PEGASUS AIRCRAFT PARTNERS II L P, 10-K405, 2000-03-30

PEGASUS AIRCRAFT PARTNERS II L P
10-K405, 2000-03-30
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, 1999
------------------------------------------------------

[ ] 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 0-18387
---------------------------------------------------------

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

Delaware 84-1111757
-------- ----------
(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:

Units of Limited Partnership Interest
(Title of Class)

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

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 47 pages.
<PAGE>
Pegasus Aircraft Partners II, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1999

Table of Contents

Page
----
PART I
- ------

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

PART II
- -------

Item 5 Market for Registrant's Common Partnership Capital and Related
Unitholder 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..............................................15
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................33

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....36
Item 13 Certain Relationships and Related Transactions....................37

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 II, L.P. (the "Partnership" or the
"Registrant") is a limited partnership organized under the laws of the State of
Delaware on April 26, 1989. 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 August 15, 1989, the Partnership commenced an offering of units of
limited partnership interest ("Units"). The offering of the Units was terminated
during the third quarter of 1990, when the total capitalization of the
Partnership reached $145.1 million. The Partnership incurred $16,295,000 of
commissions and other expenses in connection with the sale of these Units.

Although the Partnership was organized on April 26, 1989, the
Partnership conducted no activities and recognized no revenues, profits or
losses prior to September 20, 1989 at which time the Partnership commenced
operations. During the period between September 21, 1989 and August 22, 1990,
the Partnership acquired its portfolio of used commercial aircraft which are
principally subject to triple net operating leases with domestic and foreign
commercial air carriers.

The Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2007. The Partnership had the right, subject
to certain conditions, to reinvest the proceeds from sales of aircraft occurring
prior to August 21, 1998. The net proceeds of any future sales of aircraft will
be utilized to retire debt with the remainder utilized for working capital
purposes.

Outlook for the Airline and Aircraft Leasing Industries

Although not a record year, the US airline industry had a profitable
year in 1999 that continued the industry's sustained trend of profitability. The
industry also accepted delivery of a record number of new aircraft which also
put pressure on profitability.

Fuel prices have continued to rise during 1999 and early 2000. If fuel
prices were to continue to rise to significantly higher levels, cost pressures
could adversely affect airline financial performance, particularly those
airlines already experiencing cash flow difficulties. Historically, periods of
extraordinary energy cost increases have corresponded with general economic
slowdown and/or price inflation, which could have a further adverse affect on
air travel and airline performance.

Due to concern regarding potential inflation, the US Federal Reserve
Board has recently increased its key lending rate on a number of occasions in an
attempt to moderate economic activity. It is unclear as to the ultimate impact
on the level of economic activity of these rate increases, however, a
significant economic slowdown could have an adverse affect on air travel and
airline performance.

The supply of newer aircraft has led to further retirements of older
aircraft, such as those owned by the Partnership. The full implementation of
Stage III noise standards by year-end 1999 also led to additional older Stage II
aircraft being retired. The industry's results historically have been highly
correlated to general economic activity.

Trans World Airlines, Inc. ("TWA") which accounted for 19% of the
Partnership's revenues in 1999, announced its eleventh 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 three Boeing 727-200 aircraft to
freighters has improved marketability of 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.

3
<PAGE>

Aircraft Portfolio

Immediately below is a table which shows the December 31, 1999
appraised value of the Partnership's aircraft to be approximately $76.5 million,
or approximately 48% of the original acquisition cost (excluding
acquisition-related fees) plus related capital expenditures. Based in part on
these appraised values, the Partnership's net asset value at December 31, 1999
was equal to $5.87 per Unit. The net asset value was calculated assuming
additional expenditures of $11.8 million for the DC 10-10 freighter conversion.
The book value of $4.4 million, net of maintenance reserves, for the A-300
aircraft was used in lieu of the appraised value and $1.7 million for the
L-1011, based on a prior offer. It should be noted that these are only estimates
of values as of 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.

The following table describes the Partnership's aircraft portfolio at
December 31, 1999:

Dec. Current Cumu- Cumu-
Owner- Acqui- 1999 Lease Original Noise lative lative
Current Aircraft ship sition Appraised Expiration Delivery Abatement Flight Flight
Lessee Type Interest Costs(1) Value(2) Date (3) Date Compliance Hours(4) Cycles(4)
------ ---- -------- -------- -------- -------- ---- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)

Aerovias de
Mexico, S.A. McDonnell
de C.V. Douglas DC-9-31 100% $ 8.9 $ 2.8 02/6/00 1970 Stage II 66,683 62,740

Aerovias de
Mexico, S.A. McDonnell
de C.V. Douglas DC-9-31 100 8.9 2.8 02/25/00 1971 Stage II 72,412 68,300

Kitty Hawk Boeing 727-200
Aircargo, Inc Freighter 100 9.2 8.5 12/6/06 1973 Stage III (8) 75,710 52,256

TNT Transport Boeing 727-200
Intl. B.V. Freighter 100 8.5 6.7 06/22/02 1973 Stage III (8) 73,047 51,734

(7) McDonnell
Douglas DC10-10 100 18.7 15.4 (7) 1973 Stage III 83,838 30,433

(6) Airbus Industrie
A300-B4-103 100 27.1 4.4 (6) 1979 Stage III 46,226 19,527

Falcon Air Boeing 727-200
Express Inc. Non-Advanced (8) 100 11.5 4.8 03/01/02 1970 Stage III (8) 77,340 56,910

Capital Cargo Boeing 727-200
International Freighter (8) 100 17.2 10.1 07/25/05 1973 Stage III (8) 61,314 32,107
Airlines Inc.

Trans World McDonnell
Airlines. Douglas MD-82 100 21.0 14.3 11/01/04 1983 Stage III 50,915 26,004

(9) Lockheed
L-1011 100 17.7 1.7 (9) 1974 Stage III 61,209 22,907

USAirways McDonnell
Group, Inc. Douglas MD-81 50(5) 10.0 5.0 06/01/01 1982 Stage III 48,877 42,841
------ -----
$158.7 $76.5
====== =====
</TABLE>

Notes: (1) Acquisition costs do not include related acquisition fees of $3.0
million paid to the General Partners. The cost amounts shown include
aggregate capital expenditures, net of retirements, incurred from
1993 to 1999 of $21 million. This $21 million does not include the
$12.6 million in freighter conversion costs scheduled for the second
and third quarters of 2000. The total cost amount is net of the
application of maintenance reserves of approximately $2.2 million.

(2) The December 1999 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,
generally assuming half time condition. The appraiser also assumes
that achieving fair market value may require 12 to 18 months of
exposure to prospective buyers. It should be noted that appraisals
are only estimates of value and should not be relied on as measures
of immediately realizable value. A discount rate of 10% was utilized
and inflation was assumed to be 2.5%. The appraised value of the
McDonnell Douglas DC 10-10 aircraft assumes it is in a freighter

4
<PAGE>

configuration and includes the present value of the Emery lease. See
Footnotes 6 and 9 for a discussion of the A-300 and L-1011 values.

(3) Lease expiration dates do not include renewal options unless already
exercised. Discussions with Aeromexico regarding lease extensions are
in progress.

(4) The number of cumulative flight cycles and cumulative flight hours
shown are as of December 31, 1999, with the exception of the
McDonnell Douglas MD-81 leased to USAirways Group, Inc., which is as
of January 6, 2000 and the Boeing 727-200 leased to Kitty Hawk
Aircargo, Inc., which is as of February 25, 2000.

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

(6) Aircraft off lease at December 31, 1999. The CF6-50C2 engines from
this aircraft, were on short-term leases to Viacao Aerea Sao Paulo
S.A. The value shown represents the book value of the aircraft and
engines, net of maintenance reserves. The appraisal for an airframe
in need of a heavy maintenance check and engines in halftime
condition was $5.9 million.

(7) The extended lease with Continental expired on December 16, 1999. The
Partnership will convert the McDonnell Douglas DC 10-10 aircraft to a
freighter pursuant to an aircraft modification agreement for delivery
to Emery Worldwide Airlines, Inc. ("Emery"). Conversion work is
expected to commence in June 2000 and take approximately 6 months.
Appraisal assumed the plane was converted to a freighter, the Emery
lease and the residual value at the end of the lease.

(8) Federal Express hushkit installed.

(9) Lease terminated and aircraft returned in October 1996. TWA prepaid
the lease, on a discounted basis and paid the Partnership $3,000,000
in lieu of meeting certain lease return conditions. The aircraft
value shown is based upon a purchase offer received in the fourth
quarter of 1998, which was not finalized.

A description of the principal financial terms of the leases is
described in Item 8, which is incorporated herein by reference.

Significant Lessees

The Partnership leased its aircraft to eight different airlines (and
leased engines separately to another) during 1999. Revenue from each of the
airlines which accounted for 10% or greater of the total rental revenue of the
Partnership during 1999 are as follows:

Percentage of
Total
Airline Rental Revenue
------- --------------

Continental Airlines, Inc.(2) 20%(1)
Trans World Airlines, Inc. 19%
Aerovias de Mexico S.A. de C.V. 15%
Capital Cargo International Airlines, Inc. 14%
TNT Transport International B.V. 13%
USAirways Group Inc. 10%

(1) Includes the periodic recognition of amounts that were prepaid in
connection with certain lease settlements.

(2) Includes rental revenue from Continental Micronesia, Inc., a
subsidiary of Continental Airlines, Inc.

5
<PAGE>

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. Pursuant to the leases and FAA regulations,
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 pressurization's. 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, as well as Lockheed L-1011s and Airbus A-300s. 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. 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.

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.

6
<PAGE>
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 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
Capital Cargo International Airlines, Inc. in Footnote 5 to the Financial
Statements.

The Partnership's leases generally require the lessees to bear the
costs of compliance with ADs which require action during the lease terms. The
only exceptions relate to the McDonnell Douglas DC-10 aircraft on lease to
Continental, and the two McDonnell Douglas DC-9-31 aircraft on lease to
Aeromexico. Under certain circumstances, for these leases the Partnership is
obligated to share in the costs of complying with certain ADs. All of the
Partnership's Boeing 727 aircraft have had the major calendar modifications
performed as required.

In 1999, the FAA organized a two year industry task force, the Aging
Transport Systems Rulemaking Advisory Committee, to investigate non-structural,
aging aircraft systems. It cannot be determined at this time what
recommendations, if any, will be made by the task force.

