PEGASUS AIRCRAFT PARTNERS L P - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001
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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 0-17712
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Pegasus Aircraft Partners, L.P.
-------------------------------
(Exact name of Registrant as specified in its charter)

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

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

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

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

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

Limited Partnership Depositary Units
(Title of Class)

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

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

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

This document consists of 39 pages.

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

Table of Contents

Page
----

Part I
- ------

Item 1 Business.......................................................3
Item 2 Properties.....................................................7
Item 3 Legal Proceedings..............................................7
Item 4 Submission of Matters to a Vote of Unit Holders................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...................15
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................30

Part III
- --------

Item 10 Directors and Executive Officers of the Registrant............30
Item 11 Executive Compensation........................................31
Item 12 Security Ownership of Certain Beneficial Owners and
Management....................................................31
Item 13 Certain Relationships and Related Transactions................32

Part IV
- -------

Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K...........................................34

2

PART I

ITEM 1. BUSINESS

General

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

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

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

Although it is anticipated that the Partnership will be liquidated
sooner, the Partnership is required to dissolve and distribute all of its assets
no later than December 31, 2012. The Partnership sold its Boeing 747 in 2000 and
its MD-82 in 2001 and is in discussions with TNT Transport International B.V.
for the sale of the aircraft to TNT. The sale of the two aircraft resulted in
the Partnership owning 3 aircraft and 50% ownership in a trust that owns one
aircraft. The net proceeds of the aircraft sales were generally first utilized
to pay off the Partnership's debt and then applied to general working capital
reserves.

Outlook for the Airline and Aircraft Leasing Industries

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

The industry's results historically have been highly correlated to
general economic activity. Due to concerns 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. The economic downturn was further exacerbated by the
events of September 11, 2001, which also adversely affected air travel and the
air freight industry. Subsequent to September 11, at least two major US airlines
announced the accelerated retirement of aircraft of a similar type to those
owned by the Partnership which has further adversely impacted the value of the
Partnership's aircraft.

On January 10, 2001, Trans World Airlines, Inc. ("TWA"), which
accounted for 37% of the Partnership's revenues in 2000, filed for Chapter 11
Bankruptcy protection. On January 9, 2001, TWA entered into an Asset Purchase
Agreement with American Airlines, Inc. American purchased substantially all of
TWA's assets, and assumed certain of its liabilities. As part of the
transaction, American Airlines purchased the Partnership's MD-82. Kitty Hawk
Aircargo, Inc. which leases a Boeing 727 freighter, accounted for 31% of the
Partnership's revenue in the year 2001 and has been operating under protection
of the Federal bankruptcy law since May 2000. Due to an inability to find
adequate financing and reduced freight traffic, Kitty Hawk has recently made
only partial rent payments.

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

3

Aircraft Portfolio

Based in part on appraised values for the Partnership's aircraft, the
Partnership's net asset value at December 31, 2001 was equal to $1.43 per Unit.
It should be noted that this is only an estimate of values at that date and is
not necessarily representative of the values that will ultimately be realized
when these aircraft are disposed of, nor does this represent the values that may
be realized upon the disposition of a Unit.

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

Current
December Lease
Acquisi- 2001 Expir- Original Noise Cumulative Cumulative
Current Aircraft Ownership tion Appraised ation Delivery Abatement Flight Flight
Lessee Type Interest Costs(1) Value(2) Date(3) Date Compliance Hours(4) Cycles(4)
- ------ ---- -------- -------- -------- ------- ---- ---------- -------- ---------
(dollar amounts in millions)

Kitty Hawk Boeing 727-200
Aircargo, Inc.(6), (8) Freighter 100% $ 13.7 $1.2 08/06 1974 Stage III(7) 71,581 47,572

Vanguard Airlines McDonnell
Douglas MD-81 50(5) 10.0 3.7 08/04 1982 Stage III 53,633 46,135

TNT Transport Boeing 727-200
International B.V., (8) Non-Advanced 100 12.9 1.8 03/02 1969 Stage III(7) 68,185 54,579
Freighter

Off-Lease Boeing 727-200
Non-Advanced 100 11.7 0.2 1969 Stage III(7) 66,013 51,359
----- -----
$48.3 $6.87
===== =====

Notes:

(1) Acquisition costs do not include acquisition related fees paid to the
General Partners. The Partnership previously owned a Boeing 747 and a
McDonnell-Douglas MD-82, both of which have been sold.

(2) An independent aircraft appraisal firm determined December 2001
appraised values. Appraised values include the present value of rents
due under leases in place plus the present value of an estimated
residual value for the aircraft at the end of the lease, generally
assuming half time condition. The appraiser also assumes that achieving
fair market value may require 12 to 18 months of exposure to
prospective buyers. It should be noted that appraisals are only
estimates of value and should not be relied on as measures of
immediately realizable value. A discount rate of 10% was utilized and
inflation was assumed to be 2.5%. For the table above, the Off-Lease
aircraft is shown at the current book value, which also approximates
the General Partners' estimate of realizable value.

The value of the Kitty Hawk aircraft is based on collected reserves and
the estimated value of lease unencumbered aircraft, which approximates
the book value of the aircraft. The value for the TNT aircraft is the
expected amount to be realized upon the sale of the aircraft at the end
of the lease. The Vanguard aircraft is shown at its appraised value
which assumed a monthly utilization of approximately 108 hours per
month.

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

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

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

(6) Airframe is advanced, engines are JT8D-9A's

(7) Federal Express hushkit installed.

(8) Kitty Hawk aircraft converted to a freighter during 1999, and TNT
aircraft converted to a freighter during the end of 1997 and the
beginning of 1998.

A description of the principal financial terms of the leases is discussed
further in Item 8, Note 4.

4

Significant Lessees

The Partnership leased its aircraft to five different airlines during 2001.
Revenues from each of the airlines below accounted for greater than 10% of the
total rental revenues of the Partnership during 2001:

Percent of Total
Airline Rental Revenues
------- ---------------
Trans World Airlines, Inc. 15%
TNT Transport International B.V. 37%
Kitty Hawk Aircargo Inc. 31%
US Airways Group, Inc. 17%

Safety Requirements and Aircraft Aging

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

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

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

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

These aging aircraft ADs initially impacted only a limited number of
older aircraft, but additional aircraft are 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

5

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

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

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

* Substantially cycle limited

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

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

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

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
aircraft have been approved by the FAA and the Partnership's three Boeing
727-200 aircraft have had Federal Express hushkits installed.

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

6

Competition

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

Employees

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

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

7

PART II

ITEM 5. MARKET FOR REGISTRANT'S PARTNERSHIP CAPITAL AND RELATED
UNITHOLDER MATTERS

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

As of March 1, 2002, the number of Limited Partners of record was
approximately 4,383.

