borrowing commitment from
$7,500,000 to $10,000,000 and increased the interest rate from 1% to 1.25% over
prime. The Partnership provided, as additional collateral, the Boeing 727-200
aircraft leased to Continental and the Boeing 727-200 aircraft leased to Sky
Trek. The proceeds were used to fund the cargo conversion of the aircraft
delivered to TNT. At December 31, 1998, the interest rate was 9.00%. In February
1999, the lender agreed to increase the borrowing commitment from $10 million to
$14.5 million and increase the interest rate from 1.25% to 1.5% over prime, all
of which is due in April 2000. (See Footnote 11, "Subsequent Event").

8. Reconciliation to Income Tax Method of Accounting

The following is a reconciliation of the net income as shown in the
accompanying financial statements to the taxable income reported for federal
income tax purposes (in thousands):

1998 1997 1996
---- ---- ----

Net income per financial statements $ 1,050 $ 716 $ 711
Increase (decrease) resulting from:
Depreciation 2,478 1,096 456
Reserves for maintenance costs and
write-downs 204 350 150
Allowance for bad debts provided for book (261) 20 240
Aircraft expenditures capitalized
for tax, net -- -- 514
TBT interest income less
TBT rental expense (1,200) (932) (742)
Difference in basis of aircraft engine sold (8) 24 --
Maintenance reserves collected
and related interest net of
expenditures 215 219 492
Deferred rental income -- (34) (39)
Other 74 66 (53)
------- ------- -------
Taxable income per federal income tax return $ 2,552 $ 1,525 $ 1,729
======= ======= =======

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<PAGE>

The following is a reconciliation of the amount of the Partnership's
total Partnership equity as shown in the accompanying financial statements to
the tax bases of the Partnership's net assets (in thousands):

1998 1997 1996
---- ---- ----
Total Partnership equity per financial
statements $ 14,260 $ 19,675 $ 25,423
Increase (decrease) resulting from:
Commissions and expenses paid in
connection with the sale of limited
partnership units 8,441 8,441 8,441
Reserves for maintenance costs and
write-downs including Continental lease
settlement, accounted for as cost
recovery 9,484 9,520 9,170
Allowance for bad debts -- 260 240
Aircraft expenditures capitalized for
tax, net 514 514 514
Distributions payable to partners 1,600 1,632 1,648
Deferred rental income 145 282 179
Maintenance reserves collected and used
to restore aircraft net 1,905 1,654 --
Accumulated depreciation (16,781) (19,491) (20,611)
TBT interest income less TBT rental expense (5,132) (3,955) (3,023)
Maintenance reserves payable 350 192 1,627
Other 11 (13) 58
-------- -------- --------
Tax bases of net assets $ 14,797 $ 18,711 $ 23,666
======== ======== ========

9. Litigation

The General Partners, on the advice of counsel, believe that the claim
will be withdrawn.

10. Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value of certain financial instruments, whether or
not reported in the balance sheet. Where quoted market prices are unavailable
the values are based on estimates using present value or other valuation
techniques. The results are significantly affected by the assumptions used
including the discount rate and estimates of future cash flows. In addition,
because SFAS No. 107 excludes certain assets such as leased aircraft owned by

32
<PAGE>

the Partnership from its disclosure requirements, the aggregate fair value
amounts discussed below do not purport to represent and should not be considered
representative of the underlying market value of the Partnership.

The methods and assumptions used to estimate the fair value of each
class of the financial instruments are described below.

Cash Equivalents, Rents and other receivables. For these balances,
carrying value approximates fair value due to their short term nature.

Notes payable. For notes payable, carrying value approximates fair
value based on current rates offered for notes of the same remaining maturities.

Accounts payable and accrued expenses payable to affiliates, and
accrued interest payable. For these balances, carrying value approximates fair
value due to their short term nature.

