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, 2001
                          ------------------------------------------------------

                                       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 49 pages.

<PAGE>

                       Pegasus Aircraft Partners II, L.P.
                       Annual Report on Form 10-K for the
                       Fiscal Year Ended December 31, 2001

                                Table of Contents

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

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

Part II
-------

Item 5        Market for Registrant's Common Partnership Capital and
                Related Unitholder Matters....................................9
Item 6        Selected Financial Data........................................10
Item 7        Management's Discussion and Analysis of Financial
                 Condition and Results of Operations.........................10
Item 8        Financial Statements...........................................17
Item 9        Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure.........................35

Part III
--------

Item 10       Directors and Executive Officers of the Registrant.............36
Item 11       Executive Compensation.........................................37
Item 12       Security Ownership of Certain Beneficial Owners and
              Management.....................................................38
Item 13       Certain Relationships and Related Transactions.................39

Part IV
-------

Item 14       Exhibits, Financial Statement Schedules and Reports on
              Form 8-K.......................................................40

                                       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 UBS Americas, Inc. UBS Americas
is the  successor to Paine  Webber  Group,  Inc.  (Pegasus  Aircraft  Management
Corporation  and Air  Transport  Leasing,  Inc.  are herein  referred  to as 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.

         Although it is likely to liquidate sooner,  the Partnership is required
to dissolve and  distribute  all of its assets no later than  December 31, 2007.
The  Partnership  sold its MD-82 and one of its  Boeing 727  airframes  in 2001.
These sales resulted in the Partnership  owning seven  aircraft,  three engines,
and a 50% ownership in a Trust that owns one  aircraft.  The net proceeds of the
aircraft sales were generally utilized to pay down the Partnership's debt.

Outlook for the Airline and Aircraft Leasing Industries

         The US airline industry had an unprofitable year in 2001 that ended the
industry's sustained trend of profitability.  Results were adversely affected by
continuing  high fuel prices  through most of 2001 and higher  labor costs.  The
industry also accepted  delivery of a record number of new aircraft,  which also
put  pressure on  profitability.  Further,  as  discussed  below,  the events of
September 11, 2001 have negatively impacted air travel and air freight.

         The  industry's  results  historically  have been highly  correlated to
general economic activity. Due to concern regarding an economic slowdown, the US
Federal  Reserve Board has recently  reduced its key lending rate on a number of
occasions in an attempt to stimulate economic activity.  It is unclear as to the
ultimate  impact on the level of  economic  activity  of these  rate  decreases,
however, a significant economic slowdown has had an adverse affect on air travel
and airline performance.

         On January 10, 2001 Trans World Airlines, Inc. ("TWA"), which accounted
for 8% of the  Partnership's  revenues in 2001,  filed for Chapter 11 Bankruptcy
protection.  On January 9, 2001,  TWA entered into an Asset  Purchase  Agreement
with American  Airlines,  Inc.  American  purchased  substantially  all of TWA's
assets and  assumed  certain  of its  liabilities.  As part of the  transaction,
American Airlines purchased the Partnership's MD-82 for $9.5 million. Kitty Hawk
Aircargo,  Inc.  which leases a Boeing 727  freighter,  accounted for 15% of the
Partnership's  revenue  in the year  2001,  and has  been  operating  under  the
protection of the Federal  bankruptcy law since May 2000. Due to an inability to
find adequate  financing  and reduced air traffic,  Kitty Hawk has recently made
only partial rent payments.

         Passenger  aircraft and freighter  aircraft  leasing  continues to be a
highly competitive business and the Partnership's  lessees also continue to face
significant challenges.

                                       3
<PAGE>


Aircraft Portfolio

         Based in part on appraised values for the Partnership's  aircraft,  the
Partnership's net asset value at December 31, 2001 was estimated to be $2.42 per
Unit.  It should be noted  that  this is only an  estimate  of values as of that
date, and is not necessarily  representative  of the values that will ultimately
be realized  when these  aircraft  are disposed of nor does this  represent  the
values that may be realized upon the disposition of a Unit.

         The following table describes the Partnership's  aircraft  portfolio at
December 31, 2001:

<TABLE>
<CAPTION>
                                                                  Dec.      Current                             Cumu-       Cumu-
                                            Owner-     Acqui-     2001       Lease     Original      Noise      lative      lative
   Current          Aircraft                 ship      sition   Appraised Expiration   Delivery    Abatement    Flight      Flight
   Lessee             Type                 Interest   Costs(1)  Value(1)   Date (2)      Date     Compliance   Hours(3)    Cycles(3)
   ------             ----                 --------   --------  --------   --------      ----     ----------   --------    ---------
                                                 (dollar amounts in millions)
<S>                <C>                       <C>        <C>       <C>       <C>          <C>     <C>            <C>         <C>
Off-Lease (5)      McDonnell
                   Douglas DC-9-31           100%       $ 8.9     $ 0.3       (5)        1971    Stage  II      69,343      64,873

Kitty Hawk         Boeing 727-200
Aircargo, Inc      Freighter                 100          9.2       1.1     12/6/06      1973    Stage  III (7) 77,721      53,727

TNT Transport      Boeing 727-200
Intl.  B.V.        Freighter                 100          8.4       2.2     06/22/02     1973    Stage III (7)  74,864      53,597

Emery Worldwide    McDonnell Douglas DC10-10
Airlines Inc. (6)  Freighter                 100         31.9      14.8     11/01/07     1973    Stage III      84,544      30,734

Off-Lease (5)      Airbus Industrie
                   A300-B4-103               100         27.9       0.3       (5)        1979    Stage III      46,226      19,527

Off-Lease (5)      Engines only (8)          100          0.1       0.3       (5)        1970    Stage III (7)      (9)        (9)

Off-Lease (5)      Boeing 727-200
                   Freighter (7)             100         17.3       3.0       (5)        1973    Stage III (7)  62,246      32,734

                   Lockheed
Off-Lease (5)      L-1011                    100         17.8         0       (5)        1974    Stage III      61,209      22,907

Vanguard Airlines  McDonnell
                   Douglas MD-81              50(4)      10.1       3.7     08/27/04     1982    Stage III      53,633      46,135
                                                       ------     -----
                                                       $131.6     $25.7
                                                       ======     =====
</TABLE>


Notes:        (1)  Acquisition  costs do not include  related  acquisition  fees
                   paid to the  General  Partners.  The  Partnership  previously
                   owned a McDonnell  Douglas DC-9, which was a total loss in an
                   accident in 2000, a McDonnell  Douglas MD-82,  which was sold
                   in 2001, and a Boeing 727-200 airframe, which was sold to the
                   lessee.

                   An  independent   aircraft   appraisal  firm  determined  the
                   December 2001 appraised values.  Appraised values include the
                   present  value of rents  due under  leases in place  plus the
                   present value of an estimated residual value for the aircraft
                   at  the  end of  the  lease,  generally  assuming  half  time
                   condition.  The appraiser  also assumes that  achieving  fair
                   market  value may  require  12 to 18 months  of  exposure  to
                   prospective  buyers.  It should be noted that  appraisals are
                   only  estimates  of value  and  should  not be  relied  on as
                   measures of immediately  realizable value. A discount rate of
                   10% was utilized and  inflation  was assumed to be 2.5%.  The
                   Off-Lease  aircraft is shown at the current  book value.  The
                   value of the  Kitty  Hawk  aircraft  is  based  on  collected
                   reserves  and  the  estimated  value  of  lease  unencumbered
                   aircraft,  which approximates its book value of the aircraft.
                   The value of the TNT  aircraft is what is  anticipated  to be
                   realized  upon  the  sale of the  aircraft  at the end of the
                   lease.

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

              (3)  The number of cumulative  flight cycles and cumulative flight
                   hours shown are as of December 31, 2001.

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

                                       4
<PAGE>


              (5)  Aircraft  off lease at  December  31,  2001.  The value shown
                   represents the appraised  value when  available,  or the book
                   value of the aircraft and engines, which represents estimated
                   realizable values.

              (6)  The lease with Continental  expired on December 16, 1999. the
                   Partnership  has  converted  the  McDonnell  Douglas DC 10-10
                   aircraft to a freighter.  Conversion  work was  completed and
                   the  aircraft  was put  into  service  with  Emery  Worldwide
                   Airlines, Inc. in December 2000.

              (7)  Federal Express hushkit installed.

              (8)  Engines from the Boeing 727, formerly leased to Falcon. Three
                   Pratt & Whitney  JT8D-9A's,  serial  number MSN  665580,  MSN
                   674404, and MSN 674570.

              (9)  Airframe sold.

         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 nine different  airlines during
2001.  Revenue from each of the airlines  which  accounted for 10% or greater of
the total rental revenue of the Partnership during 2001 are as follows:

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

TNT Transport International B.V.                                 18%
Kitty Hawk Aircargo, Inc.                                        15%
Emery Worldwide Airlines, Inc.                                   31%
Falcon Air Express, Inc.                                         12%



Safety Requirements and Aircraft Aging

         In  addition  to  registration,  the FAA  imposes  strict  requirements
governing  aircraft   inspection  and  certification,   maintenance,   equipment
requirements,  general  operating and flight rules (including limits on arrivals
and departures),  noise levels, certification of personnel and record keeping in
connection with aircraft  maintenance.  FAA regulations  establish standards for
repairs,  periodic  overhauls  and  alterations,  and require  that the owner or
operator of an aircraft  establish  an  airworthiness  inspection  program to be
carried out by certified mechanics.  Pursuant to the leases and FAA regulations,
no aircraft of the Partnership may be operated  without a current  airworthiness
certificate.

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

         Aircraft aging is a significant issue in aircraft safety regulation. In
the past,  certain  aviation  incidents and accidents  raised  concerns over the
structural  integrity of older aircraft.  In 1989, in its "Report to Congress on
the Status of the U.S. Stage II Commercial  Aircraft Fleet," the FAA stated that
"no  correlation  has  been  established  between  the  chronological  age of an
aircraft and its  structural  airworthiness.  A more accurate  assessment of the
physical  "age" of an aircraft is the total  number of flight  cycles and flight
hours flown." A flight cycle is defined as one takeoff and one landing. A flight
cycle is important because of the added stress on the airframe, landing gear and
other  components  from  repeated  takeoffs,  landings and  pressurizations.  As

                                       5
<PAGE>

different  types of aircraft have different  missions and carriers fly a variety
of  routes,   flight  cycles  can  vary  widely  among   aircraft  of  the  same
chronological  age.  In  general,  narrow-body  aircraft,  which  are  used  for
short-haul  service,  will have greater cycles per year than wide-body  aircraft
used for  longer  routes.  Other  factors  which  contribute  to the aging of an
aircraft are the number of hours actually flown, the predominant  environment in
which an aircraft has flown, and its actual age in years.

