SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

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

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

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

                                       OR

[ ]     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 51 pages.
<PAGE>

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

                                Table of Contents
                                                                            Page
                                                                            ----
Part I
------

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

Part II
-------

Item 5      Market for Registrant's Common Equity and Related
              Stockholder Matters                                              9
Item 6      Selected Financial Data                                           10
Item 7      Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                      10
Item 8      Financial Statements                                              16
Item 9      Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                        37

Part III
--------

Item 10     Directors and Executive Officers of the Registrant                38
Item 11     Executive Compensation                                            39
Item 12     Security Ownership of Certain Beneficial Owners and Management    40
Item 13     Certain Relationships and Related Transactions                    41

Part IV
-------

Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K   42


                                       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 retained for general working capital purposes with the remainder  distributed
to all partners.

Outlook for the Airline and Aircraft Leasing Industries

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

         As to the  supply and demand for  aircraft,  the  industry  took on and
continues  to take on a record  number  of new  aircraft  that will  likely  put
pressure  on  profitability  and  will  lead to  further  retirements  of  older
aircraft,  such as those owned by the Partnership.  The full  implementation  of
Stage III noise  standards by year end 1999 will also likely lead to  additional
older Stage II aircraft being retired.

         Trans World Airlines, Inc. which accounted for 21% of the Partnership's
revenues in 1998 announced its tenth consecutive unprofitable year. While TWA is
replacing older aircraft with newer, more fuel efficient aircraft, its inability
to achieve sustained profitability is of concern.

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

Recent Partnership Developments

         Immediately  below  is a  table  which  shows  the  December  31,  1998
appraised value of the Partnership's aircraft to be approximately $67.8 million,
or approximately  44% 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, 1998 was
equal to $7.21 per Unit.  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.

                                       3
<PAGE>
         The following table describes the Partnership's  aircraft  portfolio at
December 31, 1998:

<TABLE>
<CAPTION>

                                                         Dec.      Current                              Cumu-       Cumu-
                                   Owner-     Acqui-     1998       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    11/6/99      1970      Stage  II    64,040      60,560

Aerovias de
Mexico, S.A.     McDonnell
de C.V.          Douglas DC-9-31     100          8.9       2.9    2/25/00      1971      Stage  II    69,808      66,190

Continental      Boeing 727-200
Airlines, Inc.   Advanced            100          4.5       3.0    5/1/99       1973      Stage  II    74,475      51,589

TNT Transport    Boeing 727-200
Intl.  B.V.      Advanced (6)        100          8.4       7.3    6/22/02      1973      Stage III    72,082      50,824

Continental      McDonnell
Micronesia Inc.  Douglas DC10-10     100         18.3       7.8    9/15/99 (8)  1973      Stage III    82,029      29,865

(7)              Airbus Industrie
                 A300-B4-103         100         27.9       7.1   (7)           1979      Stage III    46,226      19,527

Falcon Air       Boeing 727-200
Express Inc.     Non-Advanced        100         11.5       5.6    3/1/02       1970      Stage III    75,665      55,586

Capital Cargo    Boeing 727-200
International    Advanced (9)        100         16.8       9.8    3/1/05       1973      Stage III    59,925      31,433
Airlines Inc.

Trans World      McDonnell
Airlines.        Douglas MD-82       100         21.0      14.4    10/31/04     1983      Stage III    48,146      24,585

(10)             Lockheed
                 L-1011              100         17.7       1.7   (10)          1974      Stage III    61,209      22,907

US Airways       McDonnell
Group, Inc.      Douglas MD-81        50(5)      10.0       5.4    6/01/01      1982      Stage III    46,627      40,995
                                               ------     -----
                                               $153.9     $67.8
                                               ======     =====
</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 capital expenditures, net of retirements,  incurred during
              1998,  1997,  1996,  1995,  1994  and 1993 of $6.0  million,  $5.2
              million,  $2.5  million,  $26,000,  $.3 million and $2.2  million,
              respectively. This amount is net of the application of maintenance
              reserves to restore aircraft of approximately $2.2 million.

         (2)  The  December  1998  appraised   values  were   determined  by  an
              independent  aircraft appraisal firm. Appraised values include the
              present  value of rents due under leases in place plus the present
              value of an estimated  residual  value for the aircraft at the end
              of the  lease.  It  should  be  noted  that  appraisals  are  only
              estimates  of value and  should  not be relied on as  measures  of
              realizable  value.  A  discount  rate  of  10%  was  utilized  and
              inflation  was  assumed  to be 2.5%.  The  appraised  value of the
              McDonnell Douglas DC10-10 aircraft does not include a $9.0 million
              freighter  conversion scheduled for the fourth quarter of 1999 (as
              discussed in Note 5 of the Financial Statements).

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

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

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

                                       4
<PAGE>
         (6)  This aircraft was converted to a cargo  configuration,  hushkitted
              and delivered to TNT Transport  International B.V. ("TNT") in June
              1998.

         (7)  Aircraft off lease at December 31, 1998. The CF6-50C2 engines from
              this aircraft, are on a short-term lease to Viacao Aerea Sao Paulo
              S.A. The appraised value shown represents the appraised CMV of the
              aircraft,  exclusive  of rents  received  from the  rental  of the
              engines.

         (8)  Upon the  expiration of the extended lease with  Continental,  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").

         (9)  Aircraft was hushkitted in December 1998.

         (10) 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
              appraised  aircraft  value is based upon a purchase offer received
              in the fourth quarter of 1998, however there can be no certainty a
              sale will occur.

         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 1998.  Revenue from each of the
airlines which accounted for greater than 10% of the total rental revenue of the
Partnership during 1998 are as follows:

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

Continental Airlines, Inc.(2)                                          25%(1)
Trans World Airlines, Inc.                                             21%(1)
Aerovias de Mexico S.A. de C.V                                         14%

         (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 recordkeeping in
connection with aircraft  maintenance.  FAA regulations  establish standards for
repairs,  periodic  overhauls  and  alterations,  and require  that the owner or
operator of an aircraft  establish  an  airworthiness  inspection  program to be
carried  out by  certified  mechanics.  No aircraft  of the  Partnership  may be
operated without a current airworthiness certificate.

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

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

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

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

         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 on Page 5.

         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.   It  is  anticipated  that  the   60,000-cycle   aging
modifications will not be due to be performed until  approximately the end of or
beyond the end of, each of the current leases.

         Overall,  the General Partners  believe that the increased  maintenance
costs mandated for older aircraft may have some 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.

         The  Partnership  continues to monitor the  marketplace  based upon the
availability  of  aircraft,  pricing for Stage II and Stage III aircraft and the
timetable for  implementation  of Stage III, to best position the  Partnership's
aircraft for continued and future deployment.

                                       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

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

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

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

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

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

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

                                       8
<PAGE>
                                     PART II

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

         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,  1999,  the  number of  Limited  Partners  of record was
approximately 7,869.