11. Subsequent Event

In February 1999, the Partnership consummated an agreement to increase
the committed amount of the loan facility from $10 million to $14.5 million and
increase the interest rate from 1.25 % to 1.5% over prime. The Partnership has
pledged all of its aircraft as collateral in connection with the increased loan
commitment. The Partnership will utilize the additional borrowings to fund the
hushkit and cargo conversion of the Boeing 727-200 advanced aircraft formerly
leased to Continental, which was returned in October 1998, for delivery to Kitty
Hawk Aircargo, Inc. ("Kitty Hawk"). At December 31, 1998, the interest rate was
9.00%. This loan is due in April 2000. If the Partnership is unable to
renegotiate or refinance the loan, it will be forced to reduce or suspend
distributions.

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<PAGE>

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

There were no changes in accountants or disagreements with accountants
with respect to accounting or financial disclosure issues during 1998 or 1997.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Partnership has no officers and directors. The General Partners
jointly manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business. Information
concerning the directors and executive officers of the General Partners is as
follows:

Pegasus Aircraft Management Corporation

Name Positions Held
---- --------------

Richard S. Wiley President and Chairman of the Board
Carol L. Chase Senior Vice President, General Counsel and Secretary
Robert M. Brown Senior Vice President
Richard L. Funk Senior Vice President, Technical

Richard S. Wiley, age 45, is President and Chairman of the Board of the
Managing General Partner and Pegasus Capital Corporation ("PCC"), which was
formed in 1988. Prior to forming Pegasus Capital Corporation, Mr. Wiley was a
Vice President of CIS Corporation ("CIS"), a wholly-owned subsidiary of
Continental Information Systems Corporation ("Continental") for the period 1986
to 1988. Mr. Wiley originated aircraft transactions throughout the world and
sold aircraft to third-party investors. From 1985 to 1986, Mr. Wiley worked as
Treasurer of Caterpillar Capital Company in San Diego, California. From 1983 to
1985, he served as Managing General Partner and President of RAM Financial
Corporation in Houston, Texas, an equipment leasing venture capital company.
Prior to joining RAM, he worked for GATX Leasing Corporation as a District
Manager from 1980 to 1983. Mr. Wiley received a B.S. degree from the Indiana
University School of Business and an M.B.A. from the University of California,
Los Angeles.

Carol L. Chase, Esq., age 46, is a Senior Vice President, General
Counsel and Secretary of the Managing General Partner and Pegasus Capital
Corporation. She is responsible for providing legal counsel for all aspects of
capital equipment leasing, financing and placement. Prior to joining Pegasus,
from 1987 to 1988, Ms. Chase was Senior Corporate Counsel at CIS where she
provided legal counsel for transactions involving aircraft and related
equipment. From 1981 to 1987, Ms. Chase was legal counsel at Transamerica
Airlines where she was responsible for the legal negotiation and documentation
for the purchase, sale, lease and finance of aircraft and aircraft-related
equipment. Ms. Chase received a B.A. degree from California State University,
Hayward and a J.D. degree from the University of California, Davis. She is a
member of the State Bar of California, the American Bar Association, and the
American Corporate Counsel Association.

Robert M. Brown, 40, joined PCC in 1988 and is involved in aircraft
acquisition, finance and leasing. His primary responsibility is the structuring
of debt transactions which accommodate the PCC trading and long-term investing
activities. Previously, he served as Vice President, Aircraft Sales, and as
Regional Marketing Director during the offerings of the Partnership and an
affiliated partnership. Prior to joining PCC, Mr. Brown was District Manager
with the Chrysler Corporation. He holds a BA degree from Dartmouth College and
an MBA from the University of Washington.

Richard L. Funk, 61, joined PCC in 1992 and is responsible for the
technical aspects of aircraft marketing, including delivery and redelivery of
aircraft to airlines worldwide. From 1990 to 1992, he served as a technical
marketing consultant to the aviation industry and from 1987 to 1990 he was
President of Avtek Industries, Inc., an aircraft, missile, and electronic
components manufacturer which he founded. From 1984 to 1986 he was President and
Chief Operating Officer of Standard Aero Western, Inc., a commercial airline
maintenance facility. From 1979 to 1982, he was Senior Vice President of
Engineering and Maintenance at World Airways, Inc. From 1963 to 1979 he held
various positions with United Air Lines, Inc., including Manager of Airframe
Maintenance for a period of six years.