         The FAA has  adopted  certain  ADs for  Boeing  and  McDonnell  Douglas
aircraft  models,  including  Boeing 727s,  737s and 747s and McDonnell  Douglas
DC-9s,  MD-80s and DC-10s, as well as Lockheed L-1011s and Airbus A-300s.  These
ADs make  mandatory  the periodic  replacement  or  modification  of  structural
materials,  fittings  and skin at  certain  times  in the  life of an  aircraft,
typically  when the aircraft  reaches a certain  number of flight  cycles or age
threshold.  Previously, these aircraft were subject only to periodic inspection,
and the  replacement  and  modification  of  materials  and parts was done where
deemed necessary. In addition, it is widely expected that foreign civil aviation
authorities,  especially  in Europe and Japan,  will adopt  similar  measures to
protect the structural integrity of older aircraft.

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

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

                             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 is included in the  aircraft  portfolio  table  included
earlier in Item 1.

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

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

                                       6
<PAGE>


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  provided  that  Stage II
aircraft  would be phased out from  operation  within United States  airspace by
December 31, 1999.

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

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

         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

         In late 2001,  three formerly VASP owned  properties  were sold and the
Court judgment  awarded to the  Partnership  was satisfied,  with interest.  The
lawsuit against Capital Cargo was settled during pre-trial  mediation,  see Note
10. "Subsequent Events".

         Although Kitty Hawk had affirmed the Partnership's lease in bankruptcy,
Kitty  Hawk  intends  to file a motion  in  bankruptcy  court  in late  March to
terminate the lease,  and not pay damages.  The  Partnership  has terminated the
lease by reason of Kitty Hawk's default and will file a motion for damages under
the  lease.  Oral  arguments  will be heard in early  April  and a  decision  is
anticipated sometime thereafter.

                                       7
<PAGE>


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

         No matters  were  submitted  to a vote of the  Limited  Partners of the
Partnership, through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended December 31, 2001.

                                       8
<PAGE>


                                     PART II

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

         There is no organized  trading  market for the purchase and sale of the
Units and certain  measures have been adopted and  implemented to assure that no
organized trading market will develop.

         As of March 1,  2002,  the  number of  Limited  Partners  of record was
approximately 7,196.

         The  Partnership  declared the following  distributions  to its Limited
Partners out of cash flow received from operations during 2001 and 2000:

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

1st Quarter 2001                .00                             None Paid
2nd Quarter 2001               $.20         June 30, 2001       July 10, 2001
3rd Quarter 2001                .00                             None Paid
4th Quarter 2001                .00                             None Paid
1st Quarter 2000               $.30         March 31, 2000      April 25, 2000
2nd Quarter 2000                .30         June 30, 2000       July 25, 2000
3rd Quarter 2000                .00                             None Paid
4th Quarter 2000                .00                             None Paid

         Total  distributions to all partners for 2001 and 2000 were declared as
follows (in thousands):

                                                        2001        2000
                                                        ----        ----

         Limited Partners                              $1,451      $4,353
         General Partners                                  15          44
                                                       ------      ------
                                                       $1,466      $4,397
                                                       ======      ======

         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 net loss  reported by the  Partnership
for accounting purposes,  all of the cash distributions paid to the partners for
the year 2001  constituted  a return of  capital.  Approximately  73%,  and 92%,
respectively, of the cash distributions paid to the partners for the years ended
December 31, 2000 and 1999,  constituted a return of capital. Also, based on the
amount  of  cumulative  net loss  reported  by the  Partnership  for  accounting
purposes,  approximately 86% of the cash distributions paid to the partners from
the inception of the Partnership  through December 31, 2001 constituted a return
of capital.  However,  the total actual return on capital over the Partnership's
life can be determined only at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.

         The  Partnership  paid out no  distributions  relating to the third and
fourth quarter 2001. The Partnership's  lending facility has been limited to $25
million instead of the $30 million originally  negotiated.  This limitation is a
result of the fact that  Aeromexico  decided  not to  extend  the  leases on the
Partnership's two DC-9's for two years. Due to this limitation,  the Partnership
suspended  distributions  in  October  2000 in order to fully  fund the  DC10-10
conversion.  As has  historically  been the case,  the  amount  of  future  cash
distributions,  if  any,  will be  determined  on a  quarterly  basis  after  an
evaluation of the  Partnership's  operating results and its current and expected
financial position. However, the Partnership is required to reduce the principal
on its loan through twenty quarterly  installments  starting April 2001, as well
as utilize  proceeds from asset sales to reduce debt.  Such principal  repayment
will further reduce cash available for  distributions.  Additionally,  the MD-82
aircraft  leased to TWA,  which  accounted  for 8% of the  Partnership's  rental
revenues  in 2001,  was sold to American  Airlines  in April 2001.  Accordingly,

                                       9
<PAGE>

indebtedness  was  substantially  reduced,  and cash  flow from  operations  was
additionally reduced.


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 on Form 10-K.

<TABLE>
<CAPTION>
                                                               As of December 31,
                                                           or Year Ended December 31,
                                                           --------------------------
                                      2001            2000            1999            1998            1997
                                      ----            ----            ----            ----            ----
                                                     (in thousands, except per unit amounts)

<S>                                 <C>              <C>             <C>             <C>             <C>
Rental Revenue (2)                  $  7,357         $ 9,344         $10,603         $11,210         $10,969
Net Income (Loss)                     (3,354)          1,788             978           1,855           1,255
Net Income  (Loss) per Limited
  Partnership Unit                     (0.46)           0.10            0.11            0.22            0.17
Distributions per Limited
  Partnership Unit (1)                  0.20            0.60            1.50            1.60            1.60
Total Assets                          32,894          48,870          48,163          51,423          58,273
Notes Payable                          9,483          21,210          16,530          10,000           4,751
Partners' Capital                     16,756          21,576          24,185          34,200          44,070
</TABLE>

(1)      The fourth quarter  distribution for the years 1996 to 1999 was paid in
         January of the subsequent year.

(2)      Prior Years restated to include  ownership in MD 81 Trust on the equity
         method,  which  results  in a revenue  reduction  of $1,214 per year in
         years 1999 through 1996. There was no effect on Net Income.

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

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

Liquidity and Capital Resources

         The  Partnership  owns and  manages a  portfolio  of leased  commercial
aircraft and makes  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,  for general  working
capital  purposes or to reduce  debt.  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.

         The  Partnership  invests working capital and cash flow from operations
prior  to its  distributions  to  the  partners  in  short-term,  highly  liquid
investments  or a fund that invests in such  instruments.  At December 31, 2001,
the  Partnership's  unrestricted  cash and cash  equivalents of $8,444,000  were
primarily  invested  in such a fund.  This amount was  $6,147,000  more than the
Partnership's  unrestricted  cash and cash  equivalents  at December 31, 2000 of
$2,297,000.  This increase in  unrestricted  cash was primarily  attributable to

                                       10
<PAGE>

cash  from  operating   activities  of  $9,981,000,   investing   activities  of
$9,359,000, offset by cash used in financing activities of $13,193,000.

         Net cash  provided by operating  activities  was $10.0 million in 2001,
$5.9  million in 2000,  and $9.2  million in 1999.  In the  aggregate,  for this
three-year  period,  net cash  provided by operating  activities  totaled  $25.1
million.  The $10 million of cash  provided by operating  activities  in 2001 is
comprised of net income,  adjusted for non cash items such as  depreciation  and
changes in assets and liabilities discussed below.

         Rent and other receivables  decreased by $71,000, or 23%, from $311,000
at  December  31,  2000 to $240,000 at December  31,  2001.  This  decrease  was
primarily due to lower rent receivables  during the year ended December 31, 2001
caused  by the  termination  of the lease  with  USAir,  the sale of the  MD-82,
formerly leased to TWA, and the non-accrual  basis of the Vanguard rent,  offset
by $140,000 increase in receivables from the sale of a Boeing 727-200 airframe.

         Kitty Hawk filed for Bankruptcy  protection  under Chapter 11 on May 1,
2000,  but has  continued  to pay monthly  rent and  maintenance  reserves.  The
September  11,  2001  events put the airline  industry,  in general,  in extreme
financial  hardship.  As a result,  the Partnership agreed that Kitty Hawk could
pay only half of monthly rent and maintenance reserves in October, November, and
December 2001, and 71% of rent for January, February, and March 2002. Kitty Hawk
accounted for 15% of the  Partnership's  lease revenue during 2001. A default or
deferral of lease payments on the part of Kitty Hawk, or any other lessee, would
adversely affect cash flow from operations.

         Due to its failure to pay rents in the fourth  quarter of 1998,  Falcon
was placed on non-accrual  status beginning October 1, 1998. Lease revenues from
Falcon were recognized by the Partnership based on cash received. For the period
January 1, 2001  through  December 31,  2001,  Falcon owed  $855,000 in rent and
approximately  $287,000 in maintenance reserves.  For the period January 1, 2001
through  December  31,  2001,  Falcon  paid  approximately  $808,000 in rent and
$527,000 in maintenance reserves.  The Partnership had recorded a receivable for
$95,000  of past due rent which was offset  against a $95,000  security  deposit
from  Falcon in the  third  quarter  2001.  The  Partnership  agreed to an early
termination  of the lease at the occasion of the next "C" check and the aircraft
was returned in September,  2001. The aircraft was written down by $1,464,000 in
2001,  to a value of  $279,000.  In  December  2001,  the  Partnership  sold the
airframe to Falcon for $140,000, recognizing a loss of $100,000. The Partnership
also  accepted a Falcon offer to pay  $100,000 for a release of all  obligations
under the lease.

         Other assets decreased by $63,000, or 20%, from $309,000 as of December
31, 2000 to $246,000 as of December 31, 2001,  primarily due to the amortization
of the debt placement fee on the note payable.

         Accounts  payable and accrued expenses  decreased by $381,000,  or 63%,
from  $606,000 at December 31, 2000 to $225,000 at December 31, 2001,  primarily
due to payments,  in 2001, of capital expenditures accrued for work performed on
the McDonnell Douglas DC10-10 aircraft in 2000.