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

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

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

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

                                                       1998               1997
                                                       ----               ----

Limited Partners                                      $11,608            $11,608
General Partners                                          117                117
                                                      -------            -------
                                                      $11,725            $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   84%,  89%  and  75%,
respectively, of the cash distributions paid to the partners for the years ended
December 31, 1998, 1997 and 1996 constituted a return of capital. Also, based on
the amount of cumulative net income  reported by the  Partnership for accounting
purposes,  approximately 83% of the cash distributions paid to the partners from
the inception of the Partnership  through December 31, 1998 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.

                                       9
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

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

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

Rental Revenue                       $12,424  $12,183  $15,231  $14,026  $15,537
Net Income                             1,855    1,255    2,898    2,019    1,413
Net Income per Limited
  Partnership Unit                      0.22     0.17     0.40     0.28     0.19
Distributions per Limited
  Partnership Unit (1)                  1.60     1.60     1.60     1.60     1.60
Total Assets                          51,423   58,273   72,039   80,799   86,350
Notes Payable                         10,000    4,751    4,751    6,638    7,382
Partners' Equity                      34,200   44,070   54,540   63,367   73,073

(1)      Distribution  amounts are reflected during the period in which the cash
         for the  distribution  was  generated.  A portion  of the  actual  cash
         distributions are paid subsequent to such period.

         (See  Item  7,  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations").  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  Consolidated  Financial  Statements  of the
Partnership  and the Notes  thereto.  This  report may  contain,  in addition to
historical information,  forward-looking statements that include risks and other
uncertainties. The Partnership's actual results may differ materially from those
anticipated in these forward-looking statements. Factors that might cause such a
difference  include  those  discussed  below,  as well as general  economic  and
business  conditions,  competition and other factors discussed elsewhere in this
report.  The  Partnership  undertakes  no  obligation  to release  publicly  any
revisions  to the  forward-looking  statements,  if any,  to  reflect  events or
circumstances  after the date hereof or to reflect the occurrence of anticipated
or unanticipated events.

Liquidity and Capital Resources

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

         Cash  distributions   declared  and  cash  distributions  paid  by  the
Partnership were  approximately  $11.7 million ($1.60 per Unit) in each of 1998,
1997 and 1996, respectively. Net cash provided by operating activities was $11.7
million  in  1998,  $8.9  million  in 1997 and  $13.5  million  in 1996.  In the
aggregate,  for this three-year period net cash provided by operating activities
totaled $34.1 million and cash distributions declared by the Partnership totaled
$35.1 million. In 1996, the Partnership received $3,000,000 as part of the lease
settlement  and return of the L-1011 by Trans World  Airlines,  Inc.  ("TWA") in
lieu of TWA  complying  with certain  lease return  conditions.  Such amount was
accounted for on the cost recovery  basis and thus was not included in cash from
operating activities.

         Partnership  equity declined by approximately  $9,870,000 from December
31, 1997 to December 31, 1998 as a result of the declaration and payment of cash
distributions to the partners in excess of the  Partnership's  net income.  This

                                       10
<PAGE>
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 depreciation expense and provisions for decline
in market value of aircraft 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, 1998,
the Partnership's  unrestricted cash and cash equivalents of $2,863,000 was held
in an interest  bearing money market  account.  This amount was $2,842,000  less
than the  Partnership's  unrestricted  cash and cash equivalents at December 31,
1997 of $5,705,000.  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,  collection of
advances to lessees,  proceeds from notes payable and the unapplied  maintenance
reserves during 1998.

         Rent and other  receivables  increased  by  $47,000  from  $444,000  at
December 31, 1997 to $491,000 at December 31, 1998.  This  increase is primarily
the result of rentals due from Falcon Air Express,  Inc.  ("Falcon")  and Viacao
Aerea Sao Paulo S.A. ("VASP") during 1998,  partially offset by the repayment of
the advances to TWA.

         TWA was current on its lease payments in 1998 and made final  repayment
of the  funds  advanced  by the  Partnership  however,  TWA  reported  its  10th
consecutive  annual  loss in  1998.  Although  TWA had a cash  position  of $314
million at September 30, 1998,  given TWA's historical  financial  difficulties,
the ongoing  losses  increase the  possibility of a default or deferral of lease
payments by TWA, which accounted for 21% of the  Partnership's  lease revenue in
1998.

         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,
1998,  Falcon was four  months in arrears to the  Partnership,  with  respect to
scheduled  rent  payments,  for a total of $380,000 and $179,000 in arrears with
respect to maintenance reserve payments.  Falcon has made all scheduled rent and
maintenance  reserve  payments in 1999, and has paid $100,000 of the maintenance
arrearages.  The  Partnership  has recorded a receivable for $95,000 of past due
rent and is also holding a $95,000 security deposit from Falcon.

         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 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.

         At December  31,  1998,  VASP,  discussed  below,  was in arrears  with
respect to scheduled rent payments, for a total of $273,000,  which is reflected
in  rent  and  other  receivables  and  $129,000  in  arrears  with  respect  to
maintenance  reserve payments.  As of December 31, 1998 the Partnership was also
holding  security  deposits  from VASP of  $400,000.  If VASP is unable to bring
their  payments  current,  the  Partnership  would  evaluate  all of its  rights
including  repossession  and  remarketing  of the  engines,  which  may  include
re-installing  them on and remarketing  the A-300  aircraft.  If the Partnership
remarkets  the  engines or the  aircraft,  there can be no  assurance  as to the
ability  to do so,  the time it would take and the lease rate or sale price that
might be achieved.

         During the first  quarter of 1999,  one of the engines on lease to VASP
failed.  The engine is currently being  overhauled in a maintenance  facility by
Air France at VASP's expense.

         The  payable to  affiliates  increased  by  $381,000  from  $211,000 at
December  31,  1997 to  $592,000 at  December  31,  1998  principally  due to an
increase in unpaid management fees due to the General Partners.

         Deferred  rental  income  and  deposits   decreased  by  $686,000  from
$2,584,000  at  December  31, 1997 to  $1,898,000  at December  31,  1998.  This
decrease was primarily  attributable to the  amortization of amounts  previously
received in  connection  with the A-300 Lease  Settlement  and the L-1011  Lease
prepayment.  Also contributing to the decrease,  was the reclassification of the
unearned portion of the L-1011 lease prepayment, to additional impairment on the
L-1011  aircraft,  in the third  quarter of 1998.  This  decrease was  partially
offset by the collection of $583,000 of additional security deposits in 1998.

         During 1998,  the  Partnership  invested  $9.0  million in  capitalized
aircraft  improvements and maintenance  checks,  none of which was funded by the
application of maintenance reserves.  During 1998, the Partnership delivered one
727-200  aircraft  to TNT  Transport  International  B.V.  ("TNT").  The  L-1011

                                       11
<PAGE>
aircraft  and the A-300  remained  off lease  during  1998,  however the General
Electric  CF6-50C2  engines  from the A-300  were on  short-term  (minimum  of 6
months)  leases to VASP at December  31,  1998.  The  Partnership  continues  to
remarket the A-300 and L-1011  aircraft  for lease or sale.  If the aircraft are
sold,  the  Partnership  may  utilize  such  proceeds,  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  (through  September 30, 1999) at a
lease rate  ($138,500  per month)  equal to 92% of the previous  rate.  Upon the
expiration of the extended lease, the Partnership will convert the aircraft to a
freighter pursuant to an aircraft  modification  agreement for delivery to Emery
Worldwide  Airlines Inc.  ("Emery").  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 a monthly  lease rate of
$200,000, followed by three additional two year renewal options at the then fair
market  rental.  Emery  provided  a  security  deposit  totaling  $218,000.  The
Partnership has $790,000 on deposit with a freighter conversion facility.