Overall, increased maintenance costs mandated for older aircraft has a
negative impact on re-lease and resale values for these planes, 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 required or 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.

Stage III hushkitting and re-engineering for the Boeing 727-200 and the
McDonnell Douglas DC-9-30 aircraft have been approved by the FAA. All of the
Partnership's Boeing 727-200 aircraft have had Federal Express hushkits
installed.

7
<PAGE>

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 which are discussed in Item 1 of this Report, "Business,"
which is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS

After not being able to arrive at a negotiated settlement of
outstanding issues with VASP, the Partnership filed suit in May, 1999 in Brazil
and June, 1999 in Florida to repossess the two CF6-50C2 engines. It also sued in
Florida for unpaid rent, reserves and the repair of the engine in Florida, which
was damaged in January of 1999. In conjunction with the Brazilian suit, the
Partnership was required to post a letter of credit and the bank issuing the
letter of credit required the segregation by the Partnership of $371,000 in a
restricted cash account.

The Brazilian Court ruled in May that the Partnership could repossess
the engine in Brazil, although that ruling was stayed until September 3, 1999
after the completion of all of VASP's appeals. The Partnership has the right to
export the Brazilian engine and is working with local counsel to obtain the
necessary approval to do so.

A trial was held in Florida in December and January 2000 and an order
of the court favorable to the Partnership with respect to the rent and
maintenance reserve claims is anticipated, pending the resolution of VASP's
appeals as to the proper venue. The damaged engine has been sent to a repair
facility in California and will be disassembled for inspection when the Florida
court issues its final ruling as to possession. It is anticipated that there
will be an additional trial with respect to the damages.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT 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, 1999.

8
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON PARTNERSHIP CAPITAL AND RELATED UNIT
HOLDER MATTERS

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
organized trading market will develop.

As of March 1, 2000, the number of Limited Partners of record was
approximately 7,653.

The Partnership declared the following distributions to its Limited
Partners out of cash flow received from operations during 1999 and 1998:

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

1st Quarter 1999 $.40 March 31, 1999 April 27, 1999
2nd Quarter 1999 .40 June 30, 1999 July 27, 1999
3rd Quarter 1999 .40 September 30, 1999 October 27, 1999
4th Quarter 1999 .30 December 31, 1999 January 19, 2000
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

Total distributions to all partners for 1999 and 1998 were declared as
follows (in thousands):

1999 1998
---- ----

Limited Partners $ 10,883 $ 11,608
General Partners 110 117
---------- ----------
$ 10,993 $ 11,725
---------- ----------

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 may be
deemed a return of capital. Based on the amount of net income reported by the
Partnership for accounting purposes, approximately 92%, 84% and 89%,
respectively, of the cash distributions paid to the partners for the years ended
December 31, 1999, 1998 and 1997 constituted a return of capital. Also, based on
the amount of cumulative net income reported by the Partnership for accounting
purposes, approximately 84% of the cash distributions paid to the partners from
the inception of the Partnership through December 31, 1999 constituted a return
of capital. However, the total actual return on capital over the Partnership's
life can be determined only at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.

The Partnership paid out distributions relating to the fourth quarter
1999 on January 19, 2000 at the rate of $0.30 per Unit. The $0.30 per Unit is a
decrease from the $0.40 per Unit distributions paid for the third quarter 1999.
Delays in refinancing the Partnership's debt have necessitated the reduction in
the distribution. As has historically been the case, the amount of future cash
distributions will be determined on a quarterly basis after an evaluation of the
Partnership's operating results and its current and expected financial position.

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 Form 10-K Report.

As of December 31,
or Year Ended December 31,
--------------------------
1999 1998 1997 1996 1995
(in thousands, except per unit amounts)

Rental Revenue $11,817 $12,424 $12,183 $15,231 $14,026
Net Income 978 1,855 1,255 2,898 2,019
Net Income per Limited
Partnership Unit 0.11 0.22 0.17 0.40 0.28
Distributions per Limited
Partnership Unit (1) 1.50 1.60 1.60 1.60 1.60
Total Assets 48,163 51,423 58,273 72,039 80,799
Notes Payable 16,530 10,000 4,751 4,751 6,638
Partners' Capital 24,185 34,200 44,070 54,540 63,367

(1) The fourth quarter distribution for each year was paid in January of
the subsequent year.

As has historically been the case, the amount of future cash
distributions will be determined on a quarterly basis after an evaluation of the
Partnership's operating results and its current and expected financial position.

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 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 and cash distributions paid by the
Partnership were approximately $11 million for 1999 ($1.50 per Unit) and $11.7
million ($1.60 per Unit) for each of 1998 and 1997, respectively. Net cash
provided by operating activities was $10.4 million in 1999, $11.7 million in
1998 and $9.5 million in 1997. In the aggregate, for this three-year period, net
cash provided by operating activities totaled $31.2 million and cash
distributions declared by the Partnership totaled $34.4 million.

The Partnership paid distributions relating to the fourth quarter 1999
on January 19, 2000 at the rate of $0.30 per Unit. The $0.30 per Unit is a
decrease from the $0.40 per Unit distributions paid for the third quarter 1999.
Delays in refinancing the Partnership's debt have necessitated the reduction in
the distribution. As has historically been the case, the amount of future cash
distributions will be determined on a quarterly basis after an evaluation of the
Partnership's operating results and its current and expected financial position.

10
<PAGE>

Partnership capital declined by approximately $10,015,000 from December
31, 1998 to December 31, 1999 as a result of the declaration and payment of cash
distributions to the partners in excess of the Partnership's net income. This
resulted primarily from the fact that, unlike net income, cash flow generated
from operations, which is the source of the cash utilized to make the
distributions, is not reduced by non-cash depreciation expense attributable to
the Partnership's aircraft.

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, 1999,
the Partnership's unrestricted cash and cash equivalents of $2,300,000 was held
in an interest bearing money market account. This amount was $563,000 less than
the Partnership's unrestricted cash and cash equivalents at December 31, 1998 of
$2,863,000. This decrease in unrestricted cash was attributable to the amount by
which cash distributions to partners and capitalized aircraft improvements
exceeded cash generated by operating activities, including the unapplied
maintenance reserves, and proceeds from notes payable during 1999.

Rent and other receivables decreased by $295,000 from $491,000 at
December 31, 1998 to $196,000 at December 31, 1999. This decrease is primarily
the result of rentals due from VASP, which were netted against maintenance
reserves during 1999. Also contributing to this decrease was the completion of
payments relating to deferred rentals by Capital Cargo.

TWA was current on its lease payments in 1999, but reported its
eleventh consecutive annual loss in 1999. Although TWA had a cash position of
$180 million at December 31, 1999, given TWA's historical financial
difficulties, the ongoing losses increase the possibility of default or deferral
of lease payments by TWA, which accounted for 19% of the Partnership's lease
revenue in 1999.

Due to its failure to pay rents in the fourth quarter of 1998, Falcon
was placed on non-accrual status beginning October 1, 1998. At December 31,
1999, Falcon was approximately six months in arrears to the Partnership, with
respect to scheduled rent payments, for a total of $538,000 and $212,000 in
arrears with respect to maintenance reserve payments. The Partnership has
recorded a receivable for $95,000 of past due rent and is also holding a $95,000
security deposit from Falcon.

Falcon has become significantly leveraged and there can be no assurance
that Falcon will meet its future obligations. If Falcon were to fall further in
arrears, the Partnership may need to repossess the aircraft and if the
Partnership remarkets the aircraft, there can be no assurance as to the ability
to do so, the time it would take and the lease rate that might be achieved.

Accounts payable and accrued expenses increased by $388,000 from
$106,000 at December 31, 1998 to $494,000 at December 31, 1999 primarily due to
an increase in amounts due for capitalized aircraft improvements.

The payable to affiliates increased by $377,000 from $592,000 at
December 31, 1998 to $969,000 at December 31, 1999 principally due to an
increase in unpaid management fees due to the General Partners.

Deferred rental income and deposits decreased by $423,000 from
$1,898,000 at December 31, 1998 to $1,475,000 at December 31, 1999. This
decrease was primarily attributable to the security deposits from VASP, which
were applied against maintenance reserve amounts due during 1999.

Maintenance reserves payable increased by $615,000 from $1,696,000 at
December 31, 1998 to $2,311,000 at December 31, 1999, principally due to
increased cash reserves received from lessees.

During 1999, the Partnership invested $5.5 million in capitalized
aircraft improvements, none of which was funded by the application of
maintenance reserves. During 1999, the Partnership delivered one 727-200
aircraft to Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). The L-1011 aircraft and
the A-300 remained off lease during 1999, and the Partnership continues to
remarket these aircraft for lease or sale. If the aircraft are sold, the
Partnership would utilize such proceeds for debt reduction or for working
capital or distributions to partners.

In the fourth quarter of 1997, the Partnership entered into discussions
with the lessee regarding the DC 10-10 aircraft, the lease of which was
scheduled to expire on June 30, 1998. Continental Micronesia agreed to extend
the lease for an additional fifteen months at a lease rate ($138,500 per month)
equal to 92% of the previous rate. The extended lease on the McDonnell Douglas
DC10-10 with Continental expired on September 15, 1999. Work necessary for the
aircraft to meet the lease return conditions was done at Continental's expense
at a maintenance facility. Continental continued to pay rent until the aircraft
achieved the lease requirements for its return, which took place on December 16,
1999. The aircraft is being stored at a modification facility until June 2000 at
which time it will be converted to a freighter for Emery Worldwide Airlines Inc.

11
<PAGE>

("Emery"). The work scope under the aircraft modification agreement requires the
investment of approximately $12.6 million, subject to price escalation. The
Partnership and Emery have signed an agreement, which provides for a lease of 84
months with rent of $218,000 per month. The lease also provides a two-year
renewal at $200,000 per month, followed by three additional two-year renewal
options at the then fair market rental. Emery provided a security deposit of
$218,000. The Partnership also has $790,000 on deposit with the modification
facility.

The Boeing 727-200 aircraft returned by Continental Airlines was
converted to a freighter and hushkitted to achieve Stage III noise compliance.
It was delivered to Kitty Hawk Air Cargo, Inc. in December, 1999 under lease.
The Partnership has swapped the three JT8D-15 engines that were returned with
the aircraft for three JT8D-9A engines owned by an affiliate of the Managing
General Partner. The Partnership also received a payment of $259,000 from the
affiliate to compensate the Partnership for the relative value of the engines as
determined by a third party appraiser.