         Payables to affiliates increased by $1,264,000, or 63%, from $2,012,000
at December 31, 2000 to $3,276,000 at December 31, 2001,  principally  due to an
increase in unpaid management fees due to the General  Partners.  While the fees
are being  accrued,  payments of fees on a current basis have been suspended due
to the Partnership Agreement provisions that require fees not to be paid if cash
distributions fall below 8% of initial capital per annum.

         Notes payable  decreased by  $11,727,000,  or 55%, from  $21,210,000 at
December 31, 2000 to  $9,483,000  at December  31, 2001,  due to the payments of
principal from the proceeds from the sale of the MD-82 and the receipt of return
condition settlement with Aeromexico.

         Accrued interest payable  decreased by $104,000,  or 79%, from $132,000
at December 31, 2000 to $28,000 at December 31, 2001, due to the lower principal
balance of the note and lower interest rates.

         Deferred rental income and deposits decreased by $534,000, or 40%, from
$1,345,000 at December 31, 2000 to $811,000 at December 31, 2001.  This decrease
was primarily  attributable to the reclassification  into income of the security
deposits of the Capital Cargo and the Falcon aircraft,  and the reclassification
into income of the deferred rents from the Capital Cargo, the Aeromexico and the
Falcon aircraft.

                                       11
<PAGE>


         Maintenance  reserves  payable  increased  by  $326,000,  or 16%,  from
$1,989,000  at  December  31, 2000 to  $2,315,000  at December  31,  2001.  This
increase was primarily due to payments for maintenance reserves by TNT and Kitty
Hawk and the application of all Vanguard's payments to maintenance reserves.

         Net cash  provided by  investing  activities  for 2001 was  $9,359,000,
primarily  due to the proceeds of $9.5  million  from the sale of the  McDonnell
Douglas MD-82,  formerly leased to TWA, and $688,000 in cash  distributions from
investments  in the  MD-81  Trust,  partially  offset  by  capitalized  aircraft
improvements expenditures of $829,000.

         The  cumulative  freighter  conversion  cost for the Emery  aircraft at
December 31, 2001 was $13.6  million,  of which  $669,000  were paid in the year
2001.  Additionally,  in 2001,  there was a $159,000  upgrade cost on the Boeing
727,  formerly  leased to Capital Cargo,  to meet the requirement of the maximum
take off weight.

         The  McDonnell  Douglas  MD-81  aircraft  is owned  by a Trust  ("MD 81
Trust") in which the Partnership has a 50% interest.  An affiliated  Partnership
owns the other 50% interest.  The aircraft was leased to US Airways Group,  Inc.
("USAir")  through June 2001.  USAir returned the aircraft in July 2001 and paid
rent  through  the return  date.  In August  2001,  the  Partnership  leased the
aircraft to Vanguard  Airlines  (see Notes to  Financial  Statements - Financial
Terms of Leases - Vanguard Airlines).

         Net investment in the MD-81 Trust decreased by $287,000 from $1,583,000
at December 31, 2000 to $1,296,000  at December 31, 2001,  due to the receipt of
cash distributions of $688,000 offset by equity interest earnings of $401,000.

         The  Partnership  has  adopted  the  guidance  in EITF  Issue No.  00-1
"Investor  Balance Sheet and Income Statement Display under the Equity Method of
Investments  in Certain  Partnerships  and Other  Ventures"  (EITF  00-1) in its
Annual Report on Form 10-K beginning the fiscal year ended December 31, 2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft under the
equity method. In prior years, the Partnership had reported its ownership in the
MD-81 Trust on a proportionately  consolidated  basis. The financial results for
prior years contained herein have been restated utilizing the equity method. The
aircraft  had been subject to a tax benefit  transfer  lease,  which  expired in
April 2000.

         Net cash used in financing  activities was  $13,193,000  for 2001. This
amount represents  $11,727,000 in payments on the principal balance of the note,
and cash distributions of $1,466,000 to the partners.

         Partnership  capital  was  $16,756,000,  a  decrease  of  approximately
$4,820,000 or 22% from December 31, 2000, due to net loss of $3,354,000,  offset
by $1,466,000 distributions to partners during the year ended December 31, 2001,
as  compared to the 2000 net income of  $1,788,000,  offset by  $6,596,000  cash
distributions to partners during the year ended December 31, 2000.

         Cash distributions  declared by the Partnership were approximately $1.5
million for 2001 ($.20 per Unit), $4.4 million for 2000 ($.60 per Unit), and $11
million for 1999 ($1.50 per Unit). In the aggregate, for this three-year period,
cash distributions declared by the Partnership totaled $16.9 million.

         The Partnership  closed on a new $30 million lending  facility on April
14, 2000 and an initial  draw down was made of $19.5  million.  The facility was
limited to $25 million  because the Aeromexico  leases were not extended for two
years. The proceeds were used to retire existing debt of $16.53 million,  and to
replenish working capital. The term of the loan is six years, with interest only
payments the first twelve months. Thereafter, principal is required to be repaid
in equal  quarterly  installments  over 60 months with the first  payment due in
April 2001. The Partnership  paid a 1.0% commitment fee and the interest rate is
225 basis points over a major money center  bank's prime rate.  The lender has a
mortgaged  interest  in all  aircraft,  except  the 50%  interest  in the  MD-81
aircraft, leased to Vanguard. The loan agreement requires that the Partnership's
cash be equal to or in excess of maintenance  reserves.  The balance of the bank
note must be  amortized  through 18 equal  quarterly  payments.  If proceeds are
received from  aircraft  sales,  under the bank note,  they must be applied to a
reduction in the outstanding balance and the subsequent  quarterly payments will
be  redetermined  such  that the note  balance  will be  retired  through  equal
quarterly  payments through the remaining terms. The note balance was $9,483,000
at December 31, 2001.

                                       12
<PAGE>


Critical Accounting Policies

         High-quality  financial  statements  require  rigorous  application  of
high-quality accounting policies. The policies discussed below are considered by
management to be critical to an  understanding  of the  Partnership's  financial
statements  because  their  application  requires  significant  judgment,   with
financial  reporting  results relying on estimation  about the effect of matters
that are inherently  uncertain.  Specific  risks for these  critical  accounting
policies are described in the following  paragraphs.  For all of these policies,
management  cautions that future events rarely develop exactly as forecast,  and
the best estimates routinely require adjustment.

Lease Revenue Recognition:

Revenue  under  operating  leases is  recognized as rental income over the lease
term.

Depreciation:

Aircraft are recorded at cost and depreciated on a straight-line  basis over the
estimated  life to its estimated  residual  value.  Certain major  additions and
modifications  to  aircraft  may be  capitalized.  The  estimates  are  reviewed
periodically to ensure continued appropriateness.

Aircraft Valuation:

Aircraft are  periodically  reviewed for impairment in accordance with Statement
of Financial  Accounting  Standards No. 121,  "Accounting  for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of". An impairment
loss is recognized when the fair value of the undiscounted  future cash flows of
the aircraft is less than its net book value.  The fair value of the aircraft is
generally  based on  independent  appraisals  of the aircraft  and  estimates of
undiscounted future cash flows. The appraisals assume,  among other things, that
the aircraft are utilized  normally in an open,  unrestricted and stable market.
Short-term  fluctuations  in the market place are  disregarded and it is assumed
that there is no necessity either to dispose of a significant number of aircraft
simultaneously or to dispose of aircraft quickly.

The  Partnership  determined the critical  principles by considering  accounting
policies that involve the most complex or subjective  decisions or  assessments.
The  Partnership  identified the most critical  accounting  policies to be those
related to lease  revenue  recognition,  depreciation  methods and  valuation of
aircraft.  The Partnership also states these accounting policies in the notes to
the  consolidated   financial  statements  and  at  relevant  sections  in  this
discussion and analysis.


Results of Operations

         Most of the  Partnership's  2001 revenue was generated from the leasing
of the  Partnership's  aircraft to  commercial  air  carriers  under  triple net
operating leases and from the gain on sale of assets.

         Under the terms of the  triple  net  leases,  expenses  related  to the
operation  and  maintenance  of the  aircraft  during  2001 were paid for by the
lessees  directly or funded out of collected  maintenance  reserves.  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 costs of storing the off-lease aircraft, and the work done on
the MD-81 aircraft to put it in condition for lease to Vanguard Airlines.

         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. The Partnership also recorded a substantial write down of the value of
several aircraft in 2001.

2001 as compared to 2000

         The  Partnership's  net loss was $3,354,000 for the year ended December
31, 2001 ("2001 Period") as compared to $1,788,000 net income for the year ended
December 31, 2000 ("2000 Period").

                                       13
<PAGE>


         The  Partnership's  net loss for the 2001 Period compared to net income
of the  2000  Period  was  principally  due to  substantial  write  downs of the
aircraft and a decrease in rentals from operating  leases,  partially  offset by
the VASP settlements and Judgement, the gain on sale of the MD-82, a decrease in
depreciation expense, and a decrease in interest expense.

         Rentals from operating  leases  decreased by  $1,987,000,  or 21%, from
$9,344,000 in the 2000 Period to  $7,357,000  in the 2001 Period.  This decrease
was  principally due to the sale of the MD-82 aircraft in April 2001, the return
of one Aeromexico aircraft in August 2001, the nonpayment of rent on the Capital
Cargo aircraft,  partially  offset by rent from the Emery aircraft which started
in December 2000.

         Gain  on  sale  and  disposition  of  aircraft,  engines  or  equipment
increased by $1,240,000,  or 26%, from  $4,816,000 for the year ending  December
31, 2000 to $6,056,000 for the year ending  December 31, 2001. This increase was
primarily  attributable  to the gain  recognized  from the sale of the  MD-82 to
American Airlines in April 2001.

         Interest  Income  increased  by  $594,000,  or 437%,  from  $136,000 at
December 31, 2000 to $730,000 at December 31, 2001.  This increase was primarily
due to the interest earned on the VASP Judgement and settlement in 2001.

         Other Income recognized in the 2001 Period was $1,222,000,  compared to
zero in the 2000  Period.  This  amount  represents  primarily  $688,000  return
condition settlement from Aeromexico, and $527,000 of maintenance reserves taken
into income from Falcon.

         The  Partnership  also received  $3,791,000 from the VASP Judgement and
settlement in 2001.