         The workscope under the aircraft  modification  agreement  requires the
investment of  approximately  $8.0 million by the  Partnership.  The Partnership
also estimates expending another $1.0 million to meet lease delivery conditions.

         In early 1998, Continental Airlines, Inc.  ("Continental") returned one
727-200  ADV  aircraft  the  lease  of  which  expired  January  31,  1998.  The
Partnership and  Continental  continue  discussing each party's  obligation with
respect to the return  condition of the aircraft under the lease.  This aircraft
is currently on lease to TNT.

         In 1998,  the  Partnership  entered  into  discussions  with Kitty Hawk
Aircargo, Inc. ("Kitty Hawk") for the lease of the Boeing 727-200 aircraft, upon
the  expiration  of the current  lease with  Continental,  which expires in May,
1999.  The lease  would  require  the  Partnership  to hushkit  and  convert the
aircraft  to a  freighter  at an  estimated  cost of  $4.2  million.  The  lease
agreement  would  provide for 84 months rent at $112,700  per month.  Kitty Hawk
provided a security deposit totaling $56,000 during 1998.

         In February 1999, the Partnership  consummated an agreement to increase
the committed  amount of the loan facility from $10 million to $12.5 million and
the interest rate from 1% to 1.25% over prime.  The  Partnership has pledged all
of its  aircraft as  collateral  in  connection  with the loan  commitment.  The
Partnership will utilize the additional borrowings to replenish working capital,
which was drawn down to pay for the hushkit for the aircraft on lease to Capital
Cargo  International  Airlines,  Inc.  ("Capital  Cargo").  This  loan is due in
December, 1999. If the Partnership is unable to renegotiate or refinance it will
be forced to reduce or suspend distributions.

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 1998,
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 US Airways,
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.

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").

                                       12
<PAGE>
         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.

         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 1997.

         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.

1997 as compared to 1996

         The Partnership's net income was $1,255,000 for the year ended December
31, 1997 ("1997  Period") as compared to $2,898,000  for the year ended December
31, 1996 ("1996 Period").

         The  decrease in the  Partnership's  net income for the 1997 Period was
principally  due to the decrease in rental income in the 1997 Period as compared
to the 1996 Period and the  write-downs  required  in the 1997 Period  partially
offset by a decrease in depreciation.

         Rental  income  decreased  by  $3,048,000  or 20% in the 1997 Period as
compared to the 1996 Period. The decrease was substantially  attributable to the
income recognized during the 1996 Period with respect to the DC-10 Restructuring
as well as the fact that the two 727  non-advanced  aircraft  formerly leased to
Kiwi International  Airlines,  Inc. ("Kiwi") were off lease for part of the 1997
Period prior to delivery to Falcon and Capital.

         Interest  income  decreased  $269,000 or 37% for the 1997 Period.  This
decrease  was  primarily  attributable  to  the  utilization  during  1997  of a
significant   portion  of  the  cash  reserves  held  by  the   Partnership  for
improvements in aircraft as well as the reduction (due to repayment) of advances
to lessees, on which interest is earned.

         Depreciation and amortization  expense decreased  $1,838,000 or 19% for
the 1997 Period in comparison to the 1996 Period.  The decrease was attributable
to the decrease in depreciation relating to the DC 10-10 aircraft as well as the
reduction in  depreciation  expense with respect to the L-1011  aircraft both of
which  were  off  lease  during  the  1997  Period  (thus  no  depreciation  was
recognized). The A-300 aircraft was off lease in each period.

                                       13
<PAGE>
         The Partnership provided write-downs  aggregating $1,400,000 to reflect
the loss in value of the A-300 aircraft and the L-1011  aircraft at December 31,
1997; write-downs of $100,000 were provided in the 1996 period.

         Management and re-lease fees for the 1997 Period,  decreased by $92,000
or 9% in  comparison  to the 1996 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 1997 Period  decreased  by $219,000 or 32% in
comparison  to  the  1996  Period,   primarily  because  of  the  December  1996
refinancing which lowered the average amount of debt outstanding and reduced the
interest rate.

         General and  administrative  expenses decreased by $18,000 or 5% in the
1997  Period  as  compared  to the 1996  Period  which was  consistent  with the
Partnership's level of operations.

         Direct lease expenses  decreased by $12,000 or 3% in the 1997 Period as
compared  to the 1996  period,  due  primarily  to storage  costs and  technical
consulting  costs related to the ex-Kiwi  aircraft which were off lease during a
portion of the 1997 Period.

         At December  31, 1996 the  Partnership  provided an  allowance  for bad
debts in the amount of $640,000 which  represented  rents,  advances  (Bellyskin
Note) and related  interest due from Kiwi (See Footnote 5). No such amounts were
provided in the 1997 Period.

         Additionally,  in the 1996 Period, the Partnership recognized a loss of
$155,000 with respect to Kiwi  securities  received in prior  transactions.  The
securities are carried at a nominal value (See Footnote 5).

Inflation and Changing Prices

         Inflation  has had no material  impact on the  operations  or financial
condition of the Partnership from inception through December 31, 1998.  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.

New Accounting Pronouncements

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

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

Impact of the Year 2000 Issue

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

                                       14
<PAGE>
         The  Partnership  does not own its own  software,  but is reliant  upon
software  owned by the  General  Partners or third  party  vendors.  The General
Partners and third party  vendors are either  currently  Year 2000  compliant or
have instituted plans to be so.

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

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

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

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

         Non-compliance on the part of a lessee could result in lost revenue for
the  lessee  and an  inability  to  make  lease  payments  to  the  Partnership.
Non-compliance  by the  lessee's  financial  institution  could also  affect the
ability to process lease  payments.  The  Partnership  has attempted to mitigate
such risks by  inquiring  of each lessee  about its Year 2000  plans,  including
whether they have addressed the issue with their financial institution.

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

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

                                       15
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       PEGASUS AIRCRAFT PARTNERS II, L.P.

List of Financial Statements                                                Page
                                                                            ----

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

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

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

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

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

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


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

                                       16
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS



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


         In our  opinion,  the  accompanying  balance  sheets  and  the  related
statements of income and partners'  equity and of cash flows present fairly,  in
all material  respects,  the financial position of Pegasus Aircraft Partners II,
L.P. (the  "Partnership")  as of December 31, 1998 and 1997,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.   These  financial   statements  are  the   responsibility   of  the
Partnership's  management;  our responsibility is to express an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
financial  statements in accordance with generally  accepted auditing  standards
which require that we plan and perform the audit to obtain reasonable  assurance
about whether the financial  statements  are free of material  misstatement.  An
audit includes examining,  on a test basis,  evidence supporting the amounts and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.