The Partnership declared the following distributions to its Limited
Partners during 2001 and 2000:

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

1st Quarter 2001 $.00 None Paid
2nd Quarter 2001 .30 June 30, 2001 July 10, 2001
3rd Quarter 2001 .00 None Paid
4th Quarter 2001 .00 None Paid
1st Quarter 2000 $.40 March 31, 2000 April 25, 2000
2nd Quarter 2000 .30 June 30, 2000 July 25, 2000
3rd Quarter 2000 .30 September 30, 2000 October 25, 2000
4th Quarter 2000 .00 None Paid

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

2001 2000
---- ----

Limited Partners $1,200 $4,000
General Partners 12 40
------ ------
$1,212 $4,040
====== ======

Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the net loss reported
by the Partnership for accounting purposes, all of the cash distributions paid
to the partners for the year 2001 constituted a return of capital.
Approximately, 96%, and 88% of the cash distributions declared for the years
ended December 31, 2000, and 1999, respectively, constituted a return of
capital. Also, based on the amount of net loss reported by the Partnership for
accounting purposes, approximately 76% of the cash distributions paid to the
partners from inception of the Partnership through December 31, 2001 constituted
a return of capital. Investors who participated in the Partnership closings,
irrespective of the Partnership closing in which they participated, have
received distributions in excess of their original investment of $20.00 per
Unit. The total actual economic return on capital over the Partnership's life
can only be determined at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.

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.

8

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Partnership was derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the Partnership's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Form 10-K Report.

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

Rental Revenue (3) $ 3,340 $ 5,645 $ 7,010 $ 7,146 $ 6,319
Net Income (Loss) (445) (5) 155 (4) 805 1,050 716 (2)
Net Income (Loss) per Limited
Partnership Unit (0.11) (0.16) 0.20 0.26 0.18
Distributions per Limited
Partnership Unit (1) 0.30 1.00 1.60 1.60 1.60
Total Assets 6,473 19,065 26,972 27,792 30,512
Notes Payable -- 11,050 14,000 10,000 7,271
Partners' Capital 3,058 4,715 8,600 14,260 19,675

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

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

(3) Prior years restated to include ownership in MD81 Trust on the equity
method which resulted in a revenue reduction of $1,214 per year in
years 1999 through 1996. There was no effect on Net Income.

(4) Includes gain on sale of Boeing 747.

(5) Includes gain on sale of McDonnell Douglas MD-82.

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

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

Liquidity and Capital Resources

The Partnership owns and manages a portfolio of commercial passenger
and freighter aircraft and makes distributions to the partners of net cash flows
generated by operations in the current and/or prior periods. In certain
situations, the Partnership may retain cash flow from operations to finance
authorized capital expenditures, or for general working capital purposes. As has
historically been the case, the amount of future cash distributions will be
determined on a quarterly basis after an evaluation of the Partnership's
operating results and its current and expected financial position.

The Partnership invests working capital and cash flow from operations
prior to its distributions to the partners in short-term, highly liquid
investments or a fund that invests in such instruments. At December 31, 2001,
the Partnership's unrestricted cash and cash equivalents of $2,516,000 were
primarily invested in such a fund. This amount was $575,000 more than the

9

Partnership's unrestricted cash and cash equivalents at December 31, 2000 of
$1,941,000. This increase in unrestricted cash was primarily attributable to
cash from operating activities of $2,649,000, investing activities of
$10,188,000, offset by cash used in financing activities of $12,262,000.

Net cash provided by operating activities was $2.6 million in 2001,
$4.7 million in 2000, and $5.6 million in 1999. In the aggregate, for this three
year period, net cash provided by operating activities totaled $12.9 million.

Net cash provided by operating activities is comprised of net income or
net loss adjusted for non cash items such as depreciation and changes in assets
and liabilities discussed below.

Rents receivable were down 100%, from $149,000 at December 31, 2000, to
zero at December 31, 2001, due to the termination of the leases with US Airways
and the sale of the MD-82, formerly leased to TWA, and arrearages by Vanguard
and Kitty Hawk in the payment of rent (both accounted for on a non-accrual
basis).

Payable to affiliates increased by 74%, or $747,000, from $1,004,000 at
December 31, 2000 to $1,751,000 at December 31, 2001, principally due to an
increase in unpaid management fees due to the General Partners. Payment of fees
on a current basis has been suspended due to the Partnership Agreement
provisions that require fees not to be paid if cash distributions fall below 8%
of initial capital per annum. The fees are being accrued but cash payments on a
current basis have been suspended.

Maintenance reserves payable decreased by 32% or $546,000 from
$1,700,000 at December 31, 2000, to $1,154,000 at December 31, 2001. This
decrease was primarily due to the maintenance reserves of the Boeing 727,
formerly leased to Sky Trek, being taken into income in the second quarter 2001,
partially offset by the receipt of payments from TNT, Vanguard and Kitty Hawk.

There was no accrued interest payable at December 31, 2001, compared to
$105,000 at December 31, 2000, as the Partnership fully paid off its debt in
April 2001.

Cash flows from investing activities were $10,188,000 for the year
2001, due to proceeds of $9,500,000 from the sale of the McDonnell Douglas MD-82
aircraft, formerly leased to TWA, and $688,000 in cash distributions from
investment in the MD-81 Trust.

Net investment in the MD-81 Trust decreased by 28%, or $287,000, from
$1,028,000 at December 31, 2000 to $741,000 at December 31, 2001, due to receipt
of cash distributions of $688,000 offset by equity interest earnings of
$401,000.

The McDonnell Douglas MD-81 aircraft under lease to USAirways Group,
Inc. ("USAir") is owned by a trust ("MD-81 Trust") in which the Partnership has
a 50% interest. An affiliated Partnership owns the other 50% interest. As the
lease 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 is on a "power by the hour" basis, at the rate of $600 per
flight hour, to a maximum of $130,000 per month. Vanguard is also responsible
for funding the maintenance reserves for the aircraft. Due to the events of
September 11, 2001 and the abrupt slowdown in passenger traffic, Vanguard only
paid $260,000, of which 50% was distributed to the Partnership and 50% to the
other affiliated Partnership, in 2001. These payments were applied to
maintenance reserves within the Trust. Based on the Vanguard's financial
position, the Trust is accounting for rental income on a cash basis.

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
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.

During the year ended December 31, 2000, the Partnership capitalized
approximately $1.3 million with respect to the overhaul of two engines for the
Boeing 727-200 aircraft leased to Kitty Hawk. There was no cash outflow for
capitalized improvements during the year ended December 31, 2001.