         Depreciation  decreased  by  $2,425,000  or  41%,  from  $5,896,000  at
December 31, 2000 to  $3,471,000  at December 31,  2001.  This  decrease was due
primarily to the end of the lease on a DC-9 aircraft  leased to Aeromexico,  the
sale of the MD-82 leased to TWA,  resulting in no  depreciation  expense for the
aircraft,  the off lease  status of the Boeing 727,  formerly  leased to Capital
Cargo,  offset by depreciation taken in 2001 on the DC10-10 aircraft,  leased to
Emery.

         The Partnership took  significant  write downs of its aircraft in 2001,
in part due to the adverse economic  conditions and their impact on aircraft and
aircraft freighter values. Write down expense increased by $13,175,000, or 573%,
from  $2,301,000 at December 31, 2000 to  $15,476,000  at December 31, 2001. The
write downs in 2001 reduced the carrying  value of the TNT  aircraft,  the three
Boeing 727s, one formerly leased to Capital Cargo, one formerly leased to Falcon
and one to Kitty Hawk, the DC-9,  formerly leased to Aeromexico,  and the A-300.
The write downs were  $3,167,000 on the TNT aircraft,  $1,396,000 on the Capital
Cargo aircraft,  $1,464,000 on the Falcon aircraft, $4,250,000 on the Kitty Hawk
aircraft,  $823,000 on the DC-9, and  $2,665,000 on the A-300.  There was also a
$1,711,000  write  down on the  Lockeed  L-1011,  which had been  unsuccessfully
offered for lease or sale.

         Management  fees and  re-lease  fees for the 2001 Period  increased  by
$244,000, or 23%, from $1,043,000 at December 31, 2000 to $1,287,000 at December
31, 2001.  This increase was primarily  attributable  to sales proceeds from the
sale of the MD-82 aircraft to American Airlines during 2001.

         Interest expense for the 2001 Period decreased by $948,000,  or 41%, in
comparison to the 2000 Period, from $2,309,000 to $1,361,000.  This decrease was
primarily due to the lower balance of the  Partnership's  debt and a decrease in
the interest rate.

         Direct lease expenses  increased by $63,000 or 7% in the 2001 Period as
compared to the 2000 Period,  due primarily to increases in maintenance  expense
related to several  aircraft  which were off lease for most of the year, and the
costs  incurred  for work to  transition  the MD-81  aircraft  to its lease with
Vanguard Airlines.

         Return condition  settlement  expense of $51,000 was recognized  during
the 2000 Period,  resulting from a return condition  settlement with Continental
Airlines,  Inc.,  relating to the aircraft on lease to Kitty Hawk.  There was no
corresponding expense in the 2001 Period.

                                       14
<PAGE>



2000 as compared to 1999

         The Partnership's net income was $1,788,000 for the year ended December
31, 2000 ("2000 Period") as compared to $978,000 for the year ended December 31,
1999 ("1999 Period").

         The  increase in the  Partnership's  net income for the 2000 Period was
principally  due to a decrease  in  depreciation  expense in the 2000  Period as
compared to the 1999 period,  and a gain on  disposition of aircraft in the 2000
period.  Partially offsetting these items was a decrease in rental income in the
2000  Period as compared  to the 1999  Period,  and  increases  in write  downs,
interest  expense and direct lease expense in the 2000 Period as compared to the
1999 Period.

         Depreciation  and  amortization  decreased by  $1,653,000 or 22% in the
2000 Period as compared to the 1999 Period.  This  decrease was due primarily to
the DC10-10 aircraft not being  depreciated in the 2000 Period and a decrease in
depreciation  related to the Boeing 727-200 aircraft on lease to Kitty Hawk. The
decrease in depreciation  expense related to the Boeing 727-200 aircraft was due
to an increased useful life after capital improvements.

         Rental  income  decreased  by  $1,259,000  or 12% in the 2000 Period as
compared to the 1999 Period.  The decrease was principally due to the absence of
rental  income  related to the DC10-10  aircraft and a decrease in rental income
related to the Boeing  727-200  aircraft on lease to Falcon.  This was partially
offset by an increase in rental income related to the Boeing 727-200 aircraft on
lease to Kitty Hawk.

         During  the 2000  Period,  the  Partnership  provided a  write-down  of
$1,400,000 on the A-300  aircraft in order to reduce its value to estimated fair
market value at June 30, 2000. At December 31, 2000 the  Partnership  wrote down
the  Boeing  727-200  freighter  on  lease  to TNT by  $901,000.  There  were no
corresponding write-downs during the 1999 Period.

         Interest  expense for the 2000 Period increased by $1,075,000 or 87% in
comparison  to the 1999 Period,  primarily  due to increases in the note balance
and the related interest rate during the 2000 period.

         Direct lease expenses  increased by $700,000 or 324% in the 2000 Period
as compared to the 1999  Period,  due  primarily  to  increases  in  maintenance
expense  related  to  several  aircraft  and  insurance  expense  related to the
DC-10-10 aircraft which was off lease for most of the year.

         Gain  on  disposition  of  aircraft,  engines  or  equipment  increased
$4,643,000  for the 2000 period  compared to the 1999 period.  This increase was
primarily  attributable  to the gain recognized as a result of the total loss of
an aircraft  leased to  Aeromexico  as a result of a runway  accident.  Proceeds
received from insurance exceeded the net book value of the aircraft.

         During the 1999  Period,  the  Partnership  swapped  the three  JT8D-15
engines that were part of the Boeing  727-200  aircraft  returned by Continental
Airlines for three JT8D-9A engines owned by an affiliate of the Managing General
Partner.  The Partnership realized a gain of $173,000 related to the swap in the
1999 Period.

         Return condition  settlement  expense of $51,000 was recognized  during
the 2000 Period,  resulting from a return condition  settlement with Continental
Airlines,  Inc.,  relating to the aircraft on lease to Kitty Hawk.  There was no
corresponding expense in the 1999 Period.


Inflation and Changing Prices

         Inflation  has had no material  impact on the  operations  or financial
condition of the Partnership from inception through December 31, 2001.  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.  High jet fuel  prices  for most of 2001  affected  the
airline industry's profitability and that of the Partnership's lessees.

                                       15
<PAGE>


         Due to concern regarding the economic slowdown,  the US Federal Reserve
Board has  decreased its key lending rate on a number of occasions in an attempt
to stimulate economic  activity.  It is unclear as to the ultimate impact on the
level of  economic  activity  of this  rate  decrease,  however,  a  significant
economic  slowdown  has  had  an  adverse  affect  on  air  travel  and  airline
performance.

Risks and Uncertainties

         The events of September  11, 2001 have had a negative  impact on the US
economy and the passenger airlines, including increases in airline costs such as
insurance and security,  and a significant  decline in passenger  demand for air
travel. Due to the conversion of its aircraft to freighter  configurations,  the
Partnership  is more  reliant on the air  freight  industry  than the  passenger
airlines.  While certain  prohibitions  on passenger  planes carrying cargo have
increased  cargo for the fully dedicated air freight  business,  the air freight
business in general has been negatively impacted by the economic slowdown. These
conditions  have  caused  certain  lessees to reduce  payments  and should  they
continue,  may further affect these and the other lessees'  ability to make rent
and other  lease  payments  and may impair the  ability  of the  Partnership  to
re-lease  aircraft on a timely basis and at  favorable  rates and may reduce the
value of the  aircraft.  Also,  because  of  reduced  passenger  traffic,  major
airlines  such as United  Airlines  and  American  Airlines  announced  plans to
accelerate  the  retirement  of  their  Boeing  727-200  aircraft,   which  also
negatively impacted the value of the Partnership's aircraft.


Accounting Pronouncements

         The  Partnership  has  adopted  the  guidance  in EITF  Issue No.  00-1
"Investor  Balance Sheet and Income Statement Display under the Equity Method of
Investments  in Certain  Partnerships  and Other  Ventures"  (EITF  00-1) in its
Annual  Report on Form 10-K for the fiscal  year  ended  December  31,  2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft leased to
US Airways under the equity method. In prior years, the Partnership had reported
its ownership in the MD-81 Trust on a  proportionately  consolidated  basis. The
financial  results in prior years contained herein have been restated  utilizing
the equity  method.  The  aircraft  had been  subject to a tax benefit  transfer
lease, which expired in April 2000.

         In October  2001,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial  Accounting  Standards No.144 ("SFAS 144") Accounting for
the Impairment or Disposal of Long Lived  Assets".  SFAS 144, which is effective
for fiscal years  beginning  after  December  15, 2001 with earlier  application
encouraged,  addresses financial  accounting and reporting for the impairment or
disposal of long-lived assets. This statement  supercedes SFAS 121,  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of ", and the  accounting  and reporting  provisions of APB 30,  "Reporting  the
Results  of  Operations-Reporting  the  Effects  of  Disposal  of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions",  for the  disposal  of a segment  of a  business  (as  previously
defined in that Opinion).  The  implementation of this Statement is not expected
to have a  material  effect on the  Company's  financial  position,  results  of
operations or cash flows.

                                       16
<PAGE>


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       PEGASUS AIRCRAFT PARTNERS II, L.P.

List of Financial Statements                                                Page
                                                                            ----

Report of Independent Accountants ...................................         18

Balance Sheets -- December 31, 2001 and 2000.........................         19

Statements of Income for the years ended
     December 31, 2001, 2000, and 1999...............................         20

Statements of Partners' Capital for the years ended
     December 31, 2001, 2000, and 1999...............................         21

Statements of Cash Flows for the years ended
     December 31, 2001, 2000, and 1999...............................         22

Notes to Financial Statements........................................         24


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.

                                       17
<PAGE>




                        REPORT OF INDEPENDENT ACCOUNTANTS



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


         In our  opinion,  the  accompanying  balance  sheets  and  the  related
statements of income,  of partners' capital and of cash flows present fairly, in
all material  respects,  the financial position of Pegasus Aircraft Partners II,
L.P. (the  "Partnership")  as of December 31, 2001 and 2000,  and the results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  December 31, 2001, in conformity  with  accounting  principles  generally
accepted in the United States of America.  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  auditing  standards
generally  accepted in the United States of America,  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 our opinion.