                                                      PricewaterhouseCoopers LLP

New York, New York
March 17, 1999

                                       17
<PAGE>

                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                                 BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997



                                     ASSETS

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

Cash and cash equivalents (Note 4)                         $  2,863   $  5,705
Rent and other receivables, net (Note 5)                        491        444
Aircraft, net (Notes 5, 6, 11 and 12)                        47,258     52,098
Other assets                                                    811         26
                                                           --------   --------
     Total Assets                                          $ 51,423   $ 58,273
                                                           ========   ========

                        LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:

Lease settlement reserve (Note 5)                          $   --     $  3,000
Accounts payable and accrued expenses                           106        123
Payable to affiliates (Note 7)                                  592        211
Maintenance reserves collected (Notes 1 and 5)                1,696        591
Notes payable (Note 6)                                       10,000      4,751
Deferred income and deposits (Note 5)                         1,898      2,584
Distributions payable to partners                             2,931      2,943
                                                           --------   --------
     Total Liabilities                                       17,223     14,203
                                                           --------   --------

COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 9, 11, and 12)

PARTNERS' EQUITY:

General Partners                                               (868)    (1,008)
Limited Partners (7,255,000 units outstanding in
  1998 and 1997)                                             35,068     45,078
                                                           --------   --------
     Total Partners' Equity                                  34,200     44,070
                                                           --------   --------
         Total Liabilities and Partners' Equity            $ 51,423   $ 58,273
                                                           ========   ========

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

                                       18
<PAGE>

                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                              STATEMENTS OF INCOME

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


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

REVENUE:
    Rentals from operating leases             $   12,424  $   12,183  $   15,231
    Interest                                         187         467         736
    Other income                                     124        --          --
    Gain on sale of engine and equipment             254        --          --
                                              ----------  ----------  ----------
                                                  12,989      12,650      15,967
                                              ----------  ----------  ----------

EXPENSES:
    Depreciation and amortization                  8,273       7,863       9,701
    Write-downs (Note 5)                             537       1,400         100
    Management and re-lease fees (Note 7)          1,017         977       1,069
    Interest                                         758         455         674
    General and administrative (Note 7)              312         316         334
    Direct lease (Note 7)                            237         384         396
    Loss in value of securities (Note 5)            --          --           155
    Provisions for bad debts                        --          --           640
                                              ----------  ----------  ----------
                                                  11,134      11,395      13,069
                                              ----------  ----------  ----------

NET INCOME                                    $    1,855  $    1,255  $    2,898
                                              ==========  ==========  ==========

NET INCOME ALLOCATED:
    To the General Partners                          257          13          29
    To the Limited Partners                        1,598       1,242       2,869
                                              ----------  ----------  ----------
                                              $    1,855  $    1,255  $    2,898
                                              ----------  ----------  ----------

NET INCOME PER LIMITED PARTNERSHIP UNIT       $     0.22  $     0.17  $     0.40
                                              ==========  ==========  ==========

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

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

                                       19
<PAGE>

                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                         STATEMENTS OF PARTNERS' EQUITY

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




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

Balance, December 31, 1995                   $   (816)    $ 64,183     $ 63,367

     Net income                                    29        2,869        2,898

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

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

     Net income                                    13        1,242        1,255

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

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

     Net income                                   257        1,598        1,855

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

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

   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, 1998, 1997 and 1996

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

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                  $  1,855   $  1,255   $  2,898
    Adjustments to reconcile net income to net
       cash provided by operating activities:
       Gain on sale of engine and equipment         (254)      --         --
       Depreciation and amortization               8,273      7,863      9,701
       Write-downs                                   537      1,400        100
       Provision for bad debts                      --         --          640
       Loss from securities received in leasing 
         transaction                                --         --          155
    Change in assets and liabilities:
       Rent and other receivables                   (289)        53        711
       Other                                           5        (47)        77
       Accounts payable and accrued expenses         (17)        27        (98)
       Deferred income                                57     (1,751)      (449)
       Payable to affiliates                         381       (425)      (257)
       Maintenance reserves collected              1,105        591       --
                                                --------   --------   --------

          Net cash provided by operating 
            activities                            11,653      8,966     13,478
                                                --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Deposit for aircraft modifications              (790)      --         --
    Capitalized aircraft costs                    (9,012)    (5,240)    (2,496)
    Lease settlement reserve                        --         --        3,000
    Proceeds from the sale of equipment            1,553       --         --
    Repayment of advances by lessees                 242        363        448
                                                --------   --------   --------

         Net cash (used in) provided by 
           investing activities                   (8,007)    (4,877)       952
                                                --------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Security deposits                           $   --     $    556   $   --
    Proceeds from notes payable                    5,249       --        4,751
    Repayment of notes payable                      --         --       (6,638)
    Cash distributions paid to partners          (11,737)   (11,771)   (11,667)
                                                --------   --------   --------
          Net cash used in financing 
            activities                            (6,488)   (11,215)   (13,554)
                                                --------   --------   --------

NET (DECREASE) INCREASE IN CASH AND
    CASH EQUIVALENTS                              (2,842)    (7,126)       876

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR     5,705     12,831     11,955
                                                --------   --------   --------

CASH AND CASH EQUIVALENTS AT END OF YEAR        $  2,863   $  5,705   $ 12,831
                                                ========   ========   ========

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

                                       21
<PAGE>

                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                            STATEMENTS OF CASH FLOWS

        FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (continued)


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


SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:

Interest paid                                   $    750   $    456   $    719
                                                ========   ========   ========

Restricted maintenance reserves collected,
    net of maintenance draw-downs               $     --   $     --   $    144
                                                ========   ========   ========

NONCASH TRANSACTIONS:
Distributions to partners declared but unpaid   $  2,931   $  2,943   $  2,989

Other assets and deferred income removed
    from the books related to Kiwi bankruptcy   $     --   $     --   $    444

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.

                                       22
<PAGE>
                       PEGASUS AIRCRAFT PARTNERS II, L.P.
                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

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.

         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.

         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.

         The Partnership  received stock and rights to warrants of the lessee in
connection with two of its leases.  The  Partnership  recorded the securities at
their  estimated  value and previously  recognized a portion of such  associated
income ratably over the respective lease terms.  The Partnership  wrote-down the
securities to nominal value in 1996. (See Note 5, "Aircraft - Kiwi International
Air Lines, Inc. - Bankruptcy").

                                       23
<PAGE>
         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.

         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.

New Accounting Pronouncements

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

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

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.

                                       24
<PAGE>
     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.