The lease with Kitty Hawk is for 84 months, the lease rate is $112,700
per month and maintenance reserves are paid at the rate of $375 per flight hour,
with engine reserves to be increased if the flight hour/cycle ratio falls below
1.5 to 1. Kitty Hawk has provided a security deposit of $225,400. The
Partnership had incurred costs of approximately $4.7 million related to the
cargo conversion and hushkitting, as of December 31, 1999.

The Partnership increased its loan facility from $12.5 million to $19
million and the interest rate was increased from 125 basis points over the
bank's prime rate to 150 basis points over the prime rate. Approximately $16.53
million was borrowed at year end. The increase was primarily for the funding of
the conversion of the Boeing 727 to a freighter for Kitty Hawk. The Partnership
has provided a mortgage to the bank relative to certain aircraft and has
guaranteed the repayment of the indebtedness. The balance of this loan is due in
March, 2000. Subject to final documentation, the Partnership has negotiated a
loan with a new lender that will permit the borrowing of up to $30 million. (See
Note 11 to the Financial Statements, "Subsequent Event").

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 operating
leases.

Under the terms of the triple net leases, substantially all of the
expenses related to the operation and maintenance of the aircraft during 1999,
were paid for by the lessees directly or funded out of maintenance reserves
collected. 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, the cost of the letter of credit required under
the terms of the TBT lease on the McDonnell Douglas MD-81 leased to USAirways,
Inc. ("USAir") and the costs of storing the Airbus A-300 and Lockheed L-1011
aircraft.

The Partnership also records depreciation expense pertaining to the
aircraft on lease and incurs interest expense and management fees and certain
general and administrative expenses in connection with the 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.

1999 as compared to 1998

The Partnership's net income was $978,000 for the year ended December
31, 1999 ("1999 Period") as compared to $1,855,000 for the year ended December
31, 1998 ("1998 Period").

The decrease in the Partnership's net income for the 1999 Period was
principally due to the decreases in rental, interest and other income in the
1999 Period as compared to the 1998 Period and increases in interest and general
and administrative expenses in the 1999 Period as compared the 1998 Period.
Partially offsetting the decrease were the writedowns required in the 1998
Period compared to none in the 1999 Period, and a decrease in management and
re-lease fees in the 1999 Period compared to the 1998 Period.

Rental income decreased by $607,000 or 5% in the 1999 Period as
compared to the 1998 Period. The decrease was principally due to decreases in
the rental income attributable to the A-300 engines leased to VASP and the
decrease in rental income related to the Boeing 727 aircraft which was converted
to a freighter and is currently leased to Kitty Hawk. Also contributing to this

12
<PAGE>

decrease was a decrease in rental income related to the DC-10-10 returned by
Continental in December 1999. These decreases were partially offset by an
increase in the rental income from the aircraft leased to Capital Cargo and
Falcon and the rental income from the aircraft leased to TNT, which was
off-lease for nearly half of the 1998 Period.

Interest income decreased $75,000 or 40% for the 1999 Period. This
decrease was primarily attributable to the utilization, during 1999, of a
significant portion of the cash reserves held by the Partnership, for cash
distributions and improvements in aircraft, as well as the complete repayment of
advances by lessees, in 1998, on which interest had been earned.

During the 1998 Period, the Partnership recognized other income of
$124,000, primarily due to the realization of a gain of $116,000, representing
the difference between the amount realized and the book value of the
Partnership's claim from the 1991 Continental bankruptcy. There was no other
income recognized in 1999.

Also during 1998, the Partnership realized a gain of $254,000, of
which, $241,000 was from the sale of an engine that had been dismantled and
stored, since the return of the Boeing 727-200 aircraft by Kiwi in 1996. During
the 1999 Period, the Partnership swapped the three JT8D-15 engines that were
returned with the Boeing 727-200 aircraft returned by Continental Airlines for
$259,000 in cash and three JT8D-9A engines owned by an affiliate of the Managing
General Partner. The Partnership realized a gain of $173,000 related to the swap
in 1999.

The Partnership provided write-downs aggregating $537,000 to reflect
the loss in value of the L-1011 aircraft and various engines and interiors at
December 31, 1998. There were no write-downs during the 1999 period.

Management and re-lease fees for the 1999 Period, decreased by $57,000
or 6% in comparison to the 1998 Period primarily because of the decrease in
rental income which serves as the basis upon which certain management and
re-lease fees are calculated.

Interest expense for the 1999 Period increased by $476,000 or 63% in
comparison to the 1998 Period, primarily due to the 1999 increase in the amount
of debt outstanding and the related interest rate.

General and administrative expenses increased by $82,000 or 26% in the
1999 Period as compared to the 1998 period, primarily due to an increase in
legal expenses associated with the VASP litigation. Partially offsetting this
increase was a decrease in transfer agent fees and investor report costs, due to
lower volume and lower rates from a new service provider.

Direct lease expenses decreased by $21,000 or 9% in the 1999 Period as
compared to the 1998 period, due to a reduction in the cost of maintenance work
performed on aircraft borne by the Partnership.

1998 as compared to 1997

The Partnership's net income was $1,855,000 for the year ended December
31, 1998 ("1998 Period") as compared to $1,255,000 for the year ended December
31, 1997 ("1997 Period").

The increase in the Partnership's net income for the 1998 Period was
principally due to the increase in rental income in the 1998 Period as compared
to the 1997 Period, the gain recognized on the sale of an engine in 1998 and the
write-downs required in the 1997 Period, partially offset by an increase in
interest expense in the 1998 Period.

Rental income increased by $241,000 or 2% in the 1998 Period as
compared to the 1997 Period. The increase was substantially attributable to the
income recognized during the 1998 Period with respect to the VASP and Capital
Cargo leases.

Interest income decreased $280,000 or 60% for the 1998 Period. This
decrease was primarily attributable to the utilization during 1998 of a
significant portion of the cash reserves held by the Partnership, for cash
distributions and improvements in aircraft, as well as the repayment of advances
by lessees, on which interest had been earned.

13
<PAGE>

Depreciation and amortization expense increased $410,000 or 5% for the
1998 Period in comparison to the 1997 Period. The increase was attributable to
the increase in depreciation relating to the engines from the A-300 aircraft on
lease to VASP and the capital improvements made to the aircraft on lease to
Falcon and Capital Cargo.

The Partnership provided write-downs aggregating $537,000 to reflect
the loss in value of the L-1011 aircraft and various engines and interiors at
December 31, 1998, compared to write-downs of $1,400,000 in the 1997 period.

Management and re-lease fees for the 1998 Period, increased by $40,000
or 4% in comparison to the 1997 Period primarily because of the increase in
rental income which serves as the basis upon which certain management and
re-lease fees are calculated.

Interest expense for the 1998 Period increased by $303,000 or 67% in
comparison to the 1997 Period, primarily due to the 1998 increase in the amount
of debt outstanding and the related interest rate.

Direct lease expenses decreased by $147,000 or 38% in the 1998 Period
as compared to the 1997 period, due to a reduction in the cost of maintenance
work performed on aircraft borne by the Partnership.

Inflation and Changing Prices

Inflation has had no material impact on the operations or financial
condition of the Partnership from inception through December 31, 1999. However,
market and worldwide economic conditions and changes in federal and foreign
aircraft regulations have in the past, and may in the future, affect the airline
industry and thus lease rates and aircraft values. Additionally, inflation and
changing prices, may affect subsequent lease rates and the eventual selling
prices of the aircraft. Higher fuel prices in 1999 negatively affected the
airline industry profitability and that of the Partnership's lessees.

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 non-owner sources. The adoption of this pronouncement
did not impact the reporting of the Partnership's results of operations.

Impact of the Year 2000 Issue

The Year 2000 issue ("Y2K") 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 beginning of the year 2000, causing disruption of operation of the
Partnership, its lessees or vendors. The Partnership has not encountered any Y2K
related issues.

14
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PEGASUS AIRCRAFT PARTNERS II, L.P.

List of Financial Statements Page
----

Report of Independent Accountants .................................... 16

Balance Sheets -- December 31, 1999 and 1998.......................... 17

Statements of Income for the years ended
December 31, 1999, 1998 and 1997................................. 18

Statements of Partners' Capital for the years ended
December 31, 1999, 1998 and 1997................................. 19

Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................. 20

Notes to Financial Statements......................................... 22

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 instructions; or (3)
the schedules are inapplicable.

15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying balance sheets and the related
statements of income, of partners' capital and of cash flows present fairly, in
all material respects, the financial position of Pegasus Aircraft Partners II,
L.P. (the "Partnership") as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 20, 2000

16
<PAGE>

PEGASUS AIRCRAFT PARTNERS II, L.P.

BALANCE SHEETS

DECEMBER 31, 1999 AND 1998

ASSETS

1999 1998
---- ----
(in thousands,
except unit data)

Cash and cash equivalents $ 2,300 $ 2,863
Restricted cash 371 --
Rent receivable 196 491
Aircraft, net 44,491 47,258
Other assets 805 811
-------- -------
Total Assets $ 48,163 $ 51,423
======== ========

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:

Accounts payable and accrued expenses $ 494 $ 106
Payable to affiliates 969 592
Maintenance reserves payable 2,311 1,696
Notes payable 16,530 10,000
Deferred rental income and deposits 1,475 1,898
Distributions payable to partners 2,199 2,931
-------- --------
Total Liabilities 23,978 17,223
-------- --------

COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 8 AND 10)

PARTNERS' CAPITAL:
General Partners (796) (868)
Limited Partners (7,255,000 units issued and
outstanding in 1999 and 1998) 24,981 35,068
-------- --------
Total Partners' Capital 24,185 34,200
-------- --------
Total Liabilities and Partners' Capital $ 48,163 $ 51,423
======== ========

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

17
<PAGE>

PEGASUS AIRCRAFT PARTNERS II, L.P.