10

Net cash used in financing activities was $12,262,000 for the year
2001. This amount represents the retirement of the Partnership's bank note which
had a balance of $11,050,000 at the beginning of 2001, and cash distributions of
$1,212,000 paid to the partners in July 2001.

In February 1999, the Partnership consummated an agreement to increase
the committed amount of its loan facility from $10 million to $14.5 million and
increase the interest rate from 1.25 % to 1.5% over prime. The Partnership had
pledged all of its aircraft as collateral for this loan facility and the
principal amount was due in October 2000. In January 2001, the note was extended
to June 30, 2001 with the provision that all monthly cash flow in excess of
certain scheduled expenses was to be paid to reduce the principal. In January
2001, TWA filed for Chapter 11 bankruptcy protection under the U.S. Bankruptcy
Code and just before it filed, it entered into an Asset Sale and Purchase
Agreement with American Airlines. On April 9, 2001, the Partnership sold the
McDonnell Douglas MD-82 aircraft, formerly leased to TWA, to American Airlines
for $9.5 million. Approximately $8.9 million of the sale proceeds were used to
fully pay off the Partnership's loan balance.

Cash distributions declared by the Partnership were approximately $1.2
million in 2001 ($0.30 per unit), $4 million ($1.00 per unit) in 2000, and $6.5
million in 1999 ($1.60 per unit). In the aggregate, for this three year period,
cash distributions declared by the Partnership totaled $11.7 million. With the
off-lease status of the Boeing 727-200 previously leased to Sky Trek, the sale
of the Boeing 747 to TWA, the sale of the MD-82 to American Airlines, as well as
the non- payment of rent of Vanguard, and the reduction in receipts from Kitty
Hawk rent, the Partnership is generating less cash on an operating basis. These
factors have all contributed to the reduction and suspension of the cash
distribution.

Partnership capital was $3,058,000, a decrease of approximately
$1,657,000 or 36% from December 31, 2000, from the net loss of $445,000, and
$1,212,000 of distributions to partners.

All the Partnership leases are paid in US dollars. Jet fuel prices are
a large component of the cost of airline and air freight operations and
therefore higher fuel prices as experienced in most of 2001 had an adverse
impact on operator finances. Additionally, the Partnership aircraft are,
typically, older, less fuel efficient aircraft than the more current designs.

11

Critical Accounting Policies

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

Lease Revenue Recognition:

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

Depreciation:

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

Aircraft Valuation:

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

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

Results of Operations

The Partnership's net loss was $445,000 for the year 2001 (the "2001
Period") as compared to net income of $155,000 for the year 2000 (the "2000
Period"). The reason for the Partnership's net loss for the 2001 Period compared
to net income of 2000 was principally due to substantial write down of the
aircraft and a decrease in rentals from operating leases, partially offset by
the gain on sale of aircraft and decreased depreciation.

Rentals from operating leases decreased by 41%, or $2,305,000, from
$5,645,000 at December 31, 2000 to $3,340,000 at December 31, 2001, due
primarily to the lack of rental revenue from the Boeing 747 which was sold to
TWA in April 2000, the McDonnell Douglas MD-82 aircraft sold to American
Airlines in April 2001, the off-lease status of the Boeing 727, formerly leased
to Sky Trek which was returned in May 2000, and the 50% reduction in rent for
Kitty Hawk for the last three months of the year.

The Partnership recognized a gain of $7,317,000 for the 2001 Period due
to the sale of the McDonnell Douglas MD-82 aircraft to TWA during April, 2001,
compared to a gain of $1,611,000 for the 2000 Period for the sale of the Boeing
747-100 aircraft to TWA .

Other Income increased by $848,000, or 100%, in the 2001 Period, as
compared to the 2000 Period, principally due to the maintenance reserves of the
Boeing 727 being taken into income in the first quarter 2001.

Depreciation decreased by 61%, or $1,984,000, in the 2001 Period, as
compared to the 2000 Period. This decrease was primarily due to the sale of the
Boeing 747 to TWA in April 2000, the sale of the McDonnell Douglas MD-82

12

aircraft to American Airlines in April 2001, and the Sky Trek Boeing 727 being
off lease, which the General Partners are attempting to sell for parts or as is.

The Partnership provided a write-down aggregating $9,302,000 for the
2001 Period, to reduce the carrying value to the fair market value of three
Boeing 727-200 aircraft, one previously leased to Sky Trek, the TNT aircraft,
and the Kitty Hawk aircraft. These write downs were $1,766,000 on the Boeing
727, formerly leased to Sky Trek, $2,216,000 on the TNT aircraft, and $5,320,000
on the Kitty Hawk aircraft. There was a $950,000 write-down on the Sky Trek and
$1,157,000 write down on the TNT aircraft for the 2000 Period.

Management and re-lease fees payable to the General Partners for the
2001 Period increased by 6%, or $43,000, in comparison to the 2000 Period, which
was primarily attributable to sales proceeds from the sale of the
McDonnell-Douglas MD-82 aircraft to American Airlines during April 2001.

Interest expense decreased by 74%, or $959,000, in the 2001 Period, as
compared to the 2000 Period, due to the payoff of the Partnership's bank note on
April 9, 2001 and a reduction in interest rate.

Direct Lease expense increased by 339%, or $410,000, in the 2001
Period, as compared to the 2000 Period. This increase was due to the return of
the MD-81 from USAir and the work done on the aircraft to put it in condition
for lease to Vanguard Airlines.

Engine rental expense was $84,000 during the 2000 Period, due to the
Partnership temporarily renting two JT8D-9A engines, from an affiliate of the
Managing General Partner, for the aircraft leased to Kitty Hawk. There was no
such expense during the 2001 Period.

2000 as compared to 1999

The Partnership's net income was $155,000 for the year ended December
31, 2000 ("2000 Period") as compared to $805,000 for the year ended December 31,
1999 ("1999 Period"), an 81% decrease. This was due primarily to writing down
the carrying value of two of the Partnership's aircraft and a decrease in
rentals from operating leases. This was offset by a gain on the sale of the
Boeing 747, a settlement with Continental Airlines, reduced depreciation expense
and lower engine rental expenses.

Rental revenue decreased $1,365,000 or 19% due to the loss of revenue
from Sky Trek which returned the Boeing 727 aircraft in early 2000, and the sale
of the Partnership's 747 to TWA. This reduction was partially offset by having a
full twelve months of revenue from Kitty Hawk for the lease of a Boeing 727
freighter.

The Partnership provided a write-down aggregating $500,000, to reduce
the carrying value to an approximation of market value for the Boeing 727-200
aircraft previously leased to Sky Trek, at June 30, 2000, and an additional
write down of $450,000 for the same aircraft at December 31, 2000. The Boeing
727 aircraft leased to TNT was also written down at December 31, 2000 by
$1,157,000. There were no write-downs during the 1999 Period.