4.   Cash Equivalents

     At December 31, 1998, all cash was held in an interest bearing money market
account. At December 31, 1997, the Partnership held short-term  commercial paper
with various maturities as follows:

                                                      Purchase
      Issuer                  Purchase Date            Price         Par value
      ------                  -------------           --------       ---------
                                                   (in thousands) (in thousands)

Prudential                    December 19, 1997       $ 2,540        $ 2,550
Ford Motor Company Inc.       December 23, 1997           572            575
American Express Inc.         December 31, 1997           499            500
                                                      -------        -------
                                                      $ 3,611        $ 3,625
                                                      =======        =======

5.   Aircraft
                           Net Investment in Aircraft

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

                                                             1998        1997
                                                             ----        ----

Aircraft on operating leases, at cost                     $ 110,149   $ 103,990
Less: Accumulated depreciation                              (62,050)    (55,513)
         Write-downs                                         (8,058)     (8,143)
                                                          ---------   ---------
                                                          $  40,041   $  40,334
                                                          =========   =========

Aircraft held for lease or sale, at cost                  $  46,744   $  46,934
Less: Accumulated depreciation                              (19,093)    (18,839)
         Write-downs                                        (10,319)     (6,216)
         Lease settlement accounted for under the cost
           recovery method                                  (10,115)    (10,115)
                                                          ---------   ---------
                                                              7,217      11,764
                                                          ---------   ---------
         Aircraft, net                                    $  47,258   $  52,098
                                                          =========   =========


                           Rent and Other Receivables

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

                                                             1998        1997
                                                             ----        ----

Rent receivables                                          $     491   $     494
Advances to lessees                                              --         516
Accrued interest and other                                       --          74
                                                          ---------   ---------
                                                                491       1,084
Allowance for bad debts                                          --        (640)
                                                          ---------   ---------
Rent and other receivables, net                           $     491   $     444
                                                          =========   =========

                                       25
<PAGE>
                            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  is subject to an  extended  lease
scheduled to expire on September 15, 1999 which provides for rentals of $138,500
per month.

         Upon  the  expiration  of the  extended  lease  with  Continental,  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, 1998. 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, 1998.  The current  workscope  under the aircraft  modification
agreement  requires the  investment of  approximately  $8.0 million,  subject to
escalation, by the Partnership. The Partnership also estimates expending another
$1.0 million to meet the lease delivery conditions.

         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.  Continental  took the  A-300  out of  service  in May  1995,  and the
aircraft was  prepared  for  delivery in June 1995 to a new lessee,  Akdeniz Air
Mediterranean, Inc. ("Akdeniz") based in Turkey.

         In June 1995, the Partnership executed a lease of the A-300 aircraft to
Akdeniz for a scheduled  term of four years,  under which  Akdeniz  subsequently
defaulted.  The  Partnership  recovered  the  A-300  aircraft.  The  Partnership
estimated that it would cost  approximately  $2.5 million for a scheduled  heavy
maintenance  check,  modifications  and FAA mandated  work that will be required
prior to delivery of the  aircraft to a new  lessee.  The  Partnership  received
$557,000 from Continental pursuant to the A-300 Settlement discussed below which
was applied  towards  such  maintenance.  At December  31, 1997 the  Partnership
provided a  write-down  of $1.1 million to reflect a current  informal  purchase
offer for the airframe plus the appraised value of the engines.

         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 ("DC-10 Restructuring").

         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 Akdeniz
remarket,  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 economic
settlement  in lieu of  Continental  performing  certain  maintenance  work  and
meeting  the return  conditions  required by the A-300  lease.  The lease of the
Continental  727 No. 1 expired January 31, 1998 and the aircraft was returned to
the  Partnership.  The  Partnership  and  Continental  continue  discussing each
party's  obligation  with respect to the return  condition of the aircraft under
the lease.  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

                                       26
<PAGE>
and has  converted  the aircraft to cargo  configuration,  including a low gross
weight  hushkit.  (See TNT  discussion  below).  See also Note 11,  herein  with
respect to the disposition of Continental 727 No. 2.

         Under the DC-10  Restructuring the Partnership  received  approximately
$3,100,000 in cash, the lease  expiration  date was changed from May 31, 1997 to
October 31, 1996 and the monthly  lease  payments  were reduced from $252,000 to
$135,000  effective  September 15, 1995.  All other terms and  conditions of the
DC-10-10 lease remained unchanged.  During 1996, Continental and the Partnership
reached an agreement  to extend the lease of the  DC-10-10  aircraft to June 30,
1998 at a lease rate of $150,000  per month.  In late 1997 the  Partnership  and
Continental  signed a lease  amendment  which extended the lease of the DC-10-10
aircraft from July 1, 1998 through September 15, 1999 at a monthly lease rate of
$138,500.

         Continental  filed for Chapter 11 bankruptcy  protection on December 3,
1990. The  Partnership  entered into various lease  modifications  and financing
arrangements  with  Continental  as a result of the  bankruptcy all of which had
been repaid as of January 1998.

         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 maintenance  reserves of $225 per engine hour or cycle,  whichever
is greater.  The  Partnership  and VASP extended the lease to December  1998. 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 are the same as
the first engine lease. Both engine leases are scheduled to expire in June 1999.
The Partnership continues to re-market this aircraft for lease or sale.

         At December  31,  1998,  VASP was in arrears  with respect to scheduled
rent  payments,  for a total of  $273,000,  which is reflected in rent and other
receivables  and  $129,000  in  arrears  with  respect  to  maintenance  reserve
payments.  As of December 31, 1998 the  Partnership  was also  holding  security
deposits  from  VASP of  $400,000.  If VASP is unable  to bring  their  payments
current, the Partnership would evaluate all of its rights including repossession
and  remarketing  of the engines,  which may include  re-installing  them on and
remarketing the A-300 aircraft.  If the Partnership remarkets the engines or the
aircraft,  there can be no  assurance  as to the  ability  to do so, the time it
would take and the lease rate or sale price that might be achieved.

         During the first  quarter of 1999,  one of the engines on lease to VASP
failed.  The engine is currently being  overhauled in a maintenance  facility by
Air France at VASP's expense.

         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.  As described  below,  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,  originally  scheduled to expire on June 30, 1993. The lease 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
was fully repaid in monthly  installments  through October 1998 with interest at
9.68%. At December 31, 1997, the balance of the receivable was $94,000. All 1998
repayments of advances were made by TWA.

                                       27
<PAGE>
         In mid-October 1994, because of operating and financial  problems,  TWA
announced that it would seek a global  restructuring  of its capital by offering
common stock for its debt  securities,  preferred  stock  obligations  and lease
deferrals  negotiated with aircraft  lessors such as the Partnership  ("Exchange
Offer") with the  objective  of an orderly  financial  reorganization  through a
prepackaged  bankruptcy filing. In conjunction with this restructuring,  TWA and
the  Partnership  agreed  ("TWA  Agreement")  to a  deferral  of 50% of the rent
scheduled for November 1994, and 75% of the rent scheduled from December 1994 to
April 1995 for the MD-82  aircraft  (50% of the December 1994 through April 1995
rent with respect to the L-1011  aircraft)  followed by a return to the original
payment  schedule.  All rents  deferred  during the November  1994 to April 1995
period  were  repaid  with  interest  at 12% from the date of  deferral  over an
18-month  period  which  commenced  May  1,  1995.  Additionally,  TWA  and  the
Partnership  agreed to extend the lease of the MD-82  aircraft  six years beyond
the scheduled  expiration  date (to November  2004) at the current lease rate of
$185,000 per month. On June 30, 1995, TWA filed its  prepackaged  reorganization
plan  under  Chapter  11 of the US  Bankruptcy  Code.  On  August  23,  1995 the
reorganization   plan  which  included  the  foregoing  lease  modification  was
confirmed by the Bankruptcy Court and TWA emerged from bankruptcy.  TWA has made
all rental payments, advance repayments and payments of deferred rent. There can
be no assurance that it will be able to meet its obligations in the future.