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<PAGE>

Air Transport Leasing, Inc.

Name Positions Held
---- --------------

Gerald F. Goertz, Jr. Chairman of the Board
Clifford B. Wattley President and Director
Stephen R. Dyer Vice President, Assistant Secretary and Director
Carmine Fusco Vice President, Secretary, Treasurer and Chief Financial
and Accounting Officer

Gerald F. Goertz, Jr., age 41, is Chairman of the Board of Directors of
the Administrative General Partner. Mr. Goertz joined Paine Webber Incorporated
in December 1990 and holds the position of Senior Vice President and Director of
Specialized Investment Services. Prior to joining Paine Webber Incorporated, Mr.
Goertz was associated with CG Realty Advisors and The Freeman Company. He
received his Bachelor of Arts degree in Business Administration in 1979 from
Vanderbilt University and his Juris Doctorate and Masters of Business
Administration from Memphis State University in 1982.

Clifford B. Wattley, age 49, is President and a Director of the
Administrative General Partner. Mr. Wattley is a Corporate Vice President with
Paine Webber Incorporated, having joined the firm in 1986. He also was employed
previously by Paine, Webber, Jackson & Curtis from 1979 to 1980. From 1986 to
1992, Mr. Wattley participated in Paine Webber's Principal Transactions Group.
Since 1992, Mr. Wattley has been a member of the Private Investment Department.
He holds a Bachelor of Science degree in engineering from Columbia University
and a Masters in Business Administration from Harvard University.

Stephen R. Dyer, age 39, is Vice President, Assistant Secretary and a
Director of the Administrative General Partner. He joined Paine Webber
Incorporated in June 1988 as a Divisional Vice President and is currently a
Senior Vice President and Director of Private Investments. Prior to joining
Paine Webber Incorporated, Mr. Dyer had been employed, since June 1987, as an
Assistant Vice President in the Retail National Products Group of L.F.
Rothschild & Co. Incorporated. Prior to joining L.F. Rothschild he was employed,
beginning in January 1985, as an Associate in the Real Estate Department of
Thomson McKinnon Securities Inc. From July 1981 to August 1983, Mr. Dyer was on
the audit staff of the accounting firm of Arthur Young & Company. He received
his Bachelor of Science degree in Accounting in 1981 from Boston College and a
Masters of Business Administration from Indiana University in December 1984. Mr.
Dyer is a Certified Public Accountant.

Carmine Fusco, age 30, is Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer of the Administrative General Partner, he
also serves as an Assistant Vice President within the Private Investments
Department of PaineWebber Incorporated. Mr. Fusco had previously been employed
as a Financial Valuation Consultant in the Business Valuation Group of Deloitte
& Touche, LLP from January 1997 to August 1998. He was employed as a Commodity
Fund Analyst in the Managed Futures Department of Dean Witter Reynolds
Incorporated, from October 1994 to November 1995. Prior to joining Dean Witter,
Mr. Fusco was a Mutual Fund Accountant with the Bank of New York Company
Incorporated. He received his Bachelor of Science degree in Accounting and
Finance in May 1991 from Rider University and a Master of Business
Administration from Seton Hall University in June 1996.

ITEM 11. EXECUTIVE COMPENSATION

No compensation was paid by the Partnership to the officers and
directors of the General Partners. See Item 13 of this Report, "Certain
Relationships and Related Transactions", which is incorporated herein by
reference, for a description of the compensation and fees paid to the General
Partners and their affiliates by the Partnership during 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) As of the date hereof, no person is known by the
Partnership to be the beneficial owner of more than 5% of
the Units of the Partnership. The Partnership has no
directors or officers, and neither of the General Partners
of the Partnership owns any Units. The Assignor Limited
Partner for the Partnership, Pegasus Assignor L.P.A., Inc.
(an affiliate of the Managing General Partner), owns 5
Units. Additionally, as of December 31, 1998, ATL Inc., an
affiliate of the Administrative General Partner owns
approximately 69,016 Units as the result of legal
settlements with various limited partners.