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997

1999 1998 1997
---- ---- ----
(in thousands, except unit data
and per unit amounts)

REVENUES:
Rentals from operating leases $ 11,817 $ 12,424 $ 12,183
Interest 112 187 467
Other income -- 124 --
Gain on sale of engines and equipment 173 254 --
---------- ---------- ----------
12,102 12,989 12,650
---------- ---------- ----------

EXPENSES:
Depreciation and amortization 8,320 8,273 7,863
Write-downs -- 537 1,400
Management and re-lease fees 960 1,017 977
Interest 1,234 758 455
General and administrative 394 312 316
Direct lease 216 237 384
---------- ---------- ----------
11,124 11,134 11,395
---------- ---------- ----------

NET INCOME 978 1,855 1,255
========== ========== ==========

NET INCOME ALLOCATED:

To the General Partners 182 257 13
To the Limited Partners 796 1,598 1,242
---------- ---------- ----------
978 1,855 1,255
---------- ---------- ----------

NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.11 $ 0.22 $ 0.17
========== ========== ==========

WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000 7,255,000
========== ========== ==========

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

18
<PAGE>

PEGASUS AIRCRAFT PARTNERS II, L.P.

STATEMENTS OF PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

Balance, December 31, 1996 $ (904) $ 55,444 $ 54,540

Net income 13 1,242 1,255

Distributions declared to partners (117) (11,608) (11,725)
--------- -------- --------

Balance, December 31, 1997 (1,008) 45,078 44,070

Net income 257 1,598 1,855

Distributions declared to partners (117) (11,608) (11,725)
--------- -------- --------

Balance, December 31, 1998 (868) 35,068 34,200

Net income 182 796 978

Distributions declared to partners (110) (10,883) (10,993)
--------- -------- --------

Balance, December 31, 1999 $ (796) $ 24,981 $ 24,185
========== ======== ========

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

19
<PAGE>

PEGASUS AIRCRAFT PARTNERS II, L.P.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

1999 1998 1997
---- ---- ----
(dollar amounts in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 978 $ 1,855 $ 1,255
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of engines and equipment (173) (254) --
Depreciation and amortization 8,320 8,273 7,863
Write-downs -- 537 1,400
Change in assets and liabilities:
Rent and other receivables 295 (289) 53
Other assets 6 5 (47)
Accounts payable and accrued expenses 388 (17) 27
Deferred rental income and deposits (423) 57 (1,195)
Payable to affiliates 377 381 (425)
Maintenance Reserves Payable 615 1,105 591
-------- -------- --------

Net cash provided by operating
activities 10,383 11,653 9,522
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit for aircraft modifications -- (790) --
Capitalized aircraft improvements (5,639) (9,012) (5,240)
Proceeds from the sale of engines and
equipment 259 1,553 --
Repayment of advances by lessees -- 242 363
Increase in restricted cash (371) -- --
-------- -------- --------

Net cash used in investing activities (5,751) (8,007) (4,877)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ 6,530 $ 5,249 $ --
Cash distributions paid to partners (11,725) (11,737) (11,771)
-------- -------- --------

Net cash used in financing activities (5,195) (6,488) (11,771)
-------- -------- --------

NET DECREASE IN CASH AND CASH EQUIVALENTS (563) (2,842) (7,126)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,863 5,705 12,831
-------- -------- --------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,300 $ 2,863 $ 5,705
======== ======== ========

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

20
<PAGE>

PEGASUS AIRCRAFT PARTNERS II, L.P.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997 (continued)

1999 1998 1997
---- ---- ----
(dollar amounts in thousands)

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest Paid $ 1,226 $ 750 $ 456
======== ======== ========

NONCASH TRANSACTIONS:

Distributions declared to partners but unpaid $ 2,199 $ 2,931 $ 2,943

Transfers from restricted cash utilized to
restore aircraft $ -- $ -- $ 2,248

Deferred income transferred to write-down $ -- $ 743 $ --

Lease settlement reserve transferred to
write-down $ -- $ 3,000 $ --

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

21
<PAGE>

PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999

1. Significant Accounting Policies

Basis of Presentation. Pegasus Aircraft Partners II, 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. Certain 1997 financial
statement items have been reclassified to conform to the 1999 presentation.

Cash and Cash Equivalents. The Partnership invests funds not
immediately required for operations or distributions in temporary 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 to an
estimated salvage value (in general, 10%) is computed using the straight-line
method over an estimated economic life of twelve years. Major improvements to
aircraft are capitalized when incurred and depreciated over the 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 are accounted for under the cost recovery method
when based upon third party appraisals and market conditions, there has been a
diminution to the carrying value of the aircraft.

Lease settlement payments received in connection with the early
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 term in the case of a lease termination and over the modified
lease term in connection with a lease modification. In certain cases, where
management believes there has been an impairment in value, the payment has been
recorded under the cost recovery method.

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 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 four 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 in equal installments over the terms of the related leases.

Deferred Income. Some of the Partnership's operating leases require
rental payments to be paid monthly, or quarterly, in advance. Lease revenues not
yet earned are deferred and recognized as income when earned.

22
<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 during the year.

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 non-owner sources. The adoption of this pronouncement
did not impact the reporting of the Partnership's results of operations.

2. Organization of the Partnership

The Partnership was formed on April 26, 1989 for the purpose of
acquiring, leasing and ultimately selling used commercial aircraft. 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, 2007. The Partnership had the right, subject
to certain conditions, to reinvest the proceeds from sales of aircraft occurring
prior to August 21, 1998. The net proceeds of any future sales of aircraft will
be retained for working capital purposes with the remainder distributed to all
partners.

Upon formation of the Partnership, the General Partners each
contributed $500 to the capital of the Partnership. An additional 7,255,000
units of limited partnership interest ("Units") were then sold at a price of $20
per Unit with the Partnership receiving gross offering proceeds of $145,100,000.

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 operation 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.

23
<PAGE>

4. Aircraft

Net Investment in Aircraft

The Partnership's net investment in aircraft as of December 31, 1999
and 1998 consisted of the following (in thousands):

1999 1998
---- ----

Aircraft on operating leases, at cost $ 96,525 $ 110,149
Less: Accumulated depreciation (54,586) (62,050)
Write-downs (7,710) (8,058)
--------- ---------
$ 34,229 $ 40,041
========= =========

Aircraft held for lease or sale, at cost $ 65,921 $ 46,744
Less: Accumulated depreciation (34,877) (19,093)
Write-downs (10,667) (10,319)
Lease settlement accounted for under the
cost recovery method (10,115) (10,115)
--------- ---------
10,262 7,217
--------- ---------
Aircraft, net $ 44,491 $ 47,258
========= =========

Financial Terms of Leases

Continental Airlines Leases. During September 1989, the Partnership
Acquired a McDonnell Douglas DC-10-10 aircraft for a total purchase price of
$18,301,000, subject to an operating lease with Continental. This lease was
modified as discussed below. The aircraft was subject to an extended lease
scheduled to expire on September 15, 1999 which provided for rentals of $138,500
per month. The aircraft was returned on December 16, 1999 with Continental
paying rent through that date.

The Partnership will convert the McDonnell Douglas DC-10-10 aircraft to
a freighter pursuant to an aircraft modification agreement for delivery to Emery
Worldwide Airlines, Inc. ("Emery"). The Partnership and Emery have signed a
lease which provides for 84 months rent at $218,000 per month. The lease also
provides a two-year renewal option at $200,000 per month, and three additional
two-year renewal options at the then fair market rental. Emery has provided a
security deposit aggregating $218,000 at December 31, 1999. The Partnership
provided a deposit of $790,000 to the third party modification center which will
perform the conversion. This deposit is included in other assets on the balance
sheet as of December 31, 1999. The aircraft is being stored until June, 2000 at
which time it will enter the modification facility to be converted to a
freighter for Emery. The Partnership's estimated commitments to deliver this
aircraft to Emery are $12.6 million, subject to price escalation.

During September 1989, the Partnership acquired a Boeing 727-200
non-advanced aircraft for a total purchase price of $6,116,000, subject to an
operating lease with Continental. This aircraft was returned to the Partnership
during Continental's bankruptcy, remarketed to Kiwi (and recovered from Kiwi,
after Kiwi filed for bankruptcy in late 1996) and was delivered in March 1997 to
Falcon Air Express Inc. (see discussion below).

During August 1990, the Partnership acquired an Airbus Industrie Model
A300-B4-103 ("A-300") aircraft for a total purchase price of $28,070,000,
subject to an operating lease with Continental, originally scheduled to expire
on December 29, 2000 and with monthly rentals, in advance, of $312,000.

In January 1995, Continental announced that it was grounding its fleet
of Airbus A-300 aircraft, including the A-300 aircraft leased to it by the
Partnership, and notified the Partnership of its intention to return the
aircraft. On November 15, 1995, the Partnership reached an agreement with
Continental regarding the settlement for the lease obligations under the A-300
lease ("A-300 Lease Settlement"), which also included a restructuring of the
DC-10-10 Aircraft lease.

Under the terms of the A-300 Lease Settlement, the Partnership received
a cash payment of approximately $3,721,000, including approximately $325,000 as
reimbursement for certain integration and transaction expenses for the
remarketing of the aircraft, and (i) title to a Boeing 727-200 advanced aircraft
subject to lease with Continental for a term of approximately 26 months at a
lease rate of $85,000 per month. ("Continental 727 No. 1") (ii) title to a
second Boeing 727-200 advanced aircraft subject to a lease with Continental for
a term of 42 months at a lease rate of $85,000 per month ("Continental 727
No.2"). Additionally, the Partnership received approximately $557,000 as an

24
<PAGE>

economic settlement for the return conditions required by the A-300 lease. The
lease of the Continental 727 No. 1 expired January 31, 1998 and the Partnership
entered into a lease of the aircraft for a term of four years to TNT Transport
International B.V. ("TNT") a foreign cargo carrier and has converted the
aircraft to cargo configuration, including a low gross weight hushkit. (See TNT
discussion below). See Kitty Hawk Aircargo, Inc. discussion, herein with respect
to Continental 727 No. 2.

During June 1998, the Partnership entered into an Engine Exchange
Agreement and Bill of Sale with an affiliate of the Managing General Partner.
Pursuant to this agreement, the Partnership received cash in the amount of
$190,000 and a General Electric CF6-50C2 engine in exchange for a General
Electric CF6-50C2 engine from the Airbus A-300 aircraft. The $190,000 boot
received was deducted from the net book value of the aircraft, but no gain or
loss resulted from the transaction. The amount of the payment was determined
through a third party appraisal of the engines, which were $2.53 million and
$2.72 million, respectively.