The Partnership recognized other income of $181,000 from a lease return
settlement with Continental Airlines in connection with the return of the Boeing
727 now leased by Kitty Hawk. There was no similar revenue in 1999.

Net investment in the MD-81 Trust decreased by $771,000 from $1,799,000
at December 31,1999 to $1,028,000 at December 31, 2000, due to the receipt of
cash distributions of $1,214,000 offset by equity interest earnings of $443,000.

Depreciation and amortization was down $1,141,000 or 26% from
$4,380,000 in the 1999 Period, to $3,239,000 in the 2000 Period. This was due
primarily to the sale of the Boeing 747-100 aircraft to TWA during April 2000
and the termination of the lease to Sky Trek in May 2000. Partially offsetting
these decreases was an increase in depreciation related to the aircraft on lease
to Kitty Hawk (off-lease during the first half of 1999).

Management and re-lease fee expenses to the General Partners for the
2000 Period increased $77,000, or 12%, in comparison to the 1999 Period. This
was primarily attributable to sales proceeds of $4.36 million, from the sale of
the Boeing 747-100 aircraft to TWA during April 2000.

13

Engine rental expense was $84,000 during the 2000 Period, due to the
Partnership temporarily renting two JT8D-9A engines, from an affiliate of the
Managing General Partner, for the aircraft leased to Kitty Hawk. This was down
$112,000 or 57% from $196,000 during the 1999 Period.

Interest expense was up 6% or $76,000 from $1,215,000 in the 1999
Period to $1,291,000 in the 2000 Period. The increase is due to higher interest
rates during the 2000 Period than during the 1999 Period. The Note required only
interest payments during the 2000 Period except for the application of $2.95
million from the sale of the Boeing 747 aircraft to principal reduction.

Inflation and Changing Prices

Market and worldwide economic conditions and changes in federal and
foreign aircraft regulations have in the past, and may in the future, impact the
airline industry and thus lease rates and aircraft values. Additionally,
inflation and changing prices, may affect future leasing rates and the eventual
selling prices of the aircraft. Higher jet fuel prices for most of 2001 and
increasing labor costs affected the airline industry profitability and that of
the Partnership's lessees.

Due to concerns regarding the economic slowdown, the US Federal Reserve
Board 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 changes, however, the 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 have announced plans to
accelerate the retirement of their Boeing 727-200 aircraft, which has 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
Investment in Certain Partnerships and Other Ventures (EITF 00-1) in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 and accounts for
its investment in the Trust which owns the MD-81 aircraft leased to US Airways
under the equity method. In prior years the Partnership had reported its
ownership in the MD-81 Trust on a proportionately consolidated basis. The
financial results in prior years contained herein have been restated utilizing
the equity method. The aircraft had been subject to a tax benefit transfer lease
which expired in April 2000.

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

14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

List of Financial Statements Page
----

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

Balance Sheets -- December 31, 2001 and 2000.......................... 17

Statements of Income for the years ended
December 31, 2001, 2000, and 1999................................ 18

Statements of Partners' Capital for the years ended
December 31, 2001, 2000, and 1999 ............................... 19

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

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

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

15

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying balance sheets and the related
statements of income, of partners' capital and of cash flows present fairly, in
all material respects, the financial position of Pegasus Aircraft Partners, L.P.
(the "Partnership") as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Francisco, California
March 19, 2002

16

PEGASUS AIRCRAFT PARTNERS, L.P.

BALANCE SHEETS

DECEMBER 31, 2001 AND 2000

ASSETS

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

Cash and cash equivalents $ 2,516 $ 1,941
Rent receivable -- 149
Aircraft, net 3,941 16,968
Other assets 16 7
------- -------
Total Assets $ 6,473 $19,065
======= =======

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
Notes payable $ -- $11,050
Accounts payable and accrued expenses 124 105
Accrued interest payable -- 105
Payable to affiliates 1,751 1,004
Maintenance reserves payable 1,154 1,700
Deferred rental income and deposits 386 386
------- -------
Total Liabilities $ 3,415 $14,350
======= =======

COMMITMENTS (Note 6)

PARTNERS' CAPITAL:
General Partners 34 50
Limited Partners (4,000,005 units issued and
outstanding in 2001 and 2000) 3,024 4,665
------- -------
Total Partners' Capital 3,058 4,715
------- -------

Total Liabilities and Partners' Capital $ 6,473 $19,065
======= =======

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

17

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF INCOME

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

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

REVENUES:
Rentals from operating leases $ 3,340 $ 5,645 $ 7,010
Interest and other 81 74 84
Gain on sale of engine and
equipment 7,317 1,611 --
Return condition settlement -- 181 --
Other 848 -- --
Equity in earnings of MD-81 Trust 401 443 443
----------- ----------- -----------
11,987 7,954 7,537
----------- ----------- -----------

EXPENSES:
Depreciation 1,255 3,239 4,380
Interest 332 1,291 1,215
Management and re-lease fees 769 726 649
Write-downs 9,302 2,107 --
General and administrative 243 231 211
Direct lease 531 121 81
Engine rental and other -- 84 196
----------- ----------- -----------
12,432 7,799 6,732
----------- ----------- -----------

NET INCOME (445) 155 805
=========== =========== ===========

NET INCOME ALLOCATED:
To the General Partners (4) 800 8
To the Limited Partners (441) (645) 797
----------- ----------- -----------
(445) 155 805
----------- ----------- -----------

NET INCOME PER LIMITED PARTNERSHIP
UNIT $ (0.11) $ (0.16) $ 0.20
=========== =========== ===========

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

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

18

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF PARTNERS' CAPITAL

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

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

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

Net income 8 797 805

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

Balance, December 31, 1999 (710) 9,310 8,600

Net income 800 (645) 155

Distributions declared to partners (40) (4,000) (4,040)
-------- -------- --------

Balance, December 31, 2000 50 4,665 4,715

Net income (4) (441) (445)
Distributions declared to partners (12) (1,200) (1,212)
-------- -------- --------

Balance, December 31, 2001 $ 34 $ 3,024 $ 3,058
======== ======== ========

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

19

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF CASH FLOWS

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

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

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (445) $ 155 $ 805
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,255 3,239 4,380
Write-downs 9,302 2,107 --
Gain on sale of engine and equipment (7,317) (1,611) --
Equity in earnings of MD-81 Trust (401) (443) (443)
Change in assets and liabilities:
Rent and other receivables 149 327 --
Other assets (9) 43 (24)
Accounts payable and accrued expenses 19 (6) 14
Payable to affiliates 747 513 60
Maintenance reserves payable (546) 731 619
Deferred rental income and deposits -- (439) 147
Accrued interest payable (105) 105 --
-------- -------- --------
Net cash provided by operating
activities 2,649 4,721 5,558
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash distributions from investment in
MD-81 Trust 688 1,214 1,214
Proceeds from sale of equipment 9,500 4,000 --
Capitalized aircraft improvements -- (1,261) (4,563)
-------- -------- --------
Net cash provided by (used in)
investing activities 10,188 3,953 (3,349)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- -- 4,000
Repayment of notes payable (11,050) (2,950) --
Cash distributions paid to partners (1,212) (5,656) (6,465)
-------- -------- --------
Net cash used in financing activities (12,262) (8,606) (2,465)
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 575 68 (256)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,941 1,873 2,129
-------- -------- --------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,516 $ 1,941 $ 1,873
======== ======== ========

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

20

PEGASUS AIRCRAFT PARTNERS, L.P.