         In  mid-1996,  as part of the 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.

          At  December  31,  1998  the  L-1011  aircraft  had a  book  value  of
approximately  $1.7 million.  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.  The  Partnership is currently  remarketing  the Lockheed
L-1011 aircraft.

         TWA was current on its lease payments in 1998 and made final  repayment
of the  funds  advanced  by the  Partnership  however,  TWA  reported  its  10th
consecutive  annual  loss in  1998.  Although  TWA had a cash  position  of $314
million at September 30, 1998,  given TWA's historical  financial  difficulties,
the ongoing  losses  increase the  possibility of a default or deferral of lease
payments by TWA, which accounted for 21% of the  Partnership's  lease revenue in
1998.

         Aeromexico  Leases.  During July 1992,  the  Partnership  re-leased two
McDonnell  Douglas DC-9-31  aircraft  previously  leased to and repossessed from
Midway   Airlines  Inc.   ("Midway")  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 DC-9-31  aircraft had  originally  been acquired in March and April
1990 for purchase prices  aggregating  $14,295,000.  At the time the Partnership
repossessed  these  two  aircraft  from  Midway,  the  aircraft  were in need of
substantial  maintenance  work. As a precondition  to accepting the aircraft for
lease,  Aeromexico  required the Partnership to complete the needed  maintenance
procedures and also to make certain capital  improvements  to the aircraft.  The
Partnership incurred  approximately $5.5 million in completing these maintenance
procedures  and  capital  improvements  prior to  delivery  of the  aircraft  to
Aeromexico.

         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.

                                       28
<PAGE>
         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.

         The letter of credit has a current  face amount of  approximately  $1.2
million.  The letter of credit agreement originally obligated the Partnership to
deposit  $35,000 per quarter  (beginning on June 1, 1992) as cash  collateral to
collateralize the Partnership's obligation under the letter of credit agreement.
In July 1995,  the  Partnership  consummated an agreement with the issuer of the
letter of credit under which the issuer released its interest on the cash in the
cash  collateral  account and eliminated the  requirement for future deposits to
such account.

         Under  the  operating  lease,  the  lessee,   USAir,  has  assumed  all
liabilities,  indemnities  and  obligations of the Trust to the tax lessor under
the TBT lease and has agreed to indemnify the Trust for any liability, indemnity
or  obligation  to the tax  lessor  under the TBT  lease  except  for  liability
resulting  from breaches by the Trust of covenants  under the  operating  lease.
USAir has not posted a letter of credit to collateralize  this obligation.  As a
result of the  foregoing,  if the tax lessor  draws on the letter of credit as a
result of 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.  There have been no calls
on the letter of credit through December 31, 1998.

         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.

         Kiwi  International  Air  Lines,  Inc.  -  Bankruptcy.   In  1993,  the
Partnership leased two Boeing 727-200 aircraft to Kiwi  International  Airlines,
Inc. ("Kiwi") one of which was previously leased to Continental and the other to
Dan-Air  Services  Limited.  The  aircraft  were  originally  purchased  in 1989
(Non-advanced)  and 1990  (Advanced)  for  purchase  prices  of  $6,261,000  and
$10,748,000,  respectively  (including  related fees). The leases were operating
leases which required  monthly rental  payments,  in advance,  in the amounts of
$60,000  (Non-advanced)  and  $115,000  (Advanced)   (collectively,   the  "Kiwi
Leases").  The Kiwi Leases were originally scheduled to expire on April 15, 1998
and June 30,  1998,  respectively.  In 1996,  the Kiwi Leases  were  amended and
extended to December 31, 1999. Kiwi was also obligated to make monthly  payments
of $250 per flight hour for maintenance  reserve funds  administered and held by
the  Partnership.  An  affiliated  partnership  and  affiliates  of the Managing
General Partner also own aircraft which were leased to Kiwi.

         In connection with the delivery of the aircraft to Kiwi the Partnership
expended  $2,228,000 with respect to the Boeing 727 Advanced aircraft,  of which
$971,000 was capitalized and $1,257,000 represented maintenance costs which were
paid out of funds  received in a maintenance  settlement  with the prior lessee.
Capitalized  improvements of $743,000 were made with respect to the non-advanced
aircraft.

         The  Partnership  also  received  Kiwi stock and rights to  warrants in
connection with these leasing  transactions.  Based upon the price at which Kiwi
sold similar securities to unrelated third parties,  the Partnership  originally
recorded the securities at a value of $600,000.  The  securities  were valued at
approximately  $-0- at December  31,  1998 and $1,000 at December  31, 1997 (see
Kiwi bankruptcy discussion below).

         During 1994, the  Partnership  funded  approximately  $633,000 of costs
primarily  related to  compliance  with  certain FAA  airworthiness  directives,
$308,000 of which was scheduled to be repaid by Kiwi over a one-year period.  In
March 1996,  Kiwi signed a promissory  note  ("Bellyskin  Note")  scheduling the
repayment of this amount over  eighteen  months  which began June 1, 1996,  with
interest from February 1997 at 12% per annum.

         In August  1996,  the  Partnership  paid $1.9  million to  hushkit  the
non-advanced 727 aircraft for which Kiwi was to pay an increased lease rate over
an extended lease term.  The hushkit  purchase price was funded out of operating
cash previously generated.

                                       29
<PAGE>
         During 1996,  in part because of the  grounding of certain  aircraft by
the FAA as the result of pilot handbook  deficiencies and the market reaction to
the ValuJet crash, Kiwi did not meet its financial goals. Kiwi requested and was
granted by the  Partnership  a deferral  of its August 1996 rental and July 1996
maintenance  payments  for the  advanced  aircraft  and the July rental and June
maintenance  reserves with respect to the non-advanced  aircraft.  Kiwi was also
unable to make its  September  rental and August  maintenance  payments for each
aircraft and was placed in default by the Partnership.

         On   September   30,  1996,   Kiwi  filed  a  voluntary   petition  for
reorganization  under  Chapter 11 of the Federal  Bankruptcy  Code  ("Bankruptcy
Code") and did not make any subsequent  payments.  The Kiwi Leases accounted for
approximately 11% of the  Partnership's  rental revenue in 1996 and the aircraft
had  net  book  values  aggregating   approximately  $8,100,000  (including  the
hushkit),  at  December  31,  1996.  Additionally,  the  unpaid  balance  of the
Bellyskin Note,  plus interest,  was $290,000 at that time. On October 15, 1996,
Kiwi ceased scheduled flight  operations and rejected both leases as of November
15, 1996. The  Partnership  provided an allowance for bad debts in the amount of
$640,000  with respect of amounts due at  September  30, 1996 and did not record
any revenue beyond that date. The Partnership recovered the aircraft in 1996 and
prepared them for delivery to new lessees,  Falcon Air Express, Inc. and Capital
Cargo  International  Airlines,  Inc. as discussed below. The Partnership  filed
claims in Kiwi's bankruptcy for all unpaid items and rejection damages. In April
1997, the Partnership won a summary  judgment in Bankruptcy Court permitting the
use  of  the  previously  collected  maintenance  reserve  ($2.3  million).  The
Partnership reclassified the collected reserves from restricted cash to cash and
cash equivalents and utilized thereof a portion against expenditures to make the
aircraft  leasable.  In July  1997,  the  Bankruptcy  Court  approved a proposal
submitted  by a group that  includes  certain of the parties  that had  provided
debtor-in-possession financing to purchase the operating assets of Kiwi from the
bankrupt  estate.  Based  upon the  approved  purchase  price and the  remaining
assets, it is likely that the Partnership will have little or no recovery of its
bankruptcy claims. Based on a petition by creditors, the case has been converted
to a Chapter 7 liquidation and a Trustee has been appointed by the court.

