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, 2002
                          ------------------------------------------------------

                                       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 57 pages.

<PAGE>
                       Pegasus Aircraft Partners II, L.P.
                       Annual Report on Form 10-K for the
                       Fiscal Year Ended December 31, 2002

                                Table of Contents
                                                                            Page
                                                                            ----

Part I
------

Item 1   Business.............................................................3
Item 2   Properties...........................................................6
Item 3   Legal Proceedings....................................................7
Item 4   Submission of Matters to a Vote of Unit Holders......................7

Part II
-------

Item 5   Market for Registrant's Common Partnership Capital and Related
           Unitholder Matters.................................................8
Item 6   Selected Financial Data..............................................9
Item 7   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.........................................9
Item 8   Financial Statements and Supplementary Data.........................17
Item 9   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.........................................33

Part III
--------

Item 10  Directors and Executive Officers of the Registrant..................34
Item 11  Executive Compensation..............................................35
Item 12  Security Ownership of Certain Beneficial Owners and Management......36
Item 13  Certain Relationships and Related Transactions......................37
Item 14  Control and Procedures..............................................38

Part IV

Item 15  Exhibits, Financial Statement Schedules and Reports on Form 8-K.....39



                                       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 were
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. In
2002, the Partnership  sold two of its Boeing  727-200s,  its Airbus A-300,  its
Lockheed  L-1011,  its  engines  from the Boeing 727  formerly  leased to Falcon
Express and its 50% ownership for the  Partnership  (McDonnell  Douglas  MD-81).
These sales resulted in the Partnership  owning three aircraft,  a DC-9, a DC-10
freighter  and a Boeing  727-200  freighter,  all of which are  parked and being
offered  for sale in an "as-is,  where is"  condition.  The net  proceeds of the
aircraft sales were generally utilized to pay off the Partnership's debt.

Outlook for the Airline and Aircraft Leasing Industries

         The US airline industry had an unprofitable year in 2002.  Results were
adversely  affected by continuing high fuel prices through most of 2002,  higher
labor costs and fewer  passengers.  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 airline 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  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.  A large number of carriers have filed for  bankruptcy
protection,  including  United Airlines and US Airways.  Passenger and freighter
aircraft  leasing  and  equipment  sales  continue  to be a  highly  competitive
business.

Aircraft Portfolio

         The Partnership's net asset value at December 31, 2002 was estimated to
be $0.76 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.

                                       3
<PAGE>


         The following table describes the Partnership's  aircraft  portfolio at
December 31, 2002:

<TABLE>
<CAPTION>
                                                       Dec.2002                                         Cumu-       Cumu-
                                   Owner-     Acqui-   Estimated              Original      Noise      lative      lative
   Current          Aircraft        ship      sition  Realizable              Delivery    Abatement    Flight      Flight
   Lessee             Type        Interest   Costs(1)  Value(1)                 Date     Compliance   Hours(2)    Cycles(2)
   ------             ----        --------   --------  --------                 ----     ----------   --------    ---------
                                             (dollar amounts in millions)

<S>              <C>                 <C>        <C>       <C>                   <C>     <C>            <C>         <C>
Off-Lease (3)    McDonnell
                 Douglas DC-9-31     100%       $ 8.9     $ 0.3                 1971    Stage  II      69,350      64,879


Off Lease (3)    Boeing 727-200
..                Freighter           100          8.4       0.2                 1973    Stage III (4)  75,396      54,033

                 McDonnell Douglas
Off Lease (3)    DC10-10 Freighter   100         31.9       0.4                 1973    Stage III      84,545      30,735
                                                -----     -----
                                                 49.2       0.9
</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, of which the airframe was sold
                   to the lessee in 2001 and the engines were sold in a separate
                   transaction in 2002,  two Boeing 727-200 (sold in 2002),  one
                   Airbus  A-300 (sold in 2002),  one  Lockheed  L-1011(sold  in
                   2002),  and 50% ownership in a McDonnell  Douglas MD-81 (sold
                   in 2002).

              (2)  The number of cumulative  flight cycles and cumulative flight
                   hours shown are as of December 31, 2002.

              (3)  Aircraft  off lease at  December  31,  2002.  The value shown
                   represents the book value of the aircraft and engines,  which
                   represents estimated realizable values.

              (4)  Federal Express hushkit installed.

         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 four different  airlines during
2002.  Revenue from each of the airlines  which  accounted for 10% or greater of
the total rental revenue of the Partnership during 2002 are as follows:

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

TNT Transport International B.V.                                21%
Kitty Hawk Aircargo, Inc.                                       14%
Emery Worldwide Airlines, Inc.                                  65%

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.


                                       4
<PAGE>

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

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

         The FAA has  adopted  certain  ADs for  Boeing  and  McDonnell  Douglas
aircraft  models,  including  Boeing 727s,  737s and 747s and McDonnell  Douglas
DC-9s,  MD-80s and DC-10s, 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

                                       5
<PAGE>


         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.

         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.

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.  The
Partnership's   Boeing  727-200   aircraft  has  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.  Many used  aircraft  of a type  similar to the  Partnership's
aircraft are off-lease and are parked,  available for sale,  leases or part-out.
Also,  the  number of  carriers  using  this  type of  equipment  have  declined
significantly.  Many of the other aircraft are newer or in a better  maintenance
status than the Partnership's aircraft.

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.


                                       6
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

         None.

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, 2002.


                                       7
<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,  2003,  the  number of  Limited  Partners  of record was
approximately 7,057.

         The  Partnership  declared the following  distributions  to its Limited
Partners out of cash flow received from operations during 2002 and 2001:

                      Amount of
                    Distribution
         Period       Per Unit    Record Date                  Payment Date
         ------       --------    -----------                  ------------
1st Quarter 2002          .00                                  None Paid
2nd Quarter 2002          .00                                  None Paid
3rd Quarter 2002          .00                                  None Paid
4th Quarter 2002        $1.50     September 30, 2002 (1)       October 31, 2002
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

    (1)  Distribution  declared  in  fourth  quarter  for  Unit  holders  as  of
         September 30, 2002.

         Total  distributions to all partners for 2002 and 2001 were declared as
follows (in thousands):

                                                  2002            2001
                                                  ----            ----

         Limited Partners                        $10,882        $ 1,451
         General Partners                            110             15
                                                 -------        -------
                                                 $10,992        $ 1,466
                                                 -------        -------

         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 the years ended  December 31, 2002 and  December  31, 2001,  all of the cash
distributions  paid to the  partners  for the years ended  December 31, 2002 and
2001  constituted a return of capital.  Based on the net income  reported by the
Partnership  for the year  ended  December  31,  2000 for  accounting  purposes,
approximately 73% of cash  distributions paid to the partners for the year ended
December 31, 2000, constituted a return of capital. Also, based on the amount of
cumulative  net income  reported by the  Partnership  for  accounting  purposes,
approximately  87% of the  cash  distributions  paid to the  partners  from  the
inception of the Partnership  through  December 31, 2002 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  declared and paid  distributions to record holders of September 30,
2002 in the fourth quarter 2002.

         The  Partnership's  lending  facility  had been  limited to $25 million
instead of the $30 million originally  negotiated.  This limitation was 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 utilized proceeds from asset sales
to retire debt.  Such principal  repayments  further  reduced cash available for

                                       8
<PAGE>

distributions.  Additionally,  the Partnership  sold 4.5 aircraft and the Falcon
engines  in 2002,  resulting  in having  only  three off  lease  aircraft  left.
Accordingly,  the  Partnership  has no more  indebtedness,  but cash  flow  from
operations has been substantially 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.