STATEMENTS OF CASH FLOWS (CONTINUED)

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

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

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ 437 $1,183 $1,201

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

Application of security deposit to sale
of aircraft $ -- $ 360 $ --

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

21

`PEGASUS AIRCRAFT PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001

1. Significant Accounting Policies

Basis of Presentation. Pegasus Aircraft Partners, L.P. (the
"Partnership"), a Delaware limited partnership, maintains its accounting records
and prepares financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant assumptions and estimates relate to useful life and
recoverability of the aircraft values. Actual results could differ from such
estimates. Certain financial statement items in the years prior to 2000 have
been reclassified to conform to the 2000 and 2001 presentation.

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

Aircraft and Depreciation. The aircraft are recorded at cost, which
includes acquisition costs and the acquisition fee and the financial management
advisory fee paid upon acquisition to the General Partners. Depreciation to an
estimated salvage value (generally 10%) is computed using the straight-line
method over an estimated economic life of twelve years (five years for the
aircraft engine sold in 1997). Major improvements to aircraft are capitalized
when incurred and are depreciated, generally, over the remaining useful life of
the improvement.

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"), the recognition of an impairment for a long-lived
asset is required when the estimate of undiscounted future cash flows expected
to be generated by the asset is less than its carrying amount. Measurrement 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 121 also requires that
long-lived assets to be disposed of be reported at the lower of the carrying
amount or fair value less estimated disposal costs.

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

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

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

Deferred Rental Income. Some of the Partnership's operating leases
require rental payments to be paid monthly in advance. Deferred rental income
represents rental payments received in advance which have not been earned.

22

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.

2. Organization of the Partnership

The Partnership was formed on June 23, 1988 for the purpose of
acquiring, leasing, and ultimately selling used commercial aircraft principally
to US airlines. The Managing General Partner of the Partnership is Pegasus
Aircraft Management Corporation, a wholly-owned subsidiary of Pegasus Capital
Corporation, and the Administrative General Partner is Air Transport Leasing,
Inc., a wholly-owned subsidiary of UBS Americas, Inc. UBS Americas is a
successor through acquisition 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, 2012. The Partnership had the right, subject
to certain conditions, to reinvest the proceeds from sales of aircraft occurring
prior to March 22, 1997.

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

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

3. Partnership Allocations

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

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

23

4. Aircraft

Net Investment in Aircraft

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

2001 2000
---- ----

Aircraft on operating leases, at cost $ 26,951 $ 48,788
Less: Accumulated depreciation (12,259) (30,658)
Write-downs (11,692) (4,156)
-------- --------
$ 3,000 $ 13,974
-------- --------

Net Investment in MD-81 Trust $ 741 $ 1,028
-------- --------

Aircraft held for lease, at cost 11,915 11,915
Less: Accumulated depreciation (6,365) (6,365)
Write-downs (5,350) (3,584)
-------- --------
$ 200 $ 1,966
-------- --------
Aircraft, net $ 3,941 $ 16,968
======== ========

Financial Terms of Leases

Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). The Boeing 727-200 Advanced
aircraft was hushkitted, converted to a freighter and delivered to Kitty Hawk in
August, 1999. Kitty Hawk is a Dallas, Texas based operator of more than 100
freighter aircraft. The lease agreement provides for 84 months rent at $117,800
per month. Kitty Hawk has provided a security deposit of $236,000 and is
obligated to fund maintenance reserves, in the aggregate, at a rate of $375 per
flight hour. Compliance with the recently issued AD relating to freighter
conversions was performed in conjunction with the conversion. The Partnership
invested approximately $4.4 million in hushkitting, a C-check and the cargo
conversion.

During 2000, the Partnership invested approximately $1.3 million with
respect to the overhaul of two engines for the Boeing 727-200 aircraft leased to
Kitty Hawk. While these engines were being overhauled, the Partnership leased
two other engines from an affiliate of the Managing General Partner. One of the
overhauled engines was re-installed on the aircraft and the leased engine
removed and returned to the Affiliate. The Partnership exchanged with the
Managing General Partner's affiliate, the second overhauled engine for the other
leased engine. There was no gain or loss recognized on this transaction.

During 2001, Kitty Hawk determined that it was more economic to replace
one of the Pratt & Whitney JT8D-9A engines on the aircraft than to induct it
into a shop for repairs. The Partnership paid, in June 2001, $201,000 from the
Kitty Hawk engine reserves to Kitty Hawk and agreed to an engine exchange. Kitty
Hawk bore the additional cost for the replacement engine.

Kitty Hawk filed for protection under Chapter 11 of the U.S. Bankruptcy
Code on May 1, 2000, but stayed current with regard to its rent payments through
September 2001. For the months of October, November, and December 2001, Kitty
Hawk could not make a full payment of the monthly rent , and the Partnership
agreed to a payment of only half of the amount due. The Partnership also agreed
to a 50% reduction of the maintenance reserves due for the months of September,
October, and November 2001. Kitty Hawk accounted for 31% of the Partnership's
lease revenue during 2001. The default or deferral of lease payments on the part
of Kitty Hawk, or any other lessee, may adversely affect future cash
distributions by the Partnership. See Note 9 "Subsequent Events".

The Partnership wrote down, in December 2001, the value of the aircraft
by $5.3 million.

Trans World Airlines Leases. In April 2000, the Partnership sold its
Boeing 747-100 to the lessee, TWA, for total consideration of $4,360,000. As
part of the sale, the Partnership retained deposits received from TWA,
aggregating $360,000, which had been held by the Partnership, applying them

24

towards the sales price for this aircraft. The Partnership recognized a net gain
of $1,611,000 on the sale of this aircraft during the second quarter 2000.