                                                      PricewaterhouseCoopers LLP

San Francisco, California
March 19, 2002

                                       18
<PAGE>


                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                                 BALANCE SHEETS

                           DECEMBER 31, 2001 AND 2000



                                     ASSETS

                                                         2001       2000
                                                         ----       ----
                                                (in thousands, except unit data)

  Cash and cash equivalents                            $ 8,444    $ 2,297
  Rent and other receivables                               240        311
  Aircraft, net                                         23,964     45,953
  Other assets                                             246        309
                                                       -------    -------
     Total Assets                                      $32,894    $48,870

                       LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
  Accounts payable and accrued expenses                $   225    $   606
  Payable to affiliates                                  3,276      2,012
  Maintenance reserves payable                           2,315      1,989
  Notes payable                                          9,483     21,210
  Accrued interest payable                                  28        132
  Deferred rental income and deposits                      811      1,345
                                                       -------    -------
     Total Liabilities                                  16,138     27,294
                                                       -------    -------

COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)

PARTNERS' CAPITAL:
  General Partners                                         169        218
  Limited Partners (7,255,000 units issued and
    outstanding in 2001 and 2000)                       16,587     21,358
                                                       -------    -------
     Total Partners' Capital                            16,756     21,576
                                                       -------    -------
         Total Liabilities and Partners' Capital       $32,894    $48,870
                                                       =======    =======



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

                                       19
<PAGE>


                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                           STATEMENTS OF INCOME (LOSS)

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


                                              2001         2000          1999
                                              ----         ----          ----
                                              (in thousands, except unit data
                                                    and per unit amounts)

REVENUES:
    Rentals from operating leases         $     7,357   $     9,344  $    10,603
    Interest                                      730           136          112
    Equity in earnings of MD-81 Trust             401           443          443
    VASP Judgement and Settlement               3,791          --           --
    Other income                                1,222          --           --
    Gain on disposition of aircraft,
      engines or equipment                      6,056         4,816          173
                                          -----------   -----------  -----------
                                               19,557        14,739       11,331
                                          -----------   -----------  -----------

EXPENSES:
    Depreciation and amortization               3,471         5,896        7,549
    Write-downs                                15,476         2,301         --
    Management and re-lease fees                1,287         1,043          960
    Interest                                    1,361         2,309        1,234
    General and administrative                    337           435          394
    Direct lease                                  979           916          216
    Return condition settlement                  --              51         --
                                          -----------   -----------  -----------
                                               22,911        12,951       10,353
                                          -----------   -----------  -----------

NET INCOME (LOSS)                              (3,354)        1,788          978
                                          ===========   ===========  ===========

NET INCOME (LOSS) ALLOCATED:
    To the General Partners                       (34)        1,058          182
    To the Limited Partners                    (3,320)          730          796
                                          -----------   -----------  -----------
                                               (3,354)        1,788          978
                                          -----------   -----------  -----------

NET INCOME (LOSS) PER LIMITED
  PARTNERSHIP UNIT                        $     (0.46)  $      0.10  $      0.11
                                          ===========   ===========  ===========

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




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

                                       20
<PAGE>


                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                         STATEMENTS OF PARTNERS' CAPITAL

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999




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

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

     Net income                                     182         796         978

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

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

     Net income                                   1,058         730       1,788

     Distributions declared to partners             (44)     (4,353)     (4,397)
                                               --------    --------    --------

Balance, December 31, 2000                          218      21,358      21,576

     Net income                                     (34)     (3,320)     (3,354)

     Distributions declared to partners             (15)     (1,451)     (1,466)
                                               --------    --------    --------

Balance, December 31, 2001                     $    169    $ 16,587    $ 16,756
                                               ========    ========    ========





   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, 2001, 2000, AND 1999

                                                    2001      2000       1999
                                                    ----      ----       ----
                                                  (dollar amounts in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                   $ (3,354)  $  1,788   $    978
    Adjustments to reconcile net income to net
     cash provided by operating activities:
      Gain on disposition or sale of engines
        and equipment                              (6,056)    (4,816)      (173)
      Depreciation                                  3,471      5,896      7,549
      Equity in earnings of MD-81 Trust              (401)      (443)      (443)
      Write-downs                                  15,476      2,301       --
      Change in assets and liabilities:
       Rent and other receivables                     211       (115)       295
       Other assets                                    63       (294)         6
       Accounts payable and accrued expenses         (381)       112        388
       Accrued interest payable                      (104)       132       --
       Deferred rental income and deposits           (534)      (130)      (423)
       Payable to affiliates                        1,264      1,043        377
       Maintenance reserves payable                   326        459        615
                                                 --------   --------   --------
          Net cash provided by operating
            activities                              9,981      5,933      9,169
                                                 --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Cash distributions from investment in
      MD-81 Trust                                     688      1,214      1,214
    Capitalized aircraft improvements                (829)   (11,755)    (5,639)
    Proceeds from the disposition or sale of
      engines and equipment                         9,500      6,150        259
    Decrease (increase) in restricted cash           --          371       (371)
                                                 --------   --------   --------
          Net cash provided by (used in)
            investing activities                    9,359     (4,020)    (4,537)
                                                 --------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    (Repayment of) / Proceeds from notes
      payable                                     (11,727)     4,680      6,530
    Cash distributions paid to partners            (1,466)    (6,596)   (11,725)
                                                 --------   --------   --------
          Net cash used in financing
            activities                            (13,193)    (1,916)    (5,195)
                                                 --------   --------   --------

NET DECREASE IN CASH AND CASH EQUIVALENTS           6,147         (3)      (563)

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF YEAR                                           2,297      2,300      2,863
                                                 --------   --------   --------

CASH AND CASH EQUIVALENTS AT END OF YEAR         $  8,444   $  2,297   $  2,300
                                                 ========   ========   ========



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

                                       22
<PAGE>


                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                            STATEMENTS OF CASH FLOWS

        FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (continued)



                                                        2001    2000    1999
                                                        ----    ----    ----
                                                   (dollar amounts in thousands)

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid                                          $1,413  $2,143  $1,226

NONCASH TRANSACTIONS:

Distributions declared to partners but unpaid          $ --    $ --    $2,199

Application of maintenance reserves payable
to the carrying value of aircraft                      $ --    $  781  $ --


Deposit applied to capitalized aircraft
  improvements                                         $ --    $  790  $ --

Proceeds from sale of Boeing 727-200 not
  received                                             $  140  $ --    $ --



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

                                       23
<PAGE>


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

                                DECEMBER 31, 2001

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. Actual results could differ from such estimates.
Certain  financial  statement  items  in the  years  prior  to  2000  have  been
reclassified to conform to the 2000 and 2001 presentation.

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

         Aircraft and  Depreciation.  The  aircraft are recorded at cost,  which
includes  acquisition costs and the acquisition fee and the financial management
advisory fee paid upon acquisition to the General  Partners.  Depreciation 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.

         In accordance with Statement of Financial  Accounting Standards No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"),  the recognition of an impairment for a long-lived
asset is required when the estimate of  undiscounted  future cash flows expected
to be generated by the asset is less than its carrying amount. Measurement of an
impairment  loss is to be recognized  based on the fair value of the asset.  The
Partnership  generally  bases its  estimate of fair market value of the aircraft
upon  valuation by an  independent  third  party.  SFAS 144 also  requires  that
long-lived  assets to be disposed  of be  reported at the lower of the  carrying
amount or fair value less estimated disposal costs.

         MD-81 Trust.  The McDonnell  Douglas MD-81  aircraft,  currently  under
lease to  Vanguard  Airlines  ("Vanguard"),  is  owned  by a trust in which  the
Partnership  has a 50% interest.  An affiliated  Partnership  owns the other 50%
interest.  The  Partnership  has  adopted  the  guidance  in EITF Issue No. 00-1
"Investor  Balance Sheet and Income Statement Display under the Equity Method of
Investment in Certain Partnerships and Other Ventures" (EITF 00-1) in its Annual
Report on Form 10-K  starting  from the fiscal year ended  December 31, 2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft leased to
Vanguard under the equity method.  In prior years the  Partnership  had reported
its ownership in the MD-81 Trust on a  proportionately  consolidated  basis. The
financial  results in prior years contained herein have been restated  utilizing
the equity  method.  The  aircraft  had been  subject to a tax benefit  transfer
lease, which expired in April 2000.

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

                                       24
<PAGE>


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

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

Accounting Pronouncements

         In October  2001,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for
the Impairment or Disposal of Long-Lived  Assets".  SFAS 144, which is effective
for fiscal years  beginning  after  December  15, 2001 with earlier  application
encouraged,  addresses financial  accounting and reporting for the impairment or
disposal of long-lived assets. This Statement  supersedes SFAS 121,  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of", and the  accounting  and  reporting  provisions of APB 30,  "Reporting  the
Results of  Operations  --  Reporting  the Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions",  for the  disposal  of a segment  of a  business  (as  previously
defined in that Opinion).  The  implementation of this Statement is not expected
to have a  material  effect on the  Company's  financial  position,  results  of
operations or cash flows.

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 UBS
Americas,  Inc.  UBS  Americas is the  successor  to 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 net proceeds of any future sales of
aircraft will be used to reduce Partnership indebtedness.

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

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

3.   Partnership Allocations

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

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

                                       25
<PAGE>


4.   Aircraft
                           Net Investment in Aircraft

         The  Partnership's  net  investment in aircraft as of December 31, 2001
and 2000 consisted of the following (in thousands):

                                                          2001           2000
                                                          ----           ----

Aircraft on operating leases, at cost                  $  49,941      $ 108,866
Less: Accumulated depreciation                           (22,556)       (61,914)
         Write-downs                                      (8,567)        (7,279)
                                                       ---------      ---------
                                                       $  18,818      $  39,673
                                                       ---------      ---------

Net Investment in MD-81 Trust                          $   1,296      $   1,583
                                                       ---------      ---------

Aircraft held for lease or sale, at cost               $  73,616      $  46,744
Less: Accumulated depreciation                           (36,474)       (19,334)
         Write-downs                                     (33,292)       (22,713)
                                                       ---------      ---------
                                                           3,850          4,697
                                                       ---------      ---------
Aircraft, net                                          $  23,964      $  45,953
                                                       =========      =========

                            Financial Terms of Leases


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

         TWA  filed for  Chapter  11  bankruptcy  protection  under the  Federal
Bankruptcy  code in January  2001 and just before it filed,  it entered  into an
Asset Sale and Purchase  Agreement  with  American  Airlines,  Inc. TWA paid the
Partnership, during the first quarter of 2001, all arrearages in lease payments.
On April 9,  2001,  American  Airlines  purchased  the  Partnership's  McDonnell
Douglas MD-82  aircraft for $9.5  million.  The proceeds were utilized to reduce
the Partnership's debt and the Partnership  recognized a gain on the sale of the
aircraft of $6,156,000.