                                               As of December 31,
                                            or Year Ended December 31,
                                            --------------------------
                                2002       2001       2000       1999      1998
                                     (in thousands, except per unit amounts)

Rental Revenue (2)            $  3,370   $  7,357   $  9,344  $ 10,603  $ 11,210
Net Income (Loss)                  (25)    (3,354)     1,788       978     1,855
Net Income  (Loss) per
  Limited Partnership Unit       (0.00)     (0.46)      0.10      0.11      0.22
Distributions per Limited
  Partnership Unit (1)            1.50       0.20       0.60      1.50      1.60
Total Assets                     6,853     32,894     48,870    48,163    51,423
Notes Payable                     --        9,483     21,210    16,530    10,000
Partners' Capital                5,739     16,756     21,576    24,185    34,200

    (1)  The  fourth  quarter  distribution  for 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 and 1998. 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  one  commercial  aircraft  and two
freighter  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, 2002,
the  Partnership's  unrestricted  cash and cash  equivalents of $4,569,000  were
primarily  invested  in such a fund.  This amount was  $3,875,000  less than the

                                       9
<PAGE>

Partnership's  unrestricted  cash and cash  equivalents  at December 31, 2001 of
$8,444,000.  This decrease in  unrestricted  cash was primarily  attributable to
cash from  operating  activities  of  $14,652,000  and  investing  activities of
$1,948,000, offset by cash used in financing activities of $20,475,000.

         Net cash  provided by operating  activities  was $14.7 million in 2002,
$10.5  million in 2001,  and $5.9 million in 2000.  In the  aggregate,  for this
three-year  period,  net cash  provided by operating  activities  totaled  $31.1
million.  The $14.7 million of cash provided by operating  activities in 2002 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  increased  by  $1,130,000,  or 471%,  from
$240,000 at December 31, 2001 to $1,370,000 at December 31, 2002.  This increase
primarily  resulted  from the  remaining  $1,104,000  note  receivable  from the
Capital Cargo sale in March 2002, the remaining  $261,000 note  receivable  from
the Kitty Hawk sale in October 2002, partially offset by the $240,000 payment of
December 31, 2001 receivables from Falcon in 2002.

         Other  assets  decreased  by  $222,000,  or 90%,  from  $246,000  as of
December  31,  2001 to $24,000 as of December  31,  2002,  primarily  due to the
$222,000  prepaid debt  placement fees on the note payable being expensed in the
2002 Period when the note was paid off.

         Accounts  payable and accrued  expenses  decreased by $85,000,  or 38%,
from  $225,000 at December 31, 2001 to $140,000 at December 31, 2002,  primarily
due to payments of obligations accrued at December 31, 2001.

         Payables to affiliates decreased by $2,302,000, or 70%, from $3,276,000
at December 31, 2001 to $974,000 at December 31,  2002,  principally  due to the
reversal of accrued  management  fees for the fiscal years  ending  December 31,
2000,  December 31, 2001 and for the quarter  ending March 31, 2002.  Based upon
Preferred  Return as determined  pursuant to the  Partnership  Agreement and the
estimated value of the Partnership's  remaining assets, a determination was made
to reverse the fees accrued but unpaid to the General  Partners for fiscal years
2000 through the first quarter of 2002. Besides the reversal,  no new management
fees were accrued in 2002.

         Maintenance  reserves  payable  decreased by $2,315,000,  or 100%, from
$2,315,000  at December  31, 2001 to zero at December 31,  2002.  This  decrease
comprised of $1,277,000 of Capital  Cargo's  reserves and $130,000 of Vanguard's
reserves that were applied towards the sale price,  the $568,000 of Kitty Hawk's
reserves,  $340,000 of TNT's  reserves  that were taken into  income,  offset by
$649,000 of cash collections from TNT and Vanguard. Cash receipts originally for
maintenance  of $558,000  for TNT was applied to income and $91,000 for Vanguard
was applied to the sale of the MD-81.

         Note payable  decreased by  $9,483,000,  or 100%,  from  $9,483,000  at
December 31, 2001 to zero at December  31, 2002,  due to the pay off of the loan
in May 2002.

         Accrued interest payable decreased by $28,000, or 100%, from $28,000 at
December 31, 2001 to zero at December  31, 2002,  due to the pay off of the loan
in May 2002.

         Deferred  rental  income and deposits  decreased by $811,000,  or 100%,
from  $811,000 at December 31, 2001 to zero at December 31, 2002.  This decrease
comprised of $225,000 of Kitty  Hawk's  deposit,  $150,000 of TNT's  deposit and
$436,000 of Emery's deposit that were taken into income in 2002.

         Net cash provided by investing activities for 2002 was $1,948,000,  due
to the receipt of the proceeds  from sale of the Falcon  airframe  ($140,000) in
December  2001,  the  sale of the  A-300  aircraft  ($321,000),  the sale of the
Capital  Cargo  aircraft  ($891,000),  the  sale  of  the  Kitty  Hawk  aircraft
($196,000),  the sale of the L-1011 aircraft  ($75,000),  the sale of the Falcon
engines  ($75,000),  and cash distribution from the MD-81 Trust arising from the
sale of the MD-81 aircraft ($250,000), all of which occurred in 2002.

         Net  investment in the MD-81 Trust  decreased by 100%,  or  $1,296,000,
from  $1,296,000  at December 31, 2001 to zero at December 31, 2002,  due to the
sale of the McDonnell Douglas MD-81 in October 2002.

                                       10
<PAGE>


         The McDonnell  Douglas MD-81 aircraft under lease to Vanguard  Airlines
in 2002 was owned by a trust ("MD-81  Trust") in which the Partnership had a 50%
interest.  An affiliated  Partnership owned the other 50% interest. As the lease
with USAir ended in June 2001, USAir returned the aircraft in July 2001 and paid
rent  through  the  return  date.  In  August  2001,  the Trust  entered  into a
three-year lease of the aircraft with Vanguard Airlines, a Kansas City, Missouri
airline.  The lease agreement was on a "power by the hour" basis, at the rate of
$600 per flight  hour,  to a maximum of $130,000  per month.  Vanguard  was also
responsible  for funding the maintenance  reserves for the aircraft.  Due to the
events of  September  11,  2001 and the abrupt  slowdown in  passenger  traffic,
Vanguard only paid $442,000, of which 50% was distributed to the Partnership and
50% to the other  affiliated  Partnership,  from the  beginning  of the lease in
August 2001 through  September 2002.  These payments were applied to maintenance
reserves within the Trust. After being denied a loan guarantee for a second time
by the Airline  Transportation  Stabilization Board, Vanguard Airlines suspended
all flights  operations  on July 30, 2002,  dismissed  all but 80 employees  and
filed for  protection  under Chapter 11 of the U.S.  Bankruptcy  Code.  Vanguard
rejected  the lease  and  returned  the MD-81  aircraft  to the  Partnership  on
September 30, 2002 and the aircraft was sold on October 25, 2002.

         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  starting  the  fiscal  year  ended  December  31,  2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft leased to
USAirways under the equity method. In prior years, the Partnership  reported its
ownership  in the  MD-81  Trust on a  proportionately  consolidated  basis.  The
aircraft  had been subject to a tax benefit  transfer  lease,  which  expired in
April 2000.

         Net cash used in financing  activities was  $20,475,000  for 2002. This
amount represents  $9,483,000 repayments of the note payable in May 2002 and the
$10,992,000 cash distributions to partners in October 2002.

         Partnership  capital was $5,739,000 at December 31, 2002, a decrease of
approximately  $11,017,000 or 66% from  $16,756,000 at December 31, 2001, due to
net loss of $25,000 and $10,992,000 of distributions to partners during the year
ended  December 31,  2002,  as compared to the 2001 net loss of  $3,354,000  and
$1,466,000 of cash  distributions to partners during the year ended December 31,
2001.