35
<PAGE>

The names and addresses of the General Partners are as
follows:

Managing General Partner:

Pegasus Aircraft Management Corporation
Four Embarcadero Center, 35th Floor
San Francisco, CA 94111

Administrative General Partner:

Air Transport Leasing, Inc.
1200 Harbor Boulevard, 5th Floor
Weehawken, NJ 07087

The General Partners, collectively, have a 1% interest in
each item of the Partnership's income, gains, losses,
deductions, credits and distributions.

(b) The following table sets forth the number of Units
beneficially owned as of March 1, 1999, by directors of
the Managing General Partner and the Administrative
General Partner and by all directors and officers of such
corporations as a group:

Number
of Units
Beneficially Percent
Name Owned of Class
---- ------------ --------

Managing General Partner
Richard S. Wiley 3,216 *
All directors and officers as
a group (4 persons) 3,216 *

Administrative General Partner
None

* Less than 1% of class.

(c) The Partnership knows of no arrangements, the operation of
the terms of which may at a subsequent date result in a
change in control of the Partnership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The General Partners and their affiliates have received, or will
receive, certain types of compensation, fees or other distributions in
connection with the operations of the Partnership. The fees and compensation
were determined in accordance with the applicable provisions of the Partnership
Agreement.

Following is a summary of the amounts paid, or payable, to the General
Partners and their affiliates during 1998.

Base Management Fee. The General Partners receive a quarterly
subordinated fee in an amount generally equal to 1.5% of gross aircraft rentals,
net of re-lease fees paid. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
During 1998, the General Partners earned base management fees of $124,000.

Incentive Management Fee. The General Partners also receive a quarterly
subordinated fee, in an amount equal to 4.5% of quarterly cash flow and sales
proceeds (net of resale fees), of which 2.5% is payable to the Managing General
Partner and 2.0% is payable to the Administrative General Partner. During 1998,
the General Partners earned incentive management fees of $308,000.

36
<PAGE>
Re-lease Fee. The General Partners receive a quarterly subordinated fee
for re-leasing aircraft or renewing a lease in an amount equal to 3.5% of the
gross rentals from such re-lease or renewal for each quarter for which such
payment is received. Of this amount, 2.5% is payable to the Managing General
Partner and 1.0% is payable to the Administrative General Partner. During 1998
the General Partners earned re-lease fees of $250,000.

Beginning January 1, 1996, as part of the 1996 and 1997class action
settlement, the Administrative General Partner remits to an affiliate, all
management fees as well as all 1997 and future fees and distributions received
by the Administrative General Partner, for deposit into an escrow account for
the benefit of the class action members.

Accountable Expenses. The General Partners are entitled to
reimbursement of certain expenses paid on behalf of the Partnership which are
incurred in connection with the administration and management of the
Partnership. Such reimbursable expenses amounted to $12,500 during 1998, all of
which was paid or is payable to the Administrative General Partner. As discussed
in Note 6 to the Financial Statements, accountable expenses declined due to the
subcontracting of certain accounting services, and their cost is included in
general and administrative expenses.

During 1998, the Partnership purchased parts in connection with certain
capital projects for costs totaling $1,067,616 from a company in which the
President and Director of the Managing General Partner had an interest. In
connection with certain capital projects during 1998 the Partnership paid
$638,775 to a licensed maintenance provider that is affiliated with the Managing
General Partner.

Partnership Interest. In the aggregate, the General Partners received
or were entitled to receive cash distributions of $65,000 as their allocable
share of distributable cash flow for 1998. In addition, $11,000 of the
Partnership's net taxable income for 1998 was allocated to the General Partners.

37
<PAGE>

PART IV

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

(a) The following documents are filed as part of this Report:

1. Financial Statements: (Incorporated by reference to Item 8 of
this Report, "Financial Statements and Supplementary Data").

(b) During the fourth quarter of 1998, the Partnership did not file
any reports on Form 8-K.