         Aeromexico Leases.  During 2000, one of the DC-9's leased to Aeromexico
suffered  a total  loss in a runway  accident.  The asset  cost and  accumulated
depreciation  related to this  aircraft  was  written off in 2000 to reflect the
loss of the aircraft.  Since the insurance  proceeds  received were greater than
the net book value of the aircraft,  a gain on  disposition  of $4.8 million was
recognized in 2000. The lease with Aeromexico for the other DC-9 was extended at
its  option,  to  February  6,  2000.  Aeromexico  paid  for the  aircraft  on a
month-to-month basis and maintained possession of the aircraft while a potential
sale of the  aircraft to  Aeromexico  was being  discussed.  After  negotiations
relating to the sale were unsuccessful,  the aircraft was returned in July 2001.
Aeromexico paid $688,000 for the return condition settlement.  The aircraft only
achieves Stage II noise compliance and due to the high cost to achieve Stage III
noise compliance,  it has been determined that the plane will be sold as is. Due
to the decision to sell the aircraft "as is", the return  condition  payment was
taken  into  income and the  aircraft  was  written  down by a like  amount.  An
additional write down of $136,000 was recorded in the fourth quarter 2001, based
on management's discussion of sale to a third party.

         Kitty Hawk  Aircargo,  Inc.  ("Kitty  Hawk") Lease.  A Boeing  727-200,
received from Continental as partial satisfaction of the A-300 return conditions
was  converted  to a  freighter,  hushkitted  and  delivered  to  Kitty  Hawk in
November,  1999.  The  Partnership  swapped the three JT8D-15  engines that were
returned  with the aircraft for three  JT8D-9A  engines owned by an affiliate of
the  Managing  General  Partner.  The  Partnership  also  received  a payment of
$259,000  from the  affiliate to  compensate  the  Partnership  for the relative
difference  in value of the engines as  determined  by a third party  appraiser,

                                       26
<PAGE>

resulting in a $173,000  gain.  The lease with Kitty Hawk is for 84 months,  the
lease rate is $112,700 per month and maintenance  reserves are to be paid at the
rate of $375 per flight hour, with engine reserves to be increased if the flight
hour/cycle  ratio  falls  below 1.5 to 1.  Kitty  Hawk has  provided  a security
deposit of $225,400.  The Partnership had incurred costs of  approximately  $4.7
million  related to the cargo  conversion  and  hushkitting,  as of December 31,
1999.

         Kitty Hawk filed for Bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy  Code on May 1, 2000,  but  stayed  current  with  regard to its rent
payments  through  September  2001.  For the months of  October,  November,  and
December 2001, Kitty Hawk could not make a full payment of the monthly rent, and
the  Partnership  agreed  to a  payment  of only  half of the  amount  due.  The
Partnership  also agreed to a 50% reduction of the maintenance  reserves due for
the months of September,  October,  and November 2001.  Kitty Hawk accounted for
15% of the  Partnership's  lease revenue during 2001. The default or deferral of
lease  payments on the part of Kitty Hawk,  or any other  lessee,  may adversely
affect future cash distributions by the Partnership (See Note 8. "Litigation").

         In 2001, the  Partnership  wrote down the value of the aircraft by $4.3
million  to a  value  of $1.1  million,  based  on  collected  reserves  and the
estimated value of lease  unencumbered  aircraft,  which  approximates  the book
value of the aircraft.

         US Airways Group Inc.  ("USAir")  Lease.  During  September  1989,  the
Partnership  acquired  one-half of the beneficial  interest in a trust ("Trust")
that is the  owner/lessor  of a McDonnell  Douglas  MD-81  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 was  purchased  subject to a tax benefit  transfer  lease ("TBT lease")
which  expired in 2000.  The  aircraft  was subject to an  operating  lease with
USAir, which expired on June 1, 2001 pursuant to the renewal option exercised by
USAir in 1997. Rental payments were payable quarterly,  in arrears,  at the rate
of $304,000 (for the  Partnership's  one-half  interest in the aircraft).  USAir
also had three additional  one-year renewal options at fair market rental rates,
but chose to return the  aircraft at the end of the lease.  In July 2001,  USAir
returned the aircraft and paid rent through the return date.

         Vanguard Airlines  ("Vanguard") Lease. USAir returned the MD-81 in July
2001,  and in August 2001,  the Trust  entered  into a  three-year  lease of the
aircraft with  Vanguard  Airlines,  a Kansas City,  Missouri  airline  providing
passenger  services to 14 U.S. cities.  The lease agreement is on a power by the
hour basis for  36-months,  starting  August 27,  2001,  at the rate of $600 per
flight hour,  to a maximum of $130,000 per month.  Vanguard is also  responsible
for funding the  maintenance  reserves  for the  aircraft.  Due to the events of
September  11,  2001,  Vanguard  only paid its  August  and  September  aircraft
utilization payment,  and a partial amount of its October aircraft  utilization.
Vanguard  has been  unable to pay any of its  maintenance  reserves  due.  As of
December 31, 2001,  Vanguard has paid a total of $260,000 to the Trust, of which
50% was  distributed to the Partnership and the remaining 50% was distributed to
another  affiliated  Partnership.  These  payments  were applied to  maintenance
reserves  within  the Trust.  In January  2002,  the Trust is  negotiating  with
Vanguard for a payment plan of its rent and maintenance  reserves.  As a result,
the Trust has decided to account  for the  Vanguard  lease on a cash  collection
basis.

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

         Due to its failure to pay rents in the fourth  quarter of 1998,  Falcon
was placed on non-accrual  status beginning October 1, 1998. Lease revenues from
Falcon were  recognized  by the  Partnership  on a cash  collection  basis,  and
additional  receivables  were not  accrued.  For the period from January 1, 2001
through  December  31,  2001,  Falcon owed  $855,000  in rent and  approximately
$287,000  in  maintenance  reserves.   Falcon  paid,  during  the  same  period,
approximately  $808,000  in rent  and  $527,000  in  maintenance  reserves.  The
Partnership  recorded a receivable  for $95,000 of past due rent and also held a
$95,000 security  deposit from Falcon,  which were offset in September 2001. The
Partnership  agreed to an early  termination of the lease at the occasion of the
next "C" check and the aircraft was returned in September, 2001.

                                       27
<PAGE>


         In October 2001, the Partnership decided to accept an offer from Falcon
to buy the  airframe  for  $140,000  and to pay  $100,000  for a release  of all
obligations under the lease. As a result, the Partnership  recorded, at December
31, 2001, a receivable of $140,000 for the sale of the aircraft, a receivable of
$100,000  for the rent,  and  recognized  a loss of  $100,000 on the sale of the
aircraft.

         In 2001,  the aircraft was written down by an additional  $1,464,000 to
$279,000,  for the value of its  engines.  A total of  $527,000  of  maintenance
reserves collected in 2001 was taken into income.

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

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

         As of January  25,  2001,  Capital  Cargo  failed to make its lease and
reserve  payment.  A notice of default  was sent on February 8, 2001 and Capital
Cargo  returned  the  Boeing  727-200 on May 23,  2001.  On June 14,  2001,  the
Partnership  sued  Capital  Cargo for  breach of its  monetary  obligations  and
damages  relating to the failure of the aircraft to meet return  conditions.  On
March 15, 2002,  the  Partnerhship  and Capital Cargo  reached a court  mediated
settlement (see Note 10. "Subsequent Events").

         As of December 31, 2001,  Capital  Cargo owes the  Partnership  monthly
rent, maintenance reserves, and expenses relating to the failure of the aircraft
to meet  return  conditions,  the  amounts  of which are to be  determined.  The
Partnership  held a Capital Cargo deposit of $220,000,  which was netted against
$220,000 of rent  receivable in the second quarter of 2001. The maximum take off
weight of the aircraft was upgraded,  during late 2000,  in accordance  with the
lease  delivery  requirements  and $159,000 was paid by the  Partnership  in the
first quarter of 2001 for this upgrade.

         In 2001, based on an independent appraisal,  the Partnership wrote down
the value of the aircraft by $1,396,000  to its  estimated  fair market value of
$2,950,000.

         TNT Transport  International  B.V. Lease. In June 1998, the Partnership
delivered a Boeing 727-200 advanced aircraft formerly leased to Continental to a
European freight carrier,  TNT Transport  International B.V. ("TNT") for a lease
term of four years. The lease provides for monthly rentals of $123,500  (subject
to a reduction of approximately 10% after two years if TNT exercises, during the
lease term, an option to extend the lease for an additional two years beyond the
original expiration date) and airframe and landing gear reserves aggregating $85
per flight hour.  TNT has  contracted  with a third party  service  provider for
maintenance of the engines.  TNT has provided a $150,000 security  deposit.  TNT
also has the right to extend the lease for an additional two years at the end of
the initial  lease term (if the above  option is not  exercised)  at $95,000 per
month.

         The Partnership has invested approximately $7.8 million for a low gross
weight hushkit and cargo  conversion of the aircraft,  and the purchase of three
JT8D-7B  engines.  The Partnership  received cash proceeds of $1,050,000 for the
sale of the JT8D-15  engines  from this  aircraft,  which  resulted in a $60,000
impairment  expense. In the third quarter of 1998, due to the conversion of this
aircraft to a freighter,  the Partnership wrote-off the remaining net book value
of the interior,  determined through a third party appraisal,  which resulted in
an  impairment  expense of  $57,000.  This  aircraft  was also  written  down at
December 31, 2000 by $901,000.  In 2001,  the aircraft was again written down by
$3,167,000 to a value of $2,241,000,  based on sale  discussions plus six months
rent at $123,500 per month.

                                       28
<PAGE>


         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.

         Pursuant  to the  lease,  TNT  has  renewal  options,  however,  it has
indicated  its  intention to return the aircraft at the end of the lease in June
2002. The General  Partners  anticipate a negotiated sale of the aircraft to TNT
at the end of the lease. If unsuccessful  in the  negotiations,  the Partnership
will  remarket the aircraft for lease or sale,  but there can be no assurance as
to  whether  the plane  will be  remarketed,  the time it will take or the lease
rate, if any, which may be achieved.