During February 1989, the Partnership acquired a McDonnell Douglas
MD-82 aircraft for a total purchase price of $21,017,000 which, as of December
31, 2000, was subject to a lease with Trans World Airlines, Inc. ("TWA")
providing for rentals of $185,000 per month for a term scheduled to expire in
September 2004. TWA missed making lease payments during December 2000, January
and February 2001. TWA filed for Chapter 11 bankruptcy protection under the
Federal Bankruptcy code in January 2001, and entered into an Asset Sale and
Purchase Agreement with American Airlines, Inc., who paid for all TWA's rents in
March 2001. On April 9, 2001, American Airlines purchased TWA's assets and also
acquired the Partnership's McDonnell Douglas MD-82 aircraft for $9.5 million.
The sale price of the aircraft was in excess of the net book value of $2.2
million, and the proceeds were applied to pay off the Partnership's debt of
approximately $8.9 million. TWA accounted for 15% of the Partnership's lease
revenue in 2001.

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

The MD-81 was leased to US Airways, which renewed its lease from June
1, 1998 to June 1, 2001, at the original lease rate. Rental payments were
payable quarterly, in arrears, at a 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 returned the aircraft in July,
2001 and paid rent through the return date.

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

TNT Transport International B.V. Lease. In November 1997, the
Partnership entered into an agreement to lease a Boeing 727-200 to a European
freight carrier, TNT Transport International B.V. ("TNT") for a term of four
years. The lease provides for monthly rentals of $123,500 (subject to a
subsequent rent reduction of approximately 10% after two years if TNT exercises
an option, during the lease term, to extend the lease for an additional two
years beyond the original expiration date) and airframe and landing gear
reserves aggregating $85 per flight hour. TNT has provided a $150,000 security
deposit . TNT has contracted with a third party service provider for the
maintenance of the engines.. TNT is responsible for the first $50,000 of cost in
complying with the newly issued freighter conversion AD. Costs in excess of this
amount are initially paid for by TNT. At the end of the lease, TNT will be
reimbursed by the Partnership for a portion of the AD compliance cost based on a
formula set forth in the Partnership agreement, not to exceed $250,000. The
aircraft was written down at December 31, 2000, by $1,157,000.

For the year ended December 31, 2001, TNT accounted for 37% of the
Partnership's lease revenue. The current lease ends in March 2002, and the
Partnership agreed to sell the aircraft to TNT for $500,000 (see Note 9.
"Subsequent Events").

The Partnership wrote down, in December 2001, the value of the aircraft
by $2.2 million.

Boeing 727-200. The Boeing 727-200, formerly leased to Discovery
Airlines (Sky Trek), was returned in March 2000. The Partnership has been
unsuccessful in marketing the aircraft to a new lessee and therefore, has
decided to dismantle it and attempt to sell its parts individually ("part out").
During the second quarter 2001, the Partnership took $848,000 of paid-in
maintenance reserves relating to the aircraft into income and wrote down the
aircraft's value by $1,766,000 to $200,000, which represents the estimated
realizable value.

25

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

Significant Lessees

The Partnership leased its aircraft to five different airlines or air
freight companies during 2001. Revenues from airlines which accounted for
greater than 10% of the Partnership's total rental revenues during 2001, 2000,
and 1999 are as follows:

Percentage of Rental Revenues
-----------------------------
Airlines 2001 2000 1999
- -------- ---- ---- ----

Trans World Airlines, Inc. 15% 37% 49%
US Airways Group, Inc. 17 18 15
Kitty Hawk Aircargo, Inc. 31 21 (a)
TNT Transport International B.V 37 22 18
Sky Trek International Airlines, Inc. (a) (a) 12

(a) Represents less than 10%.

Revenues include rentals from aircraft leased to foreign airlines or
carriers of $1,482,000 in each of the year 2001, 2000 and 1999. The year 2001
amount for TWA does not include the proceeds of the sale of the McDonnell
Douglas MD-82, and the year 2000 amount for TWA does not include the proceeds of
the sale of the Boeing 747.

Future Minimum Rental Income

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

2002 1,759
2003 1,414
2004 1,414
2005 1,414
Thereafter 942
------
Total $6,943
======

Note: includes rents from Kitty Hawk of $117,800 per month through
08/26/06.

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

5. Transactions With Affiliates

Management Fees. The General Partners earn a quarterly subordinated
base management fee in an amount generally equal to 1.5% of gross aircraft
rentals, net of re-lease fees. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
During the years ended December 31, 2001, 2000, and 1999, the General Partners
earned base management fees of $60,000, $103,000, and $123,000, respectively.

Incentive Management Fee. The General Partners also earn a quarterly
subordinated incentive management fee in an amount equal to 4.5% of quarterly
cash flow and sales proceeds (net of resale fees), of which 2.5% is payable to
the Managing General Partner and 2.0% is payable to the Administrative General
Partner. During the years ended December 31, 2001, 2000, and 1999, the General
Partners earned incentive management fees of $116,000, $425,000, and $281,000,
respectively.

Re-lease Fee. The General Partners earn a quarterly subordinated fee
for re-leasing aircraft or renewing a lease in an amount equal to 3.5% of the
gross rentals from such re-lease or renewal for each quarter for which such
payment is received. Of this amount, 2.5% is payable to the Managing General

26

Partner and 1.0% is payable to the Administrative General Partner. During the
years ended December 31, 2001, 2000, and 1999, the General Partners earned
$593,000, $198,000, and $245,000, respectively of re-lease fees.

Payment of the above fees on a current basis is subordinated to the
limited partners receiving an 8% annual non-cumulative return based upon
original contributed capital (as defined and adjusted per the Partnership
agreement). Fees are therefore not being paid on a current basis and are being
accrued. Pursuant to the terms of the Partnership Agreement, the General
Partner's Capital Accounts were allocated $807,000 of the gain from the sale of
the Boeing 747-100 aircraft. Since 1996, as part of a class action settlement,
an affiliate of the Administrative General Partner places fees and distributions
remitted to it by the Administrative General Partner into an account for the
benefit of the class members.

Accountable Expenses. The General Partners are entitled to
reimbursement of certain expenses, paid on behalf of the Partnership which are
incurred in connection with the administration and management of the
Partnership. There were no such reimbursable expense in each of the year ended
December 31, 2001, 2000 and 1999. The continued absence of accountable expenses
is due to the subcontracting of certain accounting services, and their cost is
included in general and administrative expenses.

Other. During 1999, the Partnership purchased parts in connection with
certain capital projects for costs totaling $875,513 from a Company in which the
President and Director of the Managing General Partner had an interest. There
were no such purchases in 2000. In 2001, similar expenses were $203,000. In 2000
and 1999, the Partnership paid $84,000 and $196,000 respectively for two engine
leases (Kitty Hawk Aircraft) to an affiliate of the Managing General Partner.
The leases were both for $21,000 per month for each engine. As of March, 2000,
engines owned by the Partnership were placed on the aircraft.