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

3.1 (a) First Amended and Restated Limited Partnership Agreement
dated September 30, 1988. Filed as Exhibit 3.1 to
Pre-Effective Amendment No. 2 to Form S-1 Registration
Statement dated September 16, 1988 (Commission File No.
33-22986).*

(b) Amendment, dated as of December 26, 1990, to the First
Amended and Restated Limited Partnership Agreement dated
September 30, 1988. Filed as Exhibit 1 to the Registrant's
Current Report on Form 8-K dated December 26, 1990.*

(c) Amendment, dated as of March 31, 1992, to the First Amended
and Restated Limited Partnership Agreement dated September
30, 1988. Filed as Exhibit 4 to Registrant's Current Report
on Form 8-K dated April 16, 1992.*

4.1 Depositary Agreement dated December 20, 1988, by and among
Pegasus Aircraft Partners, L.P. ("Registrant"), Pegasus
Aircraft Management Corporation, a California corporation,
Paine Webber Aircraft Leasing, Inc., a Delaware
corporation, Pegasus Assignor L.P.A., Inc., a California
corporation, dated April 27, 1989. Filed as Exhibit 4.1 to
the Registrant's Form 8-A on May 1, 1989 (Commission File
No. 33-22986).*

10.1 (a) Lease Agreement dated as of September 26, 1988 by and
between Pegasus Capital Corporation, a California
corporation ("Seller") and Northwest Aircraft, Inc.
("Lessee") (Boeing Model 727-251 airframe, SN 20289). Filed
as Exhibit 10.2(c) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.*

(b) Lease Agreement dated as of September 26, 1988 by and
between the Seller and Northwest Aircraft, Inc. ("Lessee")
(Boeing Model 727-251 airframe, SN 19977). Filed as Exhibit
10.2(d) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*

(c) Sublease Agreement dated as of September 26, 1988 by and
between Lessee and Northwest Airlines, Inc. ("Sublessee")
(Boeing Model 727-251 airframe, SN 20289). Filed as Exhibit
10.2(e) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*

38
<PAGE>

(d) Sublease Agreement dated as of September 26, 1988 by and
between Lessee and Northwest Airlines, Inc. ("Sublessee")
(Boeing Model 727-251 airframe, SN 19977). Filed as Exhibit
10.2(f) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*

(e) Trust Agreement 258 dated as of December 23, 1988 by and
between First Security Bank of Utah, National Association
in its capacity as Owner Trustee ("Owner Trustee") and
Registrant. Filed as Exhibit 10.2(i) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988.*

(f) Trust Agreement 267 dated as of December 23, 1988 by and
between the Owner Trustee and Registrant. Filed as Exhibit
10.2(j) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*

(g) Amendment 1 to Lease Agreement, dated May 27, 1993, between
First Security Bank of Utah, National Association as Owner
Trustee and Northwest Aircraft Inc. to amend a Lease
Agreement, dated September26, 1988, for one Boeing 727-200
aircraft, U.S. Registration No. N258US. Filed as Exhibit
10.1(a) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993.*

(h) Amendment 1 to Lease Agreement, dated May 27, 1993, between
First Security Bank of Utah, National Association as Owner
Trustee and Northwest Aircraft Inc. to amend a Lease
Agreement, dated September 26, 1988, for one Boeing 727-200
aircraft, U.S. Registration No. N267US. Filed as Exhibit
10.1(b) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993.*

(i) Lease Agreement dated April 15, 1994 between First Security
Bank of Utah, National Association, as Trustee, (Lessor)
and Kiwi International Airlines, Inc., (Lessee) with
respect to one used Boeing 727-251 Aircraft US Registration
number N258US.*

(j) Lease Agreement dated February 15, 1994, between First
Security Bank of Utah, National Association, as Trustee,
(Lessor) and Kiwi International Airlines, Inc., (Lessee)
with respect to one used Boeing 727-251 Aircraft US
Registration number N267US.*

(k) Lease Amendment No. 1 dated March 15, 1995 with respect to
the lease between First Security Bank of Utah, National
Association, as Trustee, (Lessor) and Kiwi International
Airlines, Inc., (Lessee) in reference 10 (1) (i) dated
April 15, 1994.*

(l) Lease Amendment No. 1 dated March 15, 1995 with respect to
the lease between First Security Bank of Utah, National
Association, as Trustee, (Lessor) and Kiwi International
Airlines, Inc., (Lessee) in reference 10 (1) (j) dated
February 15, 1994.*