         Emery  Worldwide  Airlines  Inc.  ("Emery")  Lease.  The  lease  on the
McDonnell  Douglas DC10-10 with Continental  expired on September 15, 1999. Work
necessary  for the  aircraft  to meet the lease  return  conditions  was done at
Continental's  expense at a maintenance  facility.  Continental continued to pay
rent until the aircraft  achieved the lease  requirements for its return,  which
took place on December  16,  1999.  The  aircraft  was stored at a  modification
facility  until  June  2000 at which  time work  commenced  to  convert  it to a
freighter for Emery Worldwide Airlines Inc. ("Emery"). The Partnership and Emery
have signed a lease for a term of 84 months with rent of $218,000 per month. The
lease also provides a two-year renewal at $200,000 per month,  followed by three
additional  two-year  renewal  options  at the then fair  market  rental.  Emery
provided a  security  deposit of  $436,000.  The  aircraft  was  converted  to a
freighter in 2000 and delivered to Emery in December, 2000. At December 31, 2001
the conversion work totaled approximately $13.6 million.

         Lockheed  L-1011.  Based  on the  amount  of time the  L-1011  has been
unsuccessfully  offered  for  lease  or sale and the  large  number  of  similar
aircraft  available  for lease or sale,  the aircraft was written down from $1.7
million to a zero value in 2001. The aircraft is being offered for sale.

         Airbus A-300 Aircraft Lease. In 1998 and 1999, the Partnership  leased,
on a short-term  (six month minimum)  basis,  its two CF6-50C2  engines from the
Airbus  A-300  aircraft  to Viacao  Aerea Sao Paulo S.A.  ("VASP"),  a Brazilian
carrier.  At December  31,  1999,  VASP was in arrears with respect to scheduled
rent payments for a total of $838,000, and $1,265,000 in arrears with respect to
maintenance  reserve  payments.  The Partnership sued in mid-1999 in Florida and
obtained a judgment  against VASP in March 2000 for unpaid rent and reserves.  A
receiver  appointed to liquidate three VASP properties to satisfy claims of VASP
creditors has sold all three properties.  The Partnership  received $3.5 million
from the proceeds of the sale of the properties. Of the $3.5 million, $3 million
represents the Court award to the Partnership,  and $467,000 the interest earned
on that amount  since the date of the  judgement  in May 2000  through the final
payment  date of December 31, 2001.  The  Partnership  received all payments due
from the VASP Judgement in the fourth quarter 2001.

         One of the  engines  was  damaged  during  its  lease by  VASP.  It was
disassembled during the first quarter of 2001 and determined to be a total loss.
During  the  first  quarter  of  2001,  the  Partnership  and VASP  agreed  to a
Settlement  Stipulation  under which VASP paid  $800,000 to resolve all disputes
between  itself  and the  Partnership  related  to the  damaged  engine  and the
Partnership's legal costs. The Partnership received $800,000, which was recorded
as Other  Income,  and a write-down of the same amount was recorded on the A-300
in March  2001  reflecting  the  allocated  cash  value of the  damaged  engine.
Subsequent  to the  September 11, 2001 events,  the  Partnership  wrote down the
aircraft an  additional  $1,865,000  for a total of  $2,665,000,  resulting in a
value of $320,000  for its  airframe  and  remaining  engine.  The  airframe and
remaining engine are being offered for sale.

         General.  The aircraft  leases are  principally  triple net leases.  As
such,  during  the  terms  of  the  leases,  the  lessees  are  required  to pay
substantially all expenses associated with the aircraft.

                                       29
<PAGE>


                               Significant Lessees

         The  Partnership  leased its  aircraft  to nine  different  airlines or
airfreight  companies  during 2001.  Revenues  from each of the  airlines  which
accounted for 10% or greater of the  Partnership's  total rental  revenue during
2001, 2000, and 1999 are as follows:

Airlines                                        Percentage of Rental Revenue(a)
--------                                        -------------------------------
                                               2001          2000           1999
                                               ----          ----           ----

Continental Airlines, Inc. (b)                    0            (c)           20%
Trans World Airlines, Inc.                      (c)             21%          19
Aerovias de Mexico S.A. de C.V.                 (c)             16           15
Capital Cargo International Airlines, Inc.      (c)             16           14
TNT Transport International B.V.                 18%          1413
Kitty Hawk Aircargo, Inc.                        15             13          (c)
US Airways Group Inc.                           (c)             12           10
Emery                                            31            (c)            0
Falcon                                           12            (c)          (c)

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

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

(c)      Represents less than 10%.

         Revenues  include rentals from aircraft  leased to foreign  airlines or
carriers of  $1,767,000,  $3,132,000,  and  $3,350,000 in 2001,  2000,  and 1999
respectively.

                          Future Minimum Rental Income

         The  following is a schedule by year of future  minimum  rental  income
under the leases as of December 31, 2001 (in thousands):

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


                       2002                           6,336
                       2003                           5,636
                       2004                           5,636
                       2005                           4,941
                       Thereafter                     6,320
                                                    -------
                       Total                        $28,869
                                                    =======

         Note:  includes  rents from Capital Cargo of $139,000 per month through
7/25/05 and rents from Kitty Hawk of $112,700 per month through 12/6/06.

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

                                       30
<PAGE>


5.   Notes Payable

         The Partnership  obtained a $30 million  lending  facility on April 14,
2000, and an initial draw down was made of $19.5 million. The loan proceeds were
used to retire the existing debt of $16.5 million,  to replenish working capital
and to fund the  DC10-10  conversion.  The  facility  was later  limited  to $25
million because the Aeromexico  leases were not extended for two years. The term
of the loan is 6 years, with interest only payments for the first twelve months.
Thereafter,  principal is required to be repaid in equal quarterly  installments
over 60 months with the first  payment  having been paid in July 2001.  Proceeds
from the  sale of  aircraft  must be  applied  to  principal  reduction  and the
subsequent  required  principal  payments will be reset over the remaining term.
The interest  rate is 225 basis  points over a major money  center  bank's prime
rate. The lender has a mortgage interest in all aircraft except the 50% interest
in the  US  Airways  MD-81  aircraft.  The  loan  agreement  requires  that  the
Partnership  maintain  working  capital  equal to or in  excess  of  maintenance
reserves payable and have these amounts available for payment to the lessees.

         On April 9, 2001, the  Partnership  sold the MD-82,  formerly leased to
TWA, for $9.5  million and used the proceeds to pay down  principal on the note.
As of December 31, 2001, the balance due on the note is $9,483,000.

         The Limited Partnership  Agreement permits the Partnership to borrow up
to 35% (or $50,785,000) of the initial offering proceeds.

6.   Transactions with Affiliates

         Management  Fees.  The  General  Partners  are  entitled to a quarterly
subordinated  base management fee in an amount  generally equal to 1.5% of gross
aircraft rentals,  net of re-lease fees paid. Of this amount, 1.0% is payable to
the Managing General Partner and 0.5% is payable to the  Administrative  General
Partner.  During the years ended December 31, 2001,  2000, and 1999, the General
Partners  earned base  management  fees of  $120,000,  $155,000,  and  $174,000,
respectively.

         Incentive  Management Fees. 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, 2001, 2000,
and 1999, the General  Partners  earned  incentive  management fees of $909,000,
$592,000, and $442,000, respectively.

         Re-lease  Fee.  The  General  Partners  are  entitled  to  a  quarterly
subordinated fee for re-leasing  aircraft or renewing a lease in an amount equal
to 3.5% of the gross  rentals from such re-lease or renewal for each quarter for
which such payment is received.  Of this amount, 2.5% is payable to the Managing
General  Partner  and 1.0% is payable  to the  Administrative  General  Partner.
During the years ended December 31, 2001,  2000, and 1999, the General  Partners
earned re-lease fees of $258,000, $319,000, and $344,000, 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.  As distributions  from the Partnership
have fallen below a level of 8% per annum of original  capital,  pursuant to the
Partnership  Agreement,  fees to the General  Partners are being accrued but not
paid on a current basis.

         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.  There was no such reimbursable expenses in each of the years ended
December 31, 2001, 2000, and 1999. The continued absence of accountable expenses
is due to the subcontracting of certain accounting  services,  and their cost is
included in general and administrative expenses.

         Other. During 2001, 2000, 1999 and 1998, the Partnership paid $118,000,
$693,000,  and  $87,000,   respectively,  to  a  licensed  maintenance  facility
affiliated  with the Managing  General  Partner for the storage of the off-lease
aircraft.  Additionally,  during 2001,  2000,  and 1999,  the  Partnership  paid

                                       31
<PAGE>

$929,000,  $1,034,000,  and  $1,294,000,  respectively,  for aircraft parts to a
company owned by the President and Director of the Managing General Partner.

                                       32
<PAGE>


7.   Reconciliation to Income Tax Method of Accounting

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

                                                 2001        2000        1999
                                                 ----        ----        ----

Net income per financial statements            $ (3,354)   $  1,788    $    978
Increase (decrease) resulting from:
   Depreciation                                  13,627       3,503        (648)
   TBT interest income, less
      TBT rental expense                            128        (570)     (1,492)
   Gain on sale of engines                        1,499          69          85
   Reserves for maintenance costs,
      net of maintenance expense and
      write-downs of aircraft                      --          (187)       (192)
   Maintenance reserve payable                      195       1,457       1,113
   Deferred rental income                          (311)       --          (192)
   Rental income                                 (3,190)       (256)       (285)
   Management fees                                   46        --            27
   Other                                            (24)        (22)         13
                                               --------    --------    --------
Taxable (loss) income per federal
  income tax return                            $  8,616    $  5,782    $   (593)
                                               ========    ========    ========

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

                                                    2001       2000       1999
                                                    ----       ----       ----

Total Partnership capital per
   financial statements                          $ 16,756   $ 21,575   $ 24,185
Increase (decrease) resulting from:
   Commission and expenses paid
      in connection with the sale of limited
      partnership units                            16,295     16,295     16,295
   Accounts receivable                               --         --          233
   Distributions payable to partners                 --         --        2,169
   Management fees payable                             24       --         --
   Reserves for maintenance costs and
      write-downs                                  34,882     25,316     22,627
   Deferred income                                   --          311        167
   Accumulated depreciation                       (34,521)   (40,243)   (43,096)
   TBT interest income less TBT rental
     expense - Investment in Partnership             --       (7,086)    (6,516)
   Lease settlement payment, including lease
      aircraft received accounted for under
      the cost recovery method                       --       10,115     10,115
   Allowance for bad debts                           --         --         --
   Securities received in leasing transaction        --         --         --
   Fixed Assets                                      --         --          538
   Other                                              (24)       (22)       328
                                                 --------   --------   --------
Tax bases of net assets                          $ 33,412   $ 26,261   $ 27,045
                                                 ========   ========   ========

                                       33
<PAGE>


8.   Litigation

         In January 2001,  Capital Cargo stopped making its rent and maintenance
reserve  payments to the  Partnership.  As of September 30, 2001,  Capital Cargo
owed  the  Partnership  monthly  rent of  $139,000  from  January  2001  through
September 2001 and $49,000 in maintenance  reserve  payments.  On June 14, 2001,
the Partnership sued Capital Cargo in the court of Orlando County,  Florida, for
the breach of its monetary  obligations  and damages  relating to failure of the
aircraft  to meet lease  return  conditions.  In March  2002,the  parties to the
lawsuit have achieved a court mediated  settlement of the lawsuit,  see Note 10,
"Subsequent Events".