         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,  $600,000  of which  was
expended in 1996. 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 to restore the aircraft.

         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.

         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,
1998,  Falcon was four  months in arrears to the  Partnership,  with  respect to
scheduled  rent  payments,  for a total of $380,000 and $179,000 in arrears with
respect to maintenance reserve payments.  Falcon has made all scheduled rent and
maintenance  reserve  payments in 1999, and has paid $100,000 of the maintenance
arrearages.  The  Partnership  has recorded a receivable for $95,000 of past due
rent and is also holding a $95,000 security deposit from Falcon.

         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 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"),  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 had incurred

                                       30
<PAGE>
costs of  approximately  $2,000,000  related to the hushkit,  as of December 31,
1998.

         The Capital Lease requires Capital to fund maintenance reserves monthly
at a rate of $377 per flight hour.  Capital 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 in July 1997.

         Shortly after  delivery of the aircraft to Capital in 1997,  one of the
engines  failed.  In August 1998,  the  Partnership  reached an  agreement  with
Capital,  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.

         In July 1997,  in  connection  with the  delivery  of the  aircraft  to
Capital,  the  Partnership  purchased two JT8D-15  engines from an  unaffiliated
third party for cash of $1,550,000  plus two JT8D-15  engine cores returned with
the aircraft by Kiwi.  Maintenance  reserves  previously  collected from Kiwi of
approximately $1,144,000 were applied to such costs to restore the aircraft.

         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.

         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
loss. 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.  The work was  performed  and  certain  of the
aircraft parts were provided by companies  affiliated with the Managing  General
Partner or its President and Director. See Note 7 ("Transactions with Affiliates
- Other").

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

         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

Significant Lessees

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

Airlines                                         Percentage of Rental Revenue(2)
                                                   1998       1997      1996(1)
                                                   ----       ----      -------

Continental Airlines, Inc. (3)                      25%        33%        44%
Trans World Airlines, Inc.                          21         30         25
Aerovias de Mexico S.A. de C.V                      14         15         12
Kiwi International Air Lines, Inc.                  (4)        (4)        11

(1)      Such percentage  includes  amounts earned from Kiwi leases for which an
         allowance for bad debt was provided.

                                       31
<PAGE>
(2)      Such percentages include the periodic  recognition of amounts that were
         prepaid in connection with certain lease settlements.

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

(4)      Represents less than 10%.

         Revenues  include rentals from aircraft  leased to foreign  airlines or
carriers  of  $3,429,000,  $1,851,000  and  $1,872,000  in  1998,  1997 and 1996
respectively.

                          Future Minimum Rental Income

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

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

              1999                                           $10,490
              2000                                             7,455
              2001                                             6,616
              2002                                             4,394
              2003                                             3,480
              Thereafter                                       3,383
                                                             -------
              Total                                          $35,818
                                                             =======

         The above schedule of future minimum rental income, includes a total of
$3,618 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.

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

6.       Notes Payable

         In December  1996,  the  Partnership  established  a  $10,000,000  loan
facility with an unaffiliated  third party lender.  The loan commitment is for a
period  of  36  months,  terminating  December  31,  1999,  at  which  time  the
outstanding  principal  is due.  The loan  provides for interest at a rate of 1%
over the lender's prime rate of interest and is payable monthly. At December 31,
1998 the  interest  rate was  8.75%.  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
and the two  727-200  advanced  aircraft  leased  to  Continental  and TNT.  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. (See Note 12, "Subsequent Event").

7.       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, 1998,  1997 and 1996, the General
Partners  earned  base  management  fees of  $177,000,  $179,000  and  $219,000,
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, 1998,  1997 and 1996,  the General  Partners
earned   incentive   management   fees  of  $505,000,   $495,000  and  $598,000,
respectively.

                                       32
<PAGE>
         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, 1998,  1997 and 1996,  the General  Partners
earned re-lease fees of $335,000, $303,000 and $252,000, 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 $19,000, $75,000 and $75,000
in each of the years ended  December 31, 1998,  1997 and 1996,  of which $38,000
was payable to the  Administrative  General  Partner at December 31,  1998.  The
decline  in  accountable  expenses  is  due  to the  subcontracting  of  certain
accounting  services,  and their cost is included in general and  administrative
expenses.

         Other.  During 1998,  1997 and 1996, the Partnership  paid  $1,313,000,
$1,694,000 and $554,000 to a licensed  maintenance  facility affiliated with the
Managing  General Partner for work performed on certain  aircraft.  Additionally
during 1998,  1997 and 1996 the  Partnership  paid  $1,887,000,  $2,308,000  and
$134,000  respectively  to a company owned by the 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.

                                       33
<PAGE>
8.       Reconciliation to Income Tax Method Of Accounting

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

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


Net income per financial statements              $  1,855   $  1,255   $  2,898
Increase (decrease) resulting from:
   Depreciation                                    (4,523)    (4,547)    (3,381)
   TBT interest income, less
      TBT rental expense                           (1,174)      (932)      (742)
   Gain on sale of engines                            524       --         --
   Reserves for maintenance costs,
      net of maintenance expense and
      write-downs of aircraft                         459      1,400        244
   Maintenance reserve payable                      1,184        590      3,000
   Deferred rental income                            (526)    (1,686)      (449)
   Rental income                                      285       --         --
   Provisions for bad debts                        (1,678)      --          640
   Loss on value of stock                            --         --          155
   Management fees                                    (26)      --         --
   Other                                              (18)       123       (161)
                                                 --------   --------   --------
Taxable (loss) income per federal
  income tax return                              $ (3,638)  $ (3,797)  $  2,204
                                                 ========   ========   ========

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

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

Total Partnership equity per
   financial statements                          $ 34,200   $ 44,070   $ 54,540
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                                285       --         --
   Distributions payable to partners                2,931      2,943      2,989
   Management fees payable                            (26)      --         --
   Reserves for maintenance costs and
      write-downs                                  22,321     20,276     18,286
   Deferred income                                    759      2,028      3,733
   Accumulated depreciation                       (42,448)   (38,712)   (34,165)
   TBT interest income less TBT rental expense     (5,055)    (3,881)    (2,949)
   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        640
   Securities received in leasing transaction        --          599        599
   Other                                              (13)       354        254
                                                 --------   --------   --------
Tax bases of net assets                          $ 39,364   $ 54,727   $ 70,337
                                                 ========   ========   ========

                                       34
<PAGE>
9.       Litigation

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

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

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

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

10.      Fair Value of Financial Instruments

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

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

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

11.      Commitments

         Upon the  expiration  of the extended  lease for the DC-10-10  aircraft
with  Continental  Micronesia,  the  Partnership  will convert the aircraft to a
freighter pursuant to an aircraft  modification  agreement for delivery to Emery
Worldwide Airlines Inc. ("Emery"). The workscope under the aircraft modification
agreement  requires the  investment of  approximately  $8.0 million,  subject to
price escalation. The Partnership estimates expending an additional $1.0 million
to meet the delivery  conditions under the lease with Emery. The Partnership and
Emery have signed an  agreement in  principle  which  provides for a lease of 84
months  with rent of  $218,000  per month.  The lease  also  provides a two year
renewal of $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.