During 2001, 2000, and 1999, the Partnership paid $22,000, $26,358, and
$26,279, respectively, to a licensed maintenance provider that is affiliated
with the Managing General Partner.

6. Notes Payable

In January 1998, the Partnership's lender increased its borrowing
commitment from $7,500,000 to $10,000,000 and increased the interest rate from
1% to 1.25% over prime. The Partnership provided, as additional collateral, the
Boeing 727-200 aircraft leased to Continental and the Boeing 727-200 aircraft
leased to Sky Trek. The proceeds were used to fund the cargo conversion of the
aircraft delivered to TNT.

In February 1999, the lender further agreed to increase the borrowing
commitment from $10 million to $14.5 million and increase the interest rate from
1.25% to 1.5% over prime with the funds primarily being utilized for the Kitty
Hawk aircraft conversion.

During 2000, $2.95 million of the sale proceeds from the sale of the
Boeing 747 to TWA was used to reduce outstanding debt. In January 2001, the
Note, which had become due in October 2000, was extended an additional six
months to June 30, 2001. A condition of the extension was that all cash flow in
excess of certain operating expenses was to be used to reduce the principal of
the Note. On April 9, 2001, American Airlines purchased the McDonnell Douglas
MD-82 aircraft, formerly leased to TWA, for $9.5 million. Approximately $8.9
million of the sale proceeds were used to fully pay off the Partnership's loan
balance.

27

7. Reconciliation to Income Tax Method of Accounting

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

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

Net income per financial statements $ (445) $ 155 $ 805
Increase (decrease) resulting from:
Depreciation 8,664 3,453 2,760
Reserves for maintenance costs and
write-downs -- -- --
Allowance for bad debts provided for book -- -- --
TBT interest income less
TBT rental expense 128 (573) (1,492)
Difference in basis of aircraft sold 2,184 2,428 --
Maintenance reserves collected and related
interests net of expenditures (476) 685 694
Deferred rental income -- (33) (33)
Purchase Option from Partnership/Write Off (3118) -- --
Other 200 (76) (9)
------- ------- -------
Taxable income per federal income tax return $ 6,737 $ 6,039 $ 2,725
======= ======= =======

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

2001 2000 1999
---- ---- ----
Total Partnership capital per financial
statements $ 3,058 $ 4,715 $ 8,600
Increase (decrease) resulting from:
Commissions and expenses paid in
connection with the sale of limited
partnership units 8,441 8,441 8,441
Reserves for maintenance costs and
write-downs including Continental lease
settlement, accounted for as cost
recovery 17,221 7,919 9,484
Aircraft expenditures capitalized for
tax, net (8,453) 514 514
Distributions payable to partners -- -- 1,600
Deferred rental income -- -- 112
Maintenance reserves collected and used
to restore aircraft net -- 1,344 1,934
Accumulated depreciation (4,440) (5,986) (14,021)
TBT interest income less TBT rental expense -- (7,191) (6,614)
Maintenance reserves payable 1,154 1,700 1,015
Other -- -- (7)
-------- -------- --------
Tax bases of net assets $ 16,981 $ 11,456 $ 11,058
======== ======== ========

28

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

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

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

Notes payable. For notes payable, carrying value approximates fair
value due to its short term remaining maturity.

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

9. Subsequent Events

The Partnership agreed with Kitty Hawk for the payment of approximately
71% of the monthly rent, and no maintenance reserves for each of the first three
months of 2002. Any unpaid rent and reserves will be added to the existing
Chapter 11 administrative claims. Although Kitty Hawk had affirmed the
Partnership's lease in bankruptcy, Kitty Hawk intends to file a motion in
bankruptcy court in late March to terminate the lease, and not pay damages. The
Partnership has terminated the lease by reason of Kitty Hawk's default and will
file a motion for damages under the lease. Oral arguments will be heard in early
April and a decision is anticipated sometime thereafter.

In February 2002, the Partnership reached an agreement with TNT for the
ending of its lease on March 24, 2002. According to this Buyout Agreement, TNT
agreed to pay the Partnership approximately $710,000 for waiver of the
contractually required C check and waiver of the installation of the Flight Data
Recorder Upgrade. On March 13, 2002, the Partnership and TNT signed a Side
Letter to confirm their agreement of the financial settlement and the
Partnership received approximately $741,000, net of the $150,000 security
deposit the Partnership held from TNT. TNT also purchased the aircraft for a
price of $500,000 on March 26, 2002.

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

29

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

There were no changes in accountants or disagreements with accountants
with respect to accounting or financial disclosure issues during 2001 or 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 his position as Senior Vice President, Technical of Pegasus
Aircraft Management as of January 15, 2001 at which time Ervin Bach assumed the
position. 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
Erv Bach Senior Vice President, Technical

Richard S. Wiley, age 48 is President and Chairman of the Board of the
Managing General Partner and Pegasus Capital Corporation ("PCC"), which was
formed in 1988. Prior to forming Pegasus Capital Corporation, Mr. Wiley was a
Vice President of CIS Corporation ("CIS"), a wholly-owned subsidiary of
Continental Information Systems Corporation ("Continental") for the period 1986
to 1988. Mr. Wiley originated aircraft transactions throughout the world and
sold aircraft to third-party investors. From 1985 to 1986, Mr. Wiley worked as
Treasurer of Caterpillar Capital Company in San Diego, California. From 1983 to
1985, he served as Managing General Partner and President of RAM Financial
Corporation in Houston, Texas, an equipment leasing venture capital company.
Prior to joining RAM, he worked for GATX Leasing Corporation as a District
Manager from 1980 to 1983. Mr. Wiley received a B.S. degree from the Indiana
University School of Business and an M.B.A. from the University of California,
Los Angeles.

Carol L. Chase, Esq., age 49, is 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 B.A. degree from California State University,
Hayward and a J.D. degree from the University of California, Davis. She is a
member of the State Bar of California, the American Bar Association, and the
American Corporate Counsel Association.

Richard M. Oster, age 50, is Chief Financial Officer and Senior Vice
President Administration of the Managing General Partner . 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.

Erv Bach, 40, is Senior Vice President, Technical of the Managing
General Partner and Pegasus Capital Corporation. Mr. Bach has been employed in
various technical capacities with affiliates of the Managing General Partner
since 1996. From 1994 to 1996, he was Manager of Structures for Hamilton
Aviation, Tucson, and he held the same position with Lockheed Aeromod, Tucson,
from 1993 to 1994. From 1989 to 1993, Mr. Bach held various positions with
Evergreen Air Center, Marana, Arizona, the last being Manager of Engineering.