10.2 (a) Trust Agreement 603, dated as of October 10, 1988 by and
between the Seller and Owner Trustee providing for, among
other things, the acquisition of one Boeing Model 747-143
Aircraft (the "Aircraft"), and concurrently therewith
leasing the Aircraft to Continental Airlines, Inc.
("Lessee"). Filed as Exhibit 10.3(b) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988.*

(b) Lease Agreement 603, dated as of October 14, 1988 by and
between the Owner Trustee and Lessee. Filed as Exhibit
10.3(e) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*

(c) Stipulation and Order, dated June 19, 1991, among
Continental Airlines, Inc., New York Airlines, Inc., Bay
Air Lease I, Cirrus Capital Corporation of Florida, Bay Air
Lease III, Meridian Trust Company, as Owner Trustee, IAL
Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II,
L.P., Pegasus Capital Corporation, IAL Aviation Resources,
Inc., Aircraft Leasing, Inc., Pegasus Aircraft Partners,
L.P., Gilman Financial Services, Inc. and First Security
Bank of Utah, as Owner Trustee concerning various aircraft
and aircraft engines. Filed as Exhibit 19.1(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991.*

(d) Agreed Order, dated July 3, 1991, in connection with
approval of Stipulation and Order, dated June 19, 1991,
among Continental Airlines, Inc., New York Airlines, Inc.,
Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay
Air Lease III, Meridian Trust Company, as Owner Trustee,
IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners
II, L.P., Pegasus Capital Corporation, IAL Aviation
Resources, Inc., Aircraft Leasing, Inc., Pegasus Aircraft
Partners, L.P., Gilman Financial Services, Inc. and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 19.1(b) to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991.*

39
<PAGE>

Aviation Assets IV, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital
Corporation, IAL Aviation Resources, Inc., Pegasus Aircraft
Partners, L.P., Gilman Financial Services, and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 10.2(e) to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.*

(f) Lease termination agreement dated October 16, 1995, between
Continental Airlines, Inc. and First Security Bank of Utah,
N.A. as trustee of a trust in which Pegasus Aircraft
Partners, L.P. is the sole beneficiary with respect to the
lease of the 747-143 aircraft.

10.3 (a) Trust Agreement 735, dated as of September 26, 1988 by and
between Seller and Owner Trustee providing for, among other
things, the acquisition of one Boeing Model 727-224
aircraft (the "Aircraft"), and concurrently therewith
leasing the Aircraft to Continental Airlines, Inc.
("Lessee"). Filed as Exhibit 10.4(b) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988.*

(b) Lease Agreement 735, dated as of September 26, 1988 by and
between Owner Trustee and Lessee. Filed as Exhibit 10.4(d)
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988.*

(e) Supplemental Stipulation and Order, dated December 30,
1992, among Continental Airlines, Inc., Bay Air Lease I,
Cirrus Capital Corporation of Florida, Bay Air Lease III,
Aviation Assets I, Aviation Assets II, Aviation Assets III,
Aviation Assets IV, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital
Corporation, IAL Aviation Resources, Inc., Pegasus Aircraft
Partners, L.P., Gilman Financial Services, and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 10.3(e) to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.*

(f) Amendment No. 1 to Lease Agreement 735 dated as of February
28, 1997 between the Owner Trustee and Continental
Airlines, Inc.

10.4 (a) Trust Certificate dated February 16, 1989, for the benefit
of the Registrant from New DC-9T-I, Inc., a New York
Corporation and Meridian Trust Company ("Trustee"). Filed
as Exhibit 19.2(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1989.*

(b) Lease, dated as of May 20, 1983, as supplemented by Lease
Supplement No. 1 dated May 24, 1983, between DC-9T-I, Inc.,
as Lessor, and Trans World Airlines, Inc., as Lessee,
pertaining to one McDonnell Douglas DC-9-82 aircraft, U.S.
Registration No. 904TW. Filed as Exhibit 10.4 (b) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991. *

40
<PAGE>
(c) Amendment Agreement, dated as of December 15, 1986, between
Trans World Airlines, Inc., as Lessee, and DC-9T-I, Inc.,
as Lessor. Filed as Exhibit 10.4 (c) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1991. *