         Cash  distributions  declared by the Partnership were approximately $11
million for 2002 ($1.50 per Unit),  $1.5  million for 2001 ($.20 per Unit),  and
$4.4 million for 2000 ($.60 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 was six years,  with interest
only payments the first twelve months. Thereafter,  principal was 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
was 225 basis points over a major money center bank's prime rate. The lender had
a  mortgaged  interest  in all  aircraft,  except the 50%  interest in the MD-81
aircraft, leased to Vanguard. The loan agreement required 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 were
received from  aircraft  sales,  under the bank note,  they must be applied to a
reduction in the outstanding balance and the subsequent  quarterly payments were
redetermined such that the note balance would be retired through equal quarterly
payments  through  the  remaining  terms.  The note  balance was  $9,483,000  at
December 31, 2001 and it was entirely paid off in May 2002.

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.

                                       11
<PAGE>


Lease Revenue Recognition:

Revenue under operating leases is recognized as rental income on a straight line
basis 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. 144,  "Accounting  for the Impairment or
Disposal of Long-Lived  Assets".  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  accounting  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  2002 revenue was generated from the leasing
of the  Partnership's  aircraft to  commercial  air  carriers  under  triple net
operating  leases,  and from the  termination  fee payment  from Emery for early
termination  of its lease,  the  reversal of  Management  fees in 2002,  and the
recognition to income of security deposits and maintenance reserves.

         Under the terms of the  triple  net  leases,  expenses  related  to the
operation  and  maintenance  of the  aircraft  during  2002 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 storing the
off-lease aircraft and other work on the aircraft.

         The Partnership  also records  depreciation  expense  pertaining to the
aircraft on lease and write down expense on aircraft and incurs interest expense
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 2002.

2002 as compared to 2001

         The  Partnership's net loss was $25,000 for the year ended December 31,
2002  ("2002  Period") as  compared  to  $3,354,000  net loss for the year ended
December 31, 2001 ("2001 Period").

         The  Partnership's  net loss for the 2002 Period  compared to a greater
net loss of the 2001 Period was  principally  due to higher  revenues from early
lease termination fees from Emery in the 2002 Period,  revenue from the reversal
of accrued  management fees in the 2002 Period, and more recognition of security
deposits  and  maintenance  reserves to income in the 2002 Period as compared to
the 2001 Period,  partially  offset by the  reduction in rental  income in 2002,
lower  gains on sale of  aircraft  in the 2002  Period as  compared  to the 2001
Period,  and also offset by income from a VASP  Judgment and  settlement  in the
2001 Period, and higher write downs in the 2002 Period.

                                       12
<PAGE>


         Rentals from operating  leases  decreased by  $3,987,000,  or 54%, from
$7,357,000 in the 2001 Period to  $3,370,000  in the 2002 Period.  This decrease
was  principally  due to the sale of the Boeing 727,  formerly leased to Falcon,
the Boeing 727,  formerly  leased to Capital  Cargo,  and the McDonnell  Douglas
MD-82,  formerly leased to TWA in the 2001 Period, no rent payments from the two
DC-9,  formerly leased to Aeromexico,  the end of the lease of the Boeing 727 to
TNT in June 2002, the end of the lease of the DC-10-10 to Emery in October 2002,
and the decrease in rent payments from Kitty Hawk in the 2002 Period.

         Gain  on  sale  and  disposition  of  aircraft,  engines  or  equipment
decreased by $5,621,000, or 93%, from $6,056,000 for the 2001 Period to $435,000
for the 2002 Period.  This decrease was  attributable to lower gains  recognized
from the sale of the Boeing 727,  formerly leased to Capital Cargo,  the sale of
the A-300 airframe and engines,  the sale of the Boeing 727,  formerly leased to
Kitty Hawk, and the sale of the off-lease L-1011 aircraft in the 2002 Period, as
compared to the sale of the McDonnell  Douglas MD-82 to American Airlines in the
2001 Period.

         Equity in deficit of the MD-81 Trust  increased  by 338%,  or $423,000,
from a deficit of $125,000  for the 2001 Period to a deficit of $548,000 for the
2002 Period,  due to no receipts of rent from  Vanguard in the 2002 period and a
write down,  partially  offset by the ultimate  sale of the aircraft in the 2002
Period.

         The  Partnership  received  $11,440,000  from  Emery  for  early  lease
termination  fees in the 2002  Period.  There  was no such  income  for the 2001
Period.

         The  Partnership  received  $3,791,000  from  the  VASP  Judgement  and
settlement in the 2001 Period. There was no such income for the 2002 Period.

         Interest  income  decreased by $611,000,  or 84%, from $730,000 for the
2001 Period to $119,000 for the 2002 Period,  due to the interest  earned on the
VASP Judgment and Settlement in the 2001 Period.

         Other income  increased by $1,078,000,  or 88%, from $1,222,000 for the
2001 period to $2,300,000  for the 2002 Period.  This increase was due primarily
to the $1,048,000  maintenance reserves and security deposits from TNT, $792,000
maintenance  reserves  and  security  deposits  from Kitty  Hawk,  and  $436,000
security  deposit  from  Emery,  all taken into  income in the 2002  Period,  as
compared to $688,000 return condition  settlement from Aeromexico,  and $527,000
of maintenance reserves taken into income from Falcon in 2001.

         Depreciation  decreased by $2,204,000 or 63%, from  $3,471,000  for the
2001 Period to $1,267,000  for the 2002 Period.  This decrease was due primarily
to the sale of the  Boeing  727,  formerly  leased to Falcon,  the  Boeing  727,
formerly  leased to Capital  Cargo,  and the McDonnell  Douglas  MD-82  formerly
leased  to TWA,  and the  off-lease  status  of the  DC-9,  formerly  leased  to
Aeromexico and the Boeing 727, formerly leased to TNT until June 2002.

         Write downs increased by $1,542,000,  or 10%, from  $15,476,000 for the
2001 Period to $17,018,000  for the 2002 Period.  This increase was due to write
downs for the  A-300,  formerly  leased to VASP,  and the Boeing  727,  formerly
leased to Falcon in the 2001 Period,  as compared to more of a write down in the
2002 Period.  In the 2002 Period,  there were write downs of $1,316,000  for the
Boeing 727,  formerly  leased to TNT, a write down of $277,000 of the investment
in the MD-81 Trust, a write down of $453,000 for the Boeing 727 formerly  leased
to Kitty  Hawk,  a write down of  $204,000  for the three  Pratt & Whitney  JT8D
engines  from the Boeing  airframe  that was sold to Falcon  Express in 2001,  a
write down of $500,000 for the Boeing 727,  formerly  leased to TNT, and a write
down of $14,268,000 for the DC-10, formerly leased to Emery.

         Management fees and Re-lease fees to the General Partners  decreased by
100%,  from  $1,287,000  for the 2001 Period to zero for the 2002 Period.  Based
upon Preferred  Return as determined  pursuant to the Partnership  Agreement and
the estimated value of the  Partnership's  remaining assets, a determination was
made to reverse the fees  accrued but unpaid to the General  Partners for fiscal
year 2000 through the first quarter of 2002.

         Interest expense decreased by $968,000, or 71%, from $1,361,000 for the
2001 Period to $393,000 for the 2002 Period due to the payoff of the loan in May
2002, partially offset by the write off of debt placement fees in June 2002.

                                       13
<PAGE>


         Direct lease  expense  decreased by $171,000 or 38%,  from $453,000 for
the 2001 Period to $282,000 for the 2002 Period, due primarily to costs incurred
in the 2001 Period,  relating to the VASP  aircraft  engines and less  insurance
expense for the 2002 Period.  Direct lease  expense was lower in the 2002 Period
and primarily related to storage costs for aircraft off lease.

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").

         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.