In December 1997, the Partnership leased, on a short-term (six month
minimum) basis, one of the CF6-50C2 engines from the Airbus A-300 aircraft to
Viacao Aerea Sao Paulo S.A. ("VASP"), a Brazilian carrier, for rents of $2,200
per day, plus hourly rental of $225 per engine hour, with a minimum of 4 hours
per cycle. The Partnership and VASP extended the lease to December 1998 and then
to June, 1999. In December 1998, the Partnership and VASP entered into an
agreement for the lease of the second engine from the A-300 aircraft, the terms
of which were the same as the first engine lease. Both engine leases were
scheduled to expire in June 1999. The Partnership continues to re-market this
aircraft for lease or sale, although given the fact that the airframe requires a
heavy maintenance check, it is more likely to be sold.

At December 31, 1999, VASP was in arrears with respect to scheduled
rent payments, for a total of $838,000, and $1,265,000 in arrears with respect
to maintenance reserve payments. VASP failed to pay rent on the engines and
after being unable to come to agreement with VASP, the Partnership filed suit in
Brazil and Florida. (See Note 8, "Litigation" ).

During the first quarter of 1999, one of the engines on lease to VASP
failed. As part of the Florida legal action, this engine was repossessed in
Florida in June, 1999. It was sent to a General Electric repair facility in
California and based on legal advice, the Partnership is awaiting the conclusion
of the Florida lawsuit prior to a disassembly of the engine for a detailed
analysis of its condition.

Trans World Airlines, Inc. Lease. During December 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$20,763,000, subject to an operating lease with Trans World Airlines, Inc.
("TWA"), which was originally scheduled to expire on April 13, 1993, but was
amended and extended until November 1, 1998 with monthly rental payments, in
advance, of $185,000. This lease was further extended to November 2004 during
TWA's prepackaged bankruptcy in 1995.

Upon execution of the 1993 lease amendment, the Partnership reimbursed
TWA for $225,000 of capital improvements which were made to the aircraft and
advanced $750,000 to TWA to finance certain major maintenance procedures, which
was fully repaid in monthly installments through November 1998 with interest at
a fixed rate of 9.70%.

During January 1990, the Partnership acquired a Lockheed L-1011
aircraft for a total purchase price of $17,555,000, subject to an operating
lease with TWA, which was amended and extended to October 1, 1998 with rental
payments payable monthly, in advance, at the rate of $130,000.

Upon execution of the lease amendment, the Partnership reimbursed TWA
for $225,000 of capital improvements which were made to the aircraft and
advanced $550,000 to TWA to finance certain major maintenance procedures, which
were fully repaid in monthly installments by October 1998 with interest at
9.68%.

In mid-1996, as part of a fleet restructuring, TWA returned the L-1011
aircraft it leased from the Partnership. The lease, which provided for monthly
rentals of $130,000, was originally scheduled to expire in September 1998. In
connection with the return of the L-1011 aircraft TWA paid the Partnership
$2,846,000, which represented rents due under the remaining term of the lease,
discounted at 5% ("L-1011 Lease Prepayment") plus $3,000,000 as an economic
settlement for noncompliance with certain lease return conditions. The lease was
terminated, the aircraft was returned and $5,846,000 was received on October 16,
1996.

25
<PAGE>

During the third quarter of 1998, the Partnership reclassified the
$3,000,000 return condition settlement and the $743,000 unearned portion of the
L-1011 lease prepayment, as an additional write-down on the L-1011 aircraft. No
additional impairment expense was recognized. In addition, a write-down of
$420,000 was taken to reflect the estimated market value of the aircraft. At
December 31, 1999 the L-1011 aircraft had a book value of approximately $1.7
million. The Partnership continues to remarket the Lockheed L-1011 aircraft.

TWA was current on its lease payments in 1999. However, TWA reported
its 11th consecutive annual loss in 1999. TWA had a cash position of $180
million at December 31, 1999. Given TWA's historical financial difficulties, the
ongoing losses increase the possibility of a default or deferral of lease
payments by TWA, which accounted for 19% of the Partnership's lease revenue in
1999.

Aeromexico Leases. The Partnership's two McDonnell Douglas DC-9-31
aircraft were originally acquired in March and April 1990 for purchase prices
aggregating $14,295,000. During 1992, the Partnership repossessed the aircraft
from Midway Airlines Inc. ("Midway") and leased them to Aerovias de Mexico, S.A.
de C.V. ("Aeromexico") for terms of approximately five years. The leases, which
originally provided for quarterly rentals in advance of $234,000, were scheduled
to expire in July 1997; one lease was extended to November 6, 1999 (with
Aeromexico given the right, subject to notice to extend to February 2000) and
one of which was extended to February 25, 2000, each at a rate of $75,000 per
month. The lease expiring in November was extended at Aeromexico's option to
February 6, 2000. Aeromexico has been paying on a month-to-month basis while
lease extensions are under discussion.

Kitty Hawk Aircargo, Inc. ("Kitty Hawk") Lease. The Boeing 727-200,
Described as Continental 727 No. 2 was converted to a freighter, hushkitted and
delivered to Kitty Hawk in November, 1999. The Partnership has swapped the three
JT8D-15 engines that were returned with the aircraft for three JT8D-9A engines
owned by an affiliate of the Managing General Partner. The Partnership also
received a payment of $259,000 from the affiliate to compensate the Partnership
for the relative difference in value of the engines as determined by a third
party appraiser, resulting in a $173,000 gain. The lease with Kitty Hawk is for
84 months, the lease rate is $112,700 per month and maintenance reserves are to
be paid at the rate of $375 per flight hour, with engine reserves to be
increased if the flight hour/cycle ratio falls below 1.5 to 1. Kitty Hawk has
provided a security deposit of $225,400. The Partnership had incurred costs of
approximately $4.7 million related to the cargo conversion and hushkitting, as
of December 31, 1999.

USAirways Group Inc. ("USAir") Lease. During September 1989, the
Partnership acquired one-half of the beneficial interest in a trust ("Trust")
which is the owner/lessor of a McDonnell Douglas MD-81 aircraft for a total
purchase price of $10,041,000. The remaining one-half interest in the Trust is
owned by Pegasus Aircraft Partners, L.P., an affiliated partnership. The
aircraft is subject to an operating lease with USAir, which is scheduled to
expire to June 1, 2001 pursuant to the renewal option exercised by USAir in
1997. Rental payments are payable quarterly, in arrears, at the rate of $304,000
(for the Partnership's one-half interest in the aircraft). The lessee also has
three additional one-year renewal options at fair market rental rates. The
lessee may elect to purchase the aircraft at its then fair market value at the
end of any renewal term.

The 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 one-half of the annual cost of the letter
of credit and is obligated for one-half of any calls on the letter of credit.

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 action by the lessee, the Partnership and Pegasus Aircraft Partners,
L.P. through the trust will be responsible for the loss to the tax lessor until
and if the lessee performs under its indemnification.

The tax lessor is entitled to call on the letter of credit whether its
loss of tax benefits is caused by Pegasus Aircraft Partners, L.P. or the
Partnership. Pegasus Aircraft Partners, L.P. and the Partnership have agreed to
indemnify each other for any loss occasioned by the acts of the other. There

26
<PAGE>

have been no calls on the letter of credit through December 31, 1999. The TBT
lease and letter of credit will expire by May 2000.

Kiwi International Air Lines, Inc. - Bankruptcy. Kiwi International
Airlines, Inc. ("Kiwi"), a former lessee of two of the Boeing 727-200s, is in a
Chapter 7 liquidation. The General Partners believe that it is likely that there
will be minimal or no recovery with respect to the Partnership's bankruptcy
claims.

Falcon Air Express, Inc. Lease. In December 1996, the Partnership
entered into a lease agreement with Falcon Air Express, Inc. ("Falcon"), a
charter airline, with respect to the 727-200 non-advanced aircraft formerly
leased to Kiwi. The lease is for a term of 60 months and provides for a monthly
rental of $95,000. Falcon provided a security deposit of $95,000. The lease also
requires Falcon to fund, on a monthly basis, maintenance reserves of $317 per
flight hour. In connection with the delivery of the aircraft, the Partnership
completed a heavy maintenance check on the aircraft, including certain
modifications at a cost of approximately $2,700,000. The Partnership also
purchased an engine at a cost of $760,000 prior to delivery of the aircraft and
spent approximately $700,000 with respect to maintenance work on one engine
returned by Kiwi. The aircraft was delivered to Falcon in March 1997.
Maintenance reserves previously collected from Kiwi of approximately $1,104,000
were applied to such costs.

In September 1998, the Partnership received cash proceeds of $300,000
and realized a gain of $241,000 on the sale of an engine that had been
dismantled and stored since the return of this aircraft by Kiwi in 1996.

The Partnership is in discussions with Falcon regarding the
establishment of an interest bearing note in favor of the Partnership for the
remaining arrearages. Falcon has become significantly leveraged and there can be
no assurance that Falcon will meet its future obligations. If Falcon were to
fall further in arrears in the future, the Partnership may need to repossess the
aircraft and if the Partnership remarkets the aircraft, there can be no
assurance as to the ability to do so, the time it would take and the lease rate
that might be achieved.

Capital Cargo International Airlines, Inc. Lease. In January 1997, the
Partnership entered into a lease agreement with Capital Cargo International
Airlines, Inc. ("Capital Cargo"), a start-up freight carrier, with respect to
the Boeing 727-200 advanced aircraft formerly leased to Kiwi. The Partnership
agreed to finance the conversion of the aircraft to a freighter and complete a
C-check (totaling approximately $2.4 million). The Capital Cargo Lease ("Capital
Cargo Lease") is for a term of approximately eight years and provides for an
initial monthly lease rate of $105,000 per month. The Capital Cargo Lease
requires the Partnership to hushkit the aircraft on or before its 1999 C-check
visit at its own expense (approximately $2.5 million) at which time the lease
rate increases to $139,000 per month. Pursuant to the lease agreement, the
aircraft underwent a "C" check and received a hushkit in December 1998. The
Partnership incurred costs of approximately $2,412,000 related to the hushkit in
1998 and 1999.

The lease requires Capital Cargo to fund maintenance reserves monthly
at a rate of $377 per flight hour. Capital Cargo provided an initial security
deposit of $50,000 and added $17,000 per month to the security deposit during
the lease term until the deposit totaled $220,000. The lease was executed and
aircraft was delivered to Capital Cargo in July 1997.