(d) Amendment No. 1, dated as of May 1, 1991, to Lease dated as
of May 20, 1983, each between Meridian Trust Company, as
Owner Trustee and Lessor, and Trans World Airlines, Inc.,
as Lessee. Filed as Exhibit 19.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1991.*

(e) Amendment No. 2, dated as of April 15, 1993, between
Meridian Trust Company, as Owner Trustee, and Trans World
Airlines, Inc. as Lessee.*

(f) Agreed Order, dated April 14, 1993, approving lease
amendments among Trans World Airlines, Inc., Registrant,
Pegasus Aircraft Partners II, L.P. and Pegasus Capital
Corporation relating to leases of certain aircraft.*

(g) Amendment No. 3 dated as of January 16, 1995 between
Meridian Trust Company Owner Trustee as Lessor and TWA as
lessee with respect to the lease of one McDonnell Douglas
MD-82, U.S. Registration No. N904TW.*

10.5 (a) Amended and Restated Lease No. 1, dated October 14, 1988,
between PS Group, Inc. and USAir, Inc. Filed as Exhibit
10.2.9 to Form S-1 Registration Statement, dated July 3,
1989 for Pegasus Aircraft Partners II, L.P. (Commission
File No. 33-28359).*

(b) Agreement pursuant to Section 168(f)(8) of the Internal
Revenue Code of 1954, as Amended between Pacific Southwest
Airlines and General Mills, Inc. Filed as Exhibit 19.3(c)
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1989.*

(c) Assumption Agreement, dated March 22, 1989, among Pegasus
Capital Corporation, a California corporation ("PCC"), the
Purchaser, Concord Asset Management, Inc., a Delaware
corporation ("CAMI") and the Registrant. Filed as Exhibit
19.3(e) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1989.*

(d) Participation Agreement, dated September 21, 1989, among
Registrant, First Security Bank of Utah, a national
association (the "Owner Trustee"), CAMI and Pegasus
Aircraft Partners II, L.P., a Delaware limited partnership.
Filed as Exhibit 19.2(e) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1989 for Pegasus
Aircraft Partners II, L.P. (Commission File No. 33-28359).*

(e) Amended and Restated Reimbursement Agreement, dated
September 21, 1989, between the Registrant and CAMI. Filed
as Exhibit 19.2(f) to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1989 for Pegasus Aircraft
Partners II, L.P. (Commission File No. 33-28359).*

(f) Amended and Restated Security Agreement, dated September
21, 1989, between the Registrant and CAMI. Filed as Exhibit
19.2(h) to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989 for Pegasus Aircraft
Partners II, L.P. (Commission File No. 33-28359).*

(g) Security Agreement, dated September 21, 1989, between the
Registrant and Pegasus Aircraft Partners II, L.P. Filed as
Exhibit 19.2(j) to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1989 for Pegasus Aircraft
Partners II, L.P. (Commission File No. 33-28359).*

(h) Security Agreement, dated September 21, 1989, between
Pegasus Aircraft Partners II, L.P. and the Registrant.
Filed as Exhibit 19.2(k) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1989 for Pegasus
Aircraft Partners II, L.P. (Commission File No. 33-28359).*

(i) Trust Agreement 814, dated as of March 10, 1989, among PCC,
as Beneficiary, the Registrant, as Beneficiary, and the
Owner Trustee. Filed as Exhibit 19.3(i) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1989.*

41
<PAGE>
(j) First Amendment to Trust Agreement 814, dated September 21,
1989, among Pegasus Aircraft Partners II, L.P., as
Beneficiary, the Registrant, as Beneficiary and the Owner
Trustee. Filed as Exhibit 19.2(m) to the Quarterly Report
on Form 10-Q for the quarter ended September 30, 1989 for
Pegasus Aircraft Partners II, L.P. (Commission File No.
33-28359).*

(k) Letter of Credit Agreement, dated as of April 30, 1992,
between First Security Bank of Utah as Owner Trustee and
Philadelphia National Bank, Incorporated, as CoreStates
Bank, N.A. Filed as Exhibit 10.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*