                                       14
<PAGE>


         Direct lease  expenses  decreased by $463,000 or 51% 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
2001,  and the $90,000  payments in 2001 for the costs  incurred for work on the
engines of the Airbus A-300, formerly leased to VASP.

         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.


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.

         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

                                       15
<PAGE>

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.

         On July 30,  2002,  the  Sarbanes-Oxley  Act of 2002  (the  "Act")  was
enacted.  Section 302 of the Act required the Securities  Exchange Commission to
adopt final  rules that became  effective  on August 29,  2002,  under which the
principal  executive  officer and the principal  financial  officer,  or persons
providing  similar  functions,  of an issuer each must  certify the  information
contained  in the  issuer's  quarterly  and  annual  reports.  Section  302 also
requires these officers to certify that: they are responsible for  establishing,
maintaining and regularly  evaluating the effectiveness of the issuer's internal
controls,  they have made certain  disclosures to the issuer's  auditors and the
audit committee of the board of directors about the issuer's internal  controls;
and they have included  information in the issuer's quarterly and annual reports
about their  evaluation and whether there have been  significant  changes in the
issuer's internal controls or in other factors that could  significantly  affect
internal controls subsequent to the evaluation.

         In 2002,  $526,000 of direct lease expense,  incurred in 2001, that was
related to the MD-81 aircraft, was reclassified to the MD-81 Trust's equity.


                                       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, 2002 and 2001................................  19

Statements of Income/ (Loss) for the years ended
     December 31, 2002, 2001, and 2000......................................  20

Statements of Partners' Capital for the years ended
     December 31, 2002, 2001, and 2000......................................  21

Statements of Cash Flows for the years ended
     December 31, 2002, 2001, and 2000......................................  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/(loss),  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, 2002 and 2001, and the
results of its  operations and its cash flows for each of the three years in the
period  ended  December 31,  2002,  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
February 13, 2003


                                       18
<PAGE>


                       PEGASUS AIRCRAFT PARTNERS II, L.P.

                                 BALANCE SHEETS

                           DECEMBER 31, 2002 AND 2001



                                     ASSETS

                                                         2002      2001
                                                         ----      ----
                                                (in thousands, except unit data)

  Cash and cash equivalents                             $ 4,569  $ 8,444
  Rent and other receivables                              1,370      240
  Aircraft, net                                             890   23,964
  Other assets                                               24      246
                                                        -------  -------
     Total Assets                                       $ 6,853  $32,894
                                                        =======  =======

                       LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
  Accounts payable and accrued expenses                 $   140  $   225
  Payable to affiliates                                     974    3,276
  Maintenance reserves payable                             --      2,315
  Notes payable                                            --      9,483
  Accrued interest payable                                 --         28
  Deferred rental income and deposits                      --        811
                                                        -------  -------
     Total Liabilities                                    1,114   16,138
                                                        -------  -------

COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)

PARTNERS' CAPITAL:
  General Partners                                           59      169
  Limited Partners (7,255,000 units issued and
    outstanding in 2002 and 2001)                         5,680   16,587
                                                        -------  -------
     Total Partners' Capital                              5,739   16,756
                                                        -------  -------
         Total Liabilities and Partners' Capital        $ 6,853  $32,894
                                                        =======  =======



   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, 2002, 2001, AND 2000


<TABLE>
<CAPTION>
                                                         2002           2001          2000
                                                         ----           ----          ----
                                                (in thousands, except unit data and per unit amounts)

REVENUES:
<S>                                                   <C>           <C>           <C>
    Rentals from operating leases                     $     3,370   $     7,357   $     9,344
    Interest                                                  119           730           136
    Equity in earnings (deficit) of MD-81 Trust              (548)         (125)          443
    VASP Judgement and Settlement                            --           3,791          --
    Emery Lease Termination fees                           11,440          --            --
    Management & Re-lease fees reversal                     2,330          --            --
    Other income                                            2,300         1,222          --
    Gain on disposition of aircraft, engines
      or equipment                                            435         6,056         4,816
                                                      -----------   -----------   -----------
                                                           19,446        19,031        14,739
                                                      -----------   -----------   -----------

EXPENSES:
    Depreciation and amortization                           1,267         3,471         5,896
    Write-downs                                            17,018        15,476         2,301
    Management and re-lease fees                             --           1,287         1,043
    Interest                                                  393         1,361         2,309
    General and administrative                                511           337           435
    Direct lease                                              282           453           916
    Return condition settlement                              --            --              51
                                                      -----------   -----------   -----------
                                                           19,471        22,385        12,951
                                                      -----------   -----------   -----------

NET INCOME (LOSS)                                             (25)       (3,354)        1,788
                                                      ===========   ===========   ===========

NET INCOME (LOSS) ALLOCATED:
    To the General Partners                                  --             (34)        1,058
    To the Limited Partners                                   (25)       (3,320)          730
                                                      -----------   -----------   -----------
                                                              (25)       (3,354)        1,788
                                                      -----------   -----------   -----------

NET INCOME (LOSS) PER LIMITED PARTNERSHIP
  UNIT                                                $     (0.00)  $     (0.46)  $      0.10
                                                      ===========   ===========   ===========

WEIGHTED AVERAGE NUMBER OF LIMITED
  PARTNERSHIP UNITS ISSUED AND
  OUTSTANDING                                           7,255,000     7,255,000     7,255,000
                                                      ===========   ===========   ===========
</TABLE>




   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, 2002, 2001, AND 2000




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


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/(loss)                              (34)     (3,320)     (3,354)

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

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

     Net income/(loss)                             --           (25)        (25)
     Distributions declared to partners            (110)    (10,882)    (10,992)
                                               --------    --------    --------

Balance, December 31, 2002                     $     59    $  5,680    $  5,739
                                               ========    ========    ========






   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, 2002, 2001, AND 2000

                                                   2002       2001       2000
                                                   ----       ----       ----
                                                  (dollar amounts in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income/(loss)                            $    (25)  $ (3,354)  $  1,788
    Adjustments to reconcile net income to net
     cash provided by operating activities:
      Gain on disposition or sale of engines
        and equipment                                (435)    (6,056)    (4,816)
      Depreciation                                  1,267      3,471      5,896
      Equity in (earnings) deficit of MD-81
        Trust                                         548        125       (443)
      Write-downs                                  17,018     15,476      2,301
      Change in assets and liabilities:
       Rent and other receivables                     100        211       (115)
       Other assets                                   222         63       (294)
       Accounts payable and accrued expenses          (85)      (381)       112
       Accrued interest payable                       (28)      (104)       132
       Deferred rental income and deposits           (811)      (534)      (130)
       Payable to affiliates                       (2,302)     1,264      1,043
       Maintenance reserves payable                  (817)       326        459
                                                 --------   --------   --------
          Net cash provided by operating
            activities                             14,652     10,507      5,933
                                                 --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Cash distributions from investment in
      MD-81 Trust                                     250        162      1,214
    Capitalized aircraft improvements                --         (829)   (11,755)
    Proceeds from the disposition or sale of
      engines and equipment                         1,698      9,500      6,150
    Decrease (increase) in restricted cash           --         --          371
                                                 --------   --------   --------
          Net cash provided by (used in)
            investing activities                    1,948      8,833     (4,020)
                                                 --------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    (Repayment of) / Proceeds from notes
      payable                                      (9,483)   (11,727)     4,680
    Cash distributions paid to partners           (10,992)    (1,466)    (6,596)
                                                 --------   --------   --------
          Net cash used in financing activities   (20,475)   (13,193)    (1,916)
                                                 --------   --------   --------

NET INCREASE/( DECREASE) IN CASH AND CASH
  EQUIVALENTS                                      (3,875)     6,147         (3)

CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR                                              8,444      2,297      2,300
                                                 --------   --------   --------
CASH AND CASH EQUIVALENTS AT END OF YEAR         $  4,569   $  8,444   $  2,297
                                                 ========   ========   ========


   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, 2002, 2001, AND 2000 (continued)



                                                      2002     2001       2000
                                                      ----     ----       ----
                                                   (dollar amounts in thousands)

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid                                        $  199    $1,413    $2,143

NONCASH TRANSACTIONS:

Maintenance reserves recognized upon
  sales of aircraft                                  $1,498    $ --      $  781

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

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

Receivable arising from sales of aircraft            $1,370    $ --      $ --





   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, 2002

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  reclassifications of prior year numbers have been made to be consistent
with current year 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.144,
"Accounting  for the Impairment or Disposal of Long-Lived  Assets" ("SFAS 144"),
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,  formerly leased to
Vanguard  Airlines  ("Vanguard"),  was owned by a trust in which the Partnership
had a 50% interest. An affiliated  Partnership owned the other 50% interest. The
Partnership  had 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 accounted
for its  investment  in the  Trust  which  owned 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. In October 2002, the McDonnell Douglas MD-81
aircraft was sold.