Shortly after delivery of the aircraft to Capital Cargo in 1997, one of
the engines failed. In August 1998, the Partnership reached an agreement with
Capital Cargo, in which the Partnership shared in the cost to overhaul the
engine on this aircraft. The Partnership's share of the overhaul was $266,000.

TNT Transport International B.V. Lease. In June 1998 the Partnership
delivered a Boeing 727-200 advanced aircraft formerly leased to Continental to a
European freight carrier, TNT Transport International B.V. ("TNT") for a lease
term of four years. The lease provides for monthly rentals of $123,500 (subject
to a reduction of approximately 10% after two years if TNT exercises, during the
lease term, an option 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
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.

27
<PAGE>

The Partnership has invested approximately $7.8 million for a low gross
weight hushkit and cargo conversion of the aircraft, and the purchase of three
JT8D-7B engines. The Partnership received cash proceeds of $1,050,000 for the
sale of the JT8D-15 engines from this aircraft, which resulted in a $60,000
impairment expense. 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 $57,000.

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.

Significant Lessees

The Partnership leased its aircraft to nine different airlines during
1999. Revenues from each of the airlines which accounted for 10% or greater of
the Partnership's total rental revenue during 1999, 1998 and 1997 are as
follows:

Airlines Percentage of Rental Revenue(a)
1999 1998 1997
---- ---- ----

Continental Airlines, Inc. (b) 20% 25% 33%
Trans World Airlines, Inc. 19 21 30
Aerovias de Mexico S.A. de C.V. 15 14 15
Capital Cargo International Airlines, Inc. 14 (c) (c)
TNT Transport International B.V. 13 (c) (c)
USAirways Group Inc. 10 (c) (c)

(a) Such percentages include the periodic recognition of amounts that were
prepaid in connection with certain lease settlements.

(b) Includes rental revenue from Continental Micronesia, Inc., a subsidiary
of Continental Airlines, Inc.

Revenues include rentals from aircraft leased to foreign airlines or
carriers of $3,350,200, $3,429,000 and $1,851,000 in 1999, 1998 and 1997
respectively.

Future Minimum Rental Income

The following is a schedule by year of future minimum rental income
under the leases as of December 31, 1999 (in thousands):

Year Amount
---- ------

2000 $ 9,304
2001 8,368
2002 6,139
2003 5,240
2004 4,870
Thereafter 3,565
-------
Total $37,486
=======

The above schedule of future minimum rental income, includes a total of
$2,470 of rents from those lessees on non-accrual status, but does not include
rental income which would result from the renewal of existing leases or the
re-leasing of the aircraft, unless the renewal has been exercised.

28
<PAGE>

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

5. Notes Payable

In December 1996, the Partnership established a $10,000,000 loan
facility with an unaffiliated third party lender. The loan commitment was for a
period of 36 months, terminating December 31, 1999, at which time the
outstanding principal was due. The Partnership utilized $4,751,000 to pay off
its prior two facilities. In February, 1999, the lender agreed to increase the
borrowing commitment from $10,000,000 to $12,500,000. The lender further
increased the line of credit to $19.0 million in September, 1999. The
outstanding balance under this facility at December 31, 1999 was $16.5 million.
The lender has agreed to extend the maturity date until March 31, 2000 while the
Partnership obtains a replacement lender. The loan provides for interest at a
rate of 1.5% over the lender's prime rate of interest and is payable monthly. At
December 31, 1999 the interest rate was 10%. The Partnership must maintain a
minimum balance outstanding of $4,000,000 during the loan commitment period. The
loan is collateralized by the Partnership's interest in the MD-82 aircraft
leased to TWA, the three 727-200 aircraft leased to Kitty Hawk, Capital Cargo
and Falcon and the MD DC-10-10 aircraft. Subject to final documentation, the
Partnership has negotiated a loan with a new lender that will permit the
borrowing of up to $30 million. (See Note 11 to the Financial Statements,
"Subsequent Event").

The Limited Partnership Agreement permits the Partnership to borrow up
to 35% (or $50,785,000) of the original offering proceeds. It is the intent of
the General Partners to obtain financing to fund the conversion to freighter
configuration of the DC 10-10 aircraft and to replace the existing lender.
However, if the Partnership is unable to secure additional borrowing capacity to
fund these commitments the Partnership may elect to sell the DC 10-10 aircraft.
Alternatively, the Partnership may have to utilize cash from operations to
finance such commitments, thus potentially reducing or suspending distributions
to partners.

6. Transactions With Affiliates

Management Fees. The General Partners are entitled to a quarterly
subordinated base management 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 the years ended December 31, 1999, 1998 and 1997, the General
Partners earned base management fees of $174,000, $177,000 and $179,000,
respectively.

The General Partners also are entitled to 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, 1999, 1998 and 1997, the General Partners
earned incentive management fees of $442,000, $505,000 and $495,000,
respectively.

Re-lease Fee. The General Partners are entitled to 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, 1999, 1998 and 1997, the General Partners
earned re-lease fees of $344,000, $335,000 and $303,000, respectively.

Beginning July 1, 1995, 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. Such reimbursable expenses amounted to $-0-, $19,000 and $75,000 in
each of the years ended December 31, 1999, 1998 and 1997, of which $38,000 was
payable to the Administrative General Partner at December 31, 1999. 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 1999, 1998 and 1997, the Partnership paid $87,000,
$1,313,000 and $1,694,000, respectively, to a licensed maintenance facility
affiliated with the Managing General Partner for work performed on certain
aircraft. Additionally, during 1999, 1998 and 1997, the Partnership paid
$1,294,000, $1,887,000 and $2,308,000, respectively, to a company owned by the

29
<PAGE>

President and Director and two former officers and directors of the Managing
General Partner, for the purchase of parts in connection with certain capital
projects.

30
<PAGE>

7. 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 (loss) income reported for
federal income tax purposes (in thousands):

1999 1998 1997
---- ---- ----

Net income per financial statements $ 978 $ 1,855 $ 1,255
Increase (decrease) resulting from:
Depreciation (648) (4,523) (4,547)
TBT interest income, less
TBT rental expense (1,492) (1,174) (932)
Gain on sale of engines 85 524 --
Reserves for maintenance costs,
net of maintenance expense and
write-downs of aircraft (192) 459 1,400
Maintenance reserve payable 1,113 1,184 590
Deferred rental income (192) (526) (1,686)
Rental income (285) 285 --
Provisions for bad debts -- (1,678) --
Management fees 27 (26) --
Other 13 (18) 123
-------- -------- --------
Taxable (loss) income per federal
income tax return $ (593) $ (3,638) $ (3,797)
======== ======== ========

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

1999 1998 1997
---- ---- ----

Total Partnership capital per
financial statements $ 24,185 $ 34,200 $ 44,070
Increase (decrease) resulting from:
Commission and expenses paid
in connection with the sale of limited
partnership units 16,295 16,295 16,295
Accounts receivable 233 285 --
Distributions payable to partners 2,169 2,931 2,943
Management fees payable -- (26) --
Reserves for maintenance costs and
write-downs 22,627 22,321 20,276
Deferred income 167 759 2,028
Accumulated depreciation (43,096) (42,448) (38,712)
TBT interest income less TBT rental expense (6,516) (5,055) (3,881)
Lease settlement payment, including lease
aircraft received accounted for under the
cost recovery method 10,115 10,115 10,115
Allowance for bad debts -- -- 640
Securities received in leasing transaction -- -- 599
Fixed Assets 538 -- --
Other 328 (13) 354
-------- -------- --------
Tax bases of net assets $ 27,045 $ 39,364 $ 54,727
======== ======== ========

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<PAGE>

8. Litigation

The Brazilian Court ruled in May that the Partnership could repossess
the engine in Brazil, although that ruling was stayed until September 3, 1999,
after the completion of all of VASP's appeals. The Partnership has the right to
export the Brazilian engine and is working with local counsel to obtain the
necessary approval to do so.

9. 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
the Partnership, 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 and 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 due to its short term remaining maturity.

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.

10. Commitments

The extended lease on the McDonnell Douglas DC10-10 with Continental
expired on September 15, 1999. Work necessary for the aircraft to meet the lease
return conditions was done at Continental's expense at a maintenance facility.
Continental continued to pay rent until the aircraft achieved the lease
requirements for its return, which took place on December 16, 1999. The aircraft
is being stored until June, 2000 at which time it will enter a modification
facility to be converted to a freighter for Emery Worldwide Airlines Inc.
("Emery"). The conversion work is estimated to cost $12.6 million.

11. Subsequent Event

The Partnership has completed loan negotiations and loan documents are
being written with a new lender that will permit the borrowing of up to $30
million. The new borrowings are intended to retire the outstanding debt and
provide funds for the DC 10-10 freighter conversion. The term of the loan will
be six years, with interest only payments the first twelve months. The principal
will then be repaid in equal quarterly installments over the next 60 months. The
Partnership will pay a 1.0% commitment fee and the interest rate will be 225
basis points over the lenders prime rate. The lender will have a mortgaged
interest in all aircraft, except the 50% interest in the USAirways MD-81
aircraft.

32
<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 1999, 1998 and
1997.

33
<PAGE>

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 46, 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 47, 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, 41, joined PCC in 1988 and is involved in aircraft
acquisitions, 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, 62, joined PCC in 1992 and is responsible for the
technical aspects of aircraft marketing, including delivery and redelivery of
aircraft to airlines world wide. From 1990 to 1992, he served as 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.

34
<PAGE>

Air Transport Leasing, Inc.

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

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

Clifford B. Wattley, age 50, is President and a Director of the
Administrative General Partner. Mr. Wattley is a Corporate Vice President with
PaineWebber 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 PaineWebber'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 40, is Vice President, Assistant Secretary and a
Director of the Administrative General Partner. He joined PaineWebber
Incorporated in June 1988 as a Divisional Vice President and is currently a
Senior Vice President and Director of Private Investments. Prior to joining
PaineWebber 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 & Co. 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 31, 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.

35
<PAGE>

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,
ATL Inc., an affiliate of the Administrative General Partner owns
approximately 112,916 units.

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
by directors of the General Partners and by all directors and officers
of such corporations as a group as of March 1, 2000.

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

Richard S. Wiley 25,296 *

Carol L. Chase 1,300 *

Robert M. Brown 1,000 *

All directors and
officers as a group
(4 persons) 27,596 *

Air Transport Leasing, Inc.
---------------------------
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.