(l) Assumption Agreement, dated April 30, 1992, among Pegasus
Aircraft Partners, L.P. and Pegasus Aircraft Partners II,
L.P. as Obligors and Philadelphia National Bank,
Incorporated, as CoreStates Bank, N.A. Filed as Exhibit
10.1(b) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992.*

(m) Security Agreement and Assignment of lease, dated as of
April 30, 1992, between First Security Bank of Utah,
National Association as Owner Trustee and Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A. Filed
as Exhibit 10.1 (c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992. *

(n) Assignment of Collateral, dated as of April 30, 1992,
between Pegasus Aircraft Partners, L.P. and Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A. Filed
as Exhibit 10.1(d) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992. *

10.6 (a) Loan Agreement, dated April 22, 1994, between Pegasus
Aircraft Partners, L.P. and Philadelphia National Bank,
Incorporated as CoreStates Bank, N.A..* (b) Promissory
Note, dated April 22, 1994, made by Pegasus Aircraft
Partners, L.P. in favor of Philadelphia National Bank
Incorporated as CoreStates Bank, N.A.*

(c) Security Agreement and Assignment of lease between First
Security Bank of Utah, National Association as owner
trustee and Philadelphia National Bank Incorporated as
CoreStates Bank, N.A. with respect to aircraft N17010.*

(d) Assignment of beneficial interest for Pegasus Aircraft
Partners, L.P. to Philadelphia National Bank Incorporated
as CoreStates Bank, N.A. with respect to the Pegasus
interest in the USAir Trust Agreement and the Continental
Trust Agreement.*

(e) Amended and restated loan agreement dated as of July 20,
1995 between Pegasus Aircraft Partners, L.P. and CoreStates
Bank N.A..

11 Partnership policy Regarding Requests for Partner Lists.

19.1 Prospectus of Registrant, dated as of September 30, 1988.
Filed as Exhibit 19.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.*

42
<PAGE>

SIGNATURES

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

Dated: March 29, 1999

Pegasus Aircraft Partners, L.P.
(Registrant)

By: Air Transport Leasing, Inc.
Administrative General Partner

By: /s/ CLIFFORD B. WATTLEY
Clifford B. Wattley
President and Director

By: /s/ CARMINE FUSCO
Carmine Fusco
Vice President, Secretary,
Treasurer and Chief Financial
and Accounting Officer

By: Pegasus Aircraft Management
Corporation
Managing General Partner

By: /s/ RICHARD S. WILEY
Richard S. Wiley
President and Chairman
of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 1999.

Signature Title
- --------- -----

/s/ RICHARD S. WILEY President and Chairman of
Richard S. Wiley the Board of Pegasus Aircraft
Management Corporation

/s/ GERALD F. GOERTZ, JR. Chairman of the Board of
Gerald F. Goertz, Jr. Air Transport Leasing, Inc.

/s/ CLIFFORD B. WATTLEY President and Director of
Clifford B. Wattley Air Transport Leasing, Inc.

/s/ STEPHEN R. DYER Vice President, Assistant
Stephen R. Dyer Secretary and Director of
Air Transport Leasing, Inc.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REPORT ON
FORM 10-K FOR PEGASUS AIRCRAFT PARTNERS LP.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,129,000
<SECURITIES> 0
<RECEIVABLES> 476,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,631,000
<PP&E> 84,153,000
<DEPRECIATION> (58,992,000) <F1>
<TOTAL-ASSETS> 27,792,000
<CURRENT-LIABILITIES> 3,532,000
<BONDS> 10,000,000
0
0
<COMMON> 0
<OTHER-SE> 14,260,000
<TOTAL-LIABILITY-AND-EQUITY> 27,792,000
<SALES> 0
<TOTAL-REVENUES> 8,454,000
<CGS> 0
<TOTAL-COSTS> 6,234,000
<OTHER-EXPENSES> 241,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 929,000
<INCOME-PRETAX> 1,050,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,050,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,050,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES WRITE-DOWNS AND CERTAIN OTHER RESERVES
</FN>

</TABLE>