         Maintenance  Reserve  Funds.  For the year ended December 31, 2002, the
Partnership  had four  leases  where the lessee  was  required  to make  monthly
payments to  maintenance  reserve funds  administered  by the  Partnership.  The
Partnership  retained the collected  maintenance reserves when the aircraft were
sold, or when the lessees defaulted on their lease payments.

         Operating   Leases.   The  aircraft   leases,   which  were  structured
principally as triple net leases, were accounted for as operating leases.  Lease
revenues  were  recognized in equal  installments  over the terms of the related
leases.

         Deferred Income.  Some of the  Partnership's  operating leases required
rental  payments  to  be  paid  monthly,  in  advance.  Deferred  rental  income
represented payments received in advance, which had 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 or Loss Per Limited Partnership Unit. The net income or loss
per limited  partnership  unit is  computed  by dividing  the net income or loss
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.

         On July 30,  2002,  the  Sarbanes-Oxley  Act of 2002  (the  "Act")  was
enacted.  Section 302 of the Act  required the  Commission  to adopt final rules
that became  effective on August 29, 2002,  under which the principal  executive
officer  and the  principal  financial  officer,  or persons  providing  similar
functions,  of an issuer each must  certify  the  information  contained  in the
issuer's quarterly and annual reports.  Section 302 also requires these officers
to  certify  that:  they  are  responsible  for  establishing,  maintaining  and
regularly  evaluating the effectiveness of the issuer's internal controls,  they
have made certain  disclosures to the issuer's  auditors and the audit committee
of the board of directors about the issuer's  internal  controls;  and they have
included  information  in the issuer's  quarterly and annual reports about their
evaluation  and  whether  there have been  significant  changes in the  issuer's
internal controls or in other factors that could  significantly  affect internal
controls subsequent to the evaluation.

         In 2002,  $526,000 of direct lease expense,  incurred in 2001, that was
related to the MD-81 aircraft, was reclassified to the MD-81 Trust's equity.

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.
The purpose of this method of holding title is to satisfy  certain  registration
requirements of the Federal Aviation Administration.


                                       25
<PAGE>


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.

4.       Aircraft

                           Net Investment in Aircraft

         The  Partnership's  net  investment in aircraft as of December 31, 2002
and 2001 consisted of the following (in thousands):

                                                          2002           2001
                                                          ----           ----

Aircraft on operating leases, at cost                   $   --         $ 49,941
Less: Accumulated depreciation                              --          (22,556)
         Write-downs                                        --           (8,567)
                                                        --------       --------
                                                        $   --         $ 18,818
                                                        --------       --------

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

Aircraft held for  sale, at cost                        $ 49,860       $ 73,616
Less: Accumulated depreciation                           (26,237)       (36,474)
         Write-downs                                     (22,733)       (33,292)
                                                        --------       --------
                                                             890          3,850
                                                        --------       --------
Aircraft, net                                           $    890       $ 23,964
                                                        ========       ========

                            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.

         DC-9 Aircraft.  One of the  Partnership's  McDonnell Douglas DC-9's was
formerly  leased  to  Aeromexico.  The  lease  expired  in  February  2000,  but
Aeromexico  continued to pay rent for the aircraft on a month-to-month basis and
returned the aircraft in July 2001. In August 2001,  Aeromexico paid $688,000 in
return condition settlements and $56,500 of remaining rent. The aircraft,  while
parked in Texas,  was damaged  during a hailstorm  earlier in the year 2002. The

                                       26
<PAGE>

Partnership has filed an insurance claim and the General  Partners believe there
is adequate  insurance in place to compensate  for the damage.  The aircraft and
engines are being offered for sale on an "as is, where-is" basis.

         Lockheed  L-1011  Aircraft.  Based on the amount of time the L-1011 had
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 was sold for $75,000 in November
2002.

         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 lease with Kitty Hawk was for 84 months, the lease rate was
$112,700 per month and maintenance  reserves were 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 also  provided  a security  deposit of
$225,400.

         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 lease
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. The Partnership also agreed
to a payment of 71% of the rents for  December  2001,  and January and  February
2002 and no maintenance reserves payments for these months.  However, Kitty Hawk
could not make any payment in March and April 2002.

         The  Partnership  agreed in May 2002 to a sale of the aircraft to Kitty
Hawk  for a  $750,000  note,  subject  to  documentation  and  approval  of  the
bankruptcy  court.  The lease was  reinstated  with a per  month  lease  rate of
$65,000  beginning  in May  2002.  The sale of the  aircraft  to Kitty  Hawk was
completed  in  October  2002 with  lease  payments  made  from May 2002  through
September 2002 being applied to the note. The remainder of the note is scheduled
to be paid with payments of $65,000 per month through April 2003.

         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.  In 2002, the Partnership wrote
down the value of the aircraft by an additional  $453,000 based on the estimated
realizable 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 was the  owner/lessor of a McDonnell  Douglas MD-81 aircraft for a purchase
price of $10,041,000.  The remaining one-half interest in the Trust was 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 a number of U.S. cities.

         The lease  agreement  had been 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 was also  responsible  for funding the
maintenance reserves for the aircraft. From the beginning of the lease in August
2001 through September 30, 2002, Vanguard paid a total of $442,000, of which the
Trust paid 50% to the Partnership and 50% to an affiliated Partnership.

         Vanguard, as many other airlines, has been adversely affected by events
of September 11, 2001.  After being denied a loan guarantee for a second time by
the Airline  Transportation  Stabilization  Board,  Vanguard Airlines  suspended
flight operations on July 30, 2002, dismissed all but 80 employees and filed for
protection under Chapter 11 of the U.S.  Bankruptcy Code.  Vanguard rejected the
lease and returned the MD-81 aircraft to the  Partnership on September 30, 2002.

                                       27
<PAGE>

At the time of its filing, Vanguard was in arrears to the Trust in the amount of
$1,389,000  ($694,500  to the  Partnership,  for its 50%  interest)  in rent and
reserves.  At  December  31,  2002,  recovery of this  amount is  unlikely.  The
Partnership  wrote down the value of the  aircraft by  $1,030,000  for the Trust
($515,000  for the  Partnership  for its 50%  interest) in the third  quarter of
2002.  The  Trust  sold  the  MD-81  aircraft  for  $500,000  ($250,000  for the
Partnership  for its 50%  interest)  on October 25, 2002 and  retained  $442,000
($221,000 for the Partnership  for its 50% interest) of maintenance  reserves as
part of the sale proceeds.

         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 a prior lessee 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 had 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 a
required "C" check and the aircraft was returned in September, 2001.

         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. The $240,000 receivable was paid in 2002.

         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.  In October 2002, the engines
were sold for $75,000.

         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 required 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.