36
<PAGE>

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 1999.

Base Management Fee. The General Partners receive a quarterly
subordinated base management 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 1999, the General Partners earned base management fees of
$174,000.

Incentive Management Fee. The General Partners receive 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. The General Partners earned incentive management fees of $442,000
during 1999.

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. The General
Partners earned re-lease fees of $344,000 during 1999.

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 $-0- during 1999, all of
which was paid or accrued 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.

Other. In 1999, the Partnership purchased certain equipment and parts
for two Partnership aircraft from a company owned by the Director and President
and two former officers and directors of the Managing General Partner in the
amount of $1,294,000. During 1999, the Partnership paid $87,000 to a licensed
maintenance facility affiliated with the Managing General Partner for work
performed on certain aircraft.

Partnership Interest. The General Partners received or were entitled to
receive distributions of $110,000 as their allocable share of distributable cash
flow for 1999. In addition, $182,000 of the Partnership's net taxable income for
1999 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) The Partnership filed a Report on Form 8-K on October 5, 1999
reporting an increase in its line of credit under Item 5, Other
Events.

The Partnership also filed a Report on Form 8-K on January 21,
2000 reporting a change in the distribution rate to limited
partners under Item 5, Other Events.

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

3.1 (a) Amended and Restated Limited Partnership Agreement dated
April 27, 1989, as amended and restated July 11, 1989.
Filed as Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1989.*

(b) Amendment, dated as of December 26, 1990, to the Amended
and Restated Limited Partnership Agreement dated July
11, 1989. 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 Amended
and Restated Limited Partnership Agreement dated July
11, 1989. Filed as Exhibit 4 to the Registrant's Current
Report on Form 8-K dated April 16, 1992.*

10.1 (a) Agreement pursuant to Selection 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 Quarterly Report on Form 10-Q
for the quarter ended March 31, 1989 for Pegasus
Aircraft Partners, L.P. (Commission File No. 33-22986).*

(b) Participation Agreement, dated September 21, 1989, among
Pegasus Aircraft Partners, L.P., a Delaware limited
partnership ("Pegasus Aircraft Partners"), First
Security Bank of Utah, National Association (the "Owner
Trustee"), Concord Asset Management, Inc., a Delaware
corporation ("CAMI"), and the Registrant. Filed as
Exhibit 19.2(e) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*

(c) Amended and Restated Reimbursement Agreement, dated
September 21, 1989 between Pegasus Aircraft Partners and
CAMI. Filed as Exhibit 19.2(f) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.*

(d) Reimbursement Agreement, dated September 21, 1989,
between the Registrant and CAMI. Filed as Exhibit
19.2(g) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1989.*

(e) Amended and Restated Security Agreement, dated September
21, 1989 between Pegasus Aircraft Partners and CAMI.
Filed as Exhibit 19.2(h) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1989.*

38
<PAGE>

(f) Security Agreement, dated September 21, 1989, between
the Registrant and CAMI. Filed as Exhibit 19.2(i) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989.*

(g) Security Agreement, dated September 21, 1989, between
the Registrant and Pegasus Aircraft Partners. Filed as
Exhibit 19.2(j) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*

(h) Security Agreement, dated September 21, 1989, between
Pegasus Aircraft Partners and the Registrant. Filed as
Exhibit 19.2(k) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*

(i) Trust Agreement 814, dated as of March 10, 1989, among
Pegasus Capital Corporation, a California corporation
("PCC") as Beneficiary, Pegasus Aircraft Partners as
Beneficiary, and the Owner Trustee. Filed as Exhibit
19.3(i) to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1989 for Pegasus Aircraft
Partners, L.P. (Commission File No. 33-22986).*

(j) First Amendment to Trust Agreement 814, dated September
21, 1989, among Pegasus Aircraft Partners as
Beneficiary, the Registrant as Beneficiary, and the
Owner Trustee. Filed as Exhibit 19.2(m) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989.*

(k) 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 (Commission File No. 33-28359).*

(l) Assumption Agreement, dated March 22, 1989, among PCC,
the Buyer, CAMI and Pegasus Aircraft Partners. Filed as
Exhibit No. 19.3(e) to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1989 for Pegasus
Aircraft Partners, L.P. (Commission File No. 33-22986).*

(m) 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 10.4(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*

(n) 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 10.4(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.*

(o) 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 10.4(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*

(p) Assignment of Collateral, dated as of April 30, 1992,
between Pegasus Aircraft Partners II, L.P. and
Philadelphia National Bank, Incorporated, as CoreStates
Bank, N.A. Filed as Exhibit 10.4(d) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*

10.2 (a) Trust Agreement 047, dated as of April 12, 1989, between
PCC as Beneficiary, and First Security Bank of Utah,
National Association as Owner Trustee. Filed as Exhibit
19.3(b) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1989.*

(b) Lease Agreement 047, dated as of April 12, 1989, between
Owner Trustee and Continental Airlines, Inc. Filed as
Exhibit 19.3(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*

39
<PAGE>

(c) Amendment No. 1 to Lease Agreement 047, dated September
21, 1989. Filed as Exhibit 10.3(f) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1989.*

(d) 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.*

(e) 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.*

(f) 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 10.2(f) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1992.*

(g) Amendment No. 2 to Lease Agreement 047 between First
Security Bank of Utah, N.A. as Lesser and Continental
Micronesia as Lessee dated March 15, 1995.

10.3 (a) Trust Agreement 32719 between the Registrant and First
Security Bank of Utah, National Association as Owner
Trustee. Filed as Exhibit 19.4(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.*

(b) Aircraft Lease Agreement, dated as of February 15, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and KIWI International Air
Lines, Inc. Filed as Exhibit 10.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*

(c) Lease Supplement No. 1, dated March 5, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and KIWI International Air Lines, Inc.
Filed as Exhibit 10.1(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993.*

(d) Amendment No. 1 dated March 15, 1995 to the lease
between First Security Bank of Utah National Association
as Trustee (Lessor) and Kiwi International Air Lines
Inc. with respect to a certain 727 Aircraft, US
Registration N32719.*

10.4 (a) Trust Agreement 909, dated as of May 25, 1989, between
PCC as Beneficiary and First Security Bank of Utah,
National Association as Owner Trustee. Filed as Exhibit
10.5(b) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989.*

(b) Lease Agreement, dated as of October 1, 1983, between
DC-9T-II as Lessor and Trans World Airlines, Inc.
("TWA") as Lessee. Filed as Exhibit 10.2.8 to Form S-1
Registration Statement dated July 3, 1989 (Commission
File No. 33-28359).*

40
<PAGE>

(c) Lease Supplement No. 1 dated, October 13, 1983, between
TWA and DC-9T-II. Filed with Lease Agreement as Exhibit
10.2.8 to Form S-1 Registration Statement dated July 3,
1989 (Commission File No. 33-28359).*

(d) Amendment No. 1, dated as of May 1, 1991, to Lease dated
as of October 1, 1983, each between First Security Bank
of Utah, National Association 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) Provisional Amendment, dated as of March 31, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and Trans World Airlines,
Inc. Filed as Exhibit 10.3(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*

(f) Amendment No. 2, dated as of April 15, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and Trans World Airlines, Inc. Filed as
Exhibit 10.3(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.*

(g) Agreed Order, dated April 14, 1993, approving lease
amendments among Trans World Airlines, Inc., Pegasus
Aircraft Partners, L.P., Registrant and Pegasus Capital
Corporation relating to leases of certain aircraft.
Filed as Exhibit 10.3(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993.*

(h) Amendment No. 3 dated January 16, 1995 between First
Security Trust of Utah as Lessor Owner Trustee and TWA
as lessee with respect to the lease of one Lockheed
L-1011 aircraft, U.S.

Registration No. N41016.*

(i) Amendment No. 3 dated as of January 16, 1995 between
Meridian Trust Company as Lessor Owner Trustee and TWA
as lessee with respect to the lease of one McDonnell
Douglas MD-82 aircraft, U.S. Registration No. 909TW.*

10.5 (a) Lease Agreement, dated as of December 30, 1981, between
First Security Bank of Utah, National Association as
Lessor and TWA as Lessee. Filed as Exhibit 10.2.3 to
Form S-1 Registration Statement dated July 3, 1989
(Commission File No. 33-28359).*

(b) Trust Agreement, dated as of December 30, 1981, between
BWL as Owner Participant and First Security Bank of
Utah, National Association as Owner Trustee. Filed as
Exhibit 10.6(h) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989.*

(c) Amendment No. 1, dated as of May 1, 1991, to Lease dated
as of December 30, 1981, each between First Security
Bank of Utah, National Association 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.*

(d) Provisional Amendment, dated as of March 31, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and Trans World Airlines,
Inc. Filed as Exhibit 10.4(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*

(e) Amendment No. 2, dated as of April 15, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and Trans World Airlines, Inc. Filed as
Exhibit 10.4(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.*

(f) Agreed Order, dated April 14, 1993, approving lease
amendments among Trans World Airlines, Inc., Pegasus
Aircraft Partners, L.P., Registrant and Pegasus Capital
Corporation relating to leases of certain aircraft.
Filed as Exhibit 10.4(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993.*

41
<PAGE>

10.6 (a) Trust Agreement 935, dated as of April 2, 1990, between
Registrant as Beneficiary and First Security Bank of
Utah, National Association, as Owner Trustee. Filed as
Exhibit 19.1(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1990.*

(b) Aircraft Lease Agreement, dated as of June 1, 1992,
between First Security Bank of Utah, National
Association as Owner Trustee and Lessor and Aerovias de
Mexico, S.A. de C.V. as Lessee, pertaining to one
McDonnell Douglas DC-9-31 aircraft, U.S. Registration
No. N935ML. Filed as Exhibit 10.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*

(c) Estoppel and Acceptance Certificate, dated July 1, 1992,
executed by Aerovias de Mexico, S.A. de C.V. as Lessee
under Aircraft Lease Agreement, dated as of June 1,
1992, between Aerovias de Mexico, S.A. de C.V. and First
Security Bank of Utah, National Association as Owner
Trustee and Lessor, pertaining to one McDonnell Douglas
DC-9-31 aircraft, U.S. Registration No. N935ML. Filed as
Exhibit 10.1(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.*

10.7 (a) Trust Agreement 936, dated as of May 9, 1990, between
Registrant as Beneficiary and First Security Bank of
Utah, National Association, as Owner Trustee. Filed as
Exhibit 19.1(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1990.*

(b) Aircraft Lease Agreement, dated as of June 1, 1992,
between First Security Bank of Utah, National
Association as Owner Trustee and Lessor and Aerovias de
Mexico, S.A. de C.V. as Lessee, pertaining to one
McDonnell Douglas DC-9-31 aircraft, U.S. Registration
No. N936ML. Filed as Exhibit 10.2(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*

(c) Estoppel and Acceptance Certificate, dated July 20,
1992, executed by Aerovias de Mexico, S.A. de C.V. as
Lessee under Aircraft Lease Agreement, dated as of June
1, 1992, between Aerovias de Mexico, S.A. de C.V. and
First Security Bank of Utah, National Association as
Owner Trustee and Lessor, pertaining to one McDonnell
Douglas DC-9-31 aircraft, U.S. Registration No. N936ML.
Filed as Exhibit 10.2(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*

10.7 (d) Standstill Agreement dated December 13, 1994, between
Aerovias de Mexico SA de CV and First Security Bank of
Utah National Association as Owner Trustee of two
DC-9-31 Aircraft, US Registration N936ML and N937ML.