         In 1998, the Partnership  entered into  discussions with Kitty Hawk for
the lease of the Boeing  727-200  aircraft,  upon the  expiration of the current
lease of that aircraft, with Continental,  which expires in May, 1999. The lease

                                       35
<PAGE>
would require the Partnership to hushkit and convert the aircraft to a freighter
at an estimated cost of $4.2 million.  The lease  agreement  would provide for a
lease of 84 months with rent of $112,700  per month.  Kitty Hawk has  provided a
security deposit of $56,000.

         In all, the Partnership has estimated commitments of $13.7 million. The
Partnership  has drawn all  available  funds  under  its $10  million  borrowing
facility  and the  principal  balance at December  31, 1998 is $10  million.  In
February,  1999, the lender increased the borrowing  commitment from $10 million
to $12.5 million.  (See Note 12, "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  utilizing the Kitty Hawk and Emery leases to fund the  conversions of
such  assets.  If unable to secure  additional  borrowing  capacity  to fund the
commitments,  the  Partnership  may need to forgo the lease with Kitty Hawk,  as
well as possibly sell  equipment.  Further,  the Partnership may have to utilize
cash from  operations to finance such  commitments,  thus  potentially  reducing
distributions to partners.

12.      Subsequent Event

         In February 1999, the Partnership  consummated an agreement to increase
the committed  amount of the loan facility from $10 million to $12.5 million and
the interest rate from 1% to 1.25% over prime.  The  Partnership has pledged all
of its aircraft as collateral in connection with the increased loan  commitment.
The  Partnership  will utilize the  additional  borrowings to replenish  working
capital,  which was drawn down to pay for the hushkit for the  aircraft on lease
to Capital Cargo International  Airlines,  Inc. ("Capital Cargo").  This loan is
due in December,  1999. If the Partnership is unable to renegotiate or refinance
the loan it will be forced to reduce or suspend distributions.

                                       36
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         There were no changes in accountants or disagreements  with accountants
with respect to accounting or financial  disclosure issues during 1998, 1997 and
1996.

                                       37
<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 45, is President and Chairman of the Board of the
Managing  General Partner and Pegasus  Capital  Corporation  ("PCC"),  which was
formed in 1988.  Prior to forming Pegasus Capital  Corporation,  Mr. Wiley was a
Vice  President  of CIS  Corporation  ("CIS"),  a  wholly  owned  subsidiary  of
Continental Information Systems Corporation  ("Continental") for the period 1986
to 1988. Mr. Wiley  originated  aircraft  transactions  throughout the world and
sold aircraft to third-party  investors.  From 1985 to 1986, Mr. Wiley worked as
Treasurer of Caterpillar Capital Company in San Diego, California.  From 1983 to
1985,  he served as Managing  General  Partner and  President  of RAM  Financial
Corporation in Houston,  Texas, an equipment  leasing  venture capital  company.
Prior to joining  RAM,  he worked  for GATX  Leasing  Corporation  as a District
Manager  from 1980 to 1983.  Mr. Wiley  received a B.S.  degree from the Indiana
University  School of Business and an M.B.A.  from the University of California,
Los Angeles.

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

         Robert M.  Brown,  40,  joined PCC in 1988 and is  involved in aircraft
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,  61,  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.

                                       38
<PAGE>
                           Air Transport Leasing, Inc.

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

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

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

         Clifford  B.  Wattley,  age 49,  is  President  and a  Director  of the
Administrative  General Partner.  Mr. Wattley is a Corporate Vice President with
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 39, 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 30, is Vice  President,  Secretary,  Treasurer and
Chief Financial and Accounting Officer of the Administrative General Partner, he
also  serves as an  Assistant  Vice  President  within the  Private  Investments
Department of PaineWebber  Incorporated.  Mr. Fusco had previously been employed
as a Financial Valuation  Consultant in the Business Valuation Group of Deloitte
& Touche,  LLP from January 1997 to August 1998.  He was employed as a Commodity
Fund  Analyst  in  the  Managed  Futures  Department  of  Dean  Witter  Reynolds
Incorporated,  from October 1994 to November 1995. Prior to joining Dean Witter,
Mr.  Fusco  was a Mutual  Fund  Accountant  with  the  Bank of New York  Company
Incorporated.  He received  his  Bachelor of Science  degree in  Accounting  and
Finance  in  May  1991  from  Rider   University   and  a  Master  of   Business
Administration from Seton Hall University in June 1996.

ITEM 11. EXECUTIVE COMPENSATION

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

                                       39
<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 as the result of legal settlements
                  with various limited partners.

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, 1999.

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

         Richard S. Wiley                        29,501                 *

         Carol L. Chase                           1,300                 *

         All directors and
         officers as a group
         (4 persons)                             30,801                 *

         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.

                                       40
<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 1998.

         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  1998,  the General  Partners  earned base  management  fees of
$177,000.

         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 $505,000
during 1998.

         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 $335,000 during 1998.

         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 $19,000 during 1998, all of
which was paid or accrued to the Administrative General Partner. As discussed in
Note 7 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 1998, 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 $1,887,000. During 1998, the Partnership paid $1,313,000 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 $117,000 as their allocable share of distributable cash
flow for 1998. In addition, $257,000 of the Partnership's net taxable income for
1998 was allocated to the General Partners.

                                       41
<PAGE>
                                     PART IV

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

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

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

         (b)  During the quarter ended  December 31, 1998, the  Partnership  did
              not file any reports on Form 8-K.

         (c)  Exhibits required to be filed.

         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.*

         (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.*

                                       42
<PAGE>
         (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.*

         (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.*

                                       43
<PAGE>
         (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).*

         (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).*

                                       44
<PAGE>
         (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.*

         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.*

                                       45
<PAGE>
         (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).*

         (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

                                       46
<PAGE>
                        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  10.8(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
                        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.*

                                       47
<PAGE>
         (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.*

                                       48
<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.*

         (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 N357KP.*

         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 _______  between ___
                        Bank, N.A. and First Security Bank as Owner Trustee.

         11             Partnership Policy for Requests for Partner Lists.

                                       49
<PAGE>

                                   SIGNATURES

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

         Dated: March 29, 1999

                                  Pegasus Aircraft Partners 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, 1999.

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

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

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

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

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

                                       50