         Capital Cargo failed to make its lease and reserve payments relating to
a Boeing 727-200 freighter starting on January 25, 2001. 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 Partnership and Capital Cargo reached
a court mediated settlement. According to the settlement, the Partnership agreed
to sell the aircraft  leased to Capital Cargo for $2,000,000 and the Partnership
retained maintenance reserves of $1,277,000 and a $220,000 security deposit. The
$2.0 million  purchase  price for the  aircraft  will be paid through an initial

                                       28
<PAGE>

payment of  $625,000,  which was  received  in April 2002,  and a  twelve-month,
interest-bearing  note with 11  payments  of  $35,000  and a balloon  payment of
$1,050,000 at the end.

         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 provided for monthly rentals of $123,500  (subject
to a reduction of approximately 10% after two years if TNT exercised, 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  contracted  with a third  party  service  provider  for
maintenance of the engines and provided a $150,000 security deposit.

         While,  pursuant to the lease, TNT had renewal options, it returned the
aircraft at the end of the lease in June 2002 and paid a net payment of $507,000
in lieu of the aircraft  meeting  return  conditions,  and rent through July 10,
2002.  Due to the large number of Boeing 727  freighters  available for lease or
sale, the Partnership  wrote down the aircraft by $500,000 in the second quarter
of 2002.

         In the  third  quarter  of 2002,  the  Partnership  took  the  $150,000
security deposit and the $391,000  maintenance  reserves  collected from TNT and
the  $507,000  payment  in  lieu  of the  aircraft  meeting  return  conditions,
originally  booked to maintenance  reserves,  into income.  The Partnership also
wrote down the  aircraft's  value by  $1,315,000.  The  aircraft and engines are
being offered for sale on an "as-is, where-is" basis.

         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 Emery lease was for a
term of 84 months with rent of  $218,000  per month.  The lease also  provided a
two-year renewal at $200,000 per month,  followed by three  additional  two-year
renewal  options at the then fair market rental.  Emery also 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.

         Emery  had  grounded  the  DC-10 but had  continued  to pay  rent.  The
Partnership  and Emery  reached  a Return  and Early  Termination  Agreement  on
October 24, 2002,  where the Partnership  accepted the early  termination of the
lease  for a  fee  of  $11,925,000  which  included  $436,000  security  deposit
previously  received  from  Emery.  The  DC-10  aircraft  was  returned  to  the
Partnership  and is being  offered for sale on an "as-is,  where-is"  basis.  In
December 2002, the Partnership  wrote down the aircraft by $14,268,000  based on
the early termination fees received and a purchase offer of the aircraft.

         Lockheed  L-1011.  Based  on the  amount  of time the  L-1011  had 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 was sold for $75,000 in November
2002.

         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.  VASP fell in arrears with respect to rent and maintenance reserves and
the  Partnership  won a  judgment  in court of $3.0  million  for past rents and
reserves.  VASP-owned  property  in  Florida  was  sold  by  a  court  appointed
liquidating  trustee and the  Partnership  received a $3.0 million  judgment and
$500,000 interest in late 2001. In addition,  the Partnership received,  earlier
in  2001,  an  $800,000  negotiated  settlement  payment  for  legal  costs  and
compensation  for damage to one of the engines.  In March 2002, the  Partnership
sold  the  A-300  airframe  for  $121,000  and in a  separate  transaction,  the
Partnership sold the A-300 engines for $200,000.

         General. The Partnership will seek to dispose of the remaining aircraft
and  engines as soon as  possible in an "as-is,  where is"  condition,  although
there can be no  assurance  as to when the sales  will be  completed  (See "Note
10").

                                       29
<PAGE>

                               Significant Lessees

         The  Partnership  leased its  aircraft  to four  different  airlines or
airfreight  companies  during 2002.  One of the four lessees paid no rent in the
2002 Period.  Revenues  from each of the  airlines  which  accounted  for 10% or
greater of the  Partnership's  total rental revenue during 2002,  2001, and 2000
are as follows:

Airlines                                        Percentage of Rental Revenue(a)
                                              2002          2001           2000
                                              ----          ----           ----

Trans World Airlines, Inc.                      0             (c)           21%
Aerovias de Mexico S.A. de C.V.                 0             (c)           16
Capital Cargo International Airlines, Inc.      0             (c)           16
TNT Transport International B.V.               21%             18%          14
Kitty Hawk Aircargo, Inc.                      14              15           13
US Airways Group Inc.                           0             (c)           12
Emery                                          65              31           (c)
Falcon                                          0              12           (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)      Revenues  include rentals from aircraft  leased to foreign  airlines or
         carriers of $704,000,  $1,767,000,  and $3,132,000,  in 2002, 2001, and
         2000, respectively.

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 was 6 years,  with  interest  only  payments  for the  first  twelve
months.  Thereafter,  principal  was  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 were reset over the remaining
term.  The interest  rate was 225 basis points over a major money center  bank's
prime rate.  The lender had a mortgage  interest in all aircraft  except the 50%
interest in the US Airways MD-81 aircraft.  The loan agreement required 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.

         In 2002,  partial  principal  payments  on the note were  made  through
proceeds of asset sales, and on May 1, 2002, the remaining debt was retired.

6.       Transactions with Affiliates

         The  Management  fee,  Incentive  fee and  Re-lease  fee payable to the
General  Partners  are  subordinated  to the Limited  Partners  receiving  an 8%
annual,  non-cumulative  return based upon Unreturned Capital  Contribution,  as
Unreturned Capital Contribution is defined in the Partnership Agreement.  As the
Partnership  had not achieved this level of  distribution  since 2000, fees were
being accrued but not paid. Based upon Preferred  Return as determined  pursuant

                                       30
<PAGE>

to the  Partnership  Agreement  and the  estimated  value  of the  Partnership's
remaining  assets,  a  determination  was made to reverse  the fees  accrued but
unpaid to the General  Partners for fiscal years 2000 through the first  quarter
of 2002. In June 2002,  fees  previously  accrued of $2,330,000  were taken into
revenue with a  corresponding  reduction in Payable to Affiliates.  In addition,
based on anticipated future revenues,  the Partnership does not expect to accrue
Management and Re-lease fees in future quarters

         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.  Management  fees of $17,000  were  accrued for the three  months ended
March 31, 2002 and this accrual was reversed at June 30, 2002.

         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.  Incentive  Management  fees of $113,000  were
accrued for the three  months ended March 31, 2002 and this accrual was reversed
at June 30, 2002.

         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.
Re-lease  Fees of $42,000 were accrued for the three months ended March 31, 2002
and this accrual was reversed at June 30, 2002.

         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, 2002, 2001, and 2000. 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 2002,  2001,  and 2000,  the  Partnership  paid $70,000,
$118,000,  and  $693,000,  respectively,  to  a  licensed  maintenance  facility
affiliated  with  the  Managing  General  Partner  for the  storage  of and work
performed on the off-lease aircraft.  Until March 2002, the maintenance facility
was affiliated with the Managing General  Partners.  Additionally,  during 2002,
2001,  and  2000,  the  Partnership  paid  $49,000,  $929,000,  and  $1,034,000,
respectively,  for  aircraft  parts  to a  company  owned by the  President  and
Director of the Managing General Partner.