10.7 (e) Standstill Extension and Amendment dated as of February
28, 1995 between Aerovias de Mexico SA de CV and First
Security Bank of Utah National Association as Owner
Trustee of two DC-9-31 Aircraft, US Registration N936ML
and N937ML.

10.8 (a) Trust Agreement 16982, dated as of August 22, 1990,
between Registrant as Beneficiary and First Security
Bank of Utah, National Association as Owner Trustee.
Filed as Exhibit 19.1(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1990.*

(b) Lease Agreement 212, dated as of December 15, 1988,
between Wilmington Trust Company as Owner Trustee and
Lessor and Continental Airlines, Inc. as Lessee. Filed
as Exhibit 10.2.5 to Form S-1 Registration Statement
dated July 3, 1989, (Commission File No. 33-28359).*

(c) Amendment No. 1, dated as of May 26, 1989, to Lease
Agreement 212, between Wilmington Trust Company as Owner
Trustee and Lessor and Continental Airlines, Inc. as
Lessee. Filed as Exhibit 10.2.5 to Form S-1 Registration
Statement dated July 3, 1989, (Commission File No.
33-28359).*

42
<PAGE>

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.*

(f) 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 10.8(f) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1992.*

(g) Lease Termination Agreement dated November 15, 1995
between and among Continental Airlines, Inc., First
Security Bank of Utah, N.A., Pegasus Aircraft
Management, Inc. and Air Transport Leasing, Inc.

(h) Supplement to Lease Termination Agreement between and
among Continental Airlines, Inc., First Security Bank of
Utah, N.A., Pegasus Aircraft Management, Inc. and Air
Transport Leasing, Inc.

10.9 Prospectus of Registrant, dated as of July 11, 1989.
Filed as Exhibit 2 of the Registrant's Form 8-K filed
for the Event occurring on September 20, 1989.*

10.10(a) Loan Agreement, dated June 10, 1992, between Pegasus
Aircraft Partners II, L.P. and Philadelphia National
Bank, Incorporated, as CoreStates Bank, N.A. Filed as
Exhibit 10.3(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.*

(b) Promissory Note, dated June 10, 1992, made by Pegasus
Aircraft Partners II, L.P. in favor of Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A.
Filed as Exhibit 10.3(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*

(c) Assignment of Collateral, dated as of June 10, 1992,
between Pegasus Aircraft Partners II, L.P. and
Philadelphia National Bank, Incorporated, as CoreStates
Bank, N.A. Filed as Exhibit 10.3(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*

(d) Security Agreement and Assignment of Lease, dated as of
June 10, 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 10.3(d) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*

10.11(a) Secured Loan Agreement, dated September 10, 1992, among
Greyhound Financial Corporation, as Lender and First
Security Bank of Utah, National Association as Owner
Trustee under (i) Trust Agreement 935, dated as of April
2, 1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., (ii)
Trust Agreement 936, dated as of May 9, 1990, between
First Security Bank of Utah, National Association and
Pegasus Aircraft Partners II, L.P., and (iii) Trust
Agreement 909, dated as of May 25, 1989, between First

43
<PAGE>

Security Bank of Utah, National Association and Pegasus
Aircraft Partners II, L.P. as Co-Borrowers. Filed as
Exhibit 10.1(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992.*

(b) Promissory Note, dated September 10, 1992, made by First
Security Bank of Utah, National Association as Owner
Trustee under (i) Trust Agreement 935, dated as of April
2, 1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., (ii)
Trust Agreement 936, dated as of May 9, 1990, between
First Security Bank of Utah, National Association and
Pegasus Aircraft Partners II, L.P., and (iii) Trust
Agreement 909, dated as of May 25, 1989, between First
Security Bank of Utah, National Association and Pegasus
Aircraft Partners II, L.P. in favor of Greyhound
Financial Corporation. Filed as Exhibit 10.1(b) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992.*

(c) Beneficial Interest Security Agreement, dated as of
September 10, 1992, between Pegasus Aircraft Partners
II, L.P. and Greyhound Financial Corporation. Filed as
Exhibit 10.1(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992.*

(d) Continuing Guaranty and Subordination Agreement, dated
September 10, 1992, between Greyhound Financial
Corporation and First Security Bank of Utah, National
Association as Owner Trustee under (i) Trust Agreement
935, dated as of April 2, 1990, between First Security
Bank of Utah, National Association and Pegasus Aircraft
Partners II, L.P., (ii) Trust Agreement 936, dated as of
May 9, 1990, between First Security Bank of Utah,
National Association and Pegasus Aircraft Partners II,
L.P., and (iii) Trust Agreement 909, dated as of May 25,
1989, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P. Filed
as Exhibit 10.1(d) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1992.*

(e) Negative Pledge Agreement, dated as of September 10,
1992, by and among Greyhound Financial Corporation and
First Security Bank of Utah, National Association as
Owner Trustee under (i) Trust Agreement 935, dated as of
April 2, 1990, between First Security Bank of Utah,
National Association and Pegasus Aircraft Partners II,
L.P., (ii) Trust Agreement 936, dated as of May 9, 1990,
between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P.,
(iii) Trust Agreement 909, dated as of May 25, 1989,
between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., and
(iv) Trust Agreement 16982 between First Security Bank
of Utah, National Association and Pegasus Aircraft
Partners II, L.P. Filed as Exhibit 10.1(e) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992.*

(f) First Priority Aircraft Chattel Mortgage and Security
Agreement, dated September 10, 1992, between First
Security Bank of Utah, National Association as Owner
Trustee under Trust Agreement 935, dated as of April 2,
1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., as
Mortgagor, and Greyhound Financial Corporation, as
Mortgagee. Filed as Exhibit 10.1(f) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.*

(g) First Priority Aircraft Chattel Mortgage and Security
Agreement, dated September 10, 1992, between First
Security Bank of Utah, National Association as Owner
Trustee under Trust Agreement 936, dated as of May 9,
1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., as
Mortgagor, and Greyhound Financial Corporation, as
Mortgagee. Filed as Exhibit 10.1(g) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.*

(h) First Priority Aircraft Chattel Mortgage and Security
Agreement, dated September 10, 1992, between First
Security Bank of Utah, National Association as Owner
Trustee under Trust Agreement 909, dated as of May 25,
1989, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., as
Mortgagor, and Greyhound Financial Corporation, as
Mortgagee. Filed as Exhibit 10.1(h) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.*

44
<PAGE>

10.12(a) Trust Agreement 357, dated as of February 15, 1993,
between Registrant and First Security Bank of Utah,
National Association as Owner Trustee. Filed as Exhibit
10.2(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993.*

(b) Aircraft Lease Agreement, dated as of March 15, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and KIWI International Air
Lines, Inc. Filed as Exhibit 10.2(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*

(c) Lease Supplement No. 1, dated May 24, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and KIWI International Air Lines, Inc.
Filed as Exhibit 10.1(a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993.*

10.13 (a) Aircraft lease of 727-200 Advanced Aircraft N16784
(formerly N516PE) as of September 25, 1984 by Seventh
HFC Leasing Corporation as Lessor and People Express
Airlines, Inc. as Lessee.

(b) Amendment No. 1 to lease of 727-200 Advanced Aircraft
N16784 dated November 15, 1995 between Continental
Airlines, Inc. as Lessee and First Security Bank of Utah
as Owner Trustee of a trust in which Pegasus Aircraft
Partners II, L.P. is the sole beneficiary.

10.14(a) Aircraft lease of 727-200 advanced Aircraft N77780
(formerly N512PE) as of August 23, 1984 by Mellon
Financial Services Corporation #3 as Lessor and People
Express as Lessee.

(b) Amendment No. 1 to lease of 727-200 Advanced Aircraft
N77780 dated November 21, 1995 between Continental
Airlines, Inc. as Lessee and First Security Bank of Utah
as Owner Trustee of a trust in which Pegasus Aircraft
Partners II, L.P. is the sole beneficiary.

10.15(a) Promissory note issued in favor of Pegasus Aircraft
Partners II, L.P. with face amount of $307,166 dated
March 16, 1996 from Kiwi International Airlines Inc.

10.16(a) Loan and Security Agreement dated December 23, 1996
between Provident Bank, N.A. and First Security Bank as
Owner Trustee.

11 Partnership Policy for Requests for Partner Lists.

45
<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, 2000

Pegasus Aircraft Partners II, 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, 2000.

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

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

/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 II LP.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2300000
<SECURITIES> 0
<RECEIVABLES> 196000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3672000
<PP&E> 162447000
<DEPRECIATION> 117956000 <F1>
<TOTAL-ASSETS> 48163000
<CURRENT-LIABILITIES> 7448000
<BONDS> 16530000
0
0
<COMMON> 0
<OTHER-SE> 24185000
<TOTAL-LIABILITY-AND-EQUITY> 48163000
<SALES> 0
<TOTAL-REVENUES> 12102000
<CGS> 0
<TOTAL-COSTS> 9496000
<OTHER-EXPENSES> 394000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1234000
<INCOME-PRETAX> 978000
<INCOME-TAX> 0
<INCOME-CONTINUING> 978000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 978000
<EPS-BASIC> 0.11
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES WRITE-DOWNS AND CERTAIN OTHER RESERVES
</FN>

</TABLE>