30

During 1991, Mr. Bach was employed for seven months as a structural mechanic
with Trans World Airlines, 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-130s. Mr. Bach holds an Airframe and Powerplant 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, Chief Financial and Accounting Officer and
Director
Stephen R. Dyer Vice President, Secretary, Treasurer and Director

Clifford B. Wattley, age 52, is President, Chief Financial and
Accounting Officer and a Director of the Administrative General Partner. Mr.
Wattley is a Corporate Vice President with UBS PaineWebber Inc., having joined
the firm in 1986. He also was employed previously by Paine, Webber, Jackson &
Curtis from 1979 to 1980. From 1986 to 1992, Mr. Wattley participated in Paine
Webber's Principal Transactions Group. Since 1992, Mr. Wattley has been a member
of the Private Investment Department. He holds a Bachelor of Science degree in
engineering from Columbia University and a Masters in Business Administration
from Harvard University. Mr. Wattley assumed the positions of Chief Financial
and Accounting Officer on March 11, 2002, will serve in that capacity until such
time as a replacement for Carmine Fusco is named.

Stephen R. Dyer, age 42, is Vice President, Secretary and a Director of
the Administrative General Partner. He joined UBS PaineWebber Inc. in June 1988
as a Divisional Vice President and is currently a Senior Vice President and
Director of Private Investments. Prior to joining UBS PaineWebber Inc., Mr. Dyer
had been employed, since June 1987, as an Assistant Vice President in the Retail
National Products Group of L.F. Rothschild & Co. Incorporated. Prior to joining
L.F. Rothschild he was employed, beginning in January 1985, as an Associate in
the Real Estate Department of Thomson McKinnon Securities Inc. From July 1981 to
August 1983, Mr. Dyer was on the audit staff of the accounting firm of Arthur
Young & Company. He received his Bachelor of Science degree in Accounting in
1981 from Boston College and a Masters of Business Administration from Indiana
University in December 1984. Mr. Dyer is a Certified Public Accountant. Mr. Dyer
also assumed the positions of Secretary and Treasurer on March 11, 2002 and will
serve until such time as a replacement for Carmine Fusco is named.

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

ITEM 11. EXECUTIVE COMPENSATION

No compensation was paid by the Partnership to the officers and
directors of the General Partners. See Item 13 of this Report, "Certain
Relationships and Related Transactions", which is incorporated herein by
reference, for a description of the compensation and fees paid to the General
Partners and their affiliates by the Partnership during 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) As of the date hereof, no person is known by the Partnership
to be the beneficial owner of more than 5% of the Units of
the Partnership. The Partnership has no directors or
officers, and neither of the General Partners of the
Partnership owns any Units. The Assignor Limited Partner for
the Partnership, Pegasus Assignor L.P.A., Inc. (an affiliate
of the Managing General Partner), owns 5 Units.
Additionally, as of December 31, 2001, ATL Inc., an
affiliate of the Administrative General Partner owns
approximately 69,016 Units.

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

31

Managing General Partner:

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

Administrative General Partner:

Air Transport Leasing, Inc.
800 Harbor Boulevard, 3rd Floor
Weehawken, NJ 07087

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

(b) The following table sets forth the number of Units
beneficially owned as of March 1, 2002, by directors of the
Managing General Partner and the Administrative General
Partner and by all directors and officers of such
corporations as a group:

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

Managing General Partner
Richard S. Wiley 3,216 *

All directors and officers as a group
(4 persons) 3,216 *

Administrative General Partner
None

* Less than 1% of class.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

Base Management Fee. The General Partners receive a quarterly
subordinated fee in an amount generally equal to 1.5% of gross aircraft rentals,
net of re-lease fees paid. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
During 2001, the General Partners earned base management fees of $60,000.

Incentive Management Fee. The General Partners also receive a quarterly
subordinated fee, in an amount equal to 4.5% of quarterly cash flow and sales
proceeds (net of resale fees), of which 2.5% is payable to the Managing General
Partner and 2.0% is payable to the Administrative General Partner. During 2001,
the General Partners earned incentive management fees of $593,000.

32

Re-lease Fee. The General Partners receive a quarterly subordinated fee
for re-leasing aircraft or renewing a lease in an amount equal to 3.5% of the
gross rentals from such re-lease or renewal for each quarter for which such
payment is received. Of this amount, 2.5% is payable to the Managing General
Partner and 1.0% is payable to the Administrative General Partner. During 2001,
the General Partners earned re-lease fees of $116,000.

Beginning January 1, 1996, as part of the 1996 and 1997 class action
settlement, the Administrative General Partner remits to an affiliate, all
management fees as well as all 1997 and future fees and distributions received
by the Administrative General Partner, for deposit into an escrow account for
the benefit of the class members. Due to the subordination provisions of the
Partnership Agreement, all General Partner fees are currently being accrued but
are not being paid on a current basis.

Accountable Expenses. The General Partners are entitled to
reimbursement of certain expenses paid on behalf of the Partnership which are
incurred in connection with the administration and management of the
Partnership. There were no such reimbursable expenses during 2001 and 2000. As
discussed in Note 5 to the Financial Statements, accountable expenses declined
due to the subcontracting of certain accounting services, and their cost is
included in general and administrative expenses.

Partnership Interest. In the aggregate, the General Partners were
entitled to receive cash distributions of $12,000 as their allocable share of
distributable cash flow for 2001. In addition, $4,000 of the Partnership's net
taxable loss for 2001 was allocated to the General Partners.

33

PART IV

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

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

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

(b) The Partnership filed a Form 8-K on June 30, 2001, reporting a
distribution of $0.30 per Unit on or about July 10, 2001 to
unitholders of record as of June 30, 2001. The distribution was a
result of cash flow from operations and in part funds available
from the sale of the McDonnell-Douglas MD-82 to American Airlines
in April 2001.

During the fourth quarter of 2001, the Partnership did not file
any reports on Form 8-K.

(c) Exhibits required to be filed.

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

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

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

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

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

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

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

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

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

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

34

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

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

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

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

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

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

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

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

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

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

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

(e) Supplemental Stipulation and Order, dated December 30, 1992,
among Continental Airlines, Inc., Bay Air Lease I, Cirrus
Capital Corporation of Florida, Bay Air Lease III, Aviation
Assets I, Aviation Assets II, Aviation Assets III, Aviation

35

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

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

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

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

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

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

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

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

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

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

36

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

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

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

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

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

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

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

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

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

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

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

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

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

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

37

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

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

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

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

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

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

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

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

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

11 Partnership policy Regarding Requests for Partner Lists.

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

38

SIGNATURES

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

Dated: March 28, 2002

Pegasus Aircraft Partners, L.P.
(Registrant)

By: Air Transport Leasing, Inc.
Administrative General Partner

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

By: Pegasus Aircraft Management
Corporation
Managing General Partner

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

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 2002.

Signature Title

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

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

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

39