                                       31
<PAGE>

7.       Reconciliation to Income Tax Method of Accounting

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

                                                   2002        2001       2000
                                                   ----        ----       ----

Net income/(loss) per financial statements       $    (25)  $ (3,354)  $  1,788
Increase (decrease) resulting from:
   Depreciation                                    13,733     13,627      3,503
   TBT interest income, less
      TBT rental expense                             --          128       (570)
   Gain on sale of engines                           (772)     1,499         69
   Reserves for maintenance costs,
      net of maintenance expense and
      write-downs of aircraft                        --          --        (187)
   Maintenance reserve payable                       (816)       195      1,457
   Deferred rental income                            --         (311)      --
   Rental income                                     --       (3,190)      (256)
   Management fees                                    (24)        46       --
   Other                                               23        (24)       (22)
                                                 --------   --------   --------
Taxable income per federal
  income tax return                              $ 12,119   $  8,616   $  5,782
                                                 ========   ========   ========

         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):

                                                   2002       2001        2000
                                                   ----       ----        ----

Total Partnership capital per
  financial statements                           $  5,739   $ 16,756   $ 21,575
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                                --         --         --
  Distributions payable to partners                  --         --         --
  Management fees payable                            --           24       --
  Reserves for maintenance costs and
     write-downs                                   22,733     34,882     25,316
  Deferred income                                    --         --          311
  Accumulated depreciation                        (10,228)   (34,521)   (40,243)
  TBT interest income less TBT rental expense -
    Investment in Partnership                        --         --       (7,086)
  Lease settlement payment, including lease
     aircraft received accounted for under the
     cost recovery method                            --         --       10,115
  Allowance for bad debts                            --         --         --
  Securities received in leasing transaction         --         --         --
  Fixed Assets                                       --         --         --
  Other                                              --          (24)       (22)
                                                 --------   --------   --------
Tax bases of net assets                          $ 34,539   $ 33,412   $ 26,261
                                                 ========   ========   ========

                                       32
<PAGE>

8.       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.

9.       Other

         Upon the  sale of the  remaining  aircraft  and the  collection  of the
outstanding  notes, the Partnership  will liquidate  pursuant to the Partnership
Agreement.  At that time, the Partnership  will suspend all transfers,  withdraw
from regulatory filings,  make a distribution and enter into a Liquidating Trust
agreement.  The  remaining  funds will be placed in an  interest-bearing  escrow
account and will be disbursed,  net of any liabilities that may arise. It is the
current  intention of the General  Partners,  subject to no other  contingencies
arising,  to distribute  the balance of any remaining  escrow  balance within 12
months of the establishment of the Liquidating  Trust. The General Partners will
serve as the trustees of the Liquidating Trust without compensation.

10.      Subsequent Event

         On February  28,  2003,  the  Partnership  received  the pay off of the
$1,050,000 remaining balance of its note receivable from Capital Cargo.

11.      Selected Quarterly Financial Data (unaudited)

         The following is a summary of the quarterly  results of operations  for
the years  ended  December  31,  2002 and 2001 (in  thousands,  except  per unit
amounts):

         2001                      Mar. 31    Jun. 30    Sep. 30     Dec. 31
         ----                      -------    -------    -------     -------

Total Revenues                     $ 3,662    $ 8,323    $ 6,290     $   756(*)
Net Income/(Loss)                  $   133    $ 5,344    $(1,007)    $(7,824)
Net Income/(Loss) per
General Partnership                $     1    $    54    $   (11)    $   (78)
Net Income/(Loss) per
Limited Partnership                $   132    $ 5,290    $  (996)    $(7,746)
Net Income/(Loss) per
Limited Partnership Unit           $  0.02    $  0.73    $ (0.14)    $ (1.07)

Note (*): In 2002, the  Partnership  reclassified  $526 of expense,  incurred in
2001, that was related to the MD-81 aircraft to the MD-81 Trust's equity.  There
was no effect on Net Income.

                                       33
<PAGE>



         2002                        Mar. 31    Jun.30     Sep.30      Dec.31
         ----                        -------    ------     ------      ------

Total Revenues                       $  1,537   $  3,618   $  2,199    $ 12,092
Net Income/(Loss)                    $    556   $  2,224   $   (699)   $ (2,106)
Net Income/(Loss) per
General Partnership                  $      5   $     23   $     (7)   $    (21)
Net Income/(Loss) per
Limited Partnership                  $    551   $  2,201   $   (692)   $ (2,085)
Net Income/(Loss) per
Limited Partnership Unit             $   0.08   $   0.30   $  (0.10)   $  (0.28)


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 2002, 2001, and
2000.

                                    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 49, 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 50, 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.

                                       34
<PAGE>


         Richard M.  Oster,  age 51, 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,  41, 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
technical and  leadership  schools.  Mr. Bach attended  Pima  Community  College
during 1990-91.


                           Air Transport Leasing, Inc.

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

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

         Clifford  B.  Wattley,  age 53,  is  President  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.

         Stephen  R.  Dyer,  age 43, is Vice  President  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.

         Timothy F. Kelly, age 30, is Vice President,  Secretary,  Treasurer and
Chief Financial and Accounting  Officer of the  Administrative  General Partner.
Mr.  Kelly has also served as a  Divisional  Vice  President  within the Private
Investments  Department  of UBS  PaineWebber  Inc.  since June 2002.  Mr.  Kelly
previously  served  in  the  UBS  PaineWebber   Retirement  Consulting  Services
Department where he was employed since December 1997 as a Product Specialist. He
was  previously  employed  as an  Analyst  for the WTR  Consulting  Group,  from
December  1994 to  December  1997.  He received  his  Bachelor of Arts degree in
Spanish in May 1994 from  Hamilton  College and is a  candidate  for a Master of
Business  Administration  in Finance and Accounting  from New York University in
December 2002.

                                       35
<PAGE>





Section 16 (a)  Beneficial Ownership Reporting Compliance

         Timothy Kelly,  Chief Financial and Accounting Officer of Air Transport
Leasing,  Inc., was required to file a Statement of Beneficial Ownership on Form
3 upon being  appointed to that position in June 2002.  Mr. Kelly failed to file
the Form 3 at that time,  and filed a delinquent  report on Form 5 in March 2003
to satisfy the Form 3 filing  requirement.  Mr.  Kelly  reported  no  beneficial
ownership of the registrant's assignee units of limited partnership interest.


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 2002.


                                       36
<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 07086

         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, 2003



                                                     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
              (4 persons)                                  20,435            *

              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.



                                       37
<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.

         The  Management  Fee,  Incentive  Fee and  Re-lease  Fee payable to the
General  partners  are  subordinated  to the Limited  partners  receiving  an 8%
annual,  non-cumulative  return based upon Unreturned Capital  Contribution,  as
Unreturned Capital Contribution is defined in the Partnership Agreement.  As the
Partnership  had not achieved this level of  distribution  since 2000, fees were
being accrued but not paid. Based upon Preferred  Return as determined  pursuant
to the  Partnership  Agreement  and the  estimated  value  of the  Partnership's
remaining  assets,  a  determination  was made to reverse  the fees  accrued but
unpaid to the General  partners for fiscal years 2000 through the first  quarter
of 2002. In June 2002,  fees  previously  accrued of $2,330,000  were taken into
revenue with a  corresponding  reduction in Payable to Affiliates.  In addition,
based on anticipated future revenues,  the Partnership does not expect to accrue
Management and re-lease fees in future quarters.

         Following  is a summary of the  amounts  paid or payable to the General
Partners and their affiliates during 2002.

         Base  Management  Fee.  The General  Partners are entitled to 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.  Management Fees of $17,000 were accrued for the
three months ended March 31, 2002 and this accrual was reversed at June 30, 2002

         Incentive  Management Fee. The General Partners are entitled to 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.  Incentive  Management  Fees of $113,000  were
accrued for the three  months ended March 31, 2002 and this accrual was reversed
at June 30, 2002

         Re-lease Fee. The General  Partners are entitled to 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.Re-lease  Fees of $42,000  were accrued for the three months ended March
31, 2002 and this accrual was reversed at June 30, 2002.

         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 2002 . 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 2002, 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 $49,000.  Also, in 2002,  the  Partnership  paid $70,000 to a licensed
maintenance  facility  affiliated  with the  Managing  General  Partner  for the
storage of and work  performed  on  certain  aircraft.  Until  March  2002,  the
maintenance facility was affiliated with the managing General Partners.