         Although Kitty Hawk had affirmed the Partnership's lease in bankruptcy,
Kitty  Hawk  intends  to file a motion  in  bankruptcy  court  in late  March to
terminate the lease,  and not pay damages.  The  Partnership  has terminated the
lease by reason of Kitty Hawk's default and will file a motion for damages under
the  lease.  Oral  arguments  will be heard in early  April  and a  decision  is
anticipated sometime thereafter.


9.   Fair Value of Financial Instruments

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

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

         Cash and cash  equivalents,  rents  and  other  receivables.  For these
balances, carrying value approximates fair value due to their short-term nature.

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

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


10.  Subsequent Events

         The Partnership agreed with Kitty Hawk for the payment of approximately
71% of the monthly rent, and no maintenance reserves for each of the first three
months of 2002.  Any  unpaid  rent and  reserves  will be added to the  existing
Chapter 11 administrative claims.

         The  Partnership  is  negotiating  with  Vanguard  with  regards to its
payments of the monthly rent and maintenance reserves.

         On March 14, 2002, the Partnership sold the A-300 airframe for $121,000
and the proceeds were used to pay principal on the Partnership's indebtedness.

         On March 15, 2002, the parties to the Capital Cargo lawsuit  achieved a
court mediated settlement. The settlement will result in the Partnership selling
the  Boeing  727  freighter  leased to Capital  Cargo for $2.0  million  and the
Partnership  will retain  maintenance  reserves of $1.27  million and a $220,000
security deposit.  The $2.0 million purchase price for the aircraft will be paid
through an initial  payment of $625,000 and a twelve month note with 11 payments
of $35,000 and a balloon  payment at the end.  The note will bear  interest  and

                                       34
<PAGE>

will be in the favor of the Partnership's lender with payments made reducing the
Partnership's indebtedness.

         On March 28,  2002,  the  Partnership  paid down its note payable by $5
million. The outstanding balance after this principal payment is $3.8 million.


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 2001, 2000, and
1999.

                                       35
<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.  Richard L.
Funk resigned as Senior Vice President, Technical of Pegasus Aircraft Management
Corporation  as of January 15, 2001,  and Ervin Bach assumed the position on the
same day.  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           Executive Vice President, General Counsel and Secretary
Richard M. Oster         Senior Vice President, Chief Financial Officer
Ervin Bach               Senior Vice President, Technical

         Richard S. Wiley, age 48, 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 BS degree  from the  Indiana
University School of Business and an MBA from the University of California,  Los
Angeles.

         Carol L. Chase,  Esq., age 49, is a Executive 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 BA 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.

         Richard M.  Oster,  age 50, is Chief  Financial  Officer,  Senior  Vice
President  Administration of Pegasus Aircraft Management Corporation (PAMC). Mr.
Oster  is  primarily   responsible   within  the  Pegasus   companies   for  all
corporate-wide  Finance and Administration  functions that include all financial
reporting,  planning  and  analysis,  accounting,   information  systems,  human
resources and other administrative functions. Prior to joining Pegasus, Mr.Oster
served as Senior Vice President and Chief Financial  Officer of Crowley Maritime
Corporation;  and prior to that, as Senior Vice  President  and Chief  Financial
Officer of  Inchcape  Shipping  Services.  Mr.Oster is a CPA and holds a B.S. in
Business  Administration from the University of North Carolina and a M.B.A. from
the Rutgers Graduate School of Business.

         Ervin Bach,  40, is Senior Vice  President,  Technical  of the Managing
General Partner and Pegasus Capital  Corporation.  Mr. Bach has been employed in
various  technical  capacities with  affiliates of the Managing  General Partner
since  1996.  From  1994 to 1996  he was  Manager  of  Structures  for  Hamilton
Aviation, Tucson and he has held the same position with Lockheed Aeromod, Tucson
from 1993 to 1994.  From 1989 to 1993, Mr. Bach held various  positions with the
Evergreen Air Center,  Marana,  Arizona,  the last being Manager of Engineering.
During 1991,  Mr. Bach was  employed  for seven months as a structural  mechanic
with Trans World  Airlines in Kansas City.  Mr. Bach was with the United  States
Air Force  from  1982 to 1989,  rising  to the rank of Staff  Sergeant  with the
responsibility  of maintaining  the mission  worthiness of 13 electronic  combat
C-130's.  Mr. Bach holds an Airframe and Power Plant  license and attended  USAF

                                       36
<PAGE>

technical and  leadership  schools.  Mr. Bach attended  Pima  Community  College
during 1990-91.


                           Air Transport Leasing, Inc.

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

Clifford B. Wattley      President, Chief Financial And Accounting Officer and
                         Director
Stephen R. Dyer          Vice President, Secretary, Treasurer and Director

         Clifford  B.  Wattley,  age  52,  is  President,  Chief  Financial  and
Accounting  Officer and a Director of the  Administrative  General Partner.  Mr.
Wattley is a Corporate Vice President with UBS  PaineWebber  Inc.  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.  Mr. Wattley  assumed the positions of
Cjief Financial and Accounting Officer on March 11, 2002, and will serve in that
capacity until such time as a replacement for Carmine Fusco is named.

         Stephen R. Dyer, age 42, is Vice President, Secretary and a Director of
the Administrative  General Partner. He joined UBS PaineWebber Inc. 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 & Company.  He  received  his  Bachelor  of  Science  degree in
Accounting in 1981 from Boston College and a Masters of Business  Administration
from  Indiana  University  in December  1984.  Mr.  Dyer is a  Certified  Public
Accountant.  Mr. Dyer assumed the  positions of Secretary and Treasurer on March
11, 2002 and will serve until such time as a  replacement  for Carmine  Fusco is
named.

         Carmine Fusco,  age 33, was Vice  President,  Secretary,  Treasurer and
Chief Financial and Accounting Officer of the Administrative General Partner and
also  served as an  Assistant  Vice  President  within the  Private  Investments
Department of UBS  PaineWebber  Inc. On February 25, 2000, Mr. Fusco was charged
with,  and on January 14, 2002 pleaded  guilty to,  conspiracy  to  distribute a
controlled  substance.   His  employment  with  UBS  PaineWebber  Inc.  and  the
Administrative  General  Partner was  terminated on March 11, 2002, the date UBS
PaineWebber Inc. and the  Administrative  General Partner were informed of these
facts.


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 2001.

                                       37
<PAGE>



ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

              (a)  As of the date hereof,  no person is known by the Partnership
                   to be the  beneficial  owner of more  than 5% of the Units of
                   the   Partnership.   The  Partnership  has  no  directors  or
                   officers,   and  neither  of  the  General  Partners  of  the
                   Partnership  owns any Units. The Assignor Limited Partner for
                   the Partnership,  Pegasus Assignor L.P.A., Inc. (an affiliate
                   of the Managing General Partner), owns 5 Units. Additionally,
                   ATL Inc., an affiliate of the Administrative  General Partner
                   owns approximately 112,916 units.

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

                      Managing General Partner:

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

                      Administrative General Partner:

                              Air Transport Leasing, Inc.
                              800 Harbor Boulevard, 3rd 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, 2002.



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

                   Managing General Partner:
                   Richard S. Wiley                         19,135           *
                   Carol L. Chase                            1,300           *

                   All directors and officers as
                   a group (2 persons)                      21,435           *

                   Administrative Managing Partner:
                   None

                   *  Less than 1% of class.

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

                                       38
<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.  Due to
the subordination  provisions of the partnership Agreement,  fees to the General
Partners are being accrued but are not being paid on a current basis.

         Following  is a summary of the  amounts  paid or payable to the General
Partners and their affiliates during 2001.

         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  2001,  the General  Partners  earned base  management  fees of
$120,000.

         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 $909,000
during 2001.

         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 $ 258,000 during 2001.

         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.  There was no such reimbursable  expenses during 2001. As discussed
in Note 6 to the Financial Statements, accountable expenses remained $-0- due to
the subcontracting of certain accounting services, and their cost is included in
general and administrative expenses.

         Other. In 2001, 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 $929,000.  During 2001,  the  Partnership  paid $118,000 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 $15,000 as their allocable share of distributable cash
flow for 2001. In addition,  pursuant to the Partnership Agreement as it relates
to the sale of an asset,  $34,000 of the Partnership's net taxable loss for 2001
was allocated to the General Partners.

                                       39
<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 Supplementary Data")

         (b)  The  Partnership  filed a Form 8-K on June 30,  2001,  reporting a
              distribution  of  $0.20  per Unit on or  about  July  10,  2001 to
              unitholders of record as of June 30, 2001. The  distribution was a
              result of cash flow from  operations  and in part funds  available
              from the sale of the McDonnell-Douglas  MD-82 to American Airlines
              in April 2001.

              During the fourth  quarter of 2001, 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.*

                                       40
<PAGE>


         (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.*

         (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.*

                                       41
<PAGE>


         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.*

         (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.*

                                       42
<PAGE>


         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).*

         (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.*

                                       43
<PAGE>


         (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.*

         (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.

                                       44
<PAGE>


         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
                        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.*

                                       45
<PAGE>


         (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.*

         (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.*

                                       46
<PAGE>


         (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.*

         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.

                                       47
<PAGE>


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

         11             Partnership Policy for Requests for Partner Lists.

                                       48
<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 28, 2002

                                 Pegasus Aircraft Partners II, L.P.
                                 (Registrant)

                                 By: Air Transport Leasing, Inc.
                                     Administrative General Partner

                                 By: /s/ CLIFFORD B. WATTLEY
                                     Clifford B. Wattley
                                     President, Chief Financial and Accounting
                                     Officer and Director



                                 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 28, 2002.

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

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

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


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

                                       49