         Partnership Interest. The General Partners received or were entitled to
receive distributions of $110,000 as their allocable share of distributable cash
flow for 2002. Pursuant to the Partnership Agreement, there was no allocation of
the  Partnership's net taxable loss of $25,000 for 2002 allocated to the General
Partners.

                                       38
<PAGE>

ITEM 14. CONTROLS AND PROCEDURES:

         In the 90-day period  before  filing of this report,  the President and
Chairman  of the  Board  of  Pegasus  Aircraft  Management  Corporation  and the
president  of  Air  Transport  Leasing,   Inc.   (collectively  the  "Certifying
Officers")  have evaluated the  effectiveness  of the  Partnership's  disclosure
controls and  procedures.  These  disclosures  controls and procedures are those
controls and  procedures  which are designed to insure that all the  information
required to be disclosed by the  Partnership  in all its periodic  reports filed
with the Securities and Exchange Commission is recorded,  processed,  summarized
and reported,  within the time periods  specified by the Commission and that the
information  is  communicated  to the  President  and  Chairman  of the Board of
Pegasus  Aircraft  Management  Corporation  and the  President of Air  Transport
Leasing, Inc. on a timely basis.

         The Certifying Officers,  concluded, based on the evaluation,  that the
Partnership's  disclosure controls and procedures are suitable and effective for
the  Partnership,   taking  into  consideration  the  size  and  nature  of  the
Partnership's business and operations.  No significant  deficiencies or material
weaknesses in the controls or procedures were detected, so no corrective actions
needed to be taken.  Subsequent  to the date when the  disclosure  controls  and
procedures  were evaluated,  there have not been any significant  changes in the
Partnership's  disclosure  controls or procedures or in other factors that could
significantly affect such controls or procedures.


                                       39
<PAGE>

                                     PART IV

ITEM 15. 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")

(d)      During the fourth quarter of 2002, the Partnership  filed a Form 8-K on
         October 31, 2002 reporting a distribution  of $1.50 per Unit on October
         31, 2002 to Unitholders  of record as of September 30, 2002.  Funds for
         the  distribution  were  from  working  capital  as well  as the  Emery
         termination  payment.  This  8-K  report  also  disclosed  the per Unit
         estimated  value as  reported  in the  December  31, 2001 10-K had been
         revised to $1.06 per  original  $20 Unit  after the  October  31,  2002
         distribution.

(e)      Exhibits required to be filed

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

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

         (b)            Amendment, dated as of December 26, 1990, to the Amended
                        and Restated  Limited  Partnership  Agreement dated July
                        11, 1989. Filed as Exhibit 1 to the Registrant's Current
                        Report on Form 8-K dated December 26, 1990.*

         (c)            Amendment,  dated as of March 31,  1992,  to the Amended
                        and Restated  Limited  Partnership  Agreement dated July
                        11, 1989. Filed as Exhibit 4 to the Registrant's Current
                        Report on Form 8-K dated April 16, 1992.*

         10.1 (a)       Agreement   pursuant  to  Selection   168(f)(8)  of  the
                        Internal  Revenue  Code of  1954,  as  amended,  between
                        Pacific Southwest Airlines and General Mills, Inc. Filed
                        as Exhibit 19.3(c) to the Quarterly  Report on Form 10-Q
                        for  the  quarter  ended  March  31,  1989  for  Pegasus
                        Aircraft Partners, L.P. (Commission File No. 33-22986).*

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

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

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

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

                                       40
<PAGE>


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

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

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

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

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

         (k)            Amended  and  Restated  Lease No. 1, dated  October  14,
                        1988,  between PS Group,  Inc. and USAir,  Inc. Filed as
                        Exhibit 10.2.9 to Form S-1 Registration  Statement dated
                        July 3, 1989 (Commission File No. 33-28359).*

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

         (m)            Letter of Credit Agreement,  dated as of April 30, 1992,
                        between First Security Bank of Utah as Owner Trustee and
                        Philadelphia National Bank, Incorporated,  as CoreStates
                        Bank, N.A. Filed as Exhibit 10.4(a) to the  Registrant's
                        Quarterly Report on Form 10-Q for the quarter ended June
                        30, 1992.*

         (n)            Assumption  Agreement,   dated  April  30,  1992,  among
                        Pegasus  Aircraft  Partners,  L.P. and Pegasus  Aircraft
                        Partners II, L.P. as Obligors and Philadelphia  National
                        Bank,  Incorporated,  as CoreStates  Bank, N.A. Filed as
                        Exhibit 10.4(b) to the Registrant's  Quarterly Report on
                        Form 10-Q for the quarter ended June 30, 1992.*

         (o)            Security  Agreement and Assignment of Lease, dated as of
                        April 30, 1992,  between  First  Security  Bank of Utah,
                        National  Association as Owner Trustee and  Philadelphia
                        National Bank,  Incorporated,  as CoreStates  Bank, N.A.
                        Filed as Exhibit 10.4(c) to the  Registrant's  Quarterly
                        Report  on Form  10-Q  for the  quarter  ended  June 30,
                        1992.*

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

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

                                       41
<PAGE>


         (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.

                                       47
<PAGE>


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

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

         11             Partnership Policy for Requests for Partner Lists.

         99.1           Certification  pursuant to 18 U.S.C.  Section  1350,  as
                        adopted  pursuant to Section  906 of the  Sarbanes-Oxley
                        Act of 2002.

         99.2           Certification  pursuant to 18 U.S.C.  Section  1350,  as
                        adopted  pursuant to Section  906 of the  Sarbanes-Oxley
                        Act of 2002.






                                       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, 2003

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

                                By:   Air Transport Leasing, Inc.
                                      Administrative General Partner

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



                                By:   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, 2003.

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

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

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


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



                                       49
<PAGE>

                           CERTIFICATIONS PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



CERTIFICATION
-------------

I, Richard S. Wiley, certify that:

1. I have reviewed this annual report on Form 10-K of Pegasus Aircraft  Partners
II, L.P.

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
         material  information relating to the registrant is made known to us by
         others,  particularly  during the period in which this quarterly report
         is being prepared;

         b) evaluated the effectiveness of the registrant's  disclosure controls
         and  procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and

         c)  presented  in  this  annual  report  our   conclusions   about  the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

         a) all significant  deficiencies in the design or operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

         b) any fraud,  whether or not  material,  that  involves  management or
         other  employees  who  have a  significant  role  in  the  registrant's
         internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 28, 2003


By:    /s/ RICHARD S. WILEY
       --------------------
       Richard S. Wiley
       President and Chairman of the Board of Pegasus Aircraft Management
       Corporation, General Partner of Pegasus Aircraft Partners II, L.P.



                                       50
<PAGE>

                           CERTIFICATIONS PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


CERTIFICATION
-------------

I, Clifford B. Wattley, certify that:

1. I have reviewed this annual report on Form 10-K of Pegasus Aircraft  Partners
II, L.P.

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
         material  information relating to the registrant is made known to us by
         others,  particularly  during the period in which this annual report is
         being prepared;

         b) evaluated the effectiveness of the registrant's  disclosure controls
         and  procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and

         c)  presented  in  this  annual  report  our   conclusions   about  the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

         a) all significant  deficiencies in the design or operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

         b) any fraud,  whether or not  material,  that  involves  management or
         other  employees  who  have a  significant  role  in  the  registrant's
         internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 28, 2003


By:    /s/ CLIFFORD B. WATTLEY
       -----------------------
       Clifford B. Wattley
       President and Director of Air Transport Leasing, Inc.
       Administrative General Partner of Pegasus Aircraft Partners II, L.P.


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